You Don't Know What's Going on If You Don't Read This
By Dr. Steve Sjuggerud
Tuesday, April 07, 2009
"People are absolutely not positioned for hard times," Richard Russell told the crowd Saturday night. "The present bear market will get much tougher."
Richard Russell famously called the bottom for stocks in December 1974. He told readers of his newsletter, Dow Theory Letters, to buy... after stocks had fallen roughly in half in the preceding two years. During those two terrible years, Richard recommended his readers hold 100% of their money outside of the stock market.
On Saturday night, I attended a tribute dinner for Richard, who's been writing his newsletter since 1958. I figured it'd be a small affair... an occasion for investment newsletter writers like me to acknowledge the guy who taught us all how to do it right. Turns out, over 400 people showed up. Newsletter writers came to California from as far as South Africa and Europe to show their respect. It was a "who's who" of newsletter writers over the last 50 years.
Richard shined during a question-and-answer session after dinner. Famous newsletter writers quizzed him like star-struck kids. The 84-year-old showed he's still at the top of his game in the investment world.
One writer asked how he "knew" we'd hit bottom in late 1974... even though everything looked terrible. And he asked how that time compared to today. Russell replied...
The psychology was right... When I turned bullish, I got angry letters from people telling me I was wrong. The psychology today is totally different. People are very quick now to turn bullish, as we've seen lately. In a real bear market like '74 or the Depression, people don't think it can get better like they still think now.
I lived through the Depression. You could not get a job no matter what you tried to do. Today it's a lot easier. You can get a job. The last three generations haven't seen hard times. They're not prepared.
Richard remembers bread lines stretching for many blocks. He remembers the Empire State Building going bankrupt. He has good memories, too... seeing Babe Ruth hit a home run... and sneaking out to see now-legendary jazz musicians.
He got the biggest cheers with his answer to this question: "If you were in charge of the country, what are the top three things you'd do to turn this country around?"
Richard replied, "I wouldn't do a thing. I'd let the bear market take its course. The fixes won't work. They prolong and compound the problem. And they're costing us trillions."
The crowd went nuts. Russell and the newsletter crowd are strong believers in taking personal responsibility and in saving your money. Today's government "fixes" go against both of those beliefs.
Bill Bonner is behind the world's largest investment newsletter publishing business (including my publisher). Bill gave Russell the ultimate compliment... He told the crowd:
"I still read rich Richard every day. I feel like I don't really know what's going on in the financial world if I haven't read him."
Richard Russell is a hero in our little business. In 1974, he called the bottom of the bear market. Here in 2009, we now have a bear market worse than 1974. Russell is not calling the bottom here yet.
Last month, I told you "permabear" Jeremy Grantham was turning bullish, calling for stocks to rise over the next seven years. He may be right… but it's a bold call to go up against Richard's 50 years of Wall Street experience.
Good investing,
Steve
P.S. Richard's two essays "Rich Man, Poor Man" and "The Perfect Business" are must-reads. You can find them on his website www.dowtheoryletters.com. (Scroll down just a bit to find the links. They are free to non-subscribers.) |
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IT'S VOLATILE, BUT IT'S A BULL MARKET IN ANNALY
For much of the past few years, we've urged income-seeking investors to buy shares in an unusual asset called "mortgage REITs."
Now before you call us crazy for even mentioning the word "mortgage," understand our favorite ideas here don't touch the toxic home loans you hear about these days. Our pick, Annaly Capital (NLY), for instance, borrows money from Uncle Sam at low rates, then takes that money and invests in government-guaranteed mortgage loans at higher rates. It collects money on the "spread" between the two rates. (Read this essay from Steve for the full details.)
Yes, only a government would loan money at low interest rates and borrow it back at high rates. But that's an issue for another time. We're mostly concerned with the safe, double-digit yields these companies are paying out. We're also concerned with what the market thinks...
As you can see from today's chart, the market likes the safe mortgage REIT idea. Below is the past two years of trading in Annaly shares. During the worst bear market of our generation... during a time of massive bank failures... during a full credit meltdown... Annaly is higher than where it was two years ago. This is a market-approved income machine.
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Mortgage finance giants Fannie Mae and Freddie Mac plan to pay more than $210 million in bonuses through next year to give workers the incentive to stay in their jobs at the government-controlled companies.
The bonuses for more than 7,600 employees were disclosed in a letter from the companies' regulator released Friday by Sen. Charles Grassley of Iowa, the senior Republican on the Senate Finance Committee.
"It's hard to see any common sense in management decisions that award hundreds of millions in bonuses when their organizations lost more than $100 billion in a year," Grassley said in a statement. "It's an insult that the bonuses were made with an infusion of cash from taxpayers."
– Associated Press
One big problem for anyone trying to "solve" the mortgage crisis: Most of the deadbeat borrowers have more than one mortgage. About half of the seriously delinquent mortgages – loans OBAMA! would like to mandate be "crammed down" – have second liens attached to the property.
Even if the government erases the first mortgages, the folks in these homes still can't afford them. The problem isn't the mortgages. The problem is the borrowers. They're not creditworthy. And there's nothing you can do to make them creditworthy. Auctioning the houses would at least make them affordable to anyone who has been careful with his savings and didn't borrow more than could afford during the bubble.
Of course, telling people they're going to get what they deserve isn't going to win an election. Not ever.
– Porter Stansberry
S&A Digest
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Thursday, April 02, 2009
Why Gold? This Man Taught Me Why...
Wednesday, April 01, 2009 |
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