Mon, Aug 11, 2014|Sean Goldsmith

A $500 million fraud...

A $500 million fraud... Buying Range Rovers with corporate funds... Hedge fund takes $1 billion position in Twenty-First Century Fox... A new essay from Jim Rickards... Kim Iskyan on Russia's recent cease-fire... How to close a put sale...

Longtime Digest readers are familiar with the dangers of investing in state-run companies – government-controlled companies masquerading as free-market operators.

As S&A Editor in Chief Brian Hunt wrote in his Growth Stock Wire essay titled "A Timeless Lesson on Investing With the Government"...

"For years, we have been telling you to watch out for state-run companies. The bureaucrats running government agencies are not encouraged to produce profits. They are not rewarded for improving the long-term value of a business. Bureaucrats are motivated to spend their entire budgets and grow larger. This allows them to acquire more power... and bigger budgets for next year... which allows them to acquire more power and bigger budgets for the year after that.

"Compare this with an entrepreneur who has his own money on the line. He's going to do his best to keep costs down, instead of intentionally blowing his budget. He's going to do his best to hire only the employees he needs... rather than hire as many people as possible. If he doesn't keep a close eye on his cash flow, he'll go broke."

Brazilian oil giant Petrobras (PBR) is the poster boy for a mismanaged, state-run company. As Brian wrote...

Petrobras has phenomenal assets. It controls some of the biggest untapped oilfields on the planet. But those assets are in offshore oilfields. Developing them will cost huge sums of money. And bureaucrats will oversee this absurdly large amount of spending (tens of billions of dollars). Take a guess how that will turn out.

To see how the government competes against legitimate businessmen, take a look at the chart below – a five-year chart of Petrobras versus oil giant ExxonMobil (XOM)...

Over the weekend, the Financial Times published a long exposé on how deep the corruption goes at Petrobras... The government isn't just misallocating funds... It's also allegedly placing top officials, pressuring for campaign donations, and laundering money.

The federal police are in the middle of an enormous investigation into Petrobras' corruption... And the company made a mistake last year that allowed the Federal police to take action...

In May 2013, convicted black-market money dealer Alberto Youssef bought through third parties a luxury car for his friend and alleged accomplice, Paulo Roberto Costa, a former executive at state-oil company Petrobras.

But while negotiating the purchase of the R$250,000 ($110,000) Range Rover Evoque in São Paulo, they put their names together on a seemingly harmless document: a proof of address. It was the only occasion in the mountains of police investigation documents seen by the Financial Times they voluntarily appeared together.

Police raided Costa's home, seizing the Range Rover and more than $500 million in cash. Prosecutors estimate wider corruption at Petrobras could eclipse another $440 million.

The story is astounding. You can read it here (subscription required). It alleges Petrobras inflated contracts, then laundered money from the overage and strong-armed the contracted companies to make large campaign contributions.

Are these the folks you want in charge of $45 billion in annual capital expenditures?

Jeff Ubben, founder of hedge fund ValueAct Capital, is taking another huge position...

In the May 14 Digest, we told you about Ubben upping his position in software giant Microsoft...

Ubben purchased around $2 billion of Microsoft stock – about 1% of the company – last spring. He bought another $115 million or so last week. Ubben's firm now owns 69.7 million shares.

The S&P 500 trades at an average price-to-earnings (P/E) ratio of 18, with an average dividend yield of 2%. Compare that with a conservative 15 times earnings for Microsoft, which pays a 2.8% dividend.

Microsoft is up around 60% since Ubben initiated his position. And the fund just announced another large position...

ValueAct announced a $1 billion investment in Rupert Murdoch's Twenty-First Century Fox. ValueAct started building its position when Fox was trying to purchase Time Warner last month, according to CNBC's David Faber. The deal has since fallen through. But Ubben told Faber he "loves" Fox's plan as a standalone company.

Over the weekend, we published a new editorial piece financial expert Jim Rickards wrote for Connecticut's Darien Times.

In short, Rickards explained why "the stock market and economic fundamentals are on a collision course." You can read the essay for free here.

On Friday, we ran the first installment of our exclusive interview with Rickards. He explained his outlook for inflation versus deflation... which outcome he believes is more likely... and how to profit from either scenario.

S&A Global Contrarian editor Kim Iskyan sent us an update on the latest out of Russia...

It was a question of how, not if, Russia would respond to its recent economic sanctions... and it could get even uglier. The U.S. and European Union (EU) recently imposed sanctions on Russia's finance and energy sectors, which should pressure the Russian economy. Over the long term, it will hurt Russia's efforts to maintain its oil production. Still, the U.S. and EU haven't rolled out the types of sanctions that could really hurt Russia... yet.

Last week, Russia responded by imposing import bans on certain American and European food items, including cheese, fish, beef, pork, and vegetables. Russia said that it might also target the automotive, aerospace, and shipping industries, which it knows will hurt certain U.S. and European companies –from dairy producers in Finland to chicken farmers in the U.S. The economic reverberations of the Russian ban will be broad and, for some industries, deep.

Russia called for a cease-fire over the weekend, sending the market higher. But Kim doesn't think this is the end...

In the past, Russia has appeared to de-escalate, but I wouldn't count on it... The stakes are too high. Remember, Ukraine is Russia's last stand against the West's slow-but-steady encroachment into Russia's former sphere of influence. And now that the geopolitical stakes are raised, there's no way that Russia can back down without losing face. And President Vladimir Putin is not one to lose face.

Meanwhile, thousands of Russian troops are on the Ukrainian border, and Putin must decide soon whether to up the ante through an outright invasion or more troops. My former colleagues at political-risk-consulting firm Eurasia Group put the odds of an invasion at 35%... It would be hugely costly from a military and economic standpoint for Russia. It would also hurt Putin's popularity ratings, as 51% of Russians oppose a Ukrainian invasion. Plus, aggressive military action would open the gates for harsher sanctions.

So it's time to batten down the hatches in Russia. The ban on foreign food imports will push up the cost of food in Russia. That will fuel inflation and could help Russia domestically. Russians like French wine, Belgian chocolate, and Norwegian salmon... One Russian restaurant said it would struggle to find substitutes for the 50% of the ingredients it imports.

Kim doesn't think Russia will roll over. He would be surprised if Russia didn't boost its gas prices for its European customers. Remember, Russia is responsible for around one-third of the EU's natural gas supply.

But that's not the only way Russia could hurt the West's wallet...

Russia is also discussing banning Western flights over Siberia, which would make long airplane flights even longer (and more expensive). Western banks and other service providers, like consulting firms, could come under increasing pressure. American businesses, like McDonald's, will face more visits from inspectors and bureaucrats with instructions to make life difficult.

In turn, the West could make it difficult to obtain a visa for Russians who want to travel to the West. Being forced to stay in Russia (or travel to, say, Kazakhstan for vacation) would be deeply unpopular. And Kim believes that if things get really bad, it could become more difficult for Westerners to invest in shares of more Russian companies, like we saw with Russian bank VTB. That would hurt Russia's stock market – and the oligarchs who control corporate Russia – hard... and could make a cheap market even cheaper.

Is it the bottom yet for Russia? It doesn't look like it...

New 52-week highs (as of 8/8/14): Berkshire Hathaway (BRK), Lynden Energy (LVL.V), Royal Gold (RGLD), Steel Dynamics (STLD), and ProShares Ultra 20+ Year Treasury Fund (UBT).

A quiet Monday mailbag with one subscriber writing in to ask about closing out an option early. Send us your questions, comments, and concerns to feedback@stansberryresearch.com.

"You have given me a great deal of information about options, but one thing is missing. How do you close out the option if you want to exit early? And how do you know when it is the best time to close out the option? Is it always the opposite command? I.e. sell to open? Buy to close? Or buy to open? Sell to close? Perhaps you can address this for all of us in your next essay on options." – Paid-up subscriber Doris Smith

Goldsmith comment: When you sell a put option, you "sell to open." And you're correct about closing the position... You need to "buy to close" in order to cover. It's similar to selling shares short. You borrowed those put options and sold them onto the market. When you want to close the position, you have to buy those options back.

As always, we recommend following our editors' buy and sell guidelines. But if you have captured a large portion of your upside quickly, you may want to close a put sale position early. The risk of holding the position may not be worth the last nickel or dime of option premium.

Alternatively, if the position moved against you, you could decide to cover (or "buy to close") the position for a small loss.

Regards,

Sean Goldsmith

August 11, 2014

What Obamacare means for your life... and for your investments...

Due to a scheduling conflict in March, Retirement Millionaire editor Dr. David "Doc" Eifrig was unable to present at the Stansberry Society event in Miami.

In today's Digest Premium, we're sharing Doc's presentation about Obamacare, what it means for you, and his top ideas to profit off it...

To subscribe to Digest Premium and receive a free copy of Jim Rogers' latest book, click here.

What Obamacare means for your life... and for your investments...

Editor's note: Due to a scheduling conflict in March, Retirement Millionaire editor Dr. David "Doc" Eifrig was unable to present at the Stansberry Society event in Miami. In today's Digest Premium, we're sharing Doc's presentation about Obamacare, what it means for you, and his top ideas to profit off it...

Back when I (Doc) was in high school, health care spending accounted for less than 10% of gross domestic product (GDP). Today, it accounts for 18%... in 25 years, estimates project that number will rise to 24%.

One of the reasons for that increase is the aging Baby Boomer generation, which will lead to a 45% increase in the elderly population. That means more money will be spent on prescription drugs and on doctor visits.

As you might imagine, elderly people take three to four times more prescription drugs than people under 50... and 90% of seniors take at least one drug per month.

Add to that the average nursing home stay is nearly 2.3 years and costs more than $200,000. According to financial-services firm Fidelity, the average retiring couple will need $220,000 to pay for health care costs if both partners live into their 80s.

One of President Obama's top priorities was to lower prescription-drug costs for seniors, cover everyone with quality health care, and require doctors to keep electronic medical records.

So on Christmas Eve of 2009, the Patient Protection and Affordable Care Act – commonly referred to as "Obamacare" – was passed during a late-night session. It was 11,000 pages long. It would take you around two-and-a-half months to read from start to finish if that was your full-time job.

Obamacare requires individuals to have a health insurance policy or pay a penalty. But there were some flaws to Obamacare that quickly became obvious. For one, not every state is treated equally. That means some people are forced to pay higher premiums in places where there are fewer hospitals and doctors.

Plus, Obamacare has unintentionally added millions of visits to the emergency room. There are too few primary care doctors across the nation... and suddenly, there are millions of people who now have health care coverage. If a doctor doesn't accept Medicaid – or isn't open around the clock, like a hospital is – ailing patients are likely to visit the local emergency room, which costs everyone more money in the end.

Obamacare is already in effect, so it's something we'll just have to live with. But there are ways for you to profit from this in the stock market.

Drugstore chains will fill more prescriptions. Health care technology is a growing sector, and certain firms are ideally positioned. And of course, pharmacy benefit managers that help manage the prescription process are a great way to invest in this long-term trend.

– Doc Eifrig

Editor's note: Doc's Retirement Millionaire subscribers are already enjoying big gains on some of the firms poised to benefit from this long-term trend. They're up 111% on CVS... 96% on Walgreens... 67% on Medtronic... and 15% on Express Scripts. And Doc believes there are far more gains to come. To learn more about Doc's research – which costs just $0.75 per week – click here.

What Obamacare means for your life... and for your investments...

Due to a scheduling conflict in March, Retirement Millionaire editor Dr. David "Doc" Eifrig was unable to present at the Stansberry Society event in Miami.

In today's Digest Premium, we're sharing Doc's presentation about Obamacare, what it means for you, and his top ideas to profit off it...

To continue reading, scroll down or click here.