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Copper surged above $2 per pound, the highest ever. Platinum busted through the $1,000 barrier. Silver surged 22 cents to $8.35, breaking into new ground. This is unanimous. It confirms everything we’ve been telling you about the natural resources boom … the powerful impact it’s having, or is about to have, on virtually all financial markets … and how you can use it to grow your wealth. So if you’re on board with this boom, stay the course. If not, it’s not too late to do so. For more details, sort your e-mails by sender. Then read through the e-mails you have received from Money and Markets one by one. In them, you will find recommendation after recommendation on how to profit from this dramatic turn of events. Larry Edelson has been on top of this all along. Now Sean Brodrick is jumping on it in a new and different way. Don’t miss out. This morning, however, I want to focus your attention on an equally important recommendation … Make Sure You Avoid the Risks of Traditional I count six major risks. But I also have a solution for each … First, recognize the impact of being in This may seem obvious to you. But what’s not so obvious to most investors is how dramatic the impact can be. Yesterday, for example, I showed you how a $10,000 nest egg would have sunk to less than $3,400 if invested in America’s leading blue chip (General Motors) … but would have grown to nearly $27,000 if invested in a relatively conservative Canadian energy trust (Enerplus). All in just three and a half years! That’s easy to see in retrospect. But what about the investment choices you’re making now? Where will they be three years from now? Recommendation: The key signals to watch will come from natural resources. If gold, copper, energy and other commodities continue to move higher as we expect them to, it will mean more inflation to come. So avoid all market sectors that are vulnerable to rising prices and interest rates. That includes auto stocks, airlines, non-prime mortgage lenders and home builders vulnerable to a housing bust. Just yesterday, for example, it was announced that existing home sales fell a larger-than-expected 2.7 percent last month. More importantly, the number of unsold homes rose to the highest since April 1986. This is more evidence that rising mortgage rates are taking their toll in the housing market. Second, beware of accounting mistakes and fraud. Years ago, most investors thought this kind of risk would be limited mostly to small, fly-by-night companies that could duck below Wall Street’s radar or escape the scrutiny of regulators. Companies like Adelphia, Enron, and WorldCom proved them dead wrong. More recently, in the wake of the stricter Sarbanes-Oxley accounting rules, most investors thought that manipulated earnings were a thing of the past. Now, companies like Fannie Mae and General Motors have proven them dead wrong — again.
And this is the largest mortgage company in the world, still enjoying the tacit endorsement of the U.S. government. Imagine what’s possible at thousands of other companies that have neither the resources nor the high profile of Fannie Mae! Even General Motors, thought to be above the fray, has been caught manipulating its books.
Just this past November 10th, for example, GM’s shares, already at 13-year lows, fell another 5% because an accounting error led it to overstate its 2001 profit by as much as $400 million. That’s not exactly petty change. Recommendation: Seek to limit your investments to companies with strong balance sheets and high ratings from independent research companies. This does not guarantee clean accounting. But our experience tells us that companies that are careful enough to maintain a lot of cash and little debt are usually careful enough to avoid accounting problems as well. Third, be sure to avoid the risk of Wall Street hype. Major Wall Street firms have done a good job of separating the investment banking business from the research business. But most are still not doing nearly as well as the independent research providers. The evidence: Earlier this year, The Wall Street Journal published the rankings of 23 research firms, based on data provided by Investars.com.
Among the top five performers, only one, Deutsche Bank, was a Wall Street investment-banking firm. All of the other four were independent research organizations. Similarly, last month, Institutional Investor published the rankings of 20 stock research providers, also based on Investor.com data. This time, all of the top seven were independents. None of the top seven were Wall Street brokerage or investment banking firms. Recommendation: Take the research you get from your broker with a grain of salt. Follow an independent research provider. And if you choose our affiliate, Weiss Ratings, which has been one of the top-performing independents, get the ratings (plus e-mail alerts) at www.WeissWatchdog.com. Fourth, avoid the risk of failure. Suppose a company files for Chapter 11. What happens?
If we were just talking about companies that were, from the outset, rated as junk (double-B or lower) by Wall Street’s leading credit ratings agencies, this risk might be acceptable. But most of the major companies going broke recently are those that, not long ago, sported stellar ratings from the credit rating agencies. How is this possible? One way is simply that the rating agencies couldn’t predict the future, and we can’t fault them for that. But there’s also a built-in bias in the ratings, favoring the companies and, again, often shafting investors … which leads me to my next point: Fifth, watch out for the risk of delayed credit downgrades. Credit ratings are issued on thousands of companies by Standard and Poor’s, Moody’s, Fitch, and others. When a company is sinking financially, the agencies are expected to downgrade the companies’ ratings promptly, giving investors as much advance warning as possible. Indeed, the main purpose of a credit rating is precisely that — to warn investors regarding the relative probability of a default or a failure. But consider the facts: Fact #1. The credit ratings are paid for by the rated companies. Fact #2. The rated companies are empowered to choose which rating agency they want to do business with. If they think a particular agency is being too tough, they can take their business elsewhere — to a more liberal agency that’s more likely to give out higher grades. Fact #3. The rating agencies give the companies a sneak preview of the downgrades before they are released to the public. Fact #4. If the company doesn’t agree with the downgrade, it has the right to appeal — also before the new, downgraded rating is made public. Fact #5. Most of the companies can usually find a bone to pick with just about any downgrade, and their appeals can often take time, causing significant delays before investors are warned. Fact #6. Naturally, no company would ever appeal an upgrade. Result: Upgrade announcements are made in a timely manner. But downgrade announcements are often delayed. This is clearly not a balanced situation. It is routinely and hopelessly biased, and this bias is supported by the fact that the rated companies are the ones paying the freight. Don’t get me wrong. This is not behind-the-scenes hanky-panky. It’s the well-disclosed standard operating procedure of all the major Wall Street rating agencies. That’s to their credit. But in another sense, it makes it even worse: They honestly think it’s OK. And they strenuously argue that they’re not biased by the system. But then they’re at a loss for words to explain why major defaults and failures often take place before they get a chance to announce critical ratings downgrades. Recommendation: Don’t count on credit ratings to protect you from corporate failures — let alone the sharp declines in their shares that can occur long before average investors are forewarned of those failures. When you do use the credit ratings, err on the side of caution, favoring companies with ratings that are many steps above the “junk†category. More importantly, be sure to keep a substantial portion of your money in a safe haven, such as Treasury bills or equivalent money market funds. Three Major Advantages
(And One Disadvantage) Of 3-Month Treasury Bills Advantage #1 I say “almost†zero because, conceivably, if you bought a 3-month Treasury bill on a Tuesday, interest rates skyrocketed on Wednesday, and you sold your lower-yielding Treasury bills on Thursday, you could suffer a tiny loss. But as long as you can wait the three months until maturity, you’re guaranteed a 100% return of your principal plus interest. Moreover, this guarantee is based on a direct guarantee by the U.S. Treasury Department, still the highest rated institution in the world today. Advantage #2 No, the interest you earn on Treasury bills is not exempt from federal income taxes. But it is exempt from the income taxes levied by states and cities. This is a significant — but little known — advantage that Treasury bills offer, which CDs, other bank accounts and non-Treasury money market funds do not offer. Advantage #3 If you want to sell your Treasury bills before maturity, you can do so in a very active, highly liquid secondary market. It’s faster if you don’t buy the Treasury bills directly through the Treasury Department. But no matter how you buy them, you can always sell them. The Disadvantage Despite all the Fed’s rate hikes and despite all the Fed’s so-called inflation-fighting, the yield you can make on a Treasury bill today is still lower than the current pace of consumer price increases. In other words, if you kept all your money just sitting in Treasury bills, you’d be slowly losing purchasing power. But there are two ways to overcome this drawback: First, don’t keep all your money in Treasury bills. Second, allocate a portion of your portfolio to investments that benefit directly from inflation, such as the ones we’ve been telling you about right here in Money and Markets. This combination of (a) a nest-egg in Treasury bills and (b) solid inflation hedges should give you the best of both words. Three Ways to First, you can buy them directly from the U.S. Treasury Department, through their Treasury Direct program. For more information, go to www.SavingsBonds.gov. (The site covers not only savings bonds but also Treasury bills.) Disadvantage: If you want to sell your Treasury bills before maturity, you will have to transfer them to a broker, a process that can take a couple of weeks. Advantage: You pay no fees. Second, you can have your broker buy the T-bills for you at the Treasury’s weekly auction. Disadvantage: Fees for each transaction can significantly reduce your net yield. Advantage: You can keep them in your brokerage account, and they can serve as collateral for other transactions. Third, you can effectively buy Treasury bills through a money market mutual fund that specializes in short-term Treasury securities or equivalent. Disadvantage: The fund will charge expenses and fees, which reduce your net yield. Advantages: You can withdraw your money at any time via wire transfer. You can write checks against your money fund shares and continue earning interest until the checks clear. Plus, in comparison to banking fees, the fees charged by most money funds are far lower. Here are the details … Treasury-Only Money Funds According to Bank Rate Monitor, America’s banks now pay you an average of only 0.59% on personal checking. That’s far below the fair market rate for short-term money today. So without taking any additional risk, and even without any further rate hikes, you should be able to do many times better with Treasury bills. Meanwhile, on business checking accounts, banks pay you no interest whatsoever. You do get better interest with bank CDs. But there, your liquidity — the access to your funds — is severely restricted by early-withdrawal penalties. Either way, by the time you add up all the service fees that banks charge you — for regular checking, for low balances, for too many checks, for ATM withdrawals, for deposits and, worst of all, for bounced checks — it may turn out that you are paying your bank for the use of your own money. Some examples of outrageous bank fees:
In contrast, most Treasury-only money funds charge you nothing or very little for each of these situations. Meanwhile, the Treasury-only money fund will also give you check-writing privileges so that you can use the money fund as your personal or business checking account. That lets you:
What about FDIC Insurance? Money market funds are NOT insured by the federal government. My view: They don’t need that kind of insurance. The reason banks fail is almost invariably due to unsafe loans and investments. But virtually the only kind of loan or investment made by a Treasury-only money fund is to the U.S. Treasury Department. That’s not exactly an unsafe loan or investment. The reason banks need insurance is obvious: There have been thousands of bank and S&L failures, causing savers and businesses serious inconveniences and even outright losses. In contrast, there has never been a default on U.S. Treasury securities … even when the government was temporarily shut down due to a budget dispute … even when the entire country was torn by Civil War. Many Good Choices
Back in the 1960s, there was only one short-term Treasury-only mutual fund in existence: The Atlantic Fund For Investment in U.S. Treasury Securities, founded by my father, Irving Weiss. Today, however, there are many, and nearly every one of them offers the advantages I’ve told you about this morning. Some examples, in alphabetical order:
Best wishes, Martin About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. © 2005 by Weiss Research, Inc. All rights reserved. |
Hidden Risks and Safe Havens
For the first time in nearly two decades, gold bullion reached $500 per ounce yesterday. 
Fannie Mae’s stock has plunged to 8-year lows and has lost about half of its value, with much of the decline due to chronic and persistent accounting scandals. 
GM’s shares had been zigzagging downwards since 2000. And now, the decline has been aggravated by the company’s worst accounting debacle in its history. 
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