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The Surprising Price of Wheat

The Surprising Price of Wheat

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01/20/11 Tampa, Florida – I was intrigued by the title of the essay “The Cheapest Thing on Earth” by Nathan Lewis here at The Daily Reckoning.

I was interested because I thought that such a tasty trivia tidbit could come in handy, like this morning when I could have used it as a distraction when my kids were calling me “cheap” because I wouldn’t open up my wallet and give them another king’s ransom for some new dumb reason; I forget what, but there was a lot of crying and wailing about it, whatever it was.

This is where I could have said, to throw them off, “Cheap? What do you know about cheap? Do you know what is the cheapest thing on earth? Huh? Do ya? Huh? Do ya? Yes or no?!”

Instead of providing me with the answer, he starts off with a pop quiz! Damn!

And when I say “pop” quiz, I mean exactly that, as he says, “Quick: name an asset, publicly traded, that is the cheapest in a hundred years.” Pop!

I, of course, had no idea, and instead of admitting it, I quickly read ahead, hoping to immediately find the answer, only to be surprised when he taunted me. “Houses?” he asks. “Nope. Stocks? I don’t think so. Commercial real estate? Bonds?”

By this time I was pretty peeved, and getting bored, too, as I was sure that if it was, indeed, none-of-the-above, then this was going to devolve into something about investing in something obscure, the significance of which would elude me even if you explained it to me over and over again, in a company I never heard of, and, probably, in a country I never heard of, either.

Just before I gave up reading in disgust, he dared to taunt me one more time, the bastard! “Not too many, are there?” he asks.

At this final insult, my mind screamed, “Damn you! Damn you to hell! Tell me now, or I will fire off a flaming email that will be both highly insulting and vaguely threatening!”

I could almost hear his cruel, mocking laughter as he rudely called my bluff, and further insulted me and my false bravado with, “Now here’s a tougher one. Name an asset that is near the lowest price in all of human history.”

Arrgghhh! In all of human history? By this time I am angry and distraught, mostly angry, that somebody was exposing my stupidity and ignorance!

Suddenly, I am gasping for air and screaming that if he doesn’t tell me the answer pretty soon, I am going to start hearing those voices in my head again, and (now that you mention it) if I listen really closely, I can almost hear them already, way off in the distance, screaming to be heard and obeyed.

And we all remember how it turned out the LAST time that happened.

Obviously intimidated by the sudden revelation of the strange, powerful forces he is unleashing, he quickly announces, “The answer is: wheat”!!

I admit that I personally put those two final exclamation points at the end of his sentence as an emphasis, both to indicate surprise and to remind you that there are surely significant ramifications of this “price of wheat” thing, the horrors of which I never allow myself to even think, except during sleep, and then hopefully only when I am dreaming of being with some beautiful young thing, and maybe with some of her friends, too, who are all naked and sweaty and grunting and heaving and writhing around in some surreal bacchanalia of some kind, where the only interruption is the masses of people outside wailing and crying that “The price of food is up so much that we are burning things and looting grocery stores in mindless anger and desperation, and we are looking for the Fabulous Mogambo Seer (FMS) to pledge our undying allegiance and love because he predicted that this inflationary hell is Exactly What Would Happen (EWWH) when the stupid Federal Reserve kept creating more and more fiat money, creating astonishing amounts of money, creating outrageous amounts of money, creating So Much Freaking Money (SMFM) for so, so long that We’re Freaking Doomed (WFD)!”

I can reliably report, thanks to these dreams, that the sound of people starving to death is a real “mood killer,” perhaps on a par with the horror that wheat is now at the highest price ever, even going back to Biblical times, which is probably why those old Bible-era people were always “breaking bread,” and eating unleavened wheat crackers, and consuming miscellaneous cheap wheat products instead of having, you know, a few tasty tacos or maybe a pizza once in awhile, which I figure must have been because they were very expensive or something, which is why you never hear of anybody eating them.

Anyway, I immediately used this new information-as-icebreaker at the supermarket, and told the cashier, as she rang up my groceries, “I’ll bet you don’t know that wheat is at its lowest price in recorded history, but climbing fast because the horrid Federal Reserve is still creating So Freaking Much Money (SFMM) that the terrifying, heartbreaking misery and suffering of inflation in the prices of subsistence prices of items, like wheat, is guaranteed! Guaranteed, I tells ya!”

She just dragged my frozen burrito across her laser scanner, the irritating “beep!” noise only underscoring her complete lack of interest.

I went on, helpfully adding that they also said, “Actually, the entire agriculture complex, including corn, beef, pork and beans could fit this description.”

Again the lonely “beep!” as she listlessly ran my bag of Oreo Double Stuf cookies through the beam, her face never changing, not even to make the time pass with idle conversation about, for example, how much she adores cute old guys who buy such delicious cookies, or how my eyes twinkle so charmingly, or even to say how she noticed I kept looking at her boobs. You know; anything.

Giving up, I took my groceries in hand and parted without giving anyone my usual advice, which is to “Buy gold and silver right now, using whatever money you can glean from your stupid little job, because inflation is going to eat us alive, and a weird, distorted economy will make it even more hellish, all thanks to the horrid Federal Reserve continuing to create so much excess money. And buying gold and silver is so easy that a bunch of bored, underpaid worker-bees in a low-margin business like you can do it! In fact, it’s so easy that even morons say, ‘Whee! This investing stuff is easy!’”

The Mogambo Guru
for The Daily Reckoning

Author Image for The Mogambo Guru

The Mogambo Guru

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning , and other fine publications.

Read more: The Surprising Price of Wheat http://dailyreckoning.com/the-surprising-price-of-wheat/#ixzz1BnH5UDUA

 
Wheatprice chart, 2000-2009
 
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TIP OF THE WEEK - Use the Free Google Finance Stock Screener to Find High Dividend Stocks

Use the Free Google Finance Stock Screener to Find High Dividend Stocks

Jason Brizic

Jan. 21, 2011

Google Finance has an easy to use stock screener that I use to find high dividend stocks.  Go to:

http://www.google.com/finance/stockscreener

You can select amongst three exchanges: AMEX, NASDAQ, or NYSE.  Or you can choose ALL exchanges to screen from the largest pool of stocks.  You can also filter on Sectors.  This is really useful when you are looking for a high dividend stock in a particular sector to diversify your portfolio.

It starts with four default stock screening criteria: Market capitalization, P/E ratio, Dividend yield in percentage, and 52 week price change in percentage.  There are dozens of additional criteria to choose from.  To add criteria simply click the + Add criteria text and an organized list of additional criteria will be displayed.

Each criterion has two text boxes for you to enter minimum and maximum values.  You can also move two sliders on the distribution graphics that sit in between the text boxes, but I prefer the text boxes for their precision.

I use the following criteria to quickly screen for high dividend stocks:

            Market cap -                         Min 150M (I only want stocks with a market cap over 150 million dollars)

            P/E ration -                          Max 20 (That is the absolute max I’m willing to pay - ever)

            Div yield (%) -                     Min 6 (you know I like 6% or higher)

            52 wk price change (%) -  no min or max (the bigger the loss the better for the contrarian in me)

For more tips, go here:

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

How Do These High-Yielding REITs Really Make Their Money?

American Capital Agency Corp. (AGNC) and the other high dividend stocks called REITs are quite leveraged.  They are at the mercy of the banks that issue/supply their repurchase agreements.  They are borrowed short (repurchase agreements) and lent long (agency securities) just like commercial banks.  That’s fine so long as there are no financial crisis’s looming in the future.  Guess what?  The structural problems caused by fractional-reserve banking are not fixed.  Central banks around the world are printing money which just masks the problems and make them worse.

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They pledge their existing assets (agency securities) as collateral to other banks in return for a very short term loan through repurchase agreements.  The repurchase agreements loans and new stock offerings get them the capital necessary to purchase new agency securities from Fannie, Freddie, and to a lesser extent Ginnie.  They use the income generated from the agency securities and the sale of some agency securities to pay off the repurchase agreement loans when they come due.  Some of the risks to their income are badly performing agency securities (remember those toxic mortgage backed securities and what happens when people who are unemployed stop paying their mortgages) and a decline in the price of agency securities (for the same reason mentioned and Federal Reserve intervention in the MBS market).

Because they are borrowed short and lent long they won’t have the money coming in to keep their current dividend payments during the next financial crisis.  For example, AGNC has a quick ratio of 0.08.  I like to see this ratio above 1.0 meaning that the company has more current assets than current liabilities.  The cash equivalents that AGNC has on hand (current assets) are miniscule compared to their billions in repurchase agreements (current liabilities).

For comparison let’s look at Safe Bulkers quick ratio.  It is 3.30.  They have over three times their current liabilities in current assets that could be liquidated in an emergency to keep paying their fat dividend.

How Do These High-Yielding REITs Really Make Their Money?

By Jim Royal
January 18, 2011

As investors, we need to understand how our companies truly make their money. And there's a neat trick developed for just that purpose. It's called the DuPont Formula.

By using the DuPont Formula, you can get a better grasp on exactly where your company is producing its profit and where it might have a competitive advantage. Named after the company where it was pioneered, the DuPont Formula breaks down return on equity into three components:

Return on equity = Net margins x asset turnover x leverage ratio

High net margins show that a company is able to get customers to pay more for its products. (Think luxury goods companies.) High asset turnover indicates that a company needs to invest less of its capital, since it uses its assets more efficiently to generate sales. (Think service industries, which often do not have high capital investments.) Finally, the leverage ratio shows how much the company is relying on debt to create profit.

Generally, the higher these numbers, the better. Of course, too much debt can sink a company, so beware of companies with very high leverage ratios.

Let's take a look at Annaly Capital Management (NYSE: NLY) and a few of its sector and industry peers.

Company

Return on Equity

Net Margins

Asset Turnover

Leverage Ratio

Annaly Capital Management

8.2%

79.7%

0.01

8.03

Chimera Investment (NYSE: CIM)

18.5%

91.6%

0.09

2.28

American Capital Agency (Nasdaq: AGNC)

28.4%

92.1%

0.03

10.46

Anworth Mortgage Asset (NYSE: ANH)

12.7%

88.2%

0.02

6.95

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

Each of these companies offers a truly amazing dividend, ranging from 12.7% for Anworth to 19% for American Capital Agency. And how do these guys do it? This DuPont formula screen shows clearly: high leverage and fat net margins. Net margins for these group ranges from 80% to 92%, while most are very highly leveraged, with the exception of Chimera. Those tasty dividends bring out the gambler in some investors, which may explain why you might want to avoid some of these too-tempting stocks.

Breaking down a company's return on equity can often give you some insight into how it's competing against peers and what type of strategy it's using to juice its return on equity.

Jim Royal, Ph.D., owns shares of Annaly. The Fool owns shares of Annaly Capital Management.

Link to the original article: http://www.fool.com/investing/dividends-income/2011/01/18/how-do-these-high-yielding-reits-really-make-their.aspx

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Home price drops exceed Great Depression: Zillow

The price of houses will continue to decline due to excess inventory and high unemployment.  There are millions of foreclosed homes that the banks are keeping off the market.  They are known as the shadow inventory.  I’ve seen some articles put the number of homes in the “shadow inventory” close to 7 million homes.  That is literally years of inventory.

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Unemployment was really at 16.7% in December 2010 (the U-6 number  http://www.bls.gov/news.release/empsit.t15.htm ).  And it is not going to improve until the commercial banks increase lending to small businesses.

Unfortunately, that lending will create rising prices in all goods through the fractional-reserve banking process.  This is what happens when the Federal Reserve doubles the monetary base.  It will lead to huge price increases once the commercial bankers increase lending.

This article from Reuters confirms what we know in our heads.  But the newspapers and the TV news coverage tries to cover these facts up.  They avoid comparisons with the Great Depression because they are taught to believe the great Keynesian lie of consumer spending is the only way to grow the economy.

Lower home prices due to increased foreclosures would further erode the value of mortgage backed securities in the market.  That would make the agency securities on American Capital Agency Corp’s (AGNC’s) balance sheet worth less.  This would also hurt their sale price.  All this should hurt AGNC’s earnings.

However, if the FED buys more MBS after the point they previously said they were going to stop, then things change.  If the FED continues to purchase mortgage backed securities from Fannie and Freddie to bailout the big banks that still have MBS’s on their balance sheets, then this would increase their price in the market due to the increased artificial demand.  AGNC might have to pay more to buy its next batch of agency securities and the risk increases of a collapse in market value of MBS’s if the FED decides to sell some of its MBSs.  They would be propping up the MBS market for a bigger bust later.

Home price drops exceed Great Depression: Zillow

NEW YORK | Tue Jan 11, 2011 8:40am EST

NEW YORK (Reuters) - Home prices fell for the 53rd consecutive month in November, taking the decline past that of the Great Depression for the first time in the prolonged housing slump, according to Zillow.

Home prices have fallen 26 percent since their peak in 2006, exceeding the 25.9 percent drop registered in the five years between 1928 and 1933, the housing data company said in a report on Monday. Prices fell 0.8 percent over the month.

It is a dubious milestone for the U.S. housing market which has failed to gain much traction despite a host of government programs to reduce delinquencies and encourage demand with temporary tax credits and lower interest rates. Many economists expect further price drops, even if there are some anecdotal signs of growing demand, such as in pending home sales data.

"For the next six to nine months, the larger factors affecting the housing market that will produce more home price declines will be the excess inventory of homes, high negative equity and foreclosure rates, and weakened demand due to elevated employment, Stan Humphries, Zillow's chief economist, said in a blog post.

Declines are accelerating, and it will take a while before falling unemployment and other signs of economic improvement support the market, Zillow said.

Home prices fell at a 0.78 percent pace in November, the fastest since February 2009, the company said.

(Reporting by Al Yoon, Editing by Kenneth Barry)

http://www.reuters.com/article/idUSTRE70961E20110111

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A Disturbing Fact Regarding S&P500 Dividend Yields

I recently embarked on a quest to find S&P500 stocks yielding over 6 percent.  I was shocked by the results.  There are only seven S&P500 stocks currently yielding over 6 percent.

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Company

Ticker

Yield

Industry

Frontier Communications

FTR

7.71%

Rural telecom

Windstream

WIN

7.17%

Rural telecom

Diamond Offshore Drilling

DO

6.73%

Oil drilling

Altria

MO

6.42%

Tobacco

Century Link

CTL

6.28%

Rural telecom

Reynolds American

RAI

6.13%

Tobacco

Pitney Bowes

PBI

6.12%

Mail processing

That is just plain sad.  I once read that the S&P500 yielded around 6.7% back in 1982.  Today the index yields a paltry 1.7%.  A depression level bear market could bring the S&P500 yields back to the 6.7% level.  That depression will come when the Federal Reserve stops buying US Treasury debt.  You had better be holding high dividend stocks with earning power and strong balance sheets in your hand when the music stops.

Look for some analysis on these stocks in future posts.

There will be a multitude of stocks currently yielding between 4.00 and 5.99% that will become high dividend stocks when the Federal Reserve tightens and investors run for the exits.  This will mark the return of the bear market.  There will be high dividend stock bargains not seen since March 2009 when that happens.  Subscribe to www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

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What Wall Street Firm Just Took Notice of Safe Bulkers?

Citigroup initiates coverage on Safe Bulkers Inc. (SB).  More of the big boys on Wall Street are starting to take notice of this excellent high dividend stock.

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Equities research analysts at Citigroup (NYSE: C) initiated coverage on shares of Safe Bulkers, Inc. (NYSE: SB) in a research note to clients and investors on Friday. The analysts set a “hold” rating and a $10.00 price target on the stock.

Separately, analysts at Zacks Investment Research reiterated a “neutral” rating on shares of Safe Bulkers, Inc. in a research note to investors on Monday, January 3rd.

Safe Bulkers, Inc. (Safe Bulkers) is an international provider of marine dry bulk transportation services, transporting bulk cargoes, particularly coal, grain and iron ore, along global shipping routes for some of the global consumers of marine dry bulk transportation services. As of January 31, 2010, the Company had a fleet of 13 dry bulk vessels, with an aggregate carrying capacity of 1,077,900 deadweight tons (dwt) and an average age of 3.6 years. The fleet consisted of four Panamax vessels, three Kamsarmax vessels and six Post-Panamax class vessels. The Company’s subsidiaries include Efragel Shipping Corporation, Marindou Shipping Corporation, Avstes Shipping Corporation, Kerasies Shipping Corporation, Marathassa Shipping Corporation, Pemer Shipping Ltd., Petra Shipping Ltd., Pelea Shipping Ltd., Staloudi Shipping Corporation, Marinouki Shipping Corporation, Soffive Shipping Corporation, Eniaprohi Shipping Corporation and Eniadefhi Shipping Corporation.

Shares of Safe Bulkers, Inc. (NYSE: SB) opened at 8.81 on Tuesday. Safe Bulkers, Inc. has a 52 week low of $6.50 and a 52 week high of $9.00. The stock’s 50-day moving average is $8.4 and its 200-day moving average is $7.96. On average, analysts predict that Safe Bulkers, Inc. will post $0.39 EPS next quarter. The company has a market cap of $580.4 million and a price-to-earnings ratio of 5.24.

http://www.americanbankingnews.com/2011/01/18/citigroup-nyse-c-initiates-coverage-on-safe-bulkers-inc-nyse-sb/#

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Safe Bulkers (SB) Basic Financial Metrics.

Safe Bulkers (SB) Basic Financial Metrics

Sales per share.  Safe Bulkers' sales for trailing 12 months were $152,300,000.  At the end of 3Q 2010 there were 65,880,000 shares outstanding.  By dividing $152,300,000 by 65,880,000, we get sales per share of $2.31.

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Earnings per share.   Safe Bulkers' earnings per share of $1.54 for the trailing 12 months were calculated by dividing net income (income statement) by outstanding shares (balance sheet).  They earned $101,680,000 over the last 12 months.

Dividends per share.  By dividing $31,253,500 in dividends paid in the last 12 months by 65,880,000 shares outstanding, we find that Safe Bulkers had dividends per share for the last 12 months of $0.47 cents.

3Q2010: 65,870,000 shares x $0.15 dividend = $9,880,500 in dividends
2Q2010: 65,870,000 shares x $0.15 dividend = $9,880,500 in dividends
1Q2010: 55,440,000 shares x $0.15 dividend = $8,316,000 in dividends
4Q2009: 54,510,000 shares x $0.15 dividend = $8,176,500 in dividends

Cash flow per share.  The cash flow per share of $1.82 for the last 12 months was calculated by taking net income of $101,680,000 and adding back in the depreciation of $18,190,000, which has no impact on cash flow (income statement), and then dividing by the 65,880,000 shares outstanding (balance sheet).

Dividend yield.  Safe Bulkers' stock had a dividend yield on December 31st, 2010, of 6.77 percent.  The dividend yield is calculated by dividing the dividend per share of $0.60 per share at the close of 2010 by the stock price of $8.86.

Now let's begin our analysis of the ability of Safe Bulkers to meet its maturing loan obligations and current cash flow needs by computing its liquidity and debt coverage ratios.

Quick ratio

The quick ratio is an important liquidity ratio that is computed by removing inventory from current assets and then dividing by the remainder by current liabilities.  This information can be found on Safe Bulkers' balance sheet.  Since inventories are typically the least liquid of a company's current assets and are likely to produce a loss if liquidated, it is prudent to look at the firm's ability to cover short-term liabilities without relying on them.  The rule of thumb is that a company with a quick ratio over 1 or better indicates that it could cover all current liabilities with the liquid assets it has on hand, thereby reducing any need to cut its dividend.

Safe Bulkers' quick ratio for the last 12 months is 3.30, more than the standard rule of thumb that you would like to see.  The higher the ratio, the better we like the company.

Calculation: $140,610,000 current assets in 3Q2010 and no inventory divided by $42,630,000 in current liabilities in 3Q2010.

Debt coverage ratio

The short-term debt coverage ratio allows you to quickly see if the company's short-term debt obligations can easily be paid by using the cash that is being generated from company operations.  This ratio is calculated by dividing income from operations by current liabilities or short-term debt (balance sheet).  This ratio should equal at least 2.0.

Safe Bulker's short-term debt coverage ratio equals 2.82 for the last 12 months.  This means that the company is generating more than twice the cash flow it needs from operations to pay off all of its short-term obligations.  Taken by itself, this ratio would indicate that the dividend is pretty secure and would also indicate that there is sufficient operating income to offset a slightly lower liquidity position if that were indicated by the company's quick ratio.

Valuation ratios

There are two important ratios that can help you identify companies with good value characteristics.

Price-to-sales ratio.  We rank companies with low price-to-sales ratios higher than those companies whose stock is pricey relative to the sales being generated.  You can calculate the ratio by dividing the stock price at the end of 3Q2010 ($7.91) by sales per share ($2.31).  Safe Bulkers' price-to-sales ratio for the last twelve months is 3.42, which is not better than our 2.00 rule of thumb ratio that we use to indicate good value.

Price-to-earnings ratio (P/E).  Also known as the price-to-earnings multiple, this ratio tells you how expensive the stock is from a price standpoint given earnings that the stock is generating.  Historically, stocks are a good value when the ratio or multiple is below 10, but we consider stocks that have a P/E of less than 12 - the lower the ratio the better.  You can calculate the ratio by dividing the stock's price by the earnings per share being generated.  Safe Bulkers' price-to-earnings ratio for the last 12 months was is 5.14 ($7.91 stock price divided by $1.54 per share).  It is about the same today.

Dividend ratios

Dividend coverage ratio.  This ratio shows how secure the dividend is based on the cash flow being generated by the company.  Instead of applying the cash flow to analyze whether the company can meet its debt obligations, we analyze this ratio to assess how easily the company can keep making its dividend payments.  To calculate this ratio, you divide cash flow per share by dividend per share.  The higher the dividend coverage from cash flow, the better we like it.

Safe Bulkers has a dividend coverage ratio of 387 percent.

Dividend payout ratio.
  This ratio tells you how much profit the company is paying out to shareholders in dividends.  Once again, the higher the better, so long as the ratio does not exceed 100 percent.  Since a company can only pay dividends from current or retained earnings, it is a warning sign if a company is paying dividends that exceed current earnings.

Safe Bulkers' dividend payout ratio is 30.5 percent and is calculated by dividing its dividend per share ($0.47) by earnings per share ($1.54).  We tend to look for companies that have payout ratios of at least 50 percent, which to us indicates that company is committed to rewarding shareholders through dividend payouts.  However, Safe Bulkers is a very new company (less than 5 years old), so that is a nice dividend payout for such a young company.

Growth ratios

I'm not going to calculate the growth ratios until Safe Bulker's releases 4Q2010 earnings.

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Don't Buy Government Bonds

Don't buy government bonds.  That was Frank Chodorov's advice in 1962 and it is still good advice.  Frank's article will explain why it is immoral, but they are also going to pop in the bond bubble.  The Federal Reserve have more than doubled the monetary base since late 2008.  First it bought toxic mortgage backed securities from the too big to fail banks.  Next it has been buying government bonds with its "QE2" in a desperate effort to keep interest rates low.  The opposite of Ben Bernanke's wishes is happening.  Interest rates are rising.  When they rise high enough the bond fund managers will run for the exits and the loely bond investor who was told that bonds are safer than stocks will get ruined.
 
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You will be much better off owning a portfolio of high dividend stocks with earning power and strong balance sheets.  Government bonds: federal, state, and municipal bonds are all facing a huge bubble.  Dont' buy them.

Don't Buy Government Bonds

by Frank Chodorov

 

   

Chapter 17, Out of Step (1962). An MP3 audio file of this article, read by Steven Ng, is available for download. The reader might consider the further merits of Chodorov's argument, given the existing federal debt of $12 trillion.

In 1800, the United States Treasury owed $83 million. The population was then three million. Every baby born that year was loaded down with a debt burden of about $28; if the interest rate was 6 percent, the newborn citizen could look forward to paying a service charge on the national debt of $1.68 per year. Today the debt load of the nation comes to well over $290 billion, and the population is, in round figures, 180 million. Thus, while the population has increased by 60 times, the national debt has increased by 3,600 times; and figuring the interest rate at 4 percent, the cost of handling this debt is, roughly, $68 per citizen per year. The child is now loaded down at birth with a debt load of $1,700. These figures might be adjusted to the increased production per citizen, and to the decreased value of the dollar. Even so, the fact sticks out that posterity does not pay off anything of the national debt, that each administration adds to the debt left to it, and that the promise of liquidation implied in every bond issue is a false promise.

The bulk of the rise in the national debt has occurred since 1933, when Franklin D. Roosevelt abolished the gold standard and thus made money redeemable in – money. When money was redeemable in gold, the inherent profligacy of government was somewhat restrained; for, if the citizen lost faith in his money, or his bond, he could demand gold in exchange, and since the government did not have enough gold on hand to meet the demand, it had to curtail its spending proclivity accordingly. But, Mr. Roosevelt removed this shackle and thus opened the floodgates. The only limit to the inclination of every politician to spend money, in order to acquire power, is the refusal of the public to lend its money to the government. Of course, the government can then resort to printing money, to make money out of nothing, but at least the people will not be compounding the swindle. Therefore, I offer the following gratuitous advice:

Don't buy bonds.

The advice is based on purely moral, not fiscal, grounds. I could point out that when the government issues a bond it is diluting the value of all the money in existence. Every bond is, in effect, money: the fact that the indenture bears the seal and imprint of the government makes it so, even though it may not enter the market place as money; it does not become monetized for some time. That is, every bond issued by the government is inflationary, and thus robs the savers of the value of their savings. That, of course, is a swindle and is immoral. But, the immorality of bonds runs much deeper.

In the first place, when the State spends more money than it receives in taxes – a fact indelibly written into the bond – it is deliberately committing an act of bankruptcy. If your neighbor should do that you would promptly put him down as a dishonest person. Is the dishonesty transmuted into its opposite when committed by a legal entity? By what multiplier can robbery be made a virtue? The act of borrowing against imaginary income is a fraud, no matter who does it, and when you make a loan to that borrower you aid and abet a fraud.

The State's excuse for borrowing is that it invests the proceeds of its bonds for the benefit of posterity. Instead of putting the entire burden of meeting the cost of its beneficial acts on the living, it proposes to demand of unborn children their share of the cost. Quite plausible! But is this not the impossible doctrine of control of the living by the dead? What would you think of a prospective father who deliberately put a debt load on his expected offspring? That is exactly what you do when you cooperate with the State's borrowing program. You are loading on your children and your children's children an obligation to pay for something they had no voice in, and for which they may not care at all. Your "investment for posterity" may earn you nothing but the curses of posterity.

The use of the word investment in connection with a bond issued by the State is a treacherous euphemism. When you buy an industrial bond you lend your money to a corporation so that it can buy a machine with which to increase its output of things wanted by the market. The interest paid you is part of the increased production made possible by your loan. That is an investment. The State, however, does not put your money into production. The State spends it – that is all the State is capable of doing – and your savings disappear. The interest you get comes out of the tax fund, to which you contribute your share, and your share is increased by the cost of servicing your bond. In effect, you are paying yourself. Is that an investment?

When you depart from this earth you pass on to your heirs both the tax-collecting bond and the tax-paying obligation it represents. Or, as is usually the case – for the history of bonds is that ownership tends to concentrate in a few hands – if you sold your bond, the new owner in due time passes on to his heirs a claim on the production of your offspring. Your great-grandchildren are called upon to labor for his great-grandchildren. The bond thus becomes a legacy of slavery.

The fact is that posterity never pays off its ancestral debts – or not in the way you are led to believe by the bond-selling State. The present generation is posterity to all the generations that have gone before. Are we paying off any of the debts incurred by our forebears? Hardly. We have spending of our own to do and must leave to our posterity some new debts as well as those we inherited. They, in truth, will do likewise.

Whether or not there is any obligation on the living to liquidate the debt left by an arbitrary ancestry, the political machine prevents its being done. Actual liquidation would necessitate increased taxation, on the one hand, and a curtailment of State spending on the other. Increased taxation the State always welcomes, for any increase in taxes means an increase in State power, and the politicians are always for that; it can never spare a sou for the reduction of the national debt. No State – absolutist or constitutional – has ever put aside its ambitions to make good on its promissory notes. The "posterity should pay" argument, in the light of this historic fact, becomes the equipment of a confidence game.

What, then, becomes of the national debt? It grows and grows until, like a balloon, it bursts. But, though this is inevitable, thanks to the money-making monopoly of the State, it takes a long time before the balloon does burst, and certain conditions must prevail to cause the explosion.

When the promissory paper of a small nation is held by a powerful one, some semblance of financial rectitude is maintained by means of the marines; the economy of the defaulting State is impounded until the debt is liquidated, and sometimes for a longer period. Internal debts, on the other hand, are never liquidated. When the burden of meeting the service charges becomes economically unbearable, and the State's credit is gone, repudiation or inflation is resorted to.

Of these two methods, repudiation is by far the more honest. It is a straightforward statement of fact: the State declares its inability to pay. The wiping out of the debt, furthermore, can have a salutary effect on the economy of the country, since the lessening of the tax burden leaves the citizenry more to do with. The market place becomes to that extent healthier and more vigorous. The losers in this operation are the few who hold the bonds, but since they too are members of society they must in the long run benefit by the improvement of the general economy; they lose as tax collectors, they gain as producers.

Repudiation commends itself also because it weakens faith in the State. Until the act is forgotten by subsequent generations, the State's promises find few believers; its credit is shattered. Never since the Russian repudiation of 1917 has the regime attempted to float a bond issue abroad, while its import operations have been largely on a cash basis. Internally, Russia does its "borrowing" from its own nationals as a highwayman does.

Anyhow, since honesty and politics are contradictory terms, the State's standard method of meeting its debt obligations is inflation. It pays off with engraved paper. To be sure, even as it issues its new IOUs to pay off its defaulted ones, the inflationary process is on, for every bond is in fact money; like money, it is a claim on production. The bond you buy increases the circulatory medium, thus depressing its value, and you are really exchanging good money for bad. You are cheating yourself. That is demonstrable by comparing the purchasing power of the dollar at the time you bought the bond with its purchasing power at maturity.

As Germany did in the 1920s, the State can make inflation and repudiation synonymous; it can inflate for the purpose of repudiation. This is what is called "uncontrolled" inflation, another impostor term. There is really no such thing as "uncontrolled" or "runaway" inflation, because the printing presses do not run themselves; somebody must start and keep them going until the desired end, the wiping out of the national debt, is accomplished. The disadvantage of this process, as against outright repudiations, is that in wiping out the debt it also wipes out the values which the citizenry have laboriously built up; it wipes out savings. However, no nation has ever resorted to "uncontrolled" inflation until its economy has been destroyed by war, until production was unable to meet the expenses of the political establishment, to say nothing of the debt piled up by its predecessors.

But, how about the natural pull of patriotism? In the face of national danger, is it not right that we put our all into the common defense? Of course it is right; and people being what they are, the pooling of interests is spontaneous when community life is threatened, as in the case of a flood, an earthquake or a conflagration, or when the Indians attacked the stockade. In such catastrophes we give; we do not lend. Patriotism weighted with profit is of a dubious kind. Bonds do not fight wars. The instruments and materials of war are forged by living labor using the existing stock of capital; the expense must be met with current production. The bonds are issued because laborers and capitalists are reluctant to give their output for the common cause; they put a greater value on their property than on victory. Were confiscatory taxation the only means of carrying on the war its popularity might wane; the war would have to be called off.

This specious resort to spurious patriotism reaches its ultimate in the textbook justification for the public debt. It runs something like this: citizens who have a financial stake in the State, by way of bonds, take a livelier interest in its doings. Thus, love of country is made contingent on the probability of returns, both as to capital and to booty. This smacks of the kind of patriotism that motivated the money brokers of the Middle Ages; once they invested in their king's ventures they could not afford to become lukewarm in their fealty.

It is not patriotism that is engendered by the borrowing State. It is subservience. With its portfolio chock-full of bonds, the financial institution becomes in effect a junior partner whose self-interest compels compliance. An allotment of bonds to a bank carries force because its current large holdings might lose value if doubt were thrown on the credit of the State. A precipitate drop in the prices of federal issues would shake Wall Street out of its boots; hence new issues must be taken up to protect old issues. The concern of heavily endowed universities in their holdings of bonds is such that professorial doubt of their moral content could hardly be tolerated. Even the pacifist minister of a rich church would have to be circumspect in voicing his opinion of the public debt. That is, the self-interest of the tax-collecting bondholders, not patriotism, impels support of the State.

Taken all in all, the bond is a thoroughly immoral institution. I would not be caught dead with one of these papers on me.

Reprinted from Mises.org.

Frank Chodorov (1887–1966), one of the great libertarians of the Old Right, was the founder of the Intercollegiate Society of Individualists and author of such books as The Income Tax: Root of All Evil. Here he is on "Taxation Is Robbery." And here is Rothbard's obituary of Chodorov.
 
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Algorithms Have Take Over Wall Street. Are You Protected From Them?

Wired magazine published an excellent article on how algorithms have taken over Wall Street.  You must have a solid high dividend stock strategy to defend against the new volatility introduced by high frequency trading and market choking government regulations.
 
 
Please click on the Google Ads if you like the content of this blog and you want more of it.  I’m evaluating the profitability of this blog with the responses to those ads.  If you don’t see the Google Ads, then please visit my main site at www.myhighdividendstocks.com and give them a click.  Thanks you for your support.
 
You can defend your high dividend stock portfolio by keeping at least a 25% cash reserve to purchase more shares when a series of HFT causes a drastic drop in your stock's price.  You must enter some good-until-cancelled purchase orders to do this.  You can also do the same for a stock you don't own.
 
I'm going to examine how several high dividend stocks performed during the May 6th, 2010 flash crash in the near future.  Look for those posts by subscribing to www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

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Warning - AGNC dividend payout ratio might exceed 115%

Warning - AGNC dividend payout ratio might exceed 115% for 4Q2010.

AGNC’s last quarterly dividend was $1.40 per share.  They announced in December that they would pay a $1.40 dividend for 4Q2010.  They have paid $1.40 per share since 3Q2009.  However, AGNC disclosed on January 12th, 2011 that it expects to earn at least $1.20 in 4Q2010.  That isn’t enough to cover the dividend.  I wrote about this on December 17th, 2010.

http://bit.ly/how-much-longer

Their dividend payout ratio will rise above 100%.  That is a warning to high dividend stock investors that a cut to the dividend in coming in future quarters unless something changes that course.  A $1.40 divided by $1.20 equals a dividend payout ratio of 116%.  Yikes!  If the unnamed analysts are correct, then the payout ratio will be 108.5% for 4Q2010.  Factor this into your investment plans if you own AGNC.

Disclosure: I don’t own AGNC shares.

American Capital Agency Corp. Issues Q4 2010 EPS Guidance In Line With Analysts' Estimates
Wednesday, 12 Jan 2011 04:08pm EST 

American Capital Agency Corp. announced that for the fourth quarter of 2010, it expects earnings per share (EPS) to exceed $1.20, including an anticipated benefit from slower projected prepayment speeds. According to Reuters Estimates, analysts are expecting the Company to report EPS of $1.29 for the fourth quarter of 2010. 

http://www.reuters.com/finance/stocks/keyDevelopments?rpc=66&symbol=AGNC.O&timestamp=20110113225400

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