One of the things I'm trying (perhaps in vain) to teach the subscribers of my Put Strategy Report is that to be a great trader, it's just as important NOT to trade when there aren't obvious opportunities as it is to make the right trades when there are good opportunities. And...
I don't think right now is a good time to be a buyer of stocks.
In the short term, at least, I think the market is likely to pull back. There are two reasons why – I'll show you both, below.
Selling puts is tantamount to selling insurance on stock prices. If you expect stocks to go down, it's not the right time to sell insurance against stock prices. The best time to buy stocks (or to sell insurance against stock prices) is when people are afraid and eager to sell at any price.
The measure of fear in the market is called the Volatility Index (VIX). It literally measures the price people are willing to pay for insurance (put options) on stocks. When folks are afraid, they'll pay a lot for insurance. That's the time to buy stocks.
Since our primary strategy in the Put Strategy Report is selling put options, we want to sell put options when people are desperate to buy insurance. As you can see looking at the last six months of the VIX, options pricing has gone from incredibly expensive to relatively cheap. Nobody is afraid of the stock market anymore.
You might recall last March when both Jeff Clark and I noted stocks were trading well below their average trend. In fact, we'd never seen the market so far below its trendline before. (Look at the chart below. The red line is the 100-day moving average; the black line is the S&P 500.)
Now, we see stocks (as measured by the S&P 500) trading way above their average level. This doesn't mean stocks are going to collapse or even that they'll stop going up. It just means the risk-to-reward setup right now in stocks isn't nearly as good as it was in March – or even two months ago. Now's the time to be cautious. And patient.
Last October, when we launched Put Strategy Report, I made what most people considered a pretty outlandish promise – that you could make 50% a year using this strategy, without having to buy stocks. Today, roughly 10 months later, the average return of the 20 puts we've recommended selling is a little more than 50%.
I'm sure Put Strategy Report has the best track record of any newsletter I've ever published. With only one exception, we've made money on every single trade. We were able to accomplish these results because we only traded when the odds were overwhelmingly in our favor – when the VIX was above 30, when stocks were below their trendline, and when we could buy stocks at extremely attractive prices.
Those conditions don't exist right now... so we have to wait. Subscribers who are patient will be rewarded. Folks who are impatient will either get burned on their trades or miss out when the next opportunities arise. To find out more about Put Strategy Report click here.
In his May issue of True Wealth, Steve Sjuggerud recommended a value mutual fund, the Fairholme Fund (FAIRX). "The stocks Fairholme owns are incredibly cheap, so the downside risk is limited." And at the time, portfolio manager Berkowitz announced to investors he was putting "100% of his liquid net worth into the fund."
Berkowitz released the Fairholme Fund's semiannual report last week... The fund returned 13.21% versus 3.15% for the S&P 500 for the first six months of 2009. Since its inception almost 10 years ago, the fund has earned an average annualized rate of 12.06% compared to an average annualized loss of 3.06% for the S&P.
Berkowitz also revealed one of his "canaries in the economic coal mine" – car rental company Hertz Global Holdings. In a June 25 interview on CNBC, Hertz CEO Mark Frissora reported positive news: "We've seen continuous improvement every single week for the last 10 weeks in the U.S. rent-a-car space on improving demand for the summer season. We've been buying a lot of cars the last eight weeks... We're scrambling to buy as many cars as we can."
The five largest positions in the Fairholme fund are Pfizer (14.3%), Sears Holdings (8.8%), Hertz Global Holdings (6.8%), St. Joe (6.7%), and AmeriCredit (5.5%). The largest sector is pharmaceuticals at 18.9%.
By the way... In his latest issue of True Wealth, Steve says, "It's finally time to buy real estate." He shows readers how to make a tax-free $500,000 over the next two years. To learn more, click here...
It might be time for us to resume our search for farmland... For the first time since 1987, the value of farmland has fallen. Farmland averaged $2,100 an acre at the start of 2009, down 3.2% from a year earlier.
Prices in the Corn Belt held up best – Iowa and Illinois fell an average 2.2% to $3,260 an acre. In Montana, on the other hand, prices fell 22% to $700 an acre. And according to one expert, this could be the perfect entry point... "The market is taking a breather, but demand fundamentals are still in place," said Jeff Conrad, a managing director of a fund overseeing $1.1 billion of farmland. "Population, more Western-style diets and land availability all point toward more growth." He says farmland may return 10% a year as the recession eases.
Goldman's traders are once again walking on water. The untouchable investment bank made at least $100 million in trading revenue on a record 46 days in the second quarter – or 71% of the time. The previous record was 34 days in the first quarter. And Goldman only lost money on two days.
It's true Goldman has a major advantage now that its major competitors – Lehman, Bear, etc. – are out of business. But making money 97% of the time is unheard of. Most professional traders are lucky to make money on half of their trades. They manage to profit by maintaining strict stop losses and letting winners ride.
Again we wonder, are Goldman's traders that much better than everyone else on the Street? Or is something else going on?
New highs: Seabridge (SEA), Addax (AXC.TO), Eldorado Gold (EGO).
In the mailbag... One of the best subscriber exchanges we've ever had: Yes, Colleen, you're a deadbeat borrower. We can't wait to read your opinion on this one: feedback@stansberryesearch.com.
"According to your many editorials on the subject, I'm one of the deadbeat borrowers because I've applied for not one, but two, loan modifications. I can't handle my debt so I'm a deadbeat, right? Wrong. I've never drawn on a line of equity in my life and as you can see from below my expertise is real estate. I have a master's from USC in development as a matter of fact and (probably) know much more about how to evaluate real estate values than anyone on your newsletter.
"I put 20% down on one loan and 25% down on the other one, both high-priced properties in expensive markets. One was bought at auction in a market that continued to plummet after it had already declined 2 years. Even my boss, a millionaire many times over (and he seldom touches stocks) told me at the time it was a smart buy.
"Bottom line is that in real estate, just as in stocks, timing is everything. I'm as much a victim of market forces beyond my control as any corporate accountant with a 401K and a shocked look on his face. There are many, many, many honorable people out there like me trying to meet their obligations who are getting virtually no help from anyone. Not from the government that partly caused this problem, not from the media that loves to hype one side, and not even from supposed 'experts' whom I pay a goodly sum for expensive advice to help me navigate these troubled financial waters.
"Broaden your horizons. Your readers will benefit from it. I suspect if you look at the actual foreclosure numbers in depth you'll find that many of the NODs waiting in the wings are being sent to market victims, not greedy and inconsiderate credit hounds." – Paid-up subscriber Colleen Fuglaar, vice president, development, RTI Properties
Porter comment: As long as you believe you're a victim, you won't learn what life is trying to teach you here, Colleen. There's a tremendous difference between the actions you took and equity investors with their 401ks. It's simple: 401k investors didn't borrow money from other people and then refuse to pay it back. You did. That's why you're a deadbeat.
You took a risk with other people's capital. Once you do that, you're not working for yourself anymore. You're working for your creditors. Your first obligation is to pay back the money you've borrowed with interest. And apparently, you can't. So let's be clear about who the victim is here: Your creditors are the victim of your bad decisions. Blaming the lender who gave you the money is preposterous – these folks trusted you, backed you, and were willing to take a chance on you. Now, you're saying they've exploited you and you're a "victim." Give me a break.
You act as though someone came into your house one night, put a gun to your head, and forced you to sign a contract on two expensive condo buildings you couldn't really afford. Of course, that's not what happened. And we don't have any sympathy for you. Don't borrow the money if you have any doubt about your ability to pay it back. And, yes, the government certainly is to blame for creating an environment where too many people like you could borrow money to buy real estate. But no agent of the government forced you to make this or any other deal. You don't get a free pass from taking responsibility for your actions just because a lot of other people made the same bad decision. And you don't get a free pass because you have a degree in real estate "development." In fact, claiming to be an expert in something you've just bankrupted yourself doing is... delusional.
Finally... I must say... I got a real charge out of someone like you telling me to "broaden" my horizons. You might recall that I decided to fold our Real Estate Investor newsletter in 2006 because I knew there was going to be a disaster in U.S. real estate. You might also recall our numerous specific warnings about the condo market in particular. While I was telling folks to get out of the U.S. real estate market, I was working with Doug Casey and his group to select and then promote the Estancia Cafayate, a luxury project in Argentina, which has worked out very well. Also, I've been heavily involved in Nicaragua, deals that have been very lucrative.
I didn't learn about real estate at USC. I learned from two masters – Bill Bonner and Doug Casey. These guys and their partners have made hundreds of millions of dollars in real estate over the last 30 years. The secret? It won't come as a surprise to any of our subscribers: We only buy real estate we can afford. We never borrow a penny. And we work hard to improve the perceived value of the land.
You're in quite a pickle, Colleen. You've dug a big hole for yourself, and you don't know the first thing about how to get out of it. It might take you a while to realize what you have to do. It's not easy. But it is simple: From this day forward, always take complete responsibility for your decisions. From this day forward, live up to all of your promises. Start by repaying every penny you owe – no matter how long it takes. Doing this hard work will teach you a lesson you need to learn about the risks of borrowing money. And the risks of buying expensive real estate. But... once you've really learned those lessons, your life will be incredibly enriched. You'll make far better decisions. And you'll attract the goodwill of everyone you meet.
"Guys... Many people had skin in the game by paying off or paying down their mortgages. Not only on homes but also commercial property. Maybe they counted on income from these or the ability to sell them at some market price if they needed cash. For those who invested in real estate responsibly – they're screwed. Their assets – paid for – have lost 25%-75%. And in many instances, there is a no-bid market for res and commercial properties that, under normal circumstances or even depressed circumstances could draw a bid. But the destruction has been quite thorough.
"You've named all the suspects. So why not have huge loan modifications of mortgages where mortgagors paid in a good deal of equity and lost it anyway? The corrupt financial system created a huge artificial supply and destroyed values across the board. Why shouldn't they eat modified mortgages? Hell, they've already been bailed out. This isn't a double or triple dip – it's a quadruple! They made their fees acting irresponsibly, criminally. Got away with it. Got bailed out and rewarded. Now collect fees on their victims. And stand to take the victims property or remaining equity as well! Wish I had listened to you and bought a place in Nicaragua!" – Paid-up subscriber F. Levin
Porter comment: We weren't in favor of bailing out any of the banks. And we're certainly not in favor of forced loan modifications. We believe contracts are sacrosanct for lots of reasons – there's no point in going through all the reasons here. One reason is enough: Prices adjust to meet real demand. Loan modifications artificially support prices by limiting the number of foreclosures and short sales. This reduces the incentives for new capital to enter the market.
We'd prefer a sharp, severe drop in prices, which would cause assets to move from weak hands to strong hands. Real price discovery could occur, and new capital would enter the market, producing a recovery. Government efforts to forestall and delay real price discovery in the market impedes the introduction of new capital.
Many places in the U.S. still have multiple years of supply on the market. For example, in greater Miami, almost 300 condos are for sale today between $2.5 million and $5 million. That's about seven years of supply. This amount of supply and the rental rates these properties are able to get indicate prices need to fall another 50% to clear the market. (That's why I decided to rent this year – I'm sure prices will continue to fall.) That won't happen as long as the banks are forced to extend mortgages.
"Wow! Are we ever on the same page. I live in Maryland (eastern shore) and I'm leaving tomorrow to finalize on a rental in South Beach. You've got wife and kids, so a house seems like the right move. I'm going to rent a 2000 sq. ft. condo at Portofino on the 37th floor. They want $3750 a month. I think I can get it for $3k or $3250 at the most. Same condo on the market at $1,750,000. Who are they kidding? Views of South Beach, Atlantic, Government cut. You are right on, Porter. Renting is cheaper, and when buying gets right, it will be time." – Paid-up subscriber Michael Macielag
"The Loan modification Program is the punishment the banks need for causing this financial crisis and recession! Then getting taxpayer bailouts! Quit your right-wing protection of the wealthy and big banks – I'm tired of your fascist rants!" – Paid-up subscriber Markus
Porter comment: No matter what happens, Markus, you're not going to punish the "banks." Think about it. What is a bank? Mostly, it's depositors' money that's guaranteed by the government. That's you and me. So you can't hurt the banks, because we are the banks, thanks to Uncle Sam's policy of too-big-to-fail. The folks who run the banks aren't going to be hurt either, no matter what happens, thanks to their friends in D.C., like Hank Paulson.
So who really gets hurt by the loan modification program? People like me who have waited patiently for years and years to buy U.S. real estate at a reasonable price. I'd love to see prices fall another 50% – and they would in many places if the government would get out of the way.
"The most frightening aspect of reading The Digest on a daily basis is how many people there seem to be who are subscribers to an investment research service and yet still harbor so much resentment toward the wealthy. I have never understood the desire to become what one resents. When I was changing tires at night on garbage trucks for a living, I made it a point to ask respectful, well thought out questions of the successful people I encountered regarding the path they traveled to become so successful. I was usually astonished and amazed at how willing these busy successful people were to take time from their life to share knowledge with a perfect stranger just to help me out.
"For the most part, these people were as excited to have a young person showing interest in how to better themselves as I was excited to receive the help. The three greatest lessons I learned from these successful people that have benefited me greatly in my life are: 1. Be nice to the rich; the poor aren't hiring. 2. Happiness is wanting what you have; not having what you want. 3. Virtually nobody gets rich over night; everyone, through the miracle of compounding, should get rich over a lifetime." – Paid-up subscriber Ken
Porter comment: To me, the most frightening thing about reading the mailbag each day is, even in this sophisticated audience, how many people still trust the government and don't see the hand of special interests at work. Trust me... the government isn't here to help. At least, not to help you and me. The government is a completely captured tool of big business in America. Politicians pander to the poor to get votes and power, then use that power to benefit the largest corporations, which send billions to Washington for re-election campaigns in return.
The whole process makes a farce out of democracy. And by the way, most of the bailouts never end up in the paper – like the billions the government has given GE over the last year. (You can be sure CNBC isn't going to report GE's billions in government loans – GE owns CNBC.)
When you're thinking about the looming health care reform, ask yourself this: Why would the big pharmaceutical companies be buying TV ads right now in favor of OBAMA!'s plan if it weren't good for them? Do you really think your interests and Big Pharma's interests are aligned?
The one big question I have about the next 20 years is, how does this all end? We can't go on allowing the government to grow more powerful every year (and more indebted every year). Sooner or later, our entire economy will come to a standstill because of taxes, regulations, corruption, and our massive debts. Remember the Soviet Union? But the special interests that control D.C. will never relinquish their power. Likewise, it seems impossible to believe the average voter will ever escape the brainwashing he receives through TV and advertising. So how will it all end? History suggests it won't be pretty.
Regards,
Porter Stansberry
Baltimore, Maryland
August 5, 2009