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.

The Perverse Incentive

That’s a great name for a truth that somehow never quite surfaces: the role of HUD Housing Goals.  You see, my old pal Barney loves to blame “Wall Street greed” for, well, everything.  And Wall Street was greedy, no doubt.  But without the incentive — the search to do the impossible (namely securitizing loans that had unsound foundations) — caused by a very simple order: from the Department of Housing and Urban Development (yet more of my favorite people).

They gave that order to us at Fannie and Freddie.  A simple set of numbers; a set of arbitrary figures that told us how many loans we had to make that year to minorities and to the poor.  Not the deserving, not the responsible — but just to someone based on their skin color and their income.  No one considered the human cost to them and to their families for being misled by products no one in their right mind would use outside of seasoned real estate professionals with nerves of steel.  Perhaps the most offensive thing about this was not the rubble that it made of Wall Street firms and high-flying careers, but that it victimized those who it claimed it would help.  That is what is truly monstrous — and something few are willing to speak of.

These “HUD Housing Goals” created an artificial incentive.  Fannie and Freddie would buy those loans, sometimes at a significant loss even before the house price correction (I won’t say downturn… that would imply they were reasonably priced to begin with).  And that artificial incentive meant money to those on Wall Street and around the world.  But it was a false incentive; and in the final accounting it was false profit as well.  The derivatives and tranching schemes designed to make these losing loans halfway profitable proved to be too fragile for the combo of plummeting house prices and the money market run that spawned the original TARP.  Like a house of spun straw, it simply blew away in the wind.

And the people who sold you that straw house? They are still in power.  And honestly, they will never pay for what they did.  I’ve made my peace with that.

So, who’s really responsible for the mortgage mess?  Well, really, it was everyone whose policies distorted the housing market.  (Although I’m not above saying that it was mostly Democrats.  I’m petty that way). Regardless of party, the truth is that this is what you get when the Feds run just about anything.  Particularly anything with an unfunded liability as a mandate.

Gosh, I can’t wait to see what they’ll do with my healthcare!

Regards,
R. Caine

March 18, 2009

Obvious Culprits and the Untold Stories of Fannie Mae was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Many of us out there who have been involved in commodities trading and analysis have been warning, watching and waiting for the last two-three decades. So it comes as little shock to us that we are in this “crisis” now.

The Long Emergency

One of my favorite writers and lecturers is James Howard Kunstler. The Long Emergency is the title of one of Kunstler’s books, as well as one of his catchphrases, and, boy, is it dead on.

This commodities frenzy, and the related dash by nations to snatch up and secure all sorts of resources, has been a long time coming. It certainly didn’t happen overnight. I can safely say that for the vast majority of my career, commodities have been the poor redheaded stepchildren of the investment world. Two decades ago, when I walked onto the trading floor of the New York Cotton Exchange at the old World Trade Center, the climate was very different from today’s.

Back then, most “mainstream” investment houses looked at the commodity markets as a subculture. Commodities were, basically, another branch of Las Vegas, just without the free buffets, dancing girls and booze. Actually, maybe some of that stuff was available on a daily basis, but it was a lot different then.

I compare it to how Times Square was back in the 1970s and early ‘80s. If you ever visited the Big Apple back then, you know that Times Square was the worst of all things. It was a seedy, grimy, crime center filled with many colorful characters. Let’s just say Times Square was not a place tourists went, unless, of course, they were sex tourists.

Beneath it all, though, was an unpolished gem. The same is true with the resources market.

Respect Is Earned

Fast-forward to today.

Imagine you’re Rip Van Winkle and you go to sleep on 42nd Street back in, say, 1975 (let’s call you “Rip Van Wino”). You wake up in 2008 and see all the porno houses gone, bars shut down, strip clubs a distant memory…and then, suddenly, you are escorted to a homeless shelter because of New York policies on street people near 42nd Street… Welcome to the new world.

In some ways, this is true of the commodity markets, too. When I got involved with commodities in 1988, the exchanges were the low men on the totem pole. The members held all the exchanges privately, and none were traded on the stock exchange. It was a secretive world, and the only way to get a job on the floor was to know somebody. I got my job because my best friend’s brothers owned seats on the floor and gave me a job as a clerk.

Everyone on the trading floor was either related to or knew someone in the biz; it was a very incestuous market. The basic reason was that there was so much money to be made in the market nobody wanted outsiders coming in. It was a shortsighted approach, but it was the rule of law down there. The problem was that the markets stayed small and took only a small percentage of the global investment pie.

As the early 1990s set in, commodities, basically, fell and/or stayed stagnant for much of the decade, except for during the occasional war, such as we had in 1990 and 1991 (oil went wild when Saddam Hussein invaded Kuwait).

The general public focused on stocks and still pooh-poohed commodities. Nobody talked about corn or soybeans at any cocktail parties I went to in 1991. Now it’s different. I must get 15 calls a week inviting me to speak about corn and soybeans at events or on TV. It’s been a paradigm shift from 1989 to 2009.

Bubblicious

The most common question I have gotten on a weekly basis for the last 18 months is “When will the bubble pop?”

My answer is pretty standard: “There is no bubble!”

I am not usually invited back to those cocktail parties, as it scares the guests. The truth is we are not in a bubble. We are in an upward correction propelled by years of denial, stupidity, underinvestment and neglect. The blame falls squarely on several parties.

Wall Street is guilty for not embracing the commodity markets earlier. Wall Street should have allowed commodity prices to reflect the true nature of pent-up demand by making those markets available to its clients. Instead, Wall Street discounted commodities as some form of gambling.

The commodities exchanges and traders are also to blame for not making their markets more transparent, and for also projecting an image of secrecy and mystery.

And I could tell you stories about the underinvestment in basic production over the past couple of decades. Really, what were people thinking? That prices were low, and would stay low forever? Did it ever occur to anyone that all those babies born in the 1970s and 1980s might some day grow up and want food, energy and manufactured goods?

No, this is not a bubble. It’s a coming of age, a big, hard reality check that has been decades in the making. I have seen more activity by Wall Street in the resource markets in the last three years than in the previous 17. And I do not expect that it will ever go back to the way it was. I also don’t expect to see 42nd Street filled with porno and hookers again, either.

Change is often hard to accept. $140 oil, $1,000 gold, $8 corn…this is all the new reality. None of these new price trends are a figment of some rogue speculator’s imagination or the products of evil activity. This is a wake-up call that our growing world is hungry for the limited resources it still has.

The most important thing to remember is that markets, even parabolic bull markets, always correct. Those corrections can be painful if one is overextended or married to one side of the market — in this case, the bull market.

So ride the wave of change, of course. Be flexible, buy on the corrections, sell for profits on the overdone rallies and vice versa. Go short when clear tops have been made (although I grant it can be hard to determine the exact top).

There is no trail of breadcrumbs to follow on Wall Street, but that’s why you have me to help guide you. As long as grains don’t go up too much more, I should be able to supply you with a good trail to follow for many years to come, whether commodities are in rally mode or consolidation.

Yours for resource profits,
Kevin Kerr
July 16, 2008

P.S.: So if you agree that high prices are here to stay, that means there is definitely money to be made in commodities markets. But how exactly do you begin? It’s definitely a tough world out there, and the guys that have been in forever will try to keep the new guys out. That’s why I’m offering you a guest pass into this market that will help you earn more than enough money to help you keep pace with these rising prices.

Commodities Market was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.