Spanish bailout talks spook markets... The short-selling ban returns... Deutsche Bank plunges... McDonald's down big... Chinese slowdown hits casinos... Virtual banks hit new highs... Major analyst calls for end of fiat money... How to close a put position... Gold royalties a 'fraud'? Badiali responds...
Markets were slammed today on news of six Spanish regions asking for bailout money... German newspaper Der Spiegel also reported the International Monetary Fund (IMF) would stop paying bailout funds to Greece. We're not sure why Europe's ongoing debt crisis is at this point market-moving news, but it is...
Spanish 10-year bonds hit 7.565%, the highest since November 1996. Italian 10-year yields rose to 6.43%, the highest since January 19. A 7% yield on 10-year government debt is considered "the point of no return" for European nations. Greece, Ireland, and Portugal were all bailed out after their bond yields rose to more than 7%.
Meanwhile, yields on German two-year paper fell to negative 0.06% – the 12th-straight day Germany has seen negative yields.
The euro dropped to a two-year low at less than $1.21.
In response to the turmoil, Spain and Italy both reinstated a ban on short selling… because short sellers – not years of reckless spending and low productivity – are the reason Europe is crumbling. Both countries banned short selling last year, then lifted the ban in February.
Short-selling bans are pointless... They simply reflect the government admitting their equities are in trouble and looking for a scapegoat. Here's what we wrote in the height of the 2008 financial crisis, when the U.S. Securities & Exchange Commission instituted its own short-selling ban…
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Never forget, despite claims to the contrary, the United States is not a free market. A free market allows price discovery by creating an equal playing field for buyers and sellers. Actions to prevent selling, or hedging, are actions designed to prevent accurate price discovery. The government only allows a free market when the free market makes the government look good. When the free market threatens the government or its interests, you can forget it. Banning short selling also interferes with private property rights. If I own shares of a given company, I ought to be allowed to lend those shares to anyone I choose. Lending stock generates more income for long-term shareholders. And a declining price gives long-term shareholders the opportunity to lower their cost basis. Real investors love short sellers. – S&A Digest, September 19, 2008 |
Good investors use the bans to flee risk assets (like European banks stocks). Take Deutsche Bank, for example. Europe's largest bank holds a lot of debt from Spain, Italy, and the other financially weak European nations. Its shares are down around 4.6% today.
Shares of World Dominator McDonald's fell around 3% today after the company announced second-quarter net income fell 4%. (Broader market pressures also helped send the stock down.) It's trading for less than $89 a share today, down from the January 2012 high of more than $101 a share.
The fast-food giant earned $1.35 billion in the quarter, down from $1.4 billion a year ago due to "unfavorable foreign currency exchange rates." (Read: A weak euro.) Revenue increased from $6.91 billion to $6.92 billion a year ago.
Worrying about short-term fluctuations in earnings with a company like McDonald's is ridiculous... The company is one of the most stable and dominant in the world. It's a favorite holding of several of our editors, including Dan Ferris and Dr. David Eifrig.
You don't buy McDonald's for huge growth potential. You buy it because it produces billions of dollars of cash flow ever year. And it pays a solid 2.8% dividend (which it steadily increases year after year). It's one of the safest stocks you can own. Long-term investors should look to add to their positions on big drops like this.
The European news also sent Chinese markets down... Hong Kong's Hang Seng index (which tracks the 48 largest companies traded on Hong Kong's stock market) fell 3% – its biggest drop in two months. And the Shanghai Composite Index (an index of all stocks traded on the Shanghai Stock Exchange) fell 1.3% to its lowest price since March 2009.
For a visualization of the slowdown in China, take a look at shares of Wynn Resorts, the casino giant created by billionaire Steve Wynn. Last year, Wynn said so much of his business is in Macau (the "Chinese Las Vegas") that he considers his company a Chinese company... In the first quarter of 2012, Wynn earned $950 million from its Macau operations. It earned $362 million in Las Vegas.
Wynn flies to Macau at least once every six weeks. And he plans to open a second casino there by 2015.
But shares of his company have been crushed as fears of a Chinese slowdown mount... Wynn Resorts hit a 52-week low today.
Steve Sjuggerud's "virtual banks," Annaly and Two Harbors, bucked the downtrend today. Annaly is up more than 1% and Two Harbors is flat, compared with the benchmark S&P 500 stock index's 1.3% drop. Both stocks are trading near 52-week highs.
The technical term for a virtual bank is a "mortgage REIT." These companies borrow money at low rates. Then they invest in mortgage bonds paying higher rates... And the mortgage bonds they buy are 100% guaranteed by the government. In other words, there's zero default risk.
But the companies are sensitive to rising interest rates (which would increase borrowing costs). I asked Steve for his thoughts on mortgage REITs today. He responded…
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There's essentially no chance of the Fed raising interest rates through 2013. Therefore, my "virtual banks"… get a "free pass" on their cost of borrowing until 2014 – at least. Look, these guys are fantastic investors... When you give fantastic investors the ability to borrow money at near-zero-percent interest, they will undoubtedly find ways to make money on it and deliver solid (hopefully double-digit) dividend yields to us. The time to worry is when the Fed starts raising rates. We're a long way from that now. |
If you're looking for a way to add income to your portfolio, you may want to consider virtual banks... Annaly and Two Harbors yield 13% and 14%, respectively. And as long as borrowing rates stay low, those yields are safe.
In his latest issue of True Wealth, Steve recommended a brilliant new trade. This trade is a big, simple idea for profiting from a dissolution of the euro. But he's structured the recommendation so your potential upside is infinite and your potential downside is almost zero. It's one of the best, safest ways we've seen to profit from the European crisis... Steve says readers could easily make 20%-25% over the next year.
To learn more about True Wealth and access Steve's latest recommendation, click here... If you decide in the first four months that the newsletter isn't for you, we'll refund 100% of your money.
Our editor in chief, Brian Hunt, passed along a Barron's magazine interview with economist Stephanie Pomboy, founder of the research firm MacroMavens. Pomboy called the housing bubble in 2006. And she correctly predicted how the market would react after the government pumped trillions of dollars into the economy.
Large financial firms respect Pomboy. And that's why this latest interview shocked us. She's calling for the same thing our founder, Porter Stansberry, has predicted for years – the end of fiat money. When asked what investors don't anticipate today, Pomboy responded…
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That the Fed will be a presence in the Treasury market for a long, long, long time. Some believe that, with another round of quantitative easing, we move forward, emerge from the morass, and the need for further intervention will dissipate. But the Fed is really the only natural buyer of Treasuries anymore. It will have to continue to monetize Treasury issuance at the same time all the other major developed economies – from the Bank of Japan to the Bank of England to the European Central Bank – are doing the same. Pursue that to its natural conclusion, and you see the inevitable demise of fiat money. To look at our policies and not be concerned about the risks to our currency would be dangerously naive. |
We're always surprised when a mainstream analyst makes a bold call like this. As we quickly learned after releasing our End of America video (which predicted the dollar would lose its place as the world's reserve currency), many people consider the idea treasonous. You can read the full interview with Pomboy here.
New 52-week highs (as of 7/20/12): Vanguard Inflation Protected Securities Fund (VIPSX), Utilities Select Sector SPDR Fund (XLU), Monsanto (MON), Integrys Energy Group (TEG), and Two Harbors (TWO).
In today's mailbag... one subscriber throws around an ugly charge... and the editor responds. Hurl your allegations here: feedback@stansberryresearch.com.
"What is the best way to close my transaction on a PUT that was Sold to Open? For example, MSFT closed @ $30.11 for July 21st. If I had previously Sold a PUT at $30, do I need to BUY to Close on or before 7/21? Or will my broker process the transaction automatically?
"If the PUT was Sold at $31 (losing trade), should I BUY to Close before 7/21 (assuming I didn't want to own the stock)?" – Paid-up subscriber Jim
Goldsmith comment: In the case where shares trade for more than the put option's strike price on the expiration date, your puts will expire worthless. You don't have to do anything in this case... Just keep the cash payment (the "premium") you received when you sold the option.
In the second scenario, the stock is trading for less than the strike price of the puts you sold. Should you hold this position through expiration, you will be "put the stock." In other words, you'll be forced to buy shares at the strike price.
As you know, we're not allowed to give individual investment advice. But generally speaking, if you wanted to close a position before being put the stock, you would simply "buy to close" the puts you originally sold.
"Gentleman... recently you featured Matt Badiali and his Royalty Stream. It was the single reason I became subscriber. I believe it is a scam. I have read his information and the best I can discern is he suggest buying a gold fund and collect the dividends. I would appreciate a response." – Paid-up subscriber Robert Winer
Matt Badiali comment: Robert... With all due respect, if you reread the report I wrote, you will see the companies in question are all "royalty companies." They are not "gold funds." They do not own a basket of mining stocks, bullion, or gold futures contracts. Instead, they own rights to a percentage of the production from many different gold mines.
These slices of a gold mine's production are called "royalties." They are the foundation of the entire investment thesis. These royalties entitle the holder to essentially show up at the mine site every month or every quarter and get paid... no matter what.
Mining royalties are the single safest investment in the mining sector. And over the past year, the first company I featured in the report outperformed both gold bullion and gold mining stocks as you can see in the chart below...
So I beg to differ. This is far from a fraud. It is solid, well-researched investment advice, just like all the advice I give each month in the S&A Resource Report.
Please review my report "Gold Royalties: The Real Secret To Generating Huge Returns in America's Precious Metals Markets." You can find it posted under the "Special Reports" link on the S&A Resource Report section of our website. (Make sure you to read "Gold Royalties." We've posted numerous special reports, including several about gold.) (This report is for subscribers only. If you'd like to learn more about my newsletter and how to access this report, click here.)
Of course, if you still aren't satisfied, you're entitled to a refund. As Porter always says, we're more than willing to return your money and part as friends.
Regards,
Sean Goldsmith
New York, New York
July 23, 2012