Very rich people have been talking about the next BIG THING to making a lot of money real fast with very little downside risk. The cocktail circuit in the Hamptons, Palm Beach, Palm Springs, the talk was all about "HOW TO SHORT BONDS", the buzz was all about where the biggest gains will be made in the shortest possible time. The talk was all centered on how certain same shorters did the same thing on Mortgage Backed Securities back in 2006, 2007 and 2008. Some of these billionaires and millionaires short stuff 2 years in advance before the big plunge, they didn't want to miss any of the bubble fluff. Now, they are all talking about the next "BIG SHORT" of a lifetime, BONDS. I believe this will make a very select few an enormous amount of money in a very very very short time. I mean you can see little millionaires $10 mil. become Billionaires, $1 - 2 Billion is 6-12 months, if you play this trade right. Check out Billionaire Singer, he just was interviewed. I think Buffet is even in on the "BIG SHORT", along with Yellen and most of Congress and the FED and all the lobbyist, Nancy Pelosi, McCain, the Clintons, everyone is going to get filthy rich as we return to normalcy.
During this distortion called Quantitative Easing or "Zero Percent" interest rates. I only trade stocks during distorted time like this. An example is this past year. AGNC dropped 12.5% of the past 12 mos. and paid a dividend of 12.5%. A casual look at this verbage it looks like you made ZERO, which in a FED induced Zero rate environment, is all you would get on a money market account of .05% at a bank. But further analysis shows A VERY DISTURBING or FRIGHTENING result that most people are ignoring. The 12.5% dividend is a taxable event, and it is non-qualified, meaning you pay regular income tax rate on that dividend, 10%-38.5%, depending on your tax bracket. I happen to be in the 38.5+3.8% = 42.3% bracket on my Federal and another 5% to the state of Illinois in 2014. TOTAL 47.3% goes to the government. So that 12.5% divvy becomes on 6.62% net after taxes. Subtract the 12.5% reduction in your principle from the price dropping from $23 to 20.50, you are NET -5.88% negative total return.
STRATEGY: To actually make money, you need a winning strategy.
Criteria used in developing objectives to make real money:
1. Don't fight the FED, interest rates will be normalized back to 3.5-4.0% for short term money. This will
effectively in 3-4 years wipe out the carry trade, very similar to the way the FED's wiped the M-REIT's out in the 1970's. All those rubes who were chasing yield, levered 10 to 1 or more to buy up all this 2.5-3.5% 30 year debt, called MBS, HAD TO BE THE DUMBEST THING EVERY IN MY LIFETIME. This has set-up a great money making opportunity called "THE BIG SHORT".
STRATEGY: SHORT EVERY BOND LIKE INVESTMENT YOU CAN, THERE WILL BE VERY LITTLE PLACES TO HIDE OR PARK YOUR MONEY WHERE IT WILL BE SAFE, EXCEPT INSURED BANK ACCOUNTS.
Short Term yields will be 3.5 - 4.0% in 3 years, all that 30 yr. fixed MBS with 3.5% coupon rates will be almost worthless, only idiots will be caught holding this stuff.
How will this impact BK and the dividend over the next 3 years. My analysis shows it as very negative and it parallels Yellens view that risk assets are very overpriced.
HERZLIYA, Israel---Federal Reserve Vice Chairman Stanley Fischer said Monday the central bank expects to follow a “gradual and relatively slow” trajectory of short-term interest-rate increases over the next three to four years to bring borrowing costs back to “normal” levels.
Mr. Fischer said observers focus too much on when the Fed will start raising its benchmark short-term rate from near zero, and instead should think more about where interest rates are headed over time. He said Fed economists expect the rate will reach from 3.25% to 4% in three to four years.
Ye that through your hearts to-day
Feel the gladness of the May!
What though the radiance which was once so bright
Be now for ever taken from my sight,
Though nothing can bring back the hour
Of splendour in the grass, of glory in the flower;
We will grieve not, rather find
Strength in what remains behind
History does repeat, get prepared.
This has nothing to do with earnings. Nada. Apple will get halved in a 1987 crash and they will report double digit increase in earnings. This is multiple compression, massive distortion by Quantitative Easing and Zero Rates, the negative convexity of treasury bonds is skewed at record breaking amounts. The FED did this same thing in 1925 to try and keep the housing boom going, in the Roaring 20's, in 1928 they pulled back on the notes and bond purchases and then start to raise rates in 1929. The enormous convexity from all the FED distortion caused the 1929 crash, which had nothing to do with the business conditions in the early 1930's, companies were still reporting record earnings in 1930 for most of the year, the markets even staged a comeback of 50% by 1931, then another crash took it down 90%. The same will happen, except the conditions are worst now, they have never did this much distortion to the financial system, it had to be political to make the current administration look like they turned around the economy and avoided a DEPRESSION. THIS WILL BE WORSE, BY FACTOR OF 100X. I can not even put a name for this except may a mathematical expression of what you will have left after the crash and distortion is neutralize.
T(1) = time before the crash, T(c) = time after the crash, W(t1) = Net Worth before crash, W(tc) = Net Worth after the crash:
NET WORTH AFTER CRASH W(tc) = W(t1) x 1/(infinity)
General, you saw my original post on 1987 like crash, not hysteria, I have been tracking the internals and they are worst than summer of 1987 by a factor more than 10X, 20X maybe 100X, this is MASSIVE DISTORTION to the financial intergrity of our great hypocrisy. I came out first, now watch all the other economists, including Yellen and Stockman warn. Just like 1987, the little folks all ignored the warnings, it is almost like that 200+ card pileup on the expressway in Michigan or Indiana this winter, every single car was doing 65+ on near visible conditions, whiteout snow blizzard. That is the best I can describe where we are right now. CRASH IS IMMINENT, VERY SOON. Don't believe me, listen to Congressmen and women warning their voters they represent.
Here is Stockman's warning.
But according to Stockman, all this is creating is "a coiled spring that is going to break loose one of these days and there is going to be some pretty drastic and even violent adjustment."
If history is any indication, Stockman expects a crash to happen very soon. "We seem to have them every eight years," he said. "We had one in 2000 and everyone said, 'This time was different.' Then we saw a massive catastrophic decline. Eight years later, we had the same thing," added Stockman. "Now we've had the weakest recovery in post-war history and what has happened? The Fed has simply reflated the bubble to an even more gigantic proportion."
And it's not just stocks that are in trouble. Stockman sees some troubling signs in the bond market. "It's not possible that the interest rate on the 10-year German bond (NYSE Arca: BUNL) should be 70 basis points when it was 5 just a few weeks ago-or even that the U.S. Treasurys (U.S.:US10Y) should be trading at 2 percent on the 10-year when we have taxes and inflation."
To Stockman, the message is clear, "everything is totally distorted and there is a day of reckoning coming down the pike."
The tax tables.....just look at them. Interest Income is taxed at 10% - 39.6%.
Qualified Dividends & Capital Gains are taxed at 0% - 20%
IT IS 100% VERIFIED BY THE UNITED STATES TREASURY, Internal Revenue Service, 100% accurate and valid, just like those safe 1 year, 2 year and 3 year treasury bills, just like McKinley Cash 100,000 dollar bill. Better than gold. Just park your millions into McKinley cash bills, backed by the full faith of the US Treasury.
It doesn't get any truer, more accurate than this. There is no way I am wrong, I am not 99.9% right when I said to load up on TBT at 39-42, I WAS 100% right, you can not loose. No downside, all upside.
ditto, breakout today, rates are going up, almost 100% sure WITH THIS PRICE ACTION ON SUCH HEAVY VOLUME.
Should of bought more on the dip. The hedgers are using this to offset MBS losses, they are desperate, will pay any price to make it look like they are protected, but in reality they aren't. You saw that in 2013. This will be worse, it will make 2013 look like a picnic.
Easy answer, just add 1,000 of interest income to your 2014 tax return. Then jot down the tax due on 1,000 of interest income. Then add $1,000 or qualified dividends to your return or $1,000 in long term capital gains and look at the tax due.
If you make 15,000 AGI, single, and you add these above scenarios to your return, here is the outcome:
$1,000 of interest the tax increase is $100 or about 10%, because that person is 10% bracket.
$1,000 of Cap Gain or Qual Div. the tax increase is $0, the 10% bracket folks pay zero on these types of income. The 39.6% bracket folks (high income) pay maxium 20%, or half the normal rate.
Every scenario it is double, but wait there is more. Corporations have records amounts of capital in the bank not invested in anything, a lot offshore, earning "ZERO PERCENT" interest. If rates go to 3%, increase revenue from individuals by 10-fold.
RATES WILL RISE AND WILL GO BACK TO NORMAL.....IF THE TREASURY NEEDS MORE FUNDING FOR SOCIAL SECURITY OR MEDICARE, YOU CAN COUNT ON DOUBLE DIGIT YIELDS TO GET US THROUGH THE BABY BOOM RETIREMENT TSUNAMI. Just the Facts, Jack. This bull market is stocks is a massive Ponzi Scheme to get wealthy politicians and business folks out of their baby boom stock fortunes before they retire.
I will start off the discussion, you can try to hold stocks that are resistant to a crash, but all stocks loose. some just loose twice or three times as much. So, what we have here from my due diligence on this matter, is this conclusion: IT IS BEST TO BE OUT OF RISK ASSETS AND INTO CASH LIKE INVESTMENTS, there is no downside risk to cash or short term treasuries of 1-3 years, you just hold to maturity to get you principal back plus some interest. But the stocks that were resistant back in 2008-2009, those stocks lost 20-25% on average while the median loss was 65% and then there were the REAL HUGE LOOSERS, like MLP's, Business Investment Companies, etc, that lost 85-90% on average. DOES ANYONE KNOW HOW THE M-REITS did in the last downturn, I recall from memory the average REIT dropped 60-65% in line with the median of stocks. I hope this last statement is accurate. This time though, there is 500% more M-REIT's available and many of these issued multiple stock offerings, hence, from a stock volume aggregate analysis, there is a lot more capital here at stake than the previous down cycle. WE COULD BREAK RECORDS ON THE DOWNSIDE HERE, because there is a lot of rube 'YIELD SEEKERS" who do not have much experience in stock risks or values, the just looking at the yield.
This is what we should be talking about. The fact is, liquidity has gotten very bad. It is very hard to sell a large position without take substantial markdowns. If a sell off comes, the mark downs could be huge. This happened in 1987, when the market just kept making new highs, one after another, without no corrections. When it came, it hit all at once. I believe we will experience something similar. So, those who profited off the 50% correction or more in a couple of weeks, were those who anticipated it and had the conviction, the knowledge and the resources to investment during the biggest and fastest crash in history. So, I would like to discuss, WHAT GROUPS TO Buy or individual stocks to buy when the MARKET CRASHES 50% OR MORE IN A MATTER OF A FEW DAYS. You can't panic, you can't become stunned, you have to execute buy and buy orders, multiple times, lower and lower prices you may have to sell positions because you were wrong in the morning, it wasn't the bottom.
LETS DISCUSS GETTING READY. LETS DISCUSS BUY AND HOLD DECISION MAKING AFTER A STOCK HAS LOST 50, 60, 75% IN A WEEK OR TWO, not more than 10 trading days.
You simple knowledge of the FED and the government is not based on facts. The low interest rate policy has cost the FED $7 trillion or more. Eventually they will let rates rise and pay off some of this with higher tax revenue on INTEREST INCOME. In past high rate cycles, the gov. deficits disappeared and they had surpluses. Government needs the cash flow to pay for Social Security and Medicare which is growing exponentially along with Federal Civil Service Pensions. Think of it like this. If the average tax rate is 20% and bank interest rates are 1/10 of 1%, which is almost zero, 20% times zero IS MUCH MUCH LESS THAN 20% TIMES 3.0%. The government will goose their coffers by raising the average tax rate from 20% to 22%, 25%, as more and more people report big boost in taxable income quarterly which will get them into a higher tax bracket like they did in late 1970's and early 1980's to pay for the huge Bob Hope generation retirements.
This will repeat, it has to, they have to pay the retiree's. This will take 2-3 years to normalize, then around 2018 - 2019, hyper-rates will kick in, 10 YR. TREASURY WILL BE OVER 10%.
If this doesn't happen, they whole system will collapse, but the probability of that is low. I will bet on what the FED did in the 1970's and early 1980's. Most M-REIT's will go under. Like 99.9%. The gov. doesn't want carry trade investments, they need real growth, not YIELD SPREAD.
You should have picked some TBT at 46-47, it is up to $49 and has broken out of its trendline on very high volume, very bullish here or very sure rates will rise.
TBT up $2 and has broken out technically to the upside. This will make new highs shortly. A couple weeks ago, I said to load up on this at 42-43. Hope you all did, buy on any selloffs in the 45-46, buy ASAP, that is what the M-REIT's are doing as an hedge, this will go to 60's then 70's, just from the hedgers. RATES are soaring, Yellen's vision of redistribution of wealth is being implemented.
I am not trying to convince anyone, but the low interest rate environment is costing the FEDERAL GOVERNMENT, Trillions, and we all know the Government works for us, taking tax revenues, borrowing for our causes and we end up paying for it in taxes. Buying up all this MBS at inflated prices and holding to bring rates down is costing every tax payer or every citizen in this country. THE FED is diverting wealth from 90% of the people to give banks and large corporation differential advantage to pay off losses from the massive real estate loan defaults. I believe they over did it here and wealth needs to flow back to the 90% through higher rates on savings accounts, money market accounts and all the new young'uns that are forming families and don't have any investments. This is the bread and butter of our great democracy. You want these people to save so that the banking and businesses have capital to expand and grow (not buy back stock and get smaller, through attrition). There are two different types of growth. What we need is a reset, and we start with much higher interest rates, then much lower stock prices, and then the 90% will make some very good investments, in bank accounts, CD's and common stocks at good valuations. You don't want these people paying $40 - 50 for AGNC, it is a lot better investment at $5, with a 25% yield. Trust me, I have been through this dozens of times, my best investments had PE ratio's under 5, yields of 7-15%, and price to book value of .50-.60. Read Yellen's white papers on redistributing wealth......rates are going higher and higher and higher, wealth will be redistributed, redistributed, redistributed, over and over and the cycle continues.
If they raise interest rates 1% on everybody, the income tax revenue of 10 - 44.6% on Interest Income for individuals and corporation is 50%, is much much much higher and will bring a lot of need withholding and estimated tax revenue in quarterly installments. Old 30 year debt is not retired, the FED has been borrowing more longer maturity and reducing short term borrowing, mostly due to demand, no one puts their money in 0 % or .05% yielding stuff. Most is 10 yr to 30 year debt. The multiplier effect is also here also, which will spur the economy. Right now, the stock market bubble puts money into the pockets of 5-10% of the population, but with an interest rate increase bubble, it puts money into the pockets of 90-95% of the people, and then it get multiplied because businesses, partnerships, corporations, LLC's pay tax too, including Estates and Trusts, which earn interest on cash balances in their accounts. Trusts and Estates are taxed at 39.6% after their income goes over $12,150, so THIS IS A GOLDMINE that the government needs to absorb the cost and expenses of issuing 7 Trillion of new debt this past 7 years. The books need to be balance, flows in and flows out need to be settled, the longer it goes on, the higher the overall cost.
I DID. I sold everything in the 33-36 range. I was in CIM, ARR, AGNC, TWO, and dumped everything. I sold my CIM at $4.26 after they announced the penny cut in the dividend 2-3 years ago, and it was down to $2.26. I am a veteran of M-REIT's from the 1970's, I went through the whole cycle, I know when to buy, when to sell, when to short and when to pray for my fellow investors. Right now I am halfway through the short phase and only have the last phase of this process, my prayer messages for all the poor souls that got stuck on board this ill fated ship.