Saturday, March 6, 2010
There was a fantastic article on the euro in the Wall Street Journal about the beginnings of the pan-European currency. I don't frequently endorse newspaper articles, which more often than not are essentially ghost written by PR firms or placed to benefit advertisers, but this article is exceptionally good. I couldn't have done a better job of showing why the euro is doomed to fail.
In fact... next to corn-based ethanol... the euro might be the worst large-scale political/economic experiment I can think of... You can read the WSJ article for details, but the bottom line is, hardly a single country in the entire euro monetary union has ever abided by any of the rules. Instead, each country has run bigger deficits and maintained ever-larger debts. The result is a paper currency backed by nothing – not a political union and not a group of prosperous and healthy economies. The result will certainly be a disaster as each of the countries in the union tries to live at the expense of its neighbors.
The current Vanity Fair includes a great excerpt from Michael Lewis' new book, The Big Short: Inside the Doomsday Machine. The excerpt follows Dr. Michael Burry, the first investor to buy credit default swaps (default insurance) on subprime mortgages. Burry had to call Wall Street banks and ask them to create these contracts. Goldman Sachs even sent him a congratulatory note for being the first person in history to buy insurance on the mortgages. Burry noted he was "educating the experts."
What makes Burry's hedge fund, Scion Capital, great is how it began. As a medical doctor, Burry would spend the hours between midnight and 3 a.m. blogging about his stock trades. As his readership grew, professional investors, including Gotham Capital's Joel Greenblatt, offered Burry millions of dollars to manage.
The excerpt also serves as a reminder of how difficult it is to be a contrarian. Burry had to fight with everyone (his investors, Wall Street, even himself at times) to stick with his investment thesis. It ultimately meant a $100 million personal payday. You can read the piece here.
In his latest investment outlook, Pimco's Bill Gross presented an interesting thesis regarding the deterioration of sovereign debt...
Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous "unicredit" type of bond market.
If core sovereigns such as the U.S., Germany, U.K., and Japan "absorb" more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee.
In other words, Gross wonders if a country can solve a debt crisis by creating more debt. Eventually, as countries absorb more and more of the private markets' problems, their debt trades in lockstep with corporate debt. Gross says there's discussion within Pimco as to whether the debt of a highly-rated corporation (say a Johnson & Johnson) could ever trade at lower yields than its home country's debt. We're getting close. There's only a 100-basis-point (1%) spread between comparable Treasury and JNJ paper.
Another interesting point... Sovereign debt pricing is no longer contingent upon interest-rate movement. Instead, investors are starting to value this debt more as a corporation – as in, can the issuing country afford to repay this debt? You can read Gross' entire outlook here.
You may recall my plea two months ago for everyone to take advantage of Mike Williams' True Income newsletter and start buying corporate bonds. Mike has been analyzing bonds professionally since 1972. He is the most experienced analyst on our team and his track record reflects that.
Of the 24 bonds he's recommended since working at Stansberry, he's only sold four at a loss. And his winners are ridiculous. Mike regularly produces 50% gains. He's even tripled his readers' money in bonds – an unheard of feat.
Mike's returns are so impressive because bonds are much safer than stocks, yet Mike trounces the stock market. You see, bonds are a legal claim on a company's assets. As a bondholder, the company is legally required to repay your entire investment plus interest. As a common stockholder, you're only entitled to a share of the company's profits and dividends. If the company goes bankrupt, you lose everything. But if you're holding bonds, you're first in line to get repaid.
And because bonds are valued on the underlying company's ability to meet upcoming interest payments, you can sometimes buy bonds for large discounts to the company's collateral value. These are the bonds Mike recommends in True Income. They produce the highest returns.
I truly believe buying short-term corporate bonds at a discount to collateral value is the single best strategy for part-time investors. You can earn huge returns without putting your capital at risk. If you still haven't given True Income a shot, now is the time. And as always, if you're not 100% satisfied, we'll refund your money. To learn more, click here.
Date Range:2/25/2010 to 3/4/2010
Date Range:2/25/2010 to 3/4/2010