GM Bond Downgrade: Nuclear Bomb on Financial Markets

More than $450 billion of General Motors and Ford bonds have just been downgraded to “junk.”

Suddenly, investors in GM and Ford are getting slammed with large losses in their bonds and even bigger losses in their stocks. I warned you this was coming — and now, I’m warning you it’s going to get a lot worse.

First, it’s going to get worse for anyone still
holding GM and Ford stocks or bonds

These companies are already bleeding from sinking sales — and now they face the additional burden of surging borrowing costs.

Adding to the crisis, the managers of pension funds and mutual funds are now scrambling to get the heck out of GM and Ford bonds. Many of them have no choice. They’re not ALLOWED to own junk bonds.

Second, brace yourself for one of the worst
bond-selling panics in more than 20 years

When bonds of market leaders — like GM and Ford — get hammered, the troubles spill over to hundreds of other companies.

Fund managers are already scrutinizing their portfolios to make sure they don’t get stuck with bad bonds in other heavily indebted companies vulnerable to rising interest rates.

Result: Investors holding the bonds of these other companies are also about to get hammered.

This is a disaster, and the full impact is just beginning to be felt. The last time there was a full fledged bond-selling panic like this was in the early 1980s, when inflation reached double digits. Bondholders lost as much as half of their principle.

Third, when bonds fall, stocks are next

The fate of a company’s bonds and the fate of the company itself are virtually one in the same. When the bonds fall, the company’s stock value must inevitably follow.

Bonds are considered safer than stocks. If a corporation goes bankrupt, bond holders will be at the front of the line to get their money back. Stock owners, meanwhile, will wind up with just pennies on the dollar … or nothing.

Most people know this. What they don’t realize is that GM and Ford aren’t the only companies that are vulnerable to downgrades as interest rates rise.

Fannie Mae, for example, is even more vulnerable to rising interest rates. I estimate that every time rates go up a quarter of a point, it can cost Fannie Mae as much as a HALF-BILLION dollars.

Fannie Mae is sitting on the largest portfolio of fixed-interest mortgages in the history of the world — upwards of a trillion dollars.

The portfolio is so huge and volatile that, to help hide the ups and downs in its value, Fannie Mae cheated on their accounting to the tune of $11 billion, the biggest accounting lie of its kind in history.

Now they’ve fired almost everyone responsible for the cheating, including their CEO. But that doesn’t fix the trillion-dollar mortgage portfolio. Every time interest rates go up — even by just a quarter of a point — the value of Fannie Mae’s portfolio falls.

With last week’s rate hike, the Fed has already jacked up interest rates by a quarter of a point EIGHT times in a row. But Fannie Mae’s accounting is in such disarray that no one — not even company insiders — can figure out exactly how much money they’re losing. My estimate is that each quarter-point hike in rates costs Fannie Mae as much as a half-billion dollars.

Meanwhile, Fannie Mae’s sales have become dependent on the refinancing boom, which is now drawing to a close because of rising interest rates.

The company is caught in a brutal squeeze between rising costs and declining sales. Shareholders are about to be slaughtered. Shares were selling for $1 each in the 1980s; now they’re at $55 — and headed back toward $1.

Your course of action is clear to me …

1. You need to get out of long-term bonds. Not just corporate bonds — but also municipal bonds and government bonds.

On Friday, even the value of Treasury notes plunged. In fact, they plunged so fast that their yields had the single biggest one-day surge since the Fed began raising interest rates nearly a year ago.

2. Also get out of most stocks. There are companies, such as the energy and gold companies recommended in my Safe Money Report, that could actually benefit from this situation. But these are the exceptions, not the rule.

3. Next, stash your cash in a safe haven. The best and most liquid safe havens are money market funds that invest exclusively in short-term Treasury securities. My favorites include American Century Capital Preservation Fund, Fidelity Spartan U.S. Treasury Fund, or USGI U.S. Treasury Securities Cash Fund. Your principal is fully protected from rising interest rates. And you get the higher yields almost immediately as rates rise.

4. Then, with a modest portion of your money you can afford to put at risk, consider investments that can help protect you against the kinds of violent declines that are possible when stocks like GM, Ford, and Fannie Mae fall.

As an illustration, just in the past month, you could have nailed down …

• A 447% gain from the fall in GM’s shares, plus …
• An additional 438% gain with Ford’s decline!

A few weeks ago, for just $2,380 plus commissions, you could have bought a small bundle of put options on General Motors — options that are designed to go UP in value when a company’s stock price goes DOWN in value.

Then, when GM’s shares fell, you could have cashed in those options for $13,020, walking away with a gain of $10,640 — a 447% gain in less than 30 days.

You could have done almost as well when Ford’s shares declined.

This past March, a small portfolio of put options on Ford would have cost you only $650. Then, in April, you could have sold those same options for as much as $3,500, a 438% gain.

And all this was before the recent dramatic announcement that General Motors and Ford bonds were being downgraded to junk.

Meanwhile, Fannie Mae’s shares have also been going down as interest rates have gone up, generating similar opportunities with put options.

In March, for example, for $2,900 plus commissions, you could have bought a bundle of put options on Fannie Mae.

Within 15 days, with just a modest 8% decline in Fannie Mae stock, you could have walked off with a gain of 286%. The put options would have multiplied your leverage by more than 35 times. Your $2,900 investment would have turned into $11,200.

As you probably know, options are speculative investments. And just like any speculation, you CAN lose money. But even if your timing or your selection are dead wrong, the most you can lose is the amount you invest plus modest commissions. Not a penny more.

No matter what, your keep-safe funds, tucked away in conservative investments, are not jeopardized. This is an investment that lets you sleep nights and yet can make you a not-so-small fortune.

20 More Stock Disasters Waiting To Happen

Ford, General Motors, and Fannie Mae are just three of the 23 companies on my list of stocks that are likely to be slaughtered as interest rates rise. The bonds of all the companies on this list are among the most vulnerable to higher interest rates in the entire country.

With some of these companies, their stocks have already started to fall. Others are still holding up. But there are three companies in particular that I believe are on the brink.

We’ve just been waiting for a signal — a dramatic news event that would tip them over the edge.

Last week, we got two signals: The announcement that General Motors and Ford bonds were downgraded to junk on Thursday … followed by the surge in Treasury interest rates on Friday.

So now we’re ready to go, and as soon as we get the confirming signal we’re waiting for, we will be issuing our recommendation to buy the put options on these companies.

Right now, for example, for $4,250, you can buy a small portfolio of put options on these three stocks, with a nice mix of strike prices and expiration dates. These options represent $102,770 worth of the companies’ shares. But all you have to spend on them, including standard $100-per-trade commissions, is the $4,250. And no matter what happens, that’s your maximum risk in this investment.

If I’m right about how this situation is going to unfold, this small $4,250 bundle of options could be worth anywhere from $10,500 in a moderate decline scenario to as much as $25,400 in a rapid decline scenario.

Stock Market Dogs

To help you hedge your portfolio — or to go for the large profits that are possible in this kind of situation — I’ve just started a new service.

I call it “Stock Market Dogs” because its primary mission is to find the weakest companies, with the worst sales and earnings, the most debt, or the greatest probability of being downgraded as interest rates rise.

Wall Street completely missed the tech dogs and the dot-com dogs. And now I think they’re missing a whole new pack of dogs that are the most likely to get killed as interest rates rise.

But this time around, rather than let their blunders hurt you, you can use them to your advantage — to help protect your stock portfolio from potentially ruinous damage … to go after large profits … or both.

FIRST, I will give you all the ins and outs on options, and more specifically, how to use put options to take the kind of large profits that are possible when these dogs crash and burn.

SECOND, I’ll send you a detailed explanation of the bundle of put options that you can use to potentially turn just a few thousand dollars into ten thousand or more.

I’ll explain exactly what they are, how to buy them, and how much to pay for them. It’s up to you to pull the trigger. But the instructions in each issue of Stock Market Dogs are so clear that all you have to do is read them or send them to your broker.

THIRD, follow-up. Most analysts give a recommendation but don’t do the necessary homework to follow up on it. As soon as we make a recommendation, we watch the market to make sure it’s going our way. If not, we send you an urgent issue to make a mid-course correction. And when the time is right, we tell you when to sell — either to cut a loss or lock in a profit.

FOURTH, I’ll send new recommendations as soon as I spot new opportunities. Right now, the stock market dogs we’re looking at are …

* Companies like General Motors, Ford, Fannie Mae, and 20 others that we feel are especially vulnerable to rising interest rates.

* Airlines and other transportation stocks that are getting killed by soaring oil prices.

* Housing stocks, home builders, construction companies, mortgage lenders and real estate investment trusts — all getting slammed as the mortgage market falters.

But our recommendations can come in almost any sector. And no matter what sector they’re in, they have one thing in common: When they go down, they usually go down hard and fast, generating equally fast profits.

The price is $5,000 per year. No discounts. If you can’t afford to spend that sort of money — without worrying about it or jeopardizing your liquidity — you shouldn’t be investing in these high-powered, high-profit potential options.

I’m restricting this service to a maximum of 1,000 subscribers. This is absolutely essential because of the liquidity of the market. I want to make sure you get good fills on your buys and sells.

And no guarantees, but I expect the first recommendations to pay several times the cost of the service.

Once the 1,000 slots are gone,
all additional checks will be returned

Recently, in a similar situation, we sold out quickly and had to turn subscribers away.

We hate returning $5,000 checks. But it must be done. Some of these options have clear liquidity limits. So we have to do it to help make sure you get good fills on your orders.

I’m sending this invitation out to more than 100,000 subscribers. So I fully expect the slots will be sold out very soon. Once these are gone, that’s it.

I don’t want to disappoint you. If you want to become a subscriber, it’s critical that you send in your subscription fee now, before we run out of the available slots.

To make sure, I suggest you pick up the phone right away and call us at 1-800-661-2005 and mention your personal code of p179-54802.

Good luck and God bless!

Martin D. Weiss, Ph.D.
Editor, Safe Money Report
President, Weiss Research, Inc.
eletter@weissinc.com