Editor’s Note: Today, we depart from our normal Saturday fare to share key insight from Tom. Last month, Tom revealed the reason for the current stock market decline. It’s a global economic shift he calls “The Great Unwinding.” Below, he tells you where the effects of The Great Unwinding are worst, and what to do to protect yourself… and profit.
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From Tom Dyson, founder, Palm Beach Research Group: I suspect we’re on the verge of a significant drop. The market right now looks weak… very weak.
Bank stocks are plummeting. Citigroup is down 28%. Morgan Stanley is down 23%. Bank of America is down 27%.
Deutsche Bank is the fourth largest bank in Europe (and an elite member of the global banking system). Its stock is now down 67% since January 2014.
Is this the picture of a healthy financial system?
The pipeline sector is plummeting, too. Chesapeake Energy—a giant natural gas producer and one of the pipeline industry’s most important customers—is on the verge of bankruptcy.
Kinder Morgan (energy infrastructure) is down 60% since June 2014—when oil and natural gas prices peaked. Williams Companies (natural gas) is down 79%. Magellan Midstream Partners (pipelines) is down 29%. Enterprise Products Partners (pipelines) is down 73%.
The Alerian MLP ETF, a basket of 22 liquid and gas pipeline companies, is down 56% since June 2014.
And it’s not just companies—it’s countries, too.
Venezuela may soon declare bankruptcy. The country has borrowed $120 billion. That’s more money than China owes. Or Russia. Or Brazil. Venezuela is the 17th largest bond issuer in the emerging market category.
Why is this important? Venezuela borrowed this money from Wall Street. And pension funds. And insurance companies. And ETF investors. They’ve all bought Venezuela’s bonds.
When Venezuela defaults, it’s going to send pain cascading through the markets.
Banks… utilities… bonds. Notice anything about these three trouble spots?
They’re all traditional investments for income investors. They’re high-yield plays.
The world has entered a period I call “The Great Unwinding.”
The Great Unwinding is a period of economic contraction. In it, investments fall in value, businesses shrink, loans are written down, etc.
Basically, it’s an economic hangover.
This hangover will affect everything from corn prices in the Midwest… to unemployment rates in Japan… to retail spending in Moscow. And it’s going to last for a few years.
We’ve identified five danger zones for our readers. These are the five places their money could be in serious peril.
Income investing is one of these danger zones.
[The other four are China, Silicon Valley tech companies, the banking and financial sector, and emerging markets.]
Today, I’ll show you the best way to earn safe income in a perilous environment like this.
It’s not easy.
As I’ve shown you, income investments aren’t safe right now. And the pain is about to get worse.
So, what can you do?
The strategy I’m about to show you will generate income from 12-20% per year. It’s fun. It’s safe. And the more volatile the market, the more income you’ll make. (I’ll explain more in a minute.)
But first, three disclaimers…
- This strategy is not for passive investors. It requires you to monitor your positions—and even place trades—on a weekly basis.
- You need to dedicate at least $25,000 in cash to this strategy. I’d prefer you start with $30,000.
- This strategy uses options. You probably think options are complicated and risky. And you’re right. The way most people use them, they are complicated and risky. But not the way we use them.
Our options strategy is simple and safe.
We use options to make low-ball offers. And we earn income for making these low-ball offers.
Here’s an example: Three weeks ago (on January 29), Apple was trading at $94.63 per share.
For reasons that don’t matter here, we liked Apple’s stock at that price. But instead of paying full price, we told our readers to offer—through their brokers—$87.50 per share for Apple’s stock.
So, readers entered offers to buy the stock at 7.5% below its price at the time.
And they received cash for making this offer. Instant cash. Their brokers deposited it in their trading accounts the second the order went through.
How was their yield?
About 13% annualized.
One of two things will happen now. Either the market will accept readers’ low-ball offers—in which case, our readers can buy Apple stock at $87.50. (A bargain compared to its $95 price at the time.)
Or it won’t.
In either case, readers keep the instant income they receive from making the low-ball offer.
So, that’s our strategy. We enter low-ball offers on stocks we’d love to own.
The stocks we focus on are the safest, strongest companies in the world. They’re companies with recession-proof products, decades of uninterrupted dividend payments, and iconic brands.
Think Apple, Coca-Cola, Johnson & Johnson…
We’ll always want to buy these elite stocks at discount prices. And we choose that discount ahead of time. It’s usually 5-10%.
In exchange for making these deals, we earn cash. And we keep this cash… regardless of whether we end up buying the stock.
Let me repeat that: We keep the cash regardless.
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In a nutshell, we’re offering insurance. We’re guaranteeing the holder of the stock will get a certain price for his or her stock. And in return for this service, he or she pays us in cash. That’s why this strategy earns more income when the market is volatile. It’s an issue of mathematics. When a stock is making big moves, there’s a higher probability the owner of the stock will “make a claim” on the insurance we provide. Said another way, there’s a higher probability the option will have value. So, when the markets are volatile, the options market rises in price. When we make low-ball offers, we’re selling options. Because options are dearer, our strategy makes more income. |
That’s what makes trading options such a powerful strategy. It transforms flat markets—even down markets—into highly profitable markets.
In fact, even though the S&P 500 is down 9% so far in 2016, we’ve made five new low-ball offers since January 1.
All five are trading above our “offer price.” This means our offers will likely expire worthless. And we’re on track to bank average annualized returns of 14.3%.
Since 2012, we’ve recommended 185 low-ball offers to readers. Of these trades, 178 closed as winners. We generated an average income of 14.8% per year.
Where else are you going to make safe double-digit income? Bonds? Stocks? Real estate? Not a chance…