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written by reader Porter Stansberry’s next “big trade” or “Dirty Thirty”.

By chrizcringle, November 29, 2016

Does anybody have some specifics around this? It involves shorting stocks or buying puts, but would be nice to know the details.

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timmickiewicz
timmickiewicz
5 years ago

The premise is long term puts on companies that are loaded with debt and have unsustainable business models. Ie GM and Ford…tons on callable debt,due soon with poor sales…so jan 2018 naked puts…lower your bet,lower the price for the puts. Cheap insurance….gotta pay the big bucks for specifics

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timmickiewicz
timmickiewicz
5 years ago

Can’t forward their proprietary information…plus it takes forever for me to type!…bottom line big companies with a ton of debt…if you get put the shares you will be bottom feeding. If i have time i will post some of the tickers…your call on prices and risk tolerance…depending on on your take on the market long term…some were oil stock, today they are on fire

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Bill Chenault
Bill Chenault
5 years ago

Stansberry’s big trade is focused on buying long dated and out of the money puts on crappy companies. i.e. in Nov 2016 buying puts that expire in January 2018. I have not subscribed, so don’t have the official dirty thirty list. However, in his presentation materials, he specifically mentioned:
* Ford (symbol F) – didn’t declare bankrupcy during the 08-10 crisis period, so didn’t get rid of debt like GM did. Thin margins, lots of debt ($80 Billion?), which would take 100% of last year’s record profits for the next 20 years to pay off. But record profits won’t continue, sales will drop as banks tighten credit or raise rates to lower tier customers (sub-prime customers), so sales and profit for Ford will drop – making servicing their debt very tough. When the credit crisis hits, and they have trouble rolling over their debt, their stock price will also drop a ton. So he suggested buying a put at a $7.50 strike price in January 2018 (from memory, so may be off on details) while stock was trading at over $11 – could do it for just (again my memory of the details may be off, and prices change) $1.38 per share (or $138 per contract, which is 100 shares). So stock needs to fall to 7.50-1.38 = $6.12 to make money (though if it falls some quickly, you may be able to sell the put while it still has time premium value, especially if volatility rises, and make money even if stock prices hasn’t dropped that low yet). So you are betting on close to 50% fall in price to really make money, otherwise the put will slowly erode (less time value as every day you inexorably approach January 2018 date when put must be exercised or sold). If we have another credit crisis between now and then, Ford could well get hammered, and be unable to roll over it’s debt cheaply – and higher interest rates on the debt will also erode profits, which can also tank the stock. If Ford is forced to default, your put would be worth about 7.50 per share ($750 per contract), for 5x your purchase price.
* Cheniere Energy (symbol LNG) – originally built to import natural gas. When Shale boom brought lots of supplies of gas to market cheaply, and in the wake of the Japanese nuclear disaster – they shut all their nuclear reactors, providing 30% of their power, and tried to power everything with imported natural gas instead – but that caused prices of gas to spike within Japan – not enough ships to transport it, facilities to ship from (Cheniere tried to fill that gap), or unload to. But that was in 2011. High gas prices in Japan led the market to get more efficient – in terms of exporting facilities in Australia, more LNG ships built and run by various firms, etc. Also, very slowly, Japan has started to restart some nuclear reactors. So the huge price differentials that existed back in 2012 are much smaller today. Cheniere still has huge debt load from building the facility, and not much earning power (according to Stansberry – I haven’t researched much myself). So he says buy long dated puts on Cheniere as well
* Avis (CAR) is mentioned as a crummy example company that did not make the dirty 30 list – just not quite crummy enough, but close. Perhaps Hertz made his list (again, I haven’t seen it).
* In one of his presentations, he mentioned that there are 6 mall companies (likely REITs) because they tend to not pay off their mortgage debt, but just count on rolling it over and paying out the funds from operations as distributions. Brad Thomas on Seeking Alpha reviews lots of REITs, and is more positive on some than I am, but you could check his articles to see which ones are better or worse than others. You probably wouldn’t want to get a mall REIT that focused on high end properties that cater to the elite, but low end malls, especially if they don’t have grocery anchors, and excessive debt. Stansberry didn’t give enough specifics to guess actual tickers though.
General idea is to diversify, and add one or two long dated out of the money put (generally far out of the money, to keep option costs down) per month, so that you have a continual exposure to his expected drop in stock prices for indebted companies – because he can’t predict in which month the crisis will start to hit (and option premiums become to expensive to buy more), nor when the crisis will reach its peak.
One interesting additional idea that was briefly mentioned in one presentation was the fact that effective Dec 31st / Jan 1st (but before Trump takes office) is that Dodd-Frank will require banks to hold 5% of any new bond that they sell to the public – an incentive to not take crap public any more. I haven’t checked that fact, but will shortly, as that might help point to why the crisis is likely to develop soon. Take the Ford example – $80 B in debt, about half to roll over in the next 5 years. Peak earnings are less than $1 B / year, so paying it off isn’t really an option. If there is $40 B in new debt to be issued to pay off the old debt, then banks collectively need to keep $2 B of it – which will tie up their capital. Although it is an asset on their books, it is not as secure as US government debt, so they banks need to reserve for possible losses against it – taking up their capital. Probably banks will try to pass this cost on to the seller of the debt – if the banks need to hold $2 B of Ford debt, they will ask F to issue $42 B in debt instead of $40 B in debt to roll over the existing debts. The banks will keep the $2B in debt, meeting the 5% rule, without requiring that the bank raise more capital. Any interest or principle repayment in the future on that extra $2 B in assets is profit for the bank. But suddenly Ford has had their interest costs on whatever was rolled over go up by approximately 5% (assuming same interest rates as before, but paying interest on $42B instead of $40B). If average earnings for Ford are $600M / year, then 2/3 of their profits for the next 5 years will need to go to debt repayment just to get back to where they were – $40B in newly financed debt, plus the 40B in debt that hadn’t been rolled over yet, so still a total of 80B in debt. And that leaves very little room for R&D into electric or self driving cars, profits and dividends, etc. They will be running on a debt treadmill, and the first spike in rates, recession, or slow down in sales may expose the company’s situation as unsustainable.
Given trump will not take office until late January, and the rule will already be in place, and require an act of congress to overturn (no executive order), any company that has to roll over debt (instead of repaying it) in early 2017 is at risk. And since companies don’t like to wait until the last minute to refinance (in case rates move against them, bankers sense desperation, and anything due in less than 12 months is considered a “current liability” and is counted in quick ratios, etc.), any company that has debt that needs to be refinanced in early 2018 or anytime in 2017 is at risk. And if there are enough companies at risk, or that are forced to pay up to roll over, it may create the perception of a credit crisis that may become self -reinforcing, at least to a little extent. Thus, make sure that heavily leveraged companies are out of your portfolio, or that you buy some portfolio insurance like the kind Stansberry is recommending in case the credit market does tank some of these companies.

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Steve
Steve
5 years ago

I’m interested but can’t seem to message the google group

Jess
5 years ago
Reply to  Steve

I am also interested in sharing the cost of the subscription but couldn’t get the link to work. Please send info to jwdory@gmail.com

Craig Cummings
Craig Cummings
5 years ago

I too am interested in sharing a subscription. Or, if you are interested, I have subscription to the pricey Exploration Insights that I could share.

Jason
Jason
5 years ago