Another hedge-fund titan returning cash... The Fed does nothing, for now... Neither does Draghi... Spanish yields back above 7%... The next Casey Conference... Where you can learn to sell puts...
In August 2010, when hedge-fund billionaire Stanley Druckenmiller closed his fund, we guessed many other hedge-fund titans would follow suit. Most of the financial fortunes we know today were built riding the wave of the greatest expansion of credit in history. The cost of borrowing fell for 30 years. And inflation caused asset prices to rise. Here's what we wrote...
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Stanley Druckenmiller is hanging it up. Facing the first down year in a 30-year career as a hedge-fund manager (his main fund is down about 5% this year), Druckenmiller has decided to return his clients' capital and retire. We think you'll see more of this – that is, more hedge funds going out of business – as the global credit bubble deflates. |
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Druckenmiller's career happens to correlate perfectly with the largest inflation in history. As credit multiplied between 1980 and 2010, folks like Druckenmiller were paid unbelievable sums for managing the resulting capital flows. But... the credit spigot has been tightening up, at least for private capital. Now, the only bubble left is the one being blown up by Washington in the form of Treasury obligations. – S&A Digest, August 18, 2010 |
Since then, Druckenmiller's mentor, George Soros, closed his flagship Quantum Fund to new "non-family" money for the first time in the firm's 38-year history.
Steve Cohen, the billionaire founder of SAC Capital, also closed his fund to new money (from both new and existing investors). Cohen is one of the most active traders in the market... On any given day, his fund is responsible for 2% of New York Stock Exchange trading volume.
And James Lyle, a protégé of Tiger Global's Julian Robertson, announced the closure of his $750 million Millgate Funds and return of investor capital last May.
Yesterday, another hedge-fund titan, Louis M. Bacon (founder of Moore Capital), announced he was returning funds to investors. In a letter to investors, Bacon said he'd return $2 billion – about one-quarter of his fund.
Bacon cited 18 months of "disappointing" investment returns... His flagship fund was down 3.2% in the second quarter.
"I am more comfortable taking down the size of the fund than increasing the size of the positions in order to give clients an adequate return given the fees they are paying," Bacon wrote.
Even when Bacon found opportunities, they were more difficult to execute...
"I found myself trying to make money in a much less liquid environment, with less instruments to trade – it's very frustrating," he said.
These guys understood the rules of the game and were all big winners in the market for a long time... For example, if you invested $100,000 with Soros when he opened the fund in 1973, you'd be sitting on more than $100 million today... He averaged around 20% a year for a cumulative return of more than 100,000%.
But as Bacon's comments suggest... the rules are changing. You can still borrow money cheaply. (Ten-year Treasurys yield less than 1.5%.) But opportunities for high yield are fleeting. (You could always buy one-year Greek government debt for 1,140% yields.)
The Fed's non-action yesterday certainly didn't help the liquidity situation. The Dow and S&P 500 are down today for the fourth day in a row. The central bank noted the economy had "decelerated." It said the committee would "closely monitor incoming information" and "will provide additional accommodation as needed" to boost the economy.
Perhaps the Fed is seeing a pattern... It takes no action, the market falls. A piece of bad economic news emerges, and the market plummets. Then, the Fed (or another central bank) makes a strong announcement that it'll support markets. The markets rise for a few days. The pattern repeats...
European Central Bank (ECB) President Mario Draghi also disappointed investors this morning when he announced the ECB wouldn't immediately take action.
The euro dropped to less than $1.22. German, Swiss, and Dutch short-term bond yields all dropped to record-low rates. And 10-year Spanish bond yields jumped back to more than 7%.
It's all a silly game that will inevitably end in massive money printing and inflation. In the meantime, we're happy to scalp opportunities from the volatility... like Jeff Clark's silver trade we mentioned yesterday.
If you've never attended a Casey Research conference, put September 7-9 on your calendar...
As many longtime readers know, our friends at Casey Research put on some of the best investment conferences in the world... better than any "big" brand-name financial institutions. First of all, at these conferences, you get the priceless insight and humor from Doug Casey. You get energy investment recommendations from their strategist Marin Katusa. Casey also does a great job of bringing in top investors – like Eric Sprott, John Hathaway, and Rick Rule – to speak at the conferences. I've never walked away from a single Casey conference without several terrific investment ideas... especially small, undiscovered natural resource names.
And keep in mind... I say all this as a "conference skeptic." I've attended dozens of them... and I can tell you that most aren't worth attending. Casey conferences are different. They feature plenty of unconventional and controversial speakers.
The theme of the September conference, "Navigating the Political Economy," is well-timed. With Europe in recession, the U.S. presidential election around the corner, and China slowing down... investors are in constant danger of government-created crises. We don't pretend we know how to change things. But we do know that if you're feeling unsure about what's next for the global economy and the steps you should take with your portfolio over the next year, it will be well-worth your time to attend the conference.
Also the Casey group knows how to choose a location. The conference is being held in southern California. You can click here to learn how to attend the conference at a discounted price.
New 52-week highs (as of 8/1/12): SPDR S&P International HealthCare Sector Fund (IRY).
If you haven't had enough already, more positive feedback about selling options in today's Digest. Send your e-mail to feedback@stansberryresearch.com.
"In today's DailyWealth, Doc talks about a Covered Call strategy that produces safe, extra income. And, while that strategy will work, I am sure there are subscribers who won't try it for one simple reason; they don't want to give away the upside. The are afraid of what we call Seller's remorse. [For example], they buy [a stock] at $29.40, but then have to sell it to someone for $30 when the stock is above that price on expiration day. They see the stock at $31 or $32, perhaps even higher, and think about all the capital gains they lost.
"But what if there was a way to have your cake and eat it too? What if you could enjoy all the benefits of covered calls, but still have exposure to capital gains? Well, I think the strategy below will allow you to do that.
"What if, instead of 100 shares, you buy 500 shares. But instead of selling 1 covered call (worth 100 shares) you sell 4 covered calls, leaving 100 shares uncovered. You will receive $440. Let's say you can execute this strategy 4 times a year, generating potentially, ($440x4=$1760 in Covered call profit, and roughly $400 in dividends) a gain of $2160.
"Here is where the magic happens. Every 100 shares cost you $2940 in this example. There is a possibility that 400 of the 500 shares could be called away from you. And, a year from now, if that happened, you would own 100 shares that costed you $2940, but you earned $2160, so your real cost of those shares is now only $780. Put another way, you are left holding 100 shares that cost your $7.80 each.
"You get the best of all worlds. You collected money for a year. You still own 100 shares and they are worth more than you paid for them initially, and when you factor in what you made on the shares called away, you are sitting on Microsoft shares that your truly own for less than $8. I bet your friends wish they could buy Microsoft for $8 bucks!!!
"Yes, you would need almost $15,000 to execute this strategy. And, yes, you would have to put it all in one stock. But remember, this is a stock you want to own. If the price drops, the options expire worthless, and you sell more, generating more income which helps offset the loss as the share price temporarily dips lower.
"Do this on any rock solid blue chip company, like McDonalds, Coke, Intel, and you have a rock solid way to have the best of both worlds!" – Paid-up subscriber Mark Tobino
"Enough already with the naked puts and covered calls. I've been following your advice now for 13 months and have made over $23,000. It's such good advice that I'm afraid everyone is going to catch on so there won't be enough puts and calls to go around for all.
"Regarding Facebook; my wife and I developed a new drinking game. Everytime CNBC mentions Facebook, we have to take a drink. We're usually smashed within 30 minutes after the market opens and are both developing severe liver problems... " – Paid-up subscriber LK
"I've been selling puts for a long time too and have made lots of money. One hard lesson I have learned is to never sell puts right in front of a quarterly earnings call, particularly on highly volatile stocks. Believe it or not It's taken me ages to learn something that simple." – Paid-up subscriber Ron Martin
"I have no idea how to sell puts – so where do I learn?" – Paid-up subscriber JD
Goldsmith comment: As Digest readers surely know by now, we believe selling puts is one of the best ways to generate income in the market today. And based on the overwhelming amount of positive feedback we've received, you agree...
We've gone to great lengths to educate all of our readers on the benefits of selling puts... I also discussed selling puts and walked readers through an actual trade in the July 19 Digest. You can access that here.
Dr. David "Doc" Eifrig produced a series of educational videos on selling puts for his Retirement Trader subscribers. If you're already a subscriber, you can access those on our website. Click on the "Retirement Trader" link on the left-hand side of the page, and then click on "Videos." (Or simply click here.)
If you don't already receive Retirement Trader, you can learn more about subscribing – and how to access Doc's educational video series – here...
We also produced a video for DailyWealth Trader that discusses put-selling. You can access that here...
Sean Goldsmith
Rancho Santana, Nicaragua
August 2, 2012