A special week at Stansberry Research... Munis have a banner year... The secret behind Doc Eifrig's incredible track record...
Editor's note: In lieu of the holidays, we're running a series of shorter-than-normal Digests this week. Each day, we'll highlight one of our most popular advisories... and discuss the trading strategies that have led their subscribers to huge gains...
Before we discuss Retirement Trader, we'll talk about one of the best calls Doc has made during his career at Stansberry Research.
In the December 12 Digest, we discussed how municipal bonds – debt issued by state and local governments – had far outperformed high-yield debt this year (one of the most popular sectors in fixed income). High-yield bonds (or "junk" bonds) cratered with oil prices... Oil companies had become the largest issuers in the sector. The selloff in oil spooked the market.
Doc's subscribers are up nearly 100% in muni bonds since 2008. And the gains will likely continue next year.
Both Bloomberg and the Wall Street Journal featured prominent stories noting the outperformance of muni bonds this year.
As of last week, munis were up 9.4% this year – their best year since 2011. That bests the 6.8% return for investment-grade corporate debt and the 5.4% return for Treasury securities, based on data from Bank of America Merrill Lynch.
Assuming munis close out this month in the black (they're up 0.2% as of Friday), they will have risen every month this year.
Long-dated munis (those maturing in at least 22 years) were the best performer this year, returning 16.5%. That trumps the S&P 500's 15% gain.
Yields on 10-year munis hit a two-year low of 1.96% in October. They're yielding 2.14% today. (Remember, prices and yields move in opposite directions.) Investors poured $23.9 billion into muni-bond funds through mid-December, according to mutual fund tracking firm Lipper. That compares with $63.5 billion in withdrawals last year.
Even with a lower yield, muni bonds' tax-exempt interest still makes them attractive for high earners.
The top federal marginal tax rate is now 39.6%, up from 35% in 2013. The 2013 tax increases also hiked the long-term capital gains tax from 15% to 20%. It's the highest tax rate for top earners since 2000, according to Bloomberg.
Add in the 3.8% tax on investment income for top earners thanks to the 2010 Patient Protection and Affordable Care Act and the top federal tax rate is a massive 43.4%.
Today's 2.14% yield for AAA-rated 10-year munis is the same as a taxable rate of 3.76% – well above the 2.21% yield 10-year Treasurys offer today.
And while investor demand should be high in 2015, cash-strapped states are shying away from issuing lots of debt. Muni-bond issuance was $295.8 billion through November according to Wall Street Journal data, around 4% less than the same period last year. Next year's issuance should be similar.
Despite the big rally in municipal bonds this year, Doc still has his favorite muni-bond funds rated a "strong buy" in Retirement Millionaire. And you can still find muni-bond funds trading at close to double-digit discounts to net asset value... with tax-equivalent yields in excess of 9%.
While Doc's municipal-bond recommendations have generated impressive returns, they're not nearly as incredible as the track record he has amassed in Retirement Trader...
We've already written loads of good material about selling puts and the finer points of Doc's strategy in Retirement Trader. Below, you'll find an adapted piece from a Digest series we originally ran in September 2012.
As longtime Digest readers know, we believe that the strategy Doc uses in Retirement Trader – selling put options – is one of the safest and most consistent ways to generate income in the markets.
And if you follow a simple set of rules when using this strategy – some of which we'll cover this week – you'll see it's hard to lose.
Since launching his service in 2010, Doc has gone an astounding 193 for 195 – a 98.9% win rate. The average return has been 8.9% (or 50% annualized). Doc's Retirement Trader track record is one of the most incredible achievements in the history of our business.
As you can likely guess, the goal with selling puts isn't to go for "home runs"... Instead, you hit lots of "singles" and "doubles." Over time, those consistent gains really add up.
Today, we'll walk you through some of the basic concepts and strategies behind selling puts...
A "put" is an option. When you buy a put option, you're buying the right (but not the obligation) to sell a stock at a set price (called the "strike price") by an agreed-upon date in the future.
When you buy a put, no matter how low a stock's price falls, you can still sell for the strike price. You can think of a put option as insurance. The buyer of the option is paying a small premium to insure his position against a decline in price. But what most people don't realize is that individual investors can also sell someone that insurance and collect the so-called "option premium."
Most folks find it easier to think in terms of insuring a home. When you insure your home, you are essentially buying the right to sell your house to the insurance company for a certain value, under certain conditions, for a limited period of time. In return, you pay the insurance company to accept those terms – regardless whether or not you ever exercise the terms of the policy.
Put options work the same way. When you sell a put option, you're acting like the insurance company. You're agreeing to buy someone else's shares of a particular stock for a set price, under certain conditions, for a limited period of time. In the case of your house, you'd exercise your policy in a disaster... when a fire or catastrophic weather damage wrecks the value of your home.
In the case of a put option, the holder would exercise his right to sell us his stock if the market value of his shares falls below the price we agreed to pay.
When you sell a put option, the trade works one of two ways. You either collect the entire premium without any obligation... or you end up buying shares at a discount. Considering the latter outcome, it's important to only sell puts on companies you want to own.
Doc mitigates this risk by only selling puts on the world's safest blue-chip companies that are trading at bargain prices. He only sells puts on stocks he is happy to own.
Regular Digest readers know about these kinds of stocks. These are "dominator" businesses like semiconductor giant Intel, soda icon Coke, software behemoth Microsoft, and discount retailer Wal-Mart. They hold No. 1 positions in their markets... rake in huge amounts of cash... and usually pay safe, growing dividends. They rarely suffer substantial declines... and when they do, they are usually temporary stumbles. Those dips are almost always a great time to step in and buy them at bargain prices.
So far, about 79% of Doc's initial put sales have resulted in the option expiring worthless... In other words, readers who followed Doc's advice kept the premium and did not have shares "put" to them. In these situations, readers simply book the premiums and move on to the next trade.
As an example, let's walk through an actual trade Doc recommended in Retirement Trader...
Back in November 2011, Doc sold January 2012 $25 puts on Microsoft. At the time, shares of Microsoft were trading for $24.79. In this example, $25 is the strike price. As long as shares of Microsoft traded for more than $25 by the expiration date (in this case, January 20, 2012)... subscribers who followed Doc's recommendation would book the entire premium with no obligation to buy shares. (After all, why would the buyer of that put exercise his option and sell shares for less than he could get in the open market?)
When Doc made his recommendation, the option premium for selling those puts on Microsoft was $1.15 per share... An option contract covers 100 shares, so readers following his recommendation immediately collected $115 for every contract they sold.
On January 20, 2012, the Microsoft options "expired worthless." Shares of Microsoft were trading at $29.71 on the day the options expired – well above the $25 strike price. And Retirement Trader readers kept the entire premium for a 23% return on margin.
That word "margin" is important. When you sell put options, your brokerage requires you to set aside 20% of your potential obligation. Using the Microsoft example... If we sold one option contract, we were responsible for 100 shares at $25 (or $2,500). In this case, we'd deposit $500 (20% of $2,500). Because we collected $115 in premiums and only had to deposit $500, we made 23% on the trade in about two months... That's a 142.3% annualized return.
Remember... these stocks rarely suffer large price declines. So most of the time, Doc's readers never have to buy the stocks. They simply keep the cash premiums because the stock doesn't sink below the price they've agreed to pay. But even when these stocks do suffer a decline... down to bargain prices... you're happy to buy the shares. You're happy to buy "dominator" businesses on the cheap. And you're happy to start collecting steady dividends.
That's what makes this strategy so safe and profitable. It offers lots of ways to win. This is in contrast with many other trading strategies that have only one way to win... and lots of ways to lose.
There are a few more secrets behind Doc's trading success, including how to make even more money when you are "put" shares of a company – buying shares if the stock falls below the strike price on the expiration date.
New 52-week highs (as of 12/26/14): Deutsche X-trackers Harvest China A-Shares Fund (ASHR), Cempra (CEMP), Cisco (CSCO), CVS Health (CVS), Dominion Resources (D), Invesco Value Municipal Income Trust Fund (IIM), iShares Core S&P Small-Cap Fund (IJR), Kinder Morgan (KMI), Procter & Gamble (PG), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Technology Fund (ROM), Spectra Energy (SEP), ProShares Ultra S&P 500 Fund (SSO), Cambria Shareholder Yield Fund (SYLD), Target (TGT), UIL Holdings (UIL), ProShares Ultra Utilities Fund (UPW).
Regards,
Sean Goldsmith
December 29, 2014
