China: No. 1 Cyber crook... Paper money versus democracy... ECB cuts rates... Blood in the streets... More cockroaches... Jeffries: The next MF Global?... Einhorn: Buy GDX... Sprott owns more gold and silver than ever... Badiali's new silver picks... $100 billion here, $100 billion there...
I remember speaking with Barron's editor Randall Forsyth about Microsoft some years ago. He asked me about China, reminding me of the old saw that there's only one legal copy of Microsoft Windows there.
I was reminded of that conversation by a Bloomberg report today. It says China is the biggest perpetrator of economic espionage in the world. The Bloomberg piece was based on a report released today by the office of the National Counterintelligence Executive, which is responsible for countering foreign spying on the U.S. government.
It's not terribly far-fetched. If you were China, what would you do? Reinvent the wheel? Or spy on an American wheel factory and go back home and build one just like it? Bloomberg says Russia does the same thing.
I think this is what happens when there's a decade long consensus that a developing country is going to rule the planet within 20 years. It becomes an equity bubble... then a property bubble... then a fricking disaster.
Today, China is rapidly becoming known as the home of every dirty financial and economic trick in the book, from reverse-merger scandals to empty cities built with government-mandated loans to the most massive intellectual property theft endeavor in the world.
Paper money trumps democracy (once again)...
The Greek Prime Minister George Papandreou has withdrawn his call for a referendum on last week's 130 billion-euro bailout plan. He says no vote is needed because the primary political opposition to it has changed its mind. Everyone with enough power to get his name in the papers has decided a bailout would be good because it'll keep Greece in the European Union and on the euro.
Politicians like to stay close to ready sources of fiat currency. The Greek economy is a junkie economy, thanks to political meddling that penetrates every corner of national life. This can't end well.
The European Central Bank (ECB) is doing its part in the charade, taking a page out of Helicopter Ben Bernanke's book. The new president of the ECB, Mario Draghi, surprised the world today by cutting its key interest rate from 1.5% to 1.25%. The Germany, Italy, and Spain iShares MCSI exchange-traded funds are all up around 3%-5% today. Yippee! Free money! Is there anything better for stocks? (Actually, yes – real economic growth.)
You'd think folks would learn to sell everything and head for the hills when the central bankers start cutting rates. I guess they still believe they can just ride the next bubble to a fortune, instead of losing their shirts, like they did in the last one. It reminds me of the bumper sticker that appeared in Silicon Valley around 2002: "Please God, just one more bubble."
Of course, real investors aren't wringing their hands and obsessing over the headlines about Greece and the rest of Europe. They're more likely salivating at the level of distress hitting European markets.
When times are truly horrible – with blood (sometimes literally) running in the streets – real investors step in, provide liquidity, and make a killing. This is rarely done, because most so-called investors believe they can learn to pick tops and bottoms. But nobody can really pick tops or bottoms.
Instead, you need guts. Without a steel gut to go with a keen analytical sense, you'll wind up selling in a panic. That's a huge reason why stocks are a terrible investment for most people. Most folks don't have the emotional wherewithal to ride out storms.
There's never just one cockroach. When we learned of MF Global's overexposure to European sovereigns – and the fact that the company "lost" hundreds of millions of clients' dollars – we questioned the larger, systemic issues... Who else has been loading up on European debt? Who else is misappropriating client funds? Which brokerage will fail next?
The answer, it appears, is Jeffries Group… another medium-sized broker/dealer. Egan Jones, the only reputable rating agency, lowered the company's credit rating from triple B to triple B-minus, stating its high exposure to European sovereign debt. From Egan's report…
|
We are concerned about the values included in the $2.7B of "sovereign obligations" per page 24 of the Aug. 2011 10-Q representing 77% of shareholders equity. Although not as highly leveraged as MF Global's 40:1, we would prefer that JEF maintain a lower leverage than its 12.9:1. |
Jeffries plunged 20% on the announcement, then halted trading. It resumed trading, improved to a 7% loss, and halted again.
The company issued a statement saying it had "no meaningful net exposure" to European sovereigns as of August 31. Jeffries claims it holds short positions and futures instruments of $2.55 billion, offsetting long positions of about $2.68 billion. We eagerly await the slow drip of destructive news from Jeffries...
Billionaire hedge-fund manager David Einhorn believes, as we do, gold stocks are cheap compared to the metal...
"A substantial disconnect has developed between the price of gold and the mining companies," Einhorn said yesterday on a conference call for Greenlight Capital Re. The reinsurer, which Einhorn chairs, moved capital from bullion to Market Vectors Gold Miners Fund (GDX). Over the past six months, the GDX has lost 5.4%, while the metal has gained 11%.
"With gold at today's price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further," Einhorn said. "Since we believe gold will continue to rise, we expect gold stocks to do even better."
Einhorn – like fellow mega-investors Bill Gross and John Paulson – believes loose monetary policy will lead to debased currencies and higher interest rates...
"Given the challenging macroeconomic environment, we intend, for the foreseeable future, to continue holding a significant position in gold and other macro hedges in the form of options on higher interest rates and foreign exchange rates, short positions in sovereign debt and sovereign credit-default swaps," the reinsurer said in a regulatory filing Tuesday.
In his S&A Resource Report, Matt Badiali recently interviewed another billionaire who's bullish on gold and silver stocks – Eric Sprott of Sprott Resources.
"We're longer today than we've ever been," Sprott told Badiali. Currently, Sprott has about a quarter of his flagship mutual fund – more than $340 million – in silver bullion. Around 7% of the fund is gold bullion. And another 46% of the fund is gold and silver stocks. In total, Sprott has around 75% of his entire fund in gold and silver – the biggest allocation in the firm's history.
Taking Sprott's lead, Badiali recommended two silver miners in his latest issue, which we published yesterday. The two stocks are the cheapest, great silver mine in the world and the lowest-cost U.S. silver producer trading at a discount, respectively. Badiali believes silver could skyrocket 200% from today's prices. If that happens, these stocks will soar. To learn more about the S&A Resource Report and access Matt's latest issue, click here...
|
New 52-week highs (as of 11/2/11): Fairfax Financial (FFH.TO), Keyera Corp. (KEY.TO).
In the mailbag… It appears we might have Hunter S. Thompson's twin brother, James, with a seemingly narcotic-induced stream of consciousness rant about options trading. After that, it's the usual gushing about how our advice is actually worth what you pay for it. And finally, Porter responds to a subscriber's suggestion that it's unethical for us to recommend options trades. Write to us at feedback@stansberryresearch.com.
"I sold my business after 20 years, did well and at 45 years of age am, in my mind, a genius and a brilliant business man. Warren, here's my number give me a call when you need advice. Four ventures later, I knew why he never called. From a casual conversation I discovered covered calls. My wife has never missed a check... I needed income. Stocks became the venue and calls the answer. Stansberry introduced naked puts and my income increased 40%. It's about perspective. The goal is to increase the investment return. (See genius above.) The average guy can't 'pick' stocks. Hell, stock pickers can't pick stocks. The absolute key to success with covered calls and naked puts is using great companies. Did I mention the key is great companies? Would you rent McDonalds property at 2% per month based on the property value? Be patient. If a stock runs up and you are called out, buy it and do it again. Goes down buy it and follow it up. You did buy great companies after all. Don't get greedy. Margin can be your friend. (See MCD example.) Treat this like a business. One from which you'll never want to retire..." – Paid-up subscriber James
"My eyes have been opened as well. I am a long time PSIA subscriber, but 'took the plunge' and joined the Flex Alliance. My whole investment reasoning has changed. If I am interested in a stock, I have several ways to go. Do I just buy the stock, or buy the stock and sell calls, or sell puts to either buy the stock at a lower price or just pocket the premium if the stock goes up? My favorite strategy now is to buy 1/2 of the position that I am willing to hold in a stock and sell an out-of-the-money call and an out-of-the-money put. I either establish my position at a much lower price, or get a bonus dividend if the stock stays between the strike prices." – Paid-up subscriber Bill W.
"I appreciate your no-nonsense, tell-it-like-you-see-it approach.
"I will do the same. You write about puts and calls. Have you ever considered that though this approach is perfectly legal, it may be far from ethical. Why? When a person buys stocks or mutual funds that person is investing in a company. But puts and calls is simply an educated gamble on what the markets will do." – Anonymous
Porter comment: No... You're quite wrong. A put or a call is a standardized (securitized) contract. It is an offer to buy or sell 100 shares of stock at a given price for some period of time (from a month to several years).
Certainly, nothing is immoral about entering into a contract with another investor. You're providing a service – a financial guarantee – at a price you both deem fair.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
November 3, 2011