The S&A Digest: How to Handle Rising Volatility

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As of 06/25/2013

Volatility on the rise... The G8 is a mockery... Russian democracy... Porter Stansberry vs. Ann Coulter... Bring on the Focus...

 Editor's note: Contributing to today's Digest is our editor-in-chief, Brian Hunt, who details the biggest hit at the New Orleans Investment Conference...

"In the U.S.A., you have problems forming a third political party. Well, in Russia, we have those same problems with forming a second one."

Greetings from New Orleans... where the star of the week, Gary Kasparov, explained the difficulties of "regime change" in Russia.

Kasparov, if you need a refresher, became the youngest-ever world chess champion in 1985, when he was 22 years old. He was ranked the No. 1 chess player in the world for 20 years. He retired from competitive chess in 2005 and is now the highest-profile critic of Vladimir Putin's regime, which Kasparov claims is horribly corrupt.

If he isn't murdered first, he'll be the second-party candidate against Putin or the man Putin chooses to replace him. Kasparov's speech lasted for about 45 minutes. He talked about the parallels between life and chess, then moved on to rip the Russian government in what was half a stand-up comedy act, half anticorruption diatribe. Obviously enamored with the founding fathers of the United States, Kasparov quoted George Washington and Thomas Jefferson. He received two standing ovations.

Some highlights from Kasparov's speech, as best as I can remember:

"Vladimir Putin scores so high in the polls because the polls are corrupt. They cannot be trusted."

"For Western leaders to recognize Putin as an equal is devastating to the cause of freedom. It gives Putin credibility, which he doesn't deserve."

"Putin thrives on weakness. He was taught that in the KGB. He is not an ally to the West, and he never was. He's more of an ally to Ahmadinejad and bin Laden than he is to America and Europe."

"Putin is interested in supporting terrorism, which keeps oil prices high. Oil is the only industry in Russia that works."

"Including Russia in the G8 is a mockery. The G8 is supposed to be a group of democratic industrialized powers. Russia isn't a democracy, and it isn't an industrial power."

After finishing his speech, Kasparov took three questions from the audience – including my two-parter: Do you believe former KGB agent Alexander Litvinenko was murdered on orders from Putin? And... do you feel that you're too high profile to kill? Or do you worry about that?

In a roundabout way, Kasparov answered: Yes, I think Putin and Co. killed Litvinenko. And, yes, I worry about myself.

Kasparov doesn't eat food or consume liquids with people he doesn't know and trust. He travels with bodyguards in Russia, but not outside of Russia. We wish him luck.

 Porter had dinner last night with Doug Casey and Ann Coulter, who debated in front of the crowd here in New Orleans. Full details tomorrow...

 New highs: none.

 Shortest mailbag we've had in awhile. You know we can still check our e-mail while in New Orleans... feedback@stansberryresearch.com.

 "For God's sake, why don't you just give Glenn and all the other malcontents their money back and get some subscribers who appreciate you? I've been with you since the beginning and you've done better for me than all the other advisors and brokers I've had over the past 40 years. Yes, I'm over 70 and I've had some real bad advice in the past from brokers who sold me 'can't miss' deals. I finally realized they were working for the company and not for me. The malcontents should pray that there is a heaven and that they will have a massive heart attack so they can go there and be happy in a perfect place. They'll probably find something to gripe about up there too." – Paid-up subscriber Richard

 "I like the idea of two carefully selected recommendations each year. I don't know how many total ideas your newsletters recommend each year but I can only use a few. So I vote great for the Focus newsletter. But I have a 2nd suggestion. I am 85, expect perhaps another 10 years, but need reliable dividend income monthly or quarterly to pay the bills. Unfortunately none of your newsletters are focused on dividend income. The 12% Letter couples dividend and capital gains to achieve the 12%, which means I have to sell to have a liveable income. I was into the Canadian income trusts at least two years before your recommendation. Incidentally, my portfolio of Trusts include all you have recommended. Now I'm researching Partnerships and the debt/dividend stapled shares. But I would feel better if I had guidance from a reliable newsletter firm.

"My view is that a stock must pay at least 8% to offset the current effect of inflation. Personally my expenses, including medical and prescription costs, exceed the government's inflation figure by several percentage points. My goal is for my total portfolio to average at least the 8% figure.

"As a several year Alliance member it seems to me that you have overlooked the needs of your older clients." – Paid-up subscriber BJ

Hunt comment: You seem to be familiar with The 12% Letter, and that's why your comment confused me. I took a quick glance at the portfolio, and I don't know what your concern is. Two stocks are yielding 11% and 13%, with 46% and 25% gains, respectively. Five other stocks in the portfolio are yielding close to or more than 10%, with capital gains between 12% and 89%.

However, if you're unhappy with 10% dividends and 30% capital gains, we do offer Advanced Income, Jeff Clark's latest service. On his first recommendation, he made readers 14% in less than a month.

Finally, we haven't forgotten about our older subscribers. We have those two excellent income-producing services and many others that recommend only the safest stocks and focus on capital preservation. It doesn't get much safer than PSIA, True Wealth, and Extreme Value. Subscribers like you have made our business what it is today, and we'd never neglect your needs.

Regards,

Brian Hunt

New Orleans, Louisiana

October 23, 2007

How to Handle Rising Volatility

By Ian Davis

Investors are a lot more worried than they used to be...

During the height of the dot-com bubble, the median value of the Volatility Index (aka the VIX), which measures investor fear, was 24.03... Last Friday, the VIX reached 22.96, only 4.5% below the dot-com norm.

Volatility On The Rise... 

Just last July – when the market underwent a sharp correction – the VIX spiked even higher to 30.8, peaking just as the market bottomed.

Between August 15 (when the VIX reached its peak) and October 15 – just two months later – the S&P 500 soared by 10%. The sectors that benefited the most from this rebound were also the sectors hurt the most during the correction. Take the industrial metals sector, for example, which had attracted a significant amount of speculative money before the correction. Once it was clear that the market had bottomed, the speculators piled back in, leading to a 27.1% gain over the following two months.

Likewise, the food/beverage and drug retail sectors weathered the storm admirably. These are defensive industries... and money flocks to these sectors when the going gets tough. During the pullback, the S&P 500 fell roughly three times as far as these sectors... And after the market bottomed, food/beverage stocks rose by 6.6% and drug retailers by 9.3%.

After four years of relatively low volatility, the VIX is once again on the rise... Now may be the time to put some money in defensive, consumer staple stocks... like Anheuser-Busch Companies (BUD) and Kraft Foods (KFT).

Alternately, if you are looking to juice up your returns, you should buy speculative stocks... after peaks in these volatility spikes. These highfliers generally have the most pop once fear subsides.

Good investing,

Ian Davis

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