On Monday, the big news was that Fed Chairman Ben Bernanke would announce more "stimulus," and the markets rose. Today, the news says Bernanke is unlikely to announce further stimulus, so stocks are down.
Can you imagine the utter vapidity of someone who puts real money to work – buying on Monday and selling on Thursday – because some news outfit needs to fill space desperately enough to print pieces about the possible content of Ben Bernanke's mind? It sure looks like a large portion of the great, thundering, bovine mass of investors is doing exactly that.
Please tell me you're not doing this. I really mean it. Write in and promise me you're not one of these poor, misguided souls. Write to us here: feedback@stansberryresearch.com.
By now, you've probably heard legendary investor Warren Buffett invested $5 billion in Bank of America (BOA). The bank's CEO Brian Moynihan said BOA doesn't need any capital, though he happily sells Buffett $5 billion of preferred shares paying 6%. This is expensive money for BOA. Where is it going to find 6% investments in this environment?
Moynihan didn't just sell Buffett a $5 billion piece of the company. He gave him 7% of the company for free, too. With about 10.13 billion shares outstanding, BOA also gave Buffett warrants to purchase 700 million shares, struck at $7.14 each. The warrants can be exercised in whole or in part within 10 years of the deal closing.
The stock market is in love with BOA's "totally unnecessary" Hail Mary pass from Warren Buffett. The news of the deal sent BOA shares soaring today as much as 26% above yesterday's close. (Though that cooled to a 9% gain later on.)
For the average investor (who doesn't have easy access to warrants, like the ones the bank is giving Buffett), buying the common stock of a company like BOA seems ridiculous. I doubt Warren Buffett can tell you what's really in BOA's $2.26 trillion pile of assets. And I'm certain nobody inside or outside the company could tell you what those assets are worth, even if they could reasonably identify them.
I bet Bank of America's top executives aren't exactly sure what's down there, either. Nobody in this world can fathom BOA's intrinsic value. It's just a giant pile of financial risk of uncertain magnitude. Even if you want to believe Buffett can tell what it's worth… the overwhelming majority of BOA's shareholders have no idea what they own.
That's true of all the big financials, including Citigroup, JPMorgan, and Wells Fargo. You can tell me about their great franchises and superior management all you want. It's pure B.S. An investment in any one of them is simply a bet that they're just too big to fail… that people like Ben Bernanke, U.S. Representative Barney Frank, and Treasury Secretary Tim Geithner are so in love with them, they'll game the whole system to keep them afloat.
Wal-Mart tried to get a license to start a bank… But the power brokers in Washington wouldn't allow it. Too much real competition would ruin everything for the big banks. Would you deal with these jerks if you didn't have to?
Gold fell again today after the Chicago Mercantile Exchange (CME) raised gold margins by the largest amount in more than two years. The CME increased the initial margin by 27% from $7,425 per 100-ounce contract to $9,450. And it increased the margin for hedging by 22% to $7,000 per contract, from $5,000. Increasing the margin requirement means traders have to put up more capital upfront to invest in gold via the CME, which puts a damper on market activity. Quite simply, a higher margin means they can buy less gold with any given amount of capital.
Now, the precious metal is trading for less than $1,740 an ounce, down nearly $200 from the August 23 high of $1,917.98. More calls of the "gold bubble" bursting abound. As you know, we disagree. We view these corrections as buying opportunities. The European debt crisis is far from over. The European Central Bank will create some asset-buying program to save its banks. And the Federal Reserve will print more money to help the ailing U.S. economy.
Despite the drop in gold, silver rebounded today to more than $40 an ounce. A lot of hot money is changing metals.
And while the drop in gold prices is bad for some, it made S&A Short Report readers a fortune. The puts Jeff Clark recommended are now up 265% in a little more than a week.
Gold and silver aren't the only assets people buy during a panic. They also buy guns. You may recall in mid-2009, firearms dealers all over the country were out of ammo... Any ammo they received sold immediately. Many popular pistols were on back order. People were scared.
Conditions have only deteriorated since then. We're seeing "flash mobs" across the U.S., riots in London, and political unrest around the globe… We thought we'd check in with our favorite gun stock – Sturm, Ruger (RGR).
Ruger is the fourth-largest gun manufacturer in the U.S. The company has zero debt. And it's growing earnings like crazy. What do you think has performed better in the past months… gold or Sturm, Ruger?
Ruger has outperformed gold over the past one-month, three-month, six-month, one-year, three-year, and five-year periods.
Frank Curzio, who writes our Penny Stock Specialist and Phase 1 Investor advisories, recently interviewed Rick Rule for the S&A Podcast. With more than four decades of experience, Rick is one of the greats of the resource business. He turned $15 million into roughly $460 million from 1998 to 2006.
In the interview, Rick explains why gold is not in a bubble and how silver prices could easily surpass $100 an ounce. He's also super-bullish on natural gas.
Rick also talks about his favorite areas for finding huge, new deposits. He describes one as "one of the true last, great mining frontiers" to invest in. You can listen to the interview for free by clicking here.
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New 52-week highs (as of 8/24/11): McDonald's (MCD).
Tons of praise for Jeff Clark's prescient gold calls in recent months. Have you made money on his recommendations? Tell us here: feedback@stansberryresearch.com.
"I had joined Wealth Alliance maybe 10 or so years ago for maybe just under $3,000. Unfortunately, a family emergency came up shortly thereafter and I had to accept the refund. Well, I've been subscribing to various research pieces ever since. I've seen the Wealth Alliance price go up every year.
"Well several months ago I decided I simply needed to step up because I really wanted some of the higher end services anyway, so I did and man I'm sure glad that I did!! I love having all of the services available to me and I want to especially thank you Jeff for your bang up calls. I've made several times the cost of my Alliance membership and couldn't be happier. I'm glad to have such great guys working for us. Keep up the great work!!" – Paid-up subscriber Rob R.
"I read Jeff Clarks take on shorting Gold last week via the Digest. The trade made sense in light of what happened to Silver's dramatic drop last April. I decided to take action and bought the weekly GLD $175 puts (expiration on Aug. 26) last Friday for 97 cents each. On Monday they were trading for about 40 cents. I decided to walk away and see if the trade panned out, and boy did it! I sold this morning at $8.20 for an 845% gain. Jeff is Amazing." – Paid-up subscriber Michael Kunch
"I had just learned the easy steps of buying Call options and made over 1,000% on Silver Wheaton and Silver Standard Resources last summer when I started getting your newsletter and you were suggesting some 'shorts' – which were code for buying PUTS. I want to thank you. As a contrarian stock trader and an avid Gold and Silver bug since 2003, the beauty of being able to risk so little and gain so much on downward movement was just what I needed to see to be willing to step into the business of buying PUTS.
"My next step is to learn to sell them. I appreciate your 'Tough Stance' on the negative side of the market and the positive side of Precious Metals. With several of your other associates saying 'it's time to get back in' or it is 'time to buy Natural Gas stocks,' etc, the puts you recommended have more than made up for the small losses from the others...
"And then there is the Gold! I've been telling my friends – confidently – that Gold would top $1,800 before the summer ended (because of your writing) and here we are. I've, also, purchased a farm in Argentina, a few years back and am close to being profitable there as well. Thanks for the research and the push!" – Paid-up subscriber Mark
"Jeff Clark's Short Report is the most profitable subscription I ever had and I had quite some. Selling half of my 165 GLD put position I made even more than double, a 150%!!, as I couldn't check my e-mails during the day and read his alert only around 9 at night (in Europe) As I rushed to launch my sales order i couldn't belief what I saw on my screen, my puts were now worth 3$! and I bought them some days ago for 1,20$! I have to admit that when Jeff launched his alert I had shaky legs and when gold went over 1,900$ the next days i seriously considered stepping out to limit losses. Thanks God I didn't chicken out!
"Well done Jeff! I like your courageous style because I know that it is not easy to stick with a trade idea when every CNBC & Bloomberg guru is telling the stampeding crowds that gold will only go up. It's not the first trade you were right on and made me earn some fast money but it sure it was one of the most daring ones. Thanks again and you can be sure that today I'll jump into your new oil trade alert." – Paid-up subscriber Roberto Borrebach Klaui
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
August 25, 2011
Headlines and 'traders'... BOA's 'Hail Mary' from Buffett... Those unfathomable financials... Gold falls... Jeff Clark's amazing gold short: 256% in a week... Guns beat gold... 'One of the last great mining frontiers'...