The tooth fairy of the Federal Reserve?... Europe's latest liquidity push... Gold and silver plunge on Bernanke's comments... Ray Dalio, the world's greatest hedge-fund manager... Jeff Clark's 500%-upside trade... Stockton, California nearing bankruptcy... More great feedback...
"Let's go back to the Federal Reserve. Larry, get out their balance sheet... All sorts of things have suddenly appeared on the balance sheet in the last year. The tooth fairy didn't put that in the balance sheet. The Federal Reserve bought that stuff."
Government critic and commodities bull Jim Rogers appeared on the CNBC show The Kudlow Report last night. When pressed on why the stock market is feeling so healthy these days, Rogers answered with the short quip above... The Fed is supporting the market by buying up all sorts of assets. He went on to say the huge amount of government spending will make it difficult to dethrone Obama...
"I would tell you that Obama is going to win. I don't want him to win. It's not good for America. But Larry, it's hard to defeat a sitting president, and he's spending a lot of money. Things will feel good this year just because he's throwing money into the market and into the economy."
Rogers said he's avoiding stocks in favor of real assets. No surprise, considering he's been bullish on commodities for more than a decade. He's preparing for a big inflation.
And who can blame the guy, considering the latest out of Europe? The European Central Bank (ECB) announced it will lend 529.5 billion euros ($712.2 billion) to 800 banks for 1,092 days. This is in addition to the 489 billion euros the ECB gave to 523 financial institutions in the first three-year "loan" in December. And it's more than the 470 billion euros economists estimated for today's tender.
As we've been saying, global central banks will do everything in their power to keep Europe afloat. Our guess is the latest bailout – just like the previous bailout three months ago – will flop... And we'll see more liquidity injected into the system.
Taking central banks' respective fingers off the "print button" is akin to weaning heroin addicts from the needle... As Rogers alluded to above, it's easy to keep the masses happy by just printing money.
In testimony provided this morning to the House Financial Services Committee, Bernanke did not mention further quantitative easing (QE)... But he didn't rule it out, either. He described the drop in the unemployment rate as "somewhat more rapid than might have been expected." And he noted growth to date has been "uneven and modest."
Despite history's strong proof to the contrary, the market today believes the Fed's QE days are over. The Dow Jones Industrial Average and S&P 500 both turned down slightly in the wake of Bernanke's comments. And Mr. Market sent gold tumbling more than 4% to $1,715 an ounce and silver down nearly 6% to $35 an ounce.
If the market falls on fears QE may be over for good, despite the Federal Reserve chairman saying the economy is growing faster-than-expected, how fundamentally strong is that market?
Ray Dalio, the billionaire founder of hedge-fund Bridgewater Associates, bested George Soros as the world's most successful hedge-fund manager based on the total dollar returns he has generated for investors over his career. Bridgewater's flagship Pure Alpha fund made $13.8 billion for investors last year – beating its own record for largest one-year dollar gain, which he set in 2010. Hedge-fund investor LCH Investments has been tracking hedge-fund returns since 1969... Since Bridgewater's 1975 inception, the firm has returned $35.8 billion. It currently has $72 billion under management (the world's largest hedge fund).
The ranking also showed the biggest hedge-fund loss in history, John Paulson's $9.6 billion blunder last year. Despite the huge loss, Paulson still ranks third with $22.6 billion in gains.
If you were the owner of the world's largest and most profitable hedge fund, would you sell? We wouldn't either. But four years ago, Dalio announced a 10-year plan to dilute his ownership stake in the fund. And on February 16, the $109 billion Texas Teachers' pension fund bought an equity stake in Bridgewater for $250 million. Another undisclosed institutional client also owns an equity stake in Bridgewater. And the fund says it's in discussions with a third potential investor, though it would not give further details.
We don't know Dalio's true intentions. But whenever we see a so-called "master of the market" unloading a stake in his firm, via private sales or public offerings, we're skeptical. As we've said since the 2008 crisis began, returns will be much harder to achieve once the credit spigot shuts off. Dalio seems to agree.
Jeff Clark e-mailed his S&A Short Report readers this morning with a trade he thinks could return 500%... Jeff is recommending an option trade to profit on the fall of a sector that he believes is extremely overbought...
Jeff uses what's called a "bullish percent index" (BPI) to measure the percentage of stocks in a sector that are trading with bullish chart formations. It's a simple way to gauge when the stocks in that sector are overbought or oversold. A sector is considered "overbought" when its BPI goes above 80. (The maximum reading is 100.)
Although we can't identify it here... the sector Jeff wrote about today is extremely overbought and vulnerable to a correction... The sector's BPI is currently 87. That means 87% of this sector's stocks are in "overbought" territory. That's its highest reading in the past two years.
Jeff is recommending an option trade to profit when this sector falls. And he structured the trade so its potential returns are huge. As I said, he believes readers could make up to 500% when this sector breaks down. To learn more about subscribing to the S&A Short Report, which would give you access to Jeff's latest trade, click here...
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In our more than five years of publishing the S&A Digest, I don't recall ever receiving more positive feedback about any investment strategy. It's clear many subscribers are making a fortune selling puts.
If you don't want to miss out on one of the safest and most profitable ways to trade, sign up for Doc Eifrig's Retirement Trader now. Doc's advisory features a put-selling strategy. And he's closed 61 straight winning positions. His readers couldn't be happier. To learn more about a subscription, click here.
And please, continue sending your messages to feedback@stansberryresearch.com.
"I want to thank Dr. Eifrig for his newsletter Retirement Trader. In 3 months since I purchased it I have doubled my return... My favorite letters are Retirement Trader, Advanced Income, Short Report, and True Wealth Systems. Yes that is correct. I am up over $10,000 I let the professionals at Stansberry do the heavy lifting." – Paid-up subscriber Gary L. Bunday
"I would say writing puts is the single greatest strategy I have employed since I subscribed over 1 year ago. I have set up the ability to write cash-secured puts in my IRA account which helps mitigate the taxes. After reading your strategy I asked myself why didn't I think of this sooner. It is definitely a lower risk way to enter into an equity position of an equity you wish to own. (i.e. Coke, Microsoft, 3M, Encana etc.)
"What I am truly looking forward to is when my children get older to teach them this strategy so they don't have to wait as long as I did to figure it out. I would say I have made enough cash at this to almost pay for my Private Wealth Alliance membership fee in one year.
"Thanks for your information, I can't wait to read the S&A Digest every day." – Paid-up subscriber John
"Shhhh! Would you please pipe down about the put selling already!! We've got a good thing going here and if you let the buyers know then they'll become sellers and there won't be anyone left to bid up the premiums! I've been selling puts all along but until I got Retirement Trader I didn't realize that I was doing it wrong with large position sizes and deep in the money strikes. Since November I've been selling weeklys on one of Sjuggerud's stocks. Every week is a winner!
"Speaking of retirement, Thanks to S&A I'll be retiring in August at age 58." – Paid-up subscriber James J.
"Selling puts can be a very sound and profitable aspect of an overall options strategy... if you know your stocks and their typical behavior. And if you don't get greedy.
"I have a couple of rules. First of all, cash-secured put writing is preferable... avoid margin unless tactically utilized close to expiration. Secondly, in most cases, write puts expiring in 5-6 weeks or less. Except for the occasional assignment, this short-term focus permits a continual rolling into cash, which keeps the powder dry for continuing the strategy in subsequent periods. Full disclosure, the short-term, cash-flow nature of my put writing precludes any thought of paying the LT cap gains tax rate.
"Essentially I look to write puts any time there are pullbacks in the market. Conversely, I'll look for opportunities to sell covered calls against long positions on up days. For the written puts, I'll either leverage into existing short positions or I'll sell a lower strike if there is continued price pressure. On occasions when I accept assignment of 'good' stocks at a lower price, I'll patiently wait to write calls when it makes sense to raise cash or book a profit.
"A word of caution for the 'wannabe' who thinks he'll be successful selling puts. The good news, I think anybody with the time, inclination and ~$100K can successfully sell puts and make some decent money starting tomorrow. But besides the substantial stake, it does take some experience.
"For example, I've become proficient with options, which helps. This proficiency was the result of making every dumb a** option trade you can make... and learning the hard lessons from those over a number of years. I know how to assess a stock... I can quickly read income, balance sheets and cash flow statements. I am overly familiar with perhaps 200-300 companies. And I take good advice, like yours, which adds to my trading themes and stocks to watch. Lastly, and perhaps a critical advantage, I'm retired and have time to watch things... to make those periodic adjustments.
"Bottom line, selling puts can be the next best thing. It's really worked for me." – Paid-up subscriber Charley
Regards,
Sean Goldsmith
New York, New York
February 29, 2012