A new way to measure the bubble forming in stocks...
A new way to measure the bubble forming in stocks... Introducing the SIA 'Black Index'... A lesson I learned from Doug Casey... A story about the first real bear market I lived through...
In today's Friday Digest, I (Porter) want to share a story about my friend, the incredibly successful speculator, Doug Casey. I hope you'll bear with me... as I believe this story will give you a huge advantage in understanding today's stock market.
I first became friends with Doug after we met in late 1998. At the time, Doug had a "crazy" idea that the U.S. would soon become a major target for Islamic terrorists. He said investors would be wise to "make terror their friend."
I'm not making that up. That was the title of his November 1998 presentation at Blanchard's New Orleans Investment Conference. I've since come to take seriously Doug's uncanny ability to see accurately into the future of global financial and political trends.
In the few months that followed, Doug and I corresponded regularly via e-mail. I was in the midst of launching this business... by myself... from an apartment at the corner of Eutaw Place and North Avenue. That's roughly the center of Baltimore's drug and prostitution economy. As I wasn't in the market for either product, I didn't have a lot of people to bounce ideas off of. Doug was my one-man advisory council. It was ironic because he was a complete skeptic about nearly all of the work I was doing.
As you may know... the first iteration of this company was called "Pirate Investor." The name was inspired not by buccaneers, but by the theories of economist Joseph Schumpeter – the ideas of creative destruction.
The 1990s were a period of massive technological change. As a young man (I was 26 when I launched this business), I was familiar with many of the technologies reshaping the corporate and economic landscape. I'd built my first Ethernet ring with Internet protocol telephony at my friend Reed's house while I was still in high school. I'd read Microcosm 10 years earlier... I was familiar with Moore's Law... and I'd invested in Amazon shortly after its shares first went public in 1997.
I was convinced that Amazon and many companies like it were going to "pirate" the market share of far larger and more established businesses. People I knew from high school and college were heavily involved in some of these fields, mostly as engineers.
And so I wrote a big report about the changes I knew were occurring. Unlike most other analysts, I focused on both sides of the coin: the companies that would win market share, and the companies that would inevitably lose it. For example, we recommended buying software firm Adobe and selling short obsolete camera-film maker Kodak. We recommended selling AT&T (the old long-distance phone company) and buying JDS Uniphase, which was making the lasers used in telecom systems that were driving down the price of long-distance service to zero.
Doug thought some of my ideas about technology were great. He was very interested in the short ideas. But he thought my long ideas were foolish. He even told me that Amazon would go bankrupt! Doug explained to me the game as he saw it.
"Porter," I remember him telling me in an e-mail, "This market is being taken over by promoters. All they're trying to do is get the public to buy their worthless paper. This is all going to end horribly badly."
While I knew that most of the new technology stocks wouldn't succeed... I thought that using my knowledge and contacts – along with trailing-stop losses – we would be able to navigate around the pitfalls. (We did, by the way... Our average gains during 1999 were well in excess of 100%, beating even the Nasdaq's 85% rise that year.)
What I didn't appreciate then, having not lived through a true bear market in the U.S., is the terrible and inevitable consequences of runaway speculation. Surviving a market bubble isn't merely about knowing when to sell your stocks. It's also about understanding the aftereffects...
It never occurred to me back in 1999 that most of my subscribers wouldn't sell their stocks, no matter how diligently we updated our portfolio. I also didn't realize that individual investors, who were (and still are) my primary customers wouldn't sell stocks short. That left most of my subscribers dangerously exposed to tech stocks even after November 2000, by which point we'd closed essentially all of our long positions.
As Doug foresaw, the real problem wasn't what would happen to my portfolio, the real problem is what would happen to my customers. I believe this is true for almost all business owners. You should care about what's going on in the stock market, even if you're not investing in it, because it has a huge effect on consumer confidence, retail spending, and the U.S. economy.
And so Doug tried to warn me and a few other young guys in the newsletter industry about what was going to happen. He got our attention by offering a wager...
In March 1999, Doug proposed a $10,000 wager on the Dow Jones Industrial Average – winner take all. If the Dow was higher 365 days later, Doug would pay $10,000. If the Dow was lower, you'd pay Doug $10,000. I didn't take the bet because I didn't have a firm opinion on the value of the entire Dow. I knew many Dow stocks were vulnerable to new competition, but others would likely do well by buying lots of these new, small tech firms.
But a young writer at another newsletter company did take Doug up on his bet. Unfortunately, the matter became somewhat unpleasant – the other young writer didn't know how to disagree with Doug about the stock market without being disagreeable. (Sadly, nothing has changed in this regard. He soon left the legitimate newsletter industry and set up one of the lowest-quality stock promotion businesses in America. Now he's disagreeable to everyone.)
In any case... you probably know what happened. The Nasdaq peaked exactly one year later, at over 5,000. The Dow was at a new high, too. Doug lost the bet. But literally within days of this wager expiring... the markets suddenly crashed. For the next 36 months, stocks went down, down, down, and down.
Today, I believe we're in a similar situation. Stocks are being sold to the public without any earnings or any realistic chance at generating net income for years. These companies are trading at astronomical valuations that make it unlikely, if not impossible, for long-term investors to do well. Circumstances have forced investors to consider buying risky stocks and bonds.
It's not the same as 2000: Investors haven't crowded into dodgy stocks and bonds because of a tech mania. This time, the Federal Reserve is pushing investors. People know inflation is coming – sooner or later – and that bonds yielding less than 5% don't offer them any protection or upside. The result is... like a crowd stampeding at a European soccer match... investors have been forced into a corner without an exit.
It was almost a year ago now that I first warned about the bond market (May 2013) and began to sell some of my more speculative investment recommendations (June 2013). Subscribers have given me hell, by the way, for selling stocks like casino operator MGM Resorts (MGM) and energy-transport firm Cheniere (LNG) far too "early." (Never mind the huge gains we were booking in these names.)
I understand that it is impossible to time the market precisely. Doug – as brilliant a long-term forecaster as I've ever known – got the last big tech-bubble blowup wrong by about a week. I don't expect my timing will ever be that good. But I will be surprised if we don't see a major and painful break in stocks by the one-year anniversary of my first warnings.
Yesterday's failed initial public offering (IPO) of video-game maker King Digital marks the first time I can recall a heavily promoted, drastically overpriced stock tanking immediately. Shares of the "Candy Crush Saga" video-game creator fell 16% on its first day of trading. Web-based services Twitter and Groupon have also fallen significantly since their IPOs... but they didn't collapse on the first day.
Looking at what I consider the "Big 3" story stocks in the market right now – Tesla, Facebook, and Twitter – you can see that the last month has been rough. My bet is... these names are going to continue falling. And... at some point... after they're down 25% or so... the negative momentum could begin to influence other drastically overpriced stocks.
In closing, I'd like to show you a proprietary index. What we've done here is take the most recent SIA Black List – that's all the stocks in the market that are worth more than $10 billion and trade at more than 10 times sales – and convert it into a single security. You can imagine this as an exchange-traded fund of the most overpriced stocks in the world.
The Black Index consists of 25 individual stocks. What I want you to notice is that starting at the end of 2012, these stocks have gone straight up. That also happens to be the exact same time that the Japanese central bank joined with most all of the world's other major central banks in printing huge amounts of new reserves.
While no one can know precisely when this massive run will end, my hunch is that it won't go on forever. At some point the massive financial stimulus we've seen around the globe over the last five years will end. And it will end badly.
If my prediction plays out, you only want to own the safest assets – high-quality real estate, farmland, gold, and the world's best businesses, like Hershey and Microsoft.
But if you're hesitant to put money into the market at record highs, there is a way for you to buy blue-chip stocks below the current market value. In fact, you can name the exact price you're willing to pay... And you get paid for that privilege.
It's a strategy Retirement Trader editor Dr. David "Doc" Eifrig discussed last night on his live training session – selling puts. He used this strategy to amass 166 winners out of 168 closed positions. Doc's performance since launching Retirement Trader in 2010 is truly the greatest performance I've seen in newsletter history.
Even better, he's managed to make his readers a fortune with little risk. We only sell put options on the world's best companies... So in the worst-case scenario, you end up owning shares in a business you're happy to own at a price you chose.
Of course, if things get really bad, we're prepared. In Doc's educational material on this strategy, he discusses what to do in that scenario.
I like to say "there is no teaching, only learning"... So I had my doubts about how many people would sign up to watch Doc discuss this strategy. After all, who wants to watch an educational video? It turns out... this was the most popular webinar we've ever hosted. Tens of thousands of people signed up to listen to Doc's strategy.
And yours truly even made an appearance... But Doc didn't know I was coming... It took him totally by surprise.
I'm a big believer in selling puts. During the 2008-2009 financial crisis, I even launched a service of my own service based on the strategy, the Put Strategy Report. Fear was surging through the market then. Stock prices were low, and the premiums people would pay for downside protection (what owning a put gives you) were huge. We made a killing.
But it was Doc who helped me learn the nuances of this strategy, and he's a much more experienced trader than I am... And that's why I wanted him to take the reins of his own service to employ this strategy. I obviously made the right decision. His track record speaks for itself.
Unfortunately, the training session is over... However, as part of the event, Doc offered participants an incredibly generous discount to sign up for Retirement Trader. If you weren't able to participate in the training session, but are interested in learning how to use Doc's strategy... a similar version of the special offer from Thursday's event remains available. But you need to act quickly, because the offer expires soon. Click here to learn more.
New 52-week highs (as of 3/27/14): Alcoa (AA), Comstock Resources (CRK), Carrizo Oil & Gas (CRZO), and Corning (GLW).
In today's mailbag, one subscriber gives Porter a "yeehaw" of approval. How have we done lately? Let us know at feedback@stansberryresearch.com.
"I just wanted to comment on the snippet I received from your first ever book that you are penning, [Warren's Mistakes]... Bravo! I have a better understanding of 'Peak Oil' now, which gives me such serenity... thank you. I have fallen prey as well (not in terms of investing, rather in terms of being freaked out by the Peak Oil topic because it did make sense; however, your rationale is more rational!).
"I also now understand Mr. Buffett's and Mr. Munger's big mistake when investing in commodities and how they violated the number one rule of never losing money! They failed in the ConocoPhillips purchase regarding the number one rule... miserably (that's a lifetime's worth of funds for most and then some!). I am a simple fisherman from Maine, but I read your stuff, Dan's, Doc's, and Dr. Sjuggerud's emphatically (I'm a good customer) and I have learned so much... thank you. My portfolio reflects your best and safest transactions and follows the #1 rule of not losing money (I attached a TradeStops account to everything).
"Anyway, I wanted you to know that I thought your book segment was well written, easy for a layperson (like myself) to understand... which is marvelous when currying a broad segment of readers, which is what one hopes the book will do. Well, you did it, so let's give Porter a 'YeeHaw'! I can't wait to read the entire book. I'm working like a dog to get through all Dan's recommended reading list as well as some of the others at Stansberry, so I will add yours when it is available. Thank you for all you do Porter and best of luck to you." – Paid-up subscriber Amanda Odlin
Regards,
Porter Stansberry
Baltimore, Maryland
March 28, 2014
The death of the American shopper...
In today's Digest Premium, we discuss the history behind one of the biggest economic trends today... Americans' shifting shopping habits and the downfall of traditional retail.
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
The death of the American shopper...
Editor's note: Today's Digest Premium is from Stansberry's Investment Advisory lead analyst Bryan Beach, who has been studying retail trends and the rise of online shopping...
A king of American commerce is dying... and you played a role.
Maybe you remember... Probably about 20 years ago, somebody at a cocktail party told you about this new "Internet" thing. It sounded like a novelty, something to be marveled at. Then, about 15 years ago, you inserted an AOL disc into your computer and started using "e-mail" to keep up with your college roommate.
Then, 10 years ago something happened. You did something you never thought you'd do. You punched your credit card number into a website and ordered a book. Two days later, it's at your door! It was so easy. So the next year, you bought some more books. Then you bought a sweater... and then a leash for your dog. By 2013, you did almost all of your holiday shopping online. Why leave the house?
You were not alone. All across the country, hundreds of millions of Americans followed your exact same retail-habit progression. The result? Hundreds of mall closings throughout the country. The demise of American malls has spawned a website dedicated to the phenomenon (deadmalls.com). It was recently featured in the New Yorker magazine, and we wrote about it in the February 2014 Stansberry's Investment Advisory.
The thing is, we've seen this before. This isn't the first time a "novelty" took down a retail king.
Seventy years ago, shopping was a different experience.
In the 1940s, families would often dress up and ride the bus downtown for their retail fix. They might start out at Macy's, Montgomery Ward, or some other local department store – like Miller & Rhoads in Richmond, Virginia, or Baltimore's Hochschild Kohn's.
Eventually, Dad would haul the gang back out to Main Street, and he'd end up at the hardware store. Then mom might window shop before taking the kids for a milkshake at Woolworth's. Throughout the first half of the 20th century, America's downtowns were the hub of American commerce.
But by the late 1940s and early 50s... small winds of change were beginning to blow. The first breezes were felt in places like Bellevue, Washington (outside Seattle) or Whitehall, Ohio (near Columbus). At first, these changes were seen as cute novelties... again, something to be marveled at. These clusters of shops even had dedicated parking spots for that new car you just bought. Nobody imagined the way these "shopping centers" would completely transform American culture.
For the first time, folks started heading outside of town to do their shopping. By 1956, an Austrian-born architect named Victor Greun got the idea to fully enclose a Minnesota shopping center. And the modern shopping mall was born.
Within 10 years, everyone did at least some of their shopping at malls. And by the late 1970s – just 20 years after Greun got the idea to enclose a shopping center – the suburban mall had usurped the retail throne. Downtown was dead.
Now, the tables are turned on America's malls. And as we'll discuss in Monday's Digest Premium... The data on our shopping patterns makes the shift to online shopping obvious.
For hard evidence, take a look at recent Black Friday sales. Traditional retailers like malls live for Black Friday – when they offer shoppers once-a-year savings the day after Thanksgiving. Online retailers have responded with Cyber Monday. This year, it wasn't a fair fight. Black Friday sales in 2013 declined for the first time since 2009, while 2013 online sales rose 21% over past years.
The numbers are shocking. And it's a trend that will only get more pronounced...
– Bryan Beach
The death of the American shopper...
In today's Digest Premium, we discuss the history behind one of the biggest economic trends today... Americans' shifting shopping habits and the downfall of traditional retail.
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 03/27/2014
| Stock | Symbol | Buy Date | Return | Publication | Editor |
| Prestige Brands | PBH | 05/13/09 | 329.2% | Extreme Value | Ferris |
| Constellation Brands | STZ | 06/02/11 | 286.3% | Extreme Value | Ferris |
| Enterprise | EPD | 10/15/08 | 273.5% | The 12% Letter | Dyson |
| Ultra Health Care | RXL | 03/17/11 | 231.7% | True Wealth | Sjuggerud |
| Ultra Health Care | RXL | 01/04/12 | 189.7% | True Wealth Sys | Sjuggerud |
| Fluidigm | FLDM | 08/04/11 | 181.3% | Phase 1 | Curzio |
| Altria | MO | 11/19/08 | 178.4% | The 12% Letter | Dyson |
| Hershey | HSY | 12/06/07 | 175.4% | SIA | Stansberry |
| McDonald's | MCD | 11/28/06 | 172.8% | The 12% Letter | Dyson |
| Ultra Nasdaq Biotech | BIB | 12/05/12 | 171.8% | True Wealth Sys | Sjuggerud |
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 |