We'd like to see Ronaldo's left leg. According to the Wall Street Journal, Ronaldo's left leg is now touring Brazil in the company of Father Nilson, an Afro-Brazilian "mystical advisor."
Well, not his real leg, of course. It's only a wax replica. But people are praying to it all the same – hoping their prayers will protect Ronaldo's knee during his big comeback. (If you know anything about soccer, you probably recognize Ronaldo's name. He is the all-time leading goal scorer in World Cup competition and Brazil's Michael Jordan and Tiger Woods. He's also well known for his slightly unusual preference for "ladyboy" transvestite prostitutes.) We love human spectacles of all types – market manias, panics... and Brazilian soccer fans.
How to solve the mortgage crisis? By printing money, of course. The Fed has promised to buy several hundred billion dollars of Fannie- and Freddie-backed mortgage securities, increasing the size of its balance sheet to over $3 trillion – about 20% of GDP.
In anticipation of the Fed's buying, the 10 largest banks increased their holdings of Fannie- and Freddie-backed mortgages by $128 billion, or 30% in the fourth quarter of 2008. The Fed's buying has caused the price of this paper to increase substantially, resulting in "profits" for the big banks, whose CEOs were recently boasting of their return to profitability.
So... try to follow the risks here. The Treasury (U.S. taxpayers) guarantees Fannie-and Freddie-backed mortgages – many of which are in default. Then, the Fed (backed by nothing but a modern printing press) promises to buy them. Insolvent banks buy them first, mark them up considerably, and sell them, at a profit, to the Fed. Everything's fine. Really. Go back to work. What? You don't have a job? That's not our problem. We fix banks.
One big problem for anyone trying to "solve" the mortgage crisis: Most of the deadbeat borrowers have more than one mortgage. About half of the seriously delinquent mortgages – loans OBAMA! would like to mandate be "crammed down" – have second liens attached to the property.
Even if the government erases the first mortgages, the folks in these homes still can't afford them. The problem isn't the mortgages: The problem is the borrowers. They're not creditworthy. And there's nothing you can do to make them creditworthy. Auctioning the houses would at least make them affordable to anyone who has been careful with his savings and didn't borrow more than could afford during the bubble.
Of course, telling people they're going to get what they deserve isn't going to win an election. Not ever.
I've been writing for several months about the inevitable fate of highly leveraged commercial real estate firms, like mall owners. One of the world's largest shopping-center owners, Kimco Realty, is demonstrating one possible escape – though it's plenty painful to existing shareholders. Kimco will issue 70 million shares of stock – an increase of 25% to the total shares outstanding, for $500 million. That values the company at roughly $7.14 a share. In October, the stock was trading above $40.
That's an 82% decline – and Kimco is probably the best managed of all the mall owners. It has total debt of $5.4 billion and net tangible shareholder equity of $3.9 billion – about 1.4 times leverage. Contrast this with Macerich, another large mall owner. Macerich has $1.3 billion of tangible equity supporting total debt of $6.7 billion – 5.1 times leverage. It earned $50 million in rents last quarter... and paid $70 million in interest. Think Macerich will be able to raise new equity? No freakin' way.
The market disagrees with me: The stock was up 22% today, almost certainly because of the Kimco news. A lot of stock traders aren't very good at math.
I have a serious question. This is not hypothetical or a joke. If I gave you my best eight trading ideas over the last three months and if seven of them (87.5%) made money... and if the average return in only three months was 26% (over 100% annualized), would those results lead you to continue reading my trading advisory or cancel your subscription via a nasty e-mail to my customer service team?
If those results (and those are real numbers, by the way) are good enough for you, please read on...
As you probably know by now, we've had a hard time selling my latest newsletter, Put Strategy Report. The letter advises readers on a somewhat advanced strategy – selling naked options. You have to have a significant amount of capital (usually $25,000) and you have to be approved by your broker to sell naked options.
But these aren't the big hurdles. It's simply hard for most retail investors to get their heads around the idea that you can actually make more money simply promising to buy stocks that you want to own anyway than you can make buying stocks.
Now... listen. I'm not going to try to sell you the newsletter. I already know you won't buy it – no matter how good our track record is or how easy it is to make a lot of money following our recommendations. But let me show you why selling naked puts is probably the safest and smartest investment strategy you'll ever use – especially in a panicking bear market. If nothing else, you should at least think about using this strategy the next time you want to buy a stock.
Let me show you how to do it, using a real-life example from a recent recommendation. In mid-February, as the selloff in stocks was approaching its peak, we noticed an incredible anomaly in the market. Eight stocks available for purchase met Ben Graham's ultimate test of value: They had assets greater than two times total liabilities, 10 consecutive years of profits, 20 years of uninterrupted dividend payments, earnings growth in the past decade of at least 33%, and a price-to-book ratio no higher than 1.5.
That's the most "Ben Graham" stocks we'd seen trading at any one time since the bottom of the market in 1987. Of these eight, the stocks with clearly noncyclical earnings were: Cooper Industries, Cintas, Molex, RadioShack, and Tiffany. And of these five companies, the stock with the best core business, in my opinion, was Tiffany (TIF).
I was already familiar with the stock, as it is truly one of the world's great businesses. Tiffany produces double-digit returns on assets, gross margins in excess of 50%, operating margins approaching 20%, and it owns one of the best-known brands in the world.
The stock had been falling in anticipation of weak sales during the recession. (The company's sales fell 24% over the holiday period.) Thus, Tiffany "only" expects to earn $2.25 per share in 2009. When I was doing my analysis (mid-February), Tiffany was trading for $21. At that price, Tiffany wa
s valued at less than 10 times earnings and for roughly 1.5 times book value. That's absurdly cheap for such a high-quality business whose earnings are clearly only temporarily depressed.
And consider this critical fact: Tiffany carries zero goodwill on its balance sheet, which means it assigns no value to its brand whatsoever. But its brand is what powers its 50%+ gross margins, despite the global downturn. In my opinion, the brand alone was worth more than the stock was trading for at the time.
Given all of these facts, buying shares in Tiffany would almost surely (nine times out of 10) result in substantial profits over the next three to five years. In fact, I'd be willing to bet Tiffany ends up being one of the best stocks to own over the next five years. That's not because I expect the jewelry business to boom – it's because Tiffany's stock is so clearly mispriced relative to its assets and earnings.
Any rational investor should want to own the stock in the low $20s. But... what if you could buy it for $15? As I told my Put Strategy Report subscribers:
...buying Tiffany at $15 is akin to ripping off other shareholders. Tiffany has 1.23 million outstanding shares. At $15 each, that values the company for about $1.8 billion. At that price, you're paying the same amount of money for the whole company as the company itself holds in cash and inventory. You're essentially getting everything else – the profits, the brand, the buildings, etc. for free.
At $15, you're buying the stock at roughly five times depressed cash earnings. If you factor in Tiffany's share buyback and its cash dividend, at $15 you'll be earning around 32% per year in capital returns.
Now... remember, when I wrote my report, Tiffany was trading at $21, not $15. There wasn't any real possibility of buying the stock at $15. The share price would have had to fall another 28% – which was unlikely to happen given the value the shares represented at $21. But... even so... some folks holding shares of Tiffany wanted to buy insurance against the remote possibility that the share price would fall below $15. (This doesn't make any sense... But people do dumb things with money all the time. Serving their needs is almost always incredibly profitable.)
When I wrote my report, you could sell insurance on shares of Tiffany below $15 for $0.85. You could do this by selling a "put" – which is merely a promise to buy shares of Tiffany at $15 any time between now and the specified end of the contract. Your broker handles the transaction... You simply put up collateral to cover part of the possible obligation, and then you receive the insurance premium in your account, immediately.
In this case, because I thought stocks in general would continue falling, I knew we'd eventually be able to get a little bit more money for this insurance. I told my subscribers: "This option currently trades for around $0.85, but I expect it to move up in price if the market continues lower this week. Do not accept less than $1 for this option under any circumstances."
And... a few days later, that's exactly what happened. On February 23, the particular put option I was recommending (which expires in May), traded hands for $1. Anyone willing to promise to buy Tiffany at $15 per share, through the third Friday in May, could have received a $1 per share as a fee, or "premium," for insuring the stock. Please understand: We have no real intention of ever buying the stock. And as you can see, the share price of Tiffany didn't even get close to $15.
So... why promise to buy Tiffany at $15 if you have no real intention of doing so? Two reasons. We only have to put up 25% of the purchase price in order to sell the put. So we have to put up $3.75 to receive our $1 in premium. Assuming Tiffany doesn't trade below $15 between February 23 and May 15, we get to keep 100% of the premium we've received. That is, we've earned $1 using $3.75 worth of capital. That's a return on invested capital of 26%.
I think you'd agree with me that earning 26% is a great investment result. Most of the stocks you own won't return that much money (or even half that much money) in an average year.
Also, don't forget, our contract only lasts through May 15. That's a little bit less than three months from when I made my recommendation. After May 15, we can put this capital to work in another trade. Assuming we can find one as attractive as the Tiffany put, we could roll this capital over four times a year. If we earn $4 in a year, by investing $3.75, we've made more than 100% on our invested capital – without ever buying a stock.
And what's our downside? Our "risk" is merely that we end up buying a stock at $15 that we liked enough to buy at $21. That's not really a risk, unless something catastrophic happens to Tiffany, which is extremely unlikely given the company's strong balance sheet.
Now... we have taken one loss on these types of trades since I began making them last October. We got killed on Bank of America – because something catastrophic happened. That's very, very, very unusual.
Since last October, I've recommended selling puts 12 times. That's about two per month, on average. We've made money on 11 of these trades. (Like I said, the disaster with Bank of America was extremely unusual.) Our average gain (including the 54% loss on Bank of America) is 50.2% on these trades. That's better than 100% annualized with a "win" rate of 91%. And don't forget, the stock market has gone down – significantly – over the period.
While I know 99% of my readers will never sell a put or subscribe to a put-selling strategy, some of you have followed me into this market – and you're making a killing.
Randy Bowman of Annapolis, Maryland, e-mailed me to tell me he's made $87,557 on my Put Strategy recommendations since October. Martin Tolker has made over $200,000. Kyle Lothberg has made $75,000. These are real subscribers. This is real money. And they're making these profits on extremely safe trades, just like the one I showed you above. Plus, this strategy isn't only for wealthy folks like Randy. Mike Holland of Cincinnati wrote to say thanks for helping him out after he lost his job: This strategy "has generated $1,000 to $1,500 per month for the last 4 months."
While I'd love to have another new subscriber, I'll understand if you decide you don't want to read another newsletter – or pay for an expensive one. Still, I want you to know, my letter comes out on Tuesdays. It's short, usually only two or three pages long. And you will probably be able to recoup the entire subscription cost from the premium you'll make on your first option trade. Remember: You get the money upfront. Immediately.
One more thing... You should know not every subscriber is happy with my work. Says John Carnahan, "How about working...? I just completed 3-months of your Put Strategy service. The first two weeks you were on vacation and the last two weeks you did not have any advice. You know if I did not come to work I would not get paid..."
I knew this would happen. We'd positioned our portfolio so perfectly for this rally in stocks that we literally didn't have to make any trades – we already had seven open long positions. As I told my readers: "I've typically added at least three new positions per month. But because we added so many long positions during February, it's far more prudent for us to stand pat right now. We are perfectly positioned."
I looked up John's subscription to see how many recommendations he received from me over the last three months. He joined us on December 12. His first recommendation was to short sell MGM at $16 – which turned out to be one of my best trades of the entire year. We closed out with a 69% gain in a matter of weeks. In all, I made eight new recommendations during the period of John's subscription. We made money on seven of them (87.5%). The average gain was 26% – in three months! That's better than a 100% average annualized return. And don't forget, the stock market declined 5% over the period of John's subscription.
I honestly doubt any published trading service anywhere has made as much money with as high a frequency as we have over the last three months. Even though that's not good enough for John... maybe it's something you'd be interested in?
At long last, a new high: Vanguard Short-Term Tax-Exempt (VWSTX).
In the mailbag... compliments and outrage, all depending on whether or not you got snookered by our SUCR essay. Send your comments here: feedback@stansberryresearch.com.
"I read your article on SUCR... There is no such company... I had my broker look it up... Are you people morons or what? If not then tell me where this company has info." – Anonymous
Porter comment: OK, sure... We're morons. But what does that make you?
"Congratulations Porter! Your SUCR scam puts you in a class with the elite litterati. If you are not already familiar with them see H.L.Mencken – The Bath Tub Hoax and two of Mark Twain's: The Petrified Man and A double Barreled Detective Story – his reference to a sound made by a lone esophagus." – Paid-up subscriber Bob R.
"I probably spent an hour trying to track down SUCR, missing that little sentence after your sign-off. I just subscribed the previous day. I'm 65. I'm not a teenager with all the time in the world. I have no free time to speak of. I appreciate all the work you did to write that article, but the effect on me was cruel. You were way too good for my good. I forgive you, but please, don't do that again. Bronze it and put it away." – Paid-up subscriber Brant Gaede
Porter comment: We didn't intend to waste anyone's time. Most people truly enjoy a little absurdity on April 1. If you don't, we apologize. You'll know, from now on, to ignore our April 1 missive. But you should know two things about our jokes...
First, they don't take any time. The entire letter this year took me less than one hour to write. The hard work we do is the research, not the writing. It doesn't take very long to make up a story out of whole cloth.
Second, almost every time we publish an April Fools letter, we are contacted by well-known investors and well-known investment newsletter writers, folks who have fallen, completely, for our gag. So there is at least one useful purpose to the exercise for us: We get to know who among our fraternity of professional investors isn't nearly as sharp as they ought to be. Perhaps some day we'll publish the list...
"Smart of you to set up some Wikipedia sites on Fipke as well, to deepen the illusion... Looking forward already to next year's 1 April Digest." – Paid-up subscriber Oskar
Porter comment: Actually most of the stuff I included about Fipke is true – he really did figure out how to use G 10 garnets to locate diamond mines. And he really did make a fortune doing it.
"It's a sad state that we live in when you have to sign your hilarious April 1st message 'Happy April Fools' Day.' But I know what the alternative is: reams of email from people who were having trouble finding the SUCR symbol. I suspect you'll still get a few." – Paid-up subscriber Sean
"Porter, You are a bugger of the first magnitude... you caught me again! If you make it three in a row next year, I'll send you a case of wine. Cheers." – Paid-up subscriber Shaun Clarke
"Porter, You crack me up. I know that you will receive several emails from lots of pissed off simpletons who actually looked up the ticker SUCR, but I find your joke refreshing. It actually got a good laugh when I figured out that I had been duped (when I read Happy April Fools Day). I must admit that I was pretty excited for a minute just like the rest of those clowns, but those are probably the same people who complained about the 'Letters from the Chairman' and you should pay them no mind at all. Keep up the great work as everyone deserves a good laugh every now and then!" – Paid-up subscriber Skip Russell
"You fellas unwittingly exposed yourself with the SUCR recommendation. It demonstrates how facile you are at writing bullshit. You know the kind I'm talking about – 'The best stock I've come across in years' or 'Make 1500% on this recommendation' or 'If you can only invest in one recommendation this is it' or 'Make 15,348 % on this secret investment' etc. etc. etc. You should write an article on the way you all really make money, by writing financial newsletters: lots of them: with a million different recommendations; that no one can possibly keep track of. And the beauty of the whole endeavor is you're so arrogant." – Paid-up subscriber "unfortunately" R.R.
Porter comment: R.R. doesn't mention something you might find interesting. He's a medical doctor. I guess that kind of makes him an expert on arrogance...
Regards,
Porter Stansberry
Baltimore, Maryland
April 3, 2009