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Read This for Your Fannie Mae and Freddie Mac Survival Plan

By Tom Dyson, publisher, The Palm Beach Letter
Monday, July 21, 2008

Fannie Mae and Freddie Mac are about to go bankrupt...

Leverage is the problem with these government-backed institutions. They bought $1.7 trillion in assets using only $70 billion of investors' money. So these assets only have to decline by $70 billion – 4.1% – to wipe out shareholders. Actually, if you include their mortgage guarantees, Freddie and Fannie are liable for $4.8 trillion worth of mortgages. So to wipe investors out, mortgage values only have to decline by 1.4%. And that's exactly what's happening right now...

Fannie and Freddie own mortgage assets. The value of these assets is a function of home prices and the solvency of homeowners. The S&P/Case-Shiller National Home Price Index is now down 14.1% year over year. Foreclosures are up 53% from June 2007.

No one knows exactly how much mortgage values have fallen. Every mortgage is different, and there's no benchmark. But one thing's for sure: They've fallen more than 4.1%. In other words, Fannie Mae and Freddie Mac are technically bankrupt.

Fannie and Freddie, directly or indirectly, own half the mortgages in America. Their bankruptcy will be one of the most important events in the history of American capitalism. Here's how I suggest you prepare yourself...

High dividend stocks are by nature defensive stocks. The dividend acts like an anchor and prevents the stock price from falling too far.

But the stocks in the portfolio of my newsletter – The 12% Letter – do more than pay big dividends. These stocks are the safest collection of high dividend payers you will find in this market. The key to this safety? They own valuable real assets and sell things for the lowest possible price.

We've made investments in energy. Over the last two years, we made 15 investments in pipelines, natural gas, oil, oil services, electricity, coal, wind farms, and energy finance. We're showing a profit on 15 out of 15 of these stocks.

We also own fast food, convenience stores, and warehouse retailers. These are our "price leader" stocks like Wal-Mart and McDonalds. These stocks do well when consumers choose price over quality. They are excellent defensive stocks to own in the current crisis.

And we own timber, hydroelectric dams, and rural telecom assets. These stocks – when mixed together – will generate the safest 9% dividend we can find anywhere in the market. (The average dividend yield of the stocks in my portfolio is 9%.)

The government will bail out Fannie and Freddie and assume their debts. This is inflation. It will meet Fannie and Freddie's trillion-dollar debts by issuing more debt of its own. U.S. government debt will lose its value, and the dollar will keep falling.

The high-yield companies in my portfolio are the perfect stocks to protect your money from the U.S. government's inflation. These companies own productive assets. Factories are assets. So are trees. So are rural telephone networks.

But the real bonus comes when foreigners lose confidence in U.S. debt. The only way they'll be able to get any value for their dollars will be if they buy cheap American assets... like farmland, timberland, real estate... and American stocks loaded with real assets. There will be a panic into U.S. real asset and manufacturing stocks at some point in the next 12-18 months.Denominated in U.S. dollars, the value of these real assets will rise. So your money is safe... much safer than if you left it in the bank or a money-market account.

In sum, there's more pain to come in financial stocks. But if you buy stocks with big dividends and lots of cheap American assets, your money will be safe and you may even make a profit.

Good investing,


Market Notes

Goldcorp (GG)... gold
Royal Gold (RGLD)... gold
Alpha Resources (ANR)... coal
S&P Biotech ETF (XBI)... biotech stocks 
IBM (IBM)... computers
General Mills (GIS)... food 
Grey Wolf (GW)... oil drilling
Barr Pharma (BRL)... generic drugs
True Religion (TRLG)... expensive jeans
Heartland Express (HTLD)... trucking
Old Dominion Freight (ODFL)... trucking
Australian Dollar ETF (FXA)... ABC currency
Anheuser-Busch (BUD)... Benedict Arnold brewer
Baxter International (BAX)... medical equipment


AT&T (T)... telecom
Target (TGT)... retail
Coca-Cola (KO)... soda
Starbucks (SBUX)... coffee
eBay (EBAY)... online auctions
Cigna (CI)... health care
Aetna (AET)... health care
AIG (AIG)... insurance
Allianz (AZ)... insurance
Alleghany (Y)... insurance
Travelers (TRV)... insurance
Merrill Lynch (MER)... bank
Bank of America (BAC)... bank
Lehman Brothers (LEH)... bank
Fannie Mae (FNM)... mortgages
Freddie Mac (FRE)... mortgages
Legg Mason (LM)... asset manager 
Boeing (BA)... aerospace
Gannett (GCI)... newspapers
Cisco (CSCO)... networks
Microsoft (MSFT)... software
Capital One (COF)... credit cards
MGM Mirage (MGM)... casinos
Las Vegas Sands (LVS)... casinos
American Express (AXP)... credit cards
Home Depot (HD)... home improvement
Lowe's (LOW)... home improvement
Cohen & Steers (CNS)... asset manager
Toyota (TM)... world's largest car company
New York Times (NYT)... newspapers
Harry Winston (HWD)... diamonds
General Motors (GM)... American auto
General Electric (GE)... conglomerate

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