According to USA Today — I know, not the most hard-hitting rag out there — contestants on shows like America’s Got Talent and Deal or No Deal have undergone a dramatic change in the past year.

Instead of dreaming of building a mansion or retiring early, the poor saps that go on those shows are now just hoping to win some kind of money to keep afloat. On Deal or No Deal, the percentage of unemployed prospective players jumped from just 5% of its total applicants to 20%.

Who Wants to be a Millionaire’s host, Meredith Vieira, claims that her contestants no long play for big prizes. They’re there to collect a few mortgage payments or to help pay off credit cards.

Apparently, the market’s recent fake recovery hasn’t ended this game show contestant trend. Vieira notes, “There’s still a sense of need, as opposed to want.”

This could spell disaster for marketing these shows. No one wants to watch desperate people cashing out early so they don’t have to move.

“Mustn’t Watch TV” aside, you shouldn’t be surprised by the still-pathetic situation out there. After all, one of the favorite buzz phrases on CNBC is “lagging indicator.” Forget that the phrase is an oxymoron for a moment. It’s applied to – more than anything else – unemployment numbers.

We have seen a slow down in job losses, which is to say that we aren’t losing jobs in this country as fast as we were. July even saw a slight increase in employment. I suspect a portion of that tiny bump is due to people giving up. If you aren’t applying for jobs, you no longer count.

We like to think of unemployment as a percentage. But it’s important to put the actual number of would-be-workers into perspective.

We have about 14.5 million unemployed people in the U.S. — at least 14.5 million reported unemployed people. Of those, we have a significant amount that has been in that situation for more than half a year.

As this chart shows, that’s the most people on the dole since the Second World War:

This begs the question: if we do ever recover, where will these new jobs come from?

Where’s Our Next Bubble?

Speculating about which industries will provide future jobs is still damned near impossible. Could Obama’s “green tech” jobs ever come to fruition? Possibly, but it won’t be in the near future. Right now, no one can even afford those kinds of products.

Even with amazing developments in turbine technology over the past few years, it still costs about 67% more for wind power than it does for coal or nuclear power. So for electrical engineers, there might be jobs in the R&D stage of this “green revolution.” For the majority of the 14.5 million unemployed, however, that’s of no help.

It’s doubtful that we’ll see a real recovery in manufacturing jobs. That’s one segment in serious trouble. We didn’t even see it recover during the boom from its 2001 lows.

Technology is one area with some potential. Americans’ need for the latest digital toy hasn’t dissipated in this rough economy. Sure, no one can afford new plasma TVs, but just take a look at AT&T’s iPhone 3G sales this summer. Pretty impressive.

We aren’t going to stash our life savings into Apple, but we are keeping our eyes peeled to see what comes next.

The energy sector, of course, needs a recovering economy to be of importance. It’s certainly not going to lead us out of our recession. Once we do recover, however, drills will once again meet the dirt and create some jobs. But right now, we’re seeing a lot of abandoned wells across our country.

We could always just pile back into the financial services industry and pretend the past two years were a dream. Unfortunately, that’s quite possible knowing how forgetful that crew is.

Wherever new jobs come from – if they come at all – and no matter which industry leads the way, we need to keep a careful watch over every sector. As you can see in one of our favorite charts, if you know which sectors are heading in which direction, you stand to make a lot of money:

There’s no doubt we’ll replace the financial bubble with another one – just like we did with the tech bubble in the 90s. So…where’s our next bubble?

Regards,
Jim Nelson

September 7, 2009

Recovery and Jobs; Where’s the Next Bubble? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I think Linda got most of it right the other day. This bill is definitely a test of strength for the government. And I even think the term “Nicotine Nazis” perfectly describes the group doing this. But, I think she missed one point…

It’s not all about governments suppressing its citizens… at least not in this case. The reasons behind this bill are twofold:

First, smoking bans and taxes have actually helped incumbents remain seated — no matter what the level of government. Therefore, a huge federal bill restricting it – “to save the children from those damn luring flavors” – is the obvious step for liberals looking to stay in power.

Second, and here’s where true greed takes over, it’s the tobacco industry itself. Why do you think the largest U.S. cigarette manufacturer supported this legislation? It helped write it!

I’ve been following the tobacco industry pretty close as of late… not just because I’m a 2-pack-a-day smoker, but because as the resident income guy, I know how these companies can be cash cows. Many kick off huge dividends. It’s bills like this that brought me to a tobacco play outside the U.S.

In that research, one thing became painfully obvious: the U.S. market is drying up. Apparently, and quite to my surprise, those Truth.com ads are actually working. Just in the first quarter of this year, Philip Morris USA sold nearly 6 billion less cancer sticks than Q1’08. It even saw its enormous market share slip a few basis points.

You can say the same about its largest competitor RJ Reynolds. These two giants are in a lose-lose situation. They have to deal with a shrinking customer base and still battle with smaller competitors like Newport – my brand.

Newport, owned by Lorillard, is the country’s best selling menthol. The two big players were starting to lose to this small-time operation and they didn’t like it. This bill will give the FDA the power to both ban menthols AND stop new competition.

The FDA will have the authority to deny any new tobacco product that doesn’t “demonstrate health benefits to society as a whole.” What kind of tobacco product would “benefit society as a whole” according to the FDA. This is the same federal agency that picks and chooses which drugs should be sold in this country depending on which pharmaceutical company put the largest bribe in its pocket.

Even if you do get approval for a new product, you sure as hell can’t market it. The marketing restrictions in this bill are just as astounding.

Regardless of Linda and my rants, the bill did pass. Obama is signing it. It is law. Now what?

Well, I may be an income guy that’s long international tobacco, but I’m also a penny stock guy too. I like to gamble from time to time. Here’s an easy way to take advantage of the probable ban on menthol:

98% of Lorillard’s sales come from Newports [49.5% of all Newport sales were to blacks according to the 2005 National Survey on Drug Use and Health —ed]. That means, 98% of the company’s revenue will disappear overnight – the minute FDA Commissioner Margaret Hamburg decides to ban menthol cigarettes. Lorillard, which otherwise would be a great long opportunity, is now a perfect short play.

You can either do that, or pick up some put option contracts. It’s hard to say when the ban will come, but as a gambler, I’d say by the end of this year. The Lorillard January 2010 $60 puts (LTOML.X) look like one way to play it. Depending on where you stand, you can check out various contracts with different strike prices and expiration dates here…

Most of these have very little volume. So, be careful. And if you are a smoker, my best advice is “smoke ‘em if you got ‘em!”

Regards,
Jim Nelson

June 22, 2009

Big Tobacco and Government Collude was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

If you don’t want to be lumped in with this group, listen up… You need to understand something about the investment world. It feeds on your interest and greed. Without these two things, the people that are running the show – yes, the same people that drove it into the ground – don’t make any money.

Think about this for a second. When you hear about “investment opportunities,” does the person speaking know how to decipher every line of a balance sheet or income statement? Can that person understand “Wall Street Speak”? If so, does that person get paid on the basis that his or her “investment opportunity” trade more often?

My point is… brokers profit from you trading often, most of your friends that day trade probably don’t know a lick about a discounted cash flow model, and your early edition of the Wall Street Journal is full of advertisements from these same “investment opportunities” it is featuring on the front page. Get it now? Your interests don’t align with the things you hear about investments.

You can be best friends with a banker, but do you think the CD you just tied your money up in will outpace inflation? [Remember we have a 10-digit budget deficit in the U.S.]

Even here in the investment newsletter industry, we have our share of pushers. At Agora Financial, we aren’t allowed to invest in our own recommendations. We are the minority, when it comes to conflict of interest. Unfortunately, such conflicts do exist elsewhere.

I don’t mean to scare you. I don’t mean to intimidate you. I just wanted to set up what the rest of the world considers too boring to even discuss.

It’s a type of investment that may not be sexy. It may not be popular in message boards. But it does make a select few tons of money with next to no risk.

I’m talking about enormous yields, limited and known downside, and investor benefits above and beyond what most investment managers will ever advise their customers to buy.

This is the kind of investment that Warren Buffet takes advantage of every chance he gets. In fact, investments like these are about the only thing the kept the old bat afloat last year.

You hear about sweetheart deals and how investor elites practically get away with murder on Wall Street. One of the investments I’m about to show you is the exact tool they use. In fact, Berkshire Hathaway – Buffett’s investment company – can count the gains from these investments as assets even before they arrive in its trading account.

You can’t do that with the gains you expect from the shares of Google you bought when it IPOed 5 years ago. Those gains are non-existent until you sell your shares. And when you do sell, the government will tax the hell out of your gains.

Berkshire Hathaway’s investment, on the other hand, counts as real income, and is taxed at a relatively small flat rate. Beat that, stock market!

Alright, I’m done hyping… I’m talking about preferred stock. It’s the only kind of equity that is considered fixed income. Meaning, holders of preferred shares can expect – and claim – the interest from these shares as future assets.

While this may sound boring or “unsexy,” this is how the rich – like Warren Buffett – stay rich and even grow their wealth. It’s also how folks like you and me bank a few extra bucks when you can’t even count on your Google shares to increase in value.

I know from being a long-time reader of Whiskey that there’s a good chance you’re a gold bug. So am I. But do I think gold will pay me quarterly paychecks that are taxed at a flat dividend rate? Hell no!

Even when you cash out the gold you’ve been storing since the 1970s for massive gains, you will pay equally massive income tax on it [Well, some of you will—Ed.]. Dividends, which are how these preferred shares pay out, are currently taxed at a flat 15%. Average income tax is around 39%-40%. You can do the math.

Unfortunately, the people supposedly in charge of discussing opportunities like these are busy pushing more exciting “opportunities” like the “Next Microsoft” or whatever company just bought an ad in their paper.

I’m not saying there’s no room in your well-balanced portfolio for great opportunities you hear about on the 7th green at your local golf course. I’m just saying, the ones you should be hearing about just aren’t sexy enough.

Regards,
Jim Nelson

May 12, 2009

Fed Up with Wall Street Shenanigans was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

At the time, I got excited. I thought real action was coming. Unfortunately, my initial prejudice against fellow Americans held up. They are lazy, gullible, and apathetic. If I touched a nerve there, prove me wrong. I’m about to show you a significant flaw that has already made a small group of people serious money. If you want in, it’s time to man up.

Further Perversion of MBS Ridiculousness

So far, the U.S. government has piled up more than $2 trillion worth of debt to finance bailouts for banks, insurance companies and even the struggling auto industry. And unless you are the CEO of one of these companies or worth enough to make sweetheart deals like Warren Buffett, you haven’t received a dime of this money. That’s all right, because the government’s overreaction to this recession left an opening for gutsy investors.

As you know, mortgages have been the central problem in today’s economic meltdown. From there, greedy financial product creation boards went crazy. You’d have to be living under a rock not to hear the terms “collateralized debt obligations” and “credit default swaps.” These are the real doozies in today’s market slide.

However, the most important term in today’s financially-minded world is “mortgage-backed securities.” You see, it’s not the mortgages that caused the system to fail. It was the mortgage-backed securities, or MBS. These securities are not a new development in the financial world. In fact, they’ve been around longer than most of the “too-big-to-fail” banks Washington is bailing out.

During the last Depression, in 1938, President F.D. Roosevelt helped create the National Mortgage Association. Later, the word “federal” was added to the beginning. This organization, now called Fannie Mae, was created to bundle mortgages together and resell them as – you guessed it – mortgage-backed securities.

Wall Street’s further perversion of this already perverted “asset class” is a story for another day. But these “securities” are important today because the actions of the last 9 months of government intervention combined with plenty of MBS ridiculousness created an enormous opportunity for income investors.

You see, 2008 was a tough year for Fannie and her brother, Freddie Mac. Both companies’ shares lost about 98% of their value. The highly incompetent and worryingly scared Bush Administration took them over. In a very important piece of legislation, these two government-sponsored enterprises (GSE) were placed under the authority of the brand-new Federal Housing Finance Agency (FHFA).

In September, the FHFA took extraordinary action by placing Fannie and Freddie into a federal conservatorship. This conservatorship, backed by the U.S. Treasury, was designed to guarantee all GSE-backed securities. This September announcement means that the U.S. Treasury is obligated to pay anyone holding a Fannie- or Freddie-backed MBS. That’s a 100% guarantee by the U.S. Treasury. In a moment, I’ll tell you why this is important…

The Pseudo-Bank Loophole

The financial industry is full of penniless banks, uninsured insurance companies, and toxic assets. But it also includes about five pseudo banks that are in the perfect spot to take advantage of the collapsing market and the U.S. government’s desperate attempts to save it.

These companies are called mortgage real estate investment trusts, or REITs. If someone would’ve come up to me and asked me what I thought about a mortgage REIT a few weeks ago, I’d have laughed at them. But after I did some research, I found a bailout loophole that this small sector uses to make a few people very rich.

These mortgage REITs buy mortgage-backed securities from Fannie, Freddie, and occasionally Ginnie Mae (Government National Mortgage Association) at about a 5% yield. Until Bush’s ridiculous Fannie/Freddie bailout, the only government-backed securities came from Ginnie. Now, after the September conservatorship announcement, Fannie- and Freddie-backed securities are backstopped by the U.S. Treasury. That means whoever holds securities originally bundled by Fannie, Freddie, or Ginnie will get paid.

I can’t stress this enough… Until the U.S. government declares bankruptcy or the Chinese army overtakes Fort Knox, these securities are as safe as Treasury Notes. But here’s where it gets interesting…

Multiplying the Spread for Government-Guaranteed Income

The five (or so) pseudo banks that receive this “government-guaranteed” income from mortgage securities are still financial companies. And what do financial companies do? They leverage the hell out of any debt they can grab.

Here’s how it works:

Mortgage REIT A buys a bunch of government-backed MBS from Fannie. In turn, he receives a AAA+ credit rating because his portfolio is 100% backed by the U.S. government. He takes his credit rating to Lending Banks X, Y and Z. These banks give REIT A a bunch of 90-day, $100 million loans at 2% interest to buy more mortgage securities from Fannie. And we repeat, again and again.

When all is said and done, REIT A is leveraged 6-to-1. Its income comes from the 3% spread between its borrowing rate and the yield on the MBS. Multiply that by its leverage ratio, and REIT A grosses 18%.

Because of an obscure law that publicly traded realty companies cut decades ago, REITs aren’t taxed (so long as they pay shareholders all of their earnings through dividends). Therefore, with everything else equal, REIT A’s shareholders receive an 18% dividend yield.

With interest rates artificially held down by the Fed, and government-supported mortgage yields artificially held high to promote more MBS buying, we get a spread (and thus, income) that’s extremely large. And with these companies required to pay shareholders all of their earnings, we get an extraordinarily large dividend yield.

Finally, because of the mortgage mess, shares of these companies are undervalued. While most financial companies deserve their shares driven into the ground, these mortgage REITs don’t.

Investors with big cojones have already taken advantage of this. The spreads are even larger and safer now. If this is new to you, I suggest you check it out before investors jack shares back up – deflating the dividends’ effect.

Sincerely,
Jim Nelson

April 6, 2009

Fannie Mae and Freddy Mac for Safe Income was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.