From Porter Stansberry in the S&A Digest:
In Friday Digests, I always do my best to teach you something new about finance... something you're unlikely to learn on your own… something your broker would never mention... something valuable... something that gives you a better "toolbox" as an investor.
It's funny that I continue to write these messages because I don't believe in teaching. Or as I like to say: There is no teaching. There is only learning. Few subscribers actually want to learn anything. It's a wonderful thing to be confident about your ability to invest successfully... to always know how take money out of the market in any environment. What I'm really trying to do is to broaden your horizons and inspire you to learn more about finance. Having access to this knowledge has greatly enriched my life.
Take the short positions in my newsletter, for instance. Since the market peaked on April 29, I've recommended seven short sells against only two long positions. That means, while most people were losing money in stocks this summer, we've been able to make a lot of money – about 22% on average for each position. And all the recommendations have been profitable.
Did I know exactly when the market would peak? No, of course not. Do we make money on every single short recommendation? No, of course not. But… as you watched the market turn over this year… it didn't take a rocket scientist to see why adding short positions made sense. If you're familiar with shorting stocks, employing this strategy was simple and kept you in the market this summer. But if you've never tried it… if you don't understand it… you were probably left absorbing losses with no good way to hedge.
So if you're a new subscriber, I urge you to see what I've written about buying discounted corporate bonds, selling options, and the importance of having access to the downside of the market, via selling stocks short. Looking at the various gauges of market volatility (the VIX is now over 40!), it's probably a good time to look carefully at selling some options. I firmly believe that if more of our subscribers understood these financial options – bonds, shorting stocks, selling options – they would be unlikely to ever simply buy stocks again.
Happily, I think we've made some progress. Paid-up subscriber John Howlett wrote to me this week…
I wanted to echo a comment that Porter made a while back in the Digest concerning Mike William's True Income (discounted corporate bonds) and Doc Eifrig's Retirement Trader (which focuses on selling option to generate income) being two of your best newsletters. The comment stuck with me because I had come to the same conclusion probably about a week prior...
When I first subscribed to one of your newsletters about three years ago, I made mistake after mistake – wrong position sizes, lack of trade stops, buying leveraged short funds to try to time the market, lack of discipline, doing too much, etc. If you can name it, I did it. The funny thing is that I considered myself a conservative investor... yet somehow these things "happened." In any case, True Income is fantastic. Not much needed except to be patient and to buy the bonds at a good price… His calls on Global Industries and Western Refining doubled my investment in them – safely.
I had seen where Porter had several times mentioned the power of selling options – particularly puts. Not buying options, but selling them. It only took a couple of trades with Dr. Eifrig's principles to see just how right this was. In just a few weeks, I understood enough to expand his ideas to other stocks – mainly with Dan's World Dominators – putting together a spreadsheet to keep track of the option and stock together and treat them as one position.
It was stunning to see that with careful work, a person can make 18%-20% per year – or more – selling options while reducing risk. On market down days, I'm looking to sell puts. On market up days, I'm looking to sell calls. Bottom line... I have learned tremendously from these guys. My personal opinion is right along Porter's on this one. These two newsletters are gems – your readers that don't use them are missing out.
Let me emphasize... John Howlett is not an employee or a relative. We didn't solicit his comment in any way... And we didn't edit his comment for anything other than length and clarity. I say so because I understand there is a tremendous amount of cynicism and skepticism in the newsletter subscriber community – and rightfully so.
The simple truth is... the sophisticated strategies found in our publications True Income and Retirement Trader make these newsletters difficult to sell or even to explain to novice investors. Subscribers must be willing to learn. And most people are not. It's simply up to you. Try these products – along with shorting stocks via my newsletter (Stansberry's Investment Advisory) – and see if it doesn't change everything about your outlook on investing. I know it will. But I also know most people will never, ever take the first step.
In today's Digest, I'm going to return to the unfolding global banking crisis. I know, I know... many of you are tired of reading about it. A longtime reader – probably the first subscriber I ever gained – complained to me this week via e-mail that he doesn't even read the Digest anymore because he is so tired of my doom and gloom...
I used to NEVER miss an issue because I was sure I'd learn something useful and they were exquisitely smart in some sort of truncated way… Now I feel like I'm getting an ongoing macro analysis of the world economic crisis… The truth is that I often glance at the Digest now and then delete them… I think I read this stuff for wit and attitude more than for his analysis… since your analysis is pretty much the same as it's always been.
He's right, of course. If you go back and read my March 2010 issue of Stansberry's Investment Advisory – "The Greatest Danger American Has Ever Faced" – you'll see that I specifically warned about the huge losses facing Europe's banking sector 18 months ago. I didn't believe these losses could be financed, given the perilous state of Europe's sovereign creditors.
To give a specific example, I picked Italy's UniCredit, because it is the direct predecessor of Kreditanstalt, the Austrian bank whose failure in 1931 knocked Europe and eventually America, off the gold standard.
Today, UniCredit is the largest creditor to Eastern Europe. It owns, for example, Bank Pekao, Poland's largest lender. It generates about half of its profit from Ukraine, Hungary, Romania, and Slovakia. JPMorgan estimates loans to Eastern Europe will generate roughly $40 billion of losses by the end of 2010. And who will bail out UniCredit's depositors if it fails? The Italian government? It can't. It is already struggling with enormous deficits and a debt-to-GDP ratio more than 100%. The rules of the European Monetary Union won't allow Italy's government to add that much more debt to its balance sheet. So what will happen…? I believe the crisis that began with subprime mortgages in 2008 will continue to spread until the world's sovereign credits collapse and the global system of paper money fails. – Stansberry's Investment Advisory, March 2010
Given that outlook... it's not surprising that most of what I've written since then has been a continuation of these warnings. My monthly titles since then include: "Hungary Matters," "The Worst Is Yet to Come," "Risks of a Global Famine," "The BIG Collapse in Bonds," "Time Is Running Out," "For Whom The Bell Tolls," "The Day the Dollar Dies," "Phase III of the Monetary Crisis," and last month's "Europe's Breaking Point." Clearly, I've been hitting people over the head with the message.
And for some people, the message has gotten old... They're tired of reading it. Perhaps they didn't take action sooner to protect themselves... Or perhaps they believe the tide is about to turn, and they want to know what to do next... Or perhaps they're simply tired of reading bad news. Sorry. I don't make the news. I just report it... and I continue to believe these risks are so serious that nothing else is as important. Not even close.
So... here's what will happen next. Soon, Greece will default. This will begin a chain reaction of European bank failures, because most banks in Europe have only written off a small portion (21%) of the value of the Greek bonds they hold. French banks are particularly vulnerable right now. This, in turn, will cause banks to stop lending to each other out of fear.
It will also lead to big losses in the commercial paper market. That's how the crisis will spread to the U.S. – our money-market funds still hold roughly 42% of the assets in loans to Europe's banks. Companies with exposure to European financial assets (like GE) and those that depend heavily on the commercial paper market for funding (like Capital One) will see their share prices plummet. As the global economy stalls and then moves into recession, unemployment will worsen… and political tensions will greatly increase. I expect large-scale civil unrest in both Europe and the U.S.
In the short term, commodities are also likely to fall sharply. The crisis is nearing a breaking point. Europe represents the world's largest economic area. I expect oil will fall at least in half from its peak. You could see silver fall, temporarily, by maybe another 30%. Gold could fall by maybe 25% from its peak. Base metal and energy commodities – stuff like copper and coal – will get crushed, like they did in 2008. In short, this is Europe's turn to have a Lehman Brothers-like banking collapse. Only this time, it will involve dozens of huge banks and several different countries, all of which have different ideas about how the crisis should be solved.
And that means it will probably be a longer and deeper crisis than Lehman Brothers. But... sooner or later... we're going to see a massive reversal. The Fed will step in to support the ECB, and a tremendous amount of new euro will be issued. I expect the euro to fall to parity – 1:1 – with the dollar before this crisis is over.
The hard part will be knowing when the time comes to jump back into blue-chip stocks, strategic commodities (like oil shale assets), discounted corporate debt (which I believe will get much, much cheaper from here), and strategic metals (like gold, silver, copper, and iron). During the Lehman crisis, the peak interest rate spread between junk bonds and U.S. Treasurys was around 22%. The spread on European bank debt could get at least that high, as will most of the sovereign debt of the peripheral nations. And we're just not there yet.
Is there a chance I'm wrong? Is there any realistic way to solve this crisis without a Greek default and a European banking crisis? I don't see how. Germany is the only truly solvent, large European country left. And the German voters continue to hand the ruling party loss after loss in local elections, specifically because the public is almost unanimously against Germany bailing out the rest of Europe. Likewise, the German representative of the ECB resigned last week out of protest against any future quantitative easing, aka money-printing.
What should you do while this crisis continues to deepen? The same advice I've been giving since March 2010. If you're sophisticated, you want to build a large book of short sells to hedge your stock market exposure. You should own at a minimum 15% of your assets in gold and silver. If you're unable or unwilling to hedge your portfolio, I recommend putting half your portfolio in Treasury notes (via the iShares short-term Treasury Bond fund, SHY) and half your portfolio into gold (via the iShares gold fund, GLD). Doing this 50-50 split between gold and the U.S. dollar is the only true way to go to "cash," given the tremendous uncertainty in the future of the global paper money system.
I wish I had better news… or a more promising strategy I could endorse. But as always, I've got to write what I believe. I hope you'll remain patient with me and continue to subscribe. When the market turns, I'll get you back in... just as I did in November 2008 through May 2009.
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