The S&A Digest: Build Your Own Trader Calendar

Your daily dose of optimism... Jingle mail... Still bullish on virtual banks... Goldman hits a low... 3,150% leverage... We don't front run... Puh-doo-fa...

 Be sure to check out today's essay by Dr. George Huang. George is launching his S&A FDA Report on March 19, but we're giving loyal Digest readers a heads-up before it "goes public."

The FDA Report takes advantage of the huge price swings in biotech stocks following FDA announcements. The strategy is amazingly consistent, simple, and safe. As you'll learn, George found a way to take the risk out of biotech investing. Over the past six years, the strategy triggered 16 "buys." Take a look at the average returns:

Over three months: 27.2%

Over six months: 44.23%

Over one year: 75.84%

Over eighteen months: 84.86%

We will be running a 10-essay series explaining every step of George's strategy. Yesterday, we told you what an approvable letter is. Today, we explain the predictability of the strategy. You can literally set your trading calendar months in advance. See below for next date to write down...

 I figured after yesterday's market action, you could use a dose of optimism, so I excerpted this bit value house Tweedy, Browne published on its website last month:

Looking back over just the last eleven years, the stock market has endured some pretty grim news and still survived and prospered.

We are reminded of the meltdown in both currencies and stock markets that occurred in the Far Eastern markets of Indonesia, Korea, Malaysia, and Thailand in 1997, losing on average roughly 50% of their value. This was followed by the Russian bond default and the subsequent failure of Long Term Capital Management in 1998.

In 1999, there was the fear of a massive potential systems failure resulting from the Y2K issue. Next came the bursting of the technology bubble and the Presidential election crisis in 2000, followed by the terrorist attacks of September 11, 2001 and the year-end collapse of Enron, which preceded a wave of corporate accounting scandals. All of this leads up to today's credit crunch and accelerating housing crisis.

Despite these recurrent calamities followed by disheartening declines in stock prices, both the S&P 500 and MSCI EAFE Index compounded over this eleven-year period ending December 31, 2007 at approximately 8% per year.

 The market will always have its hiccups. But – as you can see from the chart below – the general trend is up. For instance, if you bought into the panic of 1987, you got in at the beginning of a huge uptrend for stocks.

 Mortgage REITs took a beating yesterday after several funds entered default and the Fed said it would not guarantee mortgages from Fannie and Freddie. But Wall Street remains bullish. Both Citigroup and Deutsche Bank are maintaining their "buy" ratings on True Wealth pick Annaly Capital (NLY). Deutsche likes the virtual bank's conservative leverage (at eight times equity) and Citi noted that Annaly brings in $1 billion a month in prepayments that it can use as cushion.

 If you don't think eight times leverage is conservative for a mortgage company, consider this note Dan Ferris found in the Financial Times... "This week Carlyle Capital, a $21bn vehicle with net debt/book equity of 3,150 per cent as of December, missed margin calls."

Leverage of 3,150% means for every dollar of equity Carlyle Capital invested in mortgages, it invested $31.50 of borrowed money. To trigger a margin, Carlyle only had to lose the original $1 investment, or 3.1%. With that thin a margin, banks must have figured a zero probability of mortgage problems.

 Here's a term you should get familiar with: Jingle mail... when homeowners mail in the keys because they can't afford the payments on their homes.

 It looks like Goldman Sachs CEO Lloyd Blankfein is gearing up for a loss. In a recent Forbes interview, he said, "If you're on a beach and a tsunami hits, you'll drown whether you're a small child or an Olympic swimmer." He also said, "I'm always imagining how much worse the headline about Goldman will be when we screw up if we have a quote out there claiming magnificence."

I couldn't imagine things getting much worse. Already, Goldman had protesters outside one of its holiday parties singing "Goldman the Two-Faced I-Bank" (to the tune of "Rudolph the Red-Nosed Reindeer") and "Frosty the Goldman" ("Frosty the Goldman/Was a very crafty soul"). Shares of Goldman Sachs touched a 52-week low of $157 today.

 New high: CurrencyShares Japanese Yen (FXY).

 Have a stiff drink after work today and relax during the weekend. We all need it after this week's market. How are you taking the edge off? Let us know here: feedback@stansberryresearch.com.

 "Taking a look at [that recommended stock's] gain yesterday, it is hard for me to believe no one is front running at S&A. Or maybe the principals are not front running but the secretaries are leaking the info. Or something. But I see this kind of thing CONTINUALLY with the S&A recommendations." – Anonymous

Goldsmith comment: There are factors in the market that affect a stock's price other than our research reports. Take earnings announcements for example. The stock you're referring to announced blockbuster earnings yesterday, and the stock jumped.

And we just published a study indicating that our recommended stocks don't jump ahead of our recommendations any more than they would on any given day. Click here to read it.

 "I was disappointed to hear your response to a subscriber in which you stated that your company policy bans you from owning stocks that you recommend. Although I'm sure you can list a few good reasons for this policy, I don't agree with it. Nothing would give your comments and opinions more authenticity than for us to know that you were personally buying and/or selling exactly what you have been writing about. Either you trust and believe that your employees and co-workers have the integrity to not influence a particular investment solely for their personal gain, or you do not. It is incongrous to me that after writing a strongly worded endorsement of a stock, you would not also be willing/able to purchase it for your own portfolio. For if you cannot, how can I take your comments at face value? I only subscribe to one other newsletter as such, and the author invests in the same places he suggests for his readers. There is nothing more genuine than that." – Paid-up subscriber Will Soppe

Goldsmith comment: I'm sure I'm not speaking just for myself, but I check the performance of my recommended portfolio at least 10 times a day. I check for news briefs and SEC filings several times. Most days, I don't have time to glance at my personal portfolio. Any subscriber "buys" or "sells" go out before I even think about a personal trade. And my spirits sink much lower when my recommended portfolio is performing poorly. If our personal portfolio goes down, we only lose money. If our recommended portfolios lose money, we lose respect, credibility, and subscribers. Most importantly, our readers suffer. That's a huge incentive to me to provide my readers with the best possible picks at any given time.

 Also keep in mind... there's 50 different ways to skin a cat in the market. If one of our editors decides he is bullish on oil, there are thousands of oil stocks out there to buy. Then you have options on oil stocks... oil futures... options on oil futures... oil ETFs... options on oil ETFs... private oil partnerships. That gives an editor about a million ways to get positioned for the expected rally. So he can write up his best idea and then maybe take the second best out of the million. I'll take the second best position out of a million all day.

 "My portfolio is doing quite well, thank you, because I had the good sense not to touch anything with the word "mortgage" associated with it. Namely, I did not take Steve's recommendations to buy MFA, NLY and TMA. You could see the mortgage train wreck coming by simply monitoring markit.com. markit.com continues to chronicle the carnage in the CDO and other derivatives markets. Instead, I bought puts on DSL, WM, WB, BAC, NCC, ABK, MBI, PMI, MTG, ACF and COF, among others. I also bought SKF, SRS, USO, UNG, GLD, and TWM. If you would like further details, I'd be happy to send along my other profitable picks." – Paid-up subscriber B. Fromme

Goldsmith comment: With all that trading you're doing, I'm surprised your gains covered the huge transaction costs. Kudos on some excellent shorts, B.

Regards,

Sean Goldsmith

Baltimore, Maryland

March 7, 2008

Editor's note: On March 19, Stansberry & Associates will officially release a special new investment service called The S&A FDA Report. Devised by Dr. George Huang – a Johns Hopkins PhD, former consultant to the biotech industry, and one of S&A's top health care analysts – it's unlike any investment approach we've ever encountered.

Dr. Huang and his team have spent nearly 14 months vetting it, backtesting it against six years of data, and searching for potential weaknesses. It's outperformed the U.S. stock market by a factor of seven. Read on for more details...

Build Your Own Trader Calendar

By Dr. George Huang, editor, The S&A FDA Report

Traders love biotech stocks.

No other sector offers as much volatility – the lifeblood of traders – as the biotech industry. But short-term trading professionals are attracted to one other lesser-known, though equally important, quality in these investments. Thanks to one piece of 1992 legislation, traders can anticipate, down to the precise day, when these huge, volatile trading events will take place.

You see, the Prescription Drug User Fee Act, commonly referred to as "PDUFA" (pronounced puh-doo-fa) dictates precisely the maximum time the FDA has to decide on the fate of a new drug's approval. It allows the FDA to collect fees from the drug industry in order to fund and expedite the approval process.

In exchange for the substantial fees a company pays to process its drug application, the FDA must hand down a decision within six to 10 months (depending on how desperately patients need the new drug). Thus, PDUFA dates are known months in advance, and the FDA routinely renders its decision on time.

 For example, if "XYZ" biotech company submits a new drug application on January 1, the FDA must make its decision by October 1 (under a standard 10-month review).

Typically, the FDA uses this entire time period to make its decision. It will fax over its decision to the company on the prescribed day. And depending on the outcome, the drug company's stock could move 50% or 100% in either direction...

We've developed our own proprietary method for playing these events – a strategy that offers unlimited upside and very limited downside. Our research shows that trades fitting our criteria had a one-year average return of 75%.

We've also built our own "PDUFA calendar" for 2008 with more than five dozen eligible events. The dates at the top of these essays are just some of the most anticipated PDUFA decisions this year. As I wrote yesterday, the focus of our strategy hinges on the FDA's "approvable letters." We suggest you circle these dates on your calendar and keep an eye on your inbox for our take on the situation.

Next week, I'll describe the first criteria of our trading strategy.

Good investing,

George Huang

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame

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

As of 06/21/2013