Saturday, June 14, 2008
The tough thing about buying stocks is, you never know when they'll appreciate in price (and you'll make a profit). The other tough thing is, no matter how much homework you've done, there's always a risk that something will go terribly wrong (fraud, accident, etc.) and your position will be wiped out. There are no guarantees when it comes to buying equity.
On the other hand, when it comes to buying bonds, investors have one tremendous advantage: The corporations that issued the paper are legally required to pay the bondholders their interest and then return their capital – on time. It's not optional.
Remember the movie, Goodfellas? There's a scene where someone has borrowed money from the mob to expand his restaurant. He learns a painful lesson. The godfather gets paid, no matter what. As the movie explains in graphic language: "Economy goes bad? F you, pay me. Restaurant burns down? F you, pay me. Wife gets cancer? F you, pay me."
When you're a bondholder, the same rules apply. No matter what happens to the business or the stock price, you get paid.
The other good thing about the bond market is that most individual investors know nothing about it. As a result, there are tremendous inefficiencies, simply because most investors don't buy individual bonds. Why not? They don't know how.
Our newest product, True Income, makes individual bond recommendations, the way our other publications recommend stocks. But unlike stocks, the moment you buy a bond, you'll know exactly how much money you're going to make and when you'll get paid.
Mike Williams, our analyst, is a 62-year-old CFA who's been buying and selling bonds since before I was born. And he's structured the product so subscribers will make big, triple-digit gains in fixed income – something most people believe is impossible. If you'd like to learn more about how Mike does it, click here.
Poor Henry Nicholas III, former CEO of Broadcom. He made the classic playboy mistake: He hired a personal assistant named "Kato." Kenji Kato sued Mr. Nicholas last year for back wages and proceeded to spill his guts in his legal filings, which found their way to prosecutors pursuing him for backdating options.
According to Mr. Kato, Henry Nicholas was a one-man Tasmanian devil of bad behavior: He spiked the drinks of technology executives with Ecstasy without their knowledge, used thousands of dollars worth of illegal drugs while at work, and hired "prostitutes and escorts for himself and customers."
Once, on a flight to Vegas on his private plane, Nicholas allegedly smoked so much pot, the pilot had to wear a gas mask! He must have been a fun boss, eh? Well, until the cocaine made him paranoid and violent. To keep the prostitutes quiet, Nicholas allegedly offered them money and threatened to kill them.
Our favorite commodities pundit, Jim Rogers, gave an interview to Bloomberg this week, and his story's largely unchanged... Jim is still short all investment banks through an ETF. He's specifically short Citibank and Fannie Mae.
Rogers also announced he purchased airlines. His reason... "Everybody's very bearish." He said flights are full, fares are increasing, and if you ordered a new plane today, you couldn't get it for several years due to problems at manufacturers. Also, 24 airlines have declared bankruptcy and "bankruptcies are signs of bottoms, not signs of tops."
In the last issue of my newsletter, PSIA, I compared the current real estate bust with the giant San Francisco earthquake of 1906. In that disaster, people set fire to their homes because they didn't have earthquake insurance but they did have fire insurance. The resulting inferno destroyed 500 blocks – essentially the entire city. The earthquake didn't cause most of the damage... the fires did.
The same thing is happening now in our mortgage markets. Home prices would probably stabilize. But the fraud and the crime that's following the disaster is the real problem. No one will take responsibility for his actions. And that's going to bankrupt just about everyone in the mortgage business.
SEC Chairman Christopher Cox thinks it'll make everything all better if bond-rating agencies just put an "s" on the end of their ratings of structured finance products. One SEC commissioner objected to the plan, not because it's just plain stupid, but because he said it was like putting a "scarlet letter" on those products. That's roughly equivalent to worrying Britney Spears is getting too much negative press.
Date Range:6/5/2008 to 6/12/2008
Date Range:6/5/2008 to 6/12/2008