The short sellers are here... Herbalife plummets on criminal investigations... Ukraine gets worse... How fearful is the market?... Why a VIX of 20 is important...
The short sellers are piling on...
Short interest in the Nasdaq – that is, the number of open short sales on stocks that trade on the exchange – has risen by 10% so far this year. Right now, 2.9% of shares outstanding that trade on the Nasdaq have been sold short, according to research firm Markit.
And the most heavily shorted company in the Nasdaq 100 (companies with larger market capitalizations) is electric-car manufacturer Tesla. Short interest in Tesla has jumped by one-third to 15% of shares outstanding.
We've written volumes about our skepticism of Tesla. Yes, the stock has risen a lot. But...
1. The company loses money every quarter...
3. The company's cars catch on fire, and...
4. It's building a $5 billion "gigafactory," a massive battery plant.
Now... shares finally appear to be turning over...
Short sellers have already made money as the momentum behind some popular market darlings has waned... Shares of companies like Tesla, Internet retailer Amazon (AMZN), 3D-printing developer 3D Systems (DDD), and social-media services Twitter (TWTR) and Facebook (FB) have been slammed.
On a side note, Porter's most recent Friday Digest reiterated some of the bloated valuations in the market today... and the downfall of Amazon (from $400 a share in January to less than $320 today).
And last week, the Nasdaq dropped 3.1% – its worst weekly loss since June 2012.
As Porter advised on Friday, we're not at a market bottom, yet. But it's time to get cautious by trimming your long positions that could be volatile and raising some cash to buy after corrections. And you should start adding short positions to hedge your portfolio against a market-wide drop.
Nutraceutical company Herbalife (HLF) is one of the more hotly debated short sales in the market today. In late 2012, Bill Ackman, the billionaire founder of the Pershing Square hedge fund, publicly announced a $1 billion short position in the company. I (Sean Goldsmith) attended his public takedown of the company, when he labeled it a "pyramid scheme."
Then activist investor, and even bigger billionaire, Carl Icahn, took the other side of Ackman's bet... Icahn now owns nearly 17% of Herbalife. The two engaged in a public shouting match on CNBC. Fellow heavyweight investors Dan Loeb and George Soros also went long Herbalife.
But Ackman scored a coup last week...
The Financial Times newspaper reported the U.S. Department of Justice (DOJ) and the FBI had launched a criminal investigation of Herbalife (in addition to several ongoing civil investigations).
Herbalife responded in a public statement:
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Still, shares fell more than 14% on the news.
The conflict in Ukraine escalated over the weekend, with pro-Russian forces invading government buildings in the eastern part of the country and violence breaking out. The Ukrainian government is accusing Russia of fueling the unrest.
It's not a pretty picture, S&A Global Contrarian editor Kim Iskyan told us in an e-mail today. Russia wants Ukraine to "federalize" its constitution and give the eastern (Russian-leaning) regions more autonomy. This will increase Russian control over Ukraine. Russia also wants the Western governments and Ukraine to recognize its annexation of Crimea.
But Kim said that's not going to happen. The West says it's up to Ukraine, and no one else, to figure out its own constitution. The interim government has offered to give some limited powers to the regions, but nowhere near as much as Russia wants. Kim wrote...
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The International Monetary Fund and the West will step in with funding for Ukraine, Kim predicted. But they're not going to pay Ukraine's gas bill. And Putin was talking late last week about requiring Ukraine to pre-pay for gas (rather than the current deliver-now/pay-later arrangement).
Also, the IMF isn't going to be inclined to bail out international holders of the country's sovereign bonds. "I think it's increasingly likely that Ukraine will default at some point, barring a sudden and dramatic turnaround of events," Kim wrote. "The country just doesn't have the cash."
Meanwhile, the currency has continued to slide... It's down another 14.3% this month so far, and 54% this year. If a country's currency reflects the market's vote of confidence on its economy... Ukraine is losing in a landslide.
And the news isn't getting any better for Russia, either. More sanctions loom... and while Putin won't care, the Russian economy will suffer. Russia will do well if its gross domestic product manages to simply remain flat this year compared with 2013. Russia's banks have lent a lot of money to Ukrainian businesses, Kim notes.
"And as Ukraine's economy is ground under Russia's steel boot, more of its businesses will default," he said. "And as the flow of goods to Ukraine from Russia slows to a trickle, revenues (and profits) of industries ranging from consumer goods to oil to car makers in Russia will suffer."
Despite what's happening in Ukraine, the Nasdaq correction, a collapse in biotech stocks, and nosebleed valuations for stock-market darlings... the market's fear gauge, the Volatility Index ("VIX"), has remained low... but is edging upward.
The VIX, as we've written before, measures the prices people are willing to pay for options that protect the value of their stock holdings. That's why we call the index the market's "fear gauge." The higher the VIX, the more people will pay to insure their stocks... hence, the more scared they feel.
As you can see in the chart above, the VIX has mostly remained below 20 since 2013. On Friday, April 4, the VIX closed at 13.96... On Monday, it jumped about 11% to 15.57. And last Friday, the VIX nearly hit 18 before closing at 17.03.
Dr. David "Doc" Eifrig, in his April 11 Retirement Trader issue, noted the VIX's moves. (A higher VIX means larger option premiums. That's good for selling puts, like Doc does in his advisory)...
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While Doc says he doesn't pay attention to a VIX under 30, Bank of America Merrill Lynch (BAML) says we should be watching "20." In a research note, BAML noted: "While US equities have fallen sharply, the VIX index still shows signs of complacency. Historically, most tradable equity bottoms transpire after the VIX Index trades above 20%."
In other words, when the VIX rises above 20, we may see a short-term bottom in the market.
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New 52-week highs (as of 4/11/14): Dorchester Minerals (DMLP), Targa Resources (TRGP), and Vocus (VOCS).
In today's mailbag, two subscribers write in asking about shorting stocks. Is that a sign of the top? Let us know what you think at feedback@stansberryresearch.com.
"As usual, you hit it on the head.
"As Doug [Casey] foresaw, the real problem wasn't what would happen to my portfolio, the real problem is what would happen to my customers. I believe this is true for almost all business owners. You should care about what's going on in the stock market, even if you're not investing in it, because it has a huge effect on consumer confidence, retail spending, and the U.S. economy.
"A lesson every business owner should adhere by every day!
"Never have been in the stock market, but am very concerned what my customers can afford to pay for my product. As a cattle rancher in the middle of nowhere, (WY) These record prices are unbelievable, but only a fool would think that they will last. One has to only ask, where is the ability of anyone to buy their product. (out of thin air)? Appreciate your insight." – Paid-up subscriber Maurice Bush
"Now that stocks seem to turn, could you please publish your current 'black list' many thanks." – Paid-up subscriber Jakob
"On April 11, Porter wrote: 'I'd recommend selectively shorting stocks. We keep a 'victim's list' of stocks that are either obsolete, overly indebted, or frauds. Start with these. Hedging 10%-20% of your portfolio with short positions can really help reduce your portfolio's overall volatility and can even help you make a profit in a year where stocks fall 10%-20%.'
"I have been interested lately in the topic of shorting, and would appreciate being advised where I can access your 'victim's list'." – Paid-up subscriber Gregory Crook
Goldsmith comment: Porter's Black List and Victim's List are only available to Stansberry's Investment Advisory subscribers. To sign up for a no-risk trial, click here...
Regards,
Sean Goldsmith
Baltimore, Maryland
April 14, 2014
Pools of blood and dead animals...
Housing investor George Huang explains in today's Digest Premium some of the biggest surprises about the business... and important lessons he has learned since launching his fund dedicated to investing in single-family housing.
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Pools of blood and dead animals...
Editor's note: Today, we complete our series with hedge-fund manager George Huang, a former S&A editor who now runs a fund dedicated to investing in single-family homes.
The biggest thing people don't realize about my business is that you have to be prepared to walk into some pretty scary-looking homes. I've gone to a couple homes that we realized immediately were the scenes of a shooting. Blood was splattered across the ceiling. And we could still see the outline of a body on the floor and dried blood where it pooled on the carpet.
You also have to deal with dead animals... Typically, you'll find dead birds and rats. Not to mention lots of cockroaches, dead and alive. The smell of dead animals in a house can leave a lasting impression. These things were shocking at first, but now it's just the daily routine. It doesn't bother me anymore.
And the other thing about this business, it's process- and detail-oriented. The difference between generating 10% rental yields versus 5% yields can be a series of small costs that add up over time – death by a thousand cuts. Really, no huge expenses will kill you. But small things – like scheduling and canceling utilities – can add $30 to $50 to your tab... And over time, that adds up and eats into your rent. If your rent is $1,400 a month, that's a 3% hit right there.
You also have to find and manage contractors. If your contractor's a week late, you're out another $400 in rent. And you have to worry about insurance. Can you negotiate a great rate on your property and liability insurance? Again, all these little costs add up... So it's about building a process to optimize your workflow and minimize costs.
I think overall in the U.S., you'll see housing markets surpass the 2006 peaks in the next three to four years. I don't expect rates to go up for the next couple years. I don't expect mortgage rates to rise, even with the Fed hinting that it could raise rates.
Homes are still very affordable in the U.S. versus prices around the world. In Dallas, for example, median home prices are around three times the median annual household income. Compare that with Taipei, Taiwan (and other big Asian cities), where median home prices are about 14 times median income and gross rental yields top out at just 2.5%. U.S. real estate is a real bargain.
– George Huang
Pools of blood and dead animals...
Housing investor George Huang explains in today's Digest Premium some of the biggest surprises about the business... and important lessons he has learned since launching his fund dedicated to investing in single-family housing.
To continue reading, scroll down or click here.
Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)
As of 04/11/2014
| Stock | Symbol | Buy Date | Return | Publication | Editor |
| Prestige Brands | PBH | 05/13/09 | 326.2% | Extreme Value | Ferris |
| Enterprise | EPD | 10/15/08 | 288.4% | The 12% Letter | Dyson |
| Constellation Brands | STZ | 06/02/11 | 267.4% | Extreme Value | Ferris |
| Ultra Health Care | RXL | 03/17/11 | 206.2% | True Wealth | Sjuggerud |
| Altria | MO | 11/19/08 | 180.9% | The 12% Letter | Dyson |
| McDonald's | MCD | 11/28/06 | 180.3% | The 12% Letter | Dyson |
| Ultra Health Care | RXL | 01/04/12 | 167.4% | True Wealth Sys | Sjuggerud |
| Hershey | HSY | 12/06/07 | 164.4% | SIA | Stansberry |
| Automatic Data Proc | ADP | 10/09/08 | 136.0% | Extreme Value | Ferris |
| Blackstone Group | BX | 11/15/12 | 135.9% | True Wealth | Sjuggerud |
Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.
| Top 10 Totals |
| 3 | Extreme Value | Ferris |
| 3 | The 12% Letter | Dyson |
| 2 | True Wealth | Sjuggerud |
| 1 | True Wealth Sys | Sjuggerud |
| 1 | SIA | Stansberry |
Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)
| Investment | Sym | Holding Period | Gain | Publication | Editor |
| Seabridge Gold | SA | 4 years, 73 days | 995% | Sjug Conf. | Sjuggerud |
| Rite Aid 8.5% bond | 4 years, 356 days | 773% | True Income | Williams | |
| ATAC Resources | ATC | 313 days | 597% | Phase 1 | Badiali |
| JDS Uniphase | JDSU | 1 year, 266 days | 592% | SIA | Stansberry |
| Silver Wheaton | SLW | 1 year, 185 days | 345% | Resource Rpt | Badiali |
| Jinshan Gold Mines | JIN | 290 days | 339% | Resource Rpt | Badiali |
| Medis Tech | MDTL | 4 years, 110 days | 333% | Diligence | Ferris |
| ID Biomedical | IDBE | 5 years, 38 days | 331% | Diligence | Lashmet |
| Northern Dynasty | NAK | 1 year, 343 days | 322% | Resource Rpt | Badiali |
| Texas Instr. | TXN | 270 days | 301% | SIA | Stansberry |