A bigger problem than Europe and China... New lows for Facebook... European banks getting crushed... Jeff Clark: Silver is about to soar... More put-selling success stories...
While news of a European crisis and Chinese slowdown have stolen headlines, another problem that will have severe and immediate consequences is taking shape on U.S. soil...
As Digest readers know, the U.S. is in the midst of its worst drought in 25 years. And the lack of water is crushing the corn crop... Corn is the foundation of the U.S. food system. It's calorie-dense and nutrient-light. And it's in everything... The livestock you eat are fattened with corn. Corn syrup sweetens your sodas and other sugary goods. And corn is a main ingredient in cereals, condiments, and packaged foods. Plus, thanks to one of the greatest government boondoggles of all time, 40% of our nation's corn crop goes into the gasoline additive ethanol.
The price of corn is up around 33% to reach new 10-year highs in the past month. Yesterday, Gregory Page, CEO of U.S. food giant Cargill, appeared on CNBC to discuss how rising corn prices will hurt the economy. Page said the annual household food budgets will rise $75 a person this year compared to last year... "So if you're a family of four on a tight budget," Page said, "it's not inconsequential."
But while rising food costs could strain Americans' wallets, this isn't a domestic problem. It's global. When severe price increases hit poorer countries around the world, that's when the trouble starts. As our editor in chief, Brian Hunt, wrote last month...
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... one of the great fears of dictators around the world is a big spike in food prices. After all, the average Joe – whether he lives in Madrid, Mumbai, or Mexico City – will willingly march to war for the craziest reasons. He will endure punitive tax rates. He will cheer on the dumbest government actions. But should his food become expensive, he'll be rioting tomorrow... alongside every one of his neighbors. |
Shares of social-networking giant Facebook hit a 52-week low yesterday. Shares are down 26% in the past four trading days. (They fell 6% yesterday.) Facebook has fallen from a high of $45 on its first trading day to less than $22 today. The rout followed Facebook's first earnings announcement as a public company.
The announcement sparked worries about the company's growth potential and high valuation... Fears we had from the beginning…
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Facebook went public with a valuation of more than $100 billion. That's bigger than online retailing giant Amazon (current market capitalization of $95 billion), fast-food goliath McDonald's ($92 billion), and the global credit-card association Visa ($80 billion). |
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And based on 2011 earnings of $1 billion and revenue of $3.7 billion, Facebook shares were expensive – 100 times earnings and 27 times sales. For comparison, McDonald's trades at 17 times trailing earnings and 3.3 times sales... And it pays a 3% dividend. We know McDonald's will continue earning billions of dollars each year selling hamburgers, fries, and soda. We have no idea how Facebook will increase its earnings. It seems the market is embracing that uncertainty as well... – S&A Digest, May 30, 2012 |
If you were one of the unfortunate ones who bought shares as part of Facebook's initial public offering in May, you can take solace knowing you weren't the biggest loser... Switzerland's largest bank, UBS, announced it lost $350 million from the Facebook offering. The bank said the Nasdaq's mismanagement of the offering caused UBS to be allotted more shares than it meant to purchase. The bank is suing Nasdaq to recover the losses.
Fortunately for UBS, the Facebook loss steals headlines from the bank's bigger problems... the slow deterioration of Europe destroying its business. UBS' second-quarter profits dropped 58%. Its investment banking arm took the worst hit... Operating income fell from $2.9 billion to $1.7 billion. (The Facebook fiasco put the unit in the red with a $130 million net loss.)
Deutsche Bank, Europe's largest bank, also announced terrible earnings. Profits fell 46% in the second quarter. Profits in its investment banking arm fell nearly two-thirds to $440 million. (Note: Porter shorted Deutsche Bank in mid-2011. His Stansberry Investment Advisory closed the position for a 24% gain in just three months.)
"The current environment continues to result in significantly lower levels of client activity, both in investment banking as well as in certain parts of our retail business,'' Deutsche Bank said in its quarterly report. ''We expect this to continue in the second half of the year.''
Societe Generale, France's second-largest bank, also reported disappointing earnings... Net profit was down to $533 million from $920 million. The bank took large write-downs on Russian and U.S. assets (not on its core, European holdings).
As European Central Bank President Mario Draghi promised last week, he will "do anything it takes" to preserve the euro. And given the recent announcements from the eurozone's largest banks, his actions will likely be sooner than later.
Since Draghi's announcement on July 26, gold is up around $40 an ounce. And when the money actually hits the economy, gold and silver will both soar.
In an urgent update to S&A Short Report subscribers yesterday, Jeff Clark said silver (the more volatile precious metal) was about to break out to the upside. Take a look at the chart he presented…
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Yesterday, silver popped above the down-trending resistance line. That's an upside breakout... and it brings the next resistance level at about $30 per ounce into play. It's not a guaranteed move, though. Nothing in the markets is ever guaranteed. But the odds have shifted in favor of the silver bulls. If silver can add to yesterday's gains – or at least not drop back into the triangle pattern – we should see higher silver prices for the next several weeks. |
Jeff said one of his favorite indicators also just flashed a "buy" signal for mining stocks on Friday...
Jeff's track record trading precious metals has been incredible... Since May, S&A Short Report readers have made 95% in one week on Seabridge Gold, 100% in one week trading GDX, and 77% in less than a month on Gold Fields.
That's on top of Jeff's astounding success in 2011... Just to name a few winners, he made 100% in 22 days on Seabridge, 103% in 22 days on Gold Fields, and 142% in just seven days on the SPDR Gold Shares Fund. He closed six other precious metals trades for gains between 47% and 91%.
Jeff is currently bullish on a certain silver-mining stock... This company has more than three times its market capitalization in proven and probable silver reserves. And it trades for only five times earnings.
But as cheap as this stock is, he likes the technical setup best... The stock looks like it's ready to explode to the upside.
Jeff believes the trade he's recommending could return as much as 340%...
If you believe gold and silver are going to rise as central banks pump more and more money into the economy, you should consider this trade. It's a turbo-charged way to profit from that increase.
In yesterday's Digest, we made a serious error, and I'd like to apologize.
I highlighted Matt Badiali's January 2010 recommendation of InterOil to his S&A Resource Report subscribers.
As you may recall, our recommendation of InterOil was highly controversial. One of our friends, hedge-fund manager Whitney Tilson, was the company's most outspoken critic... He was selling the company short.
The point of yesterday's Digest was to give kudos to Matt for performing in-depth research (including flying to Papua New Guinea) and sticking to his controversial recommendation despite negative press. We're a 100% independent publishing company – meaning we don't accept money to promote companies... So big recommendations like InterOil are the lifeblood of our business.
What I failed to mention in yesterday's Digest is that Matt stopped out of InterOil in his October 2011 issue. Though he still believed InterOil would be a successful company, he honored his stop loss and directed readers to sell. He recorded a 45% loss on the position.
Yesterday's Digest was not meant to misrepresent Matt's track record. We just had several oversights in our editorial process. As longtime readers of S&A know, we always advocate sticking to stop losses. And this case was no different.
Again, I apologize for this error. We in no way meant to suggest InterOil was a winning position for Matt's readers.
New 52-week highs (as of 7/31/12): Vanguard Inflation-Protected Securities Fund (VIPSX), Two Harbors (TWO), and Philip Morris International (PM).
Lots more feedback about selling puts... Have you sold puts yet? How did it go? Send your feedback to feedback@stansberryresearch.com.
"You've mentioned in the Digest several times that one member is generating $25,000 a month. To do that isn't he selling literally hundreds of puts every month? I'm a put seller also and realize the risk is pretty, low but if the market went against him wouldn't he be looking at massive losses either to close out the options or be assigned huge amounts of stock. Wouldn't he be looking at either a huge margin call potentially or have to have a very large stash of cash available? Is there something I'm missing? I look forward to your response. Thanks!" – Paid-up subscriber Paul Simon
Goldsmith comment: I can't speak to the number of puts this gentleman is selling each month, but he's certainly trading in size. It's an extreme, but true case. And yes, I suspect he could face a large margin call should a position move against him.
Remember… our safety with this strategy is based on two critical concepts. First, only sell puts on stocks you want to own. That way, if you are put the stock, you will own shares of a great business at a price you agreed to pay. You can hold the shares and generate more income (improving your returns) by selling calls and collecting dividends.
Also, position sizing and stop losses are vital to ensuring you never risk more money than you can afford to lose. For example, Dr. David "Doc" Eifrig urges subscribers to never put more than 5% of their portfolios in any one position… and to close your position if it costs you 25% of your "capital at risk" – what you'd pay if you were put the stock. (Doc explains this stop-loss strategy in detail for his subscribers.) That way, the most you can lose is about 1% of your trading capital. Virtually anyone can withstand that kind of loss.
Regardless of your portfolio size, you can sell puts to generate income. The absolute amount may be smaller, but it should be consistent proportionately.
"I get doc eifrig's newsletter on put selling. Before I got it, I lost eighty thousand last year. So far this year I have made fifty thousand dollars and lost nothing. The down side of this I guess is I am unwilling to do anything else. I am not open to anyone's ideas. The eighty grand really hurt." – Paid-up subscriber Steve Smith
"I have been selling puts and doing covered calls for some years now, and I am very happy with the results, this type of transactions give me tranquility to sleep without worry and joy of the cash that goes into my account. With the covered calls, I wait for a good company to fall to the price I'm willing to buy and once I bought I'll wait to sell a call maybe 2 or 3 steps up (price), when the stock goes up a little I get filled my order, so I get a good price for the call, and eventually get exercised 2 or 3 dollars above my buy price. And if I don't get called I sell another call maybe 3 or 4 dollars above my buy price, and I get the dividend too.
"It's a great strategy. With the puts, selling them from stocks I don't mind owning for a great price (bargain), and when they are trading near support, and maybe near 6-month or 12-month lows, the better to sell them and get the cash right away. I have learned a lot with you guys. Thank You." – Paid-up subscriber MM
Sean Goldsmith
Managua, Nicaragua
August 1, 2012