My High Dividend Stocks Blog

My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.

Gary North's Tip of the Week - July 02, 2011 Retirement Planning

I was busy yesterday with the family ahead of the long weekend, so I didn't produce a free tip of the week.  However, my mentor (Gary North) produced one and his is quite good.  It is one retirement planning.  Check it out.  I just did.
 
GARY NORTH'S TIP OF THE WEEK


Gary North's Tip of the Week - July 02, 2011 Retirement Planning
=====================================================
  I am not a big fan of retirement. I don't want to slow down. I
think there are many ways to stay productive after age 65.

 To be involved in post-retirement volunteer charity work, you
will need retirement income.

  Most Americans are planning to retire. Most do as soon as they
can, at age 62: preliminary Social Security payments. I don't
recommend this.

 If you plan to retire, you had better have a plan to retire.
One site that can help you make accurate calculations is here:

           http://choosetosave.org

 Because people suspect that the numbers will not add up, they
refuse to go through the exercise. "No news is good news."
Husbands and wives need to look at the numbers, beginning the
week after the honeymoon. (Actually, this should be talked
through before the marriage.)

 I have a forum on my site: Non-Retirement. That gives you my
view on the matter.

Gary "Will Write for Pay" North


 =============================================
Recent articles posted at www.garynorth.com

================================================================

The Real Estate Slump vs. Keynes and Friedman. . . but Not Mises

When the economic crash comes, it will bury the two giants of 20
th century economic theory.  Call this a positive spillover
effect.

Read the full article at:
< http://www.garynorth.com/members/8211.cfm >

================================================================

On Evaluating a Conspiracy Theory

In this area, I am one of the oldest of the old-timers. I have
seen lots of conspiracy theories.  I have even written one.

Read the full article at:
< http://www.garynorth.com/members/8210.cfm >

================================================================

Applying Pareto's Law to Project Management and Resource
Allocation

I have learned this technique from 50 years of experience.  It
was a hard lesson to learn. It is not intuitive. Pareto's law is
not intuitive.

Read the full article at:
< http://www.garynorth.com/members/8209.cfm >

================================================================

An Easy-to Learn Video Skill That Can Make You Fireproof

Anyone can learn this in 20 hours, but almost no one will,
especially not in your department.

Read the full article at:
< http://www.garynorth.com/members/8206.cfm >

================================================================

Never Say Retire

If you ignore the information here, it will cost you. Millions of
Americans have ignored it, are ignoring it, and will ignore it.

Read the full article at:
< http://www.garynorth.com/members/8208.cfm >

That's it for this week!

Visit my site, www.garynorth.com, for the latest charts on the U.S. dollar, gold's price, and Federal Reserve statistics.

Is Free-Market Anarchism Unworkable? Not in America’s Roofing Industry

Is Free-Market Anarchism Unworkable? Not in America’s Roofing Industry

by Mark R. Crovelli

Recently by Mark R. Crovelli: Patriotism Is the Last Refuge of an Idiot

 

   

Maybe it is the fact that most Americans are educated in socialistic quasi-prisons today. Whatever the reason, it seems to be virtually impossible for Americans to conceive of an economy devoid of invasive government regulations and manipulations. The idea of completely freeing the economy of these burdensome government contrivances, which is precisely what free-market anarchism means, is thus completely incomprehensible to them. A totally free market for anything is assumed from the outset to be impossible, unworkable, and dangerous.

And yet, there is at least one sector of the American economy that is already about as anarchistic as could possibly be imagined. I am talking about the thousands of businesses that install roofs and rain gutters in this country. It is an industry that is exciting, dynamic and thrillingly free. The industry offers an important economic lesson for unimaginative Americans who blithely assume that free-market anarchism is impossible, unworkable, and dangerous.

That the roofing industry could be as anarchistic as I claim may seem absurd at first glance, since there are layers upon layers of laws "regulating" it. There are licensing laws in some jurisdictions governing who may or may not install roofs and gutters. There are myriad federal and state laws governing worker safety and workers’ compensation. There are laws governing the minimum wage and restricting the hiring "illegal" immigrants. And finally, there are laws and "codes" governing the installation of the roofing system itself.

How can an industry be considered virtually anarchistic when there exist thousands of federal, state and local laws "regulating" it?

The answer, quite frankly, is that the vast majority of roofing companies don’t give a rat’s ass about the governments’ laws. Most don’t care a whit whether the rich scumbags in congress don’t want them to hire Mexicans. They hire them in droves in order to drive down their prices. Most don’t care one iota whether fat OSHA office workers want them to wear unwieldy and dangerous harnesses. They simply don’t force their workers to wear them, as if the law were voluntary. Most don’t give a damn what the federal minimum wage laws say. They pay their workers as little as the workers will accept in this bad economy and the workers are fantastically happy to have the job. And most don’t give even a moment’s notice to the licensing laws for roofers in certain jurisdictions. They simply have licensed people pull permits for them as quickly as they please. Call me if you need one pulled!

They don’t care at all about these laws because they know the trump card is in their hands: bankruptcy. If the jackasses down at OSHA try to go after one of them for not wearing harnesses, the company will miraculously go under that day only to reemerge two days later with a new name and a new proprietor. If the immigration bureaucrats come after them for hiring so-called "illegals," the remaining "legals" will hang out drinking beer for a few weeks until their other guys are able to get back over the border to get back to work. No big deal. (I once worked with a Mexican in California who was deported early one morning and made it back to work before lunchtime!) What’s the worst the bureaucrats can do to you as a roofing business owner? Take your compressor or stick you with some fines? Ha! See you in two days!

This refreshingly rebellious attitude toward the governments’ asinine laws does not mean that roofers do not care about the quality of their work, however. The key to staying in business and making money in the roofing industry is installing quality roofs and having zero leaks. Either that, or you run from state to state putting up bad roofs for suckers and then get out of town as quickly as possible. (If you ever wondered what kind of person is falling for those ridiculous Nigerian email scams, it’s the same idiot who’s hiring a cheap, out-of-town roofing company. He no doubt wonders how he keeps getting scammed).

Roofers care about putting up good roofs because much of their business comes from word-of-mouth. If you put up a bad roof, you can be sure to have lost that entire neighborhood for once and for all. Also, since any decent roofer has liability insurance against leaks (it is in fact required to do work for insurance companies), he cares passionately about not having to make claims against his insurance. Nothing will put you out of business quicker than making claims against your insurance that will either astronomically elevate your premiums or even cause insurers to refuse you coverage. The free market is thus virtually the only reason why roofers put up good roofs that don’t leak.

Hey, wait a second! What about those building codes and roofing inspections that states and cities have instituted in order to make sure that roofers put up decent roofs? Aren’t these regulations a major reason why roofers do a good job?

I am terribly sorry to have to burst your bubble if these objections are running through your naïve little head, but city roofing inspections and building codes are a complete and utter joke. In the first place, as far as building codes and roofing codes are concerned, cities basically lift the codes from manufacturer instructions or from non-profit organizations, like the ICC. Most commonly the "codes" are simply awkward bureaucratic rehashes of what roofers can read for themselves on the felt rolls or shingle bundles. In other words, the cities basically tell roofers to follow the instructions on the package. If you think that telling roofers to follow instructions is the reason you are getting a good roof, then I have a bridge I’d like to sell to you!

The city roofing inspection racket is no less of a joke. Here’s an example. I was recently doing some carpentry work at a house when the roofing inspector showed up, so I offered to let him use my ladder in order to get up to inspect the roof. He declined, saying "I can tell that it’s ok from here." I have seen that occur more times than I can count. I have also seen roofing inspectors being bribed, as if that should surprise anyone.

More importantly, city roofing inspections are completely unnecessary when the roofer has liability insurance (and anyone stupid enough to hire a roofer, or anyone else for that matter, without liability insurance deserves whatever disaster befalls him). If the roof is installed incorrectly and leaks as a result, the homeowner can make a claim against the roofer’s insurance. The roofing inspector and the city, by contrast, will give the homeowner absolutely nothing if the roof leaks. Of what use, then, is the roofing inspector? This is all the more true since the homeowner’s insurance company will often inspect the roof itself in order to assure that it is installed correctly. Also, some roofing manufacturers, like Genflex for example, will inspect, certify, and guarantee the roof themselves. Given this, why on Earth are these nosy and lazy bureaucrats necessary? The cost of the roof is higher than it otherwise would be without them, and they do nothing that is not already being done better by the insurance companies.

The good news is that it has probably never been easier to get a fantastic and affordable roof in this country. This is due to the rebellious and sunburned anarchists in the roofing industry itself, not to the politicians and bureaucrats who have bankrupted this country.

July 1, 2011

Mark R. Crovelli [send him mail] writes from Denver, Colorado.

Copyright © 2011 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

Geithner's Victims of Last Resort by Gary North

Geithner's Victims of Last Resort

by Gary North

Recently by Gary North: The #2 Port in the Academic Storm Is About to Close

 

  

You may have heard that the Federal Reserve System is the lender of last resort. This is a misleading concept. The Federal Reserve loans the U.S. government newly created fiat money. The government issues the FED an IOU. It is backed by the full faith and credit of the United States government. But who stands behind the United States government, wallets in hand? You do. And so do I.

We are the victims of last resort.

On May 13, Timothy Geithner wrote a letter to Colorado's Senator Michael Bennet. In his letter, he presented the case against freezing the debt ceiling. The letter is here.

Geithner began with a statement that is muddled almost beyond belief. "As you know, the debt limit does not authorize new spending commitments." Quite true. The debt limit does not authorize anything. It prohibits the authorization of any further borrowing. Officially speaking, prohibiting borrowing is the idea behind the debt ceiling. That is why Congress keeps raising it. Congress does not want to cut spending. It also does not want to raise taxes in order to pay for the spending.

The sentence says the opposite of Geithner's point. We know this because of what came next. "It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past."

He therefore did not really mean that "the debt limit does not authorize new spending commitments." He meant to write this: "An increase in the debt limit does not authorize new spending commitments." Therefore, he reminded Bennet, to raise the debt limit does not authorize any new spending commitments. Geithner, in his befuddled way, was trying to offer Congress a fig leaf to cover its nakedness. By raising the debt ceiling, Congress will be perceived by the voters as spending recklessly, which is an accurate perception. Geithner was trying to say this: by raising the debt ceiling, Congress does not automatically pass new spending laws.

Millions of voters understand this shell game. If the ceiling gets raised, Congress can then vote for new spending bills. If it doesn't get raised, Congress cannot pass new spending bills without cutting existing spending. The debt ceiling inhibits Congress.

Geithner's sales pitch is simple: Congress must raise the debt ceiling in order to meet its existing commitments. He is giving Congress a way to justify this ceiling hike to constituents. "We're not wild spenders. We're merely making it possible to fulfill previous Congressional commitments made to the public. You don't want us to break our promises, do you?"

He then wrote: "Failure to raise the debt limit would force the United States to default on these obligations, such as payments to our servicemembers, citizens, investors, and businesses." This is correct. This is the famous bottom line.

Do you see what this implies? A rising debt ceiling is built into American politics. Using Geithner's logic, there is no escape from an ever-larger national debt. Every year, the ceiling will have to be raised. Medicare is in the red. Social Security is in the red. Combined, they are about $100 trillion in the hole, according to some estimates.

Who is going to buy this Treasury debt as it rolls over every 50 months (today's average maturity)? For how much longer? This money will have to come from somewhere. It will come from money that might otherwise be invested in the private sector.

Ever since November 2010, the money has come mainly from the Federal Reserve System: $600 billion in newly created money. This will stop after this week. Then what?

The constant absorption of capital by the U.S. government cannot go on forever. It will undermine the growth of the economy by transferring investment capital to the Treasury. When the economy stops growing, the deficit will get worse. At some point, investors will stop lending to the Treasury at anything except very high rates. This will turn a recession into a depression. The government will raise the debt ceiling, but it will not get the funds required to keep spending. This process of ever-rising debt will not go on. As economist Herb Stein observed decades ago, when something cannot go on, it has a tendency to stop.

This means that when the Federal Reserve finally stops buying U.S. debt, there will be a great default. I mean finally. I do not mean temporarily. I do not mean this year. The fear of another recession may keep the safe-haven money flowing into the Treasury this year. But, at some point, investors will demand higher interest rates. Geithner's letter raises this specter of higher interest rates if the debt ceiling is not raised. But this threat will also exist if the debt ceiling is raised and raised again, as it will be.

The Federal Reserve at some point will start buying Treasury debt again to keep rising rates from crippling the economy. This means price inflation will return, as it did in the late 1970s. Then it will move above that era's rate of rising prices. This is why the FED will eventually have to face the music: either hyperinflation or the Great Default. I believe that it will choose the Great Default. If it refuses, then the dollar will collapse.

In either case, the division of labor will contract. In either case, there will be bankruptcies. There will be massive unemployment of people and resources.

We are nowhere near this moment of truth. I know there are lots of people out there who say that hyperinflation is imminent. They are wrong.

DEFAULT NOW

Geithner is facing a default if the debt ceiling is not raised. He said that a default would call into question for the first time the full faith and credit of the United States government. He is correct. I can think of no more liberating event. The monster would go bust.

Investors around the world would lose money, he says. I surely hope so. That might keep them from financing the monster again. Anyway, for a couple of years.

He thinks there will still be buyers, but at higher rates. That would restrict the government's spending, since the government would have to pay investors rather than subsidize new boondoggles.

Default would increase borrowing costs for everyone, he wrote. He did not say why this would be the case. If the government defaults, people will invest elsewhere. It seems to me that this would be good for the private sector. Geithner needs to prove his case.

"Treasury securities are the benchmark interest rate," he wrote. They are? Why should a FED-subsidized interest rate be the benchmark? Why should an out-of-control international debtor set the standard?

THE MOB

"A default would also lead to a steep decline in household wealth, further harming economic growth." Think about this. A thief sticks a gun in your belly. He says, "hand over your money . . . forever." He then shares this money – after handling fees – with his fellow mobsters.

Geithner is saying that if the victims ever decide not to let the thief steal any more of their money, this will reduce household wealth. It will indeed – the household wealth of the thieves. It will increase the household wealth of the victims.

"Higher mortgage rates would depress an already fragile housing market, causing home values to fall." Fact: home values have fallen even as the U.S. Government's debt ceiling has soared. There is a reason for this. As the government has borrowed more money, thereby reducing the money available to the private sector, housing prices have fallen. He did not explain this economic fact. He did not mention it. I can understand why not.

"This significant reduction in household wealth would threaten the economic security of all Americans and, together with increased interest rates, would contribute to a contraction in household spending and investment." He meant the households of politicians, bureaucrats, and everyone who is on the take from the U.S. government.

But what about the victims? What about the taxpayers whose net worth is being used as collateral for Treasury debt? Why would a ceiling on the government's pledge of their future wealth produce a "significant reduction" in their future household wealth? He needed to explain this.

Keynesian economists need to explain this.

Keynesian financial columnists need to explain this.

They never do.

AMERICAN TAXPAYERS: VICTIMS OF LAST RESORT

"Default would also have the perverse effect of increasing our government's debt burden, worsening the fiscal challenges that we must address and damaging our capacity for future growth." So, if Congress votes to cap the government's debt, this will produce even greater debt. We must therefore seek national solvency through additional debt. Solvency through debt! I am reminded of another group of slogans: war is peace, freedom is slavery, and ignorance is strength.

What else would a default do? "It would increase rates on Treasury securities, which would significantly increase the cost of paying interest on the national debt." Yes, it would. But the question arises: If the government defaults on its debt, why would it bother to pay any interest at all? The whole idea of default is to stop paying.

It's just like people who owe more on their homes than the homes are worth. They stop paying. If they are evicted – most are not for months or years – they will rent. They will pay less in rent than they pay on their mortgages. In the meantime, they pay nothing except property taxes. (Governments will foreclose when lenders won't.)

The idea of the debt ceiling is to keep the government from running up its tab, based on the future net worth of taxpayers. The idea behind opposing any increase of government debt is this: "Let's stop any new spending projects." Higher interest rates, if they come as Geithner said they will come, will reduce the ability of the government to start new wealth-distribution boondoggles. The money that would have funded the new projects will have to go to creditors in the form of interest payments.

Why is this bad?

It is bad if you are a member of a group that gets payoffs from the Federal Godfather. It is not bad if you are not.

He said that a default will lead to weaker growth. It will lead to more unemployment. A sagging economy will lead to lower tax revenues and "increased demand on our safety net programs." Whose safety net programs? "Ours."

Why will unemployment rise if the government cannot spend borrowed money? Why won't taxpayers save more money, leading to greater economic output and therefore reduced unemployment? Why is it bad for the economy to allow taxpayers to spend more of their own money the way they want to? These questions apparently did not occur to Geithner, or if they did, he chose not to consider them.

A default will lead, he said, to a reduction in "productive investments in education, innovation, infrastructure, and other areas. . . ." He said "investments." That is a political code word for "government subsidies." A default would mean that the government will have to spend less in those areas of the economy in which (1) politicians buy votes, (2) salaried, Civil Service-protected bureaucrats spend money to innovate, and (3) the teacher unions prosper.

He warned that "Treasury securities are a key holding on the balance sheets of every insurance company, bank, money market fund, and pension fund in the world." This is true. This means that taxpayers' future wealth has been mortgaged to provide securities for these outfits. So, if we take this argument seriously, how will the government ever stop increasing the debt ceiling? It won't. The Federal debt system has addicted the world's financial institutions to the promise that American taxpayers are the victims of last resort.

The U.S. government borrows by promising that American taxpayers will fork over the money. The mob has bought itself fiscal credibility. It has guns and badges, and it can finance itself by assuring investors that these guns and badges will be used.

How can this ever be stopped? Geithner or his successors will be able to use this argument forever.

There are two ways that it can be stopped: (1) hyperinflation by the Federal Reserve, which will buy the Treasury's IOUs when other investors cease; (2) default whenever the Federal Reserve stops buying new Treasury debt. One or the other must happen, because (1) the Congress keeps running $1.5 trillion annual deficits, and (2) the Social Security and Medicare liabilities are unfunded.

In the meantime, Geithner implores Congress to kick the can one more time. He will be back for another increase in a year. He is a cheerleader. "Kick it again! Kick it again! Harder! Harder!"

GEITHNER'S PAULSON IMITATION

He said that a default would raise questions about the solvency of the institutions that hold Treasury debt. This could cause a run on money-market funds. It could be "similar to what occurred in the wake of the collapse of Lehman Brothers." He said that this could "spark a panic that threatens the health of the our entire global economy and the jobs of millions of Americans."

This sounds terrifying, but is it true? We have heard all this before: in September and October of 2008. Geithner's predecessor, Hank Paulson, and Ben Bernanke warned high-level Congressmen that this was about to happen. That was how they got Congress to fund TARP. But they never proved that a collapse was imminent. In a persuasive presentation, former budget director David Stockman has shown that no such collapse was imminent.

"Even a short-term default could cause irrevocable damage to the American economy." Irrevocable! Really? Is the American economy so dependent on Treasury interest payments that everything that Americans do or own is at risk? Why? Because "Treasury securities enjoy their unique role in the global financial system precisely because they are viewed as a risk-free asset." I see. Risk-free assets. But risk is inescapable in life. Geithner said that this does not apply to buyers of IOUs from the U. S. Treasury. Not yet, anyway.

When an IOU issued by an agency that is running a $1.6 trillion annual on-budget deficit is regarded as risk-free by investment fund managers, then my strong suggestion is that you not allow those fund managers to handle your retirement portfolio.

"Investors have absolute confidence that the United States will meet its debt obligations on time, every time, and in full." They do? Really? Then they are incapable of reading a balance sheet.

"That confidence increases demand for Treasury securities, lowering borrowing costs for the Federal government, consumers, and businesses." It does? Really? Let me understand this. The demand for Treasury securities increases, because investors with "absolute confidence" in the Treasury's IOUs hand over their money to the Treasury. Yet this transfer of funds somehow lowers borrowing costs for consumers and businesses. I am a bit confused. If the Treasury gets the capital, how can consumers and businesses also pay less for capital? If money goes to the Treasury, how is it simultaneously made available to consumers and businessmen?

You see my problem. I am not a Keynesian. I have this theory that money transferred to X cannot be simultaneously transferred to Y. If money is spent by X on what he wants to buy, it cannot be spent by Y on what he wants to buy. But this is not the case in the world of Keynes.

"A default would call into question the status of Treasury securities as a cornerstone of the financial system, potentially squandering this unique role and the economic benefits that come with it." I ask: Whose economic benefits? The fellow holding the badge and the gun or the fellow with the wallet?

"If the United States were forced to stop, limit, or delay payment on obligations to which the Nation has already committed," he said, "there would be a massive and abrupt reduction in federal outlays and aggregate demand." Again, I have this problem. I am not a Keynesian. I understand cause and effect as follows. If spending by Y (the government) decreases, this leaves more money in X's (the taxpayer's) wallet. When X spends his money without the middleman of the guy with the badge and the gun, aggregate demand does not change. I realize that this is not true in Geithner's parallel universe, but that's how aggregate demand works in my world.

I guess I need a formula. Without a formula, economists cannot perceive cause and effect. So, here goes: $X + $Y = $X + $Y.

To understand this, we need story problems. We all hate story problems, but they help us understand.

(1) "If X spends $1.6 trillion dollars, and Y spends no dollars, how much is aggregate demand?"

(2) "If Y sticks a gun in X's belly and says 'hand it over,' and then spends $1.6 trillion, how much is aggregate demand?"

(3) "If Y comes to X and says, 'hand it over, but this is a loan,' and X forks it over, when Y spends $1.6 trillion, how much is aggregate demand?"

Geithner does not operate in terms of this formula. So, he said that when the government (Y) stops spending, there will be a decrease in aggregate demand. Somehow, the excess money that is now in X's wallet will disappear. "This abrupt contraction would likely push us into a double dip recession." He did not define "us." He wanted Senator Bennet to believe that if Y spends less money, X will suffer a double dip recession. We're all in the same boat, he implied. Why? Because . . . a drum roll, please . . . we owe it to ourselves!

This is Keynesianism's parallel universe. It is a world of endless increases in the U.S. government's debt ceiling. It is a world of endless increases in the Federal Reserve System's monetary base, filled with IOUs from the U.S. government. It is a world in which guns and badges turn stones into bread.

CONCLUSIONS

Here is Geithner's conclusion: "It is critically important that Congress act as soon as possible to raise the debt limit so that the full faith and credit of the United States is not called into question." He went on to say: "I fully expect that Congress will once again take responsible action. . . ."

He and I define "responsible action" differently. He defines it as "authorize people with badges and guns to borrow more money in terms of their ability to get their hands on enough taypayer money to keep paying interest." It is a system in which the taxpayer is the victim of last resort.

I have a different conclusion. I think that Congress will authorize another increase in the debt ceiling. It will do this multiple times. As this limit is increased, there will be a reduction in the number of investors who have absolute confidence in the full faith and credit of the United States government.

Congress is not going to balance the budget, because there seem to be no negative consequences for not balancing the budget, either political or economic. So, the debt will get larger.

At some point, interest rates will rise. Then we will see the negative consequences that Geithner described in his letter.

Geithner is arguing for a delay. That is what most politicians argue for. Today, most politicians have adopted the faith of Dickens' Mr. Micawber: "Something will turn up." They are right: the debt ceiling, then interest rates, then the monetary base, then M1, then the money multiplier, then prices. So will unemployment. Up, up. up.

The key is the money multiplier. When it finally moves up, price inflation will move up with it. Until then, the Federal Reserve can join with Congress in the game of kick the can. The debt ceiling will rise.

Inside the can are lots of IOUs. They are IOU's signed by Congress on our behalf. We are the targeted victims of last resort.

We won't be. At any rate, future voters won't be. The creditors will be.

There will be a Great Default when voters finally say, "We're not going to pay." On that day, your net worth had better not rest on a pile of IOUs issued by the U.S. government. Otherwise, you will be like Thomas Mitchell, in "Gone With the Wind," sitting at his desk in 1865, mad as a hatter, insisting that he was rich. Why? He had lots of government bonds issued by the Confederacy.

So, the victims of last resort will not be the taxpayers after all. They will be the trusting people who retain absolute confidence in the full faith and credit of the United States government right to the bitter end. Either hyperinflation will ruin them or default will, or maybe both: as the Confederacy experienced.

June 29, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

Miscellaneous news on AGNC, TNH, and SCCO.

American Capital Agency Corp. (AGNC) news:
Title of article is "Mortgage REIT dividends look risk free this summer".  I generally agree that the MREITs are going to do well this summer.  It takes awhile for an inverted yield curve to develop and wreck their profits.  But the people who write these articles do not understand how the Federal Reserve works.  The chairman of the Federal Reserve Board, Ben Bernanke, says he's keeping a key interest rate low for an extended period of time.  That interest rate is known as the Fed Funds Rate.  It is the rate that banks charge each other for overnight loans to meet reserve balance requirements.  However, the big banks have over $1 trillion in excess reserves.  They aren't lending to each other over night because they are stuffed full of reserves.  Commercial bankers are keeping the Fed Funds rate low not Ben Bernanke.

Its a good thing they commercial bankers aren't expanding lending because if they did loan those excess reserves, then prices would more than double from what they are today.  Think $10/gallon gasoline.

http://www.marketwatch.com/story/mortgage-reit-dividends-look-risk-free-this-summer-2011-06-30?reflink=MW_news_stmp

Conclusion: Don't buy AGNC for an investment, but you can buy it for a short term trade.  In the not too distant future interest rates will rise and destroy its asset values and net income profits.

Terra Nitrogen (TNH) news:
Shares of Terra Nitrogen Company, L.P. (NYSE: TNH) fell by 6.44% or $-9.13/share to $132.75. In the past year, the shares have traded as low as $66.38 and as high as $143.50. On average, 44595 shares of TNH exchange hands on a given day and today's volume is recorded at 52049. The shares are currently trading above the 50-day moving average which indicates that the shares have been experiencing strong upward momentum as the 50 DMA is above the 200 DMA. The stock may come back down to test the 50-day moving average, so look for a move back to the $124.35 area where the stock will likely see buying pressure.

Conclusion: Buy it way down in the $90.00 range when it is on sale.

Southern Copper (SCCO) news:

Southern Copper (SCCO) Showing Bearish Technicals With 7.23% Dividend Yield

Southern Copper (NYSE:SCCO) closed Wednesday's winning trading session at $32.25. In the past year, the stock has hit a 52-week low of $25.65 and 52-week high of $50.35. Southern Copper (SCCO) stock has been showing support around $31.50 and resistance in the $33.34 range. Technical indicators for the stock are Bearish. For a hedged play on Southern Copper (SCCO), look at the Aug '11 $32.00 covered call for a net debit in the $30.65 area. That is also the break-even stock price for this trade. This covered call has a duration of 51 days, provides 4.96% downside protection and an assigned return rate of 4.40% for an annualized return rate of 31.52% (for comparison purposes only). A lower-cost hedged play for Southern Copper (SCCO) would use a longer term call option in place of the covered call stock purchase. To use this strategy look at going long the Southern Copper (SCCO) Jan '12 $25.00 call and selling the Aug '11 $32.00 call for a total debit of $6.40. The trade has a lifespan of 51 days and would provide 2.64% downside protection and an assigned return rate of 9.37% for an annualized return rate of 67.1% (for comparison purposes only). Southern Copper (SCCO) has a current annual dividend yield of 7.23%. [THA-Seven Summits Research]


Conclusion: Technical analysis means nothing without an understanding of the fundamentals of the copper commodity price.  Wait until this stock drops to $23.04 (which is 12x average earnings).  The dividend isn't safe.


Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.


Be seeing you!

First look at American Electric Power (AEP).

I read some article on high dividend stocks and it mentioned American Electric Power (AEP).  That made me curious because I hadn’t examined this company yet.  This is what I found.

American Electric Power is one of the largest regulated utilities in the U.S. AEP's electric utility operating companies provide generation, transmission, and distribution services to more than 5 million retail customers in 11 states.  About 80% of AEP's power is generated using coal. Approximately 55% of AEP's revenue comes from operations in Ohio, Texas, and Virginia.

American Electric Power (AEP)

Market price: $37.43

Shares: 481.79 million

Link to 3 year chart: http://bit.ly/AEP3yrChart

Dividend record: (strong dividend growth)

Dividend: $0.46 quarterly

Dividend yield: 4.92%

EPS: $2.61

Dividend payout ratio: 70% ($1.84 dividend/$2.61EPS)

This stock will become a high dividend stock (yielding 6%) at a price of $30.66 per share

Earning power: $2.50 average for five years @ 481.79 million shares

(Earning adjusted for changes in capitalization)

            EPS       Net inc.             Adj. EPS

2006     $2.53    $1,002 M           $2.08

2007     $2.72    $1,086 M           $2.25

2008     $3.42    $1,380 M           $2.86

2009     $2.96    $1,357 M           $2.82

2010     $2.53    $1,211 M           $2.51

Five year average earnings $2.50

Value price territory at 12 times average earnings begins below $30.00 per share

Market price at 14.97 times average earnings

Speculative price territory at 20 times average earnings begins above $50.00 per share

Balance sheet: Looks okay to me.  The current ratio and quick ratio have me a little concerned.

Image003

Book value: $28.69

Price to book value: 1.30 (good)

Current ratio: 0.80 (over 2.0 is good)

Quick ratio: 0.51 (over 1.0 is good)

Conclusion: Add to watch list with alert set to $30.00 per share.  Start deep analysis when price approaches $30.00.  Sell above $50.00.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

Seeking Alpha contributor sees no risk with buying AGNC. He is blind.

Seeking Alpha contributor Mike Maher wrote a positive article on American Capital Agency Corp. (AGNC) on June 23rd, 2011.  He claims that each new equity offering is an opportunity to buy AGNC because a month later the stock will have climbed higher above the old price that exisited before the drop.  Where have we heard this before?  Does the phrase “house prices always go up” ring a bell in your mind?  The two year chart of AGNC does conform to Mr. Maher’s observations, but that doesn’t mean that there is no risk of AGNC going down from its current level.  Text from Mr. Maher’s article appear indented below.

http://bit.ly/AGNC2years

Mr. Maher wrote:

Wednesday's close of trading brings a familiar press release for holders of American Capital Agency (AGNC): news of a secondary offering. The firm originally announced it was selling an additional 36 million shares, with an overallotment option for another 5.4 million shares. Later, AGNC said it had sold 43.2 million shares, raising approximately $1.2 billion. Underwriters have the right to purchase 6.48 million shares to cover overallotments. Proceeds will be used to purchase more securities and for general corporate purchases. Shares are only dropping about 2%, perhaps signaling that the market was expecting another offering.

He got this right, “These massive offerings are the only way the firm can grow rapidly…”  The executives of AGNC are compensated for the amount of equity (book value per share).   All of a sudden the massive equity offerings make sense.  Here is the applicable risk factor from the 2010 annual report.  Read it for yourself.

Our Manager’s management fee is based on the amount of our Equity and is payable regardless of our performance.

Our Manager is entitled to receive a monthly management fee from us that is based on the amount of our Equity (as defined in our management agreement), regardless of the performance of our investment portfolio. For example, we would pay our Manager a management fee for a specific period even if we experienced a net loss during the same period. The amount of the monthly management fee is equal to one twelfth of 1.25% of our Equity and therefore is only increased by increases in our Equity. Increases to our Equity would be primarily from equity offerings, which could result in a conflict of interest between our manager and our stockholders with respect to the timing and terms of our equity offerings. Our Manager’s entitlement to substantial nonperformance-based compensation may reduce its incentive to devote sufficient time and effort to seeking investments that provide attractive risk-adjusted returns for our investment portfolio. This in turn could harm our ability to make distributions to our stockholders and the market price of our common stock.

As I wrote in March, AGNC is making these offerings a habit and this is the 5th offering since last September. The previous article shows each of the earlier offerings has been an opportunity, with shares being higher a month after the news. This offering should prove to be the same. These massive offerings are the only way the firm can grow rapidly and it seems like investors should get used to them. Since shares currently trade above book value, which was last reported as $25.96 at the end of March, it makes sense to use the strong stock price to raise more money and expand the business. The fact that AGNC is able to continually tap the equity markets and still see shares run up to new highs into the dividend is a testament both to the management of the firm and to investors' interest in the massive dividend, currently at $1.40 per quarter. While it would be nice to see this dividend rising as new shares are offered and the business expands, it's hard to complain about a 19% yield without sounding greedy. Management has proven itself to be an excellent operator, so I trust in both their ability and their judgment.

AGNC’s book value will crumble when short term interest rates rise faster than long term interest rates.  I have written why interest rates will rise here:

http://www.myhighdividendstocks.com/high-dividend-stocks/why-interest-rates-will-rise-why-agnc-will-lose

The management of AGNC freely admits that higher interest rates may adversely affect their book value or their net interest income.  They use the weasel word “may” because they think their active management will be able hedge rising interest rate with swaptions and other financial devices.

Because we invest in fixed-rate securities, an increase in interest rates on our borrowings may adversely affect our book value or our net interest income.

Increases in interest rates may negatively affect the market value of our agency securities. Any fixed-rate securities we invest in generally will be more negatively affected by these increases than adjustable-rate securities. In accordance with GAAP, we are required to reduce our stockholders’ equity, or book value, by the amount of any decrease in the fair value of our agency securities that are classified as available-for-sale.  Reductions in stockholders’ equity could decrease the amounts we may borrow to purchase additional agency securities, which may restrict our ability to increase our net income.  Furthermore, if our funding costs are rising while our interest income is fixed, our net interest income will contract and could become negative.

The shares are not dropping as much as they have in the past on the news of the offering, at $28.32 after hours, down $0.50 from the close of trading Wednesday. This makes a quick trade in the name less attractive, since there will be less ground for shares to make up after the offering. Expect heavy volume Thursday, but each of the last four offerings have been opportunities to get into the name at a discount and I see no reason this offering is any different. As long as the dividend is not cut and book value continues to climb, AGNC is a buy and these offerings are opportunities.

Disclosure: I am long AGNC.

True, he sees no reason to not buy AGNC’s recent drop in price.  But I do.  If you want to really understand the risks associated with AGNC and other mortgage REITs, then read some of my past articles on AGNC:

http://www.myhighdividendstocks.com/category/high-dividend-stocks/american-capital-agency-corp

Disclosure: I do not own AGNC.  I don’t plan on owning AGNC because of its potential dividend cut, poor earning power, and weak balance sheet.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

Link to original Seeking Alpha article: http://seekingalpha.com/article/276339-another-offering-another-opportunity-in-american-capital-agency

My 2 cents on Mortgage REITs: Where Danger Lurks

This is a good article on the dangers of mortgage REIT such as AGNC and NLY.

http://seekingalpha.com/article/276613-mortgage-reits-where-danger-lurks

However, I disagree with the author on this statement, “When the economy accelerates again, which I believe could be very soon, rates are likely to rise, perhaps dramatically, even if the Fed doesn’t tighten anytime soon.”

The economy is not going to accelerate unless the commercial bankers expand lending.  Bankers are terrified of more bad loans.  If they cease being terrified and expand lending, then their 1.3 trillion dollars of excess reserves will become part of the money supply.  This will increase the M1 money supply and prices would more than double from where they are no.  See Murray Rothbard’s book “The Mystery of Banking” for more details on how the fractional reserve process works.  http://mises.org/resources/614/Mystery-of-Banking-The

I think we are years away from commercial bankers being brave enough to lend their unprecedented excess reserves that the Federal Reserve printed out of thin air.

Subscribe today for free www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

A first look at a potential high dividend stock - Brookfield Infrastructure (BIP)

I read an article from Double Dividend Stocks titled “5 Defensive Utility Dividend Stocks With Increasing Institutional Buying”.  It mentioned a company named Brookfield Infrastructure Partners L.P. (BIP) that had some qualities that might make it a worthwhile high dividend stock during a broad stock market correction.  Let’s take a first look at Brookfield

Brookfield Infrastructure (BIP)

Market price: $24.85

Shares: 112.96 million

Dividend record – The company has only been around since 2007.  No dividend cuts in its history.

Dividend: $0.31 quarterly

Dividend yield: 4.99%

EPS: $4.55

Dividend payout ratio: 27% (the dividend appears safe)

Earning power – $1.14 average earnings @ 112.96 shares

(Earnings adjusted for changes in capitalization – BIP has issued many shares)

            EPS       Net inc.             Adj. EPS

2006     -           -                       -

2007     $0.05    $1.1 M              $0.01

2008     $0.72    $28 M                $0.25

2009     $0.52    $25 M                $0.22

2010     $4.25    $462 M              $4.09

Four year average earnings $1.14 per share

Value pricing at below 12 times average earnings = $13.68

Speculative pricing above 20 times average earnings = $22.80

Today’s market price: $24.85 is trading at 21.8 times average earnings

If 2011 net income can match 2010 net income, then the five year average earnings will grow to $1.82 and today’s market price would be trading at 13.7 times average earnings.  Warning: I haven’t looked into BIP’s business enough to know if 2011’s profits will be close to 2010’s.  Although the linked article shows some large expected EPS growth.

Strength of balance sheet: Appears strong, but how is it growing so quickly?  I don’t know yet, but the low current ratio and quick ratio shows a lack of current assets to cover current liabilities.

Image002

Book value per share: $44.13 ($4,985 M equity divided by 112.96 shares)

P/BV: 0.56 (really good)

Current ratio: 0.95 (over 2.0 is good)

Quick ratio: 0.18 (over 1.0 is good)

Conclusion: It is unclear at this point in time if this stock is speculatively priced or investment priced.  It has had one good year out of four in 2010, but is its 2010’s performance the new norm.  This company deserves to go on a watch list with an alert set at $21.88.  A thorough analysis would be necessary when its stock price drops between $21.88 and $13.68.  The company would begin yielding above 6% when its stock price drops to $20.66 (assuming it keeps its $0.31 dividend quarterly).

Subscribe today for free at www.myhighdividendstocks.com/feed to high dividend stocks with earning power and strong balance sheets.

Be seeing you!

* * * * * * *

Excerpts below from the article on BIP

Market: Electric Utilities

Market Cap: $3.92 billion

Institutional Transactions: 2.35%

Institutional Ownership: 55.12%

Brookfield Infrastructure (BIP): It's a bit of a misnomer to call BIP a utility, since this is just one part of their many businesses - they also own oil & gas pipelines, port facilities, timberlands, and healthcare facilities. These other parts have helped them achieve higher ROE and EPS growth numbers, which you'll see in the following tables.

BIP is the only stock in this group that exceeds all of the broad sector averages., due to its diversification into other higher margin businesses.

Dividend yield: 4.95%

Dividend payout ratio: 40.75%

Return on equity: 22.69%

Return on investment: 10.97%

Total debt/equity: 1.44

Operating margin: 62.39%

Valuations: Although utilities aren't considered a growth sector, by any means, 2 of these stocks actually look undervalued on a next year PEG basis: BIP and HE. Additionally, BIP's 5-year PEG is only .92. The Price/Book figures for these 2 stocks are also much lower than sector standards, and BIP has a very low Graham P/E x P/Book figure of 4.63.

EPS growth this year: 717.31%

Price to earnings ratio: 5.51

EPS growth next fiscal year: 95%

PEG; next fiscal year: 0.06

PEG; next 5 years: 0.92

Price to book value: 0.84

EPS growth next 5 years: 6.00%

Original link: http://seekingalpha.com/article/276627-5-defensive-utility-dividend-stocks-with-increasing-institutional-buying

TIP OF THE WEEK - Get out of debt, save, and start your own business

Get out of debt, save, and start your own business serving unfulfilled customer needs.

Jason Brizic

June 24, 2011

One of your goals should be to insulate yourself from the coming economic calamity that will result from the insane actions of money-printing central bankers and deficit spending politicians.  Starting a side business to provide a second stream of income is a very good idea.  Many millions of people have lost their jobs.  This will continue to occur due to misguided Keynesian economic policies.  But where do you get the capital to start your business?

Savings are crucial to capital formation.  You use your savings to purchase producer’s goods that you will use to produce goods for others to consume.  The classic example is the lemonade stand.  You start with some money you saved.  You use your savings to buy lemons, sugar, ice, a large cooler, cups, some signage, and some wood to build you lemonade stand.  You didn’t need a business loan from a local banker (debt) to start your lemonade stand.  You started small with just a little bit of savings and a little entrepreneurial savvy of where some thirty customers might be located.

The key to savings is getting out of debt first.  Creating and sticking to a budget that includes savings will allow you to build capital in order to pursue some entrepreneurial efforts without quitting your current job. 

You can get out of debt in several years before massive price inflation hits your checkbook and impairs your ability to save.  I suggest you save between 10 – 15% of your pretax income.  Use this money to repay debts.  When the debts are gone you will have the budget and discipline to save 10 – 15% because you just did it while paying down your debts.

Gary North provides a free get out of debt course with specific action steps to follow.  This is similar to what Dave Ramsey teaches, but it is free. http://www.garynorth.com/public/department125.cfm

Invest in value priced high dividend stocks, precious metals, and rental real estate when you need to diversify some of your savings you are earning from your successful side business.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

Which integrated oil majors will become high dividend stocks?

Total_balance_sheet_2006_2010

Today's new about the US government planning to sell 2 million barrels of oil per day for 30 day from the strategic oil reserve got me thinking about which oil majors are high dividend stocks?  The answer is none.  But some itegrated oil majors are close in the 4-5% dividend yield range.  A significant stock market correction could make some of the high dividend stocks yielding over 6%.
 
Exxon Mobil (XOM) yields 2.40%
Cheveron (CVX) yields 3.14%
Royal Dutch Shell (RDS) yields 4.90%
Total (TOT) yields 5.76%
BP (BP) yields 3.95%
Petroleo Brasilero (PBR) yields 4.47%
Conoco Phillips (COP) yields 3.62%
 
If the US government is temporarily successful at increasing the US domestic supply of oil, then oil prices should fall in the short term.  This in turn will drive the oil stocks lower.  That will drive oil stock dividend yields higher and it might possibly provide some attractive buying opportunities for price appreciation once the effects of the governments actions wear off.
 
I'm going to start by examining the highest dividend stock on this short list: Total (TOT).
 
Total (TOT)
Market price: $54.70
Shares: 2.35 billion
Dividend: $1.61 semi annual
Dividen yield: 5.76%
Recent EPS: $7.60
Dividend payout ratio: 84.7% (that sort of high, but tolerable)
 
Earning power: $4.64 average earnings over five years @ 2.35 billion shares
(Earnings adjusted for changes in capitalization - slight increase in shares)
          EPS      Net inc.          Adj. EPS
2006   $5.09     $11,788 M     $5.01
2007   $5.80     $13,181 M     $5.61
2008   $4.71     $10,590 M     $4.51
2009   $3.78     $8,447 M       $3.59
2010   $4.71     $10,571 M     $4.50
Five year average adjusted earnings = $4.64 per share
Market price is at 11.78 times average earnings.  Total appears to be value priced right now.
Value territory starts at or below 12 times average earnings = $55.68
Speculative pricing is at or above 20 times average earnings = $92.80
 
Balance sheet strength:
Book value per share: $27.84
Price to book value ratio: 1.964 (good)
Current ratio: 1.40 (over 2.0 is good)
Quick ratio: 0.87 (over 1.0 is good)
 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!