The Detroit of 1910... New home sales plunge... Another call to try short selling... Steve Cohen's No. 1 rule... Qaddafi's gold... A good experience selling puts...
Almost two years ago, Porter wrote a well-publicized essay about Detroit's miserable history. He discussed the city's change to a Democratic government and eventual downfall into a welfare state. In particular, he noted the failure of Detroit's Model Cities program, which wasted nearly $1 billion attempting to renew inner city slums. Here's an excerpt from that essay:
|
And so, you might rightfully ask... after five years of centralized planning, higher taxes, and a fleeing population, what did the government decide to do with its grand experiment, its "Model City"? You'll never guess… |
|
Seeing it had accomplished nothing but failure, the government endeavored to do still more. The Model City program was expanded and enlarged by 1974's Community Development Block Grant Program. Here again, politicians would decide which groups (and even individuals) would receive state funds for various "renewal" schemes. Later, Big Business was brought into the fold. In exchange for various concessions, the Big Three automakers "gave" $488 million to the city for use in still more redevelopment schemes in the mid-1990s. |
|
What happened? Even with all of their power and all of the money, centralized planners couldn't succeed with any of their plans. Nearly all of the upper and middle class left Detroit. The poor fled, too. The Model City area lost 63% of its population and 45% of its housing units from the inception of the program through 1990. |
|
Even today, the crisis continues. At a recent auction of nearly 9,000 seized homes and lots, less than one-fifth of the available properties sold, even with bidding starting at $500. You literally can't give away most of the "Model City" areas today. The properties put up for sale last week represented an area the size of New York's Central Park. Total vacant land in Detroit now occupies an area the size of Boston – Detroit properties in foreclosure have more than tripled since 2007. – Porter Stansberry, October 28, 2009, Digest |
Detroit's exodus crisis is getting worse... The Census Bureau released data yesterday showing the city's population has fallen to a level last seen in 1910 – the city has fallen back 100 years. Middle-class African Americans are fleeing to the suburbs, cutting Detroit's population 25% in the past decade, to 713,777. What's the only city to suffer a worse population loss since 2000? New Orleans lost 29.1% of its population. But New Orleans also suffered one of the worst natural disasters in U.S. history. Detroit's decline was pure mismanagement.
Detroit's population peaked in the 1950s at around 2 million (when the auto industry was booming). And population declines have accelerated in recent years due to the automotive industry's failure and the mortgage crisis (more than a fifth of the city's housing is vacant). But this fundamental deterioration of a once-great city couldn't be the reason for everyone's exodus... It's got to be a problem with the Census. At least that's what Detroit Mayor David Bing believes.
Local officials were expecting a count closer to 800,000. And he's requesting a recount... "If we could go out and identify another 40,000 people that were missed, and it brings us over the threshold of 750,000, that would make a difference from what we can get from the federal and state government," Bing said.
Government officials get creative when something stands between them and "their" money. And we're sure Bing will find a way to add 40,000 to Detroit's population... Whether it's pulling homeless people off the streets or bringing them in by the truckload. And we're sure that extra money will go to good use.
Housing figures are also declining nationally... Purchases of new U.S. homes fell in February to the slowest pace on record. Sales fell 16.9% to a $250,000 annual pace (economists expected a gain to a $290,000 rate). And the median price dropped 8.9% from the same month in 2010 (its lowest level since December 2003).
We constantly urge you, our subscribers, to attempt new investment strategies you may not be comfortable with... things like buying discounted corporate bonds, selling puts, and selling stocks short. And we know our efforts are futile (though one subscriber in today's mailbag had great success). In today's frothy market, holding some short positions in your portfolio is more important than ever. Nothing is cheap today (save real estate). And while the market may advance, the odds favor a serious correction.
If you've never sold a stock short, what do we recommend you do? Try shorting one share... Yes, one share of a company. Risk an insignificant amount of money. This way, even if you don't feel comfortable shorting, you'll at least know how to do it. I shorted some stocks today. It's simple. Instead of clicking "buy," you click "sell short." Then, you enter the number of shares and the trade. (Note… you must be approved for a margin account, which takes about 30 seconds.) For more on shorting stocks, reread the July 23, 2010 Digest.
To garner more insight on selling stocks short, be sure to read this 2001 interview with hedge-fund magnate Steve Cohen, unearthed by our friends at Clusterstock. Cohen runs the hedge fund SAC Capital. He's one of the world's biggest and best traders. And he's famously secretive with his strategies.
In the interview, Cohen explains one of the most important aspects of short selling: Never short valuation. In other words, don't sell a stock short just because it looks expensive. It can always go higher. He talks about shorting a stock before an offering of shares. He needs a catalyst. And if that catalyst occurs and the stock doesn't fall, he usually covers (buys back the shares he sold short):
|
A basic principle in going short is that there has to be a catalyst. Here, the catalyst was the offering. The offering was on Friday, and I started going short on Tuesday, so that I would be fully positioned by that time. If the offering took place, and the stock didn't go down, then I probably would have covered. What had made me so angry was that I had sold out my original position. |
At Stansberry, we focus on shorting three types of companies: those with obsolete products (hard-drive makers like Western Digital), those with far more debt than they can repay (GM, Fannie, and Freddie), and those we suspect are involved in a fraud.
The best short candidate is a fraud. Once the fraud is uncovered, shares can fall to zero in the blink of an eye. But they're rare and difficult to uncover.
The next best is a company with more debt than it can repay. Once you know a company cannot afford to repay its debts, you know the value of its equity is going to zero. In these cases, shorting stocks is much safer than buying them. Making a profit on these kinds of shorts is almost a mathematical certainty – as was the case with our short recommendations of General Motors (which owed more than $400 billion) and Fannie and Freddie (which owed trillions of dollars).
If you'd like to receive our best short selling advice, I recommend you subscribe to Extreme Value and Stansberry's Investment Advisory. Also, in his S&A Short Report, editor Jeff Clark uses options to trade the short side of vulnerable stocks...
|
New 52-week highs (as of 3/22/11): HMS Holdings (HMSY), iShares Silver Trust (SLV), EV Energy Partners (EVEP), SandRidge Energy (SD).
In today's mailbag, a testimonial of successful put selling. If you haven't started selling puts, I'd recommend you try Retirement Trader, written by veteran Goldman Sachs trader David Eifrig. Have you tried his option trades? How have they worked out? feedback@stansberryresearch.com.
"I've done well selling puts over the last two years, too. My most recent were BP puts after the oil spill, and Encana, which I've sold hoping to one day own the stock at a lower cost. Last week, I finally got the courage to sell short Salesforce. I used your strategy and only shorted 20 shares and surprise, surprise, the roof did not come crashing down! I know you must get tired of urging us over and over to try these strategies, but please don't stop. I can tell you as a retired teacher that most learners need to hear things over and over before the knowledge finally sinks in. This is true for adults, as well as children. So have patience with all us slow learners! Thanks for the great investment advice!" – Paid-up subscriber Nancy
Good investing,
Sean Goldsmith
Baltimore, Maryland
March 23, 2011