Who is more broke: Detroit or the Feds?...
The ideal time to sell puts...
In today's Digest Premium, Porter discusses one of our favorite trading strategies here at S&A – selling puts. He explains several rules to follow to successfully trade puts... And he tells you one important metric to watch to ensure you're making the biggest profits.
To continue reading, scroll down or click here.
The ideal time to sell puts...
In today's Digest Premium, Porter discusses one of our favorite trading strategies here at S&A – selling puts. He explains several rules to follow to successfully trade puts... And he tells you one important metric to watch to ensure you're making the biggest profits.
To subscribe to Digest Premium and access today's analysis, click here.
In today's Digest, I'm going to talk about a few things that really worry me on a personal level. These issues are going to lead America into a vast financial crisis... and perhaps widespread violence. Nobody talks about these risks, but I believe we are far closer to a violent breakdown of civil society than is commonly recognized.
Let me start with a few simple facts. These aren't conspiracy theories. These are events happening right now in our country... things that were unthinkable 20 or 30 years ago.
First and foremost, Detroit declared bankruptcy a few days ago. I've written, for years, about how Detroit should serve as a stark warning to Americans who believe in liberal social policies, like highly progressive taxes and expensive social safety nets.
These socialist programs don't cure income inequality. They merely destroy wealth by reducing incentives for building businesses and encouraging dependency. That's why societies with lots of government spending typically have few civil institutions and a small middle class.
Here's the message our politicians on both sides of the aisle seem to miss: 50 years ago, Detroit was one of the largest and wealthiest cities in the world. Nearly 2 million people lived there, and it enjoyed the highest per-capita income in the United States.
Then, in 1960, everything changed.
Liberal Democrats came to power (and have held power since). Their ideas about using the government to build a "Great Society" – using the government to provide a cradle-to-grave social safety net – have slowly transformed Detroit from the wealthiest city in America to a hellhole.
Detroit's population has declined by almost 70% since 1960. Roughly half of the people who remain are functionally illiterate. More than 60% live below the poverty line. And roughly half of all adults don't work. Only about one-third of the city's ambulances are in working order. Almost half of the streetlights don't work. It takes the police an average of 58 minutes to respond to emergency calls. The violent crime rate (no surprise) is five times higher than the national average.
It is shocking to realize that only 50 years ago, Detroit was the shining example for the world of capitalism and civil society. It doesn't take long to destroy wealth.
Now consider this... Detroit went bankrupt with total debts of around $20 billion. That's roughly $28,000 per remaining citizen. That's nothing. The debts that the U.S. government has amassed over the same period (the last 50 years) are vastly larger.
Today, all Americans owe more than $16.7 trillion on the federal level – that's nearly $54,000 per citizen and nearly $150,000 per taxpayer. How many Americans do you think realize that our federal government is twice as bankrupt as Detroit?
Here's another big issue... Detroit is a city made up of mostly African American residents. This has been the case since after World War II, when many black families fled the racism of the South and went north seeking jobs in the auto factories. Detroit became a hub for African American politics and culture. Motown Records is one example of the African American cultural influences that flowed from Detroit.
John Conyers, Detroit's U.S. congressman, is one of the high-profile African American politicians to come from Detroit. A founding member of the Congressional Black Caucus, Conyers is the second-longest serving member of the House, having been re-elected continuously since 1965.
Conyers' wife, Monica, was formerly the head of Detroit's City Council. She's been in prison since 2010, thanks to an FBI investigation of corruption in Detroit. John Conyers was re-elected in 2010, despite his obvious connection to corruption in Detroit.
Given the city's complete collapse, what are our country's black political and social leaders doing to address the city's serious problems? John Conyers' website claims he's focused on "promoting economic development." It then lists the various federal handouts he's helped win for his district... as though simply getting more handouts will cure Detroit's problems.
What about the rest of America's black political and social leadership? What have our president and U.S. attorney general said about the collapse of one of America's wealthiest cities and former capital of African American culture?
The attorney general, Eric Holder, is promising to continue fighting for "justice" in the George Zimmerman-Trayvon Martin case.
President OBAMA! in a recent speech said he would redouble his efforts to fight "income inequality" and that such policies would be his administration's "highest priority." So in short, he's promised to handle Detroit by pandering to his political base and doing more of the things that caused Detroit to collapse.
The right thing to do for the people of Detroit is to empower them to regain their dignity. This means eliminating social programs that encourage reliance on the state, rather than individuals and families. It means kicking out the corrupt politicians. Black leaders need to encourage individual responsibility and family values, not encourage people to live at the expense of their neighbors.
But that's what scares me the most. In the face of Detroit's collapse, not only has no one who should be held responsible even acknowledged the problem… but our country's leaders seem totally oblivious to the causes of Detroit's collapse.
Detroit is a living case study of why government efforts to redistribute wealth don't work. But instead of recognizing any of the lessons of the catastrophe, OBAMA! promises more of the same policies.
Meanwhile, his government is in far worse shape than the city. The only real difference is the president and the federal government are still able to print their way out of trouble, using the Federal Reserve's ongoing manipulation of the U.S. Treasury market.
But what happens when that game ends? And it will. No nation in history became wealthier by printing money and buying its own government's debts. In every case, inflation soon destroyed the economies and wiped out private savings. Rates on the U.S. 10-year Treasury bond have recently moved from 1.6% to 2.6% – in the face of continued Federal Reserve buying of $85 billion a month.
The dream that the government could provide prosperity to the residents of Detroit has come to its inevitable end. The dream that the federal government can provide prosperity to the entire country is even more delusional. It will come to a far worse end.
Printing trillions in new dollar bills to facilitate the madness won't prevent the inevitable bankruptcy of our country. It will merely gut the middle class of its savings and its wages first.
Believe me... this will come to pass. It will not take another 50 years. Maybe 10.
And when it happens, an enormous number of people will feel betrayed by the government: One group because it's been taxed and inflated into oblivion, and the other because it believed the government's handouts were a civil right, like free speech. How will those two groups relate to each other? My guess is not well. Want a preview? Just spend a few nights walking around downtown Detroit. Let me know how that works out for you...
Finally, if you still don't think something has gone terribly wrong with our country, consider this: Our attorney general just sent a letter to the Russians promising that we wouldn't torture or kill National Security Agency leaker Edward Snowden, who's applied for political asylum there.
When I grew up, then-Soviet citizens were fleeing to America to escape such government threats. I don't remember the day the world turned upside down... but it has.
As subscribers know, I've been writing about our debt-addicted government policies for a long time. It's the basis of my "End of America" reports… which focus on the consequences to our economy and our way of life when the world inevitably gives up on the dollar as its reserve currency. Earlier this year, I updated this report. To see how I expect the crisis to play out… and learn what you need to do to protect yourself… click here.
New 52-week highs (as of 7/25/13): Bemis (BMS), Chesapeake Energy (CHK), CVS Caremark (CVS), Chevron (CVX), Fidelity Select Medical Equipment & Systems Fund (FSMEX), Fuel Systems (FSYS), 1st United Bancorp (FUBC), Home Federal Bancorp (HOME), Hershey (HSY), Johnson & Johnson (JNJ), Oneok (OKE), ProShares Ultra Health Care Fund (RXL), and Cambria Shareholder Yield Fund (SYLD).
In today's mailbag, a couple subscribers write about Wal-Mart's dustup with the Washington, D.C. City Council over a "living wage" bill… and another shares his "currency trading" experience. Send your e-mail to feedback@stansberryresearch.com.
"I don't know about DC, I am from Illinois. But when I worked at WalMart, the starting pay was $9 an hour, $10 for the night shift. The news report is designed to make one think that Walmart only pays minimum wage (7.50?), when in reality, Walmart starts their pay much higher. I am glad Walmart isn't letting govt officials dictate to them." – Paid-up subscriber Gregg Clemons
"Is the Government stifling business? Hell yes! However, it has nothing to do with tax increases. It has to do with excessive regulation from Obama Care and other recent laws passed. It isn't the certainty of certain tax increases, but the uncertainty of everything else. If Obama wants to increase employment and stimulate the economy, he can simply rule that every agency has to eliminate 10% of their regulations for each of the next four years. But hey, that wouldn't be Obama, would it? He wants to increase Government regulation, not decrease it. Pray for our grandchildren." – Paid-up subscribers Phil Essley.
"Yeah, I noticed the value of my currency going down every time I buy something. Every week it costs more and more. The thing that gets me is, if I go out and earn a replacement 20%, the government takes a portion of that as well. So I have to make a total of 25% more to keep the same $10,000. At this rate the real question is: When do I get to retire?" – Paid-up subscriber C Brown
Regards,
Longtime readers know one of our favorite trading strategies is selling put options on high-quality companies.
We won't go into the basics of selling puts today… If you're not familiar with the strategy, you can read the July 5 Digest on Dr. David Eifrig's Retirement Trader, a service that focuses on selling puts.
A big component of trading options is market volatility... When volatility is high, the cash you receive upfront for selling your puts (called the "premium") increases. And the opposite is true... low volatility reduces option premiums. (More on this in a moment...)
We've recently seen lots of volatility in the stock market... Microsoft dropped nearly 12% in one day. Facebook jumped 25% yesterday. And today, video-game company (and Investment Advisory portfolio stock) Activision Blizzard jumped 15%.
With these huge swings, you'd think we would receive a large premium for selling puts. But that's not the case today.
The key to selling puts effectively is to never sell a put on anything that you wouldn't like to own at the strike price you choose. The only way you can minimize the risk is to only sell puts on stocks you'd be happy to own at strike prices you think represent a bargain to the stock's true value.
You should look for companies that have stable businesses, good margins, and good cash flows – just like you would for any long-term investment.
Then, the time to sell puts is when the Volatility Index (VIX) is high. The VIX is a measure of the available size of the book premiums. When investors are worried about the direction of stocks, they'll pay more for options that protect the value of their investments… So when fear is high, so is the VIX. That's why we often call it the market's "fear gauge."
If you want to be really successful as a put seller, you need to be willing to sell puts when other investors are panicking. We saw a small panic in the markets three weeks ago when the market reacted to Federal Reserve Chairman Ben Bernanke's announcement that we'd see them taper bond purchases later this year. The VIX jumped from 12 to 21.
That's a sharp jump… But to put things in perspective, the VIX hit 80 in October 2008 (in the middle of the subprime crisis). That was the greatest time in recent history to sell puts. That's about the time I was writing my put-selling service, the Put Strategy Report.
Today, the VIX is at 13. I'd look to sell batches of puts when the VIX rises above 20. But remember, that increase in volatility can happen in a single day, so be aware.
– Porter Stansberry with Sean Goldsmith
The ideal time to sell puts...