Last year was tough for stocks. According to Morningstar, of the 4,934 U.S. stock funds with more than $100 million in assets, none saw gains in 2008. Meanwhile, most mutual-fund investors saw huge losses. The average U.S. mutual fund dropped a record 39% in 2008. Even the best mutual-fund managers were destroyed. Ken Heebner's CGM Focus Fund, the top-performing mutual fund in 2007, dropped 48% last year. Harry Lange's Fidelity Magellan Fund dropped 49%, suffering large losses in financial stocks.
Did anyone predict this calamity? Did anyone completely avoid the train wreck? Yes, actually. Our friend Chris Weber put out a special edition of his letter, The Weber Global Opportunities Report, on November 21, 2007. This was about one month after the peak of stock prices. He told his readers to sell all their stocks and to hold only gold and cash. The update was titled "Bear Market Signal: Everyone Out."
The Dow closed below its previous low today. This triggers sells on the DIA and QQQQ as well as the Singapore ETF... What happened today is a very serious thing... I have had a small amount of my holdings in stocks, and after today I am getting out of much of those. Gold continues solid, and I would have the bulk of my holdings now in metals – actual physical metals – and cash.
Two weeks later, with his subscribers howling in protest about being told to sell, Chris followed up, explaining he wasn't permanently bearish, just very afraid of stocks at the moment: "I am prepared for a period where nearly everything drops except, surprisingly U.S. dollars."
At our S&A Alliance meeting in Mexico, which occurred just after Weber's "sell everything" letter, several subscribers asked me what I thought about Chris' prediction that stocks would soon crash. "Porter, didn't you say that Chris Weber has never been wrong about a major market call?" That's right. And now, a little more than a year later, I can tell you Weber's record is still perfect. In the business of financial forecasting, Chris Weber is without peer. And he has been doing it for almost 40 years. If you'd like to learn more about Weber's Global Opportunities Report, click here.
He has also been a generous friend and mentor to me since we first met in 1996. Chris, congratulations on yet another amazing market call. You richly deserve the wealth you've earned through your spectacular investing career.
For the rest of us mere humans, selling at the top of the market just doesn't happen. Instead, most people tend to sell at the very bottom. That's the way markets work: Most people have to buy at the top and sell at the bottom – otherwise, extremes in the market wouldn't occur. And so, after pulling all of their money out of mutual funds late in 2008, investors now have more cash in money-market funds than in stock mutual funds.
According to Jason Goepfert of sentimenTrader, "If all the money currently sitting in U.S. money-market funds left and went into buying shares of the Standard & Poor's 500 index, it would absorb 42%" of that benchmark's market value – the highest in at least 25 years. Investors are also setting aside only 42% of their investment money for stocks and 42% of their portfolio is in cash – the highest percentage ever.
Here is an interesting chart showing the average home price decline in 20 leading U.S. cities.
Back to the mailbag... We missed your notes, your zingers, and your complaints over the holidays. Most of you, it seems, decided to take a holiday from hounding us. Well, we're back at work. And we expect you to return to the 'bag too. Send us your best: feedback@stansberryresearch.com.
"In several of the past Digests you have mentioned that purchasing gold and especially silver are the best way to protect oneself in times of inflation. I know from Steve Sjuggerud's past reports that the best way to invest in gold is through coins, rather than physical bullion or miners. Does the same apply for silver?" – Paid-up subscriber Nayem
Porter comment: Just for the record, collecting rare coins has nothing to do with investing in gold. Sjuggerud may prefer rare gold coins to bullion, but that doesn't mean you should assume they're basically the same thing. Rare coins are collectibles. Their prices tend to move with other types of collectibles – like art, vintage cars, etc. Meanwhile, gold bullion is the ultimate financial safe haven. The reasons for owning gold have NOTHING to do with the reasons for buying collectibles. I don't think anyone should confuse the two strategies.
Personally, I'm not interested in collectibles. (On the other hand, Sjuggerud is very interested in collectibles.) I buy gold because it is the ultimate store of value (thanks to its unique physical properties). And it's the ultimate financial insurance – it's an asset that's not anyone else's liability. We compiled our best advice on investing in gold and published it over the holidays. If you missed it, read it here.
"How do you determine which strategy to enter a bea
rish position on these looming failures? Sometimes you advise to short the stock, other times you advise to buy the PUT. These are both proven bearish strategies. However, I was wondering what you felt about 'selling a call,' which is also a bearish strategy and therefore we collect the premium for the companies looming failure now?" – Paid-up subscriber S. Brooks
Porter comment: I can't answer this question definitively because every situation is different. When I'm convinced a company's equity is worthless, I try to design a trading strategy that will capture the highest amount of gain with the least amount of risk. Normally, that means simply shorting. But if premiums on put options are reasonable, buying puts becomes a possibility. (Lately, put premiums have been so high, it's simply been too expensive to buy puts.)
On the other hand, when companies are in trouble, you usually find you can't make money selling calls because nobody wants to buy calls on a failing stock. The best time to make money selling calls is when the market becomes unreasonably bullish. Over the last several months, the market has been unreasonably bearish. So we've been making money selling puts, not calls, in my trading-strategies letter, Porter Stansberry's Put Strategy Report.
"Some readers were put off by your recent travels and mentions of the luxuries you advisors can afford, even while many of your readers might be struggling. I learned a valuable lesson in investing: 'Only take your investment advice from those who are RICH (with a capital 'R').' Anyone who is struggling right now, economically, I don't want them writing investment newsletters. Been there, done that. And I don't mind it if you mention an occasion taste of the high life. You are tasteful enough to never rub it in. Thanks for the good work." – Paid-up subscriber RJ
Porter comment: Believe me, to many of our subscribers, the stories of our traveling makes us seem like paupers. We're not nearly as rich as many of the folks who read our letters and consider our ideas.
Regards,
Porter Stansberry
Baltimore, Maryland
January 5, 2009