Editor’s Note: In yesterday’s Daily, longtime PBRG friend Porter Stansberry wrote about a historic bond mania that’s setting up what he’s calling the ultimate “Big Trade.”
In Part II of the essay (originally published on September 30, 2016), Porter explains how to use the “Big Trade” strategy to hedge if you’re still fully invested… or as a speculation to make 10 to 20 times your money (or more) in the next three to five years.
| Recommended Link | ||
|
||
| — |
 |
From Porter Stansberry, founder, Stansberry Research: Over the last several years, governments and central banks around the world have created a bubble that’s bigger and more dangerous than any other in the history of capitalism.
It has grown so large that investors have come to believe that bonds should have a negative yield… that falling production doesn’t matter… and that companies that can’t even repay their debts should be worth tens of billions.
Soon… very soon… the enormous consequences of this huge global bubble are going to be recognized. The storm is on its way. We know it because rising default rates will cause bond investors to panic. Bond prices, which are now at all-time highs, will plummet. That will cause the cost of capital to soar, sending equity prices crashing.
The die is cast. But incredibly, despite the inevitable nature of this coming default cycle, “hurricane insurance” has virtually never been cheaper!
Let me give you one example of the kind of trade you can still make today—either as a hedge if you’re still fully invested or as a speculation to make 20 times your money (or more) over the next 24 months.
|
A clarification on the editor’s note from Sunday’s Daily… Stansberry Research founder Porter Stansberry is not putting his own money into the trades he will recommend in his latest research service, Stansberry’s Big Trade. While he may personally use the same options-trading strategy he uses in the service, Stansberry Research does not allow any of its editors to put money into the specific investments or trades they recommend. |
Cheniere Energy is a fiction of the credit bubble. It is a financial experiment wrapped in the veneer of an energy company.
The company is the creation of a clever stock promoter (Charif Souki). He rallied gullible investors who believed in the “Peak Oil” theory—that the world was running out of oil and production was in permanent decline. He convinced them to put up billions to build a new liquefied natural gas (“LNG”) import plant on the Gulf Coast. (The previous five LNG plants that had been built in America all had gone bankrupt.)
Sure, there’s no plausible economic reason to import LNG to North America, which has immense natural gas resources. The business model was akin to bringing sand to the beach. Nevertheless, in the madness of the Peak Oil days of the mid-2000s, investors stupidly fell for the idea. (For the record, we warned about the company at the time. See the June 2006 issue of Stansberry’s Investment Advisory titled “Madness.”)
Cheniere soon collapsed under the weight of its debts and its absurd business model. But then… cheap capital came to the rescue. Souki figured he could simply borrow enough money to turn the whole project around. Cheniere wouldn’t import natural gas, it would export it. It sounds like a joke, but that’s exactly what happened.
Switching business models after your build-out is expensive. In total, the company has accumulated almost $19 billion worth of debts over its lifetime. Sadly, it has produced zero profits. And the future doesn’t seem bright, either.
You see, the entire economic rationale for exporting LNG (which has to be chilled to negative 274 degrees Fahrenheit) was that it was illegal to export crude oil. Thus, LNG was thought to be one of the few legal ways to export America’s soaring energy production.
Good idea in theory. Trouble is, Congress changed the law. Now you can simply pump crude oil onto a boat, which is far cheaper than chilling natural gas to negative 274 degrees.
| Recommended Link | ||
|
||
| — |
So… who is going to pay for all of Cheniere’s LNG and all of its debt?
Nobody will.
Just as sure as you’re reading this essay, Cheniere will declare bankruptcy during the next credit default cycle, wiping out its equity holders and probably 80% or more of its debt. That’s why Wall Street’s best short seller, Jim Chanos, has called Cheniere one of his best short ideas… or as he puts it, “financial engineering gone crazy.”
And yet, today Cheniere still has a $44 share price and an equity value of $10 billion.
More incredibly, for only 85 cents, you can buy a put option with a $20 strike price that’s good through January 2018.
That means, for 85 cents, you can buy the right to sell Cheniere for $20 any time before January 2018.
If Cheniere goes to zero before that point, you can still sell your shares for $20, earning $20 for 85 cents invested, a return of 23 times your capital.
And even if you’re only half right, you’ll walk away with a profit. In other words, even if Cheniere doesn’t actually default before then (and it might not), you’ll still do very well.
My bet is that equity holders are going to wake up at some point in the next six months or so and realize that they’re never going to see a penny of dividends and that this company is just a debt bomb waiting to explode. The share price will one day take a huge dive to less than $10. And you’ll end up making something between 10 and 15 times your money on that day. I’d say there’s a 90% chance of that happening at some point in the next 12 months.
That’s what happens during a credit default cycle. Everyone wakes up and realizes how stupid they’re being. Or as investing legend Warren Buffett says, “Only when the tide goes out do you discover who’s been swimming naked.”
How should you use this kind of information?
Let’s say you have a $1 million portfolio. And let’s say you’re not stupid. You can see what’s coming. You’ve raised some cash (20%). You’ve bought some gold and other hedges (20%). But you still have something like 30% in stocks and 30% in bonds—your core, long-term holdings. You’re going to be fine as this whole thing explodes because you’re diversified and you’ve raised cash.
But why not turn this situation into a windfall?
Let’s say you take half of your cash (10% of your portfolio) and you buy the kind of insurance I’m suggesting—long-term put options on companies that are headed for bankruptcy, like Cheniere. To increase your odds of success, you don’t buy puts on just one company. You buy 10 different positions. And you diversify across time, too. You buy a little bit of insurance every month for the next year. Any time the VIX hits new lows, you can buy puts cheaply.
And let’s estimate that you only end up doing half as well as I describe above. Instead of making 10 or 15 times returns, you “only” make five times returns. Investing just 10% of your portfolio, you’ll have generated $500,000 in profits, enough to equal 50% of your entire portfolio.
Another way to look at this approach is… even if you lose 100% of your money on 9 out of 10 of those put contracts, you’ll still make a lot of money on the 10th. Making five times your money with this strategy is the least I expect is possible. I think making 10 or 15 times your money isn’t unlikely. And I’m sure that we’ll make 20 times on at least one or two of these trades.
Sadly for our country, it will not be hard to execute this trading strategy over the next several years.
Reeves’ Note: By now, readers have likely heard that Porter is launching a brand-new service next week…
Stansberry’s Big Trade will show you how to protect yourself and profit as the Fed’s latest bubble inevitably pops.
In fact, Porter believes this is the single best opportunity for huge speculative gains he has ever seen in his career. He believes the gains could dwarf those subscribers made in the last crisis, when he famously predicted the demise of Fannie Mae and Freddie Mac, General Motors, and others.
Porter will be hosting a live presentation on Wednesday, November 16, at 8 p.m. ET to explain it all… including exactly what happens next, and what you need to do to prepare.
Access is free for readers, but this event is sure to fill up quickly. If you’re interested in attending, we urge you to sign up soon. Reserve your spot and make sure you receive important updates by clicking here…