Chalk one up for the good guys... Back in February, I told subscribers of my newsletter, Stansberry's Investment Advisory, hard drives were approaching obsolescence, thanks to the growing capacity of flash drives (which use solid-state technology). Looking at the $18 billion combined market value of the two largest consumer hard-drive makers (Western Digital and Seagate), I saw a disaster in the making:
Guess who makes the highest-quality solid-state memory devices? Intel. You do not want to compete against Intel. Nobody can survive competing against Intel. Think about it... Intel already makes nearly all of the microprocessors used in personal computers. It can optimize its memory cards for use with its processors. Hard drives won't be able to compete on price or performance for consumer-level storage needs... – Stansberry's Investment Advisory, February 19, 2010
The chart below shows exactly what happened as the stock market finally realized that booming demand for PCs no longer equaled growing revenues for hard-drive makers. While Intel produced its best quarterly results of all time, shares of the two largest hard-drive makers crashed – because their revenues and earnings didn't keep pace. Just as I predicted, more and more people are opting to have solid-state flash memory installed in their laptops. Consumer hard drives will be completely obsolete within the next 18 months, thanks to Intel.
If you took my advice and shorted the shares of both Western Digital and Seagate, you've seen profits of nearly 40% on the positions so far. If you took my Barnes & Noble short-sell recommendation, you're also up about 40%. Congratulations.
While I expect revenue and earnings will continue to decline at both companies (followed by mounting losses), I recommend you cover your short position when your gains surpass 50%.
Why not hold until these stocks reach their inevitable fate? Because when you're shorting stocks, the most you can make is 100%. And that's only if they go all the way to zero. Even though I fully believe these stocks will get there, after you're up 50% on a short position, the risk-to-reward ratio begins to go heavily against you. Additionally, you don't want to get caught trying to cover your short position at the same time everyone else does.
By the way... I know most of our subscribers will never sell a stock short, no matter what we say about it. And the same probably goes for the other investment techniques we've been "pounding the table on" this year: buying corporate bonds, selling puts, following insider trading, etc. The main reason people refuse to try new techniques is because they fear the unknown. They're simply too scared to do something new. And to validate their own fears, they tell themselves "shorting stocks is too risky..."
That's complete nonsense. My Investment Advisory portfolio holds nine open short positions. Eight of them are profitable. That's a far better "hit rate" than the long side of my portfolio. If you look at my track record over the long term, you'll find more of the same. The truth is, few companies succeed for long. Most of the companies trading today on the stock exchange won't even exist in 20 years. If you refuse to short stocks, you're missing out on dozens of high-percentage, lucrative opportunities every year.
Do yourself a valuable favor. Study my short-sell recommendations carefully. Don't blow them off as "not for you." Find one that makes sense to you. Make sure you understand my rationale. Make sure you understand the numbers. And then? Call your broker. Set up your account for shorting. And do one trade, even if it's only for a single share of stock.
Trade something that represents such a small amount of money for you that you can ignore the position. That will minimize the anxiety you feel as you learn how to make these trades. You'll find shorting stocks is no different than buying them. You can make just as much money shorting. And, quite frankly, the easiest, safest, and surest trades I ever recommend are shorts.
What should you consider shorting today? Well, our hard-drive and bookstore shorts are already showing a huge profit, so I'd probably pass over those for now. But I have two new positions for you to watch carefully.
The first is my favorite way to play the European collapse. As I outlined in my July letter, this country "cannot afford its debts. Its economy cannot grow – at all – because it's stuck in a currency regime it can't truly afford. Thus, it is only a matter of time before [this country] abandons the euro and defaults on its foreign debts."
And in my latest issue, I recommended selling short shares of another company that competes with Intel. /my paid subscribers are waiting for shares of this company to increase before selling them short, so I can't give you the name. But here is a snippet from my research:
It has a long history of failure and losses. It has a huge debt load it is unlikely to repay. It has a well-funded, successful competitor. Its products are known to be inferior, and it lags its competitor in introducing newer, better products. In short, it is unlikely equity investors will ever see a penny in profits from this company, which has never paid a dividend. And it's likely that during the next downturn in technology spending, this company will finally do the world a favor and go bankrupt.
How can you receive all of my short ideas? Simple. Just sign up for my monthly newsletter. You'll find them all in my "victims" portfolio. To learn more about Stansberry's Investment Advisory, click here.
New highs: Hilltop Holdings Series A (HTH-PA), Markel Corp (MKV), Anheuser-Busch InBev (BUD), Western Digital (WDC), Enterprise Products (EPD), AmeriGas Partners (APU), EV Energy Partners (EVEP), Altria (MO).
In the mailbag... a few people who have actual experience with government contracts comment about the wage rates offered. Imagine the irony: someone who actually knows what he's talking about writing in The Digest... And they confirm what Dan wrote! We read whatever you send us: feedback@stansberryresearch.com.
"I am an environmental contractor located in Salt Lake City. I have been in business for 13 years and frequently contract for Federal Government work. Any time Federal money is allocated to any sort of construction project Federal Davis Beacon Wage rates apply to that project. The following web site gpo.gov/davisbacon/allstates.html lists all the Federal wage rates for all states. You can click on any state and then the county within that state and you will see the federal wage rates for all types of trades that must be paid on a construction project if it is in that state and county. You must pay your employees every week this posted wage rate and also turn in certified payroll reports to the federal auditors each week proving that you have complied with these wage rates. (This is a strict federal requirement even though it is not uncommon at all for the government to take 6 months and sometimes longer to pay the contractor on these projects)
"There is a wage rate and a fringe benefit rate posted next to the trade. You must combine both rates to get the hourly rate that you must pay each employee. As a recent example, my company did a cactus transplant job in Clark County Nevada two month ago. Federal funds are involved in the project and so Davis Bacon wage rates were applicable. The wage rate I had to pay my employees for digging holes which is just standard labor was $41.14 per hour. The rates for other construction trades is much higher.
"For proof, go to the web site listed above and click on Nevada, find Clark County and click on Highway, then scroll down about half way and you will see the labor rate the federal government requires regular labors to be paid on any job where federal funds are involved in Clark County Nevada. The wage rate is $24.31 per hour and the fringe benefit rate is $16.83 per hour. Combine these rates and an employer such as myself has to pay a whopping $41.14 per hour for good ole fashion hole digging labor. Also, the Federal government does hire laborers directly all the time. As long as they pay the federal wage rate they can hire whomever they please. As for the Gentleman that referred to your claim as Bull Shi**, I have only to say that some things are true whether you believe them or not!!" – Paid-up subscriber David Sullivan
"As an ex-contractor I can tell you that 42.00/ hr rates for Gov-ment jobs are standard. Also how many apprentices each journeymen must have with him, no matter the size of the job. It sucks and will continue to suck until we take back our country from these liberal idiots." – Paid-up subscriber Jones
"You can refer Doug Rush to the Department of Labor website where he can look up prevailing wages we private contractors are mandated to pay our employees for work on a Government project. I must pay my backhoe operator $51.38 per hour and a general laborer between $36.00 and $45.00 depending on the job. I hope this info helps." – Paid-up subscriber Paul Wagner
Porter comment: I truly wonder how we will ever break the hold the government has over our country. I don't think there's any way they'll give up their power peacefully. (By "they," I'm referring to both the politicians and the vested interests that sponsor the political class, like GE, which my friends on Wall Street now call the "for-profit" branch of the OBAMA! administration.)
It's unreal to see the impact on society of government spending now contributing more than 40% of the GDP. And that's not counting the incredible impact the government has in an indirect way on probably another 20%-30% of our economy through health care and the legal system.
People talk about fearing socialism. What are they so afraid of? Socialism is what we've been living with since the mid-1960s. What we have now is a bizarre mix of fascism and communism... spiked with the largest and most powerful armed forces the world has ever seen. It doesn't seem like a bold prediction to estimate the combination won't lead to peace or prosperity.
Just imagine if Thomas Jefferson could see our current tax regime, where the government takes 35% of your profits at the corporate level, then 41% (starting in January 2011) of your income each year, and then, finally, 55% of your estate when you die. That's not to mention the 10% or so you pay in state income tax/sales taxes.
Imagine you own your own business. You have no other employees or partners, so you pay yourself all of the income it earns. How much would your estate be worth, following your death expressed as a percentage of all of the income you'd earned in your life? Not counting sales or state income taxes and assuming your estate triggered the full burden of the estate tax, your family would be left with only 17.2% of your lifetime earnings. Now, ask yourself, who really owns "the means of production" in the United States?
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland and New York City
July 23, 2010