Major stock sectors are now in a race for the bottom.
These are stocks on a rendezvous with their lowest lows reached in the debt crisis of 2008-2009 … sinking back into the danger zone that came with red ink, bankruptcy, and financial ruin for millions of investors.
Hard to believe that could already be happening so soon after the market peaked?
Then consider the 25 stocks I’m going to list for you in a moment, starting with PMI Group, one of the nation’s leading mortgage insurers.
Two and a half years ago, at the height of the financial crisis, this leading mortgage insurer plummeted to a low of a meager 32 cents per share.
But in the weeks and months that followed, Washington worked overtime to inject trillions of dollars into the housing market and convince the world that the Great American Nightmare — the worst real estate crash of all time — was over.
Many Americans, blinded by their faith in “almighty government,” actually fell for it: The housing market stabilized temporarily. The economy recovered a bit. Stocks rallied sharply. And PMI surged, reaching a peak of $7.10 per share last year.
But that was just the prelude to disaster …
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In the ensuing months, all of the government’s housing support programs and all the government’s mortgage subsidy initiatives failed.
Nothing the government did could stop wave after wave of mortgage defaults and foreclosures.
And even the government’s massive injections of money into the mortgage market were unable to prevent PMI from crashing again, closing at a mere $1.12 per share in late trading hours this past Friday.
That’s down a sickening 84% from last year’s high!
If you had invested $10,000 in this dog at that time, you’d now have only $1,577 in your account right now.
An Unimportant Company? No!
PMI has historically been a huge player with a pivotal function in the housing finance industry — insuring mortgages against default. But now …
If big mortgage insurers like PMI go out of business or refuse to write new policies, most lenders will refuse to extend mortgage loans to anyone except those who are rich enough to buy a home for cash and don’t need a mortgage to begin with.
Moreover, PMI is on the frontline of the losing battle against a flood of bad mortgages in virtually every region of the United States.
So if this company is drowning and its stock is sinking to zero, you can be quite certain that many other companies downstream — lenders and banks, builders and realtors, REITs and other financials — are likely to face a similar fate.
As I illustrated here last week, nearly all bank and financial stocks are now in a race for the bottom — the only difference being, PMI is “winning” that race.
Just a Technical Correction?
If the housing and mortgage markets were holding up nicely, perhaps you could make that argument stick. But the fact is, all three key facets of this giant sector are coming unglued at the seams —
- The finances of homeowners who borrowed the money
- The finances of bankers who loaned them the money
- And the value of the home itself, the underlying collateral that’s supposed to be tapped when folks run out of money.
This is no small technicality. It’s a fundamental deterioration in the underpinnings of the entire sector.
“Why Can’t the Government Come
To The Rescue Again?” You Ask
For the simple reason that the government itself is ALSO running out of money.
But for argument’s sake, let’s say the government does somehow come up with more funds to pump into housing and mortgages.
OK. So what? What difference is that going to make?
Based on the recent history, the answer should be obvious: Not much!
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Remember: No amount of government intervention has been able to prevent home prices from plunging to new lows — even lower than the bottom of March 2009, when homes were selling at deeply distressed prices. (See chart to left.)
Similarly, no amount of government intervention can prevent nearly every sector that touches housing and mortgages from suffering a similar fate.
“Martin’s Too Pessimistic.
Don’t Listen to Him!” Say My Critics
Harry Truman once said. “I never give them hell. I just tell the truth and they think it’s hell.”
That’s what my team and I do.
If anything, we’re optimists. We find the few companies that do have the wherewithal to survive and even benefit. And we see silver linings in this crisis that I’ll be glad to tell you more about in future issues.
Moreover, this is isn’t the first time we have given advance warnings about companies like PMI.
In our Safe Money Report of April 2005, well before the housing bubble peaked, we told our subscribers not to touch PMI Group and 24 other stocks with a ten-foot pole. Here they are:
Aames Investment, Accredited Home Lenders, Beazer Homes, Countrywide Financial, DR Horton, Fannie Mae, Freddie Mac, Fidelity National Financial, Fremont General, General Motors, Golden West Financial, H&R Block, KB Homes, MDC Holdings, MGIC Investment, New Century Financial, Novastar Financial, PHH Group, PMI Group, Pulte Homes, Radian Group, Toll Brothers, Washington Mutual, and Wells Fargo & Company.
(Want proof? Click here for the SMR issue of April 2005 and scroll down to page 10.)
Subsequently, 11 of these 25 companies filed for bankruptcy, were bailed out or bought out.
ALL 25 stocks plummeted, with an AVERAGE loss of 81.3%.
And even after more than two years of stock market rally, investors who bought and held these stocks are deep in the red.
(But whether they rallied or not, our advice to anyone who owns the surviving companies today is the same: Don’t touch them with a ten-foot pole!)
Later, in the financial crisis of 2008, we were the only ones who issued negative ratings and warned well ahead of time of nearly every major firm that subsequently collapsed. We warned about …
* Bear Stearns 102 days before it failed (click here for the proof)
* Lehman Brothers 182 days before (proof)
* Citigroup 110 days before (proof)
* Washington Mutual 51 days before (proof), and
* Fannie Mae 4 years before (proof).
That’s history. What counts most now is that …
It’s “Game Over” for the U.S. “Recovery”
Look. From the outset, we knew the U.S. economic recovery was rigged — bought and paid for by the greatest monetary and fiscal extravaganzas of all time.
We knew that no government, no matter how rich, can create corporate immortality: In the real world, companies are born and companies must die. I’m sure you understood that as well.
We knew that no government, no matter how autocratic, can repeal the law of gravity: When sellers are anxious to sell and buyers are reluctant to buy, prices fall. A no-brainer!
We also knew that no government, no matter how powerful, can stop the march of time: With every second that ticks by, more debts come due, more mortgages go into default, more homes are foreclosed.
And I think you knew, too. But still you ask:
“How Could This Recovery End So
Abruptly and Crumble So Dramatically?”
Answer: As we’ve been telling you all along, it was never a true recovery to begin with:
- Behind the façade of supposedly “declining” unemployment rates, millions gave up looking for work and millions more joined the ranks of the long-term unemployed, now worse than during the Great Depression.
- Behind the smoke and mirrors of recovering housing markets, the government was essentially paying lenders to lend (by buying up over $1 trillion of their mortgages loans) and bribing buyers to buy (through tax incentives and ridiculously low interest rates).
Face it:
The government can no longer sweep the debt disasters under the rug … paper them over with trillions of printed dollars … swallow toxic megabanks, insurers, and mortgage companies … or maintain a fantasy world in which survival and success are guaranteed.
Still Skeptical? Still Believe Uncle Sam
Can Save the U.S. Economy One More Time?
If so, you need not believe former Fed Chairman Alan Greenspan who, in testimony before Congress, said this crisis was the worst in 100 years.
You need not remember the unforgettable image of former Treasury Secretary Paulson, literally dropping to his knees before Congresswoman Pelosi, begging for the billions he said were needed to prevent “a total Wall Street meltdown.”
Nor must you heed the recent parade of Congressmen and former presidential economic advisors who have said that we sit on the decks of a “financial Titanic,” face a “financial Armageddon,” and could see a crisis that dwarfs 2008-2009.
All you have to do is get up from your chair, open the door, and take a walk outside.
Nearly everything you see and hear will clue you in to the true plight of our times — 1 out of 7 homeowners delinquent or foreclosed on their mortgage … 4 out of 10 upside down on their home equity … nearly 2 out of 10 unemployed or underemployed … 7 out of 10 Americans fearful of the future, and rightfully so … PLUS, 10 out of 10 citizens paying drastically more for food, fuel, and other dire necessities.
In fact, you wouldn’t even have to leave your seat. All you have to do is close your eyes, take a deep breath, and ask yourself this simple question:
If THIS is the “recovery” we get from giant government stimulus packages, what will we get from government cutbacks?
Answer: The U.S. economy is following the path already carved out by financial stocks like PMI Group and U.S. median home prices. Want to know what that might look like? Then take another look at the charts above.
In other words, the U.S. economy goes BACK to where it was in the first quarter of 2009 … or worse!
To put this in true perspective, consider this narrative from my father, J. Irving Weiss, about a similar situation during the Great Depression.
“In the 1930s, I was tracking the facts and the numbers as they were being released — to figure out what might happen next. I was an analyst, and that was my job. So I remember them well.
“Years later, economists like Milton Friedman and my young friend Alan Greenspan looked back at those days to decipher what went wrong. They concluded that it was mostly the government’s fault, especially the Federal Reserve’s. They developed the theory that the next time we’re on the brink of a depression, the government can nip it in the bud simply by acting sooner and more aggressively.
“Bah! Those guys weren’t there back then. When I first went to Wall Street, Friedman was in junior high and Greenspan was in diapers.
“I saw exactly what the Fed was doing in the 1930s: They did everything in their power to try to stop the panic. They coddled the banks. They pumped in billions of dollars. But it was no use. They eventually figured out they were just throwing good money after bad.
“The true roots of the 1930s bust were in the 1920s boom, the Roaring Twenties. That’s when the Fed gave cheap money to the banks like there was no tomorrow. That’s why the banks loaned the money to the brokers, the brokers loaned it to speculators, and the speculation created the stock market bubble. That was the real cause of the Crash and the Depression! Not the government’s ‘inaction’ in the 1930s!
“By 1929, our economy was a house of cards. It didn’t matter which cards the government propped up or which ones we let fall. We obviously couldn’t save them all. So no matter what we did, it was going to come down anyway. The longer we denied that reality and tried to fight it, the worse it was for everyone. The sooner we accepted it, the sooner we could get started on a real recovery.”
Today, however, it seems our leaders have yet to learn this lesson. Again, the big question: Will they succeed?
As I wrote in my book more than two years ago …
The quick answer is: yes, temporarily. They can kick the can down the road. They can buy some time and postpone the day of reckoning. They can stimulate a stock market rally and even an economic recovery. They can certainly create new speculative bubbles. But that’s not the same as assuming responsibility for our future. It doesn’t resolve the next crisis and the one after that. It does little for you and me, and even less for our children or theirs.
Now, that’s precisely what has happened. The can WAS kicked down the road. The next bubble HAS been created — the bubble of massive government debt. We’ve been there, done that.
And now, the next crisis is upon us.
If You Missed Acting on Our Warnings Last Time
Around, Don’t Fret. Just Make Absolutely
Sure You Take Prompt Action This Time …
First, if you haven’t done so already, sell your vulnerable stocks immediately!
That includes not only the surviving stocks among the 25 that I listed above, but also any stock directly or indirectly connected to the collapsing real estate market — not only builders, lenders, and banks, but also home improvement companies … retailers … furniture and appliance manufacturers … plus many more.
Second, if you have stocks you’re unwilling or unable to sell, at least buy hedges, using inverse ETFs. The more the market declines, the more these ETFs will rise.
Third, consider using those same inverse ETFs as a vehicle to profit from the decline.
Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.
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Everytime the U.S. economy hits a soft patch it’s the end of the world according to Weiss Research. We’ll see how July’s earnings reports come in and what corporate guidance looks like. One month of not so good data is not enough to tell if the economic recovery hit a brick wall. Last summer the ECRI leading indicators fell off a cliff and the market and economy recovered quickly afterwards. The same dire predictions of economic doom were made then. I suppose if you constantly predict that the sky is falling, if it actually does one day then you will have been proven right. The timing of it is critical however.
Hi Martin
Thank you once again for your insightful comments. Timing is always hard to pick but I would rather have your views than not. Greece is a perfect example. You can not get a country out of debt by just lending them more money and their profligate ways have not changed much. Figures are indicative and at the moment it isn’t good.
It never ceases to amaze me how many people think you can spend trillions of dollars that no one could ever repay, while continuing to print more and more dollars, and still remain solvant. We are witnessing the fall of the American empire and at the same time many Americans expect the economy to bounce right back. This kind of apathy and or ignorance is exactly why we have the problem in the first place. The sky is not falling, and there is always opportunity, however, there will be no true economic recovery. Dr. Weiss and his staff have been extremely accurate with their insites and predictions for many years. Yes, they are salesmen, and run their operation like a business, however you can always trust their research and facts concerning economics.
Dr. Weiss and his team of experts do not ever state the sky is falling, but do present the facts in a timely manner. Dr. Weiss and his team will be the FIRST to tell you that that they cannot predict the timing schedule of any up or down in the market, but can see a likely scenario of what is to come based on facts. They also clearly state that there is ALWAYS RISK in the stock market and a bull and bear market at the same time. Weiss runs a business and has done so for many years successfully. You can’t do that if you give out bad information or information that consistently presents a loss for the subscriber. I subscribe to Weiss and am happy with the information provided and accuracy. King Ralph states “timing is critical”. If one is to involve their finances in the investing world one should have a lot of patience, knowledge and a diligent eye on the market daily. For the very reason that no one can predict the exact timing.