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The Best Opportunity in a Decade in This No-Brainer Trade

By Brett Eversole
Monday, November 19, 2012

Stocks are down 8% in the last month. The Dow has shaved 1,000 points since its recent high.
 
This is the moment we've been waiting for... Investors are scared. And we're ready to step in. Specifically, one of our favorite DailyWealth trades is now record-cheap. It's one of the best opportunities to buy we've ever seen...
 
Today, we're poised for a 58% gain in dividends alone over the next two years.
 
Importantly, the government – as I'll explain – has given us the "all clear" through 2014. So we can make this trade safely, with limited downside.
 
I'm talking about one of the best government-created opportunities in history... what my colleague Steve Sjuggerud calls "virtual banks." 
 
Longtime readers will be familiar with this story. Steve fully explained the opportunity here.
 
In short, "virtual banks" act like regular banks, borrowing money at a low rate and investing at a higher rate. They earn the interest rate spread (the difference between what they pay for money and what they earn on money).
 
Since the Federal Reserve now holds short-term rates near zero today, Annaly (NYSE: NLY) borrows at a very low rate. And we have a promise from Fed Chairman Ben Bernanke that rates will stay low for two or more years.
 
That means our opportunity in Annaly should last at least through the end of 2014. And based on our research, the Fed will tell us exactly when to sell.  
 
The below table shows a simple system for trading Annaly shares. We buy when the Fed begins to cut rates, and we sell when rates increase... 
 
Fed Action 
Date 
Status 
Total 
Return 
Annualized Return 
Time in
Trade (Years) 
Cuts Rates 
9/29/1998 
Buy 
46.2% 
65.9% 
0.75 
Raise Rates 
6/30/1999 
Sell 
-0.4% 
-0.3% 
1.51 
Cuts Rates 
1/3/2001 
Buy 
170.1% 
32.9% 
3.49 
Raise Rates 
6/30/2004 
Sell 
17.1% 
4.4% 
3.22 
Cuts Rates 
9/18/2007 
Buy 
80.4% 
12.1% 
5.16 
Source: Bloomberg 
 
Importantly, thanks to the recent selloff, now is a better time to buy Annaly than we've seen in more than a decade... At a 13% discount to book value, Annaly is at its cheapest level since 1998.
 
Annaly Price-to-Book Ratio
 
The stock is so cheap, it's hard to imagine it falling much more. And a return to 1.2 times book – which I believe will happen in the next two years – would mean a 38% capital gain from today's price.
 
In addition, Annaly's current dividend yield is 13.8%. The company has cut its dividend several times over the past few years. And investors are worried about more cuts.
 
I'm not... Annaly could cut its dividend another 25% and still yield over 10%. Where are you going to find a better income stream in today's near-zero-percent world? 
 
I believe all the bad news is "baked in." Investors have fled so we need to be ready to step in.
 
Today, Annaly trades for its lowest price in over a decade. An increase to 1.2 times book means a 38% capital gain. And we should see at least 10% annual dividends over the next two years.
 
Add it up, and you'll see buying today should lead to a safe, 50%-plus return by the end of 2014. This is one of the best opportunities we've ever seen to buy shares. Don't pass it up.
 
Good investing, 
 
Brett Eversole




Further Reading:

You can learn about the power of mortgage REITs – and another one of Steve's favorite names – here: Sixteen-Percent Dividends... from Residential Real Estate? Yes!

Market Notes


NEW HIGHS OF NOTE LAST WEEK 
 
Campbell Soup (CPB)... soup
Baxter International (BAX)... medical products
Yahoo (YHOO)... search engine & media

NEW LOWS OF NOTE LAST WEEK 
 
Sony (SNE)... electronics 
Norfolk Southern (NSC)... railroads 
J.C. Penney (JCP)... department stores 
POSCO (PKX)... Korean steelmaker 
Baidu (BIDU)... the "Google of China" 
Cameco (CCJ)... uranium 
Dupont (DD)... chemicals 
McDonald's (MCD)... fast food 
Molycorp (MCP)... rare earth mining 
Apache (APA)... oil & gas 
Devon Energy (DVN)... oil & gas 
Newfield Exploration (NFX)... oil & gas 
Occidental Petroleum (OXY)... oil & gas 
Monster Worldwide (MWW)... job search 
Pandora Media (P)... Internet radio 
Collector's Universe (CLCT)... coins & collectibles 
iRobot (IRBT)... the "GM of robots" 
RadioShack (RSH)... electronics retailer 
Teekay Tankers (TNK)... oil shipping 
Tsakos Energy Navigation (TNP)... oil shipping 
Nordic American Tankers (NAT)... oil shipping 
John Wiley & Sons (JW-A)... financial book publishing 
Hewlett-Packard (HPQ)... computers & tech services 
Cash America (CSH)... payday loans & pawn shops 

premium teaser

Another top "virtual banking" opportunity...
 
If you're interested in "virtual banks" or residential real estate, this company is a solid buy today… 
 

In The Daily Crux



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