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Friday, February 23, 2007
Charles Dow, who wrote financial newsletters and books at the turn of the century (and pioneered Dow Theory), famously said: "My clients don't pay me to be bearish."
I'm sure you feel the same way. You read DailyWealth because you want us to help you find opportunities, whatever the weather.
That said, I think we might be entering a period of poor stock returns.
Normally, you can find a sector that's been beat up for a few years. Not right now. This bull market has been the broadest four-year rally I've ever seen. Lots of investors think they're geniuses – especially the commodity guys. Everything I follow has gotten too expensive to buy safely. And investors have begun to completely ignore risk.
Meanwhile, corporate insiders have all but completely stopped buying stocks.
For the next few months, I'm going to be adding short-sell positions to the recommended portfolio in my newsletter, Porter Stansberry's Investment Advisory. It shouldn't be any surprise what my first short-sell recommendation is... General Motors (NYSE: GM).
GM can downsize, it can close factories, it can lay off union workers and renegotiate pensions. But its debts cannot be downsized. And its bondholders aren't going to settle for less than the full amount they are owed. GM cannot pay. Its shareholders will be wiped out, and its bondholders will end up owning the company. GM will be bankrupt within three years – or perhaps sooner if the economy slows.
If you don't understand GM's precarious financial situation, shorting the stock probably doesn't make sense. It pays a 3% dividend that you'll have to pay, if you're short. It's attempting a massive restructuring that will probably increase its operating results this year. The stock has bounced strongly off its lows. But none of that stuff matters when you realize that GM must spend $16 billion to $18 billion this year alone on debt financing and, with that burden, there is no way the company can make a profit. It's only a matter of time before the company goes bankrupt and the common stock goes to zero.
THE DANGEROUS DIVIDEND YIELD OF SUBPRIME LENDERS
Subprime mortgage lending companies are imploding. ResMAE Mortgage, of Brea, Calif., declared bankruptcy last week. And Bloomberg says at least 20 subprime lenders have shut down, scaled back, or sold themselves to larger companies in the past five months. Look at the chart (below) of New Century Financial (NEW) and NovaStar Financial (NFI)... two of the larger publicly traded mortgage lenders.
Right now, one-year historical dividend yields on both these stocks are around 40%. That sounds good, but you should know something before diving in: They are leveraged 20-to-1. The assets they've levered up to buy are high-risk mortgages that have begun defaulting at a record pace. While not all of the mortgage lenders will go bankrupt, some of them will. When you've got 20-to-1 leverage, your assets only have to decline by 5% to wipe out your equity.
To profit from this situation, wait until there's a clear uptrend, and bet on the best mortgage lenders in the business... or keep reading DailyWealth.