Sjug's Secret

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/08/2013

Cockeysville, Maryland

* * * The Federal Reserve left interest rates unchanged yesterday. The markets cheered. Meanwhile, fewer than one in 1,000 Americans could tell you what the "Fed" does or what its decision about interest rates means. The press only pays attention to interest rates, because like Robert Parker wine scores or microprocessor speeds, even someone whose brain has been numbed by hours of television can understand a single number. When it comes to the Fed, everyone knows a lower number is better than a high number (unlike wine and microchips). The far more important number, for anyone who actually cares about what the Fed does, is the increase or decrease to bank credit. This foretells the future growth in money supply. Knowing the interest rate in isolation tells you nothing. Growth in bank credit has slowed remarkably this year… down to 0% over the last three months. Zero growth in bank credit paired with a relatively high Fed rate tells me that the economy will slow, commodity prices will decline, and the housing market will not spring back to life.

* * * The Securities and Exchange Commission is beginning to crack down on mutual funds. The earlier scandal, led by Spitzer’s headline-hunting operation, was only the tip of a very dirty iceberg. Mutual funds are the most conflict-ridden and corrupt institution in America. The SEC is investigating a kickback scheme involving 27 different funds. Millions were paid back to fund managers in exchange for sweetheart deals on various "back-office" tasks.

The bigger scandal has yet to be discussed by the mainstream press – why have none of the major mutual-fund families (Fidelity, Capital Research and Management, Barclays, Vanguard, among others) done anything to prevent or even draw attention to the options-granting madness at America’s biggest technology firms? Could it be that the same financial companies furnish these tech firms with insurance, 401k administration, financial planning, etc.? Here’s my best advice: If your mutual-fund manager doesn’t keep most of his net worth in the fund he manages for you, sell it today. Call his compliance office (the number’s in your last statement). They ought to tell you.

* * * "I was very surprised when I saw you were recommending Intel… I’ve been selling for years. But I think I’ll stop." This from one of Intel’s former top engineers, now retired, and a member of our Alliance subscriber group. In the late 1990s, Intel made almost all of the boneheaded mistakes a company can make. It started a venture-capital group. It bought a communications-chip company. It got into computer peripherals, such as video cameras. What it didn’t do was keep on top of microchip technology. As a result, it lost its technology lead over Advanced Micro Devices (AMD). It also had to write off billions as it shed all of those terrible businesses. What did Intel do right? It kept making a ton of money and it kept spending some $6 billion a year on R&D. No one else in the chip business can afford that kind of research budget. It was only a matter of time until Intel came back and shoved AMD around again. Intel’s new "four-core" chip is, once again, the market leader. And the results are showing in the share price.

* * * Are options profits the same as profits from regular stocks? "No," says our own options master, Jeff Clark: "…comparing option trades side by side with stock trades is wrong. Option trading carries the potential for 100% loss of investment. Consequently, I never recommend putting more than 1%-2% of a portfolio into any individual option trade. I love trading options and I love the fact that we’ve had some terrific successes doing so… but I don’t think you should include option trades in your 20 Hall of Fame picks because readers shouldn’t put full-size positions into options."

I agree with Jeff. The idea of the Hall of Fame was to reward our editors with the recognition they deserve, like we do with our Top 10 Open Positions list. I decided to print the top-20 closed positions only because there were so many of Jeff’s options positions on the list… there wouldn’t have been room for hardly any other editor’s picks. So… now that Jeff himself says that options can’t be compared with stock gains, we’ll go back to 10. Two lists: our 10 best open positions, and our Hall of Fame – the 10 biggest profits taken.

* * * "No, really. This guy is a friend of mine. He’s been making me 86% a month with currency futures for the last year… he told me my returns are guaranteed…" This from a younger member of our Alliance, speaking to me on the way into lunch last week in Aspen.

"Listen to me," I said. "Ask for your money back immediately. No one in the world can make returns that high, consistently, in any market. And no one can guarantee returns. You’ve been taken by a fraud, and your money is probably gone. Get whatever you can back now. Call you district attorney if you don’t get it all back within a week – and you won’t."

My words made no impact. I’ve seen this dozens of times. Greed takes over. People willfully suspend disbelief because believing the lie is so much better than facing the truth.

"No way. I’ve seen the profits on my statements. He sends me an update each week…"

* * * And… today’s riddle: What was the biggest island in the world before the discovery of Australia by Captain Cook?

* * * * * * * * * * * * * * * * *

"Oh, man. I don’t want to do this. But if that number comes out even at 31, we’ve got to buy housing stocks…"

– Steve Sjuggerud, commenting on the homebuilder confidence survey

My friend and long-time research partner Steve Sjuggerud has a rare and valuable knack for buying sectors left for dead by other investors. I’ll tell you a secret about Steve: I can tell if he’s really on to something big, because the idea will be so contrarian even he’ll be reluctant to move forward with a recommendation.

That’s how it was with his latest idea – buying homebuilders.

For months, Steve has been watching an indicator of homebuilder confidence, which has been falling all year. (The scale is set so that a score of 50 means average confidence). Steve researched the last two big crashes in housing stocks (in the early 1980s and the early 1990s) and discovered that, not surprisingly, homebuilder confidence bottomed at almost the exact same time as the stocks. And, if you had bought homebuilders as soon as confidence ticked up at all, you could have made several hundred percent on your money, in less than two years. Confidence ticked up last week, from 30 to 31. So, in his most recent issue of True Wealth, Sjuggerud recommended buying a homebuilder… reluctantly.

Yesterday, we got the first fundamental indicator that Sjug might be buying at the perfect time. Housing inventories dropped by 2.4% at the end of September, the first reduction in inventory since prices began to decline. There’s now a 7.3-month supply. Thomas Stevens, president of the National Association of Realtors, said of the number: "It appears we have passed a cyclical peak in terms of the number of homes on the market… The good news is that fewer listings are coming online. A stable sales pace is expected to draw down the number of listings to a supply balance that will support positive price growth within a few months."

Certainly, the sector’s stock prices indicate something good is brewing. To read Sjug’s analysis, see his most recent issue… or become a True Wealth subscriber.

Good investing,

Porter Stansberry

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame