In the August 20 DailyWealth, I covered several of what I call "free money" plays – and how True Wealth readers made a pile of money back in 2002 in Annaly Mortgage (as it was called back then) and Anworth Mortgage.
That essay in August missed the bottom in these stocks by three days... If you were lucky enough to have bought at that bottom, you'd be up an average of 88% now – including dividends – in less than five months.
But I didn't just recommend these free-money "virtual banks" in that one DailyWealth... I've been driving this theme home for months...
For example, one month later, on September 20, we devoted the entire issue of DailyWealth to "virtual banks" like these. I said, "It's virtual bank season again. If the Fed keeps cutting, then the returns these stocks can make will be comical, just like they were in 2000 to 2002."
We recommended them again in the December 18 DailyWealth, devoting yet another issue to this idea. In that issue I explained these again...
"Virtual banks simply borrow money at a low rate and invest it at a higher one. They make a profit from that spread – the difference between the rate they borrow at and the rate they earn on their 100%-safe investments. All things equal, the crucial factor for the virtual banks is what the Fed is doing... If the Fed is lowering interest rates, it's Virtual Bank Nirvana."
My friend, the Fed is cutting rates... and will keep cutting...
In what was music to the ears of virtual-bank shareholders, Ben Bernanke told the world yesterday he and his compadres at the Federal Reserve "stand ready to take substantive additional action as needed to support growth."
Translation: He'll keep cutting interest rates. So the interest-rate spread should stay wide... mortgage rates could stay above 6%, and the Fed could cut rates to 3% or less.
As long as the "interest spread" is widening and stays wide, we'll make a lot of money in virtual banks. Based on past cycles, we can still make triple-digit returns here. (In the last cycle, Anworth shareholders made nearly six times their money with dividends reinvested.)
So looking ahead two years, I expect that we'll have made huge dividends... And we'll have made huge capital gains as well, as investors won't be able to resist the large dividend payments, driving the share prices of virtual banks up. The dividends and subsequent share price appreciation should be worth a double.
Importantly, this recent banking crisis is actually a benefit to virtual banks, as they take no credit risk. The CEO of Anworth recently said the worse the banking crisis gets, the steeper the interest rate spread will grow. That's the perfect situation... Virtual Bank Nirvana.
For safe, triple-digit gains, courtesy of the credit crunch and Ben Bernanke, we still like shares of virtual banks like Annaly... and my favorite True Wealth virtual bank recommendation right now... which was recommended to subscribers in the October issue.
If you're a subscriber, I encourage you to go back and read that issue. If you're not, but you're interested in safe, moneymaking ideas like this, consider coming on board and joining us as a subscriber.
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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Back in July 2007, we wrote in this space that the long, profitable trend in real estate investment trusts (REITs) had finally come to an end.
We cited low dividend yields, expensive stocks, and most importantly... a chart showing a clear change in the "big trend." We ended our commentary with this: We're sure a handful of real estate-related stocks will keep producing nice returns... but for the broad REIT market, the uptrend is over.
Well folks, the bull market uptrend is not only over... it has turned into one of the biggest bear market downtrends we could possibly show you. Our chart today of the iShares Real Estate Fund (IYR) tells the story. This is ETF is a who's who of commercial real estate in America. Major holdings include Simon Property (shopping malls), ProLogis (warehouses), and Host Hotels (hotels).
We can't help but think the Federal Reserve has seen piles of charts and numbers confirming the giant bear trend in commercial real estate... and a shot of lower interest rates to "goose" the economy will follow.
