Banks and Thrifts Failing! Home Market Collapsing! Credit Crisis Accelerating!
By: Martin Weiss and Mike Larson / Safe Money Report / July 28, 2008
Flash Alert to all Safe Money subscribers, July 28, 2008
Dear Safe Money Subscriber,
“The momentum of this devastating credit crisis is building by the hour.
“But we have a constructive solution: Three special exchange-traded funds that you can put in your regular stock brokerage account right now—both to help protect your portfolio from losses and to go for substantial profit potential.
“We'll give you specific instructions in just a moment. First, here's what's happening and why we feel it's so urgent that you take immediate action ...
“Banks and thrifts failing: Late Friday, after the Wall Street crowd had gone home for the weekend, the FDIC announced the closing of two commercial banks—First National Bank of Nevada with $3 billion in deposits and First Heritage Bank of Newport Beach with $233 million.
“Deposits up to $100,000 are fully insured. And these are not giant failures that are likely to cause other institutions to fall like dominoes. However, there are two larger concerns: The authorities themselves admit that this is just the beginning. And we fear the next bank failures could be far larger.
No one can predict with certainty which ones they will be. That depends not only on their financials, but also on the shifting psychology of depositors and investors. But what we can do is report the facts:
“Fact #1. Washington Mutual, an S&L with one of the greatest exposures to mortgages in the nation, is under siege. Last Tuesday, Moody's announced it may cut the thrift's credit rating to junk. On Wednesday, Washington Mutual announced a far larger-than-expected $3.3 billion loss. On Thursday, a prominent analyst wrote that many creditors have been quietly pulling out their money. And on Friday, the cost of insuring the thrift against default surged by as much as 33%. So don't be surprised to hear more unsettling news on Washington Mutual this week.
“Fact #2. Wachovia, one of the nation's largest commercial banks, is not far behind—reporting a staggering second-quarter loss of $8.9 billion, cutting its dividend by 86%, and still reeling from its ill-timed 2006 acquisition of the large California mortgage lender, Golden West.
“Fact #3. Most worrisome of all, some of the nation's largest money center banks are more exposed than ever to the credit risk related to their huge positions in derivatives. According to the latest report issued by the Comptroller of the Currency (OCC) for the first quarter of 2008, here's where they stand….
“For each dollar of capital, JPMorgan Chase is exposed to $4.11 in credit risk; Bank of America, $2.15; Citibank, $2.79; and HSBC, $7.21.
“These risk-exposure levels would be extraordinary even in normal times. In turbulent times like now, they are evidence that the big derivative players are now deep into the danger zone with these instruments.
“Home market collapsing: What until recently could be described as a "steady slide" is now turning into a wholesale rout. Home price declines are deeper and swifter. The pace of foreclosures is accelerating. Banks are stepping up their efforts to tighten credit. And all three of these trends are feeding on each other in an ominous vicious cycle.
“Credit crisis accelerating: Globally, financial institutions' losses announced due to the credit crisis have surged from $400 billion to approximately $470 billion… and are now headed to $1.6 trillion, according to Wall Street estimates.
“What will happen next? What should you do to insulate your entire portfolio? What further steps should you take to profit in these unusual times?
“We will give you more detailed answers in the regular issue of our Safe Money Report, to be emailed and mailed to subscribers this coming Friday, August 1.
“For now, though, suffice it to say that:
§ “The crisis is far from over. As much as three-quarters of the damage may still lie ahead.
§ “The financial dangers you face today could be greater now than at almost any time in modern history.
§ “It's not too late for you to take protective action. Quite the contrary, if you act now, you'll still be doing so at a relatively early stage in the crisis—and definitely well before the crowd.
Clearly, this is no time for complacency, and we have three urgent recommendations for all subscribers ...
Recommendation #1
UltraShort Real Estate ProShares (SRS)
“Until recently, the biggest real estate declines have been in the residential sector. Now, commercial real estate is also getting hit hard.
“The cause: The slumping economy, rising unemployment and declining consumer confidence is driving vacancy rates higher and rent growth lower.
“The consequence: A big squeeze on the companies that own and manage shopping malls, office buildings, warehouses and other types of commercial property.
“That's where the UltraShort Real Estate ProShares (SRS) can help you. This innovative exchange-traded fund (ETF) is a double inverse investment. In other words, it is designed to rise 20% for every 10% decline in the value of the index it references—the Dow Jones U.S. Real Estate Index.
“That index includes shares of major Real Estate Investment Trusts (REITs), such as mall owner Simon Property Group, industrial property landlord ProLogis, and office property firm Vornado Realty Trust—companies we believe are lined up before the real estate firing squad.
“We see nothing on the horizon that will prevent their share prices from falling sharply. And the more their prices decline, the more this ETF will rise, going up at approximately twice the pace.
“Your action: If you already own SRS based on our earlier recommendations, hold. If you don't yet own it, buy 50 shares of SRS at the market today (assuming a total portfolio of approximately $100,000).
“You can buy or sell SRS in any stock brokerage account. And it immediately serves a dual purpose: If you are concerned about losses stemming from your real estate and stock investments, it can act as an approximate hedge. And if you are looking to grow your assets, we believe it provides a very clear profit opportunity.
Recommendation #2
SPDR Gold Trust (GLD)
“In times like these, the knee-jerk response of the U.S. government is to flood the economy with cheap paper money.
“And right now, the money is cheaper than cheap: Banks borrow for 2% in the Fed funds market at a time when price inflation, even based on the government's own CPI, is 5%. In other words, banks are borrowing at three full percentage points below the inflation rate. They are effectively being paid 3% to borrow the money.
“It's a classic case of cheap money chasing scarce goods, creating the greatest danger of runaway inflation since the late 1970s.
“Your best protection: SPDR Gold Trust, symbol GLD, an exchange-traded fund dedicated to the world's premier inflation hedge—gold bullion.
“This ETF invests your money in gold with each share worth approximately 1/10th the value of bullion. So if gold is trading at $900 an ounce, GLD will trade near $90 per share.
“Like SRS, you can buy or sell GLD like any stock, making it easy to participate in bullion's bull market. Our recommendation: If you don't yet own it, buy 75 shares of GLD at the market. Also place a stop-loss order at $79 to help control downside risk.
Recommendation #3
CurrencyShares Swiss Franc Trust (FXF)
“The most predictable consequence of the spreading credit crisis is a massive flight of investors from risk to safety… and from weak currencies to crisis currencies, such as the Swiss franc and the Japanese yen.
“We expect both currencies to rise sharply as this crisis continues to unfold. But right now, we believe that, between the two, the Swiss franc offers a better balance of risk and reward at this juncture.
“Although the Swiss economy is by no means perfect, Switzerland has been relatively insulated from the financial distress afflicting the U.S., the U.K. and some other European countries as well.
“Moreover, past experience shows it benefits almost immediately in a crisis environment.
Three historic examples:
§ During the stock market crash of 1987, investors dumped their U.S. investments, rushed to buy the Swiss franc and drove up its value by almost 26% in less than four months—a very large move in the currency markets.
§ In the debt crisis of 1998, which, by all measures, was actually much smaller than the debt crisis we're seeing right now, the Swiss franc soared by approximately 20%.
§ And in the most recent credit crisis, it has surged by 30% from its 2007 bottom to its recent peak.
“To take advantage of a continuing rise, buy 50 shares of CurrencyShares Swiss Franc Trust, symbol FXF, an exchange-traded fund that invests exclusively in Swiss francs—not stocks or bonds, but the currency itself.
“If you currently own CurrencyShares Japanese Yen Trust (FXY), which we previously recommended, swap out of that position and replace it with FXF. In other words, sell your FXY position at the market, cancel any outstanding FXY stop orders you may have in place and buy 50 shares of FXF, also at the market.
“Stand by. Further instructions are coming in our regular Safe Money issue, which will be in your email box this coming Friday afternoon, soon after the New York markets close.
“Best wishes, Martin Weiss and Mike Larson
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