One way we know central banks are losing control...
Editor's note: Today's Digest Premium excerpts Porter's interview with hedge-fund manager Erez Kalir on the most recent Stansberry Radio podcast episode. Erez has worked with some of the most respected fund managers in the world. He's currently the manager of his own firm, Ironbark Investments.
In their conversation – which occurred a few days before the Federal Reserve's most recent policy statement – Porter and Erez discuss several recent events that suggest government intervention is turning the stock market into a casino...
Warren Buffett has pointed out that it's a lot easier to buy bonds and drive prices up to unrealistic levels than it is to sell bonds at a high price. With that in mind, I (Porter) asked Erez what will happen if and when the central banks have to unwind their positions.
Erez responded that whatever happens, it will result in enormous volatility in the markets that will be very difficult to endure, especially if you have not properly set up your portfolio.
He went on to note several large, "ominous" moves in a number of asset classes…
• On April 15, the spot price of gold dropped nearly 10% in one day,
• The yield on U.S. 10-year Treasurys jumped 15 basis points (0.15 percentage points) – its fourth-largest move in the past 50 years, and
• Japanese stocks and Chinese interbank lending rates in emerging markets have suffered similar "flash crashes."
"We've recently in the past few months seen these kinds of moves not just in a single asset class," Erez said, "but across several really major and important asset classes."
On the 10-year Treasury's jump in yield, Erez went on to say…
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– Porter Stansberry with Sean Goldsmith
Editor's note: To listen to the full interview for free on Stansberry Radio, click here...
One way we know central banks are losing control...
We're seeing huge volatility in today's markets... In particular, a handful of major moves across various asset classes show the government's efforts to control markets are failing. As we explain in today's Digest Premium… these events should be extremely rare, but we're seeing them almost every week...
To continue reading, scroll down or click here.
One way we know central banks are losing control...
We're seeing huge volatility in today's markets... In particular, a handful of major moves across various asset classes show the government's efforts to control markets are failing. As we explain in today's Digest Premium… these events should be extremely rare, but we're seeing them almost every week...
To subscribe to Digest Premium and access today's analysis, click here.
Treasury yields still soaring... The bond-fund exodus... The Fed already backpedaling... An opportunity in blue chips... 'The most consistent trading strategy' Porter's ever used... The problem with democracy...
The post-Federal Reserve volatility continues today...
The S&P 500 closed down a little more than 1%. The Dow fell about 140 points. And yields on the 10-year Treasury continue to rise...
Yields on 10-year Treasurys rose last week by 40 basis points (0.4 percentage points) – the largest one-week jump in a decade, according to Bloomberg. Yields ended today at 2.57%.
Normally, in a time of financial panic, money flows into Treasurys... The Treasury market is the most liquid in the world. And it's viewed as a safe-haven asset. But not today...
This sudden spike in interest rates is one of the surest signs the 30-year bond bull market is coming to an end, as Porter wrote in the June issue of his Investment Advisory. Please note, Porter is discussing yields for 30-year Treasurys in this excerpt. But the same reasoning applies to 10-year Treasurys...
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And the exodus from bond funds is accelerating...
Investors withdrew $9.1 billion from fixed-income mutual funds and exchange-traded funds (ETF) in the week that ended June 5 – the second-highest total in more than 20 years, according to mutual-fund manager Lipper.
And a new report from TrimTabs Investment Research shows a record outflow from bond mutual funds and ETFs to date this month.
"Fund investors are unloading bonds at a record pace," TrimTabs CEO David Santschi said in a report released Monday. "The combined outflow of $47.2 billion is the highest in any month on record, handily eclipsing the previous record of $41.8 billion in October 2008."
And the Bank of International Settlements (BIS), an organization of the world's central banks, made a dire prediction in its recent annual report. The BIS estimated bondholders in the U.S. would lose more than $1 trillion if yields across the spectrum rose three percentage points.
Apparently, the Fed didn't expect this bearish response to its announcement last week. New York Federal Reserve President William Dudley, a Bernanke ally, is already backtracking. In the Fed's first announcement since the policy announcement last Wednesday, Dudley said the economy had fallen short of the Fed's employment and inflation goals...
"This suggests that with the benefit of hindsight, U.S. monetary policy, though aggressive by historic standards, was not sufficiently accommodative relative to the state of the economy," he said. "In this regard, I would caution against the mechanical use of monetary policy rules following a financial crisis."
The Fed is telling the American people not to fear... almost apologizing for last week's announcement. We knew the Fed would pump more money into the economy. It's the only thing our central bank can do to attempt to fight this crisis. That was never the question...
In our minds, the question is, what happens when the Fed's easing policies stop working?
We believe that would result in a complete loss of faith in paper money and a global bond-market collapse.
There is one bright spot to the market action of the past week... Many of the greatest businesses in the world are getting cheaper. And one of the best ways you can protect yourself from market fluctuations is to own the businesses Extreme Value editor Dan Ferris calls World Dominators...
Many World Dominators are also businesses that Porter describes as capital-efficient. Companies like Coca-Cola, Hershey, and McDonald's have the ability to increase prices during inflation. Their strong brands have earned the loyalty of millions of customers. And these companies normally pay healthy and growing dividends.
In his 1994 letter to Berkshire Hathaway shareholders, Warren Buffett gave his thoughts on buying great businesses at fair prices (one of the countless times he's discussed the topic):
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But what if the market falls further from here? How can you make sure you pay the best possible price for these wonderful businesses? We recommend you use one of our all-time favorite trading strategies – selling puts.
Before getting into the details of put selling, a word on our resident expert, Dr. David "Doc" Eifrig...
In Retirement Trader, Doc shows retirees how to safely and consistently pull thousands of dollars from the market by selling puts. And in doing so, he's amassed one of the greatest track records in financial publishing history.
Last September, we published a series of Digest essays describing how many of our readers were accusing us of making up numbers about Doc's track record. We took the opportunity to explain why Doc's strategy is so safe and consistent... and to assure everyone we were not fudging any numbers.
At the time, Doc had closed 81 consecutive winning positions.
As of last Friday, Doc's Retirement Trader streak has grown even larger. He closed five more winning positions… bringing his track record to an astounding 123 consecutive positions closed for a gain. No, we're not making any numbers up... Doc has actually closed 123 consecutive winning positions in Retirement Trader.
If you've never tried selling puts before… here's essentially how it works...
A "put" is an option. When someone buys a put option, he's buying the right (but not the obligation) to sell a stock at a set price (called the "strike price") by an agreed-upon future date (called the expiration date). So when you buy a put, no matter how low a stock's price falls, you can still sell for the strike price.
You can think of a put option as insurance. The buyer of the option is paying a small premium to insure his position against a decline in price. But what most people don't realize is that individual investors can also sell someone that insurance and collect the so-called "option premium."
As I said, you can think about put options working like home insurance…
When you insure your home, you are essentially buying the right to sell your house to the insurance company for a certain value, under certain conditions, for a limited period of time. In return, you pay the insurance company to accept those terms – whether or not you ever exercise the terms of the policy.
Put options work the same way. When you sell a put option, you're acting like the insurance company. You're agreeing to buy someone else's shares of a particular stock for a set price, under certain conditions, for a limited period of time.
In the case of your house, you'd exercise your policy in a disaster... when a fire or catastrophic weather damage wrecks the value of your home. In the case of a put option, the holder would exercise his right to sell us his stock if the market value of his shares falls below the price we agreed to pay.
When you sell a put option, the trade works one of two ways. You either collect the entire premium without any obligation... or you end up buying shares at the strike price. Considering the latter outcome, it's important to only sell puts on companies you want to own… at a strike price you consider a bargain.
It seems like a simple rule to follow. But many traders are tempted to sell puts on riskier stocks because they think they can make more money...
You see, the premiums an investor can collect by selling puts on risky, volatile stocks are typically higher than the premiums he can collect on safe, steady blue-chip stocks, like Microsoft or Coca-Cola.
So tempted by the allure of larger cash premiums, many investors sell puts on risky stocks. And yes, these investors might collect a big cash premium. But they put themselves in great danger... and leave themselves "exposed" to a large loss should that risky stock experience a big price decline.
Again, Doc mitigates this risk by only selling puts on the world's safest blue-chip companies that are trading at bargain prices. He only sells puts on stocks he is happy to own. Porter, and many of our other analysts, have called selling puts on high-quality, blue-chip stocks "the most consistent trading strategy" they've ever used.
Again, we're talking about stocks like Coke, Microsoft, Wal-Mart, and Intel... They hold No. 1 positions in their markets... rake in huge amounts of cash... and usually pay safe, growing dividends. They rarely suffer substantial declines... and when they do, it's usually a temporary stumble. Those dips are almost always a great time to step in and buy them at bargain prices.
For example, computer-chip maker Intel has fallen from $25.47 on June 18 (the day before the Fed announcement) to $23.58 today – a 7.4% decline.
Soft-drink behemoth Coke has fallen from $40.93 to $39.53 over the same time period – a 3.4% decline.
Chocolate maker Hershey's tumbled from $89.61 to $86.33 – a 3.7% drop.
Again... these stocks rarely suffer large price declines. So most of the time, Doc's subscribers never have to buy the stocks. They simply keep the cash premiums because the stock doesn't sink below the price they've agreed to pay.
But even when these stocks do suffer a decline... down to bargain prices... you're happy to buy the shares. You're happy to buy "dominator" businesses cheap. And you're happy to start collecting steady dividends.
If you'd like to learn more about Retirement Trader and take advantage of the recent market volatility to sell puts on high-quality blue-chip businesses, click here...
New 52-week highs (as of 6/21/13): Short position in iShares Barclays 20+ Year Treasury Bond (TLT).
In today's mailbag, our readers opine on the problems with our country and economy. Please send your thoughts to feedback@stansberryresearch.com.
"The fact that the stock market highs are due to the Fed pumping make believe money into the system should give every thinking person cause to ponder. The mere whisper that the Fed might consider a slight reduction in manufacturing phony money sometime in the not too distant future causing sharp drops in the Dow should be a strong indication of the danger of this situation." – Anonymous
"There are so many reasons that it is actually very hard to identify only one thought or one trend as many trends are intertwining.
"However, it seems to me that the single outstanding circumstance in the decline of America is one word: DEMOCRACY.
"I know, it seems like it's unamerican, even treasonous, to say such a thing as it flies in the face of what America represents to the world and what seemingly every advanced western country trumpets as the advantage we have over other forms of government.
"However, I believe that, as Joseph Goebbels was reputedly said to state, repeat a lie often enough and it is believed to be the truth.
"Why is democracy so bad? Because it is the underlying premise that the people can get something for nothing by simply voting for the candidate that promises them the most benefits and, magically, those benefits will appear. Democracy, therefore, enables astute politicians to lie with impunity. And the country's values to be eroded until they eventually become so distorted that they become, over time, so distorted that they are unrecognizeable.
"As long as people can vote to have the government, read other people, pay the piper, they have literally been trained to do so. Benefits become 'rights' which are inviolable and permanent. The term the rich must pay actually means other people –other than me." – Paid-up subscriber Bruce Hemmings
Regards,
Sean Goldsmith
Miami Beach, Florida
June 24, 2013