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.

American Capital Agency announced an new offering for 49.69 M-I-L-L-I-O-N more shares says Dr. Evil.

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AGNC can only grow by issuing new shares.  The $1.2 billion in proceeds from its newest equity offering will be leveraged 6x-8x to add at least another $7.2 billion to its portfolio of agency securities.  Those agency securities are backed by the bankrupt US government.  Imagine that Greece was backing up Greek mortgage backed securities.  What security is that!  Well, the US is worse off than Greece when you consider the liabilities of Social Security and Medicare.  Owners of AGNC will get burned someday when the inverted yield curve returns and deficits do begin to matter.  But until then greater fools can collect a handsome dividend yield.

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American Capital Agency Announces Pricing of Public Offering of Common Stock

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BETHESDA, Md., June 22, 2011 /PRNewswire via COMTEX/ -- American Capital Agency Corp. /quotes/zigman/110324/quotes/nls/agnc AGNC -1.98% ("AGNC" or the "Company") announced today that it priced a public offering of 43,200,000 shares of common stock for total estimated gross proceeds of approximately $1.2 billion.

In connection with the offering, the Company has granted the underwriters an option for 30 days to purchase up to an additional 6,480,000 shares of common stock to cover overallotments, if any. The offering is subject to customary closing conditions and is expected to close on June 28, 2011.

AGNC expects to use the net proceeds from this offering to acquire additional agency securities as market conditions warrant and for general corporate purposes.

Citi, J.P. Morgan Securities LLC, UBS Securities LLC and Wells Fargo Securities, LLC are joint book running managers for the offering. JMP Securities LLC, Mitsubishi UFJ Securities, Nomura Securities International, Inc. and RBC Capital Markets are co-managers for the offering.

The offering will be made pursuant to AGNC's existing effective shelf registration statement, previously filed with the Securities and Exchange Commission. The offering of these securities will be made only by means of a prospectus and a related prospectus supplement. Copies of the prospectus and prospectus supplement may be obtained, when available, from Citi, Brooklyn Army Terminal, 140 58th Street, 8th Floor, Brooklyn, New York 11220, telephone: (800) 831-9146; J.P. Morgan Securities LLC, c/o Broadridge Financial Solutions, 1155 Long Island Ave, Edgewood, NY 11717, telephone: (866) 803-9204; UBS Securities LLC, Attention: Prospectus Department, 299 Park Avenue, New York, New York 10171, telephone: (888) 827-7275; or Wells Fargo Securities, LLC, Attn: Equity Syndicate, 375 Park Avenue, New York, NY 10152-4077, telephone: (800) 326-5897, email: cmclientsupport@wellsfargo.com.

This press release does not constitute an offer to sell or the solicitation of an offer to buy shares of common stock, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

American Capital Agency plans $1B offering

Washington Business Journal - by Jeff Clabaugh

Date: Wednesday, June 22, 2011, 5:56pm EDT

Related:

Banking & Financial Services

Bethesda-based American Capital Agency Corp., which buys government-backed residential mortgage securities, is planning its largest stock offering since going public three years ago, potentially raising more than $1 billion to fund its investments.

The real estate investment trust, an affiliate of private equity firm American Capital, Ltd. (NASDAQ: ACAS), says it will sell 36 million shares of common stock in a secondary offering, and give underwriters the option to purchase an additional 5.4 million shares.

American Capital Agency stock (NASDAQ: AGNC) ended Wednesday trading at $28.85 per share.

American Capital Agency raised about $780 million from a secondary offering in March, and another $655 million in January.

The REIT’s profits more than doubled last quarter as net interest income from increased investments rose five-fold. Its investment portfolio has ballooned to $28.3 billion as of the end of the first quarter.

http://www.bizjournals.com/washington/news/2011/06/22/american-capital-agency-plans-1b.html

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(RTTNews) - American Capital Agency Corp. (AGNC: News ) announced after the close Wednesday that it plans to make a public offering of 36,000,000 shares of its common stock. The stock is now down 0.56 on 442K shares.

American Capital Agency posted gains in early trade Wednesday, but settled into a range for the bulk of the session. Shares finished up by 0.35 at $28.85. The stock rebounded off of support, following nearly a 2-week decline.

http://www.rttnews.com/ArticleView.aspx?Id=1652048&SM=1

3 So-called High Dividend Stocks The Dumb Money Is Buying. You can do better.

Benzinga staff writer, Jonathan Chen, wrote an article on what he called “3 High Dividend Stocks The Smart Money Is Buying”.  His three stocks were Philip Morris International Inc. (PM), Pfizer (PFE), and Johnson & Johnson (JNJ).

These aren’t high dividend stocks.  I believe that high dividend stocks begin above 6% yield because they should be higher than bonds because common stocks are subordinate to bonds for claims on the company’s assets in the event of a liquidation.  Also, the long term rate of price inflation is much higher than the 2-3% that the Federal Reserve reports as part of its CPI numbers.  These stocks are barely yielding over 3 percent.  I would consider these stocks moderate dividend stocks.  PFE had to half its dividend in 2009, so it isn’t a great dividend grower.  JNJ is the best dividend grower of the bunch.

These stocks are not cheap.  They are closer to speculative pricing of 20 times average earnings than value territory below 12 times average earnings.

            Philip Morris is trading at 18.5 times its five year average earnings.

            Pfizer is trading at 18.24 times its five year average earnings.

            Johnson & Johnson is trading at 15.14 times its five year average earnings.

So, when should you buy these so-called high dividend stocks?  Buy them when they are values below 12 times average earnings.  The yields will be higher then also.  Then next stock market crash in reaction to the fiscal and monetary insanity of the US government and Federal Reserve will drive the prices of these stocks lower.  Buy them on sale (low); sell them when everyone thinks the market will continue up forever (high).  The smart money should be selling these stocks now if they bought them back in 2009-2010.

Consider buying Philip Morris under $44.04 per share.  PM traded below $44.00 in June 2010.

Consider buying Pfizer under $13.44 per share.  PFE traded below $13.44 in May 2009, but is has been down in the $14.00’s several times since then.

Consider buying Johnson & Johnson under $52.68 per share.  JNJ traded below $52.68 in May 2009.

Philip Morris Intl. (PM)

Market price: $68.05

Shares: 1.78 billion

Dividend record:

            Dividend yield: 3.76%

            Dividend: $0.64 quarterly

            Dividend payout ratio: 62.6% ($2.56 annual dividend divided by $4.09 recent EPS)

Earning power: $3.67 per share @ 1.78 billion shares

            Earnings adjusted for changes in capitalization

            EPS       Net inc.             Adj. EPS

2006     $2.91    $6,130 M           $3.44

2007     $2.86    $6,038 M           $3.39

2008     $3.31    $6,890 M           $3.87

2009     $3.24    $6,342 M           $3.56

2010     $3.92    $7,259 M           $4.08

Five year average earnings = $3.67

Value below 12x average earnings = $44.04

Market price at 18.5x average earnings = almost speculatively priced

Speculative above 20x average earnings = $73.40

Strength of balance sheet: Quite weak (liabilities are rising faster than assets)

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Book value per share: $1.90 (Really?  That’s bad)  I calculated it at $1.97 which is still horrible

Price to book value: 35.81 (Wow!!  That’s horrible)

Current ratio: 1.07 (Less than 2.0 is bad)

Quick ratio: 0.37 (Less than 1.0 is bad)

Pfizer (PFE)

Market price: $20.43

Shares: 7.90 billion

Dividend record:

            Dividend yield: 3.92%

            Dividend: $0.20 quarterly

            Dividend payout ratio: 76% ($0.80 annual dividend divided by $1.05 recent EPS)

Earning power: $1.12 per share @ 7.90 billion shares

            Earnings adjusted for changes in capitalization

            EPS       Net inc.             Adj. EPS

2006     $2.66    $11,019 M*        $1.40

2007     $1.17    $8,140 M           $1.03

2008     $1.20    $8,104 M           $1.04

2009     $1.23    $8,635 M           $1.09

2010     $1.02    $8,257 M           $1.05

* Net income was $19,332 M but $8,313 M was from discontinued operations.  I removed the discontinued ops so the earnings wouldn’t be skewed too much.

Five year average earnings = $1.12

Value below 12x average earnings = $13.44

Market price at 18.24x average earnings = almost speculatively priced

Speculative above 20x average earnings = $22.40

Strength of balance sheet: Fairly stable

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Book value per share: $11.17

Price to book value: 1.83 (good)

Current ratio: 2.00 (Over 2.0 is good)

Quick ratio: 1.66 (Over 1.0 is good)

Johnson & Johnson (JNJ)

Market price: $66.49

Shares: 2.74 billion

Dividend record:

            Dividend yield: 3.43%

            Dividend: $0.57 quarterly

            Dividend payout ratio: 51.7% ($2.28 annual dividend divided by $4.41 recent EPS)

Earning power: $4.39 per share @ 2.74 billion shares

            Earnings adjusted for changes in capitalization (PFE has been buying back shares)

            EPS       Net inc.             Adj. EPS

2006     $3.73    $11,053 M         $4.03

2007     $3.63    $10,576 M         $3.86

2008     $4.57    $12,949 M         $4.73

2009     $4.40    $12,266 M         $4.48

2010     $4.78    $13,334 M         $4.87

Five year average earnings = $4.39

Value below 12x average earnings = $52.68

Market price at 15.14x average earnings = priced for investment

Speculative above 20x average earnings = $87.80

Strength of balance sheet: Strong (That’s what I like to see…shareholder equity covering up the liabilities – nice.)

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Book value per share: $21.51

Price to book value: 3.09 (decent)

Current ratio: 2.05 (Over 2.0 is good)

Quick ratio: 1.57 (Over 1.0 is good)

Disclosure: I don’t own any of these stocks.

                                                                                                              

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3 High Dividend Stocks The Smart Money Is Buying

By Jonathan Chen

Created 06/20/2011 - 11:59am

[1]

In times of uncertainty, investors look to high-dividend paying stocks for some sort of normalcy. Every investor looks for dividends to juice yields and returns, as dividends are an important source of income for many, especially retirees.

We also want to be playing the same game the "smart money" is playing. The hedge funds, the legendary investors, the institutions. They are all known as the "smart money," so why should they benefit and not us?

Here is a list of a few low-risk, high dividend stocks that will allow investors to play the same game the "smart money" is playing, and hopefully, generate the same returns.

Philip Morris International Inc. (NYSE: PM [2]) is a low-risk, large-cap stock that sports a hefty 3.7% dividend yield, in addition to strong growth from outside the U.S. Philip Morris International was spun off from Altria (NYSE: MO [FREE Stock Trend Analysis] [3]) last decade as a way to unlock the value from the company's international presence, and not deal with the regulatory scrutiny here in the U.S. Shares trade at 13.6 times earnings, and have risen 17% this year, best among the tobacco stocks only behind Lorillard (NYSE: LO [4]). Capital Research Global Investors, Blackrock, and State Street are among Philip Morri's largest investors.

Pfizer Inc. (NYSE: PFE [5]) is another low-risk defensive play, and sports a dividend yield of 3.9%. The company is currently in the process of divesting businesses as a way to unlock shareholder value. Shares have been stagnant for what seems like forever, but it looks as if shares are starting to perk up a bit. The company has a rock solid balance sheet, trades at less than 9 times earnings, and counts State Street, BlackRock and Vanguard among major shareholders. The stock is also a hedge fund favorite.

The last name to consider is Johnson & Johnson (NYSE: JNJ [FREE Stock Trend Analysis] [6]). The New Brunswick-based company is the maker of things like Band-Aids, Tylenol, and other products we use everyday, but don't really think about it. Johnson & Johnson has one investor in it that will make other shareholders sleep better at night: Warren Buffett.

Late last year, the company issued one of the lowest yields over U.S. Treasuries on record, indicating the strong demand for its debt. Johnson & Johnson boasts a triple-A credit rating from Standard & Poor's, a distinction shared by only three other U.S. industrial firms. It trades at just 12.8 times earnings, and is one of the safest companies out there.

Link to original article: http://www.benzinga.com/trading-ideas/long-ideas/11/06/1183851/3-high-dividend-stocks-the-smart-money-is-buying

American Capital Agency Corp. (AGNC) goes ex-dividend tomorrow.

American Capital Agency Corp (NASDAQ: AGNC) is going ex-dividend tomorrow. To receive the dividend, the stock must be owned the day prior to the ex-dividend date. The current yield is 18.6%, which is equivalent to $5.6 for the year.  Watch the price drop following the ex-dividend date.  It usually drops the equivalent of the dividend which is $1.40 per share.
 
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TIP OF THE WEEK - The Yield Curve: The Best Recession Forecasting Tool

The Yield Curve: The Best Recession Forecasting Tool

Jason Brizic

June 17, 2011

There is a lot of talk about the economy going into a double-dip recession.  Keep your eye on the yield curve.  Gary North explains.  Visit his site www.garynorth.com.  There is a lot of good free stuff there.  This came from the free portion.  An inverted yield curve will destroy the profitability of mortgage REITs like Annaly Capital (NLY) and American Capital Agency Corp. (AGNC).

The Yield Curve: The Best Recession Forecasting Tool

Gary North

It was on the basis of this indicator that in the November 2006 issue of my Remnant Review newsletter, I predicted a recession in 2007. It arrived in December 2007, according to the National Bureau of Economic Research.

The yield curve is a "curve" of interest rates for debt certificates.

The interest rates for more distant maturities are normally higher the further out in time. Why? First, because lenders fear a depreciating monetary unit: price inflation. To compensate themselves for this expected (normal) falling purchasing power, they demand a higher return. Second, the risk of default increases the longer the debt has to mature.

In unique circumstances for short periods of time, the yield curve inverts. An inverted yield occurs when the rate for 3-month debt is higher than the rates for longer terms of debt, all the way to 30-year bonds. The most significant rates are the 3-month rate and the 30-year rate.

The reasons why the yield curve rarely inverts are simple: there is always price inflation in the United States. The last time there was a year of deflation was 1955, and it was itself an anomaly. Second, there is no way to escape the risk of default. This risk is growing ever-higher because of the off-budget liabilities of the U.S. government: Social Security, Medicare, and ERISA (defaulting private insurance plans that are insured by the U.S. government).

What does an inverted yield curve indicate? This: the expected end of a period of high monetary inflation by the central bank, which had lowered short-term interest rates because of a greater supply of newly created funds to borrow.

This monetary inflation has misallocated capital: business expansion that was not justified by the actual supply of loanable capital (savings), but which businessmen thought was justified because of the artificially low rate of interest (central bank money). Now the truth becomes apparent in the debt markets. Businesses will have to cut back on their expansion because of rising short-term rates: a liquidity shortage. They will begin to sustain losses. The yield curve therefore inverts in advance.

On the demand side, borrowers now become so desperate for a loan that they are willing to pay more for a 90-day loan than a 30-year, locked in-loan.

On the supply side, lenders become so fearful about the short-term state of the economy -- a recession, which lowers interest rates as the economy sinks -- that they are willing to forego the inflation premium that they normally demand from borrowers. They lock in today's long-term rates by buying bonds, which in turn lowers the rate even further.

An inverted yield curve is therefore produced by fear: business borrowers' fears of not being able to finish their on-line capital construction projects and lenders' fears of a recession, with its falling interest rates and a falling stock market.

An inverted yield curve normally signals a recession, which begins about six months later. The stock market usually begins to fall six months prior to any recession. So, the appearance of an inverted yield curve normally is followed very shortly by a falling stock market. Fact: The inverted yield curve is an anomaly, happens rarely, and is almost always followed by a recession.

There have been exceptions, as this report by the Cleveland Federal Reserve Bank indicates.

Here is a great page, published by Fidelity, that explains the four major slopes of the yield curve and how they form. There is even an animated graph that lets you run through almost 30 years of curves, month by month. You can click the Play button, and the graph scrolls by. Stop it at any point. Click here.

For skeptics who want a detailed explanation of the relationship between the inverted yield curve and recession, they can read a 2004 Ph.D dissertation by Paul F. Cwik, which is available on-line at The Ludwig von Mises Institute's web site.

The yield curve for U.S. Treasury debt certificates is the one that investors use to predict the economy. Investors assume that the Treasury is the safest lender -- the least likely to default -- and therefore the rates on Treasury debt are least affected by risk.

The Treasury publishes the various rates here: Treasury debt rates

For more tips, go here:

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

American Capital Agency Corp. (AGNC) Risk Factors. Have you read and understand them?

AGNC published its 2010 annual report a month or so ago.  There are 18 pages of risks.  I have summarized them for you here.  Many of them will occur in the future due to the fragile nature of the fractional reserve banking system and the national socialist government interference into the mortgage markets.  I urge you to read and understand these risks before you invest your hard earned capital into American Capital Agency Corp.

I have said many times in the past that AGNC will continue to be a ultra high dividend stocks for the near term, but they will be decimated in the long term.  Plan and invest accordingly.  I believe that there are much better high dividend stocks out there in the stock market attractively priced with a safe dividend and a strong balance sheet.  I like the dry bulk shipper Safe Bulkers (SB) the best.  See my articles on this company for an example of a quality high dividend stock.

For a better understanding of the fraud that is fractional reserve banking read Murray Rothbard’s “The Mystery of Banking”.  This is the book that the FED would most want burned.  http://mises.org/resources/614/Mystery-of-Banking-The

For a brief introduction and warning on GSE’s (Fannie Mae and Freddie Mac) written back in the early 2000’s: http://mises.org/freemarket_detail.aspx?control=391

Item 1A. Risk Factors

You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K, including our annual consolidated financial statements and the related notes thereto before making a decision to purchase our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Related to Our Investing, Active Portfolio Management and Financing Strategy

1.     We may experience significant short-term gains or losses and, consequently, greater earnings volatility as a result of our active portfolio management strategy.

2.     The potential of the U.S. Government to limit or wind down the role Fannie Mae and Freddie Mac play in the mortgage-backed securities market may adversely affect our business, operations and financial condition.

3.     To the extent that we invest in agency securities that are guaranteed by Fannie Mae and Freddie Mac, we are subject to the risk that these U.S. Government-sponsored entities may not be able to fully satisfy their guarantee obligations or that these guarantee obligations may be repudiated, which may adversely affect the value of our investment portfolio and our ability to sell or finance these securities.

4.     New laws may be passed affecting the relationship between Fannie Mae or Freddie Mac, on the one hand, and the U.S. Government, on the other, which could adversely affect the availability and pricing of  agency securities and the ability to obtain financing against agency securities.

5.     Market conditions have disrupted the historical relationship between interest rate changes and prepayment trends, which make it more difficult for our Manager to analyze our investment portfolio.

6.     Continued adverse developments in the broader residential mortgage market may adversely affect the value of the agency securities in which we invest.

7.    Federal Reserve programs to purchase securities could have an adverse impact on the agency securities in which we invest.

8.    Changes in the underwriting standards by Freddie Mac or Fannie Mae could have an adverse impact on the agency securities in which we invest.

9.    Failure to procure adequate repurchase agreement financing, or to renew (roll) or replace existing repurchase agreement financing as it matures, would adversely affect our results of operations and may, in turn, negatively affect the market value of our common stock and our ability to make distributions to our stockholders.

10.  Pursuant to the terms of borrowings under our master repurchase agreements, we are subject to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

11.  If our lenders pursuant to our repurchase transactions default on their obligations to resell the underlying agency security back to us at the end of the transaction term, or if the value of the underlying agency security has declined by the end of the term or if we default on our obligations under the transaction, we will lose money on these transactions.

12.  Differences in timing of interest rate adjustments on adjustable-rate agency securities we may acquire and our borrowings may adversely affect our profitability and our ability to make distributions to our stockholders.

13.  Interest rate caps on mortgages backing our adjustable rate agency securities may adversely affect our profitability.

14.  An increase in interest rates may cause a decrease in the volume of newly issued, or investor demand for, agency securities, which could adversely affect our ability to acquire assets that satisfy our investment objectives and to generate income and pay dividends, while a decrease in interest rates may cause an increase in the volume of newly issued, or investor demand for, agency securities, which could negatively affect the valuations for our agency securities and may adversely affect our liquidity profile.

15.  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.

16.  Changes in prepayment rates may adversely affect our profitability.

17.  Changes in accounting rules may adversely affect our profitability.

18.  Our hedging strategies may not be successful in mitigating the risks associated with interest rates.

19.  Our use of certain hedging techniques may expose us to counterparty risks.

20.  Pursuant to the terms of our master swap agreements, we are subject to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

21.  We may fail to qualify for hedge accounting treatment.

22.  Our strategy involves significant leverage, which may cause substantial losses.

23.  Our rights under our repurchase agreements will be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under the repurchase agreements.

24.  Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which could dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

25.  We have not established a minimum dividend payment level and we cannot assure you of our ability to pay dividends in the future.

26.  The stock ownership limit imposed by the Internal Revenue Code for REITs and our amended and restated certificate of incorporation may restrict our business combination opportunities.

27.  The stock ownership limitation contained in our amended and restated certificate of incorporation generally does not permit ownership in excess of 9.8% of our common or capital stock, and attempts to acquire our common or capital stock in excess of these limits will be ineffective unless an exemption is granted by our Board of Directors.

28.  Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws could discourage a change of control that our stockholders may favor, which could also adversely affect the market price of our common stock.

Risks Related to Conflicts of Interest in Our Relationship with Our Manager and American Capital

1.     The management agreement was not negotiated on an arm’s-length basis and the terms, including fees payable, may not be as favorable to us as if it were negotiated with an unaffiliated third party.

2.     We have no employees and our Manager is responsible for making all of our investment decisions. Certain of our Manager’s officers are employees of American Capital and are not required to devote any specific amount of time to our business and each of them may provide their services to American Capital, its affiliates and sponsored investment vehicles, which could result in conflicts of interest.

3.     We are completely dependent upon our Manager and certain key personnel of American Capital who provide services to us through the management agreement and the administrative services agreement and we may not find suitable replacements for our Manager and these personnel if the management agreement and the administrative services agreement are terminated or such key personnel are no longer available to us.

4.     We have no recourse to American Capital if it does not fulfill its obligations under the administrative services agreement.

5.     If we elect to not renew the management agreement without cause, we would be required to pay our Manager a substantial termination fee. These and other provisions in our management agreement make non-renewal of our management agreement difficult and costly.

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

Risks Related to Our Business Structure

1.     Loss of our exemption from regulation pursuant to the Investment Company Act would adversely affect us.

2.    We are exposed to potential risks from legislation requiring companies to evaluate their internal control over financial reporting.

3.    We are highly dependent on information and communications systems. Any systems failures could significantly disrupt our business, which may, in turn, negatively affect our operations and the market price of our common stock and our ability to pay dividends to our stockholders.

Risks Related to Our Taxation as a REIT

1.    If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

2.    Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

3.    REIT distribution requirements could adversely affect our ability to execute our business plan.

4.    Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

5.    Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.

6.    Complying with REIT requirements may force us to liquidate otherwise attractive investments.

7.    The failure of agency securities subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT.

8.    Liquidation of assets may jeopardize our REIT qualification.

9.    Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

10.  Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

11.  As a REIT, if we derive net income from prohibited transactions (as defined in the Internal Revenue Code provisions) it is subject to a 100% tax.

Risks Related to Our Common Stock

1.    Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business.

2.    The market price of our common stock may fluctuate significantly.

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Don't buy Southern Copper (SCCO) now despite predictions of higher copper prices.

Southern Copper is a massive copper producer and it is a high dividend stock.  But you shouldn’t buy it now at such a high price and will a likely fall in the price of copper.  Motley Fool writer Ilan Moscovitz gave Southern Copper a clean bill of dividend health, but he did not explain how he came up with his dividend payout ratio numbers or mention the price of the shares.  Are they value priced or speculative?

I came up with a completely different and higher dividend payout ratio than Mr. Moscovitz’s 93%.  SCCO has 850 million shares outstanding.  The company is paying a quarterly dividend of $0.56 per share which equates to an annual dividend of $2.24 per share.  It earned $1.83 per share in 2010.  This equates to a 122% dividend payout ratio when using the current dividend divided by last year’s EPS.  I’m going to perform a second calculation using the five year average earnings per share (adjusted for changes in capitalization) of $1.92.  The dividend payout ratio would be 116% ($2.24 dividend/$1.92 avg EPS).  Where does he get 93%?  I checked the 1Q2011 financial statements and the company earned $0.56/share and it will pay a dividend of $0.56/share, so the dividend payout ratio is at least 100% if you consider the first quarter of 2011 indicative of its 2011 overall performance.  Sheeesh!  I’m beginning to think Mr. Moscovitz doesn’t know what he’s writing about.  The bottom line is that Southern Copper’s dividend is not safe at $0.56/quarter.

I think that SCCO is too expensive right now.  The stock is trading at roughly 18 times its five year average earnings of $1.92.  Wait until the global double dip takes it down below $24.00 before you risk your capital on this copper miner.

Southern Copper (SCCO) lives or dies on the price of copper in the global marketplace.  Copper has been priced in the $3.00 to $4.00 per pound for four of the past five years.  The 2009 price dropped to a low of around $1.50 per pound.  It finished the day at $4.11 per pound yesterday.  SCCO made a profit in 2009 of $929 million (down from $2.216 billion net income in 2007 at the height of the global infrastructure boom).  What direction will the price of copper go throughout the rest of 2011?  You must at least acknowledge this question before any serious investment in SCCO. 

I’m going to take you through an analysis of a Kitco.com article on copper price expectations.  My comments are in bold and bracketed.

Copper Expected To Languish Over Summer But Pick Up Into Year-End

15 June 2011, 2:16 p.m.
By Allen Sykora
Of Kitco News
http://www.kitco.com/

 

 

[Why should the price of copper languish over the summer?  Who are these faceless, unnamed analysts?]

(Kitco News) - Copper should languish over the summer after the early 2011 bullish enthusiasm, but analysts expect renewed demand later this year that could push prices again to near or above $10,000 a metric ton.

[The supply of copper in the London Metal Exchanges warehouses have been building since the end of late 2010.  LME stocks decrease when supply is constrained.  There is a report out by Bloomberg that domestic copper supplies in China are dwindling.  The Chinese government has created a real estate bubble that is going to pop.  That bubble consumes a lot of copper to build the equivalent all the real estate of Houston, Texas each month.  It will pop and the copper demand that these Keynesian economists are forecasting will evaporate.  The price of copper will fall.  The price of Southern Copper stock will fall.

]

Some already point to signs of some improvement, such as rising premiums for physical copper in key consuming regions. Any meaningful pick-up in demand should be supportive since supply remains constrained due to factors such as labor disruptions, declining grades and limited new major discoveries.

Three-months copper closed at $9,154 a metric Wednesday on the London Metal Exchange, down 10.2% from a record of $10,190 in mid-February.

[Why is the LME copper stock increasing if the supply side is restrained?  The demand side at $4.11/lb is definitely weakening due to the Chinese governments efforts to stop the price inflation and real estate bubble that they created with their Keynesian mercantilist policies]

“The supply side is pretty restrained on copper,” said Edward Meir, analyst with MF Global. “Not too many people are capable of cranking out extra output. But the demand side is weakening.”

Much of the U.S. economic data over the last month has been softer than expected, raising concerns about future consumption of industrial commodities such as copper.

[So why will there be a pickup in copper prices at the end of the year?  All this supporting evidence points to lower copper prices.]

Further, there are worries that Chinese authorities have been successful in slowing their economy to avoid an overheating. A massive spring earthquake in Japan also dented demand for some industrial metals. Meanwhile, inventories of copper in LME warehouses have risen to 475,750 from 377,550 at the end of 2010.

Several analysts said copper could fall some more in the next couple of months due to this uncertain backdrop, and also because of slower seasonal demand  during the vacation season and maintenance shutdowns in the Northern Hemisphere.

“There is so much that could go wrong,” said Leon Westgate, base-metals analyst with Standard Bank. “There is the potential for a Greek default. There is potential for China tightening even more aggressively and probably overdoing things.”

Chinese buyers have been largely sidelined. “The physical demand from China has picked up from the lows seen in March, but it’s still far from spectacular,” Westgate said.

Catherine Virga, director of research with CPM Group, suggested copper is “vulnerable in the near term” and could fall back to the $8,500 region. Meir figures copper could drop to $7,800 to $8,000 over the summer.

“We might not see a sharp turnaround until market conditions get a little bit tighter,” Virga said.

Weakness Seen By Many As Buying Opportunity

Some analysts, however, believe any copper weakness may well end up being a buying opportunity.

[There will be a double dip recession.  Keynesian deficit spending all over the world is destroying capital that will not be invested by entrepreneurs.]

“Fundamentally, I continue to like it,” said Bart Melek, head of commodity strategy, rates and foreign-exchange research with TD Securities. “But investors, traders and the community broadly will have to be convinced that the current soft patch in global economic growth…is temporary and will not morph into some sort of more insidious decline, with potential for a double-dip recession.”

[Mr. Melek expressed optimism that U.S. economic data will improve in the second half of the year.  What does he base his optimism on?  Keynesian economic theory that deficit spending by governments is beneficial to increase the standard of living for all.  The Austrian school refutes this.  Experience refutes this.  Read any of Gary North’s free articles for a good explanation of why Mr. Melek is clueless: http://www.lewrockwell.com/north/north-arch.html]

The market has not yet gotten sufficient data to confirm the recent economic slow patch is only temporary, which could mean more pressure on commodities generally. Copper could fall another 5%, Melek said. Nevertheless, he expressed optimism that U.S. economic data will improve in the second half of the year.

[The global economy is going to fall apart before it gets better.  The malinvestments of the boom haven’t been liquidated.  Banks are holding hundreds of billions in bad loans.  Central banks are printing money like never before.  All hope is placed on Chinese bureaucrats who are trying to quell possible rebellion due to high unemployment and high price increases.  The Eurozone is falling apart and the US federal, state, and local governments are broke.  Governments are trying to increase taxes.  This take money away from individuals.  It crowds out capital investment by individuals seeking profits and put their money in the hands of bureaucrats buying votes on money losing projects.]

“I would be buying these dips or corrections,” Melek said. “The fundamentals are strong. We here at TDS are quite convinced that the global economy isn’t going to fall apart. It’s going to grow at just under 4% or so.”

To be convinced of stronger fundamentals, the market may want to see more bullish monthly Chinese import figures and drawdowns in LME warehouse inventories of copper. Melek looks for LME warehouse stocks to decline later this year and points out that Shanghai Futures Exchange inventories are already down.

Already, there are some early signs of improvement in copper demand, Virga said. The premium in Shanghai rose to $112 a metric ton as last week wound down, well up from $20 in mid-May. European premiums rose to $92.50 from $57 in mid-May. 

Further, the premium between London and Shanghai exchange prices has narrowed from May, creating an incentive for China to start picking up more copper on the international market, Virga said.

Yet another potential supportive influence is pending exchange-traded funds that would be backed by copper holdings, should these be approved in the coming months by the U.S. Securities and Exchange Commission, Virga said. This would add to investment demand.

Demand Grows Less Quickly Than Expected, But 2011 Deficit Still Expected

[The expectations are all based on Chinese demand growth.  China is a bubble.  Watch the video in the top 10 search results for google search ‘China bubble Jim Chanos’ if you don’t believe me.  Chanos is not the only one calling a China bubble, but he is one of the most credible due to his shorting of Enron before it fell.]

Overall copper demand has not grown as robustly as some were forecasting last year, Virga said. “But it is still positive and is going to outpace supply, particularly because of so many disruptions.”

One such disruption getting attention lately is a strike at the world’s No. 5 copper mine, El Teniente in Chile.

Meir and Westgate both look for “modest” 2011 supply/demand deficits. Meir anticipates 150,000 to 200,000 tons. Westgate expects some 200,000 tons.

Others anticipate  larger deficits. CPM Group projects 390,000 tons,   Melek looks for 400,000, and Harbor Intelligence thinks there will be  a deficit between 500,000 and 600,000 tons.

Melek anticipates LME copper will get back near $10,000 in the second half of the year. CPM Group projects copper averaging $9,800 a metric ton in the third quarter and $10,250 in the fourth, Virga said.

Jesus Villegas, analyst with Harbor, looks for copper to hit all-time highs again either in the fourth quarter or else in early 2012, perhaps hitting $5 a pound and $11,000 a ton. By then, he said, copper will be past its seasonally slow period and fund and other speculative money should be flowing back into the market.

Meir, however, figures copper has already put in its high for the year. After a fall to $7,800-$8,000 in the next two to three few months, he anticipates a range of $8,000 to $9,500 for the remainder of the year.

Westgate looks for a 2011 average cash price of $9,525, with $9,750 in the fourth quarter. He anticipates the copper market will be tighter in 2012 than this year, with prices also rising next year.

By Allen Sykora of Kitco News; asykora@kitco.com

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Southern Copper: Dividend Dynamo or Blowup?

http://www.fool.com/investing/general/2011/06/15/southern-copper-dividend-dyn...

Ilan Moscovitz
June 15, 2011

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Southern Copper (NYSE: SCCO  ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Southern Copper yields 7.3% -- rather high and worthy of closer examination.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company pays out in dividends to the amount it generates. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford.

Southern Copper's payout ratio is an aggressive 93%, though its free cash flow payout ratio is a more reasonable 61%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Let's examine how Southern Copper stacks up next to its peers:

Company

Debt-to-Equity Ratio

Interest Coverage Ratio

Southern Copper

70%

       15

Freeport-McMoRan (NYSE: FCX  )

30%

       24

Newmont Mining (NYSE: NEM  )

27%

       16

Teck Resources (NYSE: TCK  )

29%

        7

Source: Capital IQ, a division of Standard & Poor's.

Southern Copper's debt burden appears higher than its peers, though the absolute level is moderate.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Over the past five years, Southern Copper's earnings per share have grown 3% annually, while its dividend has grown at 7%.

The Foolish bottom line
Southern Copper exhibits a fairly clean dividend bill of health. Its payout ratio appears somewhat aggressive, however, so maintaining or growing those payouts will depend on the company's ability to expand production and the prices of its commodities can fetch.

Terra Nitrogen hits 52 week high; dividend yield decreases. When should you buy?

Terra Nitrogen hit its 52 week high today at $132.98.  The move upward in price has dropped the dividend yield down to 4.09%, but some of the online investing sites compute the yield wrong because of the special dividend that TNH paid last quarter.  For example, Google Finance reports Terra Nitrogen’s current dividend yield at 7.49.  TNH is paying a $1.36 quarterly dividend that equates to $5.44 annually.  $5.44 dividend divided by $132.98 market price equals a yield of 4.09%.

Motley Fool writer Dan Dzombak dug up some reassuring dividend safety info on Terra Nitrogen (TNH) which you can read below.  I agree with his conclusions on the dividend’s safety.

I still think that Terra Nitrogen is approaching the speculative price territory.  See my recent article:

http://www.myhighdividendstocks.com/high-dividend-stocks/two-views-of-terra-nitrogen-tnh-value-or-investment#more-440

Terra Nitrogen would become a high dividend stock again at the price of $90.66 per share.  I would wait until the stock falls somewhere between $90 and $70 to purchase.  A general stock market correction will take Terra Nitrogen down along with many other medium dividend stocks.  You can see in this chart how recently TNH traded in the $60’s:

http://stockcharts.com/h-sc/ui?s=TNH&p=W&b=5&g=0&id=p69438073925

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By Dan Dzombak

Motley Fool

Image001

updated 6/12/2011 7:30:00 AM ET 2011-06-12T11:30:00

Dividend investors know that it pays to follow how much of a company's money goes toward funding its payouts. A nice yield now won't matter much if the company can't keep making those payments going forward.

Here, we'll highlight a given company and its closest competitors to see just how safe their dividends are, with a little help from three crucial tools:

  • The interest coverage ratio, or earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. An interest coverage ratio less than 1.5 is questionable; a number less than 1 means that the company is not bringing in enough money to cover its interest expenses.
  • The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
  • The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business' health. The FCF payout ratio measures the percentage of free cash flow devoted toward paying the dividend. Again, a ratio greater 80% could be a red flag.

Let's examine Terra Nitrogen and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

Terra Nitrogen

15.4%

962.7

64.5%

64.4%

Mosaic (NYSE: MOS)

0.3%

54.3

4.0%

7.3%

Potash Corp. (NYSE: POT)

0.5%

23.5

7.3%

38.4%

Scotts Miracle-Gro (NYSE: SMG)

1.9%

8.8

23.6%

17.8%

Source: Capital IQ, a division of Standard & Poor's.

With an interest coverage of 962.7, Terra Nitrogen covers every $1 in interest expenses with over $900 in operating earnings, meaning the company barely has any debt at all. Given that its EPS payout ratio and FCF payout ratio are below 70%, you shouldn't have to worry that Terra Nitrogen will need to cut its dividend anytime soon.

Link to original article: http://www.msnbc.msn.com/id/43370848/ns/business-motley_fool/

Our Economic Future: From Worse Case to Best by Doug Casey

WORST CASE – WAR

War is the worst thing that can happen to an economy, but it’s also the most likely thing at this point. When the going gets tough, the people in charge like to blame somebody else for the problem. That’s compounded by the foolish – but widely accepted – notion that war is good for the economy and that, for instance, it pulled the U.S. out of the last depression.

Like all wars, this one results in a complete stifling of civil and economic freedoms. If my second scenario is unpleasant, this alternative is grim.

The big conflict has already been teed up – the continuation of the Forever War between Islam and the West. I’ll hazard the major situs will be Europe – which has pretty much always been the case for wars in general for the last 2,000 years. Europe will be the worst place to be over the next two decades. And North America will be locked down like a police compound.

China will have serious social turmoil as it is forced to reorient an export-driven economy catering to Europe and the U.S. As in the past, South America will be out of the conflict and in a position to benefit from it. India will also be a net beneficiary, largely uninvolved, and happy to watch their ex-colonial masters rope-a-dope themselves into poverty.

People will always argue who really started it. Was it the Muslims when they poured out of Arabia in the 630s? Or was it the West when it invaded the Near East with the Crusades starting in 1099? Or was it the Muslims when the Turks took Constantinople in 1453 (although only 40 year later the Muslims would lose Grenada, in Spain, as the reconquista was completed) and then moved on to almost conquer Europe before being turned back at Vienna in 1683? Or is it more relevant just to look at recent history, starting at the beginning of the 19th century, when the West conquered and colonized every single Muslim country? Or the very recent past, when Muslims were counter-attacking, using a new military approach popularly called “terrorism”?

My bottom line is that the next twenty years may be dominated by the Forever War that started in the 600s, being resumed in earnest. At least in Europe, it has the prospect of becoming a war of survival, much nastier than either WW1 or WW2.

That resumption is being accelerated by what is going on in the Middle East now. The chances that the upheaval in the Arab world will just peter out and everyone will return to thestatus quo ante are about zero. It’s a culture-wide affair, much as the revolutions in Eastern Europe were. Or, for that matter, the revolutions against Spain in South America at the beginning of the 19th century.

The Arab revolutions are a good thing, in that they’re getting rid of criminal regimes. Some will be replaced with equally repressive cliques, although manned with different criminals. I suspect a few might be more like the French Revolution of 1789; good riddance to the old regime, but then came Robespierre. And after him Napoleon.

Regardless of how the tumult plays out in any particular country, the erstwhile docile collaborators with Europe and the U.S. are being elbowed aside, and the regimes that replace them are going to accommodate the vast public constituency for hostility toward the West, if only for the sake of internal political advantage.

The war is not going to be fought with conventional armies. First of all because the Islamic world doesn’t have any that would last more than a day or two against a Western army. But also because a Western army is useless against an amorphous mass of millions of people.

So what will the conflict be like? Amorphous and disjointed, chaotic and without fixed fronts. Millions of Muslims are in Europe – Pakistanis in the UK, Turks in Germany, North Africans in France, Indonesians in Holland. Europe’s destructive conquest of the world has come back to bite. These people will approach majority status over the next 20 years, both because they reproduce at several times the rate of the Europeans and because they’re not being absorbed. And because, now, millions and millions more are going to arrive as boat people.

The natives aren’t going to like it, for lots of reasons. And the outcome will likely resemble what always happens when large numbers of unwelcome foreigners invade a territory: violence.

One consequence of the war, and especially of the collapse of the regime in Arabia (in 2031 it’s no longer called Saudi Arabia, because the ruling Saud family – at least the ones who couldn’t get to their jets in time – has been massacred) is a cut-off of oil until the U.S. invades.

I hate to overemphasize oil, but the world still runs on it. When something does happen in Arabia, you can count on a disruption in the shipment of oil. And absolutely count on active U.S. intervention.

A prolonged guerrilla war, similar to those in Iraq, Afghanistan, Libya and other Arab countries will follow. But there won’t be any cover story about ousting a bad guy or bringing democracy to the oppressed. It will be pretty obvious to everybody that, from the West’s point of view, it will start out simply to answer the question: What’s our oil doing under their sand? But from the Muslim’s point of view, it will be a different question: How can we rid ourselves of these aggressive infidels once and for all? Then the West will rephrase their question to: These people want to kill us! How can we stop them once and for all?

You may be thinking that the U.S. can’t lose a war because it has a large and extremely high-tech military. All those expensive toys can be useful from time to time; they can win lots of small battles. But they’re basically useless for winning the next generation of warfare, as useless as cavalry in WW1, battleships in WW2, tanks in Vietnam or nuclear missiles today.

What? Nuclear missiles obsolete? Of course. They’re expensive, clunky, and the enemy can tell exactly where they came from. A plane, or a boat, or a truck – or a FedEx package – is a much neater delivery system. And there will be plenty of nuclear devices to deliver. If they’re within the grasp of tiny countries like Israel and North Korea, they’re within the grasp of anyone.

In fact, the centerpieces of today’s military are well on their way to the scrapheap or to museum displays. There may well be a few aircraft carriers, nuclear missiles, B-2 bombers, F-22 fighters, and the like around in 20 years. But they’ll be oddities reserved for special purposes, like typewriters. Laser, electronic and robotic weapons will have replaced those using gunpowder, and they’ll be readily available to anyone (an accelerant in the collapse of the nation-state). The military’s reliance on centralization and on computer power will prove an Achilles heel; a gang of teenage hackers (not only the best kind, but the most common kind) can devastate a military for pure sport.

Conquest of wealth or territory will be pointless; that’s one thing even the Soviets suspected in the ‘80s, when they still had the power to invade Western Europe. It’s now nothing like in the old days, when a successful war yielded lots of gold, cattle and slaves. This lack of an economic return will obviate one reason for a military. The hollowing-out of nation-states will obviate another; governments will find they just don’t have either the financial means or the popular support for serious military establishments.

The military, as the cutting edge of the nation-state, is in serious decline. Conflict between groups will still exist, of course, but it will be more informal, more the kind of thing that a Mafia or an Al-Qaeda might conduct. The growth of private military contractors, like Blackwater (now Xe), which only need be paid when in use, is indicative.

A BASIC PLAN

Sorry I can’t do any better than a best-case scenario that just isn’t very rosy – at least over the near term. And there’s a high likelihood of the worst-case scenario. There will probably be some overlapping elements from all three, if I’m on the right track.

From an economic point of view, I see only two things as being predictable: One, that many people will always produce more than they consume and save the difference; this will create capital, which is critical for not only a higher standard of living, but for the advancement of technology.

Two, that since there are currently more scientists and engineers alive than have lived in all previous history combined, technology will keep advancing; technology is the major force to advance the general standard of living. So that’s essentially why I’m an optimist. Let’s just hope the savers aren’t wiped out, and the scientists don’t do too much government work.

The most sensible plan for the next 20 years is to plan to survive. The days of “He who dies with the most toys wins,” and of two whole generations living way above their means, are over.

20 years isn’t forever. Think of it like a bear market, when the best thing to do is take your chips off the table, grab some books and retire to the beach for a year – except that this is going to be a lot longer and more serious. Nonetheless, I expect my fundamental optimism to get through it undamaged, as should yours.

For one thing, the long-term trend is favorable. Mankind has risen from subsistence and living in caves as little as 12,000 years ago, to reaching for the stars today – and the rate of progress has been accelerating. Why should that stop now?

But, as I mentioned earlier, thinking too far in the future is perhaps pointless. So what should you do now? The essential advice remains the same:

* Own gold and silver. At Casey Research, we’ve made a lot of money on them – and they’re no longer cheap – but they’re going higher, simply for lack of alternatives. Look at them as you would cash.

* Produce more than you consume, and save the difference. This is no longer the time for promiscuous, conspicuous consumption.

* Be alert for speculations. Some markets will collapse (for instance, I wouldn’t want to own a McMansion in the suburbs or a “collectible” car). Other markets will likely turn into manias, benefiting from trillions of new currency units (I suspect mining stocks will be one of them).

* Diversify your assets (and yourself) politically and geographically. As big a risk as the markets will be, your government is an even bigger one.

And, incidentally, we’re going to be looking carefully at the stock markets in the Arab world. It’s too early to buy. But there’s a time and a price for everything.

Our Economic Future: From Best to Worst Case
 originally appeared in theDaily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

    


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The Next Financial Crisis.

The Next Financial Crisis

by Gary North

Recently by Gary North: The Safe Banking Fantasy

 
  

The mainstream financial media are running stories on the next financial crisis. This is unheard of two years into a so-called economic recovery. So weak is this recovery that the old pre-2008 confidence has not returned.

The first sign that "this time, it's different," was Treasury Secretary Geithner's statement, which received widespread coverage, that there will be another crisis.

On May 18, The Daily Beast ran a story on Geithner's unexpected appearance at the initial screening of an HBO movie, Too Big to Fail, which dramatizes the crisis of late 2008, during which time Geithner was president of the Federal Reserve Bank of New York. In an interview, Geithner said this. "It will come again. There will be another storm. But it's not going to come for a while."

That was surely forthright for a sitting Treasury Secretary. He was not specific, but to say that another crisis will come was unique. He added this: "It's not going to be possible for people to capture risk with perfect foresight and knowledge."

That was amazingly forthright. It points to the reality of the naive faith of regulators that they can devise formulas that will keep the system from being hit by some unexpected mini-crisis that will trigger a wider systemic breakdown. He acknowledged that risk analysis, based on statistics, cannot deal with uncertainty: events outside the law of large numbers that serves as the basis of statistics. Ludwig von Mises discussed this in 1949, and Frank H. Knight wrote a book on this in 1921: Risk, Uncertainty, and Profit. Nassim Taleb has called this a black swan event. Whatever we call it, such an event torpedoes the best-laid plans of government regulators as well as statisticians advising leveraged banks.

"Things were falling apart," Geithner said. "We had no playbook and no tools. . . . Life's about choices. We had no good choices. . . . We allowed this huge financial system to emerge without any meaningful constraints. . . . The size of the shock was larger than what precipitated the Great Depression."

That is the official government line, which Treasury Secretary Hank Paulson used to persuade Congress to fork over $700 billion in TARP loans. It justified the Federal Reserve's swaps at face value of liquid Treasury debt in its portfolio for unmarketable toxic assets held by large banks. It justified the 2009 stimulus package of another $830 billion.

The author of the article correctly noted: "In the end, the taxpayers saved the Wall Street investment banks, with Geithner & Co. injecting enough capital to cushion them from bad bets." That is exactly what happened.

GEITHNER RETREATS

On June 6, Geithner spoke at a meeting of the American Bankers Association in Atlanta. Here, his analysis was completely different from what he had revealed in his appearance at the HBO screening. It turns out that the system was saved by investors, not by the government and the Federal Reserve.

Of the 15 largest financial institutions in the United States before the crisis, only nine remain as independent entities.

Those that survived did so because they were able to raise capital from private investors, significantly diluting existing shareholders. We used stress tests to give the private market the ability – through unprecedented disclosure requirements and clear targets for how much capital these institutions needed – to distinguish between those institutions that needed to strengthen their capital base and those that did not.

He did not mention that the reason why investors came to the rescue was that the winners had been bailed out by the taxpayers and the Federal Reserve.

Regulation has saved us, he insisted, and it will continue to save us.

We now have the authority to subject all major financial institutions operating in the United States to comprehensive, consolidated limitations on risk taking. That represents a dramatic change from before the crisis, when more than half of the financial activity in the nation that was involved in "banking" from the investment banks to large finance companies, AIG, and Fannie Mae and Freddie Mac, operated outside those limits.

And the markets where firms came together – like the over-the-counter derivatives markets – will now be subject to oversight, once regulators finalize and implement new rules authorized by Dodd-Frank. We now have much stronger tools to limit the risk that one firm's failure could cascade through markets to weaken the rest of the system.

Overall, and this is the most important test of crisis response, the U.S. financial system is now in a position to finance a growing economy and is no longer a source of risk to the recovery.

He ended with this inspiring promise. "So we will do what we need to do to make the United States financial system stronger. We will do so carefully. And as we do it, we will bring the world with us."

This was cheerleading for government regulation. This is what we have come to expect. The problem is this: it is a full-scale retreat from his admission at the HBO screening.

GEITHNER'S GOOFS

Simon Johnson took him to task in the New York Times on June 9, in an article titled, "The Banking Emperor Has No Clothes." Johnson was the chief economist of the International Monetary Fund, and is a member F.D.I.C.'s newly established Systemic Resolution Advisory Committee. He said that Geithner is naive about the supposedly high degree of safety for the banking system. He complains that Geithner is way too optimistic.

First, he reminds us that the government bailed out the banks. He reminds us of Geithner's admission of this in his HBO interview. Second, he reminds us that the international banking system is interconnected.

But big banks in almost all other major countries have run into serious trouble, including those in Britain and Switzerland – where policy makers are now open about the potential scope of further disasters. French and German banks made large amounts of reckless loans to peripheral Europe and have strongly resisted higher capital requirements, helping to create the current potential for contagion throughout the euro zone (and explaining why the Europeans are so keen to keep control of the International Monetary Fund).

Geithner claimed in Atlanta that U.S. banks are less concentrated than other nation's' banks. But how will that save our banks from a crisis that is triggered outside the U.S.? "Mr. Geithner's most serious mistake is to believe that we can handle the failure of a global megabank within the Dodd-Frank framework."

Mr. Geithner's thinking on bank size is completely flawed. The lesson should be: big banks have gotten themselves into trouble almost everywhere; banks in the United States are very big and have an incentive to become even bigger; one or more of these banks will reach the brink of failure soon.

Johnson then gets to the famous bottom line. The bottom line is this:

There is no cross-border resolution mechanism or other framework that will handle the failure of a bank like Citigroup, JPMorgan Chase or Goldman Sachs in an orderly manner. The only techniques available are those used by Mr. Geithner and his colleagues in September 2008 – a mad scramble to find buyers for assets, backed by Federal Reserve and other government guarantees for creditors.

That this should appear in the New York Times is indicative of the extent to which the old confidence in the banking system is fading.

FELDSTEIN WEIGHS IN

On June 8, the Wall Street Journal ran a column by Martin Feldstein, who served as Reagan's chairman of the Council of Economic Advisers. He is a Harvard faculty member.

Feldstein is a Keynesian. He has a reputation as a conservative. He is on the board of contributors to theJournal. He is regarded as a conservative because he favors tax cuts. But he also favors Federal spending in times of crisis. Somehow, he also comes out for a lower deficit.

He said that Obama's $830 billion stimulus package did not go far enough. "As for the 'stimulus' package, both its size and structure were inadequate to offset the enormous decline in aggregate demand." The money should have gone to the Defense Department.

Experience shows that the most cost-effective form of temporary fiscal stimulus is direct government spending. The most obvious way to achieve that in 2009 was to repair and replace the military equipment used in Iraq and Afghanistan that would otherwise have to be done in the future. But the Obama stimulus had nothing for the Defense Department. Instead, President Obama allowed the Democratic leadership in Congress to design a hodgepodge package of transfers to state and local governments, increased transfers to individuals, temporary tax cuts for lower-income taxpayers, etc. So we got a bigger deficit without economic growth.

This is pure Keynesianism. It is a call for massive spending in a recession. So, should there be another fiscal crisis, Feldstein's recommendation is a bigger stimulus. The problem for his is this: with the economy slowing, it will be even more vulnerable to an unexpected black swan event.

Second, we are getting an economic slowdown, he says, because Obama will not make the Bush tax cuts permanent. This creates uncertainty in the minds of investors. So, he sounds like a supply-side economist. But he isn't. He is a traditional Keynesian.

Third, there is the deficit.

A third problem stems from the administration's lack of an explicit plan to deal with future budget deficits and with the exploding national debt. This creates uncertainty about future tax increases and interest rates that impedes spending by households and investment by businesses.

Fourth, there is the official strong dollar policy that has led to the decline of the dollar. But he never mentions Federal Reserve policy: QE2.

What are our prospects? He is not optimistic.

The economy will continue to suffer until there is a coherent and favorable economic policy. That means bringing long-term deficits under control without raising marginal tax rates – by cutting government outlays and by limiting the tax expenditures that substitute for direct government spending. It means lower tax rates on businesses and individuals to spur entrepreneurship and investment. And it means reforming Social Security and Medicare to protect the living standards of future retirees while limiting the cost to future taxpayers.

All of these things are doable. But the Obama administration has not done them and shows no inclination to do them in the future.

So, here is a Harvard economist saying that we needed a larger stimulus in 2009, but we need reduced spending now. We also need to reform Social Security and Medicare, while protecting the future retirees and limiting costs. All this is doable.

All this is utter nonsense. The politics of Medicare and Social Security have not changed in 40 years because there is no politically acceptable way to limit their costs. Voters will vote against anyone who suggests such a reform. The voters were promised the Keynesian moon, and they will not tolerate the popping of that pipe dream. In short, none of what Feldstein suggests is doable, short of a monumental crisis that enables Congress to start goring specific electoral oxen. And when that crisis comes, Feldstein will no doubt recommend a large deficit, with the money going to the Defense Department.

This is Establishment Wall Street opinion.

WIGGIN TELLS IT STRAIGHT

Then there was an article in Forbes, a conventional outlet, written by Agora's Addison Wiggin. He begins with this.

There is definitely going to be another financial crisis around the corner," says hedge fund legend Mark Mobius, "because we haven't solved any of the things that caused the previous crisis."

Mobius is a legendary hedge fund manager. If he thinks there is going to be another crisis, we would be wise to listen.

Wiggin thinks the Greek debt crisis is a good candidate for a trigger event.

The Greek crisis is first and foremost about the German and French banks that were foolish enough to lend money to Greece in the first place. What sort of derivative contracts tied to Greek debt are they sitting on? What worldwide mayhem would ensue if Greece didn't pay back 100 centimes on the euro?

That's a rhetorical question, since the balance sheets of European banks are even more opaque than American ones. Whatever the actual answer, it's scary enough that the European Central Bank has refused to entertain any talk about the holders of Greek sovereign debt taking a haircut, even in the form of Greece stretching out its payments.

The ECB is determined to protect the Too Big to Fail banks. It always says that it will not lend more money to the Greek government, but it always does. It calls for more bailouts by the German and French governments. The game must go on!

It will accomplish nothing. Going deeper into hock is never a good way to get out of debt. And at some point, this exercise in kicking the can has to stop. When it does, you get your next financial crisis.

CONCLUSION

We are being warned in advance by the financial media: expect another major crisis. The bailouts were not enough. The expansion of the monetary base was not enough. The new Dodd-Frank regulatory structure is not enough.

The international banking system is an interdependent, interconnected system. The system is not transparent. Even if it were, the level of debt – unsecured IOUs – is enormous. Wiggin comments.

Estimates on the amount of derivatives out there worldwide vary. An oft-heard estimate is $600 trillion. That squares with Mobius' guess of 10 times the world's annual GDP. "Are the derivatives regulated?" asks Mobius. "No. Are you still getting growth in derivatives? Yes."

In other words, something along the lines of securitized mortgages is lurking out there, ready to trigger another crisis as in 2007-08.

There is no formula to deal with this. There is no organized government response that is waiting in the wings. There will be another crisis. And when it comes, the response will be the same: to preserve the solvency of the biggest banks, at taxpayer expense and at central bank expense. When it comes to bailouts and central bank inflation, it's all "doable." It will therefore be done.

June 11, 2011

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

Copyright © 2011 Gary North

The Best of Gary North


Link to the original article: http://lewrockwell.com/north/north990.html

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TIP OF THE WEEK - Learn to use the Stock Market Fear Index to Maximize Your Profits

Learn to use the Stock Market Fear Index to Maximize Your Profits

Jason Brizic

June 10, 2011

 

There have been some amazing stock market declines since the 1987 crash of 25% in one day.  I wasn’t invested in the stock market in 1987, but I have been an avid market participant since 1992.  I experienced the 2000-2003 bear and sidestepped the 2008 crash.  Rampant fears lead to jaw dropping selling.

 

“Buy when there is blood in the streets…”, said the shrewd Mr. Rothschild.  I am not fan of central bankers, but Rothschild's advice here is excellent.  In other words, “Buy when others are fearful; sell when others are greedy.”  You can use the S&P500 volatility index (aka the fear index) to help time your buying and selling of the stock market.

 

The following excerpt comes from a 2008 Zeal article that I link to at the end of this “Tip of The Week”.  This is a concise explanation of the VXO index.

 

To drive such exceedingly rare big down days [he’s talking about the 7% down days in 2008], incredible levels of fear are necessary.  Fear is such a fascinating emotion.  Its potency is very asymmetrical compared to greed.  Fear flares up much faster.  But like greed it still leads traders to make poor decisions.  So all good traders must ultimately suppress their own fear to escape its bad influence.  Then they must simultaneously game others’ fears by going long when popular sentiment is scared, which leads to great bargain prices.

 

While this ethereal emotion is not directly measurable, some great tools exist which infer its levels.  My favorites are the implied volatility indexes.  These brilliant tools collate and analyze real-time options trades on stock indexes, actual bets made with real money, and distill them out to one number.  It expresses the annualized expected volatility of an index over the next month.  An implied volatility level of 30 indicates options traders expect 2.5% swings (30% divided by 12 months) in either direction in the coming month.

 

The flagship volatility index is the venerable VIX.  Launched in 1993, it estimated near-future volatility in the S&P 100.  The S&P 100 is the top 20% of the S&P 500 stocks, or the biggest and best American companies with very high trading volumes.  In times of great distress, it is these S&P 100 companies that are sold the hardest.  Their great liquidity ensures traders can sell fast with minimal price impact for any individual trader.  So when fear drives selling, these elite companies are the go-to stocks to cash out.

 

Unfortunately today’s VIX is not this original battle-tested version.  In September 2003 the same VIX moniker was given to a totally new implied volatility index based on the broader S&P 500.  This sounds innocuous and reasonable, but the VIX’s custodians also considerably changed its calculation methodology.  Thus today’s VIX has never been tested in a stock bear so we have no idea what extreme fear levels for it really are.  Thankfully the original S&P 100 VIX was preserved in the form of the VXO.

If you read the rest of the article you will learn to:
1) Sell the S&P 500 Index using the short ETF (ticker SH) when the VXO goes below 20.  Greed is greatest with the VXO below 20.

2) Buy the S&P 500 Index ETF (ticker SPY) when the VXO goes above 50.  Fear is greatest above 50 on the VXO.

 

There are other long and short S&P 500 ETFs and ETNs listed here: http://etf.stock-encyclopedia.com/category/s&p-500.html  I just picked the biggest ones for an example.

 

Here is the link to the article on the VXO and its inverse relationship to the SPX (S&P 500 index).  I can’t explain it any better than the guys at Zeal LLC as you can see from the excerpt above: http://www.zealllc.com/2008/vxospx2.htm

 

See the last three years of the VXO for yourself.  It bottomed in late April at 13.43 and has been rising steadily.  Market participants have been lured into a greedy state of market conviction.  It is time to short the S&P 500. http://bit.ly/FearIndex
 
For more tips, go here:

 

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