Issue 3

07/02/04

The Anti-Clinton Strategy: Take back from the government, for your personal investment gain.

Dear Fellow Investors,

I'd like to first of all greet all of you who read Rebecca Fine's wonderful newsletter, The Certain Way (http://www.scienceofgettingrich.net/index.html) and thank you for joining my Mom and me, here at Investing With Mom. As I've mentioned previously, the goal of the Investing With Mom investment newsletter is to generate a high rate of absolute returns, no matter how the rest of the market performs. I believe it can be done through adherence to Buffett and Graham like value. For those who may not know Graham was Warren Buffett's mentor. I also believe that there are some exceptional value plays within the growth stock universe, too and so I won't hesitate to recommend companies if they meet certain criteria during my investment research. You may also find that I do not strictly follow Buffett and Graham, simply because I'm looking for the best returns and so I consider them to be useful guidelines in my investment research, not strict unwavering commandments.

Regarding International Investors:

A special welcome also goes out to all of our international readers. We now have readers on 5 different continents and nearly a dozen countries. In fact, I would be most curious to really know where you are all from, so feel free to drop me a note at anytime. I promise to reply as quickly as possible. This does however lead me to a question posed by a brand new member of the Investing With Mom investment newsletter family, who lives in Tasmania, Australia. He asks if the recommendations in Investing With Mom will be available to him or not? First of all, let me emphasize that while I am honored to have readers who live overseas, my Mom and I currently reside in the U.S. of A. and thus will focus our efforts on stocks that trade on the major U.S. markets. That does not mean however, that these stocks are unavailable to you, just because you don't live in the 50 States. There are already 2 companies that are currently in our portfolio, who mainly trade in other countries, Encana (Canada) and PetroChina (China). However, it will be enormously frustrating for you if you only wait for me to recommend foreign companies, so I would suggest that you take one of two options to remedy the situation. The first option will be mostly for those of you who have the ability to setup U.S. based investment accounts, mostly Canadians simply because of proximity. After checking with Buy and Hold, I found that they require a valid U.S. address in order to open an account, as I'm sure most U.S. brokerages do. That is mostly a result of the new Patriot Act rules, although I'm sure there were a few restrictions in place prior to 9/11. This leads me to option number two, open an international investment account. In this day and age of globalization, there are many specialty brokerage houses, as well as international conglomerates, who offer to invest your money in any number of stock markets around the world. The best thing about them is that instead of having to deal with someone based in a different country, these specialists live and work in the same country as you. After having said this however, I must plead ignorance as to who would be a reputable, low cost, internet based brokerage, with access to the U.S. markets, in Australia, New Zealand, England or any of the other countries represented in our newsletter now. Here now is your second project, if you all would be so kind. While I do a little more research into possible U.S. brokerages who could accept international clients, I will collect any information passed on to me by anyone who knows of brokerages based in your home country, with access to U.S. markets, who also don't require an arm and a leg to open an account.

I will then take those mentioned and find one or two recommendations per country for our new subscribers. One other aspect of this, before I move on with this edition's recommendation. The U.S. dollar is not exactly the strongest currency in the world right now and although it does have its ups and downs, the general trend of the dollar will be down for many years to come. We may not notice it here in the U.S., but if you live elsewhere and wish to invest in the U.S., you will have to overcome the currency's drag on your investments. It will of course also depend upon where you reside and although I'm not saying you shouldn't invest in the U.S., I am saying you must be aware of the implications to your portfolio. This also means that any results you do get will be different from the Investing With Mom investment newsletter, sometimes better and at other times much worse. We'll discuss currencies again during future editions of Investing With Mom, but now it is time to discuss my latest update recommendation.

The Anti-Clinton Investment Strategy:

You may not have heard Hillary Clinton's latest admission of communist beliefs, because it hasn't been in the news much, but having lived for over 6 years inside Communist China, I immediately recognized what she was saying. The other day, former "Worst Lady" Hillary Clinton said,

"Many of you are well enough off that ... the tax cuts may have helped you. We're saying that for America to get back on track, we're probably going to cut that short and not give it to you. We're going to take things away from you on behalf of the common good."

If that doesn't scare the living daylights out of you and send chills up your spine, then I'm afraid you're not thinking clearly. Let me rephrase what she just said, you may be better off because the Bush tax cuts may have helped you start a new business or pay some bills, but we don't want that kind of success. We want you dependent upon the government for everything, so we're going to take away any benefits you may have derived from controlling more of your own money and we're going to force you to abide by our plan for your life and success, whether you like it or not! Let me just remind everyone that the money she's referring to is not the government's, it's our money, yours and mine, and we can do a better job of managing it than the government can. How can I be so sure? Well, have you ever made a decision that involved money and your future, where you DIDN'T take the absolute best option for you, even if others thought you were crazy? I rest my case! It is human nature to seek out that which is best for us, within the rules that we must operate. I don't care what your religion or belief system, if you are thinking, you will do what's best for you, and the government will do what is best for it. I for one can not and will not wait until November to vote against the communist plans of the Democrat's, but rather will use today's recommendation and others to get the government to pay me back the money it took, as soon as possible. The bank mentioned below does just that.

A Bank With No Branches:

It may sound like a pretty small, insignificant and probably worthless bank, if it doesn't have any branches, but not this bank. It doesn't want branches, employees, or for that matter anything else that could increase the bank's operating expenses. Sounds good, but I thought the whole purpose of a bank was to have a physical presence, so that it could develop relationships with the local communities, thus increasing opportunities for everyone involved? Well with this bank that's not necessary either, because they don't accept deposits nor do they offer any services at all. In fact they are perfectly content to be anonymous because they are making so much money they don't even need you money! There are actually about 6 of these companies, I own a riskier one in my personal account, but I recommended Annaly Mortgage Management (NLY - NYSE) to my mom because it's bigger and more conservative. First let me explain why this bank exists and then I'll explain why Annaly is worth our attention. I'm sure that most of you have known about the origins of Fannie Mae & Freddie Mac. They are the most well known of all the government created agencies that guarantee mortgages here in the U.S., thus allowing Joe Citizen greater access to lenders and thus increasing home ownership. The U.S. government, which is mostly run by whose with wealthy backgrounds, knows that home ownership is one of the easiest and simplest ways to boost someone's net worth, especially at the lower end of the economic spectrum. They decided back in 1938 that these guarantee companies could provide a way for banks to loan money to higher risk clients without taking on the additional risks involved, by buying the loans from the banks, thus guaranteeing the banks got their money back. Now about 7 years ago the deal got even sweeter, which caused these 6 companies, one of which is Annaly, to begin buying loans from Fannie & Freddie. What was the honey that sweetened the pot? These companies were guaranteed the interest payments on any loans they purchased from Fannie & Freddie, even if the original Joe Citizen debtors defaulted. In fact, these mortgage banks are never even told when someone defaults, because Fannie & Freddie keep paying them the interest, no matter what! Now let's get to the good stuff. What? You thought that was the best it could get? Oh no, I'm just getting started. Now, I don't care what anybody says, even if it is already a low risk investment, I want to lower the risk even more. Annaly achieves this in a number of ways, but the main one is lower leverage. When a business or an individual goes bankrupt, it's usually because they can no longer make the minimum payments to keep from defaulting on their loans and other lines of credit. Now most banks in the mortgage loan business, JP Morgan Chase for one example, use about 20 times leverage, whereas Annaly only goes up to about 10 times. In other words, for every dollar they invest in loans, they control 9 more dollars for a total of 10 dollars. It's basically the same thing that you do when you put a 10% down payment on a house, except Annaly is dealing with over $1 billion in assets. What this also means is that because Annaly has no branches or employees to speak of, the only costs they incur from borrowing all this money is just that, the interest they pay on their loans! Whoa hold up, didn't Greenspan just raise interest rates? Yes and he also warned the market for several months that he was going to do just that. Greenspan is also on record as having said that he's going to continue to slowly raise rates until they're back in line. Okay now, but doesn't that kill Annaly? No, because as John Mauldin (the highly astute and well-reasoned investment advisor at http://www.2000wave.com) said 2 weeks ago, any money manager who has "surprise losses" because Greenspan increased rates 2 days ago, ought to be fired! Greenspan has telegraphed the market his interest rates plans through early next year, which means that Annaly, probably the most conservative of these banks, will have plenty of time to adjust their portfolio to include higher paying mortgages, before their costs go up significantly. To summarize, Annaly makes its money on the spread between the interest payments they receive and the interest they must pay. During the 1Q of this year that spread sat at 1.68% (in other words, they received 3.16% and paid 1.48%), which was an increase from the 4Q of last year of 0.16%, even though interest rates were already bottoming out. This means that because of their 10X leverage they generated an approximate 16.8% return for their shareholders. Now unlike most banks, Annaly is structured as a Real Estate Investment Trust (REIT) which means by law they must pay out over 90% of all income to the shareholders, or else they will pay taxes! Yes, that means that Mizz Clinton hasn't gotten her greedy hands on any of Annaly's profits before they get into your pocket. This also means that as long as Annaly keeps their spread above 1.2%, we will continue to receive over 10% ROI returned to us in the form of dividends, every quarter. Not bad if you ask me, especially because our dividend yield will stay above 10%, it's currently above 11.4%. Now because of the current volatility don't buy Annaly unless you can get in below $17/share, and quite honestly that shouldn't be too difficult this month with a little patience. Annaly just paid a dividend and will be announcing this quarter's results on or around the 26th of July, so if you just have a little patience you will get in without much trouble. Unlike any other stocks in our portfolio, Annaly will not have a trailing stop, instead we will watch the quarterly reports for their interest rate spread and when it drops down to about 1.2% or lower, then we will sell. Now you can sell before we get to that point if you wish, but we will not because our main concern isn't what the market thinks of Annaly, but rather how wide of a spread is Annaly generating.

Thanks For The Warnings:

Finally, as we enter Independence Day weekend I want to thank Hillary for revealing the anti-freedom, anti-business and anti-investor philosophy she really believes in to us all. Now that she has admitted this, we can take the necessary steps to protect ourselves from her evil plans. First, by getting the government to pay us to invest through Annaly, and second by voting against her and all her fellow comrades who are also running for office, Kerry, Gephardt, and Frost to name just a few. Even if you don't like anything else Bush has done, besides tax cuts and defeating terrorists everywhere, take some time this Fourth of July weekend and think about which is better, Bush's pro-freedom, pro-investor policies or the Democrat Party's anti-American philosophies. I won't apologize for having spoken of politics in an investing newsletter, because if you don't have freedom both politically and economically, you'll never be able to make much money in the market, nor will you ever be allowed to enjoy it. If that ever ends up being the case, I may as well stop writing this newsletter and leave the country because all freedom will have been lost. I want to make my mom and I some money in the market, but I want the freedom to help you do so as well and to enjoy those gains, even more! Have a happy Independence Day and God Bless America!

I hope next time to bring you an airline so rich it could buy itself and go private, but I've still got plenty of research to do before I'm comfortable with the recommendation. In the mean time enjoy your gains and be patient with Annaly.

Yours for good investments,

Andy Prior