The 'rout' in China continues...
The 'rout' in China continues... Steve's latest thoughts... An 'irresistible' opportunity in the U.S... Why we short stocks... Porter's big news...
Chinese stocks plunged again today...
The benchmark Shanghai Composite Index closed down 5.9% after falling as much as 8.2%. The index has now fallen nearly 30% from its recent highs in June.
As we've discussed, the Chinese government has gone to great lengths to boost stock prices over the past year. Since the market peaked last month, Chinese officials have gone to even greater lengths to stop the selling.
In just the past several days, the government has announced so many measures, it's difficult to keep track of them...
It has relaxed margin requirements (meaning investors can borrow money more easily to buy stocks)... cracked down on short selling... delayed new initial public offerings (IPOs)... banned state-owned companies from selling stocks... and even announced plans to buy stocks directly with government money through various agencies and state-owned investment firms, among others.
In addition, it has completely halted trading in more than 50% of mainland Chinese stocks – mostly small caps – and has given no indication when trading will resume.
These actions appear to have had little effect so far, and in some cases, could be making things worse...
Because trading in so many small-cap stocks has been halted, shares of blue-chip stocks are now being hammered as investors reduce exposure by selling whatever stocks they can. The selling has also spilled over into the Chinese government bond and commodities markets as investors try to raise money. From Bloomberg...
"People are selling everything in sight to get their hands on cash," Liu Xu, a trader at private asset-management company Guoyun Investment in Beijing, said by phone. "Some need to cover their margin calls in the stock market, while others are gripped by fear that the Chinese economy will be affected by this crisis."
Metals, including nickel and silver, on the Shanghai Futures Exchange fell to their daily limits, while rubber entered a bear market. The volume of copper traded was almost six times the three-month average. Steel rebar and iron ore, as well as eggs, sugar, and soybean meal dropped to the lowest level allowed by their exchanges.
"Agricultural products, in my view, are collateral damage in this selloff," said Liang Ruian, a fund manager at Shanghai-based Jianfeng Asset Management "Pigs are still going to eat, so what does this stock market stampede have to do with soybean meal?"
While the news looks grim at the moment, there are still reasons to think the Chinese economy may weather this storm. As the Wall Street Journal noted this morning...
Economists see little chance the stock market turmoil will seriously hurt the world's second-largest economy. UBS economist Tao Wang notes that equities still account for only about 20% in China's overall household wealth, compared with 54% in bank deposits. "We don't anticipate the stock market turmoil leading to a systematic problem for China's financial system," Ms. Wang said.
Regular Digest readers know our colleague Steve Sjuggerud has been following Chinese stocks closely since turning bullish last year.
This week's declines triggered stop losses in his China recommendations, and Steve sent his True Wealth subscribers a special update on the situation today.
We know many Digest readers are concerned as well, so Steve graciously agreed to share a portion of this paid-subscriber content with all readers below...
We hit our trailing stops in our Chinese stock positions over the last few days. Subscribers who bought on our initial recommendation made a big gain... They sold half of [one position] once we were up 100%, and they're now selling the other half for a gain of 63%, based on our stop price.
Shares of [our other two positions] – which didn't soar nearly as high as [our first position] – are still winning positions based on our stops... up 3% and 5%, respectively. On the other hand, subscribers who got in recently are faced with a quick and dramatic loss.
The most important principle you can possibly learn from this is: the market doesn't care if you're in the black or in the red. If you're in the red, the absolute worst thing you can say is, "Oh, I'll just wait until I get back to breakeven before I sell." You must understand that the MARKET DOESN'T KNOW OR CARE if you're down. We need to follow our stops now.
Steve also emphasized how volatile investing in China will be...
I still believe Chinese stocks will soar by triple digits in the coming years... From 2006 to 2007, China's Shanghai Composite Index soared from around 1,000 to around 6,000. Then it fell by 70% in 12 months.
While the upside was great in 2006 and 2007, the downside that followed was terrible. You want to avoid that downside risk. Our best way to do that is through trailing stops.
We believe China ultimately has incredible upside. But the downside is incredible, too. We will put money back into China when the time is right – just like we did in True Wealth Systems in biotech. That's how we've made eight times our money so far. But the time is not right today. Sell these positions now to protect your principal and to have cash ready when the time is right.
While the situation in China may be up in the air today, one area of the market where Steve remains bullish should befamiliar to many Stansberry Research readers: U.S. housing. He explained in Tuesday's DailyWealth why he is still personally putting his own money to work in that sector...
Right now, I have a greater percentage of my net worth invested in the U.S. residential property market than in any other asset class – by far. (I'm not even including my home when I say this.) The opportunity is irresistible.
Prior to the housing crash nearly a decade ago, Steve had never invested in U.S. real estate. But when the prices of real estate and raw land collapsed, he took advantage of the incredible investment opportunity...
The first major property I bought was a few hundred acres of land in Florida... I bought this land from a bank for 93% less than it was under contract for just three years before.
When I bought it, the real estate market was DEAD. Nobody was buying a home, so nobody needed to build a home. And if nobody needed to build a home, then nobody needed this land.
Fast-forward three years to today... The situation is the exact opposite. We have plenty of home buyers – but no homes. Whether people are renting or buying, they need a place to live. It's simple... no supply and a ton of demand is a recipe for higher prices.
And as Steve explained in today's DailyWealth, there are two main reasons why right now is an incredible time to purchase a home. For one, home prices are finally recovering from the crash and are officially in an uptrend. And two, despite a recent rise, mortgage rates remain historically cheap.
Steve determines the "fair price" of the median home in America by looking at median house prices, mortgage rates, and median income...
Today, home prices are still $52,000 away from fair value. They need to rise by 25% to get back to fair value (assuming the other two factors don't change). The move back to fair value is already underway. The good news is, house prices still have plenty of room to run higher.
That's the theory anyway... The reality is, housing is driven by greed and fear... Homebuilders don't stop building once we've reached equilibrium. They keep building and building, until we reach the point where we have way too much supply and not enough demand. Then prices fall. That's what happened when housing started to crash seven years ago.
Steve also noted that housing starts have remained below average for eight years, which has led to low supply and high demand... and will inevitably lead to higher prices.
Of course, we realize not everybody is in a position to be able to buy a home today. But in the July issue of True Wealth, Steve found a way to invest in housing through the stock market with a single click of your mouse.
This company owns nearly 10,000 homes across the U.S. and pays out 90%-plus of the income it generates. Today, shares trade at a 21% discount to their fair value... And Steve thinks shares have 80% upside within the next three years. To learn more about a risk-free trial subscription to True Wealth – which will give you access to Steve's housing recommendation – click here.
Changing gears a bit, we discussed the latest on former Stansberry's Investment Advisory short sale recommendation Yelp (YELP) on Monday.
As you likely know, short selling is a strategy to profit from a decline in stock prices. (If you aren't familiar, you can read a great introduction in the Stansberry Research Education Center here.)
But you may not know why we recommend shorting stocks... particularly when we're cautiously bullish on stocks in general.
Done correctly, short selling is a type of low-cost "portfolio insurance" that can protect you during an unexpected correction in a bull market... and make you an absolute fortune in a bear market. Stansberry's Investment Advisory lead analyst Bryan Beach explained the strategy in detail in the August 22 Digest.
Finally, a quick "heads up" to end today's Digest...
Several readers have written in recently asking us for an update on Porter's OneBlade project. Given the recent holiday weekend, we wanted to be sure you didn't miss the big news in last week's Friday Digest...
In short, after years of testing and development, OneBlade razors are now shipping.
Customers who pre-ordered should be receiving them shortly, if they haven't already arrived. I (Justin) purchased one myself... and I'm looking forward to trying it for the first time when it arrives.
If you'd like to try one for yourself, you can visit www.onebladeshave.com, or simply click here.
New 52-week highs (as of 7/7/15): American Financial Group (AFG), Allied World Assurance (AWH), Chubb (CB), Direxion Daily CSI 300 China A Share Bear 1x Shares Fund (CHAD), short position in Viacom (VIAB), and W.R. Berkley (WRB).
In today's mailbag, another subscriber weighs in on discount brokers, and we answer two frequently asked questions on gold. Send us your questions, comments, and complaints to feedback@stansberryresearch.com.
"Regarding the question about retail brokerages, I can speak from the perspective of someone who doesn't have a lot to invest. I like to sell puts and covered calls as recommended by Eifrig and Clark, but when I do so it is usually just one contract at a time, sometimes two. With that little amount of capital at risk, a $9.99 commission or a 19.99 assignment commission (like that of TD Ameritrade) can really eat into the profitability of a trade. I would just encourage others with my kind of net worth to keep that in mind if they are doing much trading. I know there are cheaper options out there. I use Interactive Brokers, and while I don't find them as user-friendly as many of the other brokerages, their fees are considerably lower and make it worth my while." – Paid-up subscriber R.M.
"Several months ago, you recommended several gold and silver dealers who you thought were responsible and honest. Please remit those names to me. Thanks in advance for your help." – Paid-up subscriber Jerry Alampi
Brill comment: We recommend contacting Van Simmons at David Hall Rare Coins and Rich Checkan at Asset Strategies International. As always, we receive no compensation for recommending their services. They simply have a long track record of taking care of our subscribers.
"I read your article on this topic at the research center. It accurately explains why gold is the best money and the consequences of removing U.S. money from the gold standard. What it doesn't explain is how a person actually could 'use' gold if the monetary system is greatly devalued or collapses. I'm sure this example is too simplistic but, for example, how would we get 'change' for our gold coins or bullion in the grocery store's check-out line?" – Paid-up subscriber Jim Hunter
Brill comment: As always, we can't give individual advice. But we have some thoughts...
First, we believe the situation you refer to – where you're using physical gold to buy food in the grocery store – is extremely unlikely. Looking at the history of currency collapse and devaluation in other countries, gold's primary value has been as a stable (and portable, if necessary) store of wealth that can be used as capital or exchanged into alternative currencies for transacting when the crisis is resolved.
On the other hand, if you're predicting a scenario where no alternative currencies exist for transactions, then yes, history suggests folks would eventually return to using precious metals again. In that case, you'd likely also want to have plenty of silver on hand for smaller purchases. But that scenario implies a complete breakdown of civilization. If that happens, you can probably forget about shopping in grocery stores, and you'll likely have far bigger problems to worry about than how to get change for your gold.
Regards,
Justin Brill
Baltimore, Maryland
July 8, 2015
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