The Most Dangerous Word in Investing

  • Beware the word “should” — especially now
  • Why is Wall Street holding up while Main Street’s in the tank?
  • And more importantly, what can you do about it?
  • USO roiling oil markets
  • Steal of the Century, Round 2
  • Gold clings to $1,700… social-distancing strippers make national news… safety in “the great American flyover”… and more!

It’s days like today we’re reminded the most dangerous word in investing is “should.”

As we write this morning, the major U.S. stock indexes are rallying for three trading days in a row.

The S&P 500 has recovered more than half of the losses experienced during the meltdown that began with a record-high close on Feb. 19… and ended when the market bottomed on March 23.

Halfway Back to the Top

Looked at another way, an unprecedented near-35% drop in less than five weeks… is now a much more palatable 15% drop in a little over two months.

And there’s no earthly reason the market “should” — there’s that word — be staging this sort of comeback.

First-time unemployment claims are smashing all previous records. Factory activity is back to Great Recession levels and falling. Consumer confidence as measured by the Conference Board just registered a record one-month drop this morning.

And with earnings season in full swing, one company after another is “withdrawing” its guidance for investors about the rest of the year — there’s just too much that’s up in the air. Which states will open up again, and when and how much? It’s all guesswork.

But there it is — the stock market at the same level where it was last June, when a pandemic was the furthest thing from anyone’s mind.

So what gives? Why the big comeback when the market “should” still be on its heels?

The most obvious answer is the massive injection of funny money by the U.S. government and the Federal Reserve. The first beneficiaries are always the people closest to the system, and that means Wall Street and the corporate giants.

Perhaps it was no coincidence the market bottomed on March 23 — the same day the Fed announced it would start buying Treasury debt and mortgage-backed securities in unlimited quantities.

If only there were a way to cash in alongside the connected insiders. As it happens, there is.

One of our premium trading services was put to the test when the market began its big drop in February. Could it still deliver handsome gains in the new reality of a market that likely won’t return to those February highs for a while?

This service is The Profit Wire — where I team up with floor-trading veteran Alan Knuckman to pinpoint market-moving news before it happens. We use a proprietary indicator called QIT-4 that detects connected-insider buys in the derivatives markets… then we identify a way to piggyback those buys using call options.

In late March, this indicator lit up on the oil refiner Valero Energy Corp.

By all rights, Valero “should” have been poised for an even bigger drop than it had already experienced. Demand for gasoline was way down, so much that competitors were shutting down refineries. Talk abounded that VLO would cut its dividend.

But QIT-4 was pointing to a turnaround, so we recommended call options on March 31 in anticipation of some sort of good news.

Sure enough, last Friday VLO announced its dividend for the current quarter. No cut. The share price jumped, and Profit Wire readers cashed out yesterday for a 50% gain in four weeks.

In fact, that was one of three winners they were able to book yesterday. There was also 50% on the pharma giant Pfizer (in only six days) and 100% on DuPont in just over a month.

All told, the scorecard since the market peak on Feb. 19…

  • Two 100% gainers
  • Four 50% (or thereabouts) gainers
  • Three more where the jury’s out, but there’s ample time before the options expire.

Yes, there’s more where that came from. There’s a new recommendation every week… so you can get going right away. Follow this link and I’ll show you how to book big, consistent gains regardless of what the market “should” be doing.

As the day wears on, most of the gains racked up early in the trading session have been erased.

At last check, the Dow and the S&P are flat on the day… while the Nasdaq is down nearly 1%. Treasuries are rallying, with the yield on a 10-year note at 0.62%. Gold clings tightly to the $1,700 level.

But the big mover is crude — down another 5% to $12.15. Quite the two-day climb-down from nearly $17 on Friday. And it’s not just about producers running out of storage in the face of cratering global demand.

No, the culprit for the latest volatility in oil appears to be the world’s biggest oil ETF, the United States Oil Fund (USO).

You get a hint of what’s going on at the very top of USO’s homepage…

COVID-19

Until now, USO invested mostly in “front-month” crude futures — the most short-term contracts anyone could buy. That became a wee bit problematic last week when the price of the front-month contract went negative for the first time ever… and USO held a quarter of all those contracts the week before expiration.

Yesterday, USO began scrambling to trim its risk profile — announcing it would start buying a mix of futures contracts, up to four months out.

Today, USO will execute an 8-for-1 reverse split — meaning every eight shares a shareholder owns right now at roughly $2 apiece will become a single share worth roughly $16. The idea is to get USO’s share price somewhere in line with the price of a barrel of crude.

Yeah, we’ve got our doubts. We still advise steering clear…

Feels as if we’re gearing up for Round 2 of the “steal of the century.”

That was the name we gave to a scheme the feds concocted in 2012. Officially the name was “REO-to-rental.” Millions of foreclosed homes sitting on the federal government’s books after the 2008 financial crisis were flipped at fire-sale prices to hedge funds and private equity firms — who proceeded to manage those properties as rentals.

Key point: These deals were available only to investors able to drop at least $1 billion on a bulk transaction with Fannie Mae, Freddie Mac or the Federal Housing Administration.

If you, as a middle-income peon, merely wanted to buy the foreclosure property down the block and rent it out in hopes of generating a bit more income than you could get from a 5-year CD, well… sorry, you didn’t qualify.

We sense a rerun in store after encountering this headline…

Bloomberg Tweet

As of five days ago, about 6.4% of residential mortgage borrowers have delayed their monthly payments — a number likely to grow. But according to Bloomberg, “the real chaos won’t start until the pandemic passes.

“The problem is confusion over what will happen when borrowers have to make up those payments. Federal agencies that back most of the market have introduced policies, some of which could require documentation that overwhelms servicers, leading to lengthy wait times and, in extreme cases, foreclosures.

“Industry executives say Fannie Mae, Freddie Mac and their regulator are attempting to unveil a program in coming weeks that could alleviate many of the problems. Mortgage lenders say they hope the companies and their watchdog come up with a plan that prevents a repeat of the turmoil that followed the 2008 financial crisis, when confusion and delays hindered borrowers in trying to resume payments.”

Who’s kidding whom? If this plan is run with the same level of efficiency as the “Paycheck Protection Program” — more about that later this week — there’s zero hope.

Maybe the number of borrowers pushed into foreclosure this time will be more modest than in 2008. But it’ll still be a bonanza for well-heeled types who can scoop up those properties at bargain prices and rent them out. And the U.S. homeownership rate will once again resume its 21st-century plunge…

Number Gonna Fall

As of late 2016, big investors owned up to 2% of all U.S. single-family rentals. Bet it’s only going up from here…

As proof once again The 5 stays ahead of the curve, we see the Portland, Oregon, strip joint that reinvented itself for the lockdown era is now national news.

Oregon Strip Club

As noted here last month, the Lucky Devil Lounge could not remain open under the state’s stay-home order. So it redeployed its dancers — delivering food off the club’s menu in pasties and booty shorts, all while keeping a six-foot distance and with the club’s bodyguards furnishing security close by. The initial name of the service? “Boober Eats.”

But that was just a quirky story in Portland’s alt-weekly newspaper. Fast-forward six weeks and the globe-spanning Reuters newswire has advanced the story. The club’s services have now expanded to drive-thru as well, and it’s been rebranded “Food 2 Go-Go.”

You get more of a show with the drive-thru option, apparently. “The performances included throbbing music furnished by a DJ, stage lights and prizes presented to customers at a safe distance by dancers using long plastic grabbers – like those used to pick up litter. Giveaways have included samples from a local cannabis dispensary and rolls of toilet paper.”

Still, it’s only a stopgap. Club owner Shon Boulden says for all his team’s efforts, revenue is one-sixth of normal…

On the topic of food shortages, where we had some not-so-common takes yesterday, we heard from a reader in “the great American flyover.”

“The CBS Evening News spent quite a bit of their time last night talking about the meatpacking plants (beef, pork and chicken) closing and animals being euthanized along with vegetables rotting in the fields. I believe that is what I wrote about three weeks ago. The meat processors had a supply of frozen product on hand but that won't last long.

“It will probably not be long until the larger cities begin to see food riots. Most people living in the cities do not know where their food comes from (other than a grocery store) and would have no idea how to produce their own. Now is the time of year to prepare the ground and plant gardens. There are vacant lots in most cities that could grow enough food for a lot of people if someone would organize the effort. Unfortunately, too many people feel they are owed a living from the government and don't want to have to work (so let's throw them some cash).

“For the next few months I will feel much safer out here in the flyover. Like Hank Williams Jr. sang, I can skin a buck and I can run a trotline and this country boy can survive! While you were sending up the warnings about the stock market I thought the food supply chain might run into problems but I did not expect it to fall apart as quickly or as bad as it has (if you don't think it is bad yet, wait a few weeks).

“I look forward to reading The 5! Keep yelling the warnings into the darkness. Some of us pay attention (at least part of the time)!”

Keep it up — one of the best sources of news I read,” reads the subject line of a complimentary email.

“Dave, as humans we all choose what (and who) we will believe. What are facts and truth to me are often lies to my niece in Portland

“I appreciate The 5, and even if I don’t agree with you, I do learn something. I read your report to keep informed on lots of things I otherwise wouldn’t pay much attention to but know that I should. Thank you for paying attention to the details and giving me a short read each day.”

The 5: Our privilege. And thank you for saying “best” and not “only,” as we hear from folks now and then. The 5 is, to paraphrase the cereal commercials of days gone by, only part of a well-balanced informational diet.

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Three winners in one day?

No, not every day is like that for readers of The Profit Wire. But it happened yesterday. When you’re on a roll, you’re on a roll. And since the stock market peaked a little over two months ago, they’ve booked six winners out of six closed trades.

Given the volatility in the broad stock market, that would feel pretty good, wouldn’t it?

How does the system work? And how can you put it to work for yourself? Answers here.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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