JPMorgan's big numbers... Why Goldman's will be better... Last day for Retirement Trader discount... China's president slams the dollar... Editor's note: If you didn't already see it, please review the annual Report Card Porter published in last Friday's Digest. Our Report Card is a great way for readers to get added insight into our publications. Porter will publish the second installment of the Report Card this Friday.
Financial stocks jumped higher Friday on news of JPMorgan's 47% increase in quarterly earnings. CEO Jamie Dimon predicted demand for new credit would expand this year and noted the U.S. consumer "is getting stronger." The bank issued $50.8 billion in new mortgage loans, up 24% from a year ago. Total loans were up 9% from a year ago. But the biggest contributor to JPMorgan's $4.38 billion in earnings was $2 billion of reserves it released (fewer bad loans freed up the cash).
If JPMorgan's numbers are this good, you can bet the best on the street – Goldman Sachs – will announce blockbuster numbers on Wednesday. Unlike JPMorgan, Goldman doesn't have a retail banking operation. Instead, Goldman makes the bulk of its money trading (some $100 million a day) – a much higher-margin business than taking deposits and writing mortgages. And it almost never loses money... You may recall last year when Goldman made headlines because it lost money on 10 trading days one quarter (the bank usually only loses money on one or two days... it's had perfect quarters before). Despite the 10 losing days, Goldman still made more than $5.6 billion in trading revenue.
Goldman uses huge leverage when trading – somewhere between 20 to 30 times. Committing such little equity means the potential profits are huge. But so are the risks. At 20 times leverage, a 5% drawdown wipes you out. The question we've long asked is "how does Goldman make so much money, so consistently, when it's trading with huge leverage?" The answer is Goldman – or any other investment bank for that matter – doesn't trade like you or me. As we wrote last July:
They don't do the kind of trading most individuals do. They're doing pairs trades (buying one stock, while selling another), which limits risk. They're selling options, rather than buying them. They're trading very low-risk bonds, near maturity. And they have extremely accurate options-pricing models that give them a wide margin of safety on their trades.
Rather than trying to make 10% or 20% on each trade, these strategies are designed to earn small (1%) gains in a way that's essentially risk-free – day after day. While that might not sound like much... it adds up. – Digest, July 16, 2010
Coincidentally, Goldman agreed to more transparency when reporting its trading results. A new division at the bank called "institutional client services" will report revenue and earnings separately from bond, currency, commodity, and stock trading as well as prime brokerage (services the bank provides its hedge-fund and other institutional clients). But this extra transparency won't give you any more insight into how Goldman really makes its money.
We will still rely on our in-house expert, former Goldman "prop" trader – Dr. David Eifrig. After years of making a fortune "ripping people's faces off" – Wall Street-speak for a good trade – Eifrig tired of the life. He left Wall Street to become an eye doctor. But he retired from that profession, too. Now, he works with us. And he shares his trading secrets with his Retirement Trader readers. Eifrig has also taught many of us around the office (including Porter) some of his trading secrets... And we use these strategies daily in our own accounts.
Since we launched Retirement Trader last April, Eifrig has produced incredible results. Since launching the service last April, Eifrig’s gone an amazing 12 for 12 in his closed trades. For example, Retirement Trader readers made more than 20% in less than two months selling puts on Microsoft, more than 16% in two months selling puts on Annaly, and more than 9% in about two months selling puts on Eli Lilly.
Trust me, when you start trading with Eifrig and see how quickly and safely you can produce gains using his strategies, you'll wonder why you ever did anything else. It's the perfect strategy for retired people who need income to live on. Really, it's the perfect strategy for anyone tired of having to put so much capital at risk to earn a suitable investment income. Plus, as we deal with massive changes in global markets and economies this year, traders – not investors – will benefit. The volatility will play in their favor.
Even if you don't consider yourself a trader, I hope you'll watch this video discussing Eifrig's trading techniques. Also, today is your last chance to sign up for Retirement Trader at a generous discount.
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New highs: Atlantic Power (ATP.TO), WidsomTree Japan SmallCap Fund (DFJ), First Trust Dow Jones Select MicroCap Fund (FDM), Dun & Bradstreet (DNB), Calpine (CPN), HMS Holdings (HMSY), ExxonMobil (XOM), AmeriGas Partners (APU), EV Energy Partners (EVEP), Magnum Hunter Resources (MHR), Vanguard Natural Resources (VNR), Procter & Gamble (PG), SVB Financial Group (SIVB), Alexander & Baldwin (ALEX).
We're particularly proud of our annual Report Card... It's one of the many things that set us apart from our competitors. And judging by the mailbag, you enjoy it too. If you've never written in, we'd love to hear from you – we read every e-mail you send... feedback@stansberryresearch.com.
"That you provide the ratings at all is remarkable. That you do so with such objectivity and transparency is unique in the newsletter industry. As an aside, Mr. Stansberry, I want to thank you for Stansberry's Investment Advisory in particular. Yes, it has been good to me, but what I want to acknowledge is that I think it is in way of being your personal gift to your subscribers. I can think of no other explanation for the low price at which you make it available. Thank you." – Paid-up subscriber Randall Ward
"I record all my investment transaction in Quicken so it was easy to use your time frame, 3/1/2009 to 12/31/2010. My portfolio is up 44.2% for that period. I have no idea which letter contributed what percentage as I read them all (hopefully) and don't always act on every recommendation. Over the years, I have spent thousands on newsletters. Most lost me money. Yours are the best." – Paid-up subscriber Jim McNally
"When I subscribed a while ago I was promised four booklets or pamphlets on silver investing, etc., and so far haven't received any. All I've received are lots of e-mails." – Paid-up subscriber Don Winterstein
Goldsmith comment: We created a special "End of America" section under the "Stansberry's Investment Advisory" link on our homepage. It contains the five reports we sent you. You can view it here.
"Please let me know if you will send us recommendations for covered call options, and selling short put options, since I'm a subscriber." – Paid-up subscriber Norman
Goldsmith comment: We have an entire publication dedicated to covered calls, Jeff Clark's Advanced Income. You can learn more about it here. Also, Eifrig's Retirement Trader is excellent for recommendations on selling put options. You can learn more about it here.
Sean Goldsmith
Baltimore, Maryland
January 17, 2011