Fannie Mae and Freddie Mac are about to go bankrupt...
Leverage is the problem with these government-backed institutions. They bought $1.7 trillion in assets using only $70 billion of investors' money. So these assets only have to decline by $70 billion 4.1% to wipe out shareholders. Actually, if you include their mortgage guarantees, Freddie and Fannie are liable for $4.8 trillion worth of mortgages. So to wipe investors out, mortgage values only have to decline by 1.4%. And that's exactly what's happening right now...
Fannie and Freddie own mortgage assets. The value of these assets is a function of home prices and the solvency of homeowners. The S&P/Case-Shiller National Home Price Index is now down 14.1% year over year. Foreclosures are up 53% from June 2007.
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No one knows exactly how much mortgage values have fallen. Every mortgage is different, and there's no benchmark. But one thing's for sure: They've fallen more than 4.1%. In other words, Fannie Mae and Freddie Mac are technically bankrupt.
Fannie and Freddie, directly or indirectly, own half the mortgages in America. Their bankruptcy will be one of the most important events in the history of American capitalism. Here's how I suggest you prepare yourself...
High dividend stocks are by nature defensive stocks. The dividend acts like an anchor and prevents the stock price from falling too far.
But the stocks in the portfolio of my newsletter The 12% Letter do more than pay big dividends. These stocks are the safest collection of high dividend payers you will find in this market. The key to this safety? They own valuable real assets and sell things for the lowest possible price.
We've made investments in energy. Over the last two years, we made 15 investments in pipelines, natural gas, oil, oil services, electricity, coal, wind farms, and energy finance. We're showing a profit on 15 out of 15 of these stocks.
We also own fast food, convenience stores, and warehouse retailers. These are our 'price leader' stocks like Wal-Mart and McDonalds. These stocks do well when consumers choose price over quality. They are excellent defensive stocks to own in the current crisis.
And we own timber, hydroelectric dams, and rural telecom assets. These stocks when mixed together will generate the safest 9% dividend we can find anywhere in the market. (The average dividend yield of the stocks in my portfolio is 9%.)
The government will bail out Fannie and Freddie and assume their debts. This is inflation. It will meet Fannie and Freddie's trillion-dollar debts by issuing more debt of its own. US government debt will lose its value, and the dollar will keep falling.
The high-yield companies in my portfolio are the perfect stocks to protect your money from the US government's inflation. These companies own productive assets. Factories are assets. So are trees. So are rural telephone networks.
Denominated in US dollars, the value of these real assets will rise. So your money is safe... much safer than if you left it in the bank or a money-market account.
But the real bonus comes when foreigners lose confidence in US debt. The only way they'll be able to get any value for their dollars will be if they buy cheap American assets... like farmland, timberland, real estate... and American stocks loaded with real assets. There will be a panic into US real asset and manufacturing stocks at some point in the next 12-18 months.
In sum, there's more pain to come in financial stocks. But if you buy stocks with big dividends and lots of cheap American assets, your money will be safe and you may even make a profit.
This article was written by Tom Dyson, co-editor of DailyWealth, a free daily investment letter
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