Oil's unexpected plunge... A controversial claim... How to sell 'stock insurance'... Dr. Eifrig's 'cult following'...
Central banks around the world are printing money, and the great re-flation is underway. So you would expect oil to soar...
After all, hard assets perform well during periods of inflation. And oil is the quintessential hard asset. It powers the world.
And yet… as Digest readers know… Porter is bearish on oil. He maintains his bearish stance despite the trillions of dollars about to flood the global economy.
Several factors suggest oil will perform poorly. China is slowing down... And debt-laden European Union countries (notably Italy and Spain) are on the verge of collapse. As these economies slow, so will their demand for oil.
But Porter sees a larger, more fundamental reason for oil prices to fall... The drilling happening in the huge oil reserves in shale-rock formations across the U.S. right now (in places like North Dakota's Bakken shale and Texas' Eagle Ford) will create a glut in domestic supply.
Natural gas prices provide a good window to what a glut can do to prices... Natural gas prices spiked to almost $14 per thousand cubic feet (mcf) in 2008, but sit at $2.75 per mcf today – an 80% decline from the top.
Not only does the collapse in natural gas prices provide a model for what's about to happen with oil… it will exacerbate oil's decline. Porter believes historic low natural gas prices will encourage the world to find more uses for the fuel...
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What will propel natural gas prices over the medium term (say, five years) is an economic truism: It's impossible for a surplus of energy to exist for long. As prices fall, more and more uses for natural gas will appear. At some price, natural gas becomes competitive with other forms of energy. – November 2011, Stansberry's Investment Advisory |
When Federal Reserve Chairman Ben Bernanke announced a third round of quantitative easing (QE3) on September 13, markets jumped. West Texas Intermediate Crude (the benchmark oil price) jumped too, from $97 a barrel to $99 on September 14.
Then, the rally reversed... By the end of the trading day on September 17, oil had dropped to $96.51 a barrel. The markets thought it was a "glitch," like high-frequency traders piling into a false trend. We see it as the first signs of our thesis playing out... and besting Bernanke's all-powerful printing press.
The next trading day, oil dropped to $95.25 a barrel. Then, yesterday, in spite of the Bank of Japan announcing further easing, oil dropped again... Crude plunged more than 3.5% to $91.73 a barrel.
Some attributed the drop to vague comments from the Saudi oil minister that he expects oil prices to be "stable" this year. Others cited "technical resistance."
The answer is simpler than that... Oil demand is weak. And supplies are at a record high and growing.
Despite global easing, we're still bearish on oil...
For the rest of today's Digest, we'll cover one of the most important – and controversial – topics in our business right now.
The idea we are about to cover regularly gets us accused of "making up" numbers... of fraudulent marketing. We've received loads of hate mail about how we market this idea.
On the other hand, this idea is extremely important. It's an idea we want every single S&A subscriber to understand. We want our parents to understand it. We want our children to understand it. Knowing about this idea – and using it – is one of the real keys of successful investing.
It's a "high level" idea most of our senior analysts and employees use to make money in the market. Some of the more advanced investors on our staff use this strategy almost exclusively. We're proud of this idea... and proud of the claims we are able to make about it.
OK... I hope you're interested... because learning this idea means taking a major step forward in your sophistication as an investor. It's moving from little league to the major leagues. And I hope you're skeptical of anyone who claims he has profited on 81 of his last 81 trades.
You see, that's the source of controversy surrounding one of our exclusive trading services, Retirement Trader. Editor Dr. David "Doc" Eifrig has put together an unbelievable track record in the service. We mean that literally. People don't believe that going "81 for 81" is possible. We've been accused many times of making up the numbers.
We're actually happy that many of our readers are skeptical of these types of claims. We certainly are. A healthy dose of skepticism is a great thing for consumers of financial services and information. And it's good to be skeptical of a claim that someone has gone "81 for 81." It's just impossible, right? Isn't it too good to be true?
Actually, no. It's not. In the case of Retirement Trader, what Doc has done for his readers is incredible. He has strung together a series of 81 consecutive winning trades.
Doc has shown thousands of retirees how to safely and regularly pull thousands of dollars out of the stock market... and put it into their retirement accounts. It's no wonder we receive more positive – even gushing – feedback about this service than we do any other service we publish. We sometimes worry Doc has so many loyal readers, he has developed a "cult" following.
For example, here's an e-mail we received from subscriber Rick F., an experienced trader…
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I've studied options trading, subscribed to several trading platforms... and continued to lose money. I was lucky enough to subscribe to Stansberry in 2008... but had already lost a great deal of money and was afraid to follow his advice, instead, thinking I knew best about my own trading skills... and continued to lose money... but less now. |
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My trading today is built almost entirely of selling puts and calls on a daily basis, combing the six different Stansberry newsletters that I subscribe to in search of stocks to option. |
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I've gone from losing money to making $25,000 a month in net earning... and growing, and I've done this safely without overextending myself, taking very little risk in my opinion. I don't however take possession of any stock, rather I buy to close the day before expiration. |
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I have no desire to own stocks anymore, and I am so delighted to have learned from your newsletter, it has truly changed my life! – Paid-up subscriber Rick F. |
As some of our Digest readers know (and Rick alludes), the trading method behind Doc's unbelievable track record is the options strategy of "selling puts."
A "put" is an option. When someone buys a put option, he's buying the right (but not the obligation) to sell a stock at a set price (called the "strike price") by an agreed-upon future date. So when you buy a put, no matter how low a stock's price falls, you can still sell for the strike price.
You can think of a put option as insurance. The buyer of the option is paying a small premium to insure his position against a decline in price. But what most people don't realize is that individual investors can also sell someone that insurance and collect the so-called "option premium."
Again… Most folks find it easier to think in terms of insuring a home.
When you insure your home, you are essentially buying the right to sell your house to the insurance company for a certain value, under certain conditions, for a limited period of time. In return, you pay the insurance company to accept those terms – whether or not you ever exercise the terms of the policy.
Put options work the same way. When you sell a put option, you're acting like the insurance company. You're agreeing to buy someone else's shares of a particular stock for a set price, under certain conditions, for a limited period of time.
In the case of your house, you'd exercise your policy in a disaster... when a fire or catastrophic weather damage wrecks the value of your home. In the case of a put option, the holder would exercise his right to sell us his stock if the market value of his shares falls below the price we agreed to pay.
When you sell a put option, the trade works one of two ways. You either collect the entire premium without any obligation... or you end up buying shares at a discount. Considering the latter outcome, it's important to only sell puts on companies you want to own.
As an example, let's walk through an actual trade Doc recommended in Retirement Trader…
On November 22, 2011, Doc sold January 2012 $25 puts on Microsoft. At the time, shares of Microsoft were trading for $24.79.
In this example, $25 is the strike price. As long as shares of Microsoft traded for more than $25 by the expiration date (in this case, January 20, 2012)… subscribers who followed Doc's recommendation would book the entire premium with no obligation to buy shares. (After all, why would the buyer of that put exercise his option and sell shares for less than he could get in the open market?)
When Doc made his recommendation, the option premium for selling those puts on Microsoft was $1.15... An option contract covers 100 shares, so readers following his recommendation immediately collected $115 for every contract they sold.
On January 20, 2012, the Microsoft options "expired worthless." Shares of Microsoft were trading at $29.71 on the day the options expired – well above the $25 strike price. And Retirement Trader readers kept the entire premium for a 23% return on margin.
That word "margin" is important. When you sell put options, your brokerage requires you to set aside 20% of your potential obligation. Using the Microsoft example... If we sold one option contract, we're responsible for 100 shares at $25 (or $2,500). In this case, we'd deposit $500 (20% of $2,500).
Because we collected $115 in premiums and only had to deposit $500, we made 23% on the trade in about two months... That's a 142.3% annualized return.
We'll end today's discussion of selling puts here. I encourage you to read and re-read today's Digest. Once you understand how to sell puts – and how profitable this strategy is – you'll have a hard time doing anything else in the market.
Tomorrow, we'll explain the key to making this strategy work... There's a right way to sell puts, and there's a wrong way. The wrong way can lose you a lot of money. The right way is why Doc is 81 for 81….
New 52-week highs (as of 9/19/2012): Berkshire Hathaway (BRK-A), Guggenheim BulletShares 2015 High Yield Corporate Bond Fund (BSJF), Franco Nevada (FNV), ProShares Ultra Health Care Fund (RXL), Sandstorm Gold (SSL.V), Abbott Laboratories (ABT), Monsanto (MON), First Majestic Silver (AG), Yamana Gold (AUY), BLADEX (BLX), Procter & Gamble (PG), 1st United Bancorp (FUBC), Sysco (SYY), and GenMark Diagnostics (GNMK).
Selling puts shouldn't be a new concept to regular Digest readers… It's one of a handful of strategies we've urged readers time and again to try. Many readers have reported phenomenal success with the strategy. Are you among them? Or has something stopped you from trying?
If you've balked at the idea, we'd love to know why. Tell us your reasons at feedback@stansberryresearch.com.
"I've been meaning to write for awhile now and I'm finally getting around to it. First off, thanks for all the insightful, educational and amazing data that is contained in each and every one of your emails. Like others have said, I look forward to opening my email at the beginning of the day to see my DailyWealth Premium sitting there and at the end of the day with the market recap. I've never been a big finance or investment guy but I gotta say I'm completely hooked and the better my IRA does the more and more I want to learn.
"I don't have as much money as I'd like to put towards my portfolio (who does?), but I'm definitely trying to put as much away as possible. The purchase of our first home in March along with ongoing renovations doesn't allow for a lot of extra cash flow, however, having family close by to help renovate sure helps. Buying for 75% of the asking price doesn't hurt either and with my wife and I both being architects we hope the renovations will easily turn a profit. The constant emails from Steve about the upward trend in the housing market are encouraging and will hopefully make it all worthwhile.
"Currently, my total portfolio is up 15% (not including dividends) since the end of last year with my most recent acquisition… currently up 47% in just over a month!… Keep the information coming and I'll do my best to put it to work." – Paid-up subscriber LP
Regards,
Sean Goldsmith and Brian Hunt
Baltimore, Maryland
September 20, 2012