The S&A Digest: The Search for an Oil Indicator

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

As of 07/02/2013

A critical mistake… BUD sets a new record… Racism at S&A?… Why isn’t True Wealth in the top 10?… Ian on oil…

Before we move on to new topics, we must unfortunately address a critical mistake we made on Friday. We inadvertently published something that’s demonstratively false. We wrote that I personally buy and own the stocks I recommend to subscribers. This is NOT true. The mix-up occurred in our editing process. A "not" was left out where an emphatic "not" belonged. It’s a critical mistake because our corporate policy expressly forbids me from doing this.

No analyst working at Stansberry & Associates may own the stocks he recommends to you.

This, at first glance, probably appears to be a very strange rule. Assuming a writer waits a suitable period of time after a recommendation, there’s certainly nothing ethically wrong with him then buying the recommended stock. And if a writer believes his own words… shouldn’t he buy the stock?

So… why don’t we allow our writers to also invest in the stocks they recommend to you? There’s a legal reason.

The Securities and Exchange Commission has recently claimed, in open federal court (unfortunately, I was there) that it has the right to regulate any action that’s taken in conjunction with the purchase or sale of a security. The SEC thus claims to have the right to review and censor any publication if the writer also buys the recommended stock.

This claim treads upon freedoms newsletter writers won in the landmark 1985 Supreme Court case, Lowe v. SEC.

The SEC’s claims haven’t been adjudicated yet, so it’s not clear whether buying a recommended stock puts the writer in legal jeopardy. Until we have a firm idea of what the law of the land is, it makes sense not to do anything that might get us sued by the feds. That’s why, currently, we don’t allow our writers to buy what they recommend. Ironically, it is okay for our employees to buy what others in the company have recommended – and that’s what I do, from time to time.

Signs of a market top… The yield curve has been inverted for the past 26 weeks. Normally, the yield on a three-month Treasury bill is lower than that of a 10-year, because investors require a higher return to invest their money for longer periods of time. There have been seven times in the past 40 years when prolonged inverted curves have led to recessions.

Last year, Anheuser-Busch (BUD) sold more beer than ever before. The company announced that U.S. shipments to wholesalers grew 1.2% to 102.3 million barrels in 2006. The growth in sales is fueling massive share buybacks.

Fortune has named Google the best company to work for. Google offers employees 11 free on-site gourmet cafeterias, dry-cleaning, oil changes, personal trainers, haircuts, doctor visits, language classes, personal concierges, $5,000 towards a hybrid car, and weekly TGIF parties with live music. Shareholders get nothing.

Thailand is even cheaper… now trading at 5.8 times earnings. Pack your bags, Goldsmith. You’re coming to Thailand with me in search of the world’s best, cheap stocks.

New high: American Eagle (AEOS).

The mailbag is overflowing… with spite, damnation, and – rarely – praise. We’re sifting through it all, as we do every day. Send us a letter, and we promise to read it: feedback@stansberryresearch.com.

"I’m a subscriber focused on no loss of principal, while emphasizing current retirement income. I remember reading that you and Dyson were working on a publication aimed at that objective and priced around $1k/yr. Is that still in the works, currently available or no longer anticipated? If still in the works, is there a target pub date?" – Paid-up subscriber Rod Druschel

Porter Comment: Yes, we’re definitely moving forward with True Income, which will uncover safe, high-yielding bonds. We had a bit of a setback last year when we made some personnel changes. Tom had to take over The 12% Letter… but the first issue of True Income will be out before June.

In response to Noel Griffith’s inquiry regarding trading in Australia, we had dozens of subscribers write in. They recommended three brokers: Interactive Brokers, OptionsXpress, and TD Ameritrade.

"In our top 10, why don’t you have any from the True Wealth letter? Although I haven’t made any money yet, I am hoping to make enough to pay for the letter." – Anonymous

Porter Comment: Well… technically, that’s simple. Steve’s open positions in True Wealth haven’t gone up as much as these 10 other recommendations. But perhaps a deeper and more satisfying explanation would be that in True Wealth, Steve is aiming for totally safe, double-digit returns. He’s not aiming to hit the ball out of the park. (You’ll notice that in his Sjuggerud Confidential letter, he does hit it out of the park.)

"You recommended it and I did it. I put 95% of my portfolio in this trade [Boston Properties (BXP)] and made $7,000.00. It was stupid on my part to put so much into it, but it turned out ok. I guess even a blind squirrel gets a nut once in awhile. Keep up the good work." – Paid-up subscriber Gus Harko

Porter Comment: That’s crazy.

"Today, I received an e-mail from Porter Stansberry suggesting that I fork out an additional $2,500 (his ‘gift’ to me) for something called the Phase 1 Investor, which is trumpeted as some of the best research you have ever done. If I paid ‘a one time fee to receive ALL of [your] best research, for as long as [you] publish it,’ I think I and other Alliance subscribers are entitled to just that – ALL – which should include the Phase 1 Investor and any other research you may happen to publish in the future. That is what I believe we were promised." – Paid-up subscriber John Finch

Porter Comment: We make it very clear, in all of our promotional materials for the S&A Alliance, that Phase 1 is not included. (It’s the only publication we don’t include.) The reason is very simple: We spend a fortune on each Phase 1 recommendation, which inevitably involves hiring outside medical experts – who don’t come cheap. Also, the conference calls we frequently conduct with all subscribers are very expensive on a per name basis. So we don’t include Phase 1 in the Alliance package.

"I am a financial advisor with clients based in Hong Kong, London and Paris and headquartered in Hong Kong. I have been reading your daily column for a few months now and I am today utterly SHOCKED to read the comment you are doing in the opening of your column. In my days in the business, and with the experience I have, I have NEVER read such openly racial comment as: "the Chinese are about to start paying you for a change." Who, exactly, do you think you are to do such remark? Don’t you realize that, with the help of the Internet, your column is read all over the world and ESPECIALLY where there is money today, meaning in Asia? If you think this is the best way to attract (and keep) your clients, let me advise you in changing your strategy because you just lost one, and one with a very, very big address book!"

– Paid-up subscriber Carolyne Borel

Porter Comment: A racist comment? To note that China has, for the better part of 15 years, manipulated its currency against the value of the dollar and built its entire economy by exporting, at a gross advantage, into the United States? And to try to exploit the economics of this situation for the good of our subscribers, by recommending they invest in selected Chinese companies? That’s racist?

"I was quite surprised to read your comment about Romanian immigrants and gypsies. It is odd that you assume that Romanian immigrants are gypsies and that if they are stealing something they must be gypsies. I am sure that you wouldn’t make similar comments based on stereotypes of Jews, African-Americans, Asians, or Italians. Gypsies don’t have the same political clout as other ethnic groups, but that doesn’t mean they should be the subject of racist wisecracks. As an American Jew, I am aware of the prejudice against gypsies that resulted in the same genocide under the Nazis that we Jews were subjected to. Comments like yours demean your publication." – Paid-up subscriber Paul Kleinman

Porter Comment: We reported the facts – gypsies were stealing copper from public works in Italy. Had Jews, or Africans, or Martians been caught doing this, we would have reported the same.

Regards,

Porter Stansberry

Baltimore, Maryland

The Search for an Oil Indicator

By Ian Davis

It’s probably the most important market in the world. It’s a deeply cyclical commodity. And it’s produced in parts of the world that are terrifically unstable…

Oil should be the perfect commodity to trade.

To find a reliable oil indicator, I looked into global demand, specifically the demand caused by the transportation sector – the largest oil consumer. I figured some correlation should exist between the market performance of the automobile industry and the price of oil.

Developing the Indicator

The U.S. automobile index (comprised of U.S. carmakers) is not correlated to the price of oil. This seems surprising at first, since transportation is responsible for about two-thirds of the country’s total oil consumption, and the U.S. is by far the largest oil consuming country. However, most new cars sold today in the U.S. are replacing vehicles that will no longer be in use. Already saturated with automobiles, the U.S. market is large but mostly static.

The Asian automobile index (comprised of Asian carmakers) is well correlated to the price of oil. As you can see, since 1986 (the earliest data point in my index), the price of oil has done a fair job of tracking the DataStream Asian automobile index. Asia (and China in particular) is rapidly industrializing. With this industrialization come better roads and more money to spend on cars, leading to a higher demand for oil.

This is exactly what I look for when developing an indicator: A good correlation with a logical explanation to back it up.

To turn this correlation into an indicator, I used a two-part model based on both the trend in the price of oil and the trend in the Asian automobile index. Both trends need to confirm one another. If the price of oil is rising, but the automobile index is falling, then the oil rally is in jeopardy. Conversely, if the price of oil is falling, and the automobile index is rallying, then we also want to stand to the side. Several factors dictate the price of oil, and despite the bullish implications of a rallying automobile index, it’s best to wait until oil finds its bottom.

Conclusion

Using this indicator (buying when both indexes are above their one-year moving averages and selling when one or both fall below their one-year moving averages), you would have taken part in every bull market in oil since 1987 and made an annualized return of 21.9% during the eight years you were invested. This is significantly better than the annualized buy and hold return of 6.1%.

You would have made 10 trades. Only 60% of these trades were profitable, but the losing trades were all very small. The largest of the losing trades was only -7.8%.

Currently, the trend in the Asian automobile index is up. However, since the trend in oil has yet to break out, I recommend sitting on the sidelines until oil begins to rally.

Update on Previous Picks

On November 6, I recommended Toll Brothers (TOL) at $28.05. TOL closed this Friday at $31.06, up 10.73% since my recommendation. After rallying strongly though most of November, this stock has been mostly flat since the beginning of December. I recommended a six- to 20-month window for this trade. We are now two months in, and I believe it will continue to be profitable. Toll Brothers remains a HOLD.

On November 13, I recommended Home Depot (HD) at $36.62. HD closed this Friday at $39.79, up 8.66% since my recommendation. The stock peaked recently at $41.84 before falling to its current price on news of the retirement of HD’s CEO and the large severance package that he will receive. Despite this short-term drama, the environment for retail home-improvement stocks, and Home Depot in particular, remains bullish. Home Depot remains a HOLD.

My most recent recommendation, made on December 4, was Thai Fund (TTF) at $10.92. TTF closed this Friday at $9.78, down 10.44% since my recommendation. The stock is down 18.43% from its high of $11.99 during our holding period. If the stock closes at or below $9.59, it’ll hit our 20% trailing stop, and I will recommend that you sell your position.

So, what’s going on in Thailand? I recommended Thailand because of the cheap valuation of its stock market, the rising business sentiment, and the assumption that the situation in Thailand was going from bad to less bad. Unfortunately, the situation in Thailand so far has gone from bad to slightly more bad. The new government implemented draconian controls on foreign capital (this sent the Thai stock market into a tailspin, at which point the government decided to remove the restrictions on foreign investments in equity).

Additionally, a series of bombs went off in Bangkok on New Year’s Eve, probably set by rebel factions supporting the ex-prime minister. These events have left investors worried both about the fitness of the new government and the stability of the country in general. Right now, I believe there are a lot of ways in which the situation in Thailand could get better and not a lot of ways that it could get worse. Thus, I think there is quite a bit more upside potential than downside risk. Unless we hit our trailing stop, the Thai Fund will remain a HOLD.

Good investing,

Ian Davis

January 8, 2007

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