What falling gold prices mean for you... Japan eases... Europe is next... Why the ECB will be 'forced to go nuclear'... How Doc went 189 for 191... Watch the third video in Doc's series...
In yesterday's Digest, we discussed oil's retreat to a three-year low... And why you likely have more exposure to energy in your portfolio than you realized.
But oil isn't the only commodity in a rout today... Gold fell to less than $1,140 an ounce today to a new four-year low. Since hitting an all-time high in September 2011, gold prices have fallen nearly 40%.
With all the money printing going on around the world – and the record amount of sovereign debt – how is it possible for gold to fall?
Stansberry Research Editor in Chief Brian Hunt explained it in an e-mail...
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Last Friday, the Bank of Japan announced it would increase quantitative easing to meet its 2% inflation goal (from today's 1.2% inflation rate).
The BOJ will now purchase an additional 30 trillion yen (or $271 billion) in Japanese government bonds... for a total of 80 trillion yen (or $723 billion) in Japanese government bonds per year.
The BOJ will also triple its purchases of exchange-traded funds (ETFs) to 3 trillion yen ($27 billion). Purchases of real estate investment trusts (REITs) will triple to 90 billion yen ($800 million).
At the same time, Prime Minister Shinzo Abe is putting pressure on Japan's $1.2 trillion Government Pension Investment Fund (GPIF) to shift funds away from low-yielding Japanese government bonds and into riskier, higher-yielding investments. GPIF has 67 million participants.
On Friday, GPIF approved a plan to change its allocation guidelines. In general, 40% of domestic Japanese bonds will be sold. Domestic- and foreign-stock holdings will more than double.
Specifically, the new portfolio allocation lowers domestic bonds to 35% and increases the exposure to domestic and foreign stocks to 25% each. The remaining 15% will be allocated to overseas bonds.
The new portfolio allocation, according to Japanese government officials, will better support the aging Japanese population. So much for risk.
Japanese stocks soared to seven-year highs on the news. And the yen, as Brian mentioned above, fell to a seven-year low against the dollar.
The U.S. dollar's strength is one reason why gold is getting crushed today... But rest assured that gold will have its day.
Global central banks are racing to devalue their currencies. While the Federal Reserve ended its bond-buying program (at least, until we see a big correction), Japan is ramping up.
And Europe, led by European Central Bank head Mario Draghi, will also start buying bonds soon. Eventually, the game will fail... and gold prices will soar.
In the November 3 Growth Stock Wire, Mercenary Trader cofounder Justice Litle explained why Europe will be forced to ease...
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It's just a matter of time before the game is up and gold prices are much higher. Until then, mind your stop losses. And if you don't own gold yet, now is a good time to consider buying some for "insurance" purposes.
We're continuing our weeklong discussion about selling put options. If you missed the first two installments, you can read them here and here. In today's edition – originally published on September 24, 2012 – we'll explain how we can say Doc Eifrig has closed 189 winning positions out of 191 in Retirement Trader for an incredible 98.9% win rate. (Remember... this series was originally published in September 2012, so the numbers we quote below are outdated. But as we explained yesterday, we're running this series untouched simply to demonstrate the strategy and show its benefits.)
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Today, we tackle the last big question out there... How can we say Doc has never closed a losing position in Retirement Trader since it launched in April 2010, when several positions resulted in stocks being "put" to subscribers? Let us explain...
As we've said many times... selling puts is one of the greatest trading strategies out there. It generates super-safe income. And if done properly, your odds of losing money are very, very slim.
Yesterday, we told you there's a right way and a wrong way to sell puts... As long as you sell puts the "right way," you too can enjoy the kind of phenomenal success Doc has had. And it's not difficult. To sell puts the "right way," only sell them on the world's safest blue-chip companies when they're trading at bargain prices. As we described it...
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As we said... sometimes the stock will trade for less than the put option's strike price on option-expiration day. In that case, you will have to buy 100 shares at the strike price. (Remember... for every put-option contract you sell, you are responsible for 100 shares of stock.)
That's called being "put" the stock. Many people think if they're put a stock, they lose...
But we're only selling puts on stocks we want to own – the world's best companies... So having to buy the stock isn't a bad thing. In fact, it can be a great thing. We get to name the price we're happy paying to own the stock. And we keep the initial premium.
Plus, once we are put the stock, we can immediately start generating more income.
To date, about 79% of Doc's put sales result in the option expiring worthless. In those cases, Retirement Trader subscribers did not have shares put to them... They simply kept the premium free and clear. But what about the other 21% of the time?
As we said, in those cases, they ended up buying shares. But because Doc has only recommended trades on blue-chip stocks, subscribers wound up holding shares of some of the greatest companies in the world (which, in most cases, pay a healthy dividend).
They also used the stock positions to generate an extra 12%-20% a year in income... To do that, we use another trading strategy called "selling covered calls."
Like a put, a call is an option.
When someone buys a put option, he's buying the right (but not the obligation) to sell a stock at a set price (called the "strike price") by an agreed-upon future date.
When someone buys a call option, he's buying the right (but not the obligation) to buy a stock at a set price by an agreed-upon future date.
We're not interested in buying calls in this example... We're only interested in selling them. So we're selling someone else the right to buy our stock at a set price in the future... In short, we're taking cash up front and agreeing to sell the stock we own for more than we've paid for it.
"Covered" simply means we own enough shares to cover the liability should the call option be exercised and we're forced to sell our shares. (That's known as having our shares "called away.")
There are two basic outcomes when selling covered calls. The first is that the stock closes below the strike price at expiration. In this case, you keep your stock and the premium... And you can sell another round of calls to generate more income.
The second outcome is that your shares are called away... The stock closes above the strike price at expiration. You keep the premium and sell your shares for the strike price. So your profit is equal to the premium plus the difference between the prices at which you bought and sold shares (the "capital gains").
To better help you grasp the concept, we're going to walk through an actual trade where Doc was put the stock and started selling covered calls...
On March 23, Doc recommended subscribers sell the May $33 puts on Wells Fargo. At the time, shares of Wells Fargo were trading for $33.53. And Retirement Trader subscribers collected about $1.25 in premium for each contract they sold.
In this example, $33 is the strike price. As long as shares of Wells Fargo traded for more than $33 by the expiration date (in this case, May 18), subscribers who followed the recommendation would book the entire premium with no obligation to buy shares.
But when the options expired, shares of Wells Fargo were trading for $30.94 – below the strike price. So we were "put" shares of Wells Fargo. On the morning of May 21 (the Monday following the expiration date), Retirement Trader subscribers purchased shares of Wells Fargo for the strike price, $33 a share. Meanwhile, Wells Fargo traded as high as $31.47 in the market.
Even if you take the highest possible price you could have gotten that day for Wells Fargo shares – $31.47 – and add the $1.25 premium collected for selling the puts, you have "just" $32.72. That's still $0.28 below the strike price... meaning readers were, at best, down $0.28 on the position.
That's why many people consider being put shares a loss. And it would be... if you sold your Wells Fargo shares that Monday and closed the position.
But Doc didn't do that...
On the same day readers purchased the stock (May 21), Doc recommended selling the July $33 call options on Wells Fargo. Retirement Trader readers collected $0.86 for every contract they sold.
When the calls expired on July 20, Wells Fargo was trading at $33.81. Because the stock was above the strike price, the July calls were exercised and subscribers' shares were "called away." In other words, they sold their stock for $33 a share... The same price they paid for it.
And because they collected the extra $0.86 in premium from selling covered calls, they turned what could have been a $0.28-per-share loss into a gain. By following Doc's recommendation to the end... subscribers could have booked a 6.6% gain on this trade in less than four months. That's an annualized gain of 20.4%.
And that's how Doc has achieved his incredible track record.
Thanks to selling covered calls, even when you are put a stock, the trade can end up a winner. That's why it's so important to only sell puts on high-quality companies you want to own.
There are many other examples of situations where Retirement Trader subscribers made a profit by selling calls after being put a stock...
Doc recommended selling December $25 puts on dominating computer-chip maker Intel on October 28, 2011. Subscribers who followed his recommendation were put the stock on December 19 at $23.82. (That accounts for the $1.18 in premium they received at the outset of the trade.)
The same day, Doc recommended selling the February $24 calls. Subscribers collected an additional $0.65 in premium. And they received $0.21 a share in dividends. The shares were called away in February for an 8.6% gain in about four months... That's a 27.9% annualized return.
Last July, Doc recommended selling September $65 puts on the health care-products giant Johnson & Johnson for a $0.95 premium.
Subscribers were put the stock $64.05 a share. (Again, that accounts for the put premium we received up front.) And Doc immediately recommended selling the November $65 calls for an additional $1.60 in premium. The November calls expired worthless, and subscribers were able to sell another set of calls – the January 2012 $65 calls – for $1.22. They also received $0.57 a share in dividends while holding the stock.
Readers' Johnson & Johnson position was called away in January for a 6.7% profit in six months.
Staying in the medical sector, Doc recommended selling August $50 puts on pharmaceutical company Abbott Laboratories on June 24, 2011. Subscribers collected $0.90 in premium.
Come expiration day, Abbott shares were just below the strike price. So subscribers who sold the option were put shares. Then Doc recommended they sell the November $50 calls for $2.13 in premium. Subscribers also received $0.48 a share in dividends while they held the stock.
Like in the two examples above, subscribers' Abbott Labs shares were called away in November for a 5.1% gain in less than six months... a 12.6% annualized gain.
It doesn't happen often... But if you sell puts, sometimes you will have to buy shares. (In Retirement Trader, about 21% of Doc's recommended put sales have resulted in subscribers being put shares.)
If you sell puts on risky stocks (in hopes of capturing larger premiums), that can cause losses. But if you only sell puts on blue-chip companies (all of today's examples qualify), you can still end up booking a profit on the position. It's no wonder Doc has produced such an incredible track record.
Editor's note: We released Doc's third instructional video today. You can view it for free by clicking here. And if you missed the first two videos, you can watch them here and here.
In today's video, Doc explains how you can "be the house" and profit from gamblers in the stock market. And he shares his strategy for turning stocks in your IRA into safe, double-digit income streams.
Again, these videos are free to watch. We simply want you to better understand this valuable trading strategy. And remember... to close out "options week," Doc is hosting a live webinar followed by a Q&A session tomorrow night at 8 p.m. Eastern time. You can reserve your spot here.
New 52-week highs (as of 11/4/14): American Financial Group (AFG), Berkshire Hathaway (BRK.B), Chubb (CB), CDK Global (CDK), CME Group (CME), iShares Dow Jones U.S. Insurance Fund (IAK), InterDigital (IDCC), Eli Lilly (LLY), 3M (MMM), Altria (MO), Microsoft (MSFT), Nuveen Municipal Opportunity Fund (NIO), Pepsico (PEP), Procter & Gamble (PG), ProShares Ultra Health Care Fund (RXL), Constellation Brands (STZ), Skyworks Solutions (SWKS), Travelers (TRV), and W.R. Berkley (WRB).
The mailbag is full with plenty of questions about selling puts. Do you have a put-selling question that we haven't answered yet? Let us know at feedback@stansberryresearch.com.
"I know very little about computers and even less about the market. How do I go about getting a broker who will assist me with selling puts?" – Paid-up subscriber Billy Morrow
Goldsmith comment: You can hire a full-service broker to place the trades for you. But it can be expensive. A discount broker (like Fidelity or Scottrade, for instance) is much cheaper. Doc has prepared a report for Retirement Trader subscribers walking them through the basics of opening a brokerage account (full-service or discount).
"Mr. Stephens is correct when he says you can't use margin in Roth's or IRA's but with Scottrade you can still do naked puts as long as you have the capital to cover the trade if exercised. I do all of my naked puts in my Roth IRA. In fact all of my option trades are in my Roth IRA. I'm pretty sure that Scottrade isn't unique in this regard." – Paid-up subscriber C. Kelley
Goldsmith comment: IRAs don't allow investors to sell naked puts on margin. What you're doing is selling cash-secured (or "cash-covered") puts. That just means you have to have all of your capital at risk available in cash in your brokerage account.
I have watched the instruction videos and made some Put trades that have paid off. They were some recommended in letters and some I made on my own and some went down for loses. One thing that seems to be glossed over in the tutorials is exactly what to do when a trade begins to lose money. Do you buy or sell to get out and minimize losses. It may seem obvious to the very experienced trader but to the novice it can be puzzling. How about a good explanation of how to trade to minimize a losing situation." – Paid-up subscriber Norb Delph
Goldsmith comment: Doc tells subscribers to follow a 25% trailing stop on your capital at risk. He also rolls forward positions that haven't hit their trailing stops, allowing subscribers to collect more income along the way... which helps turn losing positions into winners.
Regards,
Sean Goldsmith
November 5, 2014
Why bond investors are 'at substantial risk when the next default wave arrives'...
Editor's note: Porter recently spoke with bond expert Martin Fridson. In today's Digest Premium – excerpted from episode 185 of Stansberry Radio – Porter and Fridson discuss the state of the high-yield bond market... and why investors are taking on so much risk today...
Porter Stansberry: My strategy as a high-yield bond investor is to try to buy at a discount, knowing that there is some recovery available in the bonds. Unlike in stocks – where if stocks go down 50%, that typically means they're more likely to go to zero – if bonds go down 50%, you're more likely to make a lot more money. That's what is so interesting for individual investors and discounted bonds.
They offer a better risk-to-return ratio than stocks in certain situations. This leads to the question I've been dying to ask: How do you explain people paying huge premiums for high-yield bonds? You and I both know that over time, the default rate on these bonds is going to be 12%-15% over the life of the issues... Yet people are accepting yields as low as 5% for these things. How do you explain this behavior?
Martin Fridson: You can explain that in one word: Fed. The Fed is keeping interest rates at extraordinary low levels. They would be somewhat low just because of economic conditions anyway. But the Federal Reserve is pushing them even lower than that. That has been very painful for savers who know firsthand, just looking at what they can get on certificates of deposit or other traditional income-generating investments. As a result of that, there has been a desperate quest for yield.
Investors are looking outside their traditional, lower-risk types of investments and moving from Treasury securities – which are considered risk-free – into corporate bonds. Those who were buying investment-grade, blue-chip corporate bonds are moving down into high-yield bonds with a higher default risk. As that happens, the yields get pushed down and the prices get pushed up to premiums above par... to levels that are going to put you at substantial risk when the next default wave arrives.
Porter: The investment behavior right now is so illogical. Everyone thinks they will be able to get out before the music stops. But Martin, you've been in these markets long enough to know that's just not going to happen.
Fridson: Yeah. You don't have the liquidity to achieve that. Once it starts going the other way, the bidders disappear. That has always been true, but it has gotten even worse. This is not a market where you can just go execute a trade. You have to get a dealer in one of the investment banks and the market maker to buy your bonds in hopes of being able to sell it to someone else.
Porter: There's a great scene in the movie Margin Call where the dealer at the investment bank says, "We can't go out there and dump all these bonds on our clients because we know that they're not worth anything and we'll never be able to sell anything to them again." The head of the bank goes, "So what? We'll survive." That's exactly what happens when the music stops in these bond markets. There is no bid. There is no way to transact. You're stuck with paper that's going to default.
Fridson: Yeah. It has gotten worse, even from the past, because the banking regulations have discouraged banks from holding bond inventories and being active as market makers, so the liquidity probably will be even worse in the next downturn than in past episodes.
Why bond investors are 'at substantial risk when the next default wave arrives'...
In today's Digest Premium, bond expert Martin Fridson discusses the state of the high-yield bond market... and why investors are taking on so much risk today...
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