A major hedge fund follows our lead on Devon...
A major hedge fund follows our lead on Devon... A favor to ask... The End of Baltimore?... The End of America?...
As you may have seen, Ron Paul – the 22-year veteran Congressman from Texas, former presidential candidate, and lifetime fighter for liberty – decided to endorse our company a few weeks ago.
We are grateful, humbled, and deeply flattered by his decision. As a direct result of Ron's endorsement, we have received a large number of new (trial) subscribers – many of whom have never read financial newsletters before and who may be somewhat perplexed about what they find in our letters.
For new subscribers... there are two mantras I frequently invoke at the beginning of these Friday Digests. First and foremost: There is no such thing as teaching, only learning.
If you've ever learned something new and important in your life, I (Porter) know you will recognize the core truth of this concept. As much as I desire to be a great teacher and to make these critical concepts easy for everyone to get, none of this effort will amount to anything if you're not ready and willing to open your mind and think about what I've written below.
Second... my goal in these Friday essays (which I write personally each week) is: to tell you what I would most want to know if our roles were reversed. I believe that's the best way I can serve my subscribers and thereby grow this business.
I hope you will share these ideas with your trusted advisors and friends, and ask them to be critical of my work. As longtime subscribers know, I still personally read every e-mail that gets sent to feedback@stansberryresearch.com.
And... for longtime subscribers – "Porter Supporters" – I have a sincere favor to ask. If you've gotten value from our work and would recommend it to a friend, please write me one short note. It will take two minutes.
I'd like to know two simple things... One, why would you recommend someone read our newsletters (and this Friday Digest)? And two, how has Stansberry Research improved your investing and understanding of the markets?
Please send a short note today to feedback@stansberryresearch.com. My goal is to learn more about how subscribers are using our work, so that we can do more of what you really need.
Now, let's talk about oil. We've been predicting a major U.S. oil boom since 2010. We were the first investment advisors to write about the Eagle Ford and the Permian Basin Shales. We accurately predicted that oil would fall to around $40... that "Peak Oil" was bunk... that oil exports would boom (see our recommendation of Targa)... and that the U.S. would shortly become the largest oil (liquids) producer in the world, surpassing Saudi Arabia.
All of these things have come to pass, and many of these predictions resulted in huge profits for investors brave enough to believe in our ideas – which were considered "crazy" by the mainstream.
If you're a new subscriber, please review our July 2014 newsletter. This was an open letter to Devon Energy's management (which we've "unlocked" for you here). Devon is a major U.S. gas and oil producer with prime assets in both the Eagle Ford and the Permian Basin. Unfortunately, it also owns significant assets in Canada's oil sands – what we disparagingly call "oil mud." Last July, shortly before oil prices collapsed, we warned Devon's management team that their expensive-to-produce Canadian oil assets were dragging the company's value down and that it was foolish to continue to invest in Canadian oil mud when there was so much more value to unlock in Texas shales.
Sadly, the company didn't take our advice... and as a result, the stock fell sharply. We triggered a stop loss, exiting the position with a small gain. (Make sure you know how to use trailing stop losses.) And that's where the matter stood... until this morning.
Dan Loeb is the most fearsome "activist" hedge-fund manager on Wall Street today. Only Carl Icahn is more widely respected in the hedge-fund world. But Loeb is certainly more feared. His scathing letters to management teams are legendary. Finance wonks treasure Loeb and his ability to intelligently lampoon management teams making foolish decisions with capital.
Today, Loeb's Third Point hedge fund announced that it has established a "significant" position in Devon's shares. You won't be surprised to learn why... In his most recent quarterly letter, Loeb echoes – almost verbatim – the letter I wrote to Devon's management team nearly a year ago...
|
Many people wonder – with all of the chaos in the world's currency markets and with the huge and obvious risks America faces (like a completely unsustainable federal debt and tax burden) – why anyone would invest in the stock market.
My answer is the work you see above. Loeb has earned his investors 17% a year for 20 years, during good times and bad. He accomplished both capital appreciation and capital safety by operating an activist, hedged portfolio. He buys into companies that are cheap but improving, and he sells short companies that are expensive and failing. This is the same strategy we employ in my Investment Advisory.
And it works. We know from track-record studies of my newsletter's model portfolio that we've earned around 14% a year without using any leverage... results that are comparable to any of the world's best hedge funds. We get the same results because we're frequently doing exactly the same things, as this example clearly shows.
Another example is what happened yesterday with market darling Yelp. As you may have noticed, the company's market cap fell billions yesterday as shares dropped more than 23%. That's one of the biggest one-day collapses I've ever seen in my career. Lots of investors likely got wiped out by that move.
On the other hand, we recommended shorting the stock in March. Shorting is a strategy that allows you to profit when a stock falls. Subscribers who took our advice didn't lose 23% yesterday on Yelp... they made 23% in a single day.
The stock market allows us to protect ourselves from currency chaos by investing in things like oil, which performs well when currencies collapse.
It also allows us to compound our wealth safely in certain businesses that are positioned to thrive even during periods of turmoil – like well-managed insurance stocks and trouble-proof operating businesses like McDonald's.
I encourage our new subscribers to closely study our insurance recommendations and our "capital efficient" recommendations like McDonald's. These ideas give us our definitive edge in the markets. These stocks are poorly understood by other investors. There's a lot more to our strategy than outsiders understand.
The things we're recommending for our subscribers aren't hard to implement. But if you don't want to read our letter (for less than $100 per year) and do the trading yourself, I would recommend investing in Loeb's fund. His team will do exactly the same kind of sophisticated financial analysis on your behalf. You won't have to lift a finger. No more mantras about learning or treating people like you'd want to be treated.
There's only one catch. You'll have to deposit around $5 million with his firm. And you'll have to pay a management fee of 2% on that $5 million every year. Plus, you'll have to give his firm 20% of your profits. At a minimum, investing with Loeb will cost you $100,000 a year. And your total fees will likely be $500,000 to $1 million a year. But hey, you won't have to read anything.
Finally... a brief note about Baltimore. I'm one of the few (only?) financial analysts who has consistently warned about the growing risk of a violent societal breakdown. I began to issue these warnings with my End of America report in late 2010. What I see is simple for anyone to grasp if you know a few simple facts.
Here's the key thing to understand... For decades – essentially the entire history of this country – wages were linked to gains in productivity. In fact, this link (as the chart below shows) was one of few "sure things" in a market economy. The reason, of course, is easy to understand: As the value of labor increases through gains to productivity, competition for workers forces wages higher.
(Lest you think that chart is part of a vast "right-wing" conspiracy, you should know that I cribbed this chart from an article in the New York Times, written by leading liberal economist Paul Krugman.)
The breakdown between gains in productivity and gains in wages is the underlying cause of the kind of social breakdown we're experiencing in Baltimore and in cities all across America. And these problems are going to get worse – much, much worse – before they get better. Here's how I know...
In 1971, the U.S. government stopped backing the U.S. dollar with gold. As a result, the Federal Reserve can create as much new money as it wants, whenever it wants. The government, of course, uses this power to make sure that certain favored industries (banking, most notably) are protected. The Fed has printed $4 trillion in new money in just the last five years. It's also this constant creation of new money that allows the government to finance its own massive debts. Without the Fed, our government would have defaulted long ago.
The downside of this constant inflation is that wages are no longer keeping pace with gains in productivity. Wages are being inflated away. Inflation is a silent, invisible tax that no one votes for and few people understand. Since 1971, real, after-tax, adjusted-for-inflation wages haven't grown at all. They've been declining since the mid-2000s.
The combination of soaring productivity (thanks mostly to computers) and falling wages has put many Americans in a totally unsustainable position. There are fewer and fewer jobs. The jobs that remain, instead of paying more (as they should), actually pay less. That's what's destroying America's working poor.
The poor kid who (allegedly) got his neck broken by Baltimore cops – whose death sparked several days of violent riots – has been arrested a dozen times before.
He was a heroin dealer. He was selling poison to his own people in his own neighborhood. He was no saint. Last year, he was arrested on a serious (felony) drug charge – heroin distribution. He received 100 hours of community service for this charge. If we had a working criminal justice system in Maryland, this poor kid would have been in prison for the next 10 years... not back on the street getting his neck broken in a police van.
Half of the state of Maryland's prison population comes from this kid's neighborhood, a 70-block area in west Baltimore called Sandtown. Think about that for a minute. Think about how many resources are being wasted trying to put every drug dealer in west Baltimore in jail. These people aren't going to stop using drugs. We should have learned this from prohibition.
Our society is on a collision course. On one hand, there are folks like me (and probably you) who have benefited tremendously by the rise of computer networks and global capitalism. We have education. We have jobs. We have assets that appreciate during inflation. And our incomes are soaring. But the gains in productivity that are benefiting us are no longer leading to a stronger dollar, stronger wages for all workers, or for a higher standard of living across our country.
On the other hand... on the boat that's heading straight for us, there are several generations of Americans who are completely dependent on a bankrupt government, whose handouts and "welfare" payments are collapsing (in real, inflation-adjusted terms), whose "leaders" will not address their core internal problems of drug addiction, violence, and fathers abandoning their children.
Freddie Gray was 25 years old. He didn't deserve to have his neck broken. But he should have been in prison for most of his useful working life because he was a heroin dealer. My fear is that rather than doing the hard thing – demanding that people in neighborhoods like his get jobs, stop doing and dealing drugs, and start making positive contributions to society – our political leaders will instead treat these men (they're mostly men) like spoiled children and continue to build their culture of dependency.
Freddie Gray got 100 hours of community service for dealing heroin. He had been arrested a dozen times. He isn't the martyr you want leading your cause. But that's what's happening right now in our country... and it's not going to end well for anyone.
My biggest fear is that the underclass in America, who don't understand how inflation and the government is strangling them, will blame capitalism and the wealthy for their plight. The result will be violence on a scale nobody imagines is possible... and not just in Baltimore.
Ironically, it's only through real capitalism (with sound money) that America's underclass will ever be lifted out of poverty and the moral depravity that comes with it. Sadly, there are probably fewer than a dozen political leaders in this country who understand anything about sound money or its key role in creating a fair and just society. (Ron Paul is one of the few who does understand it.)
I'm more and more convinced that rather than doing the things that could save us, these politicians will continue to do the things that got us here in the first place: More taxes. More welfare. More leniency in crimes. We're reaping what we've sown for 40 years of "Great Society" programs that attempt to give people something that can only be earned... economic self-sufficiency and the self-respect that comes with it. As a result, as they say on HBO's hit series, Game of Thrones, "winter is coming"...
Civil unrest and a complete financial collapse is a scenario Ron Paul warns is facing our nation today. Ron recently appeared on camera to discuss these dangers. You can watch it by clicking here.
New 52-week highs (as of 4/30/15): Guggenheim China Real Estate Fund (TAO), and short position in Yelp (YELP).
Not everyone thinks our editorial is too long-winded... Send your e-mails – positive or negative – to feedback@stansberryresearch.com.
"I couldn't help but smile at a subscriber complaining that Stansberry's Investment Advisory is too long and wordy. I find them exceptionally well written and engaging. In fact, if they were twice as long (and wordy), I would probably enjoy reading them twice as much! There are some great stock recommendations given (Hershey is one of my better performing buys), but there is so much more value in the newsletter than a ticker symbol. That's why I am a lifetime subscriber – just don't cut them short!" – Paid-up subscriber Todd Johnson
Porter comment: The financial-newsletter industry was built 40 years ago by direct-mail marketing mavens like Bill Bonner, Howard Ruff, and Bob Kephart. These men sold newsletters via long marketing pitches that were delivered via snail mail. As a result, the buyers were all people who liked to read, who admired a good yarn, and who, unlike most Americans, bothered to read their mail.
These same cultural preferences remain among many publishers (like myself). But... more and more... our subscribers are folks who found us on a website. These people have a preference for short copy. They typically don't read for pleasure. And they almost never read their mail. They can't even fathom why anyone would want a printed copy of a newsletter.
We now have a much more difficult job trying to serve both groups and their dramatically different content preferences. We're in the works to offer "executive summaries" of our work in the form of a cover letter. This will allow folks who are reading on a cell phone to quickly get the gist of our recommendations and insights, while (hopefully) not taking away too much from the pleasure and enjoyment of those who like to read a good story. Stay tuned...
Regards,
Porter Stansberry
Baltimore, Maryland
May 1, 2015
