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A Safe, Easy 45% Profit... Thanks to BernankeBy
Wednesday, July 21, 2010
The people who set short-term interest rates in the U.S. just showed their cards last week...
Thanks to the minutes to the latest Fed meeting, we now know what Fed Chairman Ben Bernanke's playbook is.
Bernanke is making it easy for us to invest... In short, he will keep money as "easy" as possible, for as long as possible – likely beyond 2012.
Today, I'll show you the safest, easiest way to make large profits from Bernanke's easy-money deal. Our target gain is 45% in one year.
To understand what Bernanke is up to, think of it this way... He's trying to light up the U.S. economy like it's a grill. He's dousing it with rocket fuel and pumping away on the "start" button. We're just waiting on the "WOOSH!"... the big flame. He's trying so hard, we're just standing back and waiting for his eyebrows to get burned off.
But chances are, he won't see a "WOOSH." Or more specifically, he won't see the economy light up like he wants. Instead, all Bernanke's rocket fuel will do is light fires elsewhere.
He'll create asset bubbles – like tech stocks in the 1990s or housing in the 2000s – that will eventually result in spectacular busts. But Bernanke won't care about those. All he cares about is igniting the grill in front of him.
According to the minutes to the latest Federal Reserve meeting, the Fed expects the economy will grow a bit slower than it thought... Unemployment will be a bit higher... And core inflation will be lower – only around 1% through 2012.
If those guesses from the Fed are even close to correct, it will keep interest rates near zero for a very long time.
That will make money next-to-free to borrow. The obvious beneficiaries of free money are "virtual banks" like Annaly (NYSE: NLY).
If you've read my writing for any amount of time, you probably know how the story goes with these...
"Virtual banks" are essentially built to take advantage of the government's control of interest rates. These virtual banks borrow money at current (incredibly low) rates, and then buy 100% government-guaranteed mortgage bonds, which yield over 4%. So they take on no credit risk.
They make money off of the interest-rate spread, and they pay high dividends – in the 15% range. And right now, they're cheap! In addition to high dividends, we have room for 30% capital gains in Annaly...
Currently, Annaly is trading near book value. I fully believe it will rise to 1.3 times book value. Why? It's simple...
The dividend yield is just too attractive. I am certain income investors will be willing to bid up the share price of Annaly so high that the dividend yield falls to 11.5%. Think about it. Which would you prefer? Earning less than 1% in the bank? Or earning 11.5% in Annaly for a little bit more risk? An 11.5% dividend would put Annaly at 1.3 times book value.
In short, you'll collect 15% interest while you wait on a 30% capital gain. If it happens within a year, you can make 45% total returns (capital gains plus dividends) – in a totally safe investment.
We have 30% upside in Annaly – and we're getting paid 15% a year in interest. Not a bad deal.
Bernanke and the Fed have shown us their hand, and low interest rates are going to be here for a long time. Take advantage of the Fed and invest in "virtual banks," like Annaly, at today's low price.
Plan on holding for a year or taking profits at 1.3 times book value, whichever comes first.
Good investing,
Further Reading:
Don't think a boring old virtual bank can turn in a quick, 45% gain? How about 73%? It happened last year. And these stocks are even cheaper today than they were back then. Get the story here: A 73% One-Year Return on Your Cash.
If you're a long-time reader and you've already maxed out your virtual bank position, take a look at these essays from Tom Dyson. They describe two of the world's very best income investments: This Almost-Safe-as-a-Bank-Account Investment Pays 5.5% and The Perfect Income Investment.
Market NotesONE OF THE MARKET'S "MUST WATCH" INVESTMENTS It's back to moving sideways for U.S. banking stocks.
This past March, we profiled the long, sideways trading pattern in XLF. This fund is a basket of the largest financial companies in America. Major holdings include JPMorgan, Goldman Sachs, Wells Fargo, American Express, and Bank of America. These are the companies that rise and fall with America's ability to earn money, invest money, service debts, and launch new businesses.
Last year, XLF enjoyed a huge rebound off its credit-panic lows. But in October, the uptrend faltered... and turned into a long period of sideways trading action. Several months ago, XLF rallied out of this sideways pattern. But as you can see from today's chart, that rally soon gave way to weakness that took XLF back to sideways.
We recommend keeping an eye on this big $13-$15 channel... and on the direction XLF breaks out. As we said, XLF's constituents are the backbone of our banking and credit system... so its share price is a good clue to what's really happening in the economy, no matter what politicians or CNBC commentators blather on about. Money talks and you-know-what walks. You can listen in with XLF.
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