The perfect setup in bonds...
The perfect setup in bonds... Something important to watch in oil... Reader feedback: A lot of questions about bonds...
I (Porter) took on the task of writing about the corporate-bond market with a lot of fear. I thought it would be almost impossible to explain the advantages that discounted corporate bonds hold for investors who normally invest only in stocks. I wrote five Digests – and more than 20,000 words – about the topic, sharing everything I think is important for investors to know.
You can boil down the message to this: When corporate bonds trade at wide discounts to par (sub-$70), they offer investors far superior average capital gains, with far more income, than stocks. And they do so with dramatically less risk.
The reason lies in the basic disconnect between bond investors (typically large institutions that value safety and reputation above all else) and equity investors (who typically don't follow bonds and tend to value liquidity above all else).
I was worried about trying to explain the opportunity that's emerging in bonds because the last time I tried to do this (back in 2008), I encountered an unbelievable amount of resentment and a never-ending stream of mostly senseless comments. To say people didn't "get it" would be a huge understatement. Most subscribers wouldn't even attempt to buy a bond. Some of them, I bet, simply didn't believe that these kinds of opportunities were real. It was a nightmare.
As you know if you've been reading my work for any length of time, I'm not afraid of people saying bad things about me or the things I publish. Writing a financial newsletter that's published on the Internet is the ultimate "glass house." My track record is public and everyone in the world with an Internet connection is entitled to throw a stone. I don't take any of it seriously.
In fact, I print almost all of the negative feedback (see below) that we get, because it's entertaining. I've also long believed the best way to diffuse unwarranted criticism and totally false accusations is to laugh at it.
There's no point in trying to convince someone that you're honest or smart. Only a fool says such things. It's either apparent from your work or it isn't. Besides, printing up the sometimes crazy ideas of our detractors and their frequently rude e-mails serves a purpose. It's like my high school water polo coach once told me after I turned the ball over three times in a row during a close game: "Nobody is completely useless. You can always serve as a bad example."
It wasn't all the vitriol that bothered me. What drove me nuts was how many people missed one of the greatest investment opportunities I've ever seen (maybe the greatest) because they couldn't or wouldn't follow simple advice and clear strategies. We launched our last bond advisory (True Income) in early 2008. Within a year, we were able to buy bond funds that were trading at half of net asset value and yielding more than 20% annually.
In early 2009, high-yield corporate bonds were trading at prices that were so low, they were yielding 22 percentage points more than comparable-duration U.S. Treasury securities. This was like a gigantic pile of free money – enough to create huge fortunes. And it was easily available to any reasonably affluent investor who was paying attention. The recommendations from our bond advisory during this period included a 700%-plus winning bond recommendation. Of the six distressed bonds our analyst recommended during this period, none ended up in default. And yet, no other product I've ever published led to more vociferous complaints – complaints that still come into our feedback e-mail, even now.
As I explained on our recent webinar on Wednesday, it was like I had hired the 1927 Yankees to play baseball for my subscribers and they decided to fire all of the players instead. It was amazing to me how many subscribers canceled our product (more than 10,000... seriously) and how many complained bitterly about the advice we offered, despite the fact that it was overwhelmingly profitable.
And so today... as I watch the corporate-bond market begin to "roll over" and yields (and default rates) begin to rise... I know it's time to start looking carefully for good opportunities in the bond market. But until last week, I was so afraid to even mention it to my subscribers. I just didn't want to go through all of that again.
This time was completely different, though. Rather than launching the product with a bunch of advertising, I introduced the idea through five lengthy Digests. (If you missed the series, you can read it here.)
"Porter, won't that dramatically reduce our sales?" asked my staff. "If you tell them everything you know about bonds, they might not subscribe... and who is going to read all of these long Digests?"
I told my staff that I didn't care if anyone read them or if no one subscribed. I don't want anyone to subscribe to Stansberry's Credit Opportunities, unless they understand how the bond market is dramatically different than the stock market... unless they can appreciate and use the work we're producing. Having no one buy this product would be a lot less painful to me than having to refund money to thousands of folks who should be buying bonds, not stocks.
But guess what happened? Taking the time and making the effort to genuinely explain how bonds work – how they're different from stocks, a few of the key strategies to being successful in bonds, and not even mentioning any current opportunities – was a success.
A huge number of people read those Digests and a reasonable number of people subscribed to our brand-new letter, even though I insisted we would only sell it on a lifetime basis. Again, I just don't want to go through what happened last time. I've gotten more positive feedback about those five Digests than anything other series I've ever written.
I'm thrilled. I'm so happy and excited that I was finally able to "reach" my subscribers and show them how interesting and profitable the bond market can be. Once you understand it, it's far more interesting than the stock market.
Let me give you an example... This is a situation we're working on right now for the second issue of Stansberry's Credit Opportunities.
There was a problem at a publicly traded company last week. It's a big problem – at least, for shareholders. The senior executives are alleged to have engaged in a bit of accounting fraud. They were probably gaming the numbers to earn higher performance-bonus income. As the news has filtered out this year, the stock is down more than 80%. That's a wipe out for most folks.
The interesting thing is, these accounting shenanigans appear have no effect – absolutely none – on the company's cash flows, although we're still digging into it. The company has submitted new audited financial statements and expects to be profitable this year. In fact, you'd be hard-pressed to find a business with better operating metrics: Operating margins are almost 50% and it has virtually zero capital expenses. It's the perfect kind of capital-efficient stock we love to buy.
Would you buy a stock that's down more than 80% and has just finished reporting a whole truckload of accounting irregularities? Maybe you would. But you certainly wouldn't do so unless you had tremendous assurances that all of the crooked people were gone and their previous misdeeds had not permanently damaged the company's goodwill.
My general advice would be to wait until the company had completed a new financing. Let the bankers do a lot of diligence on your behalf. Let them figure out if there are any more "bad apples" left in the barrel.
But what about the bonds? What if there was a bond that had been issued by this company? Bonds are legally binding contracts. Their values aren't determined (at maturity) by whether investors trust the company's management. They must be repaid, in full, at their par value ($100). And bondholders must be paid their coupons, in full and on time. This company's huge profit margins and its massive cash income isn't in dispute. As a result, there is zero chance, in our view, that the bondholders here will not be paid, in cash and in full.
If you could buy these bonds below par and with a near-term maturity, wouldn't you do it? What if there was a fully legal way to invest in this kind of a situation where you are legally guaranteed to make a profit and be paid a healthy amount of income, and you're still able to profit hugely if the accounting troubles really are over and the stock bounces back?
That is exactly the situation we are researching today. And these bonds have fallen almost 50%. Incredibly, they are trading below par. It wouldn't surprise me if we're able to make 11%-12% profits on this situation in the next seven months. That's more than 20% on an annualized basis, all while taking meaninglessly small risks.
Our logical downside is to be repaid at par, earning a small capital gain and a few percentage points of yield. I'm confident we will either make a fair return on our capital (almost 10%) for few months... or we will make a killing. Losing money? In my mind, that's almost impossible here.
Now, you may be wondering... how did we find this opportunity? Why don't equity investors know about it yet – because, if they did, the discount to par wouldn't exist. The answer is, most investors don't pay any attention to bonds. And there aren't any individual investors (to my knowledge) that have built the kind of analytical engine we have.
We start by looking at data on more than 40,000 separate bond issues. We then cut down that universe by looking only at bonds that mature within five years and that have significant size (more than $300 million issues). That leaves us with a few thousands bond issues to study, from around 1,000 different issuers.
The opportunities like the one I describe above jump out at us because we model the entire market by comparing our proprietary credit score against bond prices and other credit agencies' ratings. It's easy for us to spot anomalies like this – opportunities that are totally hidden from 99% of equity investors.
You may have heard that we're charging $5,000 for a subscription to Stansberry's Credit Opportunities. Believe me, that upsets a lot of people who want this kind of research but who just can't afford it. So why did we charge so much? Well, this subscription will never expire. Our subscription term is forever: As long as we're publishing, you'll receive our work. (There's a small maintenance fee each year to make sure that we're able to cover all of the fulfillment costs.)
You should also know that you can't invest in bonds without a lot of capital – at least, I wouldn't recommend doing so. Bonds have a par value of $1,000. Brokers usually require you to purchase a minimum number of bonds – typically, the minimum is five bonds. In my opinion, building a diversified bond portfolio requires at least $50,000 in your brokerage account so you can safely dedicate about $15,000 to your bond investments.
But this bare minimum might not be feasible if you are only able to buy one bond at a time. So as I've been saying, having a good bond broker who is willing to work with you is important. Buying bonds is harder than buying stocks – you really have to understand that to do well.
All of these things factor into our price. But, just consider... our research costs about the same as buying five bonds. That is, for a lifetime of bond investing, during which you will probably invest in hundreds of bonds, we're charging the same thing as it costs for you to buy just five bonds. On this basis, I firmly believe our work represents great value.
This change in the way we introduced this idea to you (with education, not with dozens of "hype"-filled e-mails) and the way we're offering it for sale (only on a lifetime basis, with a limited refund period) represents the future direction of my company. Thanks to the support of our loyal lifetime subscribers, our business has reached a point where we do not have to market aggressively anymore. We can survive happily on their support. Thus, we can focus more and more on hiring better analysts and building better tools – like we've done here.
As you'll see, this new model will be better for the subscribers who enjoy, appreciate, and can afford our work... It will help us to avoid wasting our time and yours, and it will help avoid wasting millions of dollars on marketing expenses to reach customers who simply don't really want or can't really use our research. So... you won't be getting a dozen e-mails a day from us anymore... but it will become slightly more expensive to receive our work. That's a great tradeoff for anyone who values our research. And I'm tired of trying to convince the folks who don't.
Oh... one more thing... as part of this change, we won't normally be selling our elite research services like Stansberry's Credit Opportunities individually. We're going to focus our marketing efforts on selling memberships in our Alliance programs (where you get some or all of our products on a lifetime basis).
So when we close the current offer for Stansberry's Credit Opportunities at the end of this month, you won't hear any more about it (to the relief of many of you, no doubt). But you won't be able to buy it, either... not unless you're ready to join one of our Alliance programs. This is all part of our desire to build a better organization that's exclusively focused on serving its existing customers. To learn more (and to subscribe before we close this offer), please click here.
Oh boy... I bet a lot of subscribers thought I was completely full of B.S. when I wrote a few months ago that the "Peak Oil" nutjobs almost got it right. They just forgot a word. Instead of worrying about running out of oil, they should have been worried about running out of oil storage.
Well, I was right on the money. Despite huge cutbacks to drilling in the U.S., the Saudis and other OPEC members keep pumping as much oil as they can in a desperate bid to maintain their market share in the U.S. Land-based storage is nearly at capacity globally and now, according to the Financial Times, we're even running out of ocean-based storage (boats). This sets the stage for a truly epic bottom in the price of oil... and in gasoline prices, too.
Sure, it's great to have "nailed" such a big macro call on oil. I've been writing about how Peak Oil was nothing but clap-trap since at least 2006, when I could see that natural gas production was soaring and was going to boom. Likewise, we've been writing about the U.S. oil production boom since 2010 and we've been predicting big trouble for oil prices since 2011.
I was the first analyst anywhere to predict oil prices around $40 a barrel. But let me tell you, I wish I was wrong. Commodity price busts are painful, and tremendous damage is coming to our economy. The collapse in retail stocks like Macy's, Nordstrom, and other department stores is just the first sign. We desperately need a president who is willing to take the shackles off of our oil producers. If we could sell our oil anywhere in the world (like the Saudis do), we could compete and win. The resulting economic boom here would be incredible. Hopefully the next president won't be economically illiterate... but I'm not holding my breath.
New 52-week highs (as of 11/12/15): none.
In the mailbag, some vitriol about our new product... and a few good questions, too. Send your e-mails – good and bad – to feedback@stansberryresearch.com. It's impossible for me to respond individually, but I do read every note.
"After sitting through another 50 minute 'presentation,' this time for your new Stansberry's Credit Opportunities service, I should not have been surprised to learn that you were asking a very high cost of membership for this new service. Silly me, hoping that this offering would be one that I could finally participate in. Bummer, another wasted hour, but I did learn a lot about bonds that I had not considered before. So for that I thank you.
"However, having to then listen to you bad mouth those of us who don't have the funding to play in your sandbox was a bit much. However, it did make me realize that I'm wasting my time with Stansberry Research because of the negativity I heard. I will follow up with a letter to your offices canceling all of my piddling little subscriptions, since you have such low regard for the $99 subscriber. Thanks for making me see the light, or lack thereof, at Stansberry Research." – Formerly paid-up subscriber J. Nelson
Porter comment: We provide unbelievable value for small investors via an entire lineup of super-high-quality, low-cost financial newsletters – including Stansberry's Investment Advisory, True Wealth, Retirement Millionaire, and the Stansberry Resource Report.
Meanwhile, we lose a fortune marketing these newsletters, typically more than $30 million a year. We only make a profit on these investments by earning your renewal or by selling the wealthy investors who subscribe to these publications one of our elite publications.
Take for example, Stansberry Venture editor Dave Lashmet's work over the last 16 years.
What he has done for investors is simply incredible. I've had many investors tell me they made millions by following Dave's work. Here's just one example...
Years ago, he found a small business, called Illumina, whose technology was greatly increasing the speed at which genetic codes could be broken. This technology was allowing scientists to trace human biology back to the genome. And they, in turn, were transforming medicine, particularly the fight against cancer.
When Dave first recommended the stock, it was a tiny company with a market cap of just $195 million. This week, the company was named to the S&P 500 – it's now one of the 500 largest and most important businesses in America, with a market cap of $24 billion. The potential gains for investors who have followed Dave's recommendations are astronomical.
Now, I'm not citing Illumina just to claim a huge gain for our track record. The fact is, we closed that position before the big returns came to pass. The point is that Dave understood the magnitude of Illumina's innovation… and he delivered that insight to subscribers long before most investors understood what was happening.
Remember, this isn't a hypothetical example. It's exactly what Dave picked for our readers. And this is far from the only example of a company Dave wrote about that eventually went up five or 10 or even 60 times. So how much does Stansberry Venture cost? We charge $5,000 per year for it. We could easily charge 10 times more. Nothing like it is available on the market for individual investors. Even at $50,000 a year, wealthy investors would much rather subscribe than try to hire their own Dave Lashmet or spend a fortune investing in a high-tech hedge fund.
If the price of our elite products makes you so mad that you cancel your monthly newsletter... then I guess you don't understand the value you've been getting or where the money to pay for it comes from. And that's too bad. But mostly it's bad for you.
"I joined Stansberry's Credit Opportunities last night after the presentation. I reviewed the materials and then called my broker, Schwab, to find out more about placing a trade. When I reached the bond desk, a very nice man took my call. I told him the bond I was looking for and he said 'oh is that a Stansberry recommendation?' and I said yes.
"He then went on to tell me that I should be very careful... He asked if you 'knew anything about bonds.' He then told me that several other people had called about the bond you recommended and that you were giving out the wrong CUSIP number, and that should make me very suspicious. I asked him if I gave the right CUSIP and he said yes, and I said well maybe the other people aren't paying attention and got the number wrong. [Editor's note: We definitely did NOT publish the wrong CUSIP number.] Then he told me about some guy at [another newsletter company] who lost his clients millions of dollars. He mentioned a bond he told them to buy at 94 that now trades at 32... I just wanted to let you know that the mainstream investment houses are concerned about the little guy." – Paid-up subscriber Jeff P.
Porter comment: Here's a firm that's happy to take your stock trades, no matter how risky the stock in question. You buy anything, even penny stocks, from Schwab and no one will say a word to you. But... try to buy a safe bond that's trading for $0.70 on the dollar and it has all kinds of scary warnings? Schwab knows – better than just about anyone – that individual investors, on average, do terribly in the stock market. I wonder why it doesn't want more of its customers to buy bonds. That seems fishy to me.
But... it doesn't bother me.
It boggles my mind that so many people are eager to criticize me (and my firm) and think nothing of disparaging us by passing along total nonsense ("I read it on the Internet, so it must be true"), but meanwhile remain totally unwilling to read a single issue of my newsletter.
I am all for someone criticizing my work. If the criticism is valid, I will use it to improve our products – it happens all the time. But I completely dismiss anyone – especially a damn bond salesman – who says a bunch of B.S. about me or my company who hasn't read our work. So the next time you hear someone bad-mouthing us, just ask him: How many of Porter's newsletters have you actually ever read?
"I am sure many of your readers ran for the hills after the 2nd or 3rd article on bonds. I was on the hill watching others run towards me after the first one! But, then I realized here is an opportunity to at least learn about a subject I knew little about, so I read all of them, taking notes. Here are my questions, as simple some of them may be (feel free to comment off-line, if this is too many questions):
1. If the current credit debt is significantly greater than in 2007/8, do you expect the percent of defaults on non-investment grade bonds to also be greater than Moody's current estimate of 21%? Did I hear you say on the webinar that they could be as high as 30+%?
2. Do you tend to pay more for a bond that has the convertible feature?
3. Here's my simpleton question: Is 'the highest yielding bond' the same as the 'highest interest paying bond'? And 'coupon' is just a technical term for interest?
4. How can you determine how much debt a company has outstanding, just in bonds? Is it a line item on their financials, or do you have to dig for it?
5. You are also correct in that I do not look forward to calling a bond broker, particularly, if I have to go calling around other brokers as well.
6. You said in article 3, that you may not be able to sell bonds that go bad... that the only way to limit risk is to limit your size position. What do you consider to be a small number of bonds?
7. To that end, regardless of percentages of my portfolio, do you have a minimum figure in your head which says, 'if you don't have this much to put into this, don't bother.' I hear you and agree on the importance of diversification, but if I can't afford to get into 12-15 different bonds, I'm opening myself up to greater risk." – Anonymous
Porter comment: Here are my answers...
1. Yes. The world's leading expert, Marty Fridson, is my guide. He was my guest at the Stansberry Alliance meeting in Casa de Campo in 2014. I took him fishing down there and we spent a whole day in a beautiful 70-foot Hatteras yacht talking about the bond market and catching blue marlin. He expects 30%-40% of all outstanding "junk bonds" to default in the next credit-default cycle, and total defaults to exceed $1.6 trillion worth of bonds. It is going to be a tough market – but it's in conditions like these that the best opportunities arise. I don't believe it will be difficult to avoid most of these defaults, but, you should know, it's also inevitable that some of our recommendations will default. You can't reasonably expect to dodge ALL the potholes. So make sure you diversify.
2. Other investors do, but I do not. I don't recommend buying corporate bonds above par. And, most of the time, the bonds we recommend will be well below par. In these situations, the market completely ignores the value of the embedded call option. It's one of the truly free rides on Wall Street.
3. You lost me here. Your question doesn't make sense to me, but I'll try to explain how interest rates are derived from bonds. The coupon is fixed. These nominal payments (cash amounts) are not interest rates. Coupons are fixed payments that each bondholder receives, typically twice a year. The value of these payments, judged against the current price of the bond, is what generates the interest rate of the bond, or its yield. This income, plus the potential capital return when the bond is redeemed at par, is what makes up the "yield to maturity," which is the primary way to figure out which bonds are cheap and which are expensive. Look at the "deal boxes" we will publish with every bond recommendation in Stansberry's Credit Opportunities. We will spell out exactly how much you will be paid and when with every bond we recommend.
4. Any good broker can tell you this information. We use a Bloomberg terminal to look up the debt schedule that contains all of a company's bonds. I've also heard that Interactive Brokers does this for its clients using its normal web interface, but I've never seen it.
5. It's no big deal. Just remember, you're the client. If your broker isn't nice or helpful, just hang up and find a new one.
6. This is the most important thing to understand: You cannot expect to trade bonds like you trade stocks. Especially if a bond is being downgraded or it's getting more risky to own, most bond owners will flee and few people will buy. Therefore, you have to try to avoid default at all costs. And if you get stuck with a bond that defaults, you may be better off waiting for a recovery than selling in the market. I personally wouldn't consider buying discounted corporate bonds unless I could reasonably expect to buy bonds from 20 different issuers.
7. I'm conservative, so I wouldn't consider buying discounted corporate bonds with any money that I couldn't afford to lose. And to give myself the best chance to win, I would be heavily diversified, as I mentioned above. I don't think you can do either of those things in a responsible way without at least $50,000 in your brokerage account – but that's just my opinion. In fact, I tell people all the time that if you haven't developed the discipline to save at least $50,000 in cash, you're unlikely to possess anything like the discipline required to be successful as an investor. Nobody listens to me, though.
"Porter, this isn't meant to be hate mail. I have gotten so much from my subscriptions. What I have learned from everything has been huge. But this particular situation regarding the bond crisis was unexpected. If for no other reason than the fact that the business model is flawed. There are two specific things that are obvious. It has been presented as a cycle. Yet the sales pitch portrays it as lifetime. We are seeing an oxymoron here. In fact the track record from the past gives the cyclical version credence. Whereas lifetime has no credibility.
"Actually, lifetime speaks toward the length of the cycle. Going into the webinar I was willing to pony up $2000 for a subscription. But based on how it was presented there was no way. In all honesty this didn't fit the Stansberry business model. It smacks of an easy money approach... I would like this criticism to be nothing less than positive. Maybe I am seeing things in the wrong perspective. If that is true I apologize. All of what was presented leading up to the webinar was exceptionally good. It reminded me of all that I have learned about bond ownership from the past. To me that was very good. It is why I have such great faith in Stansberry products. Now that I have had a few days to research all of this on my own I realize that I can do this on my own and I appreciate that. I have found resources that I can use on my own. Also my brokerage firm is second to none. As always, I so appreciate all that you have taught me over the years. Any dollars I have spent have been returned many times over." – Paid-up subscriber Jeff Spranger
Porter comment: Jeff, I'm sorry you didn't find our offer compelling. I decided to limit the offer to a lifetime subscription only because I believe that the major cycle we're tracking will last three or four years. I want the opportunity to serve our subscribers across the entire cycle.
I also think offering subscriptions forever, as opposed to for a single year, better aligns our incentives. We won't have to try to make a killing right away for our clients, who have proven their long-term interest in our work. That will absolutely give us the ability to do a much better job for our subscribers. This kind of offer also makes our products affordable – as long as you stick with them.
Over a decade, even this bond letter at $5,000 is fairly cheap. Even after this cycle ends, I'm confident we can still find a bunch of terrific opportunities in the bond market – like the convertible bond I wrote about above. I want to encourage people to stick with us.
Finally, most of all, knowing how expensive bonds are to buy, I simply wanted to make sure that we priced this product in a way that would only appeal to the customers who can truly afford to use it. I'm glad you learned something from the essay series and I hope you'll do well with your own bond investing.
Regards,
Porter Stansberry
Baltimore, Maryland
November 13, 2015
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