Act Like an Insurer as Investors Fear a Second 'Flood'
Act like an insurer as investors fear a second 'flood'... A once-in-a-decade opportunity to profit from nervous investors... The bull case and the bear case... Expect twists and turns through November... What a difference a year makes...
Insurance companies make a living off of fear...
Think about when you're most likely to pay for flood insurance...
Most people buy that type of insurance right after a flood hits their town. The floodwater probably damaged a lot of their property... And now, they don't want to lose anything else.
These folks are terrified that another flood could strike at any time – causing even more devastation. They weren't properly prepared the first time around... which leads them to rush out to buy flood insurance the next day.
But remember, the entire town just had a flood. And the floodwater destroyed the properties of families all across town... So now half the neighborhood wants to buy flood insurance as well.
With so much demand, the local insurer can raise the price it charges for the insurance.
And the thing is... the first flood is still fresh in everyone's minds. So they'll pay the higher premiums without another thought. They'll just hand over their credit cards or cut checks.
That's because they're driven by fear.
As you can imagine, the insurance companies can make a small fortune in these disaster situations. They get to collect massive premiums from their policyholders' fears of the future... when the town may or may not experience another flood in the coming months.
It's a beautiful business.
Today, I (Jeff Havenstein) want you to be the insurance company...
You see, many investors remain scared right now.
The financial markets experienced their own "flood" back in March, plunging more than 30% in about a month... and some people are still trying to recover from it. The massive losses in a short span have these folks worried about a second market flood in the months ahead.
The truth is, no one knows what will happen next.
I'm sure you've heard the word "unprecedented" at least 100 times in recent months, but it's true... We've never experienced a crisis like the COVID-19 pandemic. We've never seen a global shutdown of this magnitude. As a result, we've never seen uncertainty like this.
And as regular Digest readers know, investors hate uncertainty.
I wish I were writing to you today with a better sense of where the market will head next... But I simply can't make predictions with any level of certainty. No one can. Too many unknowns exist. We could see a plethora of different outcomes for the rest of the year.
The good news is... because no one truly knows what's going on in the markets, it has created one of the best moneymaking opportunities in more than a decade.
I'm not talking about buying bitcoin, commodities, or whatever hot stock tip millennials are chasing today. The opportunity I'm going to share with you in this Digest is something every investor should take advantage of... assuming you like to make safe, steady money.
You see, today is the greatest time in more than a decade to sell portfolio insurance to nervous investors. As the insurance company, you can make a killing as uncertainty reigns.
But before I get to all the details of this opportunity, we need to discuss why you shouldn't be too bullish or too bearish today, and why you should expect fear to stick around...
Over the past couple of months, I've heard from market bulls telling me that stocks would make record highs before Christmas. I've also heard from market bears saying that the major indexes would test their March lows... and that the bear market is far from over.
If you're a bull, you're optimistic about three things...
- The ridiculous amount of spending by the federal government
- The progress of the economy reopening
- A potential vaccine
It's no secret that the government is willing to do whatever it can to keep the economy and stock market afloat.
Back in March, the Federal Reserve went "all in" and announced that quantitative easing would potentially be "unlimited." And just recently, the Fed acknowledged that interest rates will likely remain around 0% for at least the next couple of years.
You can see in the chart below how the Fed's balance sheet has skyrocketed this year...
With the Fed buying U.S. Treasurys, corporate bonds, and exchange-traded funds ("ETFs"), it should provide strong support for the market... at least in the short term.
Meanwhile, we're seeing signs that folks are leaving their houses and spending again...
Near our headquarters in Baltimore, the roads are nearly full again. The stores in my neighborhood and our weekly farmers market were packed... and I'm hearing about more of my family and friends taking vacations – or at least planning to get away sometime this fall.
Look at how retail sales plunged in March and April, but then came roaring back in May...
And finally, any additional progress on a vaccine will certainly make investors more willing to buy stocks. Although biotech company Moderna (MRNA) had to recently delay the start of its Phase III vaccine trial, it's still on track to begin that phase within the next 30 days.
Vaccines usually take years to develop, receive approval, manufacture, and distribute. But again, we're in unprecedented times right now... We've never had so many scientists and doctors working so hard and so fast on developing a single vaccine. So there's hope that a vaccine will be ready by the end of the year or in early 2021. (Note that I emphasized "hope"...)
On the other hand, if you're a bear...
Your argument revolves around the resurgence in U.S. cases of COVID-19 in recent weeks, as well as the disconnect between the stock market and the economy.
Due to rising numbers of COVID-19 cases, states like Washington, California, Florida, and Texas have paused their reopening plans. And many folks are worried that other states will follow suit if the virus keeps spreading.
Since the markets have already regained much of their losses from the pandemic, any slowdown in the economy's reopening could send stocks lower in a hurry.
Yes, we've seen signs in the real world that the economy is improving. But the fact is, we still have an unemployment rate of greater than 10%. The stock market is acting like things are already back to normal, while the economy is simply making progress on a recovery.
Clearly, a disconnect exists between investors and where the economy actually is.
Stocks aren't the bargain they once were... One small hiccup could send them tumbling.
Many economists also worry about what will happen at the end of this month...
Currently, tens of millions of Americans are receiving an additional $600 per week in unemployment benefits from the federal government. That will run out on July 31, and economists are worried about how losing that extra help will hurt consumer spending...
Longer-minded investors will also point out the massive amount of U.S. corporate debt...
Corporate debt as a percentage of U.S. gross domestic product is now at its highest level in decades. That alone may keep folks out of the market (or at least keep them skeptical)...
I'm not here to tell you that the bulls or the bears are right. Only time will tell. As I said earlier, no one can make a prediction with any certainty today... And the market could truly go either way.
We haven't even discussed another major event this year yet...
The November presidential election.
I won't get into politics and talk about which candidate I think will win between Republican incumbent Donald Trump and presumptive Democratic challenger Joe Biden. But as we've seen throughout history, election years almost always come with heightened uncertainty.
The last I checked, Biden – who was the vice president under President Barack Obama – was leading in the latest polls. But a lot of time remains between now and the November 3 election day.
Given the divisiveness of the two parties in America today, I'm willing to bet that it will be a tight race. That means we'll likely see a lot of twists and turns from now until November.
And that brings me to the main point I want to make with today's Digest...
Fear and uncertainty are here to stay – at least for the next few months.
So many unexpected developments could occur... with the virus, with the reopening of the economy, with the stock market, and with the presidential election in November.
I couldn't be more excited, though.
You see, now is not the time to be fearful. Instead, it's time to act like an insurance company in the days after a flood hits your town... capitalizing on the fears of others.
After the bloodbath in March and with so much uncertainty in the market today...
Investors are lining up to buy portfolio protection...
The portfolio protection they're buying is something called a "put option." A put option acts like a form of insurance because it can limit your losses in a market crash.
For example, if you buy a put option on Apple (AAPL) and the iPhone maker's stock crashes, the put option will allow you to possibly sell your stock for more than it trades for after the sell-off. Because you insured your shares with a put, you can reduce your losses.
Investors have been buying put options to insure their portfolio for decades. And like when a flood strikes a town, this type of portfolio insurance is in high demand in times of crisis.
Given everything that has happened so far in 2020, investors want to make sure they have portfolio protection right now. And put prices have soared as a result...
Below, you'll see the CBOE Volatility Index ("VIX") – or what many folks call the market's "fear gauge." When the VIX is up, investors are fearful and pay more for put options. When the VIX is low, investors don't feel the need to buy insurance and put options are cheap.
As you can see, during the recession of 2008 and 2009, investors desperately wanted portfolio protection. They were willing to pay big premiums for it.
Before the financial crisis, you would have to go all the way back to Black Monday in 1987 to see volatility near these levels. This type of stuff only happens once in a decade... or longer.
But the same thing happened in March of this year... As fear crept into investors' minds with the COVID-19 pandemic and the ensuing global shutdown, the VIX soared higher. It briefly surged to an all-time high of more than 80 in March, just before the market bottomed.
And even though the market has rallied nearly 40% off its bottom, you can see in the chart that fear in the market remains at a historically high level. The VIX has been hanging around 30 for the past month, which is still higher than its long-term average of around 19.
As I said earlier, fear and uncertainty will continue to dominate the headlines over the next couple of months. That means the markets will remain volatile... And in turn, folks will keep paying a lot of money for portfolio protection.
So again, I want you to be the insurance company today...
I can't overstate how rare of an opportunity we, as insurance companies, have right now. It's truly a once-in-a-decade opportunity to sell portfolio protection to scared investors...
I'll give you an example...
Let's say, in June 2019, you were worried about beverage giant PepsiCo (PEP) falling. At the time, you could have bought put protection for your PEP shares for $144. (The specific put was selling for $1.44... and each put covers 100 shares.)
Let's fast-forward to July 2020... If you wanted to buy the exact same put option to protect your PEP shares today – after all the volatility in recent months – it would cost $428.
This is the exact same put option with exactly the same terms as the one you could have bought in 2019. But because folks are so scared of another flood – a broader market downturn – today, you now must pay 197% more for the same protection as a year ago.
With that in mind... would you rather be the put buyer or the put seller in this example?
Of course you would rather be the one selling the insurance...
As the put seller, you get to pocket $284 more today than a year ago – for the exact same trade. In today's low-rate world, you won't find this type of income anywhere else. And no matter what happens with PEP shares from here, you would get to keep the $428 payment you received and could sell another insurance policy on another world-class business.
Selling put options in today's market is one of the most profitable strategies you will find. Nervous investors are willing to pay a lot to protect themselves in case the next flood strikes... and that means bigger-than-normal premium payments for insurance sellers.
Now, you might be wondering what will happen if the market does crash...
Normally, an insurance company must pay out claims when disaster strikes. And sometimes, if the disaster is really bad, the insurance company can lose money.
But when you sell a put option, the worst thing that can happen is that you are forced to buy shares of the company you sold insurance on. And oftentimes, thanks to the premium you received, you'll own shares for much less than they're currently trading.
That's why you should only sell put options on stocks that you want to own. That way, even if the stock drops, you really can't lose... You'll collect a massive upfront premium payment, and in the worst-case scenario, you'll buy shares of a stock you love for a discount.
In this case, it's a win-win for the insurance company.
The premium payments you can get in today's uncertain market can boost your income in a big way...
If you know what you're doing with options, you can make hundreds of dollars – or even thousands – in extra income each month.
So if you've never thought about selling options before, I urge you to consider it today... This is truly a once-in-a-decade opportunity to take advantage of other investors' fears.
Despite what you might think, it's not a difficult strategy for regular folks to master – especially if you have an expert holding your hand along the way... And you won't find a better guide than my boss, Dr. David "Doc" Eifrig, who has been teaching everyday investors how to successfully use his basic put-selling strategy for more than a decade.
Since Doc started publishing his Retirement Trader newsletter back in 2010, he has put together an incredible 93% win rate through more than 520 options trades. Because of that performance, he has earned "A" grades or better in our annual Report Card year after year.
If you want to find out how to boost your monthly income in just a few minutes a day, you owe it to yourself to learn more about Doc's Retirement Trader. The good news is, he just recorded a brand-new presentation to explain just how lucrative selling options can be...
This surge in volatility we're seeing in recent months won't last forever. So it's important to take advantage of this opportunity right now before it's too late. But don't just take my word for it... Hear all the details about this powerful strategy straight from Doc right here. (Plus, you'll learn how to get one year of Retirement Trader at 37% off the regular price.)
New 52-week highs (as of 7/6/20): Alamos Gold (AGI), Amazon (AMZN), Alibaba (BABA), ProShares Ultra Nasdaq Biotechnology Fund (BIB), Sprott Physical Gold and Silver Trust (CEF), Crispr Therapeutics (CRSP), DB Gold Double Long ETN (DGP), New Oriental Education & Technology (EDU), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), iShares China Large-Cap Fund (FXI), SPDR Gold Shares (GLD), JD.com (JD), KraneShares Bosera MSCI China A Fund (KBA), KraneShares CICC China Leaders 100 Index Fund (KFYP), KraneShares MSCI All China Health Care Index Fund (KURE), Lonza (LZAGY), Microsoft (MSFT), NetEase (NTES), Sprott Physical Gold Trust (PHYS), ResMed (RMD), ProShares Ultra Technology Fund (ROM), Seabridge Gold (SA), Sprott (SII), The Trade Desk (TTD), Victoria Gold (VGCX.TO), Vanguard Inflation-Protected Securities Fund (VIPSX), and Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP).
In today's mailbag, feedback on Kim Iskyan's discussion about Hong Kong in yesterday's Digest. What's on your mind? Tell us at feedback@stansberryresearch.com.
"I hope everyone in America will take note of what's happening in Hong Kong. If Hong Kong citizens dare to kneel during the Chinese national anthem, they could be sentenced to life in prison. It's disgusting to think about the Chinese Communist Party getting away with such nonsense." – Paid-up subscriber Jason L.
"What prompted Great Britain to even begin talks of leaving Hong Kong? Sounds like something the U.S. State Dept would come up with." – Paid-up subscriber D.B.
Regards,
Jeff Havenstein
Baltimore, Maryland
July 7, 2020