Draghi holds steady...

Draghi holds steady... But there's more to come... Home prices slowing... Steve says housing still a 'buy'... Great feedback on selling puts...
 

 European Central Bank ("ECB") President Mario Draghi is holding interest rates steady...

 

The ECB will keep its key lending rate at 0.15%. The deposit rate remains at -0.1%.

 

A negative deposit rate means banks actually pay to park their cash with the ECB. It's a way to encourage European banks to lend more and accelerate the economy.

 

For the full details on Draghi's last round of quantitative easing, be sure to read the June 5 Digest.

 

 The European economy is still facing lower inflation... As we discussed yesterday, Italy entered its third post-crisis recession, German factory orders fell, and Portuguese bank Banco Espírito Santo failed.

 

Annual inflation for countries in the European monetary union was just 0.4% in July. The ECB is aiming for 2%... So it's clear Draghi's efforts aren't working yet.

 

 The targeted long-term refinancing operations (TLTRO) Draghi announced in June are taking place next month. As we explained in June...

 

To further support bank lending, the ECB announced 400 billion euros of TLTRO. It's a fancy way of saying the ECB is lending banks money. In this case, Draghi said banks can borrow up to 7% "of the total amount of their loans to the euro area nonfinancial private sector," excluding home loans.

 

 In a press conference today, Draghi said he will wait and see how the market reacts before announcing further easing. He expects the TLTROs will help boost the economy. And he reiterated he will do anything in his power to get inflation to 2%.

 

 Draghi also highlighted the current geopolitical risks (namely the Ukraine crisis)...

 

He said there are fewer than six financial institutions directly tied to Russia, but it's difficult to know the sanctions' effect. Still, Draghi says the geopolitical environment is a major reason he's negative on the economy today.

 

 One way our own Steve Sjuggerud is playing the "Draghi Asset Bubble" in True Wealth is by shorting the euro... Draghi needs a weaker euro to boost the European economy.

 

And during his press conference, he made his intentions clear... Draghi told the audience he expects the euro to weaken against the dollar. He said European monetary policy is on a "diverging path" from the U.S. (which is currently tightening). And he said real rates will remain negative in the European monetary union for much longer than they will in the U.S.

 

 To summarize... The most powerful man in the European economy told you the euro will fall... And that he will do anything in his (nearly infinite) power to make that happen. Take note.

 

 The market reacted to Draghi's news by piling into German government bonds (the safe-haven asset)... Yields on two-year German debt went negative today for the first time since May 2013. The 10-year yield hit an all-time low of 1.078% today.

 

Despite his clear and strong language, Draghi hasn't yet convinced folks to move into European equities... But he is dedicated to goosing the economy and pushing the euro lower. Former Federal Reserve Chairman Ben Bernanke did the same thing... And U.S. stocks tripled. We expect to see a similar scenario play out in Europe soon.

 

 U.S. home prices were up 7.5% at the end of June, according to analytic firm CoreLogic's price index... That's down from an 8.3% year-over-year increase in May. For comparison, home prices last June were up 11.4% year-over-year.

 

So home prices are slowing... And the market was atwitter with declarations of the end of the housing recovery. But Steve says we still have more room to run. In the August issue of True Wealth, he explained...

 

When the typical American family decides to buy a house, they look at factors like the house's location, size, view, and number of rooms. But the only thing that REALLY matters is the monthly payment. The BIG questions are "Can I afford it?" and "What will I owe each month?"   Most investors ignore the monthly payment when they size up the housing market. They will look at home prices relative to incomes, for example... And then they will say that housing is expensive. However, when you dig deeper than that – when you take the monthly payment into consideration and look at housing affordability instead of just home prices – a different story emerges...   Today, interest rates are at extreme lows... So mortgage payments are relatively low. This makes homes relatively affordable – it makes the monthly payment low. Because of this (with the exception of the past couple years) houses in America are more affordable than they've been in generations. Take a look...

 

 As Steve explained, the chart you see above shows "housing affordability" – or the U.S. median household income versus the monthly payment required to pay for the U.S. median home. He uses this as a way to determine the "fair value" for U.S. housing prices...

 

And even after a big move up in prices, our fair-value calculation shows big upside in U.S. housing...     Right now, the median house in America is about $52,000 below our measure of fair value. The gap has been closing for a couple years (as prices have gone up, and our fair value has gone down because mortgage rates have gone up), but there are still plenty of gains left. This housing bull market is NOT over yet!   And it's not just affordability that makes us optimistic on house prices. As I'll show, a low supply of new houses will lead to higher home prices... and even higher homebuilder share prices...

 

 It's not too late to buy a house... And hedge-fund billionaire John Paulson agrees. He recently said he still thinks buying a house (as a residence) is one of the best investments you can make.

 

 Also, you only have two more days to purchase discounted tickets to our event in Los Angeles on August 23. You'll hear from one of the most important men in technology, Chris Anderson. Also, Tesla Chief Technical Officer J.B. Straubel has agreed to speak... He'll have a lively discussion with Porter about the future... and Tesla automobiles. You can get the full details here.

 

 

 New 52-week highs (as of 8/6/14): Lynden Energy (LVL.V).

 

 In today's mailbag, readers write in with plenty of feedback on selling puts. Have you tried selling puts? How's it going? Let us know at feedback@stansberryresearch.com.

 

 "I have been a broker for 37 years and I'm a new subscriber. I think it might be a good time to tell your customers the dangers of being too aggressive selling puts. Most of the time things go great, but in periods of large declines people have been wiped out with margin calls. I know you caution your customers about over exposure, but it's particularly important when it comes to selling puts. It can be addictive receiving the income it provides, and the tendency is to buy more than you should in stocks that are most volatile. I believe you do a great job, but a word of caution may be needed here." – Paid-up subscriber Ed Riska

 

 "Just started selling puts a few months ago, thanks to the lessons from Doc and Jeff Clark, and I'm already up more than $8,000, even after subtracting my losses on buying calls. But I'd like to urge full disclosure in your lessons and videos (e.g. Jared's). There is little coverage of what could go wrong and what to do about it. And there is no mention of the limits on selling puts due to the cash secured requirement (100% in my case). I've had to learn this on my own.

 

"Without covering the risks and limitations of selling puts, you are presenting an incomplete and somewhat misleading picture, making it seem greater than it really is. It will not make you rich overnight. You can make really big money only if you are already rich. That ought to be clearer." – Paid-up subscriber William A. Kinder

 

Goldsmith comment: We always urge our readers to be conservative when selling puts... It's true... If the market pulls back, and you have lots of open put positions, you may get "put" shares – meaning you'll have to buy shares of those companies. That's why we tell our readers to only sell puts on companies they would be happy to own and at prices they are willing to pay.

 

And it's important to use proper position sizing. Remember... every option contract covers 100 shares. If you would normally buy 200 shares of a company, only sell two put options. As for the comment that selling puts won't make you rich overnight, we agree completely. In Retirement Trader, Doc sells puts with the intention of generating lots of small returns... In essence, you're hitting lots of singles instead of going for the home run.

 

And to date, his strategy has worked... Doc has 178 winners out of 180 closed trading positions. The average gain is 8.9% – or 51.2% on an annualized basis.

 

Regards,

 

Sean Goldsmith

August 7, 2014

 

Editor's note: Porter's mentor and business partner Bill Bonner recently appeared on an episode of Stansberry Radio. In today's Digest Premium – adapted from episode 172 – Bill discusses the role of government that he details in his new book Hormegeddon...

 

 

 I (Bill) have made progress in better understanding the nature of government and the role that it plays in our lives.

 

People think of government as a force for progress or change. They have mottos they come up with during elections – like "change" – but government is the last organization to ever want change, because government represents fixed capital interests.

 

 The people who give money to politicians in the government are the ones with the money. They're threatened by change. They're not going to benefit from change. And retirees don't want change. They want to make sure that the set-up of the current system that they contributed to for all those years survives. And not only do they want to get what's coming to them – according to the rules set up over the last 50 years – but they want to get even more...

 

There are more people retiring and more people voting. All of them have the same interests: to hold on to what they have. Those are the people who control elections and government.

 

But really, the interest of the future is very different. The interest of the future is unknown. We don't know what kind of world the people who are born today are going to live in, what kind of challenges they're going to face, and what they're going to need. Just take one little element, the U.S. federal deficit, which is a claim on what those people are going to earn 25 years from now. It's really shameful the way it's done.

 

 In my new book, Hormegeddon, I explain how government is always a reactionary force. It's always controlled by certain groups of people, and those groups of people always want to maintain order as it is.

 

There are some exceptions that have happened by accident, but that's the way it works in general. And that opens up a better understanding of how these terrible disasters happen. When a government backing some particular idea or notion gets into play, things start lining up in favor of a certain kind of program until we end up with this "hormegeddon" where things go wrong in a big, big way.

 

– Bill Bonner

 

 

Editor's note: No one has ever published a book like Hormegeddon before. Bill will be the first person to admit he's not a great businessman or investor. But he's one of the richest men in America, worth nearly $1 billion. He attributes his success to a unique philosophy, which he shares in his new book, Hormegeddon.

 

Right now, you can't buy a copy of Hormegeddon on Amazon or anywhere else. But we've found a way for you to get a hardback copy and early access to his brand-new newsletter. To learn more about this offer – and see why Porter says Hormegeddon "might turn out to be one of the most valuable things you'll ever read" – click here.

Government is always a reactionary force...

 

Porter's mentor and business partner Bill Bonner recently appeared on an episode of Stansberry Radio.

 

In today's Digest Premium – adapted from episode 172 – Bill discusses the role of government that he details in his new book Hormegeddon...

 

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