A billionaire hypocrite... Gold and volatility act as they should... What a rising VIX means for option traders... Cisco crushed... A video you should watch... Another new high for Two Harbors...
Look who suddenly thinks modern too-big-to-fail banks are a bad idea...
Sanford "Sandy" Weill is one of the most famous bankers in the world. In the 1980s and '90s, Weill built the first mega-financial institution... known today as Citigroup. It was the first firm to house under one roof commercial lending, brokerage, insurance, and all the services large investment banks now offer.
Weill began his career as a lowly "runner" at Bear Stearns – handling stock orders for higher-ups. Then, he started a securities firm and later sold it to American Express for hundreds of millions of dollars.
Using that capital, Weill purchased Commercial Credit Corp., a low-end Baltimore lender, in 1986. He used Commercial Credit as the foundation for what is now Citigroup... Over nearly two decades, Weill bought a myriad of companies (including Smith Barney and Travelers)... all thanks to the free-flowing credit of yesteryear.
In April 1998, Weill wanted to merge his Travelers Group (which now included Aetna Life & Casualty, Shearson-Lehman, and Salomon Inc. – parent company of Solomon Brothers) with Citicorp. It was a $76 billion deal...
But federal law – specifically, the Glass-Steagall Act – stood in his way... Also known as the Banking Act of 1933, the law limited the activities and affiliations between commercial banks and securities/insurance firms. The details are arcane, but in essence... the newly formed Citigroup had up to five years to operate. If Congress did not repeal Glass-Steagall by the end of the grace period, the company would have to disband.
So like any egomaniacal bank titan, Weill set out to have Glass-Steagall repealed.
Weill launched a relentless lobbying campaign and appointed former Republican President Gerald Ford and former Democratic Treasury Secretary Robert Rubin to his board.
The Citigroup merger was completed on October 8, 1998. Glass-Steagall was repealed the next year. Weill ran the company until October 2003, when he was replaced by Chuck Prince (who ran Citi until it buckled during the crisis).
Imagine our surprise when we saw Weill on CNBC this morning essentially calling for the return of Glass-Steagall (which many blame for the financial crisis)... Weill said...
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What we should probably do is go and split up investment banking from banking. Have banks be deposit takers. Have banks make commercial loans and real estate loans. Have banks do something that's not going to risk the taxpayer dollars, that's "not too big to fail." |
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I'm suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won't be at risk. The leverage of the banks will be something reasonable, and the investment banks can do trading. They're not subject to a Volker rule. They can make some mistakes, but they'll have everything that clears with each other every single night so they can be mark-to-market. |
Weill suggested banks should operate at leverage ratios of 12 to 15 times. This would ratchet down profitability and risk. Leading up to the 2008 crisis, investment banks had leverage ratios exceeding 50.
No one benefited more than Weill from the repeal of Glass-Steagall. Now, he is essentially closing the door on hyper-aggressive bankers who would follow in his footsteps. Should his recommendations be carried out, it would be impossible for anyone to build an empire like Weill did (though his creation proved to be a heap of highly leveraged garbage, which would have collapsed without government intervention). He's happy to risk taxpayer funds to save his own creation, but using it to save others is out of the question...
Just before the markets closed yesterday, I saw a "breaking" headline on the Wall Street Journal website... "Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring."
I expected the announcement to goose stocks. It didn't. There was zero movement aftermarket yesterday...
As of yesterday's close, the S&P 500 stock index has closed lower for three straight trading sessions. The Volatility Index (the "VIX") – which tracks the price of options and helps gauge levels of investor fear – is above 20... still fairly complacent, but up sharply from its three-month low of 15.45 last Thursday.
And gold is finally starting to act as it should... The yellow metal jumped nearly 1.5% today.
The response was lackluster for two reasons... First, the market expects more quantitative easing. It's going to take a lot more than an equivocal Journal article to boost the market. It's going to take a massive, globally coordinated cash blast.
Second, Jon Hilsenrath, the Journal staffer who penned the article, has become a sort of "boy who cried wolf." He's been leaking hawkish (action-oriented) commentary from the Fed since the central bank ended its last round of money printing (Quantitative Easing 2)... most of which led to no real action. And nobody believes him anymore.
If Fed officials floated the article to the Journal to try and influence the market, the investors' response was clear... "Print or we're selling."
Of course, if the VIX is rising, it means people are paying more to buy options... And that means option traders will have more opportunity to capture fat premiums from their put sales – the kind Dr. David Eifrig recommends in his Retirement Trader service. DailyWealth Trader co-editors Amber Lee Mason and Brian Hunt noted in today's issue that while the index is not at an "officially high" level of 30, its move up is creating some trading opportunities...
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The downside of a climbing VIX, of course, is that the broad market is slumping. That makes pulling the trigger on new trades hard. But sticking with a couple simple rules will keep you safe and increase your chance of profiting... |
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First, only sell puts on the highest-quality companies. These include 12% Letter editor Dan Ferris' "World Dominating Dividend Growers," Retirement Millionaire editor Dr. David Eifrig's picks, and Porter Stansberry's "no risk" stocks. (You'll find retail giant Wal-Mart (WMT), software giant Microsoft (MSFT), and health care giant Johnson & Johnson (JNJ) on all three lists.) |
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Second, sell puts after one of these stocks suffers a big selloff. That will "wring" a lot of risk out of the trade... and increase the premium you collect for selling puts. |
One World Dominator, computer networking giant Cisco, got crushed yesterday... The stock fell 6% after the company announced it would lay off 1,300 employees.
Cisco is cheap (at around 11 times trailing earnings). And it has more than $48 billion of cash on the balance sheet. Plus, it yields 2%. If you're looking for a put-selling candidate after the market rout, Cisco is a good place to start.
Selling puts is the most valuable trading strategy I know. It allows you to generate income, while naming the price you're willing to pay for world-class companies. If you stick to that strategy, it's among the safest ways to make profits from the stock market.
We know many subscribers will never try selling puts... and that's too bad. But if you're among those who are willing to set aside your fears and excuses ("They're too risky"... "It's too complicated"... "It's not for me"), we've prepared a video that explains this strategy and shows exactly how you can start generating hundreds or even thousands of dollars of income per month. If nothing else, at least watch this video... It's completely free. To watch it, click here...
One stock that bucked the downtrend yesterday, hitting a 52-week high and climbing again today, is Steve's mortgage REIT Two Harbors. We discussed Two Harbors in Monday's Digest. The Journal article did reinforce the fact that interest rates will stay low for a long time... And that's bullish for mortgage REITs.
New 52-week highs (as of 7/24/12): Two Harbors (TWO).
In today's mailbag... confessions of a corporate marketer. Send your questions or disclosures to feedback@stansberryresearch.com.
"Back in 1985 I was working for Prof Leonidas at the Faculty of Management Studies in the Commerce and Finance Program at the University of Toronto. He was formerly President of Coke Canada.
"Our task was to create the marketing program for New Coke. You know what happened next... what you don't know, is that my research suggested New Coke was ONLY a hit with impartial patrons... people who had no particular preference for their soda of choice... Digging a little deeper, my data showed loyal Coke drinkers would not switch or try other sodas... I predicted a backlash and loss of sales, as customers would feel alienated by Coke. I also presented Coke with a back-up plan... just in case I was right... it was called Coke Classic... and the rest is history.
"By the way, for several years Coke never regained the market share it once held prior to the launch of New Coke... at the time it was selling more Coke in one day than all other soft drinks combined sold in a year... including Pepsi.
"Not sure how the numbers look these days but I am sure they lost some ground.
"I worked closely with a fellow named Campbell... I believe he was VP of Coke Canada at the time.
"I went on to work on other projects for the faculty including Nescafe, Brim, Bombardier/Challenger and Loctite... fun times as a marketing student playing with multimillion-dollar budgets!" – Paid-up subscriber Gregg Mills
"Could you please give me a brief definition of 'free cash flow?' I see it in your various newsletters and am not sure what it is." – Paid-up subscriber Rennie Sheffield
Goldsmith comment: Free cash flow is operating cash flow (the cash a business generates from its operations) minus capital expenditures (what the business reinvests in itself). It's a measure of the cash a business generates after maintaining/expanding operations.
Regards,
Sean Goldsmith
New York, New York
July 25, 2012