Markets are expecting QE3... Our favorite short sales... Buying gold is not enough... Silver is on a tear... Gold is more popular than stocks...
The market wants another round of quantitative easing. We can't think of another reason the Dow and S&P 500 rallied today…
Anticipation of a third money-printing program is no surprise, given the recent 18% decline in the S&P 500 since April 29 and the current market conditions – record-low interest rates, volatile market swings, and soaring gold and silver prices.
And Federal Reserve Chairman Ben Bernanke knows how to goose a market...
This Friday, Bernanke will address the world from the annual Fed Symposium in Jackson Hole, Wyoming. Since last year's Jackson Hole gathering, when Bernanke announced a $600 billion bond-purchase program, the S&P 500 rallied 28% through February 18, 2011. Gold – the scorecard of fiat money's deterioration – is up 53% since last year's meeting. It's flirting with $1,900 an ounce today.
While we're certain another round of quantitative easing is inevitable, we don't think it's coming this week. The Fed has already dropped interest rates to zero percent and printed trillions of dollars... Its options are limited. The next stimulus Bernanke announces will likely be his last, and he must save it for the right time... a more desperate time than today.
If the market continues rallying this week and Bernanke doesn't announce more money-printing at the Symposium, watch out below. We could see another market crash. But longtime readers are prepared for that…
We've been advocating adding short sales to your portfolio all year. And if you heeded our warnings, you've made a lot of money.
For example, in the December 2010 issue of Stansberry's Investment Advisory, Porter recommended shorting homebuilder Pulte Group…
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[W]e doubt the company will be able to earn enough money to pay the interest on its debts. Next year, the interest will total $222 million. It will also have to repay or refinance $397 million in debt coming due. That's a total of more than $600 million. |
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In 2012, it will have to repay or refinance $986 million in debt while paying another $204 million in interest... |
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The company has two significant assets on its balance sheet. Cash stands at $2.6 billion, though much of it is pledged as collateral for loans, as we described earlier. (The company's defacto cash cushion is roughly $800 million.) It owns nearly $5 billion worth of homes and land, which, at auction would probably fetch 50¢ on the dollar. So... let's say the company's assets in liquidation are worth around $3.3 billion. Measured against these assets you'll find $6.7 billion in debt... That's not a situation which would produce a quick and easy, low-cost refi. Just like PulteGroup's homebuyers, the corporate subprime lending racket has been mostly shut down. Our guess? You'll see the corporate version of a foreclosure within 12 months... |
Porter recommended shorting Pulte at $8.23. As I write, shares are $3.87 – a 53% gain.
To profit from the European crisis, Porter recommended shorting Deutsche Bank and Royal Bank of Scotland in his July issue. The thesis was simple:
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Several years ago, when it established the capital requirements of European banks, the Bank for International Settlements (BIS) made an exception to the reserve requirements for sovereign debts. As a result, European banks were greatly encouraged to buy government debt, which enabled them to raise their leverage ratios and report far bigger profits. The rub, of course, is these debts are not safe and will surely default. That will cost the equity investors in these banks all or most of their investments. These stocks, which are very liquid and trade in the U.S., should be easy for you to sell short and will provide a great hedge against the coming global volatility. |
As Europe continues deteriorating, so will these two bellwether banks. The Deutsche short is up 25%. And we're up 39% on RBS.
Given recent market strength, it's a good time to revisit what we look for in a short sale...
First, we look for heavily indebted firms that cannot service their debt (like our short sales of GM, Fannie, and Freddie). Second, we search out an obsolete company (think the recently bankrupted bookseller, Borders Group). The third thing we look for is Porter's personal favorite – fraud (WorldCom, Enron).
In his most recent issue, Porter recommended shorting a company involved in a massive fraud. You can learn more about it here...
We thought it would be fun to match our "short selling check list" up against that of the world's greatest short seller, Jim Chanos... They're almost identical.
Jim Chanos founded the short-only hedge fund Kynikos Associates. He nailed the Enron and WorldCom frauds, profited from the decline in secondary education, and just went short China. Chanos looks for four different types of shorts:
1. Booms that go bust – Chanos defines a boom as debt-fueled growth where the underlying cash flows don't cover the cost of the debt.
2. Consumer fads.
3. Technological obsolescence.
4. Structurally-flawed accounting – In addition to the literal meaning (creative accounting that can overvalue a company's assets), this is a friendly way of saying fraud.
In last Friday's S&A Digest, short selling was one of five ways we recommended you protect yourself today. The other four steps were…
1. Have a year's worth of living expenses in gold and silver.
2. Make sure your family is safe from the threat of violence.
3. Hold cash.
4. Obtain a food source, like a co-op.
Our friends at Sovereign Man have an even more exhaustive list of steps you should take to protect yourself from the End of America. They advise, as we do, to buy foreign real estate, open foreign bank accounts, and look into second citizenships and passports. The folks at Sovereign Man are the experts on these topics. They constantly travel the world looking for the best countries (and influential people within those countries) to protect themselves and their readers from the deteriorating U.S.
If these ideas interest you, I'd advise you to read Sovereign Man's essay, "Buying Gold is Not Enough." You can read it, for free, here.
While gold is still dominating the headlines, let's not forget about silver... In the August 8 Digest, we wrote…
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Gold is soaring – and stealing all the headlines. But silver is still under $40 an ounce. Compared to where it was trading for most of the last three years, silver is cheap next to gold. We don't think this will last for long... |
Silver has rallied from $39.86 – when we wrote the above – to $43.60 today. But the gold-to-silver ratio is still over 43. As silver continues to be viewed as a monetary asset, that ratio will approach its historical average of 16. Silver has a long way to run...
There are plenty of ways to own silver. You can buy bullion, ETFs, or silver stocks. The different forms have different advantages. For example, silver stocks are more liquid than bullion... But if a monetary crisis hits, you'll be able to exchange your bullion for goods and services. While we can't say which form of silver ownership is best for you, we can tell you the cheapest way to buy it. Doc Eifrig discovered a way to buy physical silver for as little as $3. You can get the full details in Retirement Millionaire. Click here to learn more...
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New 52-week highs (as of 8/19/11): SPDR Gold Trust (GLD).
Some nice notes in today's mailbag. Send your praise or criticism to feedback@stansberryresearch.com.
"No too many people actually understand what's going on here... ..but I'm convinced you are damn close. Your Friday writings in the digest are absolutely indispensable to those who truly value education and trying to understand what's actually happening in the world around them. At the risk of feeding your enviously large ego, kudos to you for your smarts and your defiance in trying to explain to folks what you really think they need to know. I, for one, will be forever grateful.
I have made a point over the past decade of determining who is really worth listening to and who is not. Since the latter list is infinite, let's concentrate on the former. In no particular order, here, in my considered opinion is the short list of those who 'know'. Eric Sprott, John Embry, Chris Weber, Doug Casey, and Porter Stansberry. Not coincidentally all five are massive gold (and silver) bulls. That's why fully 75% of my investable net worth (low 7 figures) is in gold and silver bullion. The collective smarts of these 5 guys are 'saving my bacon'.
Porter – just keep it coming man – you are truly among the best of the best!" – Paid-up subscriber Jonathan M. Smith
"I have not been reading very long, but in the five months since I found your newsletters I've learned so much. I wish I knew of you a long time ago. Mr. Stansberry, I have come to view you as the real life John Galt. Please don't go to Atlantis." – Paid-up subscriber Jefferey Smith
"Hello mr stansberry, i always look forward to your friday digest. It' sounds to me that this would be a perfect time for all governments to get rid of a very significant portion of all the cash that is circulating in the undergound economies and ilegal activity in the us and around the world. Im sure we can take hundreds of billions of dollars out of circulation. This would be done by giving people 30 days to turn in their old dollars for a new type of dollar that looks different than the old dollar. At that time people would have to somehow show where the money had come from, or maybe give each adult $1,000 allowance no questions asked to trade in anything above that they would have to fill out an irs form. who knows if thats part of the plan anyway." – Anonymous
Good investing,
Sean Goldsmith
Baltimore, Maryland
August 22, 2011