Two of the Most Important Trends in the Investment World Today
Two of the most important trends in the investment world today... The largest asset manager gets even larger... 'The incredible shrinking stock market'... Your chance to partner with some of the world's best investors... 'Last call' for The Atlas 400... P.J. O'Rourke: The Tax Reform We Need and Want, Part I...
This morning, investment-management firm BlackRock (BLK) reported quarterly earnings...
As you may know, BlackRock has been the world's largest asset manager for nearly a decade. It dominates Wall Street. In fact, founder and CEO Larry Fink was recently asked if he was the most powerful man on Wall Street. His only quibble was that its offices are in Midtown.
But we don't bring this up to discuss the firm's earnings...
You see, alongside its latest results, BlackRock reported an astonishing achievement, even by its standards. It noted assets under management ("AUM") have now soared to an all-time record of $5.4 trillion.
We hear a lot of big numbers tossed around these days... $1 million – or even $1 billion – isn't as impressive as it used to be. But $1 trillion is still an unfathomably large number for most folks. Consider this: One million seconds is equal to about 12 days. But one trillion seconds is more than 31,000 years.
How did a single firm rack up $5.4 trillion of investor money?
In large part, by leading a trend that is radically changing the investment world.
Many folks don't pick stocks anymore. More and more, they prefer to collect the average market return (less fees) by buying index funds. And BlackRock has become a leader in low-cost index funds and exchange-traded funds (ETFs).
BlackRock runs some actively managed funds, but it owes its growth to the rise of "indexing."
This trend has been celebrated by many in the financial media. And for many folks, investing in index funds is an improvement over high-cost mutual funds that rarely beat the market. But you likely haven't heard about one of the biggest risks to index investing.
In short, the size – and quality – of the stock market has been quietly declining...
Forbes has called it "the incredible shrinking stock market"...
In 1996, the U.S. stock market boasted more than 8,000 publicly listed companies. Today, that number has fallen to just 3,600.
Thousands of firms have "disappeared" via private buyouts and mergers. And they're no longer being replaced by as many new ones.
Today, innovative startups are staying private longer... or no longer going public at all. Instead, these firms take money from wealthy investors in markets that aren't available to regular investors.
But as we mentioned, this trend isn't just reducing the number of stocks in the market...
It's lowering the quality – and therefore, the potential return – of the broad market, too.
After all, do you think these institutions and skilled investors choose the worst investments for themselves? Of course not. They buy the most profitable businesses and best investments, take them private, and keep them out of the hands of everyday, public investors.
Over time, this leaves investors in index funds holding the "junk" that private money doesn't want. And fewer quality businesses means lower market returns.
So what should you do if you don't want to settle for low returns in index funds and ETFs?
First, stay with us...
Of course, we're biased. But we believe our investment research is among the best available anywhere, at any price. And high-quality research will become more and more important for individual investors as the universe of great companies continues to shrink.
Second, we recommend taking advantage of opportunities to shift these trends in your favor...
For example, our colleague Dr. David "Doc" Eifrig has found a simple "backdoor" way to partner with some of the best private-equity investors in the world.
Doc says folks who take advantage of this opportunity could see capital gains of 150% or more in the years ahead... And they'll collect an income stream that's three times higher than average publicly traded S&P 500 companies while they wait.
But unlike most private-equity investments, you don't need connections or millions of dollars in capital to take advantage. Any regular investor can participate.
Doc will be publishing all the details on this opportunity for the first time tomorrow – Thursday, April 20 – after the markets close. And you can be among the first to receive it. Click here for the details.
We'll close today with a short note from our friend Gray Zurbruegg, director of The Atlas 400...
When I (Gray) was a kid, my best friend lived across the street from me.
We used to play tag at recess and ride our bikes together after school. In high school, my best friends were my football and baseball teammates. We traveled to games and chased girls together. In college, it was the same thing. I was closest with the people who were literally close to me. We slept in the same dorms… went to class together… worked together.
Somewhere along the way, my trajectory changed. I developed a core set of ideals, threw myself into my career, and achieved some professional success.
More important, I became different from everyone I had grown up with. I had different values, different goals, and a different way of looking at the world.
When we're young, the only thing that matters is proximity. But at this point in life, close relationships are much harder to come by. It's difficult to find people who share your values and have similar professional success. You're lucky to find a handful in a lifetime. Surrounding yourself with a network of people like this... well, that's almost impossible. Almost.
In 2009, a group of us felt this void – the absence of meaningful relationships...
So we decided to do something about it. We created The Atlas 400.
What started as a small club with a few close friends and colleagues has evolved into a group with more than 100 members across 14 countries. The Atlas 400 is comprised of the most interesting and respectable people I know. They come from various backgrounds and professions – authors, oil tycoons, corporate executives, entrepreneurs, hedge-fund managers, rocket scientists.
Regardless of profession, everyone shares one major similarity: They got where they are through hard work. Nothing has been handed to them. Atlas members understand what it takes to be successful. They value responsibility and freedom.
This might sound like an intimidating group of people. But it's not. Every applicant to The Atlas 400 goes through a comprehensive interview process. We know exactly what kind of member we're looking for. And successful applicants find comfort knowing that our members approach life in a similar way.
These days, there's no reason to limit your social circle to your neighbors and coworkers. Imagine a group of like-minded people from around the world... who gather not just to play golf and socialize, but to experience the world in a radical new way. There's a whole universe of those people out there. They're members of The Atlas 400.
We bring these people together to exchange ideas, enjoy new experiences, and make meaningful relationships...
We do this by going on amazing, life-changing journeys around the world... like last year's adventure through South Africa and Zimbabwe... or exclusive access to a Formula One racetrack.
These trips are a great way to facilitate the true meaning of Atlas: to get people out of their daily routines and comfort zones... and place them in a faraway land with a group of like-minded people. That's the best way to build friendships and make lasting relationships.
But time is running out...
We only accept new members twice a year. And the spring deadline is on May 5 – the same day as our annual meeting at the St. Regis Hotel in New York City. It's one of my favorite events of the year. Nearly 100 members and their guests gather for two amazing evenings in the city. It's a fantastic experience.
This club is for successful people. The initiation fee to join is substantial ($30,000), and our excursions aren't cheap. But if you're at a point in your life where meaning is paramount, and you're in a position to enjoy the fruits of your labor, I urge you to apply. If you'd like to learn more about this opportunity, simply click here. I look forward to hearing from you.
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New 52-week highs (as of 4/18/17): National Beverage (FIZZ), Cedar Fair (FUN), JD.com (JD), McDonald's (MCD), and Annaly Capital Management (NLY).
In today's mailbag, a longtime subscriber shares what he has learned from our research. What's on your mind? Let us know at feedback@stansberryresearch.com. And be sure to read on below for a brand-new submission from bestselling author and Digest contributing editor P.J. O'Rourke.
"Porter, your consistent message to us subscribers is that 'there is no teaching, only learning.' So I thought you might be interested to see how a long-time Alliance member culled advice from several current Stansberry Research newsletters and synthesized it into a trading strategy that solves a particular problem. I set out to find a way to more fully profit from your Dirty Thirty trades while maintaining just a comfortable amount of capital at risk.
"One problem option owners face is we must correctly predict three things to make a profit: the direction, magnitude, and timing of the underlying stock's move. If we misjudge any one of the three, the time decay progressively swallows up our position's value and could eventually cause it to expire worthless. I knew there had to be a way to reduce the risk in the trade by making it a combination trade similar to the Stansberry Alpha put-call pairs, but on the short side.
"I purchased small positions in a few of the LEAP puts you recommended to the Big Trade subscribers. As you've stated, it only takes a few Big Trade winners to multiply a speculative investment as much as ten-fold. So I'm thinking what's better than betting on a ten-bagger that pays off when a company defaults during the next credit crisis? Doing it with "free" money, of course! And how do we get this money? By selling options for income as detailed in Retirement Trader and DailyWealth Trader.
"Then I noted that to your Stansberry's Investment Advisory readers, you recommended shorting one of the same companies (on the Big Trade list) at around $8.50. So yesterday, I sold near-term, out-of-the-money naked calls on the same company I own the LEAP puts on. If the stock price moves up and the calls are assigned, I end up short the stock just as you advised, but with an even higher profit potential due to the premium collected. If the calls expire, I keep the premium and thus lower my cost basis on the LEAP puts I own.
"It would only take three months of selling short-term calls to completely pay for the LEAP puts. At that point, the risk of owning the long-term option is zero, since I've made my investment back already. Or as you like to put it, I'm now playing with the house's money. Of course, all of this must be done with reasonable position sizes and stop losses, as prudence requires when selling any naked option.
"I realize you can't comment on this specific trade, and that the risk is entirely mine in managing it. But being an Alliance member has allowed me to get the broad perspectives and reasoned research of multiple analysts on the Stansberry team that makes this kind of brainstorming possible. When I can combine strategies learned in Stansberry Alpha with techniques from DailyWealth Trader and Retirement Trader to construct my own improved trade using research from Big Trade and SIA, and know how to control risk with position sizing and stop losses, I feel I'm making use of the entire library of resources at my disposal as an Alliance member. I've never regretted making that investment in my financial education nine years ago.
"I retired 15 months ago, and have profitably used the Stansberry Research newsletters to both generate current income and also continue to grow our retirement accounts for the future without needing to draw them down. We have a solid base of bond investments from the Credit Opportunities list, and one entire account invested in the Portfolio Solutions Income Portfolio. We are enjoying retirement and the future is bright for us; we feel well-prepared financially with the great advice and education we receive from the Stansberry team. Thanks for all your efforts to produce such a quality product. I can't thank you all enough for your role in making this new chapter possible for us." – Paid-up subscriber L.B.
Porter comment: I applaud your efforts to use our research to your best advantage. It gives me tremendous satisfaction to see "regular" investors like yourself using some of the best strategies in finance to accomplish your goals.
In regards to your strategy, the downside is that call premiums typically aren't as big as put premiums, which means you probably won't get the full benefit of the Alpha strategy when you make the kind of inverse Alpha trade you describe. And for subscribers who can't sell naked options (which requires a pretty big margin account), the strategy you're using is simply out of reach.
For folks who don't have a big margin account that's approved to sell options, here's an easy way to replicate the idea of using "house money" to pay for your naked put option hedges: Invest in a solid, big dividend-paying vehicle and use the dividend payments (or most of them) to buy long-dated puts. If you lose the money, you've lost some income. But spending even 2%-4% of your portfolio to hedge (using naked put options) can greatly reduce the volatility of your overall portfolio by cushioning your losses during a correction or a bear market.
Regards,
Justin Brill
Baltimore, Maryland
April 19, 2017
Editor's note: Today, we're featuring the first of a special two-part series from Digest contributing editor P.J. O'Rourke about what could be the most significant step President Trump could take to invigorate the American economy: reforming the U.S. tax code. In today's essay, P.J. examines the hurdles to this once-in-a-political-lifetime opportunity...
The Tax Reform We Need and Want, Part I – the Ugly Truth
We really need tax reform... We really want tax cuts... And we have a once-in-a-political-lifetime chance to get both.
In all three branches of the federal government, Republicans hold a majority... more or less. (Hey, Freedom Caucus members, where are you going?! Get back over here!)
The people who pay taxes are, for a change, in charge of what taxes should be paid.
What I mean is that the nonpartisan Pew Research Center has examined tax information from 2014 – the most recent year for which statistics have been released by the IRS – and found that people with adjusted gross incomes of more than $250,000 filed 2.7% of individual income tax returns but paid 51.6% of all income tax.
Meanwhile, people with adjusted gross incomes of less than $50,000 filed 62.3% of returns, yet they paid only 5.7% of income tax.
Those who make more than $250,000 a year tend to vote for fiscally conservative candidates – or should have their heads examined if they don't. Republicans are fiscal conservatives. (So they say.)
We can pass tax reform. Q.E.D. (For those of you who, like me, flunked high school Latin, that stands for quod erat demonstrandum, which loosely translated means, "I just proved it, sucker!")
However, we're all suckers if we believe that proving we can pass tax reform means proving we will pass tax reform.
Taxes are too damn high. But any tax reform that lowers taxes is going to be messy. Tax reformers immediately find themselves plunged into "a mud bath of math."
One number is particularly dirty and sticky – $3.8 trillion.
That's what the federal government spent in 2015, the most recent year for which we have complete figures from the U.S. Treasury Department. Lowering that number is going to be hell. I'll describe this journey through Hades in a moment...
But first, let's pause and consider two things I've just said: "2014 – the most recent year for which statistics have been released by the IRS" and "2015, the most recent year for which we have complete figures from the U.S. Treasury."
Those phrases in quotation marks say all that needs to be said about fiscal conservatives' dearly cherished concept of running the federal government like a business. How much confidence would you have in a business that was two or three years late issuing its annual report?
The federal government cannot be run like a business any more than monkey business can.
Now to get back to the monkey business at hand – the $3.8 trillion. Except now – according to Congressional Budget Office estimates – it's $3.9 trillion for 2016. That's a ridiculous number. That's 21% of U.S. gross domestic product (GDP). That's about $12,000 per person living in the United States.
Cutting that number would seem to be as easy as cutting government lard with a hot, sharp knife of public indignation. Except the knife goes cold and gets as dull and breakable as a chopstick when we face the facts.
The worst facts are the debt and the deficit. The 2016 deficit projection is $544 billion, resulting in a gross national debt of $19 trillion, which is 104% of our GDP, the highest percentage since 1950.
There's a simple explanation for these facts. While government expenditure was $3.9 trillion, government revenue was less than $3.4 trillion.
This kind of reckless government overspending has been going on all our lives. We've had only five balanced budgets in the past 60 years and no significant reduction in the national debt since Ike's second term. (When the national debt was only $1.7 trillion.)
If you and I behaved with our personal finances the way the government does, we'd be... well, since government fiscal behavior shapes individual fiscal behavior – we'd be in the same circumstances that caused voters in 2016 to hand over all three branches of the federal government to fiscal conservatives and arm them with a hot, sharp knife of public indignation.
Yet the truth is, if we're going to avoid the economic catastrophe that growing deficits and debts will inevitably cause, we must increase government revenue.
"No, no!" I hear you cry with horrified voices. "We must cut government spending!"
Good luck with that.
Of the $3.9 trillion the government spends, $2.4 trillion is mandatory entitlement spending. Neither President Trump nor moderate Republicans nor any Democrats at all are willing to grab the aforementioned budget-slashing cutlery and press it against this political third rail.
That leaves us with $1.5 trillion in spending. But we have to pay about a quarter trillion in interest on the debt we've accumulated. And we'd better continue to do that or repo men from China will be jacking up the Capitol building and dragging it away with a tow truck.
So now we're down to $1.3 trillion of spending that can be cut. Except 54% of this is military spending, which Republicans have promised to raise. Even if they don't keep their promise, it's hard to see how we can spend less on our armed forces unless ISIS, the Taliban, and Syria all go jump in the lake. And in that part of the world, they don't have much in the way of lakes to jump into.
The actual amount that the government has in hand for all other discretionary spending is something in the order of $675 billion.
It sounds like a lot, but it isn't. For example, the American Society of Civil Engineers gives U.S. infrastructure a D+ and estimates that we'll have to spend $3.6 trillion by 2020 just to bring our national infrastructure back up to adequate.
This is $900 billion a year. Subtract $900 billion from $675 billion and you get... a big hole, just like those we have in I-95.
Plus, more bad news: We really should be allocating a substantial portion of our federal budget – $100 billion a year, at the very least – to paying down our national debt.
Thus, although we really need tax reform, we also really need $4 trillion in government revenue as opposed to the $3.4 trillion the government currently collects.
How can we possibly square the tax-cutting tax reform we want with the $600 billion in increased revenue we require?
I think it can be done. And I'll tell you how tomorrow.
In the meantime, I want to leave you with a little hope. There is a fundamental governmental budgetary principle that will bring government outlay closer to government income. I've just invented it. I call it "The O'Rourke's Circumcision Precept."
You can take 10% off the top of ANYTHING.
So now all we need to do is find $3.6 trillion for the government to spend.
Regards,
P.J. O'Rourke
Editor's note: If President Trump's tax-reform proposal passes, all of the power that has been consolidated in D.C. over the past 40 years will evaporate. In essence, Trump has put a metaphorical gun to the head of the "Deep State." And now, the Deep State is fighting back...
Porter and his team of analysts have put together a list of 12 companies that stand to win and lose based on Trump's proposals. If they're right, you could pocket gains like 1,110%... 1,370%... 2,650%... 4,980%... 6,760%... and more. But you have to act quickly, because as soon as these laws go into effect, the opportunities won't last long. Click here to learn more.