We begin our Digest today the way we usually end it... with a letter from a paid-up subscriber. There's a lot to learn from this subscriber's experience. I believe this is one of the best letters we've ever received. (Please note: I've lightly edited it for length and clarity.)
"I am a retired bond trader from a major Wall Street firm, 48 years old... I survived the disaster of Bear Stearns (my former employer, I had a heavy load of stock from deferred comp plans). My net worth did take a big roll back from the peak in Jan of 2007 in large part because of that one stock.
"I signed up for The 12% Letter in September of 2008 and PSIA in December of 2008. By late January I became a Private Wealth Alliance member. I plan on joining S&A Alliance on the next opening.
"My first PSIA trade was the short sale of DR Horton. I got stopped out on 3,000 shares, a $7,700 loss. I have lost on shorts on SPG ($8,600) and had one winner/one loser on COF, loss of $14,300 net. My worst trade for was the Oil Report's COP recommendation. Apparently both Buffett and AXA unloaded in size right after I got in and it blew through the stop pretty quickly. I lost $22,000 on 2,000 shares in one month.
"Virtually everything else I have done has been a winner. I often sell out-of-the-money puts on the long recommendations and out-of-the-money calls on short recommendations. The most important thing to me, though, after a very rough 20 months in the markets is your sound reasoning on investments has re-engaged my trading skills. I would have a hard time quantifying the effect this has had on my investment results, but it's definitely a major positive. I have cancelled 5 other newsletters I was receiving and now am working almost exclusively on names your team has researched.
"Winners include plays on SLV (I think it was Clark's buy/write recommendation) – I'm up $28,000. My original investment was only $50,000. Return on actual invested dollars is 56% over a five-month holding period. Incidentally that was my first precious metals long. I have invested in GLD, GDX and GG for $13,000 of profits so far this year. I played the DNA takeover by selling puts in 11 separate transactions. I cleared $13,260 and was never seriously challenged on the downside. In that series, I made $5,000 in March after the final agreement was made. I was stunned that there was still money on the table at that point. I will give you an assist on the Budweiser acquisition too. A friend had told me about it but seeing that you had recommended it gave me more confidence – $17,300 profit in option premiums.
"On Verizon [a longtime PSIA top buy] I have cleared $19,800 on expired puts dating back to last September. I am up $10,165 on the 4,500 shares I bought. I also held onto my existing Verizon position in my IRA, which would have stopped out otherwise. On Exelon [another longtime PSIA recommendation] puts, it looks like I am about to clear $9,500 on 15 put contracts that expire in July.
"My favorite [PSIA] recommendation was your strongest: to buy AWF and short TLT. I bought AWF, 10,500 shares, at prices from $6.70 to $10.35, averaged at $8.38. I am up $24,869 net on only $88,000 invested over five months. On the TLT side I have $8,180 in profits (expired call options I sold). Going by only actual dollars invested with a rough estimate of the time invested I would say this pairs trade made 37.5% in an average holding period of three months. Imagine that on a hedged bond play by a retail investor who only moved tepidly on the recommendation – a brilliant call.
"The last one I would mention was your short CAL, long CPN call in March. I played CAL by selling naked calls, I lost $1,670 in the price action. But on CPN I bought at $4.80 and stopped out at $10.21. That investment of $10,080 made $11,361 in 3 1/2 months.
"After several years out of the stock, you inspired me to get back into Annaly. I have cleared $13,535 in put premiums since late January and $6,500 in dividends and price appreciation. On Burlington Northern, I have cleared $11,610 in put premiums since April. Position sizes were no larger than 12 contracts.
"I have made some money on old recommendations from the archives or ones that went through stop loss recently. On the former, I cleared put premiums on Hershey, $5,300, and on the latter Sjuggerud's PHK junk-bond fund. I bought PHK after he was out and it went back down, and am up $6,000 on an $8,000 investment since March 12 (including interest). On GLAD, I am up $5,100 on a $19,000 investment in 3 months (enduring a 50% dividend cut to boot!). I made $15,400 on O after Dyson had stopped out. That includes a 30-day round trip buy and sell for 6 1/2 points on 1,000 shares and option premiums. I started those trades in October, closed out by December 2008. On the big cap plays Dyson did for covered calls, I played short puts there also. I had a nice run with McDonalds, clearing $8,350 with no position bigger than 15 contracts. With MO, I am up $6,700 in cleared premiums, dividends and capital gains on small trades. In Exxon, I am likewise up $4,000, and up $5,200 on KO. I am down $5,700 on PG.
"Adding all that up in my head it looks like $183,000 to the positive on trades I can identify with your company going back 8 months. I have probably averaged $400,000 in actual stock investments during that period (started very slowly) and $600,000 at risk on puts... Taking the net profit divided by the invested amount the return would be 49.9% on an annualized basis. Keep in mind, this period includes the massive sell-offs in the stock and non-government bond markets of late 2008 and the first quarter of 2009...
"Porter, not only did I do very well overall with picks from your company on a net basis, I somehow avoided extreme volatility in this portfolio during a very volatile market period. I do not have the tools to calculate a risk-adjusted return but I can tell you its very favorable. I am very pleased to have come into your services and look forward to a long and profitable relationship in the future." – Paid-up subscriber RL
I hope you'll take away three things from RL's experience. First, losses happen. That's ordinary and to be expected. Imagine if RL had decided after taking a loss on the first recommendation he got from me that he wasn't going to follow my letter anymore? The trick to success, as RL would tell you I'm sure, is to keep the losses small. That allows you to stay in the game, which is what RL did.
Second, RL wasn't afraid to try new asset classes as an investor. He'd never bought precious metals before, but he trusted our analysis on the sector and he made a killing as a result. If you've never bought bonds or sold options or shorted a stock – try it. We're recommending the strategy for a reason. If you're not willing to try new things, you're not going to get as much as you could from our advisory. As with anything you're doing for the first time, be careful. But don't be frozen out of our strategies simply because you've never done something before.
Finally... and perhaps most importantly... RL has been incredibly successful (earning $183,000 in profits on a portfolio of roughly $500,000) because he took the time to understand the fundamentals behind our strategies and optimized his own trading to best suit his needs. For example, he took advantage of stocks we had stopped out of but that wer
e now trading at much, much lower prices where they were attractive again. And he used various options techniques (like I cover in Put Strategy Report) to leverage our research into his trading.
Here's the biggest lesson from RL's letter: You can do it. You don't have to settle for horrendous mutual-fund returns. It doesn't matter if there's a terrible bear market. Following our letters and using your own simple risk-management strategies, you can always make money in the markets.
Bond King Bill Gross says the U.S. is heading into a "new normal" of higher savings and lower consumption, and investors should favor bonds and dividend-paying stocks. He says this new normal will last at least a generation, so investors should "stress secure income." And so far this year, not surprisingly, Gross has been right. Investment-grade corporate bonds returned 9.2% this year through June, beating Treasuries by a record 13.7 percentage points.
Every day we get more negative news about the commercial real estate industry... "Hotels without question will have the highest foreclosure rate of any commercial real estate sector," real estate hedge-fund manager and University of California economist Kenneth Rosen told Bloomberg. The value of hotel properties in default or foreclosure nearly doubled to $17.3 billion in the second quarter through June 24 from $9 billion at the end of the first quarter.
In addition to hotel properties being worth much less than they were two years ago, revenues are plunging... Luxury hotel revenue fell 28% in April from a year ago and has dropped for 12 straight months. Revenue per available room (RevPAR), a standard industry measure for room rates, is down 18% from January to March this year compared with 2008. One-third of the $8.6 billion in securities backed by hotel loans coming due in 2010 are at risk of default. And 20% of the $99.8 billion in commercial mortgage-backed securities coming due over the next 12 months are hotel loans – making them second behind office buildings. The worst offender... 753 Marriott-branded properties have a combined outstanding securitized loan balance of $10.4 billion.
Iraq completed its first round of oil auctions, and only one company – British oil giant BP – won a contract. BP will pump oil from the Rumaila oil field, which has 17.8 billion barrels of oil reserve. The company will earn $2 a barrel for every barrel it pumps out over 1 million barrels per day. Iraq expects output can reach 3 million barrels per day. BP originally wanted $4 per barrel, but the Iraqi government countered with $2. ExxonMobil offered $4.80 and wouldn't accept anything lower. It backed out of the bidding.
At $2 per barrel, Iraqi officials estimated foreign companies could have earned $16 billion in total. Meanwhile, with oil at $50, Iraq would take home $1.7 trillion. Maybe they can afford to pay us back for the war...
As we've pointed out before, a few billion dollars to the world's largest oil companies is a rounding error... And while it's exciting Iraq is opening up its massive reserves to foreigners, you won't make any money investing in the oil majors.
That's why we've recommended our two favorite microcap Iraqi oil stocks in Phase 1 Investor. One of these companies has a near monopoly for drilling oil wells in Iraq... And it's about to be very busy. This company is partners with the Iraqi government. When the oil majors enter the country, this company will be drilling almost all of the new wells. Today, we can buy it for 84% below its fair value.
The other company owns parts of eight oil fields in Iraq, two of which are in production. Preliminary results suggest this company's largest field will produce more than 2 billion barrels. We expect this stock to double in the next 18 months based on its production capability. But with the massive amount of money flowing into Iraq, it's more likely a Big Oil company will simply buy our recommendation for many multiples its current value... It's already happened with our Oil Report recommendation, Addax. To access our microcap Iraqi oil recommendations in Phase 1, click here.
New highs: CuraGen (CRGN), Hatteras (HTS).
In the ol' mailbag today... a lesson in Russian. Plus, as we mentioned the other day, we're interested in learning more from our subscribers about how they've put our research to good use. Send your case study here: feedback@stansberryresearch.com.
"I've made some very good money with Dr. Steve, but I dearly miss Dan's Extreme Value. I got a year's worth of a free look when I bought a life subscription to the Private Wealth Alliance. I dearly miss Dan's Extreme Value newsletter, as buy and hold suits my investment style... I also had a subscription to Ferris's Penny Letter. It was Dan's bad luck to start that particular missive at precisely the wrong time. The general market devastation crushed most of the portfolio. As crazy as it sounds, I was wondering if there were any plans to bring back a similar letter. I also miss the work you all did on foreign and medical holdings. Are there any plans to bring those back? Are there any plans to make Mr. Ferris' work more affordable on a long-term basis? Still, I've managed to make money in good times and bad with Stansberry & Associates, and I intend to keep it up, assuming of course you all do!" – Paid-up subscriber Steve Heitzig
Porter comment: We charge a premium price for Extreme Value because we believe Dan Ferris is the best single-stock analyst in America. He's worth it, as his subscribers know.
"You quite often use the words 'Amerika' and 'comrade' in your newsletters – both apparently Communist references. In case you are interested, there is no such word as 'comrade' or anything close to it in the Russian language. The correct word to use is tovarish, pronounced, tuh-VAH-reesh. Just thought you would be interested i
n knowing. Who knows, before too long maybe Russian will be the official language here, in honor of the U.S. going Communist." – Paid-up subscriber Jeremiah
Porter comment: Good to know, tovarish.
Regards,
Porter Stansberry
Baltimore, Maryland
July 1, 2009