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The Best, Safe Investment of 2009 Pays 19% InterestBy
Friday, February 13, 2009
If you know anything about investing, you know that "19% interest" and "safe" don't belong in the same sentence.
But bear with me today... In this one case, right now, it's actually true. Thanks to all the government tinkering this year, this impossibility – 19% interest, safely – is a reality... Three months ago, I said you should "take advantage of this no-risk traderight now." I hope you took my advice then... because you'd be up about 10%, including your 4% quarterly dividend payment. If you didn't listen, you're in luck, because the opportunity is still huge... Right now, we have an opportunity to buy into a few very simple businesses. They borrow money at around 3% interest and invest it at about 5% in government-guaranteed investments. This last part is crucial: These companies don't take any credit risk. The U.S. government is 100% responsible for paying the interest on those investments. The idea is pretty straightforward. These businesses simply earn the interest "spread" like a bank... But importantly, they're not banks. They don't have teller machines, or buildings, or even many employees. But they do earn an interest spread. So I call them "virtual banks." Right now, these virtual banks are earning a huge amount of money... The government is keeping short-term interest rates low, so these virtual banks can borrow at a low rate of interest. But interest rates on the government-guaranteed investments they buy have still not come down, so they can earn a high rate of interest for a safe investment. We're in the "sweet spot" for virtual banks. Take a look at this table of the major virtual banks:
* based on 2009 earnings estimates
Annaly is the biggest virtual bank by far. Its potential dividend for 2009 (at 16%) is the smallest of the four stocks. And Annaly's forward price-to-earnings ratio is the highest (at 6.2) of these businesses. But Annaly has a history of doing well in bad times, so it deserves to sell at a premium to its peers. And it's still cheap. The other three stocks are even cheaper... They can pay 19% dividends or more in 2009, based on current share prices. And they're all trading at just five times forward earnings! They all trade pretty close to book value, too (the most expensive one is only at 1.2 times book). This isn't complicated... These four virtual banks are in their sweet spot. They can earn a huge interest "spread," thanks to the government. They take on essentially ZERO credit risk by investing 100% in government-guaranteed investments (MFA is 99% in government-guaranteed investments). They collect around 5% interest. And they borrow money at low rates – around 3% As the government tries to help the economy, it helps the virtual banks on both sides of their balance sheets... letting them borrow cheaply and invest risk-free. Be careful, the share prices of these virtual banks will fluctuate... If you're looking for cash in the bank, this is not it. But if you're looking to take on a little more risk than cash in the bank for a lot more reward, virtual banks are the place to be. Look into these four stocks and add some of them to your portfolio today... You'll likely earn 19% dividends in the next 12 months. Chances are great we'll also get capital gains as the rest of America figures out the safe, high-yielding world of "virtual banks." Good investing, Steve
Further Reading:
You Should Take Advantage of This No-Risk Trade Right Now Market NotesTHERE'S A HUGE OPPORTUNITY IN PLATINUM RIGHT NOW
A note for the speculators reading DailyWealth today: Check out the platinum/gold ratio.
Successful speculation is about finding extremes and betting against them. For instance, Chinese stocks were extremely expensive in late 2007. The euro was extremely overvalued in 2008. Commercial real estate was extremely popular in 2007. We wrote about each of these "extreme" situations… and each was crushed soon after. The extreme effect is why we're interested in our colleague Jeff Clark's "buy" recommendation on platinum right now. Gold and platinum are both precious metals… so they typically trade in a "band" together. One ounce of platinum usually buys two ounces of gold. Right now, that band is stretched to an incredible multiyear extreme. Platinum is super cheap. The auto industry uses platinum to make catalytic converters… so the recession sent the price of platinum from $2,200 an ounce to $800 in 2008. This huge fall has caused the platinum/gold ratio to reach "extreme" levels. |
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