Transcript of Interview:

Louis Basenese: Food safety. I think the assumption is for everyone that the government takes care of it for us, so there’s really nothing to worry about, right? How about scaring us with the truth, so to speak, from your perspective.

Rich McKeown: Let’s start with the basics. And that is the food system is a large and complex system. When you think that we’re talking about things that start in the ground on trees and animals and end up on plates in front of Americans, there’s just a lot of stages and a lot of steps in between there.

The government, over the course of time, has created a set of operating rules through legislation and regulations. Recently, they passed a new Food Safety Modernization Act intending to increase the safety. But I think all of us recognize that if industry were simply to comply with what the federal government is requiring, that we would not have a safe system. And that the industry are the players who are going to have to step up in a big way and create better mechanisms.

Jennifer McEntire: As you say, the rules say that you have to sell safe food. But one of the difficulties, I think, in relying on the government to ensure this, is that the government just doesn’t have the resources to enforce all the rules all the time. And so it winds up being the responsibility of industry in many ways to police themselves and to police each other in the supply chains to make sure that the rules are being followed.

It’s not foolproof. It’s not a foolproof system. I don’t think we can rely – as consumers – rely wholly on the government to take care of this for us. But everyone, I think, has some responsibility and is doing their part.

LB: You bring up a great point. You’re talking about how legislation can’t solve the problems for us necessarily. And that it’s not necessarily just a United States problem.

In your experience, what are the things that are going on. I know in the news we hear about issues in China where they’re putting ingredients in dog food that’s leading to fatalities and where are the big areas in the world where we’re seeing a lot of these issues pop up?

RM: Listen, if anybody walks into their cupboard and starts to open up and look at country of origin, they’re going to be surprised at how much food comes from outside the United States. When you look at even an issue like seafood, 80% of what Americans consume in the area of seafood comes from mostly from Asia. And I think it shocks people when they begin to do such an evaluation. We are involved– and this is the maturing of the global marketplace, the notion that we are sourcing from everywhere across the country or around the world.

And there really are problems. The melamine situation that you reference is an unfortunate incident that occurred in 2007, I believe, when melamine, which is used in the production of plastic, was introduced into dog food because when you test it at the laboratory, it approximates protein and therefore made cheap dog food appear to be expensive dog food. And it was perpetrated as an economic fraud.

But it was an illuminating moment in time, where people began to look at this. And there were a number of significant US responses to that. One was the creation of an import safety action plan by an executive order from President Bush. Another was the development of a food safety plan which Dr. David Acheson at FDA commenced putting together. Third was negotiations with China that I was involved in, along with David Acheson and others from FDA, on food and feed.

And we began to learn and to recognize that we don’t have systems that interoperate with each other in ways that allow us to identify things and to maintain them in the supply chain. And so I think that’s the– at its essence, there are problems everywhere.

Jennifer, you may want to add some specifics to it.

JM: Thanks, Rich. I think it’s important to recognize that in different countries, they have different regulatory structures with respect to food safety as well as in general. And in some of these countries, they, for all intents and purposes, hardly even have food safety regulations. Additionally, in other parts of the world, we deal with different cultures. What’s right and what’s wrong may be defined differently in another part of the world.

And yet our food supply is absolutely global. We’re sourcing from all over the world. So I think it’s incredibly important for the industry perspective to understand where the food is coming from and the risks that may be associated with foods coming from different parts of the world.

LB: And Jennifer, you had a quote that really seemed profound to me. You said when someone eats, the whole history of the product is going in their mouth. Explain what you mean by that.

JM: Yeah, I really appreciate that you’ve picked up on that quote, because it’s just so true. We have today, in many cases, incredibly complex supply chain. Food is transformed, and it touches so many different points truly around the world before it lands in the consumer’s mouth. And at each of those points, there’s an opportunity to either increase or decrease the risk associated with that product.

So there are opportunities to process products to make them safer. Or people could just screw things up and increase the risk associated with that product. And ultimately, by the time as a consumer that it gets into your mouth, what you’re eating, is the culmination of all those actions associated with that product, on that product before it landed in your mouth.

And those actions could be numerous. And the truth is that today, certainly from a consumer standpoint, you have no idea what those touchpoints are. Even from an industry standpoint, there’s not full visibility and transparency of the path that a product took before it got to wherever it is at a specific point in time.

LB: Here we are, it’s May 2013, and the Food Safety Modernization Act was from early 2011. The next question I really have is what do you see? I mean, is this a normal legislative delay that we can expect from policy setting to implementation.

JM: I think it’s important to recognize that this piece of legislation, FSMA is enormous. It is widely considered to be the most sweeping overhaul of the food safety system pretty much since we had one. And so implementation is going to take quite a long time. So we expect this, but Congress did lay out some deadlines for FDA, very aggressive deadlines, I think we all recognized that upon passage.

LB: But in March, Jennifer, you wrote a piece saying that we’re nearing the tipping point for traceability, for being able to trace food and drugs through the supply chain. Can you give us just some idea why you think we are nearing that point? I mean, and what’s driving that thought?

JM: There are a number of reasons, I think. What really prompted my statement at that time was the release of the IFT reports to FDA on traceability. I’ve been working in the area of traceability for about five years. And for most of that time, the comments that I heard from industry with respect to why they weren’t doing more, why they weren’t doing better, was because they weren’t going to do anything until FDA told them to do something. And so I think that now that we’ve seen this glimpse of where FDA may go, at least the recommendations made to FDA. And it’s up to FDA to consider Them, pass them along to Congress, make their recommendations to Congress, and ultimately issue regulations.

I think we’re at this stage now where it would be very difficult for the industry to say FDA didn’t tell me. I didn’t know that there were issues here. I didn’t know ways in which I might be able to improve. Because the IFT report spells out some of the ways in which things could be improved and identify some of the problems in the current system.

LB: Yeah, and I don’t want to put either you of on the spot and ask for a very specific timeline. But is this an issue where you think the FDA is going to make a formal proposal in three months time, six months a year and possibly longer?

JM: FDA took an interesting path here in terms of the process. They put the IFT report out, instead of submitting their recommendations to Congress including that report as they were supposed to this past July. They often instead in March to put the IFT report out for public comment. That comment period is open until this July, July 3.

And then it’s at a point to be determined when they’ll issue a report to Congress. So the regulation itself is a long time coming, but I think that in terms of industry taking action, there’s enough out there right now that industry should and is well advised to begin making some changes. We’re not at a point where we don’t know what a regulation is going to look like, so we can just sit back and do nothing. I think the landscape has changed and it’s up to industry now to grab the bull by the horns and move forward even in the absence of regulation.

LB: The next question I really have is what are the available solutions to this? I mean, you talk about industry really being left with no choice but to start implementing solutions. They know what the landscape is. So what’s out there to help prevent the 48 million cases per year of food-borne illnesses? What can we do?

RM: Let me initiate that conversation by identifying what the problem is. There are a lot of companies who are major players in this industry. And you’ve got a lot of medium sized and a lot of very small players in this. And they all come to this problem with different capacity for resources. +

The difficulty is that many companies have internally created systems that they believe allow them to track internally all of the system changes and all of the food and the like. But there’s no ability to link all of this data together. You’re aware that we’ve aligned ourselves with a product called ReposiTrak ReposiTrak is an existing technology that has been developed over the course of the last 16 or 17 years that has the ability to accept digital data in all forms.

Some people in the industry would like to adopt a single identifier on all the way across the board. And our perspective is that’s great if it can happen, but in order to accelerate our capacity to link data together, we need a system that can do it simply, efficiently, easily, and that’s what we have proposed as we put together this company called ReposiTrak between Park City Group and Leavitt Partners.

So we think it has the capacity to work with just about all existing systems out there and to tie this information together in ways that’d be quite useful to the food supply system.

LB: Now with saying that, ReposiTrak is a solution, one of the solutions out there, and available. And you just announced a pretty large deal with the Retailer Owned Food Distributors and Associates, which for those that don’t know is the largest cooperative of independent food wholesalers. Can you just give us some more details about this announcement and why you think it’s so significant in terms of the adoption of traceability?

RM: These are wholesalers, and they’ve taken the position that food safety is a significant interest of theirs. And as they begin to move through this, and as we begin to work with the members of ROFDA, which is the acronym for the names you just gave, as they begin to work through it, they are making the utilization of the ReposiTrak system a condition of continuing to do business with them. And this notion of requiring that is a reflection of all that we’ve talked about that is pressurizing the system to say we’ve got to make it safer.

We’ve got to make it easier to identify problems and to mitigate the amount of time that things are on the shelf when they are a problem. We believe that there’s a technology that can help string together the pieces of information in the system that will help do that. And I think that’s what manifesting itself here as you now have a company that says we believe in quality. Now we’re taking some steps that we think will help us shorten the time that [INAUDIBLE] their products on the shelf.

This system is not going to cure the problem of bad food, but because it happens along the process. But what would it will do is it will mitigate the damage, and it will allow the identification of things much more quickly as this technological solution runs through system.

LB: I mean, can either of you just kind of give our readers just an idea how big is this market?

RM: Now, I don’t know that I can give you a quantified number. But I can just tell you that everybody in this country eats food. They do it every day, and they do it multiple times a day. And the market behind it supplies that food is a match with many, many connectivities and as Jennifer and I both alluded, it comes out of the ground. It comes from animals. It comes from all over and works its way into a system. And there’s just so many interconnecting points that the market is both complex and really quite huge out there.

JM: I would also add that as Rich mentioned, ReposiTrak doesn’t stop food safety problems from happening in the first place. It’s a little bit more on the reactive side to really be able to respond and react quickly, pinpoint a problem to remove product. So when we look at food safety overall, there are so many ingredients, so many components to an effective food safety system, that there are many different markets just within the opportunities associated with food safety, from the preventive side through to the reactive side.

There’s so many different types of services that are needed in order to really improve food safety. So what ReposiTrak does, in the tracing side, is one such aspect. But in terms of what we do for the rest of our business on the consulting side, there’s so many different types of needs that I can tell you, at least speaking personally, it keeps me really busy.

LB: So the key really here, if I understand it right, is just having that visibility. It’s great for reacting to potential problems or problems that break out and putting and end to them quickly, but it’s also great for making adjustments. I think you both have given us a great overview of exactly what’s going on and dug into very specifics in terms of the legislation and the market opportunity ahead. So I do want to take the time and just thank you both for joining us today. And I would definitely look forward to having you back soon as more developments come up with ReposiTrak and hopefully more legislation gets pushed through, and it makes its way actually into implementation. So thank you again, for, your time today.

RM: We’re grateful for the chance to speak with you.

I scored an exclusive interview with a legitimate FDA insider.

Allow me to set the stage for you (trust me, you’ll get more out of the interview by knowing the quick backstory)…

You see, like it or not, the powers-that-be in D.C. can, in fact, “legislate” profits.

I’m not talking about the Federal Reserve’s ability to print money on demand, mind you.

Instead, I’m talking about how Congress can pass new laws that force companies to spend billions of dollars, simply to comply with the new regulations.

And those expenditures often end up lining the coffers of a select few publicly traded companies.

By knowing the identity of these ultimate beneficiaries in advance, switched-on investors and politicians can unlock killer gains in the stock market.

And today, we’re breaking the story on perhaps the biggest profit opportunity that Washington’s legislative process has ever triggered.

As you’ll soon see (and hear), it concerns an aspect of life that impacts every last human on earth – food safety.

From Policy to Profit in Food Safety

Each year, approximately 48 million people suffer from foodborne illnesses. Of that total, 128,000 are hospitalized and 3,000 die, according to the CDC.

That’s just unacceptable, which is why Congress passed the Food Safety Modernization Act (FSMA) in January, 2011.

It represented the most sweeping reform to our food safety laws in almost a century.

And the legislation granted the Food and Drug Administration (FDA) authority to recall contaminated food, as well as the power to regulate any aspect of food production.

The only catch?

Before the FDA could wield its newfound power, it needed to determine the best ways to rapidly identify contaminated food sources.

True to form, the government took its merry time. But the FDA has finally finished. That means we’re literally on the cusp of new regulations forcing the entire food industry to take action.

To put the size of the opportunity into perspective, consider that in the United States alone, there are two million farmers; 570,000 facilities in the food service segment; and 167,000 manufacturers, processors and warehouses.

A Wall Street Daily Exclusive

Given the enormity of the market, there’s no doubt that billions of dollars are going to be spent to comply with the new regulations. And that’s too big of an opportunity for me to ignore.

So, in an effort to help you understand where that money could end up – and, in turn, how we can profit from the situation – I secured an exclusive interview with not just one industry insider like I mentioned above, but two…

• Rich McKeown, the former Chief of Staff for the U.S. Department of Health and Human Services, which oversees the FDA. McKeown is now the President and CEO of the internationally known healthcare and food safety consulting firm, Leavitt Partners.
• Former Senior Staff Scientist at the Institute of Food Technologists (IFT), Jennifer McEntire, Ph.D. She co-authored the final reports provided to the FDA before joining Leavitt as the Senior Director of Food and Import Safety Practice.

In other words, I went directly to the source to get the scoop. And it paid off!

During the course of our interview, they revealed why we could see food industry companies spring into action even before the FDA issues its final regulations.

Most important of all, they share the identity of a publicly traded company that’s uniquely positioned to benefit from the implementation of FSMA. The fact that Wall Street remains largely clueless about this company (not a single analyst, except me, follows the stock) only increases our profit potential.

To hear for yourself, all you have to do is click on the image below. I’m sure you’ll agree that it’s important to act on this political intelligence before it’s too late.

Ahead of the tape,

Louis Basenese

Talk about an ominous statement for investors.

But if his “everywhere” includes the residential real estate market, Mr. Gross is sorely mistaken.

As I shared yesterday, the real estate recovery is legitimate. And it’s gaining traction, too.

However, the way we capitalize on this trend is evolving…

Forget the Usual Suspects

No longer can we expect to book the biggest profits on the most obvious beneficiaries of a housing recovery – homebuilders.

Nor can we bank on “first derivative” opportunities – companies with obvious ties to an uptick in home sales.

I’m talking about home improvement stores like Home Depot (HD) and Lowe’s Companies (LOW), and building materials suppliers like Lumber Liquidators Holdings (LL) and Masco Corporation (MAS).

As I told you in late February, these plays are too obvious and overcrowded.

Instead, it’s time to move our attention to “second derivative” opportunities – companies that investors don’t even remotely think about when it comes to the real estate market… but are nonetheless highly leveraged to the recovery.

I can think of no better example than mortgage insurance companies…

Back From the Dead

Mortgage insurance companies cover losses when homeowners, who typically make a down payment of less than 20%, default on their loans.

But you know the story: During the go-go days, just about everybody put less than 20% down and then defaulted. As a result, it drove the biggest mortgage insurance providers to the brink. Meanwhile, others – like PMI Group – completely crashed and burned on the courthouse steps.

Fast forward to today, though, and we’re working through the excesses of the last boom.

Case in point: The total share of distressed home sales keeps falling.

Take Las Vegas, for example. In September 2011, distressed sales accounted for over 70% of all activity. Now, it’s almost half that – and still falling. We’re seeing big declines in many other major markets, too…

The Comeback is Officially on for Mortgage Insurers

As the real estate market charts a path back to normal conditions, it’s a similar story for mortgage insurers.

Sure, the bonds of the largest insurers like MGIC Investment (MTG) and Radian Group (RDN) still carry junk ratings. So we’re not in the clear, yet. But there are definitive signs that their businesses are coming back to life. Consider:

• In the most recent quarter, Radian reported a 69% jump in new mortgage insurance business. And CEO S.A. Ibrahim sees a “return to operating profitability” on the horizon, too.
• MGIC reported a 54.7% increase in new insurance business in the first quarter. And its delinquency rates continued to improve, dropping more than two full percentage points in the last year.

Industry-wide data confirms that a recovery is underway, too.

Moody’s Investors Service says operating income before taxes for the entire mortgage insurance industry more than doubled compared to last year.

And Inside Mortgage Finance found that sales of private mortgage insurance rose by almost 80% in the first quarter.

And this comeback isn’t going unnoticed, either…

Follow the Leader

You’ll recall that hedge fund manager, John Paulson, made a name for himself – and his firm, Paulson & Co. – when he famously sold short subprime mortgages in 2007.

Basically, he predicted the top in the real estate market and positioned himself to profit from it.

A $3.7-billion profit, to be exact.

Today, Paulson is signaling the bottom of the market – and setting himself up to profit again.

As Bloomberg reports, Paulson & Co. and other noteworthy hedge funds are “piling into mortgage insurers.”

Paulson’s hedge fund alone owns 17 million shares of MGIC. He also owns 8 million Radian shares, which he thinks could top $20. That would be 45% higher than the current price.

That’s enough profit potential to get my attention. How about you?

Bottom line: In a normal environment, mortgage insurers enjoy strong profitability. And we’re moving to a more normal market.

Or, as Paulson said in a letter to his clients, “Mortgage insurers are all experiencing improving fundamentals… and should offer considerable upside if recent positive housing trends continue.”

As I’ve demonstrated here many times, all signs point to the positive housing trends continuing. So do your portfolio a favor and follow the leaders into mortgage insurance stocks.

Ahead of the tape,

Louis Basenese

At least, that’s what the mainstream financial press wants to scare us into believing.

A recent Bloomberg article, entitled “Brooklyn to California Bubble Threat Grows in Rebound,” recounts an all-too familiar tale from the go-go days:

“An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000, drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for $2 million got six offers last month, including four from builders planning to tear it down to construct a bigger house.”

Bidding wars! The ultimate sign of a bubble, right?

Not so much…

The Same, But Different

Let’s ignore, for a moment, that Bloomberg cherry-picked these examples, and that they’re completely out of touch with reality. (The median price for a house in the United States remains below $200,000. Yet Bloomberg uses million-dollar listings to characterize the broader market.)

The real reason we’re “hearing stories of frenzy – lots of traffic and multiple offers,” as Paul Willen at the Federal Reserve Bank of Boston puts it, isn’t because we’re in another bubble.

It’s because inventory remains at mind-numbingly low levels.

You see, for a normal (and healthy) market, we need about six months’ worth of supply. Yet home inventories rest at just above 1.9 million units, which equals about 4.7 months of supply, based on the current sales rates.

And inventories keep dwindling on a year-over-year basis.

According to the National Association of Realtors (NAR), listed homes for sale are down 16.8% from last March.

The declines aren’t regional, either, considering that 135 out of 146 markets tracked by NAR experienced year-over-year inventory declines. And about one-quarter of the markets witnessed declines of 20% or more.

So there’s no way we’re getting to six months’ worth of supply any time soon. Not unless home construction activity picks up in a major way. (FYI: New home construction remains 66% below the peak, which also flies in the face of any bubble talk.)

Now, when you couple this scarcity of listings – particularly high-quality ones – with historically low interest rates, what do you get?

Competition for properties, of course. It’s the basic economic principles of supply and demand at work.

Or, as real estate agent Barbara Brown-Allen told Bloomberg, “Once the inventory is this short, you have a lot of people vying for the same properties.”

But we don’t have to fret about this situation leading to another bubble. For two reasons…

Two Factors Keeping a Lid on Prices

First, increasing mortgage rates promise to slowly erode record affordability.

Borrowing costs for a 30-year fixed mortgage just hit 3.51%, the highest level in six weeks. As rates creep higher, it should help contain demand.

Second, as I shared in late February, most mortgage applicants now boast FICO scores above 740. So lending standards remain tight.

The NAR’s Chief Economist, Lawrence Yun, says that’s a bad thing. In his latest report, he said, “The bad news is that underwriting standards remain excessively tight.”

That’s not bad news, Mr. Yun. It’s great news!

Insisting on higher credit scores ensures that the real estate market doesn’t get (way) ahead of itself… again.

Or, as Jonathan Miller – President of the real estate appraiser, Miller Samuel Inc. – says, it’s “keeping the process close to honest for the time being.”

I think Mr. Yun would agree that a little honesty is certainly not a bad thing!

Bottom line: Despite all the fearmongering, we’re not in another real estate bubble. Not yet, at least. So we should continue to look for ways to profit from the recovery.

With that in mind, I’ll soon share an opportunity to pocket a short-term gain of as much as 50% on an under-the-radar real estate investment. Be on the lookout for it!

Ahead of the tape,

Louis Basenese

Facebook (FB) CEO Mark Zuckerberg has lost $5.8 billion on paper since he took the company public a year ago. Call it a “fine” for allowing the company’s share price to dwindle this year.

And although shares have climbed notably higher since hitting a low in September, the stock has a ways to go before it reaches its IPO level.

Can’t say that we’re surprised.

We’ve been dogging Facebook long before its IPO.

In January 2012, Chief Investment Strategist, Louis Basenese, provided the three most compelling reasons why the company was doomed to fail from the start.

~Reason #1: Social Media IPO Flops

Both Zynga (ZNGA) and Groupon (GRPN) had flopped during their IPOs. Zynga traded below the offering price on its first day of trading. And although Groupon zoomed 55.7% higher on the first day of trading, within weeks, the stock collapsed to trade below its IPO price of $20 per share.

Today, they’re both trading way below their IPO price.

~Reason #2: Beware Slow Growth

With IPOs, you’re essentially investing in the future of the company. So if that company can’t grow, watch out below!

And as Louis said last year, “In about four years’ time, Facebook’s user base went from 66 million to 800 million. If Facebook grows at the same rate over the next four years, its user base would hit 9.7 billion. I can guarantee Facebook isn’t going to keep growing that fast. There literally aren’t enough potential customers on Earth.”

~Reason #3: Who Needs Profits?

Not focusing on profits is fine and dandy when you’re a private company. Not so much when you’re a public company. As we all know, Wall Street obsesses over profits. Every quarter. That’s why stock prices ultimately follow earnings.

So the fact that Mark Zuckerberg wasn’t focused on profits from day one was a huge red flag. As he said in an interview with The Wall Street Journal before the IPO, “The thing to take away isn’t that we don’t care [about business]. People for years were asking me why aren’t we trying to make more money. I would say I’m trying to build a business for the long term…”

Doesn’t sound like such a good idea now, does it?

In his 1993 hip hop anthem, O’Shea Jackson, better known as Ice Cube, raps…

“You better check yo’ self before you wreck yo’ self. Cus’ I’m bad for your health, I come real stealth.”

And that’s exactly the warning speculators in the new(ish) and wildly popular digital currency, Bitcoin, need to hear.

Otherwise, they might find their dreams dashed – or worse, their portfolios “stealthily” ruined.

Let me explain…

Desperate for An Alternative to the U.S. Dollar

Ever since the Federal Reserve embarked on its easy money campaign, everyone and their mother has been on a crusade for an alternative reserve currency.

The battle cry? Stop devaluing our money!

I hear you. But what are we going to do about it?

Several years ago, the euro was the top answer to the currency woes. Then the eurozone imploded. Game over.

China’s yuan entered as the next great contender. But let’s be real. We have a better chance of seeing Jesus tomorrow than we do of seeing the world embrace the currency of a communist government as the new reserve.

Even if the Chinese government finally decides to allow its currency to freely float – rather than controlling its value within predetermined ranges – it’s still not going to happen.

Of course, during the world’s desperate search, the Federal Reserve has just continued printing more money. And that has only intensified the desire for an alternative.

Enter, Bitcoin.

Bitcoin was envisioned in a 2008 paper by the pseudonymous developer, Satoshi Nakamoto, and launched in 2010.

It’s essentially a peer-to-peer electronic cash system that can be transferred through a computer or smartphone without an intermediate financial institution.

That sounds incredibly interesting. Or, as Jeb Terry of Aberdeen Investment Management says, “Bitcoin is a curiosity.”

Let me assure you, though – it’s nothing beyond that.

So any talk about Bitcoin being a potential alternative currency is a function of desperation, not rational thinking.

Even if it keeps garnering more and more notable support.

You Don’t Impress Me Much

Last week, BitPay – an Atlanta-based startup involved in processing payments that merchants receive in Bitcoins – secured $2 million. Founders Fund, a venture capital firm backed by the co-founders of PayPal, led the round of funding.

A few weeks before that, Coinbase, an 11-month-old startup that also facilitates Bitcoin transactions, secured $5 million in capital from another Silicon Valley heavy-hitter, Union Square Ventures.

Despite such strong votes of confidence, though, Bitcoin stands zero chance of being a legitimate, widely adopted currency. And here are three key reasons why…

~Bitcoin Pitfall #1: In God Nobody We Trust

No doubt, the atheists who cringe over the fact that U.S. paper money says “In God We Trust” love the fact that Bitcoins pledge no such allegiance.

In fact, many supporters of the digital currency tout the lack of any centralization or regulation over Bitcoin as a key selling point. Combine that with a finite supply of Bitcoins (21 million), and it seems like no government can inflate the currency.

I’ll concede that a world without inflation would be wonderful. And Bitcoin is set up to make that a possibility.

But without regulation, and the guidelines and legal protections that come with it, consumers have no reason to trust the currency.

And if we can’t put our trust in a currency, we won’t use it. Simple as that.

Besides, if you think governments around the world are going to sit on the sidelines and allow an unregulated, digital currency to gain momentum, you’re crazy.

The Department of Homeland Security has already dropped the hammer on Mt. Gox, the world’s largest Bitcoin exchange, for operating a money-transmitting business without a license. And that’s only a preview of what’s to come.

So this whole notion of an unregulated currency is really just a pipe dream. While citizens might want it, world governments won’t allow it.

Whether or not that’s fair doesn’t matter. It’s reality.

~Bitcoin Pitfall #2: No Guarantees

In addition to lacking trust, we have no guarantee that Bitcoin won’t be replaced. I mean, what’s going to stop a better Bitcoin from coming onto the scene?

And if the limited supply drives up prices to untenable levels, there’s nothing to stop the creators from simply creating more Bitcoins.

They say they won’t. But do you actually trust them?

Put another way, would you be willing to accept your next paycheck in Bitcoins?

Yeah, I didn’t think so.

~Bitcoin Pitfall #3: No Inherent Value

Haters continually deride the U.S. dollar because it’s not backed by anything of value.

What’s the difference with Bitcoin?

Just like there’s no inherent value in paper, there’s no inherent value in a bunch of ones and zeros in cyberspace.

That means there’s no way to figure out what a fair price is for a Bitcoin. And that’s ultimately the digital currency’s undoing. It’s nothing more than a (wild) speculation.

When Bitcoin first hit the market, it had little to no value. But the price of each coin quickly soared above $25. Then it collapsed back to $5 again.

After a slow and steady recovery, prices zoomed above $250 in the wake of the asset seizure in Cyprus. And sure enough, they cratered back down to Earth again.

Notice a pattern?

I’m sorry. But people want a currency with a stable value. And that’s something Bitcoin simply can’t offer.

Bottom line: The only reason people won’t stop talking about Bitcoin is because of the chart above. Forget its “sound theoretical underpinnings,” as Henry Blodget of Business Insider notes. Greed is what’s driving interest right now.

Investors see an opportunity to make a quick buck on a far-fetched “asset,” just like they’ve been doing for centuries. Tulip bulbs, anyone?

And the fringe set of retailers that accept Bitcoins are no different. They like the currency because it allows them to avoid interchange fees. And it also immunizes them to the risk of chargebacks. (Like cash transactions, Bitcoin payments can’t be reversed.)

In other words, it lines retailers’ pockets with more money.

Ultimately, it’s greed – not a genuine interest in a fundamentally stronger alternative to the status quo – that’s driving Bitcoin prices.

So forget Bitcoin being a contender as an alternative currency. At best, it’s a speculative investment. And a very speculative one at that.

Ahead of the tape,

Louis Basenese

You’re not alone, either.

By our best estimates, there are roughly 1.2 million such freaks trading the market each day.

What would happen if all these paranoid maniacs decided to sell?

Well, it’d look a lot like the Hindenburg crash of 1937, which I just happened to watch a documentary about last night.

Look, we’re all human, which means it’s perfectly natural to be a bit paranoid, given that the market keeps hitting new, all-time highs (on what seems like a daily basis).

However, asking about it with no way of arriving at an answer makes no sense at all.

Didn’t you know that only purpose-driven paranoia is productive and acceptable?

To that end, on Wednesday, I introduced you to my trusty “Bear Market Checklist,” which provides a systematic way to assess whether or not anxiety over a stock market collapse is, indeed, warranted.

Full disclosure: I can’t take credit for the checklist. It actually represents a compilation of reliable bear market indicators monitored by myself, along with other noteworthy Wall Street veterans.

Like Richard Bernstein and Morgan Stanley’s (MS) Chief Investment Strategist (and author of the must-read investment book, The Art of Asset Allocation), David Darst.

However, the fact that others find the indicators worthwhile should only boost your confidence in using it.

Now, earlier in the week, I just had time to cover the first four indicators out of nine. Today, I’m finishing the job, so you’ll be fully equipped to answer the most nagging question about the stock market.

Let’s get to it…

~Bear Market Warning Sign #5: A Peak in New 52-Week Highs

Bull markets can’t keep rising on the backs of a few stocks. To the contrary, the rally must be broad-based.

It must have “breadth,” as Wall Street pros like to say. And we can easily measure the rally’s breadth by monitoring the number of new 52-week highs.

An early warning sign that a run-up might be losing steam is a declining number of stocks hitting new 52-week highs. As I’ve shared before, Ned Davis Research found that the average bull market ends 30 weeks after the number of new 52-week highs tops out.

So when was the last time this occurred during this bull market? Two weeks ago? Two months ago?

Try two days ago!

As Bespoke Investment Group reports, “An astounding 37.2% of stocks in the S&P 500… hit new 52-week highs [on Wednesday].”

Based on the averages, even if that reading ends up being the tippy top, this bull market could endure until December 11, 2013.

~Bear Market Warning Sign #6: Cash Crunch

For stocks to keep hitting new highs, investors need to keep buying more shares. And that takes cash.

But unlike the government, which can simply print more money as needed, individuals can’t. So by monitoring cash balances on the sidelines, we can determine if there’s any fuel left to propel share prices higher – once investors find themselves in the buying mood.

Again, there’s nothing to worry about right now. Although I shared on Monday that investors are rotating out of money market funds into stocks, there’s still plenty more cash to go around.

To be exact, there’s another $2.583 trillion in money market mutual funds, according to the latest tally by the Investment Company Institute.

That’s down about $1.2 trillion since the bull market began. But it’s about $1 trillion more than right before the dot-com collapse. And it’s about $2 trillion more than the lows hit during the early 1990s.

Any way you look at it, there’s more than enough cash to keep fueling this rally.

~Bear Market Warning Sign #7: Get Shorty!

The “smart money” has a pretty good track record of increasing their short bets ahead of stock market declines. Therefore, if we’re so overdue for a correction, we should see short interest creeping higher.

Yeah, that’s not happening. Short sellers appear to be borrowing a page from Taylor Swift’s book. They remain completely noncommittal.

The short interest as a percentage of float for the S&P 1500 Index stands at a measly 5.7%. That’s almost exactly where it stood one month ago when I last brought this indicator to your attention. Yet the S&P 500 Index has rallied another 5% since that time.

~Bear Market Warning Sign #8: Runaway Valuations

Bull markets give way to bear markets when valuations get overstretched.

Consider: Prior to the dot-com collapse and the Great Recession, the price-to-earnings (P/E) ratio for the S&P 500 Index reached almost 30.

Today, though, it stands a tad over 16. We’re nowhere close to the danger zone.

Not to mention, we’re looking good on a forward P/E ratio basis, too.

As of May 10, the forward P/E ratio stood at 14.2, which is only slightly above the 10-year average of 14.1, according to FactSet.

~Bear Market Warning Sign #9: Stocks Can Only Go Up

The time to be wary of a stock market collapse comes when everyone (and their mom) gets bullish and starts buying stocks.

That’s not now.

As Darst says, “Nobody is buying stocks.”

Exaggeration? Maybe a little bit.

But the point remains: We’re nowhere close to a Great Rotation into stocks. There’s no one running around saying that “stocks can only go up” – like they did about real estate not too long ago.

The data backs me up, too…

Take the most recent sentiment readings from the American Association of Individual Investors (AAII), for instance. They’re not even close to being out of whack. The latest bullish sentiment reading checked in at 38.5%, compared to an average reading of 38.8% since 1987.

And the latest bearish sentiment reading clocked in at 29.3%, which is right in line with its long-term average of 30.6%.

Then there’s the STALSTOX Index, which measures the average recommended allocation for stocks by U.S. chief strategists. It’s not overwhelmingly bullish, either. Currently, it rests at 49.2%, down from 61% at the start of 2012.

Bottom line: If you’re prone to worry, I suggest you keep this checklist handy. It’s a much more reliable way of pinpointing exactly when this bull market is losing steam.

Ahead of the tape,

Louis Basenese

If any professional baseball player (particularly one in New York) puts up stats like that, he’s immediately booed and ridiculed.

But when it comes to a particular stock market indicator, it’s actually a reason to celebrate.

And guess what? It’s time to break out the bubbly!

No Batter! No Batter! Big Whiffer!

I can’t tell you how many readers routinely accuse me of being too optimistic. And I’ll readily admit that I’m a “glass half full” kind of guy.

Despite my predisposition, though, I always base my bullishness on cold, hard facts. So my optimism is always justified.

What’s more, when the data warrants a pessimistic stance, I have no problem embracing it. And we simply start sleuthing out attractive short-selling opportunities together.

Right now, however, there’s nothing to be bearish about. And I say that with conviction, because my “Bear Market Checklist” is a perfect 0-for-9.

Heck, not a single indicator on the list is even close to flashing a warning sign. We’ve got nothing but big whiffers!

Take a look…

~Bear Market Warning Sign #1: A Tightening Fed

When Fed Chairmen – and their merry band of bankers – start tightening monetary policy, it’s time to keep an eye on the exits.

Why?

Because they have a tendency to overdo it, thereby creating a much more challenging environment for businesses.

Or, as Richard Bernstein notes, “Historically, bull markets didn’t end when the Fed started to tighten. Rather, they ended after the Fed tightened too much.”

We’re in the clear now, though, since Ben Bernanke isn’t even contemplating an end to the quantitative easing efforts.

If you want something specific to track, look at the yield curve. That is, the difference in short-term and long-term government bond yields. When it inverts (i.e. – short-term yields rise above long-term yields), it’s a surefire indicator that the Fed has tightened too much.

As you can see, the current yield curve is nowhere near inverted.

~Bear Market Warning Sign #2: The Incredible, Disappearing Profit

By now, I’m sure you’re tired of hearing me say that stock prices ultimately follow earnings. But it’s true. So when corporate profitability starts taking a hit, it’s only a matter of time before stock prices head south, too.

Again, we’ve got nothing to worry about.

In the first quarter, S&P 500 companies reported a 3.2% increase in earnings. And analysts expect them to keep growing over the next three quarters, by 1.6%, 7.9% and 14.2%, respectively.

~Bear Market Warning Sign #3: A Recession is Coming! A Recession is Coming!

Economic activity tends to slow down long before corporate profits take a hit. So we need to be on the lookout for reliable signs of a looming recession.

Note the word “reliable.”

I say that because, at any given time, there are always a handful of analysts warning that a recession is coming.

Ignore the Chicken Littles – and their opinions. Instead, focus on the hard data, including the two most reliable recession indicators I shared with you in late March – Piger’s “Recession Probability Index” and the 2/10 Spread. (For the record, they aren’t flashing any warning signs.)

Besides, although the economy isn’t firing on all cylinders, it’s growing nonetheless. The latest estimates call for GDP growth of about 2% this year.

~Bear Market Warning Sign #4: A Spike in CDS Prices

With all the funny money being pumped into the market by the Federal Reserve, another banking crisis is the biggest threat to the stock market.

As I’ve shared before, there’s a simple and quick way to determine if we need to be fearful. All we need to do is consult the latest prices for credit default swaps (CDS) for banks and brokers.

CDS prices reflect the cost to insure against a default. So if banks are truly about to pull the stock market into the abyss, CDS prices should be rising rapidly.

Guess what? Right now, we have nothing to fear but fear itself.

Or, as Bespoke Investment Group says, “Our Bank and Broker CDS Index is now at its lowest level since April 15, 2010. Over the last week alone, financial-sector default risk is down 8.5%, and it’s down 50% over the last year.”

Stay tuned for tomorrow’s column, where I plan to share the remaining five indicators on our “Bear Market Checklist.”

In the meantime, pop a pill and relax. There’s no immediate danger threatening stocks.

Ahead of the tape,

Louis Basenese

For months, we’ve heard that a “Great Rotation” is underway. That is, investors are dumping bonds and promptly putting the money back to work in equities. And this uptick in buying activity is precisely why the stock market keeps hitting new all-time highs.

Sounds perfectly logical. And Wall Street appears to be corroborating the theory.

“You have this huge migration moving from grossly overweight fixed income back into equities,” says John Stoltzfus, Chief Market Strategist at Oppenheimer.

The only problem? The data tells an entirely different story.

Here’s the proof in a single chart – and, more importantly, why Wall Street’s latest deception ironically bodes well for us…

Stocks Back En Vogue

I’ll be the first to admit that a transition is afoot.

In January, investors (finally) rediscovered stocks. U.S. stock funds reversed 20 consecutive months of outflows by attracting a record $18.4 billion.

And over the course of the first quarter, the enthusiasm for stocks intensified. According to the fund tracker, EPFR Global, investors plowed a total of $53.9 billion into stock funds in the first three months of the year.

Yet none of these purchases were fueled by the sale of bonds.

As you can see, U.S. bond funds actually attracted another $43 billion in fresh capital in the first quarter.

Granted, that’s down about $30 billion from the same period last year. But it’s still a net inflow, which indicates that investors aren’t rotating out of bonds one bit.

So where’s the money coming from to buy stocks? Money market funds.

Based on EPFR data, investors yanked a total of $103.9 billion out of these funds in the first quarter.

The latest numbers from the Federal Reserve support the EPFR data, too. According to the Fed, the $644-billion influx into savings accounts and CDs we witnessed in 2012 slowed to a trickle this year.

As I’m sure someone will point out, I’m basing my conclusion on data for the first quarter of 2013, which ended about six weeks ago. And a lot can happen in that amount of time.

Fair enough. But even if we look at the most recent data, it’s clear that a rotation out of bonds still isn’t underway.

Survey Says? Bonds Over Stocks

The latest weekly report from EPFR reveals that investors still prefer bonds to stocks.

Case in point: For the week ending May 10, global bond inflows totaled $13.07 billion, versus $10.49 billion for stocks.

And if we focus only on U.S. flows, bond funds and stock funds finished the week almost dead even at about $7 billion. So investors certainly aren’t ditching bonds en masse in the United States, either.

Of course, those headline figures don’t tell the whole story.

As Cameron Brandt, EPFR Global’s Director of Research, said, “A single ETF accounted for over $5 billion of the total net [equity] inflows and retail redemptions were the second highest year-to-date.”

Bottom line: Forget all the chatter about the so-called “Great Rotation.” Investors still love bonds more than stocks, which means this bull market has plenty more room to run.

If you’re reluctant to embrace such an optimistic view of reality, tune in tomorrow. Boy, do I have a statistic that’ll zap any bearishness out of you!

Ahead of the tape,

Louis Basenese

Mobile point of sale (POS) systems are quickly gaining momentum in the market.

According to research firm, IHL, the traditional point of sale industry was worth about $18 billion worldwide in 2012. And it’s expected to grow about 5% this year.

Mobile POS, on the other hand, is projected to grow 39% – from $2.3 billion in 2012 to $3.2 billion by the end of 2013.

Of course, companies like Square are leading the way. But others, like New York-based ShopKeep, are also getting more and more attention lately.

ShopKeep works in a similar way to Square, in that it uses iPads for POS transactions for small businesses.

Customers pay $49 a month for each register (with a discount for three or more), and a one-time equipment fee of roughly $1,100. That includes an iPad, a cash drawer, iPad stand, card swiper and printer.

Joel Branson of One Girl Cookies, a trendy New York bakery, certainly likes the system…

“It’s very cost-effective, for the complete set up. It cost about 20% of what a big, bulky Windows-based PC point of sales costs, which is great. The iPad has numerous functionalities. I use it for my stereo. I use it for my time clock. I use it for the internet. $50 a month is nothing in comparison to all the time I save, actually not having to dig through all the receipts. It’s so easy to use. I’ve been doing it for 11 years, and can’t even imagine going through the first nine without this.”

Better yet, ShopKeep plans to improve its system from here…

As the CEO and Founder, Jason Richelson, says, “We’re now getting so many customers and they continue to want this feature and that feature, and we’re trying to deliver what their needs are. We can never make everyone happy. But we’re trying very hard. That’s why we moved to this [New York City] office. We’ll be able to hire more engineers [and] hire more people, so we can deliver on the needs of our customers.”