Mike Stathis

Industries to Avoid, Industries to Buy

Response to Economics Teacher: Your last response was much preferred. Although I disagree, at least you explained your views. It is appreciated. However, let me first say this; I agree with you about the auto industry in the '80s, but only in the early '80s. By the late '80s it had to have been clear to management that foreign imports would only increase. So yes, they were fighting the unions. I apologize if I did not make that clear.

As for trade, I certainly agree that it's good for all involved. However, the fact is that under our current economic system, America has entered a system of unfair trade with the rest of the world. As a result, the only beneficiaries are corporations and foreign workers. And we are seeing the results of this job transfer - no real wage growth since 1999, a weak dollar, and soaring inflation for basic necessities.

How can America expect to have fair trade with nations that manipulate their currency (China) with no ability to counteract (due to the control by WTO), nations whose corporations do not face the costs of EPA and OSHA standards, and whose governments cover the costs of the fastest growing expense in cororate America today - healthcare? U.S. companies simply cannot compete with this and that is precisely why millions of jobs have been sent overseas. As well, most large corporations have moved operations to Asia, taking jobs along with them.

Also note that America has been unintentionally transferring its innovation secrets to its trade partners. I won't go into the details here but as an example, India now produces F-16s under contract. This has catalyzed the growth of its own airline industry. You can check he Dallas Federal Reserve website for an excellent article on this topic.

And yes, I do fault the auto makers for jumping on the consumer finance bandwagon. In fact, I actually use that as a benchmark for companies that have achieved the limits of growth. When companies shift their focus from making cars to makig interest, I think that paints a dim picture for U.S. manufacturing. The fact that many large U.S. companies now have huge consumer finance divisions tells the story of the U.S. economy. And now we are seeing the effects of excess consumption.

Finally, I never claimed to be an "investment guru" and I'm certainly not perfect. I welcome all comments and criticisms. The only thing I ask is that people provide me with the same respect they deserve so we can all mutually exchange our ideas and viewpoints.

Industries to Avoid, Industries to Buy

Response to Bhakta: I agree – Washington is responsible for the current problems. I could also argue that our badly damaged free market system is responsible for many of our economic problems, but that does not mean that we should scrap it. Accountability is key, and right now very little exists. The government has a role in resolving many of the problems if voters demand it. They must be held accountable for their actions. But as it stands today, most Americans are kept in the dark with the help of the media so they really do not understand what is going on. All they see are higher prices and lower quality jobs. And when they listen to the radio or watch TV, they are told these problems are due to the democrats or republicans. In reality, the problems are due to both parties. Like it or not, the government will always be involved. We must accept this fact and focus on making sure their involvement is beneficial to Americans. That is their responsibility.

Response to Cicero: If you think I am advocating socialism then you have misinterpreted my article. Government involvement does not necessarily imply socialism. It’s not about WHETHER the government is or should be involved because they are. What is more important is to define their role and make sure they do what they are supposed, no more, no less. I agree that corruption is part of human nature. But that does not mean we cannot strive to minimize it. Arguably, the level of corruption seen today is unprecedented in U.S. history.

For those of you who have concluded that I am a socialist or liberal, you are way off base. I can only conclude that those who would label me as such do not understand the complexity of the problems in America. Once again, my work experience celebrates capitalism at its highest reach. I am an entrepreneur at heart and I have always been compensated via merit-based performance, which is consistent with capitalism at it purest form. Capitalism is the best system, but only if it is functional. That said, I urge you to reconsider my views because they come from someone who supports capitalism as the only path for America. But it has many problems that must be fixed.

Industries to Avoid, Industries to Buy

Response to keltorttruth: Actually, I am very far from being a liberal. All I want is for more equity in America. We have given the oil industry many chances to deliver. And all it has managed to do is deliver record profits. Meanwhile, OPEC nations now enjoy enormous trade surpluses due to oil export revenues. What are they doing with all of this cash lying around? They are buying up U.S. assets, mainly hard assets – real estate, factories, and banks. Combined with the effects of free trade, America is selling off its most vital assets in exchange for oil and consumer goods which used to be made in America. The current system isn’t getting the job done. There is a much better way. I am not so naïve as to think that blanket regulation would solve the problems. The government needs to be held more accountable. Clearly, we need to commit to a formidable alternative energy policy. Why is that you think Exxon refuses to invest a single penny into alternative energy? Because they have a monopoly. If you want to play the “liberal vs. republican” game that tells me you have let the media brainwash you. The fact is that both parties are essentially the same. America’s economic problems are not party-centric, they are Washington-centric. This is why Washington makes it extremely difficult for a third party candidate to run. They don't want anyone to spoil their party. It’s all about big money. And unless you are part of that boys club, you stand to suffer, along with the rest of us.

Industries to Avoid, Industries to Buy

Response to Economics Teacher: For you to make such a rash ascertain tells me you are of the school of traditional economic thought in America – the same school of thought that advocates the Federal Reserve’s destruction of our currency; the same school of thought that believes that a 2-decade plus period of overconsumption is somehow good for the U.S. economy; the same school of thought that promised free trade would bring better jobs to Americans. Look at the effects of this reckless economic policy. America is mortgaging off its wealth to foreign nations. And the weakness of the dollar is a reflection of this reality. Finally, my investment track record speaks for itself. Back in 2006, when virtually every U.S. economist glamorized the strength of the economy, I uncovered the realities of the illusion created by Greenspan and predicted the events we see today. I also provided numerous investment ideas such as shorting the mortgage, homebuilder, bank stocks, buying gold, oil, etc. I suppose you think GDP, inflation, and employment numbers, as reported, are not manipulated. Finally, if economists really understand the things that enable one to provide valuable investment advice, why is it that I have never heard of an economist who has become wealthy from investing? With all due respect, if in fact you possess a superior understanding of the topics you mention that are critical for investments, perhaps you should exchange your teaching career for an advisory role with a hedge fund.

Fed Bailout of Wall Street: Not Fair to the Commercial Banks

Nice commentary and great industry insight.

A note: Bear Stearns was not bailed out. In fact, the Fed refused to bail them out but granted unlimited cash to IBs in the future. Bear got a bad deal.

Perhaps we should all be wondering how it was that JPM got such a sweet deal - virtually no risk of loss and the world's most highly coveted clearing and prime brokerage business units from Bear, which I would estimate to be worth in excess of $18 billion.

Either way, both the commercial and IBs come out of this mess with the support of taxpayer dollars, which is debasing the dollar further, causing further inflation and higher oil prices.

I think a better title for your article might be "Fed Bailout of Wall Street Not Fair to Taxpayers."

I regard U.S. banks as the enemy of the American people, both commercial and investment alike. America is now more preoccupied with making interest than making products and the full effects of this disasterous strategy has only begun to surface.

Having worked on Wall Street, I've seen the fraud and corruption. And I left the industry because I did not want to be anywhere near that type of "business."

As a consumer, I have been exploited, lied to, and even had money stolen from me by one very large commerical bank. In fact, as it stands today, the commercial banking industry now joins the ranks of the worst run industries in America, along with the auto and airlines.

Fannie Warns 'Walkaways' a Second Time

Freddie and Fannie want to "have their cake and eat it too." The mortgage industry was perfectly capable of enacting the proper controls on both ends (lender and homeowner), but they did not. Instead, they were too concerned with counting the cash flooding in. You cannot change the rules of the game after the players have entered. I would consider that deceitful business practices at best, and extortion at worst.

For FNM and FRE to come out and make these warnings, after their management fudged earnings in order to get their multimillion dollar bonuses - it's ridiculous!

Perhaps even more ridiculous is their "grave" warning, as if anyone who walks away from a mortgage will be in a position to buy a home within three years anyway! And if they are, a 680 FICO isn't particularly high.

Stay Clear of Traditional Asset Classes

In response to fredlee....I appreciate your comments, and I agree with most of what you said - in all 3 of your comments...Except the part about me being naive about the effect of lobbyists on the healthcare industry. My core technological expertise is healthcare. Understand that I was limited to what I could mention about it without distracting too much. As you can see, my article was quite long as it is.

The problems with healthcare are numerous; so much in fact that most people think they realize what the problems are, yet they overlook so many others. Without addressing all of the core problems, can't possibly understand potential solutions. But certainly, the healthcare lobbyists - the largest most powerful lobbyists groups in Washington - have a big role in the healthcare crisis; namely, making sure that Washington stays away from price controls. And cost containment is perhaps the biggest problem in healthcare because high costs limit access which prevents more from having coverage, which increases the number of medical bankruptcies. You point about eating healthy is well taken and I completely agree. The food industry must be held more accountable for poisoning the food supply.

That said, I feel that I do understand the full complexity of the problems that have created a healthcare crisis. And am currently working on what I hope to be a groundbreaking book, geared for investors that introduces telemedicine as part of the solution. Perhaps in the future I will address healthcare as it relates to investments.

As far as investing in physical gold, while I do see value in that approach, I did not feel it was relevant to most readers of Seeking Alpha since the site appears to be geared for stock market investors. I guess I was wrong!

buying and holding the physical gold has both advantages and disadvantages. First, you have to worry about storing it in a safe place or else you will have to pay to have it stored. Second, you won't be able to take advantage of the tremendous volatility swings. If you are a good trader you can make alot of money trading it. Finally, it is not nearly as liquid as gold ETFs and you have to pay a spread to buy and sell it.

HOWEVER, the great thing about holding physical gold is that it prevents one from trading it. Even the best traders can get shut out after failing to get back in right before a huge rally. And it could soar from there. In addition, trading it will create a big tax liability which some won't be prepared to meet without hardship.

Finally, you should understand that the gold ETFs are supposed to be buying the physical gold in accordance with demand for the ETF. So buying the physical gold yourself won't increase the price due to a supply-demand imbalance.

HOWVER, no one really knows for certain whether or not the ETFs really hold all the gold they claim since the audits only check for paperwork.

In conclusion, for some, holding physical gold is the best way to go. For others, managing a gold position in ETFs is preferred. As for silver, I actually think it has more upside at current levels than gold. But I think it will heat up later. Right now, gold is on fire due to the banking crisis.

For those of you who feel I've understated the potential disaster, you should know that I try to make conservative forecasts. For everyone else, I appreciate your comments and feedback, especially the generous compliments.

Stay Clear of Traditional Asset Classes

Magman, just so there is no confusion, SKF is an Ultrashort Financial EFT. Hence, to take a short posture in financials, one would buy (not short) it.

As for the treatment options to avert this potential economic catastrophe, Washington must restructure free trade and healthcare, America's biggest problems. To enable this, voters must demand an end to lobbyists donations. As long as money flows from corporations to Washington, America will be controlled by corporate America and working-class Americans will suffer.

8 High-Yielding Stocks for Income Investors

This is a nice article and contributions by readers are equally good, While I am a big fan of high dividend yield common stocks during the current market conditions, I'd like to mention a few points. First of all, I think consideration of some of the big pharma names is worthy. Certainly they don’t offer the double-digit dividend yields of other stocks, but they are amongst the highest DYs for large stable companies.

PFE and BMY have been beaten down for years. And in my opinion, there is much more upside over the next several years than downside. They are currently yielding upwards of 6%. At the same time, they are solid at these valuations. PFE has an excellent 40-year history of dividend growth, while BMY is not quite as good, but still impressive. The main risk with the pharmas (and with all other traditional asset classes) is market risk or the risk of a market decline. Sure, there are some issues such as waning pipelines, but this has already been factored into these stocks. Thus, I feel the valuations present some nice appreciation potential once Medicare Part D kicks in with retiring boomers.

The second point I'd like to mention it's not that easy to find high dividend yield stocks that are safe. While the author makes note of companies that have and will always be around, "being around" as investment criteria is a dangerously low benchmark. A stock can cut its dividend by 50% or even 80% and the stock price could get hammered. This would not only devastate the expected dividend income but would also pummel the account value. In fact this is exactly what happened to some oil trusts a couple of years ago. Although we can never know what is ahead, one thing investors should do is look for increasing dividends during rising oil prices.

When researching for dividend-bearing stocks, first you should check the dividend growth. Next, you should consider are the merits of the industry and particular stock under consideration. I would consider the shipping stocks to be very risky and would not purchase them personally. Aircraft leasing is also quite risky unless you have been an investor for a long time and have a low cost basis. Understand that these companies, by necessity are involved with the financial system and could have some problems down the road.

Regardless how nice a stock may look, one should be extremely careful with any financial firm paying 15% dividends. Ask why the DY is so high. Is it due to the stock price getting sacked while the dividend has remained? Or is the dividend just that high? Regardless, I'd stay away from financials for a while, especially if you are seeking dividends.

I do think the oil trusts offer the best risk-reward. But I certainly would not overbuy. Regardless of your income needs, you should still have some stocks offering capital appreciation. Oil prices are volatile but oil trusts don't share the same volatility as the other types of oil stocks due to the high dividends. However, these trusts have thin trading volumes, making liquidity a potential issue. All this said, I think the oil trusts are excellent. Just don't buy too much because they are like any other stock - eventually they will have problems.

When interest rates soar (I expect this in a couple of years) stocks with high DY won't be as attractive to investors and this alone could knock the price down.

Always remember, if you think you can easily find stocks paying 15% DY that don't have high risk, you are wrong. A 15% investment return is outstanding, but you should never expect that to be sustainable over a long period. While it can and does happen, it defies market performance, as the average annual returns over 70-80 years have been 8% (capital appreciation + dividends). It simply defies the risk-reward dynamics within the market as well as the law of supply-demand which dictates stock prices. If stocks with 15% DY were viewed as low risk by investors, they would be purchased in masses, driving the share price up and the DY down. But this has not happened (not yet anyway). So be careful because the market is saying that these stocks are very risky. The market is not always right in the short-term, but over a longer timeframe it is. And if you are dealing with a short investment horizon such as that during retirement, you'll want to be careful.

Fannie and Freddie Get a Little Breathing Room

The reader comments above are right on track. They get what's going on.

10 Reasons Why Gold Has Further to Run

Nice article. I might have added 2 more reasons:

1) Gold also serves as a hedge during a crisis

2) The Gold-DJIA ratio

3)

Time To Go Long The Dollar?

That's a credible take on alternative currency positions. However, in my opinion, it is better to stick with strength against the dollar rather than currencies that might show weakness. It's a numbers game. There are many more currencies that will continue to outperform the dollar rather than underperform it. I think your strategy might be more suitable for experienced currency traders.

To forgive any remaining principal for those facing the potential threat of foreclosure would be an assualt on our free market system; a system that is already broken for many industries (eg. oil and healthcare). Such a move would cause further damage. How can one justify bailing out those who can't make payments on homes while neglecting others who have borrowed funds from relatives, savings, and made other concessions?

It makes no sense to reward the most financially irresponsible while punishing those who tightened up their belts. Certainly, the mortgage industry along with Wall Street is to blame for this mess. But everyone must be treated fairly. Otherwise, homeowners might stop making payments on their mortgage in order to get a writedown on principal, causing even more problems.

As far as the Fed loosening the capitalization requirements of Freddie and Fannie, that is simply irresponsible. Already they have been undercapitalized and this will serve to increase the risk of further devastation. The Fed will keep printing money causing even more devaluation of the dollar. Either way you slice it, there is no way out of this mess. Trying to avoid the pain will only make the devastation worse, maybe not now but most certainly down the road.

Greenspan tried to mitigate the effects of the Internet bubble by collapsing rates, and that led to the current real estate and banking crisis. What crisis will Bernanke create? I do not know what it will be but if he keeps acting in this irresponsible manner, we could be looking at a problem even worse than we face now in a few years.

Current Financial Crisis Going Into Extra Innings

To be a bit more cut and dry, we have a long way to go; and the direction will be a downward spiral unlike anything ever seen. Pickaroonwyo and SeriousBull are right on track.

Before it's all said and done, this fiasco is going to make the S&L crisis look like a walk in the park. There will be several bank failures. But the Fed will pump money into the system via auctions (collateralized with junk bonds). The FDIC is already beefing its staff up to handle the coming mess.

Banks won't close their doors like in the 1930s. You'll get your cash.
The only problem is that this measure will continue to destroy the dollar. And it's going to result in many many corporate bankruptcies outside of the financial sector.

Don't fall for these sucker rallies. If anything, take the opportunity to set up your short positions.

Warning Signs of a Modern Depression: See 1990 Japan

Very nice article. One thing I'd like to point out, as a former employee of BSC is, although it's spoken of as the 5th largest investment bank, BSC has a much larger impact during the current crisis. One could argue that it has the largest impact of any other bank for the following reasons:

1) It's prime brokerage unit handles the largest amount of hedge fund assets of any bank. How will hedge funds deal with the uncertainty of its prime brokerage unit during a time when many funds have massive leverage?

2) It's clearing unit is the best in the world. Certainly it's not going to disappear, but integrating the unique culture of BSC employees into another bank with prove very challenging.

3) It's derivatives and collateralized securities business, which serves as a key player with institutions. The total derivatives oustanding is approaching $200 trillion, for a growth of around 500% since 2000. On a net basis we do not know what this exposure is. But we do know that over $30 trillion of this is in credit default swaps. Because of the loss of confidence in the financial system, institutions that have used CDS to hedge against interest rates cuts have gotten burned.

Down the road, it might actually improve the financial system to have butchered the one of the top players in derivative and MBS. But that will be a small concession for the devastation that will only continue to increase. The risk of a global financial meltdown due to derivatives alone is high and increasing by the day. At the very best of scenarios, the unwinding process is going to be destructive for many funds and financial institutions. The Fed is going to have to bail them all out. And of course that means the dollar will sink further.

There is no way out of this mess. The Fed can continue to print money and exchange it for worthless MBS debt as collateral (as announced during its meeting yesterday). But that will only hasten the dollar's decline. And while it is doubtful that banks will close their doors due to lack of dollars, at some point, our currency might not be worth the paper it's printed on. You should expect a further 20-30% decline in the dollar at minimum. Regardless, the dollar will remain quite low for many years.

And if you think the economy will get better in a few years, you will be wrong. Only the government's twisting of data will make things look better; the same charade we have witnessed since the Internet correction. What happened to all of the "experts" who were preaching how the economy was so strong? "Just look at the data-unemployment is under 5%, GDP is 3%" etc. These individuals should be holding their heads in shame. You know who they are-teh Fed, Washington officials, journalists, TV hosts. In fact, they should all resign and apologize to the people.

In my estimation, inflation and interest rates will reach double digits over the next few years. The real inflation numbers are already around 8% if they were calculated correctly.

Ask yourself these questions:

1) Why did the Fed stop reporting the most critical indicator of inflation last spring, M3?

2) Why won't Washington disclose more transperancy on the asusmptions it uses for hedonics?

3) Why did Washington shut down the website clearing house for economic data in March, economicindicators.gov?

4) Why is the FDIC increasing its staff and why have they increased FDIC insurance fees to banks?

At the end of the day, America needs good jobs, wage increases in excess of inflation and solid employee benefits. Only then will household savings materialize. This implies a restructuring of free trade policies and healthcare. This mandates a full understanding of the problems and leadership to execute change. The Fed can provide banks with liquidity, but that isn't a real solution. It's desperation. What is needed is more accountability and transparency in the financial system.

Credit Market Mayhem and the S&L Crisis: Drawing Parallels

Nice article. And it was especially good of you to point out the leverage firms have dug themselves into, as many still do not realize that virtually every US bank has excessive leverage. The unwinding process is just beginning. Will we see many more situations like Caryle before it's over. I think to compare the current meltdown to the S&L crisis is a huge understatement. Already, the losses due to mortgage-related writeoffs have exceeded $200 billion. Finally, together with the European Central Banking System, the total amount of cash released to banks in less than a year as a result of the subprime debacle is in excess of $1.2 trillion. In order to provide adequate liquidity over the next year, I estimate another $1-$1.5 trillion will be needed in order to keep banks solvent. In total, I am expecting direct losses due to the real estate-banking meltodown of $600-$800 billion.