Saturday, February 28, 2009
Take note... Late the other night, on the way home from National Airport, my driver, whose car service I've used for years, asked me an investment question for the first time ever. He knows my business well, as he ferries most of us to the local airports when we travel and brings in people for interviews. What did he want to know? How to buy gold bullion.
It's one of life's real paradoxes. Back when gold was trading for $250 an ounce, we couldn't even write about it without subscribers calling us quacks and "gold bugs." Now, with gold near $1,000 an ounce, my driver tells me all of the talk radio personalities are recommending gold. Everyone wants it, apparently.
Meanwhile, stocks have fallen about 50% from their highs. Many companies are now, for the first time in decades, trading for less than book value. But nobody wants to buy stocks. Nobody.
When the facts change, we change our minds. Three years ago, we thought small community newspapers might be a good investment. We assumed lots of the large regional papers would go bust, as competition from the Internet stole advertisers and subscribers. But we thought the smaller community papers would survive, if only because they have a monopoly on local news.
Wrong. We recommended Journal Register, publisher of the New Haven Daily and 19 other community newspapers, in May 2005. About a year later, it was clear our hypothesis was wrong: Newspapers weren't going to survive. We took a 25% loss. Nobody likes taking a loss. But a 25% loss sure beats a complete wipeout. Journal Register filed for bankruptcy this week, along with Philadelphia Newspapers – publisher of Philly's two largest papers.
We learned our lesson, slowly, and made up for our loss by selling short Gannett, publisher of USA Today. We booked a 60% gain in PSIA on Gannett. Remember: The downside from here is still 100%. It's almost never too late to sell short, if you can find shares to borrow.
This is a theme I'm following in my newsletters... Companies that borrowed a lot of money to buy assets in 2005 and 2006 have seen the value of those assets plummet, and the returns from those assets disappear.
Meanwhile, they still owe billions from the acquisitions and can't afford to pay the interest on their debts. It is impossible for these companies to refinance now – they're trapped. It's the corporate version of people taking out huge mortgages they can't really afford to buy McMansions. There's no better trade in 2009 than short-selling companies that cannot afford their interest payments. To access my latest recommendation, click here.
From a reader: I have been watching Citigroup shares fall from $50 in late 2007 to under $2 today. With the stock so severely devalued, this seems like a future 10-bagger or more.
Citigroup is at the epicenter of the financial earthquake that began in early 2007 as the default rate on mortgage securities began soaring. Without the Fed propping up the bank, it would have gone under a long time ago (and in my opinion, should have gone into receivership long ago).
But your point about it being too big to fail is certainly true. One of the main reasons the government must put forth programs like the TARP, etc. is because the FDIC is woefully underfunded. Without these kinds of bailouts, a national run on the banks would be a real possibility – which explains why the price of gold has gone up.
But just because the banking operations of Citigroup cannot be allowed to reach insolvency doesn't mean the common stock is worth anything. Likewise with General Motors, Fannie Mae, Freddie Mac, etc., the government might have a vested interest in these corporate institutions, but all of them belong to their bondholders, not their shareholders. The shareholders were wiped out a long time ago. They just don't know it yet.
Anyone recently diagnosed with cataracts must check out the interview our own Dr. David Eifrig conducted with a board-eligible ophthalmologist in Florida who has discovered some surprising – and dangerous – facts about the way eye surgeries are handled in the U.S. If you've been told you need surgery, you should hear from her before you go under the knife.
The interview is only available to Retirement Millionaire subscribers. If you'd like access, click here...
Many of you have asked about the risks of investing in the virtual bank, Annaly. This week, the company put out a wonderfully readable press release about the risks to its business stemming from the Obama mortgage plan. It should answer most of your questions.
Date Range:2/19/2009 to 2/26/2009
Date Range:2/19/2009 to 2/26/2009