The 21st century has been the most dangerous time for investors since the Great Depression; and in this issue, we give you very specific solutions.
Consider all that’s happened in just the first 12 years of the new millennium:
The world has been battered by the Tech Wreck, the Housing Bust, the Mortgage Meltdown, the Great Recession, and the Sovereign Debt Crisis — each bigger than the previous, each impacting a broader swath of investors and ordinary citizens.
We’ve witnessed the collapse — or near collapse — of America’s largest bank (BofA), largest insurance company (AIG), largest mortgage lender (Fannie Mae), largest brokerage firm (Merrill Lynch), and largest state economy (California).
We’ve witnessed the biggest government failures in recorded history — Greece, Ireland, Portugal, and now probably Spain.
We’ve seen the spectacle of governments and central banks trashing tried-and-tested monetary and fiscal policies … lurching from one desperate countermeasure to the next … experimenting recklessly with zero interest rates, giant bailouts, rampant money printing, plus more.
And the Crisis Continues …
Eight days ago, at the 19th EU summit, we saw European leaders announce their latest “solution to the crisis” — direct cash injections into failing Spanish banks. Then just four days ago, the European Central Bank cut its official interest rate to an all-time low.
Yet, despite all these Herculean government efforts, the crisis continues to accelerate — and spread!
Just this past Friday, for instance …
The euro plunged to brand new lows, wiping out all of its meager gains — and more — since the EU summit.
Spain’s bond market crashed again, driving 10-year yields above 7% — sky-high borrowing costs that could push the country to seek a full-blown bailout like Greece, Ireland, and Portugal.
The true U.S. unemployment rate, including all discouraged workers, rose to 22.8% — just a hair from its worst level of the Great Recession. (See Shadow Government Statistics.)
No Time for Complacency!
If you haven’t done so already, you must take action to protect yourself without delay.
So starting with this issue of Money and Markets, I have assembled the wisdom of our entire Weiss team to create an urgent guide — to help you achieve three fundamental goals:
Goal #1. To avoid losses and find true SAFETY for your hard-earned money (Part 1 of this series) …
Goal #2. To GROW your wealth even in the worst of times (Part 2), and …
Goal #3. To USE this crisis to go for the kinds of profits that are only possible in an era of accelerating global change like today’s (Part 3).
Part 1 of This Series
How to Avoid Losses and Find True
SAFETY for Your Hard-Earned Money
In a moment, we’ll tell you how to protect your stock holdings, what to do with real estate, and how to avoid major bank and sovereign debt failures.
But first, imagine how much money you could have today if you could have simply avoided all the major financial catastrophes of the last 12 years!
Easier said than done, right? Perhaps. But follow this timeline and you will see how it was VERY possible …
1999: A few months before the Tech Wreck of 2000-03.
This is when our team identified the first major Internet stock most likely to crash — Amazon.com. We even coined the term “Amazon.bomb” and sent our warning to hundreds of thousands of investors.
Wall Street scoffed. But soon thereafter, Amazon’s stock plunged 58% in just 45 days.
And Amazon wasn’t the only one. Far from it! DoubleClick fell 60% and At Home plunged 61%, while AOL, Yahoo, CMGI, and Priceline also lost more than half their value — all in a matter of weeks … all BEFORE the Tech Wreck began.
What did these losers have in common? At the time, we pointed out that …
• Every one of these stocks was rated a “buy” or “aggressive buy” by a gaggle of major Wall Street brokerage firms, and …
• Each was red-flagged by our Weiss ratings as far too risky to own.
By year-end 1999, we red-flagged over 90% of the stocks listed on the Nasdaq.
We said they were high risk. We told all our readers to dump them immediately. And we followed up with urgent reports mailed to more than a million investors, warning of the coming “Internet Apocalypse” and “Judgment Day for dumb dot-coms and hair-brained high techs.”
Wall Street scoffed again. But then, it happened:
• Amazon.com fell 87%! If you had put $10,000 into this company, you’d have lost a whopping $8,761 by year-end 2000. Yet right at its peak, in December 1999, Merrill Lynch and 32 other Wall Street firms were still giving it superlative ratings and telling investors to scoop it up.
• Priceline.com, which Wall Street said was “a quintessential virtual business model,” plunged 98.6% — from $104 per share to $1.50 per share. If you had listened to Morgan Stanley or any of the other 18 Wall Street firms that gave it a “buy” rating, $10,000 in this turkey would have dwindled to a meager $144.
All told, the market value of the 4,300 stocks listed on the Nasdaq fell from $7.6 trillion on March 10, 2000 to $2.4 trillion on April 6, 2001.
Investors lost $5.2 trillion — more money than was lost in the worst crashes of all recorded history and the equivalent of nearly HALF the entire U.S. GDP. All in just 13 months!
Now, more than a decade later, you’d think most investors in Nasdaq stocks would have finally recovered their losses.
But the fact is that 555 Nasdaq stocks went bankrupt within the first three years of the Tech Wreck and the vast majority of those stocks never came back. And the Nasdaq Composite Index as a whole is still miles away from its peak reached in 2000.
How could investors have avoided these wipeout losses? With three easy steps: Heeding our warnings, calling their broker, and issuing a simple four-letter instruction — SELL.
Unsure which stocks to sell first and how? Then …
- Pay close attention to the stocks we cover in our newsletters. These take into account not only standard financial data, but also our big-picture views and the role the investment plays in a broader, diversified portfolio.
- If we don’t mention your stock specifically, look it up with our free rating and tracking service at www.weisswatchdog.com.
- If your stock is rated D+ or lower, consider selling it.
- If you are unable or unwilling to make major changes in your stock portfolio, protect yourself against losses with investments that are designed to go up in value when stocks fall, such as inverse ETFs
2005: One year before the housing bust began.
We first warned of the real estate bust 12 months before it began — on the front page of our Safe Money Report.
That’s where we headlined “the final stage of the real estate bubble,” and warned:
“When it pops, stocks of big banks, construction companies, and mortgage lenders will be shattered.”
Then, as housing stocks began to fall, Mike Larson wrote:
“Calling [the coming housing bust] ‘a soft landing’ will be like calling the dot-bomb gust a ‘gentle correction.’ Defaults and foreclosures are going to skyrocket. And prices on a wide variety of properties are going to fall in vast swaths of the U.S.
“If you’re selling a home right now, don’t muck around on price. And if you have residential investment property … dump it!”
(See Housing stocks plunge! Housing is next! June 9, 2006.)
But few listened.
In fact, when Mike told a group of analysts that the housing bubble was about to bust, he practically got laughed out of the room.
They spoke about a brother turning a small sum into a fortune … a neighbor’s house getting 15 bids within minutes of being listed … or housewives becoming million-dollar-a-year real estate agents.
Question: How much could millions of Americans have saved if they simply followed Mike’s instructions to sell?
Answer: Their ENTIRE net worth, plus much more. In fact, among the countless homeowners who suffered a total wipeout of their home equity, 16 million are still underwater, meaning they have yet to recover even one penny of that loss.
How deep in the hole are they now? Even with the so-called housing “recovery” of recent months, real estate valuation company Zillow estimates that those 16 million homeowners owe an average of $75,644 more than what their home is worth.
Collectively, that means they’re $1.2 trillion in the red — in addition to the trillions they lost in equity!
Result: Despite some sparks here and there, the real estate crisis is far from over. And it remains vulnerable to a double-dip recession.
What should you do with your properties? Mike recommends the following steps:
1. Begin by finding out more about the market conditions in your area.
• On the Web, go to the Federal Housing Finance Agency (FIFA) cities data tool.
• Click on the first row, where it says “–Select MSA 1–” and choose the city or area you live in. If you can’t find yours, search for the name of the nearest large city.
• Click “Start Search.” You’ll get a table that lists the most recent percentage change in house prices. It also details how that compares to every previous quarter.
• If the negative numbers have flipped into positive territory in terms of percentage change, that’s a good sign. It signals that conditions are improving.
• Next, to get a fix on changes in your home’s value based on this same data, go here.
• Click on the words “MSA/MSAD.”
• Click on the down arrow to select your area.
• Click on the arrow next to “Purchase Quarter” and enter when you bought your home.
• Click on the arrow next to “Valuation Quarter” and select the most recent quarter.
• Enter the purchase price you paid.
• Press “Calculate.” The site will spit out a current estimated value, as well as a chart showing how your home’s value has likely changed over time, based on the government’s pricing data.
If you see your home value improving over the last few quarters, that’s a good sign. Just remember that one or two quarters is not enough to make a trend.
2. When buying, avoid the many pitfalls of borrowing. So …
Stay away from home equity loans or lines of credit, which can leave you upside down if the value of your property falls.
Make sure you get a good faith estimate of ALL your mortgage costs before you agree to go with a specific lender, and also consider negotiating the fees charged by that lender. (Your lender has more control over those than over third-party fees, such as those charged by appraisers.)
Also, make sure you avoid a high loan-to-value mortgage, one where the loan principal is close to the value of the property. After all, if prices fall or go nowhere and you eventually have to pay a 6% commission to sell your home, you could easily lose money.
3. When selling in tough markets, don’t dilly-dally. Use every selling technique you can to get your property sold very soon after it’s first listed.
Be aggressive on price and don’t let sentimentality get in the way of closing a transaction!
Recognize that your home may not be worth what you believe it “should” be and that potential buyers are going to play hardball in this lackluster housing market.
And consider offering incentives, such as a re-decorating allowance or assistance with the buyer’s closing costs.
2008: The Lehman Brothers Failure and the Great Debt Crisis.
First, it’s vital to remember the major failures of recent years. Then, we’ll give you instructions on how to avoid the next ones.
March 14, 2008: The Federal Reserve Bank of New York provided a 28-day $29 billion emergency loan, while Bear Stearns signed a merger agreement with JPMorgan Chase in a stock swap worth $2 per share, or less than 10% of Bear Stearns’ market value.
The sale price represented a staggering decline from a peak of $172 per share as late as January 2007 … and from $93 per share just two months earlier.
A total surprise to everyone? Not exactly. Precisely 102 days before the failure, we wrote:
Bear Stearns has “sunk its balance sheet even deeper into the hole, with $20.2 billion in dead assets, or 155% of its equity; and is threatened with insolvency.” (For the evidence, see “Dangerously Close to a Money Panic,” Money and Markets, December 3, 2007.)
September 7, 2008: Fannie Mae and its sister company, Freddie Mac, were placed under conservatorship of the U.S. government, with the U.S. Treasury committing to bailout funds of $100 billion for each — the largest bailout for any company in history at that time. Common and preferred shareholders were wiped out.
Four years earlier, we wrote:
“Fannie Mae is already drowning in a sea of debt. It has $34 of debt for every $1 of shareholder equity. That’s big leverage and of the wrong kind. Plus, the company has only one one-hundredths of a penny in cash on hand for every $1 of current bills. Think Fannie Mae can’t go under? Think again.” (See “My Chat With FDR,” Money and Markets, September 24, 2004.)
And 41 months before the failure, we warned again, listing Fannie Mae as a stock not to touch with a “ten-foot pole.” (Safe Money Report of April 2005.)
September 15, 2008: Lehman Brothers filed for Chapter 11, a landmark event that froze credit markets globally and began a new era of financial instability.
But exactly 182 days before its failure, we warned that Lehman was vulnerable to the same disaster that struck Bear Stearns. (“Closer to a Financial Meltdown,” Money and Markets, March 17, 2008.)
And that was not our first warning. In the prior year, we wrote that Lehman was in a “similar predicament as Bear Stearns” because of an even larger, $34.7 billion pile-up of dead assets, or 160% of its equity. (“Dangerously Close to a Money Panic,” Money and Markets, December 3, 2007.)
November 24, 2008: The U.S. government announced a massive bailout of Citigroup and other major banks devised to rescue the companies from bankruptcy.
And three days before the failure, in Business Week online, we warned:
“We’re getting to the critical doomsday question: What happens when a megabank like Citi fails? [Citi] is on the razor’s edge.”
In the same broadcast, we warned about Wachovia Bank, Washington Mutual, Sovereign Bank, Huntington Bank, and First Tennessee Bank, all of which subsequently failed, were bailed out, or forced to merge.
2009: One year before the onset of the sovereign debt crisis.
In a white paper presented at the National Press Club in Washington, DC, and submitted to Congress on March 19, 2009, we warned of Dangerous Unintended Consequences of banking bailouts.
We wrote that a government’s most precious asset is not federal lands or military hardware. It’s the power to borrow money readily in the open market — without which it would be unable to run the country’s basic operations, finance the deficit, or refund maturing debt.
We warned that by bailing out their private banks and other corporations, governments all over the world would literally trash that valuable asset. Yes, they could save big banks temporarily. But in the end, they would wind up sacrificing their own credit rating.
In sum, we warned that, by papering over the great private debt crisis of 2008-2009, they would create a far greatercrisis in 2010 and beyond — a sovereign debt crisis!
Where would the sovereign debt crisis begin? About a year later, Elisabeth, Anthony, and I happened to be in Greece on a cruise, and I subsequently wrote:
“If a local soothsayer had told me that the next global debt contagion would begin here, blocks away from the Pantheon, I would have been incredulous. Yet that is precisely what has just happened in recent weeks.
“The next contagion is beginning to spread around the globe. It is unexpected on Wall Street, misunderstood in Washington — and very dangerous.
“It could sabotage the plans of the U.S. Treasury, the Federal Reserve, and many of their counterparts overseas.
“It is the collapse of sovereign government bonds.” (See “The Next Contagion,” Money and Markets, February 1, 2010.)
Since then, the contagion has spread to Ireland, Portugal, Spain, and Italy.
It has sabotaged the finances and the economy of nearly all of Europe.
And beyond the four already afflicted, it could spread to at least 15 more major nations with huge debts and deficits, including the U.S. and Canada! (See last week’s Money and Markets.)
Here’s what we recommend:
1. Seek to avoid doing business with banks meriting a Weiss Rating of D+ or lower, regardless of how big they may be. Prime examples of large weak banks in the U.S. and overseas include:
Bank of America (D+)
Barclays PLC (D-)
Crédit Agricole (E)
Deutsche Bank (D)
JPMorgan Chase Bank (D+)
Société Générale (D-)
SunTrust Bank (D+)
UniCredit SpA (D+)
2. If you must do business with lower rated banks, be sure to keep your total deposits to a minimum size.
3. Seek to do business primarily with banks meriting a Weiss Rating of B+ or better.
4. Unload the long-term bonds and stocks that may be vulnerable to a debt collapse and recession in the countries receiving the lowest Weiss Ratings. (See table at right.)
5. And we repeat: If you are unable or unwilling to liquidate those assets, hedge against their decline with bear investments — inverse ETFs or long-term put options that are designed to go UP if your assets go down.
6. Above all, make safety your priority!
7. THEN look to grow your wealth in good times or bad, the primary subject our column next week.
Good luck and God bless!
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