You Should Take Advantage of This No-Risk Trade Right Now
By Dr. Steve Sjuggerud
November 4, 2008
This is the greatest moment I've ever been a part of in American finance.
The fed funds rate is at 1%. In other words, 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.
This is something you absolutely have to take advantage of, right now.
This opportunity will vanish soon. And someone will make a fortune... Position yourself right, and that could be you.
The ultimate way trade on this historic discrepancy, for high-returns with very low risk, is through shares of companies like Annaly Capital (NLY).
Annaly is now paying a 16% dividend. And there's an excellent chance that number could go UP next quarter...
Annaly's business is incredibly simple... It borrows money at a low interest rate and invests it at a higher interest rate in an ironclad safe, government-guaranteed investment. It earns the difference – the "spread." As I told you two months ago, when Annaly is in its sweet spot, it makes a fortune.
Right now, the business is in a sweet spot.
Annaly can borrow money incredibly cheaply... 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. So these "government mortgage bonds" are just as good as risk-free Treasury bonds. Since the bailout, both bonds have the same government backing.
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. (Now, seven times leverage is real leverage... but this is nowhere near the amount of leverage that got the banks into trouble. And this is not an exotic idea, it's not the "toxic waste" debt you've been reading about. It's government-guaranteed bonds, just like Treasuries.)
Annaly sells for around $13.50 a share. 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%!
So if you buy Annaly today, you'll earn roughly 38% in dividends over the next two years. This is ridiculous... An opportunity like this only appears during market turmoil like we're experiencing now.
The story gets even better... How 'bout adding 85% capital gains over two years to your 38% total dividends?
Annaly sells for about $13.50 a share. But its 19% dividend is bound to get investors excited. So let's say investors start diving in. Let's say they drive the share price up to $25 a share. This makes the $2.50 dividend payment a solid 10% yield.
Even if the stock nearly doubles and goes to $25, then investors could still be willing to pay up.
So you could make an 85% capital gain on the stock price (from $13.50 to $25) and as much as 38% in dividends over two years. That would be a total return above 120% – on a government-guaranteed investment!
This is a historic moment. The difference between the cost of money (around 1% and heading lower) and the return on money relative to that cost is at the most extreme levels I've seen in my career.
The ideal way to play it – where you're taking on literally no credit risk to have a very good shot at pocketing a double or more over the next two years – is through buying stocks like Annaly.
Take advantage of this historic moment, right now. And buy stocks like Annaly today.
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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THE MAKE OR BREAK LEVEL FOR COMMODITY STOCKS
When our old friend "Dr. Copper" suffered his giant heart attack this fall, no stock suffered more than Freeport-McMoRan...
As the world's largest publicly traded copper and gold producer, Freeport is one of the "bell cows" of the natural-resource business. Its size makes it a favorite of money managers looking to speculate on commodity prices. As you can see from today's chart, this speculation has worked out terribly in 2008...
Freeport reached a peak around $126 per share in late May. Commodity prices were high, and everybody wanted in. Nowadays, it's the complete opposite. Copper, oil, nickel, and iron ore have collapsed... and so have the companies that mine the stuff. Freeport, for instance, declined 81% from its May peak. This sort of decline for a blue chip is incredible.
Freeport is one of the world's highest-profile commodity stocks... so keep an eye on $25 per share. That is the lowest point the stock reached in October. If it holds above this level, it's a sign the worst is over for commodity shares. If it breaks $25, more misery is on the way...
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The price of petrochemicals used in making goods from toys to mobile phones and from T-shirts to pipes has tumbled to multi-year lows, in further evidence of the slump in global manufacturing activity.
The drop in petrochemicals prices goes well beyond the fall in oil prices, suggesting that demand for plastics and synthetic textiles is extremely weak as the Asia-Pacific export-oriented nations, including China, suffer from reduced overseas orders.
The cost of naphtha – the cornerstone of the petrochemical industry – fell last week to a five-year low of $284 a tonne in the far-east Asia market, down 76 per cent from July's record high of $1,200 a tonne, according to Platts, the pricing agency.
At current levels, naphtha, a by-product of crude oil, is trading well below the cost of crude, a highly unusual phenomenon. While naphtha prices have tumbled more than 70 per cent in three months, oil prices had fallen 45 per cent – a gap that traders described as "unprecedented".
The cost of other petrochemicals has also slumped. For example, the price of polyvinyl chloride – a plastic popularly known as PVC – in China dropped last week to a five-year low of $635 a tonne, down from a record $1,320 a tonne in July. |
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Ford Motor Co., the second-biggest U.S. automaker, said its U.S. sales fell 30 percent in October, the 23rd decline in the past 24 months.
The total dropped to 132,838 cars and trucks, from 190,195 a year earlier, the Dearborn, Michigan-based company said today in a statement on its Web site.
Industrywide U.S. auto sales probably fell for the 12th straight month in October, extending the longest slide in 17 years.
Tight credit, falling consumer confidence and a weakening economy, the same forces that suppressed buying in September, hurt automakers again last month. |
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| Barack Obama took his kids out for Halloween... but he only let them take candy from households making over $250,000 a year. |
– Jay Leno |
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