Yellen trips... A mistake?... From sexual assault to managing money... The story of John Meriwether... Gambling on the rise... New high for this 'elite' company...
After digesting Federal Reserve Chair Janet Yellen's announcement yesterday, the market shuddered...
The Federal Reserve, in its statement, said rates would remain in the 0 to 25 basis-point (0%-0.25%) range for a "considerable time after the asset-purchase program ends."
The definition of "considerable" seems to have tripped up the market... Following the prepared remarks, Yellen expanded on the Fed's timetable in the Q&A. "At the present path, we would be looking at next fall" before the Fed raised rates, she said.
But then, Yellen added, "The language in the statement... probably means something on the order of six months" to raise rates.
Yellen is a noted proponent of easy-money policies. So her comments reflected a less accommodating, more "hawkish" tone than most people expected from her.
Though some think the new Fed chair may have misspoke... the move away from quantitative measures of economic improvement (6.5% unemployment and 2% inflation) is in line with her loose-money dovish reputation. Unlinking policy action from hard numbers gives the Fed more wiggle room to boost the economy – and we were fast approaching the 6.5% unemployment number (currently 6.7%).
During her Q&A, Yellen did redirect everyone to the Fed's official statement... "The FOMC statement is the device that the committee uses as a group to express its policy about rates."
Whether Yellen's "six month" remark was a mistake or not, the markets chose to ignore the official statement and focus on the words from the chair herself...
Stocks fell… The dollar rose… Gold plunged.
Hawkish moves from the Fed would make it difficult for one alleged sexual offender to profit in the market...
In May 2011, former International Monetary Fund head Dominique Strauss-Kahn (DSK) was charged with sexual assault and the attempted rape of a housekeeper at the Sofitel hotel in New York City, where he was a guest.
Strauss-Kahn was indicted the same month on seven criminal counts. Strauss-Kahn posted a $1 million bail and went under house arrest with a monitoring ankle bracelet.
The case was eventually thrown out after prosecutors questioned the housekeeper's credibility.
Strauss-Kahn resigned as the head of the IMF. And we didn't hear from him for a while... until today.
In what could be the ultimate sign of a top, DSK is seeking $2 billion to start a global-macro hedge fund, DSK Global Investment.
They're about to start a fundraising tour with stops in the Gulf and Russia, according to a spokesperson for the fund.
We applaud DSK's hutzpah... But his fundraising efforts couldn't possibly match those of former Long-Term Capital Management (LTCM) founder John Meriwether.
Meriwether founded LTCM, the famous quantitative hedge fund, in 1994. The fund was staffed with some of the brightest PhDs and mathematicians, including Myron Scholes and Robert Merton (who won the Nobel Memorial Prize in Economic Sciences for their method for valuing derivatives – the Merton/Scholes model).
The fund produced returns between 20% and 40% a year in its first few years... Along the way, it added more leverage. Then it collapsed following the Asian financial crisis in 1997 and the Russian crisis in 1998.
The fund was so big and levered, its collapse was viewed as a systemic risk... The heads of 14 financial institutions agreed to bail out the fund with $3.6 billion.
Author Roger Lowenstein wrote a great book on LTCM called When Genius Failed.
One massive failure wasn't enough for Meriwether... In fact, neither were two...
Despite the LTCM debacle, Meriwether was still able to raise money in the mid-2000s for a second fund, JWM Partners. It went belly up 2009 after posting a 44% loss for clients. We wrote about his exploits in the October 22, 2009 Digest:
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There's no news on how he has performed for his latest clients. As best we can tell, the fund is still active. He has caught three years of a massive bull market… but we wouldn't bet on that for the long term.
However, on the topic of gambling...
In the midst of easy monetary policy, folks like to gamble. Throw a dart at a board of tickers... Whatever you hit will likely go up. Likewise, if you're experiencing negative real interest rates (when the rate of inflation is greater than the risk-free rate), you can't simply let your money idle. You may as well throw some dice or play some blackjack.
In other words, the market reacts when the government announces its goals to make a currency worthless... And they treat it as such.
So it's no surprise to see shares of brokerages and casinos soaring. As our Editor in Chief Brian Hunt pointed out in the March 11, 2014 DailyWealth Market Notes:
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One of Small Stock Specialist editor Frank Curzio's elite, small-cap dividend-paying companies recently hit a new high...
Diebold is the world's No. 1 supplier of automatic teller machines (ATMs). It's also a leading supplier of security products, like bank vaults and safes. It's a 150-year-old company. And it has increased its dividend every year for the last 60 years – the longest streak of any company in North America.
Not even the 2008 financial crisis stopped Diebold from raising its dividend... In 2007, Diebold paid $0.94 per share in dividends. It bumped the payout to $1 per share in 2008... and $1.04 in 2009. Today, the company pays an annual dividend of $1.15 per share – a 3% yield.
Small Stock Specialist readers are up 35% on the position since December 2012.
New 52-week highs (as of 3/19/14): Diebold (DBD), Enterprise Products Partners (EPD), KLA-Tencor (KLAC), ProShares Ultra KBW Regional Banking Fund (KRU), Penn Virginia (PVA), Skyworks Solutions (SWKS), and Vocus (VOCS).
In today's mailbag... a couple subscribers have questions about two of our core strategies: put-selling and trailing stops. Send your questions to feedback@stansberryresearch.com.
"Should your broker, to whom you pay a quarterly fee, be able to calculate these trailing stops?" – Paid-up subscriber Robert Munger
Goldsmith comment: Your broker can track your stops for you, but we don't recommend it... As we explained yesterday, entering your stops into the market gives market makers the chance to pick your shares off.
"Always sell at least half your put options at a double... Subject is from the 3/15/14 Short Report. Does this apply to sold put options also?" – Paid-up subscriber Arnold Christenson
Goldsmith comment: When you sell a put option, you collect the option premium from the sale immediately... And that's the maximum amount of money you can make on the trade. Assuming your goal is to pocket the premium (and not actually enter into the equity position), your best outcome is for the option to expire worthless.
In other words, the maximum upside when selling puts is the premium you collect upfront. When you buy options, the potential upside is unlimited.
Regards,
Sean Goldsmith
New York, New York
March 20, 2014
This bellwether stock just hit a new low…
A former hedge-fund analyst recently warned us about an event he thought would mark the decline in a popular sector known for its high dividend payouts.
And he's starting to see that fall… We share a note he recently sent in today's Digest Premium.
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
This bellwether stock just hit a new low…
Editor's note: Our friend and former hedge-fund analyst Paul Mampilly has been following worrisome signs for the popular income-generating securities master limited partnerships (MLPs). MLPs are companies (often energy- and pipeline-related) that pay out the vast majority of their earnings in distributions to shareholders in exchange for big tax advantages… Their large yields make them attractive as an income-generating asset.
And now, Kinder Morgan Energy Partners (KMP), the big boy of the MLP space, just hit a new low…
Today, we're sharing some of Paul's thoughts on the situation. Yes, we realize the stock already hit a new low. But it's important to understand the thought process behind Paul's thesis… And you'll also learn how the MLP sector works.
Kinder Morgan Energy Partners (KMP) announced in February that it was going to sell 6.9 million shares in a secondary share offering. Normally, if you own an MLP like Kinder Morgan Partners, whose primarily appeal is its high yield, this is not such a shocking thing. MLP companies pay out all their cash and issue new stock to buy new assets all the time.
But KMP's announcement was different. The regulatory documents that accompanied the offering suggested that KMP is on the verge of experiencing a cash crunch.
You see, when a company issues shares, the law requires it disclose why it's raising the cash. Most of the time, the company will say it's for "general business purposes" or some boilerplate language that makes you want to fall asleep.
But the prospectus that KMP issued last night was absolutely stunning reading…
First, KMP said it was issuing stock to pay off commercial paper. That's a huge tell. If you remember, one of the big issues during the 2008 financial crisis was when Lehman Brothers was not able to fund itself in the commercial-paper market.
Commercial paper is really just a very short-term loan. Issuing stock to pay off short-term loans is extremely unusual. You see, commercial paper is the equivalent of Treasury bills, except issued by companies. In general, you can't issue commercial paper unless you are a rock-solid company. And people who buy commercial paper are very sensitive to changes in the credit quality of a company.
Anyone looking at what KMP was doing by issuing new shares could only come to one conclusion: KMP's credit quality was no good in the commercial-paper market. And one larger holder of commercial paper wanted out.
That holder was UBS... United Bank of Switzerland, a global mega-bank.
And guess what? UBS was also the underwriter for the new shares.
That's a huge conflict of interest. KMP owes UBS money. UBS is helping KMP sell a bunch of news shares into the market. But UBS can't be an impartial judge of KMP's creditworthiness because it needs KMP to raise some cash so it can pay back the bank.
Why would UBS want to cash out? I believe UBS thinks that KMP is not good for its money anymore, and it wants out ASAP.
KMP's equity issuance could turn out to be the pin prick that breaks what I believe is a big bubble that has built up in the MLP sector of the stock market.
– Paul Mampilly
Editor's note: There aren't a lot of ways to play a drop in MLPs. There is one inverse MLP fund… but it has just $4 million invested into it and it's not liquid enough to recommend to a large group.
Not all our analysts see the same degree of danger in MLPs, right now. Dr. David Eifrig rates the sector a "hold"… but close to "buy" territory in the latest issue of his Income Intelligence. He noted that the price increases the securities had enjoyed since December have now stopped, but their yields have been stable.
In any case, we'll be watching the factors Paul cited… and as always… minding our trailing stops.
This bellwether stock just hit a new low…
A former hedge-fund analyst recently warned us about an event he thought would mark the decline in a popular sector known for its high dividend payouts.
And he's starting to see that fall… We share a note he recently sent in today's Digest Premium.
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 03/19/2014
| Stock | Symbol | Buy Date | Return | Publication | Editor |
| Prestige Brands | PBH | 05/13/09 | 361.0% | Extreme Value | Ferris |
| Constellation Brands | STZ | 06/02/11 | 284.6% | Extreme Value | Ferris |
| Enterprise | EPD | 10/15/08 | 273.1% | The 12% Letter | Dyson |
| Ultra Health Care | RXL | 03/17/11 | 251.0% | True Wealth | Sjuggerud |
| Ultra Nasdaq Biotech | BIB | 12/05/12 | 230.0% | True Wealth Sys | Sjuggerud |
| Fluidigm | FLDM | 08/04/11 | 227.0% | Phase 1 | Curzio |
| Ultra Health Care | RXL | 01/04/12 | 206.6% | True Wealth Sys | Sjuggerud |
| Hershey | HSY | 12/06/07 | 179.0% | SIA | Stansberry |
| McDonald's | MCD | 11/28/06 | 172.6% | The 12% Letter | Dyson |
| Altria | MO | 11/19/08 | 171.0% | The 12% Letter | Dyson |
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 |
| 2 | Extreme Value | Ferris |
| 3 | The 12% Letter | Dyson |
| 1 | True Wealth | Sjuggerud |
| 2 | True Wealth Sys | Sjuggerud |
| 1 | Phase 1 | Curzio |
| 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 |