"We just didn't want to put up with it anymore," says Karen Potyk. She and her husband sold the last of their stock holdings on May 20, moving the money to bonds, certificates of deposit, and bond-like annuities.
Today's Wall Street Journal article, quoted above, discusses the huge numbers of individual investors that are giving up on the stock market. Individuals removed $20 billion from stock funds during the last three weeks of May.
We understand their frustration, considering how the Nasdaq bust, the housing bust, the European crisis, and the flash crash in May has whittled (and often "blown") away the value of their retirement portfolios.
Because most individual investors give their money to mutual-fund companies, "Main Street" really is at the mercy of large institutional investors. They're powerless against the high volatility and correlation that is killing returns... If you "bought and held" stocks for the past decade, you've underperformed most other investment classes.
While this flight from the market could be seen as a contrarian buy signal, we see it as a sign that more than ever investors need advisories like our soon-to-be-launched Retirement Trader advisory, written by Dr. David Eifrig.
As you may know, "Doc" was a proprietary derivatives trader for Goldman Sachs in the 1980s. He has more experience with the inner workings of Wall Street, and its options trading, than anyone on our team. In his new Retirement Trader service, Doc will show readers super-safe trades that help investors boost their returns... without taking the big risks that have decimated so many portfolios over the past decade.
He'll show readers things like how to buy "free stock options"... and how to make safe "income scalping" trades that can be hugely profitable when the market enters a period of high volatility. In his May issue (available in "beta form" to Alliance members only), Doc introduced a trade that is up 100% in less than two months.
We expect to launch Retirement Trader this week. And we're giving Digest readers the first opportunity to test our newest product once it becomes available. We'll continue to update you in the Digest.
Another market phenomenon that should scare you away from buy and hold... Headlines abound about the stock market's record correlation... and how stock pickers, who typically buy either out-of-favor or momentum stocks, can no longer generate returns above benchmark indexes.
Stocks' correlation, or their tendency to move in the same direction as the index, last week hit its highest point since the 1987 market crash. Every day, Connecticut-based research group Birinyi Associates calculates market correlation using the 50-day moving average of the S&P 500 versus its member stocks. A correlation of 50% means half the index's stocks are moving in the same direction as the market. A 100% correlation means all of the stocks are moving in the same direction. The average correlation since 1980 has been 44%. Last week, correlation hit 81% – the highest since October 1987, when it hit 83% for one day.
The high correlation is attributed to institutional investors playing the broad market instead of trying to outperform by picking individual stocks. Mass buying and selling of indexes and exchange-traded funds (ETFs) means more stocks are likely to rise and fall together on any given day. Since the S&P 500's April 23 peak, none of its 10 sectors have shown a gain... Not even in the super-defensive sectors like dividend payers, health care, or utilities. Meanwhile, Treasuries are up nearly 8% since the market peak.
Another interesting article in the Wall Street Journal last week discussed commercial banks swapping their gold for cash. The article says big banks are pawning their gold to the Bank of International Settlements (the so-called "bank for central banks") at a record amount... 349 metric tons since December, raising $14 billion in cash. The swaps are simple. A bank agrees to exchange its gold with the BIS in return for cash. The bank agrees to purchase the gold back at a later date.
The gold market was spooked because the amount of gold in question totaled 20% of global annual production (hence gold's recent floundering). But the market isn't reading enough into these gold swaps. Banks went to the BIS for loans and put their gold up as collateral... Likely because that's one of the few assets the BIS would accept. So gold is still serving its function as the world's only true money. The market is also worried the BIS will have to sell the gold if the banks default on loans. That won't happen for two reasons. First, the banks won't default because the government will bail them out. Second, if you were the BIS, would you rather hold gold or the money the government printed to pay you back in the case of a default?
We've got a small Internet sensation on our hands this week at Stansberry & Associates Investment Research...
I'm sure many of you have seen our marketing piece for the latest company under coverage in our exclusive Phase 1 Investor advisory... a small company set to introduce to the world what we've nicknamed "Gold Sands."
This company is nowhere near your standard gold exploration firm. It doesn't brave Canadian winters or cut down swaths of Central American jungle in its search for gold. This company is set to mine gold off the ocean floor.
On first glance, this claim sounds like it's straight out of one of our April Fool's Digest e-mails. But I can assure you... this company is 100% real.
That's why a handful of the richest, most powerful mining companies – and one of the smartest resource investors in the world – are financial backers of the company. And unlike most gold explorers, this company has no debt and plenty of cash to fund its projects.
Our marketing has generated a tremendous buzz in our industry. And since there aren't many companies involved in underwater mining, some folks have "divined" the company we're researching. This has pushed the price of its thinly traded stock over 30% higher than where it was trading before we sent our marketing piece out.
I can tell you right now, the people chasing this stock higher and higher are going to lose money. You should never buy a stock without doing your own due diligence or even reading ours... Plus, our entry strategy for this stock isn't what most folks think. To learn what all the fuss is about, click here...
Also, tonight at midnight is your last chance to sign up for Phase 1 at a generous discount.
New highs: ATAC Resources (ATC.V) and Carbo Ceramics (CRR).
We've got a first-timer in today's mailbag... tell us what's on your mind... feedback@stansberryresearch.com.
"I was born before 1920. The only financial education I received was being told 'never buy stocks or you will lose your shirt, shoes and shorts too.' When I was laid off for lack of work I took on other jobs. The only thing I borrowed money for was my house. My net worth including my house is probably about $180,000 which is probably pocket change for Porter. However a co-worker at the same factory where I worked invested in stocks and he died a couple of years ago. He left his estate to three institutions in the city so its worth became public knowledge. Its value was $3,000,000. With the present bunch of thieves running the government I don't think that performance can be repeated. I have collected Social Security for 28 years and over $90,000 from Medicare and I feel I am accepting stolen money. Nuff said." – Paid-up subscriber Klem
"I am an Alliance member who has never responded to anything in the S&A Digest. However, I was so taken by your Digest of 9 July, 2010, that I am writing to ask your permission to send a copy, as a letter to the editor, to my local newspaper. As a matter of fact, I think it should be sent to every newspaper in the U.S.A. I could acknowledge your authorship (or not, as you wish.) I could just change the wording a little, but I would not do that without your permission. The average person in my community needs to read this, written as it is. I, like you, cannot believe the utter economic ignorance of our elected officials (and, unfortunately, our average citizen.)" – Paid-up subscriber Tom Pope
Goldsmith comment: You may forward the S&A Digest for educational purposes to whomever you see fit. Please do not change any of the writing. And please always include the author's name and our website address (www.stansberryresearch.com).
"'If you're reading S&A, that's proof that you're brilliant, that your wife is beautiful, and your children are gifted.' As an alliance member I used to think highly of you just for the investment advice, now I know you must be clairvoyant." – Paid-up subscriber Sean B.
"What Hillary failed to mention, and what you can be forgiven for not knowing, is that the Brazilian tax code falls heavily on salaried workers, and almost not at all on wealthy business owners and others who can cook the books and/or arrange to get paid in an indirect fashion. The number of corporate and other loopholes available to the wealthy is a laughing matter, and these are kept open by a series of 'favors' for politicians, bribes in the legal system, and whatever other expediencies might be necessary. There is probably not one member of their equivalent of the IRS who has not taken bribes on multiple occasions.
"While I am not sure what this proves economically, one thing it does prove in the larger arena is that Hillary bases her opinions on a superficial understanding of the facts. It also shows, I think, that the better-off of the Brazilians are not even willing to pay taxes at the 27.5% rate which you rightly quote as their highest, and which is far below our own highest rate. I lived in Brazil for 30 years and worked in their financial system, so I know what I am talking about.
"Brazil's current spurt of growth is likely due to an abundance of natural wealth, including oil, and the fact that their far-left government has been more fiscally responsible than our own right or left wing governments over the last 8 years. How is this possible? It is possible because the history of deficit spending in Brazil proves definitively that the only possible outcome is hyper-inflation (about 2,500% in 1989, if memory serves). When Lula took over in 2002(?) he was faced with a situation so dramatic that he had no choice but to cut spending. Result? Surprise! Growth and stability. Who'd a-thunk it?" – Anonymous
Regards,
Sean Goldsmith
Baltimore, Maryland
July 12, 2010