A Market Legend Has Come Out of Retirement

A market legend has come out of retirement... The latest on oil... Badiali: The bottom is in for oil stocks... Last call for Steve's True Wealth Systems...

Billionaire George Soros has returned to the markets...

These days, Soros is better known for his statist political views than his trading prowess, but there's no denying he's one of the greatest macro investors in history...

His Quantum Fund hedge fund – which he cofounded with Jim Rogers in 1973 – returned an unbelievable 4,200% over its first 10 years. He also famously "broke" the Bank of England in 1992. In one of the greatest trades of all time, he made $1 billion in a single day betting against the British pound.

The fund was officially closed to outside investors in 2011. Since then, it has operated as a private family office – Soros Fund Management – managing Soros' multibillion-dollar fortune.

Even before this change, Soros had stepped back from making the fund's investment and trading decisions. For years, he has mostly left these decisions to other managers. And he officially announced his retirement in January 2015 to focus on "political philanthropy."

Apparently, that is no longer the case...

Last night, the Wall Street Journal reported that Soros is back at the helm of Soros Fund Management for the first time in years.

Why the sudden change of heart? The Journal says he was "lured by opportunities to profit from what he sees as coming economic troubles."

Hmm... Where have we heard that before?

Regular Digest readers already know Soros' fund disclosed big positions in gold and gold miners in the first quarter... along with a big bet against the S&P 500.

But the Journal notes that these trades weren't made by the fund's top managers, as most folks assumed. Soros made them himself. From the Journal...

Worried about the outlook for the global economy and concerned that large market shifts may be at hand, the billionaire hedge-fund founder and philanthropist recently directed a series of big, bearish investments, according to people close to the matter.

Soros Fund Management LLC, which manages $30 billion for Mr. Soros and his family, sold stocks and bought gold and shares of gold miners, anticipating weakness in various markets. Investors often view gold as a haven during times of turmoil.

Soros is bearish on the U.S. and Europe, but is particularly worried about troubles in China. He believes weakness there will lead to deflationary pressures – "a damaging spiral of falling wages and prices" – here in the U.S. and around the world.

But perhaps even more important than his concerns is his timing...

The Journal notes that the last time Soros was "closely involved" in his firm's trading was 2007, when he became worried about problems in the U.S. economy.

The bearish bets he made over the following two years added another $1 billion to his personal fortune.

Elsewhere in the market, the rebound in oil continues...

Crude oil settled at a 10-month high yesterday. West Texas Intermediate crude ("WTI") – the U.S. benchmark for prices – closed above $51 for the first time since last summer.

A number of factors are driving the rally...

Oil was severely oversold after falling to 12-year lows in February, and prices have benefited from falling production from U.S. shale producers and gradually increasing demand.

But the biggest factor has been something no one could have predicted: massive supply disruptions.

Longtime readers will recall that the massive increase in global oil supply – thanks to the U.S. shale boom and record production from OPEC producers – caused prices to crash in the first place.

At its peak, global oil production outpaced demand by more than 2 million barrels per day. This had fallen to an average of 1.4 million barrels per day during the first quarter of the year.

But over the past few months, oil production has been lost to a worker's strike in Kuwait, power outages and severe weather in Iraq, an export halt in Libya, wildfires in Canada, and militant attacks in Nigeria.

These last two are especially important... The disruptions in Canada and Nigeria alone have taken nearly 2 million barrels per day of supply off the market.

According to the U.S. Energy Information Administration, unplanned global supply disruptions soared to a record 3.6 million barrels per day in May.

In other words, in just the past few months, the global oil markets have swung from a surplus of nearly 2 million barrels per day to a deficit of nearly 2 million barrels per day. And more disruptions could be coming...

OPEC member Venezuela currently produces about 2.5 million barrels of oil per day. This number has been slowly declining for years as the country's socialist economy has fallen apart.

But the situation has deteriorated rapidly this year, and Venezuela is on the verge of collapse. There's a real chance the country's oil production could drop to zero.

Production in Canada is beginning to resume, and the disruptions in Iraq and Libya aren't expected to last long. But the problems in Nigeria and Venezuela are unlikely to improve in the near future.

In short, the dramatic surplus that caused oil prices to crash to nearly $20 per barrel does not currently exist. And while no one can know for certain, it appears unlikely that it will return anytime soon.

What should have been a short-term bounce in oil prices has become a likely bottom... unless (or until) oil production moves much higher again.

Stansberry Resource Report editor Matt Badiali agrees...

Matt says oil prices could be a little overextended in the short term. After the sharp rally of the past few months, a 10%-20% correction wouldn't be unexpected. But he believes a significant bottom is in.

More important, while he admits there is still "blood in the streets" of the oil sector today, he believes it's finally time to start buying select energy companies. He explained why in the June issue of the Stansberry Resource Report...

More than 70 oil and gas companies have declared bankruptcy since the beginning of 2015. Several of the biggest names filed in the last few weeks. In total, almost $52 billion in debt had to be restructured since 2015. That's only about 15% of all the debt issued to oil and gas companies... Moreover, that number is growing almost daily. In the first half of May, eight companies filed for bankruptcy. Combined, the restructured debt totaled $17.7 billion.

However, it isn't just the debt. Companies have destroyed their asset value as well. They're writing off billions of dollars. Many companies paid too much for their assets. The prices were based on the assumption that oil couldn't fall. If you buy oil production that is profitable above $80 per barrel and the oil price falls to $25 per barrel... your acquisition is worth a whole lot less than you paid for it.

The 84 largest oil producers (by volume) listed in the U.S. shed a mind-boggling $179 billion in assets since 2013. That's more money than 20 states make in a year. It's more than the gross domestic product of Rhode Island, Delaware, and Alaska combined.

As Matt noted, the oil and gas sector is changing quickly. Companies that took on too much debt, overpaid for assets, and/or spent more than they earned are in big trouble today.

Those numbers are bleak. But beneath the surface, some companies are quietly recovering. More from Matt...

We're beginning to see a handful of "good" companies emerge from the crisis. These businesses continue to improve their balance sheets and cut costs quarter after quarter, and their share prices are rising as a result. Don't get me wrong, none of these companies are solvent if oil prices stay at $25 per barrel... or $35 per barrel. But they did the things necessary to survive low oil prices.

You can compare it to a two-income family after the husband loses his job. There are some families that, even with extreme cuts, have too much debt. Mom's salary can't cover the interest payments. Unless Dad finds a job immediately, they are going to go bankrupt. Other families have two choices. They can assume Dad will find another job right away and just keep on living as usual... or they can cancel the vacation, quit eating out, and save money.

It works the same for all these natural resource companies. Longtime readers will remember the similarities with gold miners. But it can be any company that sells a commodity... If you borrow too much and spend too much, falling commodity prices will kill your company.

What's left are the more conservative companies. They didn't overspend during the good times. They cut costs and sold assets on the way down. And as oil prices head to $50 per barrel, these are the companies that will benefit.

But that's not the only reason he's bullish today. He also showed subscribers that oil and gas stocks just broke out above a critical trend line...

The chart below shows the Thomson Reuters Datastream Oil and Gas Index. It's made up of 78 companies from all parts of the oil industry, including explorers, pipelines, refiners, and service companies... Companies from ExxonMobil, to Williams Partners, to Halliburton are on this list.

After peaking in 2014, the index bottomed earlier this year. It's now up 29% since its low in January 2016. Most importantly, it just broke out to the upside of an important "trend" indicator (red line). Take a look...

The red line is called the "10-month moving average." It's the average monthly closing price for these stocks over the last 10 months.

As Matt explained, the reasoning is simple: When the index is above the red line, you want to own oil and gas stocks. When the index is below the red line, you want to be out of oil and gas stocks.

As you can see in the chart, the index recently moved above the red line for the first time since October 2014. Matt explained why this simple chart can be so valuable...

This is important because economic data is usually months old by the time you get it. Gathering the details of the oil market is slow. For example, the latest available production data is from March 2016. Consumption data lags even more. This indicator is simply the best way to gauge the bottom of the market. And right now, it's telling us that the bottom is in for oil stocks.

Finally, a quick reminder...

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New 52-week highs (as of 6/8/16): Aflac (AFL), Becton Dickinson (BDX), Bank of Montreal (BMO), Western Asset Emerging Markets Debt Fund (ESD), Fidelity Select Medical Equipment and Systems Fund (FSMEX), VanEck Junior Gold Miners Fund (GDXJ), Johnson & Johnson (JNJ), Medtronic (MDT), 3M (MMM), Altria (MO), Pretium Resources (PVG), Ritchie Bros. Auctioneers (RBA), Silver Standard Resources (SSRI), AT&T (T), Vanguard Inflation-Protected Securities Fund (VIPSX), and ExxonMobil (XOM).

In today's mailbag, a subscriber sends high praise for Steve Sjuggerud. Send your questions, comments, and criticisms to feedback@stansberryresearch.com.

"I've been a subscriber for a long time and way back when Steve called RXL in True Wealth we stopped out. Then he called RXL again a few months later and I thought 'this bonehead is gonna make me go broke!' Well... look what happened to RXL I'm kicking myself for not listening to Steve. Years later... I was EXTREMELY skeptical of Steve's multiple calls to buy GDXJ. In and out. In and out. In and out and back in the trade. But since I decided to just trust Steve after seeing what happened to RXL I stomached his advice I am now I'm sitting on 100%+ gains in GDXJ.

"Steve is the real deal. I finally upped the ante and became a lifetime subscriber of True Wealth Systems. It's only been a few weeks but every recommendation of Steve's I've followed so far is a winner compared to the S&P 500. And please don't fire Porter. He's the one who hired Steve. Thanks again guys." – Paid-up subscriber Matt Vestrand

Regards,

Justin Brill
Baltimore, Maryland
June 9, 2016