Filed under: Newsletters, Stocks to Buy, Recession

“Annaly Capital (NYSE: NLY) is in the sweet spot,” says Steve Sjuggerud in Daily Wealth. He says, “It borrows money at a low interest rate and invests it at a higher rate — and earns the ’spread’.”

“The cost of money is historically low, and it’s headed lower. Meanwhile, relative to the cost of money, the return on money is higher than it’s ever been.

“The ultimate way trade on this historic discrepancy, for high-returns with very low risk, is through shares of companies like Annaly, which is now s now paying a 16% dividend.

“In the latest-reported quarter, the company borrowed money at 3.5%. (The credit markets have calmed down a bit, so its cost of borrowing should be even lower next quarter.)

“It invests the money in government-guaranteed bonds. You remember how the Treasury bailed out Fannie Mae and Freddie Mac? It wiped out shareholders. But it explicitly guaranteed the bonds.

“In the latest-reported quarter, Annaly earned 5.6% interest on these risk-free bonds. Therefore, it earned a 2.1% spread. If the company uses seven times leverage, a 2.1% spread means a 14.7% return on its money.

“Analysts estimate the company will earn $2.50 per share next year. It pays out essentially all of its earnings in dividends. So that’ll be a dividend yield of about 19%. This is ridiculous. An opportunity like this only appears during market turmoil like we’re experiencing now.

“This is a historic moment. The difference between the cost of money and the return on money relative to that cost is at the most extreme levels I’ve seen in my career. Take advantage, and buy stocks like Annaly today.”

Steven Halpern’s TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation’s leading financial newsletter advisors.

Annaly Capital (NLY): ‘In the sweet spot for historic yields’ originally appeared on BloggingStocks on Fri, 21 Nov 2008 15:39:00 EST. Please see our terms for use of feeds.

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Filed under: International markets, Financial Crisis

Notch another day of modest progress for the credit markets.

Short-term interest rates declined early Tuesday, as several central banks in Europe injected more cash into the financial system. The London rate for three-month loans in dollars fell 4 basis points to 3.47%, its 12th straight daily decline. The three-month rate for the euro, or Euribor, fell 5 basis points to 4.85%. However, interest rates in Asia rose, with the Hong Kong interbank offer rate, or HIBOR, rising 10 basis points to 3.84%

In addition, the difference between what banks and the U.S. Treasury pay to borrow dollars for three months, the TED spread, narrowed 14 basis points to 262 basis points Tuesday. The TED spread has now declined 172 points from 434 basis points more than a week ago.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Continue reading Short-term interest rates fall on central bank cash injections

Short-term interest rates fall on central bank cash injections originally appeared on BloggingStocks on Tue, 28 Oct 2008 09:55:00 EST. Please see our terms for use of feeds.

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Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

At the end of October (see Fed Implode-o-Meter October 31), it looked like the Fed had spent about $3.8 trillion in the year to date. Not even three weeks later, that figure is now up to $4.28 trillion. According to CNBC, “To put it in perspective that’s . . . more than what was spent on WW II.” Funny choice of comparison; the Iraq war, the longest-running conflict in the history of the US, has also cost more and the final tab won’t be in for years. Anyway . . .

So, where’s all the money going? Here’s a list (hat tip to CNBC) of what has been made public:

The Telegraph UK quotes Paul Volcker, former chairman of the US Federal Reserve and short-list candidate for Treasury Secretary, as saying, “. . . it is already too late to avoid a severe downturn even if the credit markets stabilize over coming months. I don’t think anybody thinks we’re going to get through this recession in a hurry. The economic slump has begun to metastasize after a shocking collapse in output over the past two months . . . normal monetary policy is not able to get money flowing. The trouble is that even with all this [government] protection, the market is not moving.” Further, he said “What this crisis reveals is a broken financial system like no other in my lifetime,” he told a conference at Lombard Street Research in London. Mr. Volker is 81 years old. Normal monetary policy can’t restart economic activity because credit is contracting at a faster pace than new money is coming into the system. Fractional reserve lending can’t work unless banks lend.

Through all of this, the Fed is still taking as collateral illiquid, mark-to-model assets, presumably at notional value, from the banks. In return, the banks receive brand-new treasuries that, in principle, could be lent out. At this point, most, or probably all, of the Fed’s general collateral is comprised of toxic waste. Currently, the Fed does not even have enough reserves to cover dollars in circulation.
Good thing we’re only talking about Monopoly money. If it were real money we’d be in big trouble.

There are a number of grass-roots efforts trying to put an end to the Fed’s out-of-control borrowing. One of them, End the Fed.us is having a meet-up on November 22 in 39 cities. Mish of Global Economic Trend Analysis is putting together another email, fax, and phone-call campaign to stop further auto company bailouts. Chances are slim that the brakes will be put on before the end of the year.

However, with a new administration coming in, 2009 could be another story.

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A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

From its inception, the primary focus of the $700 billion bailout package was on businesses or, more importantly, banks and financial institutions. The plan was aimed at providing financial support to a system that had ceased to function properly, with credit markets freezing up and firms gasping for the additional capital they needed with no one willing to give it to them. Of course once the government gave them that capital it’s been having a hard time persuading them to lend it out again. Still, it appears that the Treasury is ready to broaden the bailout’s goals and provide assistance to an entirely new demographic: Consumer debt.

Treasury Secretary Henry Paulson came out today to let us know that Uncle Sam would not only be bailing out banks and other troubled lenders, but is going to (attempt) some rescuing of consumer debt firms as well. This “second stage” of the bailout, as it’s being called, officials are hoping to bring in some private money as well, which would give the bailout efforts more weight. In a surprising change in focus, Paulson said that the government will no longer be planning to buy troubled mortgage assets, which was its original intention, but will continue to examine ways to help homeowners so that they can somehow stem the tsunami of foreclosures that’s appeared in recent months to be gaining momentum.

Paulson noted that “Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions, “Second, the important markets for securitizing credit outside of the banking system also need support,” he said. “Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.”

What this means is that the Treasury will not be aiming efforts at loosening up another important aspect of our economy: consumer spending. These consumer finance companies that he mentioned are the ones who provide us with car loans, student loans, and credit cards. Much like investors don’t want securities that are backed by mortgages anymore, they’ve lumped investments backed by other loans into that pack as well, and so firms like American Express are having some trouble getting the funding they desperately need.

The thinking is that by providing them with capital, they’ll once again begin lending out to consumers, which should get us to spend more and help support the economy. Then again that was the idea when they bailed out the banks, too, and getting them to start lending again has been much akin to pulling teeth. As a result there’s been a good amount of criticism that these banks are using the money for their own purposes rather than helping struggling homeowners and the overall economy. What’s stopping consumer lending firms from doing the same?

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Filed under: Consumer experience, Housing, Recession, Financial Crisis

Are you better off than you were a year ago? Probably not. Since then, global markets have lost roughly half, or $30 trillion worth of their value. House prices fell 16.6% between August 2007 and August 2008 and 3.4 million people are expected to have foreclosed on their houses by the end of 2009. So you can’t retire as soon as you thought and if you still own it, you can’t borrow money against your house.

Looking ahead to the holiday season and witnessing thousands of people losing their jobs could put you in a bad mood. After all, median income is down since 2000 while it still costs much more to fill your gas tank than it did back then — not to mention pay for health care. So it should come as no surprise to learn that consumer confidence is lower than it has been in the last 41 years.

But consumers are not smart. As John McCain advisor, Phil Gramm has said, Americans are whiners. And McCain himself has made it clear that the economic fundamentals are strong. After all, McCain (or more likely his wife) owns seven houses and thirteen cars. So the point is that his economic fundamentals are strong. And that’s all that really matters.

As for American workers, let them eat cake.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

With house prices down 16.6%, consumer confidence at lowest level in 41 years originally appeared on BloggingStocks on Tue, 28 Oct 2008 12:32:00 EST. Please see our terms for use of feeds.

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I had to step back from the market the last few days.  Trying to follow it by the minute you sometimes lose the bigger perspective of what really is transpiring.  On Thursday for example, the market was heading for another major loss continuing a multi-day trend and it looked like we were going to test […]
Related Posts:
■What the TARP? Cutting Back to the Necessities: 3 Emerging Trends in this Economic Crisis. The Mighty are Falling, Consumers Forced to Save, and Job Protectionism.
■Crash! The Housing Market Free Fall and Client #10 Contagion. Lessons From the Great Depression: Part VI.
■The Four Horsemen of the Economic Apocalypse: Lessons from the Great Depression: Part XX. Housing Distress, Stock Market Tanking, Commodities Collapsing, and Unemployment Surging.
■Two 400+ Point Days in Two-Weeks: Why this is Horrible News for Housing. Volcker and Protecting your Mac.
■The All Hat and No Cattle Nation: Lessons from the Great Depression Part XVII: When Economic Times Cause and Economic Tipping Point.

I had to step back from the market the last few days.  Trying to follow it by the minute you sometimes lose the bigger perspective of what really is transpiring.  On Thursday for example, the market was heading for another major loss continuing a multi-day trend and it looked like we were going to test the October 27 lows.  This is normal in most volatile markets.  Markets never go down in a straight line.  The balance between buyers and sellers always manages to put floors at different price points.  Well the market blew right through the low and flirted in the 7,000 territory.  This was crucial.  After testing those technical lows the market blasted through the stratosphere with a 911 intraday swing.  Insanity.

At the end of the day the punditry had very little to say.  These were some of the headlines:

“Bargain hunters are back.”
“People are focused on value.”
“I have no idea what just happened.”

The last headline made more sense.  During the day on CNBC they were running around like chickens with their heads lopped off talking about complete nonsense and then at the end, it was all about value investing.  Aside from the lack of knowledge, something came to my attention at that moment.  We now have a majority of Americans, many in positions of power that have never lived through an economic calamity like the Great Depression.  They have no idea what is going on.  The economic events of their generation although big, are not epic like those in previous generations.  This one will be legend yet people are still trying to fit it into some sort of known construct.  You hear “stagflation of the 1970s” or “supply side” or all these other terms that simply reflect a known universe.  We are traveling in a different galaxy with a GPS device built for Earth.

One of the things that popped into my mind is that most that lived through the Great Depression are now no longer with us.  The few that did live through it are most likely retired and no longer in positions of power.  Those in their peak power years are baby boomers who never faced World War II or the Great Depression.  In addition, those that lived through the depression had shorter life expectancies:

Take a look at the chart above.  Those that would remember the Great Depression with absolute clarity are those in their 20s, 30s, and 40s.  Let us use the 20 age range.  They would have been born in the 1900s.  Many of those people had an expected life expectancy of slightly above 40 years for males and 50 for females.  So their collective history if not passed on by their children was finished in the 1940s or 1950s.  Those born in the 1910s lived slightly longer, males slightly above 50 years and females 55 years.  So that pushes the range out to the 1950s and 1960s.  The same range applies for those that were actually born during the Great Depression.  You have to go to the 1941 - 1951 range to see a real jump in life expectancy.  In this batch, we have many of the baby boomers.  At this point, we now have males living to 65 years of age and females breaking the 70 years mark.  Many from this group now hold positions of power and have only historical reference of the Great Depression.  With approximately 76 million boomers in our country, this is a sizable part of our population.

I bring this up because when I hear mainstream commentators, many boomers themselves the majority have a lack of understanding of major economic calamity.  Frankly, they may be saying, “this is as bad as the Great Depression” but really don’t have any conviction behind it.  They still believe that those things aren’t possible.  Why would they?  They’ve never lived through an economic bubble of this size.

It is also important to notice that maybe one reason for the distance between historical memory of previous bubbles is the fact that we have nearly doubled the life expectancy from those that were born in the 1900s.  Many people live longer to keep the narrative alive.  In fact, we have the Long Depression that lasted a stunning 23 years from 1873 to 1896 which was twice as long as the Great Depression.  But a sizeable number of people in their 20s, 30s, and 40s during the Long Depression were no longer alive during the 1920s.  There was a new generation that had forgotten the past.  Now, it takes a little longer simply because of the shifts in demographics.  Just an observation.  The Glass Steagall Act came about in 1933 and was repealed in 1999, 66 years later.  Nearly the life expectancy of a male born in 1942 right before the baby boom got going.

Enough of the past for a second, let us bring things back to the current day.  Thursday’s stunning reversal was purely a technical resistance bounce.  There was no good news coming out.  Unemployment claims breached the 500,000 weekly mark and put us at a 7 year high.  Retail sales are pathetic and are stunning us on the downside.  Companies are reporting horrible earnings and managing expectations for the future.  There was zero good news yesterday aside from the fact that we went under 8,000 and technical traders simply jumped in whether they were bottom fishing or short covering.  We will also talk about in this article that with retail sales getting hammered, the unemployment rate is set to sky rocket because a large number of employment is in the retail side.  Also, these big up and down days are not indicative of a healthy market.

Technical Trading Bounce - Retesting October Lows

The above chart should be rather clear.  As the market progressively gets into a vicious feedback loop of bad news fueling bad earnings which then fuels bad sentiment, we need to understand why major rallies happen within bear markets.  The reason at least from a technical and micro side is money is still to be made in these short term fluctuations.  People jump in after a 10% drop and sell out in mass pushing prices up again.  At this point, many things are disconnected from reality and are purely technical.

In fact, the last few months saw the largest number from retail investors pulling their money from mutual funds because they simply do not trust the markets.  Why should they?

Take for example the absurdity which was the mortgage backed securities market.  Here is how the crap played out:

(a)  Originate subprime mortgage

(b)  Batch said subprime mortgages into a security

(c)  Cut the security into tranches of varying quality (i.e., AAA, AA, BBB, etc)

(d)  Sell securities to investors

(e)  Get greedier and create another side bet with CDOs

(f)  Since many investment funds cannot buy securities that aren’t “A” rated, you can take that BBB fund, chop that down and create additional tranches of AAA, AA, and BBB.

(g)  Rating agencies rate it as AAA and investment funds by this stuff up

But return to point a.  All this is premised on mortgages that were 100% assured to blow up.  In addition, the derivatives market create a market larger than the actual face value of the mortgages.  How so?  Think of it as a fantasy basketball league.  Does the fact that millions play fantasy basketball actually impact the game or real players?  No.  But in the case of the derivatives market, synthetic securities were created above and beyond the real world mortgage values.  That is why losses are now larger than the actual face value of many subprime loans.  And let us be honest, Wall Street securitized anything that walked including consumer debt, student loan debt, and mortgage debt.  I talked about this one year ago in the CDO Super Mortgage Birth Story and should give you an insight into how we got into this mess.  What seemed controversial then is flat out common sense now.

The market as I write this is down 300 points which puts us so far with a 3 months losing streak:

DOW September 2008 performance:             -5.7%
DOW October 2008 performance:                 -14%

DOW November 2008 performance so far:   -8.4%

So that is how things stand.  Let us now move on to the consumerist machine that is the United States which is coming to a screeching halt.

Retail Sales Drop Biggest on Record

The market was already expecting a major drop in retail sales.  They were expecting a 2.1% drop but got a record breaking 2.8% drop.  Now that may not seem like a big deal but when approximately 70% of our economy depends on consumption, this is gigantic.  This again reflects the silent depression that is already being experienced by countless Americans.  The shopping gig is up.  Look at recent bankruptcies of Circuit City and Mervyns and you’ll get an idea of where spending is going.  Best Buy announced anemic results in the week thus fueling the flame.  Even the unstoppable latte espresso machine Starbucks announced an incredible drop of 97% in profits for the 4^th quarter.  These are not good results folks.  But what is more problematic is that this will slam on the retail employment side of things.  Do you want to see which singular fields employ the most people?

Now this is a chart of largest occupations, not largest sectors but keep in mind the retail trade side of things employs 17.6% of the entire population.  As you can see from the chart, these are also lower paying fields.  The top two occupations of retail salesperson and cashiers are going to be hit hard by all these stores closing and the abysmal number in sales.  Even though this number may jump up a bit for the holiday season, you can expect that 2009 is going to be horrific.  Many of these are the folks that are considered employed but really want more solid work.  Now, even these jobs will be cut back.  Expect this to show up in the employment numbers in droves over the coming months.

Market Volatility not a Sign of a Healthy Market

It goes without saying that these major up and down swings in the market are not good.  Stability is good. A market that performs well with both economic and technical fundamentals.  The dollar cost averaging daily retail investors is done at least for a good amount of time.  What if you dollar cost averaged for 20 years and saw your account go to say $400,000.  It drops 50% over the past year.  Say you have a few years before retirement.  How much dollar cost averaging will you need to do to recover that $200,000?  And this is someone who simply invested in say the S & P 500 or a broader range of products.  We’re not even talking about riskier investments that could have wiped out an entire portfolio.

Even the most “conservative” funds went insane in this market.  Take a look at one of the largest retirement systems in the world, the CalPERS system here in California:

“(LA Times) The California Public Employees’ Retirement System reported Wednesday that in the year ended June 30 its real estate portfolio declined to $6.08 billion from $9.36 billion, based on 461 independent appraisals of its investments in 288,000 housing units across the country.

The decline in real estate represents a portion of CalPERS losses since the fund hit a high of $247.7 billion on June 30, 2007. It fell to $239.2 billion a year later and since then has plunged a further 23%, to $184.2 billion as of Monday.

CalPERS provides pension benefits for 1.6 million current and former employees of the state and many local governments and school districts. Those employers, which are suffering from strained budgets, could be forced to increase their contributions to the pension fund if CalPERS’ investment performance does not turn around in the next couple of years.”

This doesn’t even factor in additional losses that will come down the pipeline.  We have merely entered into the first stage of the actual major recessionary job losses that will show up in large droves in the BLS numbers.  These are late to the game but we are in full feedback mode now.  These funds gambled and lost big.  $63 billion in losses in one year in a supposedly conservative retirement fund.  The fact that they bought real estate at the peak is frankly out of this world and thought this was a good piece to add to a “diversified” portfolio.  This is like saying since you have cat, dog, horse, and turtle crap it won’t smell so bad because it is diversified.

Remember that big jump on Thursday?  Let us look at the biggest point gains for the DOW:

Most of the best days have come in 2008!  The worst year on record for many decades.  This again is simply a reflection of how absurd saying big jumps and drops is good.  It reflects a poor performing economic system.  Let us look at the biggest point declines:

Once again you see that 2008 reemerges the winner.  Of course, simply going by points doesn’t reflect the actual pain.  We need to look at percentages to reflect changes from history:

Notice something eerie in that chat above?  Most of the biggest percentage daily gains occurred during the Great Depression.  In fact 17 out of 20 biggest one day gains occurred during that time.  We also have the one day jump in 1987 but guess what else shows up on the list?  Two days in 2008.  Nearly 80 years of history and we now have 2 days of this year showing up here.  Not a good sign.  And this is for a supposedly biggest positive day!  Let us look at the worst percentage drop days:

2008 once again shows up but three times here.  9 out of the top 20 down days occurred during the Great Depression.  Then we have other mixed periods such as the panic of 1907, 2001, and various other eras.  But make a note that 2008 is now tied for the worst yearly percent declines in terms of actual days with 1929.  Both have 3 of the worst days on record.

Take that for what it is worth.

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Financial and Economic Amnesia: A Society who has Long Forgotten the Great Depression. 3 Critical Tipping Points: Technical Trading, Retail Sales, and Biggest Market Volatility.

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Related Posts:
■What the TARP? Cutting Back to the Necessities: 3 Emerging Trends in this Economic Crisis. The Mighty are Falling, Consumers Forced to Save, and Job Protectionism.
■Crash! The Housing Market Free Fall and Client #10 Contagion. Lessons From the Great Depression: Part VI.
■The Four Horsemen of the Economic Apocalypse: Lessons from the Great Depression: Part XX. Housing Distress, Stock Market Tanking, Commodities Collapsing, and Unemployment Surging.
■Two 400+ Point Days in Two-Weeks: Why this is Horrible News for Housing. Volcker and Protecting your Mac.
■The All Hat and No Cattle Nation: Lessons from the Great Depression Part XVII: When Economic Times Cause and Economic Tipping Point.

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Filed under: Law, Politics, Financial Crisis

Just say it’s been “a long and winding financial road” for billionaire investor George Soros — but one that’s had more smooth traveling than detours.

True, the Hungarian-born Soros was fined $2 million by a French court in 2002 for insider trading, which France’s highest court upheld on an appeal on June 14, 2006, but other than that transgression, critics would be hard pressed to find other operational/financial flaws.

Soros is perhaps best known for one of the most cunning and successful short-term plays in investment fund history. On September 16, 1992 Soros sold short more than $10 billion worth of the British pound, after the Bank of England failed to raise interest rates. Soros’ profit on the ensuing fall in the pound: about $1.1 billion.

Further, the other dimensions of Soros life that some critics would cite — his social activism and philanthropy — are viewed as positives by many others. Soros has promoted nonviolent democratization in Central and Eastern Europe, and other states, and pledged hundreds of millions of dollars to numerous universities globally and to antipoverty programs in Africa, among many other charitable acts.

Continue reading Financial Felons: George Soros

Financial Felons: George Soros originally appeared on BloggingStocks on Thu, 20 Nov 2008 18:10:00 EST. Please see our terms for use of feeds.

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A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

I guess it’s not all that surprising given the increasing number of foreclosures across the nation over the past few months, but the FDIC officially came out with detailed plans as to how the government will come to the rescue of delinquent borrowers. The announcement was made earlier today by FDIC Chairwoman Shella Bair, and caught a number of experts off guard.

Apparently, the proposal is built upon 2 crucial points. The first is that housing payments on delinquent borrowers two months or more late would be reduced to 31% of gross monthly income. How do they intend to do that? By setting mortgage rates lower for awhile…possibly as low as 3% for five years. Loan terms are also likely to be extended to as long as 40 years (so you’ll be dead before you actually own your home…?). In addition, the FDIC will “encourage” servicers to participate as well, as the government would share 50% of the losses if the borrower they help still doesn’t pay up and ends up defaulting anyhow.. is this really what it’s come to? The FDIC will also start paying servicers who process mortgages $1,000 for reworking loan terms to keep homeowners in their homes and to prevent additional foreclosures. The cost? An estimated $24.4 billion, which will come from the $700 billion bailout program that Congress approved in the previous month. The FDIC also released a statement Friday stressing the importance of reducing foreclosures: “It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.”

So..if delinquent homeowners are getting a piece of the bailout, what about everyone who happens to pay their mortgage on time and live within their means? Will they get a check in the mail to say hey thanks for doing a good job with your finances..sorry you have to eat trillions of dollars in debt over the coming years? The bailout’s focus has been constantly expanding, and there’s been no shortage of people and organizations lining up for their “share.” The mayors of Philadelphia, Phoenix, and San Jose among others have already requested that cities be added to the bailout list as well.

So that means for the bailout candidates list we have banks, delinquent home owners, credit car companies, failing U.S. Automakers, insurance companies, and cities (I’m sure I missed some).

Everyone except the average taxpayer.

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