One of Porter's Most Serious Predictions Is Now Coming True
One of Porter's most serious predictions is now coming true... The 'lions' are still hunting... 'Worse than 2007'... Why Doc is actually bullish today...
We begin today's Digest with an urgent reminder...
In less than two hours – at 8 p.m. Eastern time – our colleague Dr. David "Doc" Eifrig will be hosting a free live webinar explaining the strategies he uses to help subscribers generate more income with less risk than by simply owning blue-chip, dividend-paying stocks.
And while the rest of today's Digest is bearish – as you've come to expect in these pages – make sure you read to the end... Doc will explain why he's actually bullish today... and why this turbulent market is a trader's dream come true.
Remember, the biggest profits are made during times of volatility and fear. The key is to focus on the highest-quality assets that have gone on sale.
Switching gears, for several months now, Porter has been warning readers of a huge crisis... what Porter has called "the greatest legal transfer of wealth in history."
And regular Digest readers know several of Porter's early predictions have already come to pass...
While few believed it possible last spring, oil prices have collapsed below $30 per barrel, just as Porter said they would.
Credit problems have spread from the oil and gas sector to the other parts of the high-yield or "junk" bond market, like he predicted.
And investors in several high-yield bond funds have already been "trapped" by liquidity problems, just as he forecasted.
But if today's markets are any indication, one of Porter's most serious predications is also coming to pass... and the crisis could be moving to a much more serious phase.
As we've discussed several times, problems in the credit market are different from problems in the stock market. They're "contagious"... When huge amounts of debt go into default, it can trigger a chain reaction, and institutions that would otherwise be fine can end up in trouble because they've invested in risky debt.
In the December 11 Digest, Porter warned that the recent troubles in high-yield bonds would eventually make their way even to the investment-grade bond market...
Trust me on this: Next year will be a lot worse. Credit problems are "contagious." Trouble in credit tends to spread, even into areas of the market that aren't directly distressed.
The first big credit fund to collapse, the high-yield Third Avenue Focused Credit Fund, began to "gate" investors yesterday. That means they're trapped. They won't be able to get their money out. Those investors will have to raise liquidity to meet their own obligations in other ways – perhaps by selling bonds that aren't in trouble at all. That's one example of how trouble in high-yield bonds will inevitably spread to investment-grade bonds...
As you can see in the chart below, investment-grade credit risk is now rising, too...
In addition, several of the "lions" we've been following fell to new lows today...
Crude oil fell to a new 12-year low. West Texas Intermediate ("WTI") crude oil – the domestic benchmark – plunged 4% to $28.35 per barrel. Brent crude fell 1.2% to $28.77 per barrel.
Emerging-market stocks – as measured by the iShares MSCI Emerging Markets Fund (EEM) fell more than 3%, hitting a new six-year low.
And as you can see below, high-yield bonds – as measured by the iShares iBoxx High-Yield Corporate Bond Fund (HYG) – also plunged to new six-year lows...
Today, we also learned another high-profile figure has joined us in warning of a crisis...
Back in September, we shared a video from legendary investor Carl Icahn that sounded remarkably similar to Porter's predictions.
Earlier this month, fellow renowned investor George Soros joined him.
But last night, William White – former chief economist of the Bank of International Settlements – shared a warning that may be even more dire than ours. In an interview with British newspaper The Telegraph, White said...
The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up.
Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief. It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.
Why should you listen to White?
Well, he was one of the few central bankers who correctly predicted the last crisis. More important, he was one of the only ones who had the courage to speak out about it before it happened.
In fact, he's known for being the only official who dared to stand up to former Fed Chairman Alan Greenspan and warn of the dangers of his easy-money policies. And as we now know, he was correct.
But White wasn't the only big name to issue a warning yesterday...
So-called "Bond God" Jeff Gundlach of DoubleLine Capital told CNBC that the latest dramatic declines in the stock and bond markets suggest "margin calls are going on," meaning investors are being forced to sell assets to raise cash.
Gundlach also predicted that this round of declines in the credit markets is likely to continue until we see the market's "fear gauge" – the Volatility Index ("VIX") – rise above 40.
The VIX closed the day at 27.50.
As a seller of put options, Doc would love to see the VIX at 40. As he'll explain tonight, the upfront cash premium you collect by selling options soars as volatility marches higher. People are scared, so they're willing to pay an obscene amount of money for the downside protection of a put. And Doc is happy to sell it to them.
A VIX of 40 would offer the biggest premiums we've seen since the financial crisis. Still, even today, the VIX is at multiyear highs.
Readers often get up in arms when we present two analysts with differing opinions. And it happens from time to time...
But we hire the best analysts in the world. And we don't tell our analysts what to think. So they naturally disagree sometimes about the direction of the markets.
Porter is bearish today. But Doc thinks we have the rare chance to generate huge income selling puts on some of the world's best companies (which, in his mind, are oversold today).
We understand it can be frustrating when two of our analysts have different opinions. Who do you follow?
We'll let you in on a little secret: Whichever camp you're in, you should be prepared for both outcomes. The greatest investors always are. And learning a valuable, new strategy will only benefit you in the long run.
Well, Doc is long-term bullish on equities – he's a so-called "permabull."
He believes the current market turmoil is a long-overdue correction... similar to the one we experienced in 2011, before stocks recovered and headed to new highs.
And while he admits this correction may have farther to run, he notes that some of the world's highest-quality stocks have already gone "on sale."
Take Apple (AAPL) for example... The stock has fallen from more than $130 per share this summer to less than $100 today. Right now, you can buy one of the world's greatest companies for 30% less than you could just a few months ago... And selling options on companies like these can reduce your cost basis even further.
Doc even thinks that falling oil prices are bullish. In fact, he says it will be a boon for the economy. When oil prices fall, energy, food, and transportation (basically everything) becomes cheaper. And that means more money in the consumer's pocket.
We asked Doc to give you a preview of his current mindset and what he'll be discussing tonight. From Doc:
I believe people get rich sticking with equities for the long-term. And history supports me here... The stock market has always gone up over time.
That's why I'm excited right now. This is the perfect market for Retirement Trader subscribers. We thrive – and capture the largest premiums – during times of volatility and panic. I'm happy people are bearish. That means my readers are able to make huge money by selling puts on the world's best companies.
We don't experience selloffs like this often, so you have to be ready to pounce when we do. I look forward to sharing more with you tonight.
We hope you'll take some time tonight to listen to the rest of Doc's reasoning...
Even if you don't agree with his bullish thesis, you should tune in. Again, the best investors are prepared for any outcome. So learning and understanding Doc's perspective (not to mention his trading strategy) is incredibly valuable today.
New 52-week highs (as of 1/19/16): short position in BOK Financial (BOKF), short position in Cullen/Frost Bankers (CFR), short position in Capital One Financial (COF), short position in iShares MSCI Canada Index Fund (EWC), short position in Santander Consumer USA (SC), short position in Suncor Energy (SU), short position in SPDR S&P Oil & Gas Exploration & Production Fund (XOP), and short position in Zions Bancorporation (ZION).
In today's mailbag, more readers share their experience with options. What's on your mind? Send your notes to feedback@stansberryresearch.com.
"You guys are all writing about option writing, especially puts on stock you wish to own as well as calls on stocks acquired that way. All great income generating strategies, as well as a great method to acquire stocks and lower one's cost. All great strategies. Also consider index options for general market plays (long or short options depending on one's outlook for the market in general). I personally love the selling of premium, and have made a rich living at it for decades.
"Here is another consideration for you: consider buying the stock of the major exchange that trades options on all the above. Analogy: it's like buying the picks and shovels in the mining industry, rather than picking the winning mining company. Less risk, more probability of gain. Of course, the leading exchange in equity and index options is CBOE... take a look at the long term chart since its IPO in June 2010." – Paid-up subscriber B.B.
"I just read the Digest... At the end, remarks from those who have used Doc's Retirement Trader techniques were requested. Here are mine: Since the late 1990s, I have traded a lot of single leg options. There are countless ways to weave various 'legs' together to create butterflies, condors, backspreads, etc. However, Doc's simple approach to selling puts intrigued me.
"To simply state it, I was trading Doc's recommendations, but allowed myself to become discontent with his advice to keep my risk exposure low. I see now that with the winning ratio that he has, I should have bet the whole pile across Doc's many recommendations. Instead, I allowed my sour grapes attitude to push me to cancel my subscription. But, I thought I could replicate what Doc was doing. Instead, I went premium shopping, started watching weekly options (instead of sticking to the monthly ones) to speed up the process, and ended up buried in a bunch of crummy stocks. I probably violated every rule that Doc laid out.
"Today, I'm older and wiser. I sell 'cash-covered' puts out of my IRA, against only Porter's Trophy Assets stocks. When I buy one, I keep it and sell covered calls against it. I now look at the stocks that I am occasionally forced to buy as simply providing inventory for my covered calls operation. Recently, I was assigned shares in CPN. I then wrote calls and puts against CPN. All three positions are doing well! Thanks to you, Doc!!!" – Paid-up subscriber Richard D.
"I have been an Alliance member for a long time and have learnt a lot from reading all of the subscriptions but I follow the advice given by Doc, Steve and Porter mainly. When I started to read and learn more about trading options from Doc I was very skeptical at first but now have been successfully trading for a number of years using his advice. Apart from using Doc's recommendations, I now have the confidence to trade on my own using his guidance. Thanks to Doc options trading has provided regular cash flow." – Paid-up subscriber Graham U.
Regards,
Justin Brill
Baltimore, Maryland
January 20, 2016
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