Investors beware the newest green boondoggle... Steve nails the housing call... Decrease your taxes: Buy a house... Homebuilders are making money... Porter's secret meeting... The 'global currency war'... Doc's amazing winning streak...
Remember Solyndra, the solar-panel manufacturer that declared bankruptcy in September 2011 after receiving millions of dollars in federal loans and was later raided by the FBI?
How about Konarka? The solar-energy company went belly up shortly after Solyndra. It was also a recipient of government-allocated capital…
Well, our Dear Leader's glorious administration is helping to foster another "green" energy boondoggle – the electric car. Back in 2009, Komrade Obama extended a $460 million line of credit to luxury electric-car maker Tesla Motors. As of June 30, Tesla has already borrowed $432 million of the available funds.
Tesla recently reported it now expects $400 million-$440 million of sales of its Model S sedan this year. That's well below earlier projections of $560 million-$600 million.
The company's sales have grown 82% the last two years. That's the good news. Unfortunately, its expenses have grown more than 400% and losses have grown 357%. Tesla lost $254 million last year on $204 million in sales. In the first half of 2012, it lost $195 million on $57 million in sales.
Will Tesla make a profit if it sells $400 million worth of Model S cars? I (Dan Ferris) have my doubts. Tesla doesn't appear to be anywhere near the scale it needs to produce a profit. And you have to wonder how much demand exists for an electric car that costs almost $100,000. (Tesla's all-electric cars cost between $50,000 and $98,000 – after federal tax credits.)
Since Tesla isn't making any money, it's having trouble paying on its loans. Tesla has filed an SEC document modifying the loan covenants and payment schedule.
Unlike Solyndra and Konarka, Tesla is a public company. Tesla plans to sell 4.3 million new shares, worth about $120 million (and falling). Tesla says it will use the cash for "general corporate purposes." We suspect the money will end up paying back the government.
Is Tesla a zero, like the solar companies? Time will tell, but we see little reason to believe otherwise...
Last year, Phase 1 Investor analyst Larsen Kusick wrote in Stansberry & Associates' free e-letter Growth Stock Wire about the hype surrounding electric cars. And he cited two stocks "stuck in a brutal downtrend." You can read Larsen's piece here.
The bullish news on housing keeps rolling in…
As Digest readers know… True Wealth editor Steve Sjuggerud has been bullish on housing all year. He summed up his thesis in a recent DailyWealth…
- Housing prices have fallen more than they ever have in our lifetimes – by far. Today, houses are selling for well below replacement cost.
- Meanwhile... housing prices are up for five straight months. It sure seems like they've bottomed.
- Mortgage rates are at record-lows – around 3.5% today. With low home prices and low interest rates, houses are more affordable than ever.
Last Friday, homebuilder KBHome surprised the market with a quarterly profit. The company earned $3.3 million ($0.04 per share) on sales of $425 million. Analysts expected a loss of $0.16 a share... The year before, the company lost $9.6 million on sales of $367 million.
In addition to improved earnings, KBHome said potential future housing revenue in its backlog rose 33% to $744.7 million. And net orders increased 3% for the second consecutive quarter to 1,900 homes. The stock soared 16% to a new high.
Then, another homebuilder, Lennar, announced third-quarter earnings of $0.40 per share, beating analyst expectations of $0.28. Lennar's new orders were up 44%...
"The housing market has stabilized and the recovery is well underway," said CEO Stuart Miller. "Low mortgage rates, affordable home prices, increased buyer confidence, and an extremely favorable rent-to-own comparison are driving growth in each of our markets. Additionally, reduced foreclosures and declining distressed home inventory are further contributing to the improvement in the housing market."
Lennar's backlog of homes increased 79% to 4,513 homes. The value of the backlog is $1.3 billion – a 95% increase.
Finally, today, the S&P/Case Shiller housing index jumped higher for the sixth-consecutive month, rising 0.4%.
We maintain that housing is one of the best investments you can make today. If you can afford a new home and/or have access to financing, it's a no-brainer. In addition to low prices and low mortgage rates, the record-high rentals across the U.S. make it even more attractive. For more from Steve on the opportunity in housing, you can read this DailyWealth essay.
In November 2010, Porter described for his Investment Advisory subscribers a secret meeting he attended in New York. The guest list included a senator and two CEOs from major global corporations. A half-dozen of the world's most accomplished investors and several senior government officials attended. Possibly one of the most interesting among them was a former well-known central banker.
They had gathered to discuss how rising food prices around the world could threaten national security.
Although Porter couldn't reveal the names of those who attended or exactly what they said, he was able to share his thoughts on the subject...
After listening for about two hours… Porter did what he was invited to do – speak his mind. He explained how a currency war was underway... one that began in 2008 with the collapse of Wall Street's investment banks. And he pointed out how currency wars lead to trade wars. Most important... he pointed out that the problem of food prices was actually a currency problem. Here is what he said...
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But why hasn't anyone yet pointed to the obvious problem? |
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It terms of gold, agricultural commodities prices have fallen by about 50% over the last 10 years. |
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Obviously it's not the price of food that's the problem. It's the collapsing purchasing power of the U.S. dollar that's led us to this situation. |
Today, with central banks around the world trying to stimulate their economies through various "easing" policies – essentially massive money printing – the price of food is spiking higher…
According to Rabobank, an international bank that specializes in financing food and agricultural businesses, world food prices will hit an all-time high in the first quarter of next year, exceeding the record it set in February 2011. The banks analysts say the index of food prices tracked by the United Nations could increase 15% from current levels...
Rising food prices will no doubt hurt Americans' wallets… but when price increases hit poorer countries around the world, that's when the trouble starts. As our editor in chief, Brian Hunt, likes to say…
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... one of the great fears of dictators around the world is a big spike in food prices. After all, the average Joe – whether he lives in Madrid, Mumbai, or Mexico City – will willingly march to war for the craziest reasons. He will endure punitive tax rates. He will cheer on the dumbest government actions. But should his food become expensive, he'll be rioting tomorrow... alongside every one of his neighbors. |
In his November 2010 issue, Porter urged readers to hedge against food inflation…
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The combination of increasing global demand coupled with the Fed's quantitative easing makes a huge move higher in these commodities likely. Prices could soar high enough to trigger a global crisis. |
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Whatever the temporary political solution, the ultimate answer is more production. The only way to increase farm productivity substantially is better technology. One company is ideal for the job. |
The stock he recommended was among his most controversial: Monsanto (MON). Since recommending the stock in November 2010, Stansberry's Investment Advisory subscribers are up more than 56% (including dividends).
The company pays a modest 1.3% dividend based on today's share price. That sounds small. But Monsanto knows how to treat shareholders well. In 2010 and 2011, Monsanto returned more than $1 billion each year to shareholders via dividends and share buybacks. And they're heading toward another $1 billion this year. Sales and earnings are back to growth status, just as Porter predicted back in November 2010….
We were inundated with angry e-mails. Most objections focus on the company's production of genetically modified seeds. Porter responded to that criticism in this Digest essay.
As we have consistently said… our job is to provide excellent investments to our subscribers. And Monsanto has repeatedly proven to be just that – an excellent investment…
If you missed the past few days of Digests, you've missed one of the most important educational pieces we've produced... We dedicated three days of the Digest to discussing how you can mimic the super-safe trading strategy Dr. David "Doc" Eifrig uses to compile his extraordinary track record in Retirement Trader.
In Retirement Trader, Doc sells put options. We know simply mentioning the word "option" scares away most people. But we think selling puts is one of the most valuable trading strategies around today... It's a way to consistently generate large income with low risk. And we encourage everyone to try it.
That's why last week, we told you how put selling works. We also discussed why it's critical to only sell puts on blue-chip stocks. And yesterday, we showed you a way to generate even more income should you end up owning shares of the companies' stock (if you're "put" the stock).
I hope you had a chance to read those Digests... And I hope you give put selling a try … Once you understand the power of this strategy, you won't want to do anything else in the market.
New 52-week highs (as of 9/24/12): Fidelity Select Medical Equipment & Systems Fund (FSMEX), Western Asset High Income Opportunity Fund (HIO), Virginia Gold Mines (VGQ.TO), Medtronic (MDT), Procter & Gamble (PG), Fluidigm Corp. (FLDM), and GenMark Diagnostics (GNMK).
In today's mailbag… two subscribers write in about options and put selling… We believe this tool is so valuable, we can't talk about it enough. Please keep the questions and comments coming. Write to feedback@stansberryresearch.com.
"I want to thank you for your pounding the table about silver, the 'carve out bottom', and your recommendation of Van Tharp's Trade Your Way to Financial Freedom. I bought 2 SLW 6-month calls at the end of June for $3.30 each and closed them out this morning at $13.10. Close to $2000 profit or about a 6R profit according to Van Tharp. I set my stop at a close below $24.87 or $330 including commissions (whichever came first) and trailed a volatility based stop up from the recent highs.
"In the past I would have bought 10 contracts and used a stop that was too tight and gotten stopped out just as the move was about to take place. With a fairly wide stop and small position size I was not fretting over getting stopped out or whether or not I should prematurely take profits. Great recommendations all around. Thank you." – Paid-up subscriber PWM
"When you quote annualized gains on short term trades, it seems like 'phony profits.' Sure, a $1,000 profit in 3 months is $4,000 annualized, but your account balance only shows a $1,000 gain. It sounds like a way to quote a higher profit, thus looking better in the eyes of the subscribers.
"Quoting a higher profit on put sales based on the margin requirement versus the full amount to buy the stock is the same thing. Using Doc's conservative strategy, the put seller must have the full amount to buy the stock if he is put the stock. That money can't be spent on something else. Again, your way looks better, but is not realistic in my opinion.
"I do not mean these comments as negative for the trading methods, just the profit reporting methods. The trading methods are superb. And I'm not an accountant, nor do I play one on TV, so I could well be wrong." – Paid-up subscriber RE
Goldsmith comment: No 'phony profits' here... Annualizing a short-term trade simply allows us to compare returns with other, long-term strategies.
A single put sale with a 60-day timeline could "only" return 5%... Whereas buying and holding a large-cap stock for one year could also return 5%. Yes, both trades returned the same nominal amount, but… The stock investment would have tied up your money for a full year. In contrast, the put sale freed your capital after 60 days.
This means you were free to put that money to use again… And if you repeat that trade six times per year, your returns approach 30% (in this example). Naturally, subsequent trades won't work out exactly like the first... But it's a yardstick of how successful the trade and the strategy are.
That's why annualizing matters.
"I think S&A is being deceptive in presenting put selling as a low risk investment. When I read about the risk and reward of selling puts, I learn that the reward of selling puts is limited to the premium collected; however the risk is unlimited. The risk is not really unlimited because the price of the stock can only fall to zero. The point is that the price of stocks can and do fall.
"In Dr. Eifrig's video, he gives the example of Intel falling to $16 with us holding a put with a strike price of $17. He only gives one example. Intel could fall anywhere between $17.00 and zero, and our loss would be much greater than that shown in Dr. Eifrig's example. Dr. Eifrig claims 81 winners in 81 trades. Some of this success can be attributed to the recent climb in the over all stock market. How would Dr. Eifrig's put selling program have worked in 2008 and 2009? How will it work in the next bear market?" – Paid-up subscriber Richard Oldenski
Goldsmith comment: Yes, in theory, put selling could result in big losses if, as you say, the stock price falls to "zero." But that's why limiting your trades to blue-chip, World Dominator-type stocks is crucial. (We covered this part of the strategy on Friday.) It's a key factor in mitigating risk.
Take your example, Intel. It's the No. 1 company in its industry by a mile. (It controls 80% of the market for microprocessors)… It's got more money in the bank ($15 billion) than it knows what to do with… And it generates gobs more cash every year ($21 billion in annual operating cash flow). Unless you believe the world is going to stop using computers and microchips in the near future… Intel is simply not going to zero. Not under any reasonable scenario.
We look at price declines in stocks like Intel, Coca-Cola, Wal-Mart, etc. as buying opportunities. We're happy to get paid to buy these stocks at discounted prices (and generate more income by selling covered calls).
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
September 25, 2012