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Neil George is an investor, an investment advisor, educator, philanthropist and editor of the online advisory He is also editor of By George, a long-standing financial and news advisory. He is the former editor of Personal Finance for many years as well as editor of Inner... More
My company:
The Pay Me Strategy
My blog:
The Pay Me Strategy
  • Rethinking Risk 0 comments
    Apr 1, 2010 6:16 PM | about stocks: AWF

    Forget about what you've been told over and over about market risk. The “safest” investments are really the most risky - while the “risky” are really the safest. 

    Brokers and their bosses are constantly trying to make sure that they don't get sued by their clients. And to make doubly sure - brokers make clients sign off on an arbitration process that skews the whole process in favor of the brokers, not the investors.

    Moreover, if and when they do get sued, they've got the system rigged so that they have a plausible defense.

    One of the cornerstones of this lawsuit prevention process is that when it comes to credit risk, brokers' bosses take a very tight line on what clients are allowed to buy.

AAA/Aaa is fine and dandy - but start to enquire about BBB/Bbb or below, and that's where a barrier tends to be thrown up between you and the best investment deals.

    There's a funny double standard at work here: When you're buying stocks, credit ratings tend to be forgotten. You can put through plenty of trades without a hitch, as long as they're for stocks of companies that are more than a few grades down from perfect credit - including some members of the sacred Dow Jones Industrial average that have junk credit ratings.

    But while stocks get a pass, if you try to buy the bonds of supposedly lower credit rated companies - red flags start to pop up and brokers get nervous.

    But what makes stocks any different from bonds in this regard? After all, we've seen time and time again that stock prices can plunge and whole companies can just go away with a delisting and that's that.

    And of course - everybody should know by now that these days the general stock market isn't the place to make real money, what with the S&P currently running at a loss of over 17 percent for the past decade.

    So, if you lose money on stocks, just try to blame your broker - you won't get far.

    Buy Bonds the Same Way You Buy Stocks

    When clients want to buy bonds, they get shown high credit-rated but low yield opportunities. I guess that's because if they do go belly up, then the brokers can always come back with the defense that the bonds were AAA/Aaa or close to it.

    The trouble is that while all of us like to buy stocks of companies that are building and improving their values, when it comes to bonds - we tend to follow along with the idea of buying the highest credit ratings.

    The effect is that too often, investors buy bonds that are priced to perfection. They can't get any more valuable and, if anything - they can slip and slide if they lose their perfect credit ratings. AAA/Aaa means that bonds are priced to fall - not to rise.

    So, when buying bonds – follow my mantra and look at them in the same way other investors look at stocks. Find the bonds that are priced low, but are proving that they're getting better over the quarters and years to come. That way you'll get big yields now and capital gains over time, which is part and parcel of The Pay Me Strategy - my plan to help you grow your retirement.

    Another Credit Rating Scam to Avoid

    One of the biggest scams of Wall Street's brokers these days is being repeated right now and nobody's catching on.

    Remember the last credit fiasco? You know the one in which banks, insurance companies and other institutions worked to get AAA/Aaa ratings on so many pools of toxic mortgages and other debt packaged together and signed off by Moody's and S&P. 

It didn't take long for those nice, supposedly riskless bonds to go belly up, taking down trillions of dollars, euros and pounds from the balance sheets of those same institutions.

    Well, those same credit rating companies - Moody's, S&P, Fitch and others are at it again - and the same banks are perpetuating the same scam system by inflating credit ratings on bonds that should be considered toxic.

    This time it's not the mortgages that are getting inflated ratings – but whole governments.

    Think that the US is AAA/Aaa? Well, with 12.7 trillion dollars of national debt and the nominal GDP running around 14.4 trillion dollars, that puts our debt to production at a precarious 88 percent.

    That's a bad number - but as we always do when it comes to looking at corporate debt - we need to look at the total debt issue when it comes to the US. Off-balance sheet liabilities are what got plenty of insurers and financials in trouble during the previous credit fiasco mentioned above.

    And the same might well be true with the latest fiasco-in-the-making for government credit. When you include our massive liability for entitlements, the US real debt - including off-balance sheet liabilities - is running more like 64.8 trillion or 4.5 times our GDP according to a little-noticed study recently released by the International Monetary Fund (NYSE:IMF).

    Scary, right? Thinking that the US is doomed and that you need to look at safer havens such as the supposedly more prudent Europeans? Think again.

    The big governments of the EU are in the same boat as the US. Britain is running its total liabilities way above what it should be allowed to borrow and still keep an investment grade rating. 

How's this for supposedly secure credit: The United Kingdom is running at the same precarious debt to GDP ratio as the U.S. – 4.5 to 1, when you include include all liabilities.

    And Germany? A bit better. But still, running at a rate of 2.5 times its anemic GDP.

    And I won't mention the even more precarious liability to GDP ratios of the truly imperiled members of the euro-zone that run up to as high as 9 times GDP.

    So, the big supposedly safe US government and its AAA/Aaa is not what its supposed to be. And the EU with its supposedly credible governments, including Germany isn't what its AAA/Aaa are supposed to be.

    How about Canada?

    While Canada has cleaned up some of its financial accounts, thanks to the last decade's run up in resource revenues, it can still be best referred to as a debt bomb.

    The IMF has particularly singled out Canada for its credit mis-management, stating that the nation's government has mortgaged too much of its future with a total liabilities and debt to GDP at more than 6.5 times - making the US look good in the process.

    Yet, like the US, Germany and others - Canada still gets to keep AAA/Aaa ratings.

    It seems that if you borrow enough, the ratings agencies and the banks and financials that get to make all of the money in underwriting, trading and processing will be happy to keep the perfect credit ratings scam going - just as they did with the mortgage market of a few years ago.

    Less Risk, More Yield...and Worse Credit Ratings?

    In ratings-agency eyes, the more credit outstanding - the higher the ratings. The more cash that you have – the worse your ratings.

    While the bonds of debt-bombs like Canada are still puttering around with their AAA/Aaa ratings, the bonds of countries with less credit and a whole lot more cash and production are the ones being demonized with credit ratings of BBB-/Baa3 or, if they're lucky, A+/A1.

    These are the bonds of countries that are referred to as "emerging" by Wall Street's brokers. They're called the risky part of the market. But what's more risky? Having all of that debt and liabilities piling up, or having all of that cash piling in?

    Take a couple of the leading so-called emerging markets governments. For the same total debt to GDP ratio - Brazil comes in at 0.51. And China? How about 0.02 times!

    And guess who is being pitched by Wall Street - including Goldman Sachs - to help out moving the bonds of the supposedly credible EU? Yep, China and Brazil. But they aren't buying.

    In fact, they're selling.

    Did you see the recent story on US Treasury buys and sells by governments around the world? A lot was made of the report that showed China reducing US Treasury bond holdings by some 34.2 billion dollars, bringing that nation down to the second largest creditor of the US treasury now following the Japanese.

    Now before you start getting even more nervous - don't. The Chinese, as well as the other so-called emerging nations with their massive government investment funds, aren't pulling out of the US - they're just putting their cash into better deals.

    If you examine the total flows of capital tracked and reported by the US Treasury - you would find that while China did dump plenty of Treasuries - they more than doubled their buying of corporate securities in the US.

    Now, what does this mean for you?

    Buy What Wall Street Says is Risky

    First - this is nothing new. If anything, it's a confirmation of my Pay Me Strategy. In my portfolio of recommendations I continue to buy the bonds not of the creaky debtors of the US, EU and Canadian governments - but the up and comers of the emerging markets.

    And some of my best bond holdings keep piling on the profits, not only with yields in the upper single digits - but also capital gains. In just one of my closed-end funds focused on these bonds - AWF - those that have been following my lead have nearly doubled their money in just the past year alone. 

Keep buying what Wall Street says is risky - and continue to pass up what Wall Street is pitching as supposedly safe.

    Second, there are great opportunities in the corporate markets. Do what China is doing more of with its cash, and you too can get paid a whole lot more while getting real assets - not just promises - backing up your investments.

    I have a nice assortment of these bonds that trade right on the New York Stock Exchange. They look and feel like preferred shares, but are actually corporate bonds in nice, easy-to-buy sizes trading in the 20-dollar range. And they keep paying you nice solid yields running in the high-single to low double-digits.

    And, while we see rates backing up for credit-challenged Treasuries, the exact opposite is happening for many corporates as business conditions begin to improve.

    Want an example? How about AT&T's minibond, KTBB? Yields more than the company's common shares and with lower volatility to boot. Moreover, it's up 10% since the financial meltdown while T is still down over 30%!

    The bottom line is, never take Moody's, S&P or any Wall Street broker's word on what's risky or not. Instead, look at the real numbers behind the ratings. What's “risky” might actually be the safest place for your retirement cash.


    Disclosure: No positions.

    Disclosure: No positions.
    Stocks: AWF
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