Saturday, April 3, 2010
A great quote from Richard Russell on yield:
Today the quest for yield, any kind of "safe" yield, goes on and on. The Fed has taken short rates down to zero. This allows the banks to borrow at extremely low rates and then to buy Treasury bonds at yields near to 4%. This allows the banks to accumulate fat, almost risk free, income. Thus the Fed has taken care of its own.
The big banks are flush with cash again. And all the while Americans are gasping for income like fish out of water. Leading bankers are making more money than ever, while the poor slob on the street is lying awake at night wondering how he's going to make the overdue payment on his home. Of course, his home is "underwater," since his home is worth less than his mortgage.
"Yield chasing" is a classic investor error and part of the speculative contagion that often ensues from the Fed's manipulation of interest rates. If you can't get a return, what do you do?
Yield chasing is one reason banks like Barclays and Bank of America bought CDOs. Some Wall Street genius sliced and diced a giant stack of mortgage paper, bumping up the yields with low-quality mortgages, while getting the ratings agencies to rate the whole thing triple-A.
Government regulators did their part by requiring more capital to hold prime mortgages than triple A-rated securities. That gave the banks just the nudge they needed to chase a few more points of yield, selling lower-yielding prime mortgages and buying slightly higher-yielding CDOs.
If you're thirsting for yield, be careful in general. And you should make sure to check out Tom Dyson's latest pick. Tom has found a stock that benefits directly from the yield-spread boon to the banking system described by Richard Russell in the quote above. From Tom's latest issue of The 12% Letter:
Today, I'm going to show you why I believe this community bank is the safest stock in America... it happens to be sitting on a gargantuan hoard of cash that represents almost 65% of its total market cap... This bank's stock is about to rise 50% or more... and you can get dividends as high as 11% a year if you invest today...
The CEO of this bank saw the real estate crisis coming, and steered his bank away from bad mortgages. In fact, he never bought a single subprime loan. Also, this bank has no debt, and it's made a profit every year since 2000 – as far back as we can find data. This is the safest financial stock we've ever seen. And you won't hear about it anywhere else.
A quick kudos to Dyson for his amazing performance in The 12% Letter. All 27 of the recommendations in his current portfolio are in the black. His biggest gainer is up almost 90% (almost every recommendation is up double digits). If you're looking for yield, you won't find a better advisory than The 12% Letter. To learn more and discover the safest financial stock in America, click here.
Iron ore producers are getting confident. They're now more willing to tie their fortunes to the spot market for iron ore.
For 40 years, iron ore has been priced based on annual contracts. That's all over now. Brazilian miner Vale and Anglo-Australian miner BHP Billiton have abandoned the annual benchmark system. Asian steel companies have signed shorter-term contracts with the big mining companies, with the pricing tied to spot market prices. Initial contract prices, at around $120 a ton, are about double the $60-a-ton contract prices in place for the past year.
I love this news. Higher iron ore prices will generate cash for the big miners. They'll use the cash to shop for new reserves... and do I ever have a slug of new reserves for them.
My No. 1 Extreme Value recommendation is a small company loaded with cash and securities and no debt, with the best management team in the industry... In addition to gold and nickel royalties, it owns 46% of a huge iron ore deposit, one that's likely worth as much as $300 million. It'll also get a royalty once the deposit becomes a producing mine.
The whole company's market cap is less than $300 million today, and the iron ore is just one of a dozen different mining investments, any one of which could yield tens of millions of dollars or even $100 million. The company has nearly $11 a share of cash and investments and no debt. It's selling for less than $10 a share.
Anybody who wants to own a great mining stock with massive upside potential that is also well-protected on the downside needs to learn about this stock right away. Click here to learn how it could make you 28 times your money.
S&A Investment Research
Date Range:3/25/2010 to 4/1/2010
Date Range:3/25/2010 to 4/1/2010