FORTY YEARS A SPECULATOR

"Getting Rich Through Homeownership - The End Of An American Dream," by Fred Carach

2011-08-23T15:54:00.004-04:00

Much has been heard in the press lately about the end of the great
American dream of homeownership but what the press has missed is that what has really died in the crash is a perversion of the American dream. The perversion of getting rich exclusively through homeownership. That perversion really started in the 1970s and died in the great real estate crash that began in 2007.

Prior to the 1970s homeownership was regarded as a key asset in the accumulation of wealth but it was never considered the only asset. Real estate values rose too slowly to accomplish that mission. In fact it is surprising how little real estate values have risen over the long term. According to the economist Robert J. Shiller, the recognized economic expert on this matter from 1890 when accurate records began to the crash year of 2007 residential real estate rose only 3.44% a year. Far less than most people would assume. Then the rise in inflation rates changed everything.

In the decade of the 1970s inflation turbocharged real estate and values rose a blistering 8.12% a year, the greatest rise in history and in the 1980s values rose an additional handsome 5.86% a year. These two decades convinced millions of American homeowners that they could now get rich solely through homeownership.

Their home they were now convinced was the truth, the light and the way to getting rich.

People adore owning real estate. They lust for the stability and permanence of the land. They can roll around in the stuff and as the saying goes they are not making any more of it. What’s more everyone knows or rather knew that you can’t lose money in real estate. People have always had an exaggerated notion of how profitable an investment real estate has historically been. This opinion is based to a great extent on the enormous leverage that is common in homeownership. If your down payment is 5% you are employing leverage of 20:1. Wall street speculators would kill for this kind of leverage.

But there was more to it than that. By the 1970s the American people had changed. They were for the most part no longer willing to make the sacrifices that their parents and grandparents had made.

Scrimping and saving and living below your means was too tough for them. Instant self-gratification was in. What was attractive to them was blowing every dime they had on a big-beautiful home and get rich while they were wallowing in their big-beautiful home like a pig wallows in slop. Saving and sacrificing was for dummies. As for the stock market it was way, way to risky. They were far too smart for that crazy gamble. Risk taking was for dummies. Their home was the perfect investment it required zero risk and zero sacrifice. Which was just what they were looking for.

An interesting component of this belief was an amazing lack of interest in any real estate other than their home. When there was enough equity in their home to support an investment in any real estate other than their home for the most part they turned it down flat. After all any investment outside their home would require a sacrifice on their part. We couldn’t have that happening now could we? Instant self-gratification always comes first. The smart career move from their point of view was to shoot for the Mcmansion. Boy could they pig wallow in that baby.

In 2007 their big-beautiful homes imploded on their heads. It is hard to overstate the financial devastation that the housing crash has had on the American middle class. The unemployment rate that everyone is whining about is almost a side show. For millions of middle class, home owning Americans their home was their only financial asset. In a matter of months millions of home owning Americans went “upside down.” They went from having $100,000 to $250,000 or more in equity in their homes and often much more. To being that much or more underwater.

For those who have twenty years or more before they retire recovery is possible but for the millions who are approaching retirement there is very little hope. The statistics are so grim that many of them are hard to believe. According to the famous Case-Shiller Housing Index home values hit rock bottom in the depression year of 1933 with a decline of -30.5% from the 1920s peak boom period. As hard as it is to believe according to the latest Case-Shiller findings we have just broken that record in the 2nd quarter of 2011 with a decline of -32.7% from the 2006 market peak.

About one-third of all the homes in America are paid off and have no mortgage. The remaining two-thirds of all homes have mortgages. An amazing 25% of homes with mortgages are underwater. The outstanding mortgages exceed the value of these homes.

Then there is the seldom reported vacant housing crisis. There are 126 million housing units in this country or about one housing unit for every 2.38 Americans. That is an awful lot of housing for each American. The classic 3/2 American home is overkill if there is only 2.38 people rattling around in it.

The census figures tell the tale. When I first read these numbers they were so bad that I could not believe that they were true. The 1990 census reported that there were a staggering 10.3 million vacant homes in this country. It gets worse, in the 2000 census that figure had risen to 15 million vacant homes and in the 2010 census that figure had risen to 19 million vacant homes. About 15% of all the housing stock in America is vacant. You could level 19 million homes and there would still be housing for every American. This is not good! What were we thinking? We were thinking that you can’t lose money in real estate. Every new home is money in the bank.

The chickens have come home to roost. There will be no quick recovery. We are not only broke but we have a mountain of inventory hanging over our heads. It will take us years to work our way out of this mess.

"My life As A Speculator-How I Make Money By Losing Money," Fred Carach

2011-06-14T11:28:00.005-04:00

I have been at this game for a very long time. I made my first investment in the stock market in 1961 and I have never been out of the market since then, not even for a single day.

I don’t believe in sure things. What I do believe in is risk-reward ratios and that is the concept that I build my life around. I think that believing in certainty in the world of investing is an exercise in delusional thinking that will destroy you. The higher the tolerance for uncertainty, the greater the rewards.

At this point the “I refuse to lose my money crowd” will proudly point to the fact that they have never lost a dime in their investing because they only invest in sure things like government guaranteed savings accounts or treasury bonds.

I go nuts. The first thing I do when I hear this argument is to frantically search for a chair so that I can break it over their idiot skulls. How can anybody be stupid enough to believe that any government guaranteed investment earns you a positive rate of return after inflation is beyond me? At this point dufus proudly points to the official government statistics that prove that the rate of return on government treasuries is above the rate of inflation. The stupidity takes my breathe away.

There is however, one exception to this rule. From time to time governments will embark on a kill inflation now crusade. During these short crusades, it is indeed possible for the true rate of interest to exceed the rate of inflation.

Except for these short term crusades I do not know of a single nation on the face of the earth whose bonds will pay you a positive rate of return after inflation if accurate numbers are used. I regard government bonds as guaranteed certificates of confiscation. The longer the term of the bond the more certain the confiscation.

For the sake of argument, let us suppose that we have discovered that the ten-year bonds of Outer Mongolia will pay you a positive rate of return after inflation using true numbers. I am talking miracles here. When the bonds mature in ten years, you do indeed have a positive rate of return. Or do you? There is the little matter of converting the Mongolian currency into dollars. You have a positive rate of return only if the Mongolian currency is convertible into dollars at a rate that is equal to or higher than it was at the time you purchased the bonds. In other words you could not only have a loss but you could have a very large loss on what you presumed to be a guaranteed return and this problem exists with every currency on earth.

The point that I am trying to make is that your investment in Mongolian bonds is certain only if you know with certainty what the exchange rate is going to be ten years into the future.

Recently a 21-year-old kid questioned me about my investing. He wanted me to recommend an investment that he could not lose money on. When I told him that I have never in a lifetime of searching found such an investment a look of total scorn appeared on his face. He told me that only stupid people invest in things that they can lose money on. Smart people only invest in sure things. When I asked him what he regarded as a sure thing, he said a savings account and then real estate.

This belief in sure things is not rare; it is as common as dirt. Nothing is more common than the belief in a sure thing. People spend their whole lives looking for it and when they think they have found it, they bet the ranch. All too often, their sure thing turns out to be a mirage and they lose everything.

I am a great admirer of Warren Buffet who is beyond dispute one of the greatest investors of all time. Recently however, he said something that was so stupid that it blew my mind. He said that the first rule of investing was not to lose money. The only trouble with this is that to follow that rule we would all have to be psychic and be able to predict the future. Since the only true psychics are safely tucked away in mental institutions, which is where they belong. It therefore follows that we cannot invest in anything because we cannot be assured in advance that we will not lose money.

If you look at the cover my book, you will see a green felt table with dice on it. It is a true depiction of how I invest. In well over forty years as an investor, I have owned more than 750 positions and have been successful more than 60% of the time. Anyone who tells you that they are right more than 80% of the time in this business is a liar.

It is time to reveal the secrets. If there is a key to investment success it is above all else the willingness to lose and to put your money at risk. The willingness to take a loss overrides all other investment considerations in importance. Nothing else even comes close. It is hard to overestimate just how unwilling people are to even consider the possibility of taking a loss. Let alone taking a loss. There are vast numbers of people who doom themselves to a career of working at a fast food joint after they turn 65 because the miserable returns they have earned on their safe investments did not even keep them up with inflation. If we are being truthful these people actually lost money by investing in a sure thing but they would rather die than admit it. For reasons that I have never been able to understand these people are quite proud of the fact that they have never taken a risk. Having dispensed with these pathetic losers, we can now consider the next category of investors.

Investors who are emotionally capable of accepting the fact that if they don’t want to be working at a fast food joint after they turn 65 then there is no choice but to invest in investments that have risk but earn you a real return. The crisis that will determine their success or failure as investors rests largely with how they react when they have a “paper loss.” It is impossible to overestimate the importance of paper losses in the career of investors. A paper loss is a loss that would occur on an investment if you sold it at today’s price.

It is dogma today in the trend chasing community that dominates the stock market that all paper losses of more than 10% are real losses and that the only real investors are those investors who have the courage to accept this fact and act on it. In this community selling your losers and thus turning your paper losses into real losses is regarded as proof that you have what it takes to be a real investor.

I have spent more than four decades proving that these people are wrong. I have made a career out of turning paper losses into profits. It isn’t hard. The only thing you have to do is to hold on to your investment until it returns to the profit column. These geniuses will tell you that this can never happen because all stocks that fall more than 10% are destined to go to zero. Nothing can shake them from this belief. Including the fact that many of them have a list of stocks that they have sold at a loss that is longer than their arm. Stocks that would be in the profit column today. If they only had the courage of their convictions and held on to them.

It gets far, far worse. My ultimate crime is that I routinely increase my position in stocks that I am holding at a loss. After all why shouldn’t I. I know what these stocks are worth. I have spent decades analyzing stocks. In other words, I make money by losing money. The biggest profits I make tend to be stocks that I have increased my position in after they went down. The trend chasers who dominate today’s markets are adamant in their belief that adding to a losing position is suicidal. Then again, if you mindlessly buy stocks about which you know nothing solely because they are going up. You face a crisis when they go down. Don’t you? This incidentally is the stock and trade of the trend chasing community. After all, they do not have an opinion that is worth a dam as to the true worth of the stocks that they are buying and selling.

John Wayne summed it up nicely:

“Life is tough but it is even tougher when you are stupid.”

"The Curious Transformation Of The Stock Market Into A Dog And Pony Show," by Fred Carach

2011-06-14T11:21:00.003-04:00

I have been an investor for more than four decades. During this time period, I have watched the stock market gradually transform itself from a cathedral of capitalism into a circus freak show. The curious thing about this transformation is that almost no one recognizes that it has even happened. Many ill-informed people will tell you that there never was a transformation. That the stock market was always a circus freak show or a dog and pony show. I know better. I was there when it really was a cathedral of capitalism. You could say I was there at the creation.

The decisive change that has occurred is that the stock market is becoming progressively worse in its central task of providing the public with accurate and reliable figures as to what stocks are worth. A task that it performed well for generations. It is an example of the law of unintended consequences writ large. Very large.

It all started to go wrong in 1971 when the stock market under pressure from the SEC abolished fixed commissions on stock trades. Until that time, the only investors that could day trade were members of the New York and the American Stock Exchanges. The NASDAQ did not yet exist. The members of these exchanges had the invaluable privilege of being able to trade on the floor of their exchange without paying a commission. In those days the commissions were so brutal that they would eat alive any day trader who had to pay them.

As a result of the brutal commission structure, anyone who was not a member of the exchanges was forced to be a conviction investor. You were compelled to be a buy and hold investor. You could not afford to bail out of any trade that went a couple of points against you. This compelled investors to carefully research the stocks that they bought and to hold on to them even if the trade went temporarily against them. The result was that the stock market performed the way that it was supposed to. It provided the public with accurate and reliable figures of what stocks were worth.

Each decade after 1971 saw lower and lower commissions. As the commissions fell, more and more investors felt that they could ignore the cost of commissions. For the first tine, they could afford to guess about the direction of stocks. They no longer were compelled to be conviction investors who carefully researched their stocks. The boom of the 90s coupled with the internet witnessed the full flowering of the day trader. The age of the dog and pony show had begun.

To veteran stock investors the thing that hit you on the head was that the stock market was reacting to every news event no matter how insignificant with a violence that had never been seen before. The stock market was becoming a perpetual overreaction machine. Stocks and the stock market were being jerked around like a monkey on a chain by news reports that in the old days would scarcely move stocks or the market. Knowledgeable investors were noticing something else that the general public was blind to. They noticed that there was an ever-widening gap between the intrinsic value of stocks and their selling price.

The rise of a new investment class of day traders and trend chasers was changing the very nature of the stock market. This new class regarded stock analysis as a waste of time. They would proudly tell you that the only thing you needed to know about a stock was whether it was going up or down. You mindlessly bought whatever was going up and you mindlessly sold whatever was going down. As the conviction investor declined in numbers and power there was no one left to mind the store. There was no one left to keep the market value of stocks from deviating more and more from their intrinsic value.

If this new class of investors regarded traditional stock analysis as a waste of time there was something that they did not regard as a waste of time.
They were obsessed with analyzing the buying and selling actions of other investors. They could not care less about the stocks. In this new world stock analysis was out. Guessing which way the herd would stampede was in. When you stop to think about it. This is very strange behavior. It is much easier to estimate what a stock is worth than to try to figure out which way the cattle are going to stampede.

It is as if the fans in a sport stadium have decided that the best way to find out who is winning on the field is by doping out the actions of the fans in the stadium rather than following the action on the field.

Welcome to the new dog and pony show. The strangest thing about this is that no one seems to have realized that it has even happened. I follow the stock market very closely and I cannot recall the subject even being brought up.

This article is the latest in a series of articles that I have written about today’s weirdo stock market. Those who have found this article of interest should read the latest in this line entitled, “Stupidity Unchained - The Curious Saga Of Today’s Stock Market.”

"Why A Real Estate Appraiser Prefers The Stock Market To Real Estate," by Fred Carach

2011-05-10T11:31:00.003-04:00

The twin crashes of the stock market and real estate that began in 2007 have devastated the American people as nothing has since the Great Depression. The American people today are far,far poorer than they were prior to these twin crashes. But something very strange has occurred. The stock market bottomed out in March of 2009 and since then has blasted upward in a powerful bull market rally while real estate the favorite investment of the American people and where most of their wealth resides has twisted ever so slowly in the wind.

It is time to ask a most important question. What accounts for this strange divergence? Before we go any further I need to state that in this article I use the narrow, popular definition of real estate. I refer only to condos,townhouses and single family homes. This article ignores apartment buildings and commercial real estate. Those interested in my considerably different views on commercial real estate are invited to read my article on commercial real estate and REITs titled, "How The Small Investor Can Afford To Buy Commercial Real Estate," on my blog.

It is important to point out that until the recent crash real estate had enjoyed one of the greatest sustained booms of all time. You have to go back to the S&L crisis of the late 80s to find the last time that real estate was not in boom conditions. That crisis ended in 1991 and from 1991 until 2007 real estate did nothing but go up. Everyone was riding a wave that they couldn't lose on. You had to be truly stupid or unlucky to lose money in real estate during this fantastic 16 year period.
For reasons that I have never been able to understand people have enormous difficulty in understanding that in residential real estate it is impossible for real estate to rise faster than people's income for any sustained period of time because people will not be able to qualify for the mortgage.

And this is exactly what happened as the boom progressed. All sorts of strange mortgages were being created to fudge the issue that people could not possibly qualify for the homes that they wanted to buy. Mortgages with weird names such as ARMs, Alt A, negative amortizing mortgages and of course the famous liar loans dotted the landscape.

In 2007 the yawning gap between what people could honestly afford to pay and ever rising real estate prices could no longer be papered over and the whole rotten edifice collapsed. In that year the median priced home sold for $230,000 and the median income household could afford to buy a home in the $150,000-$175,000 price range using honest standards. Incidentally, that is exactly what the median priced home is selling for today. For the first time in many years the median income American family can afford to buy the median priced home.

Why then do I an insider with 30 years in the appraisal industry and a licensed realtor prefer the stock market to real estate? It is indeed fortunate that real estate is selling for the first time in many years at a price range that is affordable to the American people but the $64,000 question is what will make real estate values rise. The answer I am afraid is that in the next five years there is almost nothing that I can see that will cause a sustained increase in real estate values on the national level.

It is amazing to me that people can not figure out why real estate values are dead in the water and refuse to rise. Contrary to popular belief real estate doesn't increase in value because they are not making any more of it or some other idiotic popular delusion. Real estate increases in value for only one reason and that reason is because buyers engage in bidding contests to purchase properties. In the absence of bidding contests real estate prices cannot and will not rise.

By now it should be obvious to the reader what the problem is. The problem is that the American people have been financially devastated by the twin crashes of the stock market and the real estate market. They are no longer players. They are too broke to engage in bidding contests.

Until the crash there were millions of active real estate players throughout the country who had a net worth of say at least $1 or $2 million on paper if not in reality that they could borrow against. Huge numbers of these players no longer exist. They are done, through, finished, foreclosed upon and have
declared bankruptcy. These now vanished players were the heart of the real estate market and they will not be coming back anytime soon. Indeed many of them will never come back. Their credit ratings have been destroyed and no bank will lend them money. This is a fatal combination in the world of real estate.

The stock market sails serenely on for the best of reasons. You don't need a credit rating of 620 or better to buy stocks and you don't need a bank loan to buy stocks. Stocks are a cash market. In this sea of darkness there is one light. The remarkable rise in real estate of the "cash buyer." For the cash buyer with a 7-10 year time horizon real estate is a market that has real potential.

"Is the Bull Market In Silver Finished," by Fred Carach

2011-05-08T20:47:00.005-04:00

As I write these words silver has just collided off of a brick wall that has capped it upside performance since its old 1980 high of $50 an ounce. It is now in what appears to be a death spiral to the day-traders, momentum players and technicians that dominate today's markets as never before in history.

As they consult their all powerful charts these trend chasers see a classic double top at $50 an ounce that has held for thirty-one years. Case closed! There is really nothing more to consider.

If you are a stock market addict like I am you see these kinds of pronouncements all the time in the commodity markets. What they are blind to is that there is a radical difference between the stock market and the commodity markets.
Stocks exist only in the financial world. Since they exist only in the financial world and not in the physical world investors have the power to hammer stocks to zero if they are so inclined.

In the world of commodities the reality is radically different. Commodities exist primarily in the physical world and only secondarily in the financial world. In the short term it is indeed true that speculators in the trading pits can jerk around a commodity with no concern about its real world value. In the long term however, it is the real world value of the commodity and not short term trading games in the commodity trading pits that determine value.

Silver is a very rare and desirable metal. According to the authoritative Silver Institute in 2010 global production rose about 2.5% to 735.9 million ounces or about a tenth of an ounce for every human being. Historically the global production of both gold and silver has increased only about 2% a year for generations. Just what do you think the number would be for the paper currencies of the world?
And it is this that is driving the demand for both silver and gold not just in America but in every country on earth.

The popular notion is that a bunch of buffoons in the commodity trading pits receive their marching orders for determining what the price of silver should be by consulting their trading charts is as common as it is insane.

Let us be honest. Americans and Europeans with rare exceptions do not own silver. Indeed they would be hard put to give you a reason as to why any sane person would want to own silver. After all silver doesn't pay interest. Today the price of silver is not being set by the demand for jewelry or industrial purposes as has been the case in recent decades but by investment demand.

That investment demand is being set by Asia's teeming millions who today as never before have the means to purchase it. Asia's lust for silver goes back thousands of years. During the heyday of the Roman Empire writers were constantly complaining about the flood of silver that was departing the empire heading east on the fabulous Silk Road to China in payment for the empire's voracious desire for silk and the other luxury commodities that the east produced. A desire that was matched only by Asia's lust for silver.
With the notable exception of Japan no Asian in his right mind would trust his currency. Asia has always been too poor to afford gold but it has always had enough to afford silver the poor man's gold.

According to the Silver Institute in 2010, China's net imports of silver nearly quadrupled to a staggering 3,500 metric tons and India's imports rose by 136% to 3,030 metric tons. Of course these figures are insane and cannot be maintained but what they indicate is of crucial importance. The figures indicate that Asia is both ready,willing and able to out bid the rest of the world when it comes to silver, a commodity that Asia has treasured for thousands of years. The price of silver will be set in Asia and not in the trading pits of the west.

One final point needs to be considered. The trend chasers who dominate today's markets place enormous importance on price. Value is something about which they know nothing. They are in the business of mindlessly buying whatever is going up and mindlessly selling whatever is going down. The reason why they are so certain that the bull market in silver is over with is that in their world only a fool buys a stock or a commodity that is declining in price. When they consult their charts what they see is a horrific declining trend line in silver.

It has never dawned on them that in Asia a declining price for silver is a cause for joy and not fear. In Asia silver is not a trading commodity it is the core of your life savings. In Asia a fall in the price of silver is not an invitation to sell in a panic but an invitation to back up the truck to quote a popular Wall Street saying.

"Stupidity Unchained -The Curious Saga Of Today’s Stock Market," by Fred Carach

2011-04-21T18:39:00.001-04:00

As I contemplate fifty years in the blood-splattered arena that we call a stock market I realize that the game has never been more in my favor. Charlatans and buffoons have rigged a once sane market. It is a market where stupidity has been unchained. It is a most curious saga. I saw it all. I was there at the creation. The prevailing stupidities of today’s stock market are as follows:

1) any stock that falls 10% must be sold immediately because it is going to zero.

2) all stocks are generic clones of each other and therefore will go up and down together.

3) a dangerous over reliance on vague, generalized data about the market and the economy rather than hard, specific data on individual companies.

4) the growing belief that stocks are empty boxes with no intrinsic value and that therefore stock analysis is worthless.

5) a dangerous over reliance on averages and indexes that distort the truth.

When I broke into the stock market in 1961, the stock market was a much different beast than it is today. In those days, the stock market was dominated by long-term conviction investors. People understood that they were buying a business and not a lottery ticket. It would have never occurred to these investors that they were supposed to follow their stocks on a daily basis. The notion that a drop of 5% or 10% in a stock that they believed in was a cause for panic selling would have been regarded by them as a nonsense proposition. Indeed, it is quite possible that they would not even be aware that their stock had fallen by 10% or even 15%. I doubt if most of them even looked at the stock price more than about once every six months. In those days, most newspapers did not even carry the stock tables and there certainly were not any financial channels on TV.

Historically great emphasis was spent upon analyzing and researching individual stocks because your success or failure depended on your ability to pick winning stocks. The prevailing notion then was that picking stocks with superior future prospects that were selling at bargain prices was the heart and soul of successful investing. Macro-economic factors such as guessing about the economy or guessing about whether the stock market was going up or down was regarded as a fool’s game.

I am a survivor with fifty years in the blood-splattered arena that they call a stock market. During that period, I have owned about 750 stocks. Guessing about what the market was going to do or what the economy was going to do or what was supposed to be happening in China or Europe has never made me any money. What has made me money was being right about individual stocks that I had researched, understood and believed in.

Consider CNBC, everyone’s default financial data source. For the most part, what you see is a bacchanalia of guessing. Guessing about the economy. Guessing about the stock market. Guessing about China and Europe. Over any sustained period, their guesses are no better than a coin toss. Except for the nifty-fifty, individual stocks are rarely mentioned and when they are mentioned, the only thing you hear is vague generalities. Rarely do you hear hard, factual data on individual stocks that a serious student of the game would regard as being important.

The implication is that all stocks are clones imbedded in a mass of concrete and therefore must rise and fall together. In 2010 the S&P 500, the benchmark for the stock market was up 12.8%. The top performing stock in the index was Cummings, which rose 105.8%. The worst performing stock in the index was Office Depot, which fell 23.4%. Is there anything more stupid than the now common belief that if the stock market is up 12.8% then that’s what all investors earned? What is more important being right about the stock market or being right about individual stocks?

The whole art of stock investing used to concern itself with discovering what the intrinsic value of a stock was. This process was called “price discovery” and was regarded as the primary function of the stock and commodity markets. By analyzing the stocks that investors as a group bought and sold, the market “discovered” the intrinsic value of stocks. Until about twenty years ago, nobody doubted that stocks had intrinsic value. The issue was discovering what that intrinsic value was.

Today growing armies of alleged investors believe that stocks are empty boxes with no intrinsic value. If stocks have no intrinsic value then stock analysis is worthless. It therefore follows that what is of supreme importance is not analyzing stocks but analyzing the actions of buyers and sellers who are now regarded as “price dictators” and not “price discoverers.” In other words stampeding with the herd is the supreme virtue.

If you gave a skid row bum today who knows nothing about the market $50,000 and turned the TV on to CNBC and told him to start trading he would be operating on a level that is equal to that of most investors today. After all what does he have to know? The short answer is nothing. The only thing he has to do is become a trend chaser and stampede with the herd. Mindlessly buying whatever is going up and mindlessly selling whatever is going down and he will do this instinctively. There is no need for training.

The astute reader has already figured out the consequences. An ever-greater deviation between intrinsic value and stock prices as fewer and fewer investors made any attempt at all to analyze the intrinsic value of stocks.

At no time in the history of the stock market has there been such a dangerous over reliance on averages and indexes to guide investment decisions. Very few investors have a clue as to just how convoluted and dubious the formulation of these averages is. I have commented about the S&P 500 index that was up 12.8% in 2010. A year in which the top stock in the index was up 105.8% and the bottom performer was down 23.4%.

Or take a gander at the famous NASDAQ 100. In 2010 this 100 stock capitalization weighted index ranked Apple as number one with a weighting of 19.7%. Google at number two has a weighting of 4.7%. The top two stocks account for 24.4% of the index. The bottom fifty stocks account for virtually nothing. The only reason they are in the index is to deceive the ignorant.

Averages are liars. Once the investor realizes this, he has a powerful weapon in the unending battle for superior performance.

In such a world the elite core of investors who still analyze and invest in individual stocks are living in a golden age. It is only necessary to hide in the weeds with our high-powered investor rifles and blow away the big game animals as they stampede past us in one of their mindless cattle stampedes.

“How The Small Investor Can Afford To Buy Commercial Real Estate,” by Fred Carach

2011-03-16T09:06:00.006-04:00

What is truly astonishing is that after all these years this fantastic investment tool is almost unknown to the general public in spite of its impressive performance.
The benchmark against which stock market performance is measured is the Standard & Poor’s 500, which is the index of the 500 largest and bluest stocks in America. It is universally referred to as the S&P 500.
Since 1972, the REIT index has blown away the S&P 500 but almost no one is aware of this fact. Since that year, the REIT sector has delivered compound average annual returns of 11.9% a year. Compared to only 9.8% for the benchmark S&P 500 index. It is interesting to note that 60% of that return has been in dividends. It is not hard to figure out why this is the case. REITs are a privileged investment asset. As long as they pay out 90% of their earnings in dividends, they are not required to pay corporate income taxes.
As a result, REITs pay unusually high dividends. Six percent and higher are not unusual.
I have been cashing in on REITs high dividends for many years and they are the core of my income portfolio. In my own investing with rare exceptions, I insist on a dividend yield of at least six percent. The current period is one of the rare exceptions. Since the March 2009 stock market bottom, REITs have had a spectacular rally and I have had to lower my sights to about five percent. However, I think you will find my REIT portfolio to be of some interest. Dividend yields are as of March 7, 2011.
The small investor has always longed to buy into commercial real estate but it has always been a bridge too far. Simply put it has always been beyond his resources. And yet the investment tool that could enable him to buy not just commercial real estate but multimillion-dollar blue chip commercial real estate has been readily available to him since 1972 when the first Real Estate Investment Trusts or REITs as they are called arrived on the scene.

CBL & Associates (CBL) pays 4.83%

Innvest REIT (IVRVF) pays 7.34%

Commonwealth REIT (CWH) pays 7.47%

Hospitality Properties Trust (HPT) pays 7.96%

Medical Properties Trust (MPW) pays 6.94%

National Retail Properties (NNN) pays 5.93%

Sun Communities (SUI) pays 7.38%

Riocan REIT (RIOCF) pays 5.84%

CBL & Associates- ordinarily I would have kicked out any REIT from my portfolio that was paying such a low dividend but CBL is a champion. In 2007, this stock sold for $50 a share and paid a dividend of $2.00 a share. In 2009 at the bottom of the crash, it had cut its dividend to 80 cents a share and it was selling for an unbelievable $1.92 a share. What were these lunatics thinking of? Today the price has recovered to $17.54 and it has just announced a 5% dividend increase. A return to the region of a $2.00 dividend and its old high of $50 a share in the next two years is not unthinkable because it asset base is largely unimpaired. Its assets are not inconsiderable. They own a controlling interest in 75 malls located throughout the country with a total GLA (gross leasable area) of 71,264,850 square feet.
Innvest REIT- this is a Canadian outfit. It is the largest hotel REIT in Canada with 148 hotel properties and 19,381 guest rooms which are located in every province in Canada. This stock peaked in 2007 at $13.39 a share and its crash low was $1.90 a share. Almost identical to CBL’s crash low. It has now recovered to $7.00 a share and as the economy recovers, it could return to its old $13 a share range.
Commonwealth REIT- this REIT invests in office and industrial properties. It owns a mix of 518 office and industrial properties with a total size of 66.8 million square feet. This is another case of the investment follies. At its 2007 high, it sold at $54.68 a share. During the crash, it was knocked down to $6.28 a share. It is now selling at $27.00. Those who stick around will be rewarded.
Hospitality Properties Trust- this is another recovering hotel REIT. It owns 289 hotels with a total of 42,880 rooms. Its 2007 high was $51.46. During the crash, it fell to $6.88. It is now selling at $22 a share. Do you see a pattern here?
Medical Properties Trust- this hospital REIT owns 51 hospitals in 21 states. It has $1.3 billion in total assets. The 2007 high of this stock was $16.70. During the crash, the buffoons took it down to $2.76. It is now selling at $11.50. You are being well paid to wait for the return to its old high and more.
National Retail Properties- this retail REIT has increased its dividend every year for the last 20 years. It specializes in stand-alone single tenant, long term, and net-leased properties of national importance. It has 1,015 properties with a total GLA of 11.4 million square feet. The long-term net leases that they utilize are typically for 15-20 years. This is an unusual strategy for REITs. A net lease strategy shifts all property operating costs such as maintenance, taxes insurance, etc. from the owner to the tenant. This results in a far more stable cash flow. Their typical clients are national outfits like Best Buy, Barnes & Noble and Denny’s. As a result of its unique strengths it withstood the crash well. Its low of $10.03 a share has been exceeded and it now sells at $25 a share.
Sun Communities- specializes in 136 high-class mobile home/recreational home communities with 47,385 rental sites. Its 2007 high was $35.54. During the crash it shares fell to $6.76 and have since rallied back to $34 a share.
Riocan REIT- is Canada’s largest REIT. It has a portfolio of 246 shopping centers with 54.5 million square feet of GLA. Its 2007 high was $27.34 a share and its crash low was $11.23 a share. It has since rallied to $25 a share. It is a powerhouse that has shopping centers in every province in Canada and has started to acquire properties in the United States.
There is one more unique characteristic of REITs that must be discussed. The first thing that the wise investor does when he is researching a high dividend paying stock is to check out its EPS or earnings per share to insure that the dividend is safely covered. In other words, the EPS per share must comfortably exceed the dividend per share or the dividend is at risk.
It is more than common for alleged stock market professionals to discover to their horror that the dividend being paid by REITs exceeds their EPS. Our alleged professional then flees in terror from what he regards as an unwise investment.
It is a unique characteristic of REITs that the metric that determines their ability to pay dividends is not EPS but FFO or Funds From Operations. REITs by virtue of their enormous commercial real estate holdings generate massive amounts of depreciation every year. According to GAAP (generally accepted accounting principals) to calculate EPS you are required to first subtract depreciation from the EPS figure.
Let’s pull a figure out of the air to see how this works. Your REIT earns $100 million this year. This amount is cash on hand, money in the till that is available to pay dividends or other discretionary purposes. In REITs, this figure is referred to as FFO. Your depreciation for the year is $25 million. According to GAAP, you are required to subtract this $25 million from your FFO to arrive at EPS. Thus according to GAAP your REIT earned not $100 million this year but only $75 million. The $25 million that you were required to deduct is a fictional accounting expense. The reality is that you have in the till not $75 million but $100 million in cold hard cash.
Now let’s take a look at why I am so keen on CBL. In 2010, its EPS was 21 cents a share and yet it paid out 84 cents a share in dividends. How does this work? It works because its FFO was $2.03 a share. Theoretically, it could have paid out $2.03 a share because that was what was in the till. It would not surprise me to see CBL raise it divided perhaps as often as every quarter for the next year or two.
Fred Carach

An Enlightened Solution to the Housing Crisis - A Solution Without Losers

2010-09-17T13:45:00.004-04:00

Since the housing crisis started I have been mystified that no real estate professional has stepped forward with several of the more obvious solutions to this crisis. Since I am not aware of any professional that has set forth a win-win program. I have decided to set forth mine. Everyone is a winner in my program. There are no losers.
Under our foreclosure system, everything begins when the homeowner falls 90 days behind in his mortgage payments. It is at this point that the foreclosure system kicks in. History has proved that it is very rare for any homeowner to save his home once he falls 90 days behind in his payments.
Under the system that I propose, the lender at this point instead of starting foreclosure proceedings, would send his agent to the residence with two legal documents. These two legal documents would be a Deed In Lieu of foreclosure and a Lease-Option contract. Or more specifically a negotiable five- year lease with an option to purchase. As I will explain, the negotiable feature is very important.
Let us now examine how these two rather simple legal documents would solve both the problems of the lender and the homeowner.
In today's real estate market, foreclosing on a home is akin to lenders suicide. First, it must pay for the far from cheap attorney and other foreclosure fees. When it takes possession of the home, it is common for it to discover that either the departing owner or crack heads and vandals have trashed the home. Often to the tune of $20,000-$30,000 or more.
When a property owner signs a Deed In Lieu of foreclosure, all of these crushing lender foreclosure expenses are short-circuited. This document is the voluntary transfer of the owners title in the property in return for the promise of the lender not to engage in foreclosure proceedings against the homeowner.
The question now becomes why would an owner agree to such a thing? There is of course some benefit to the owner in signing a Deed In Lieu of foreclosure document. His credit rating will not be as badly damaged and the lender cannot come after him for losses it suffers on the property. The answer however, is that the real benefit to the homeowner is the other legal document in the briefcase of the agent, a negotiable five- year lease option contract.
These are the contract terms. For an option premium of $200, the lender who now owns the home will rent it to the ex-owner, who is now the tenant for a period of five years at a rent equal to 31%-33% of the tenants verified gross monthly income. It really does not matter which number is used. History has proved that in this range the tenant will be able to handle the rent. At any time during or at the end of the five year rental lease the tenant will have the option but not the obligation to purchase the property from the lender at the original sale price. The homeowner has an additional inducement to agree to all of this.
The option has an important additional selling point. It is negotiable. What this means is that any time in the five-year option period the option holder can sell the option to any interested buyer for whatever price it can command. You will recall that the premium to purchase the the option was $200. Over the five-year option period, home values may be expected to recover to the extent that the tenant may be able to sell his option for thousands of dollars to a stronger purchaser. Or his situation may improve to the point where he can exercise the option and purchase the property back at the original sale price. Frankly, the $200 option premium amount is totally arbitrary but I think it is critical for both the homeowner and future potential buyers to know that the option has value. In the absence of some such fee human nature being what it is I feel that it might be difficult to establish in peoples minds that the option contract has true value.
As you can see, there are powerful inducements for both the lender and the homeowner to agree to the solution I have outlined. Most importantly, it is a win-win scenario. There are no losers,only winners.
The only thing I can not figure out is why a real estate professional has not been able to get a workable solution such as this out to the general public before now.

Forty Years a Speculator - The Death of the Stock Market As I Knew It

2010-03-05T16:25:00.004-05:00

When I broke into the stock market more than forty years ago in 1961 it was a radically different beast than it is today. It was a market overwhelmingly dominated by long-term, conviction investors who believed that they were buying or owned a real business rather than a stock certificate. The belief then was that the stock certificate was nothing more than proof of ownership. It was not a lottery ticket. Investors then were committed owners who religiously bought the goods and services of the companies that they owned. What was important was that the stock that they purchased paid a good dividend and in those days, it usually did. It was then common for blue chip stocks to pay a dividend of five or six percent.

It would never have dawned on investors then that they were supposed to rush to sell their holdings even if their stocks fell as much as ten or fifteen percent. In fact it was quit probable that they would not even be aware of a ten or fifteen percent move. The way it worked in those days is that about every six months it dawned on you that you should look in the paper to see what your stocks were selling for. Then you would throw away the newspaper and not look at your holdings for another six months. It was common to think of holding periods of five or ten years and in many cases people expected to retire owning the stock. The dividend was going to be an important supplement to their social security.

This of course assumes that your newspaper even carried the stock tables. In those days, many newspapers did not. When I was growing up the Cortland Standard, our local newspaper did not carry the stock tables. In fact it did not even have a financial section.

When I started investing in the 60s, I refused to look at my stocks during the week. I didn't want to get caught up in the weekly cattle stampedes. I always knew that stampeding with the herd was not the answer to successful investing. I subscribed to Barron's Financial Weekly, which arrived every Saturday. I could then leisurely review my holdings over the weekend. This strategy served me well for decades. However, eventually I had to go on line like everyone else. The decades of discipline served me well. My investment strategy of long-term conviction investing remained unchanged.

Today the stock market as I knew it is dead. The long-term conviction investors who understood that they were buying a business and not a lottery ticket is now a shrinking minority group. The stock market today is dominated by the trend chasers, a category that barely existed in the 60s. it makes little difference if you call this dominate group day traders or momentum players. They are united by their steely conviction that what they are buying is a lottery ticket. Regrettably, they are too stupid to realize that if you treat the stock market like a casino then the stock market will treat you like a gambler.

The world of the trend chasers is to a great extent dominated by technicians or chartists. About the fundamentals of the corporations that they are following they know nothing. Indeed they regard their ignorance as a badge of honor. They are totally clueless that their might be a real business behind the lottery tickets that they own. They are interested in only two things as they track their stocks across their charts, price and volume. They will be happy to inform you that the only reason to buy a stock is that it is rising in price and if it is not rising in price it is a bad investment no matter how great the fundamentals are.

Their other great fixation is their unalterable conviction that paper losses and real losses are the same thing. They have total scorn for anyone who does not share this belief. A paper loss is a loss that would be realized if the holding was sold at its current price. Therefore, since a paper loss and a real loss is the same thing their secret weapon for investment success is the " stop-loss order." The stop-loss order is an order to your broker to automatically sell your stock if it falls to a predetermined price. Which is almost always set at between five and ten percent below the current price.
Trend chasers are adamant that all paper losses greater than five or ten percent must be sold immediately because all such stocks are destined to go to zero. Nothing can dissuade them from this insanity. The brutal result is that every time they turn around they are being blown out of their positions by their stop-loss orders being executed. Stock declines of five to ten percent are as common as dirt in the stock market. The trend chasers refuse to recognize this reality. The brutal result is that all their paper losses become real losses.

As a conviction investor I have made a career out of Turning paper losses into profits. The trend chasers make a career out of turning paper losses into real losses with devastating consequences. If you have a good opinion on stocks and just hold on most of the time the stocks will reverse their decline and your losses will turn into profits. Their insistence in believing that all stock declines greater than five or ten percent is proof that the stock is headed for zero is insanity.

Very few investors who practice this strategy survive over the long term in spite of its tremendous popularity. The way it usually works is that the trend chaser is blown out of his position at or near the bottom. They then sit around in a stunned stupor as the stocks that they sold at a loss reverse their trend and make back all that they have lost and more. Often much more.

What is truly astonishing is that no matter how often they have seen how this film ends. They never change their tactics. The losses keep piling up until they are so shattered by their losses that they end their investing career. They can then embark on a their new career of contemplating how much they wold have today if they only had the courage to hold on to their losers.

Those who have found this article of interest will also find my related articles on the stop-loss order and technical analysis which are on this site to also be of interest.

"Why You Keep Losing Money on Great Stocks-The Trend Chasers Dilemma" by Fred Carach

2009-09-17T12:51:00.002-04:00

Investment attitudes have changed greatly since I broke into the investment world in 1961. In those days, everyone was a conviction investor. You bought a stock because it was a great stock and you believed in the company. As long as you believed in the company, you held on to the stock. After all, why would you sell a stock in a company that you believed in just because it was temporarily declining in value? If you were right about the stock, it would turn around and head upward in due course. You were by definition a long-term investor. After all, great stocks remain great stocks for years. They don't become dogs five minutes after you buy them. Today the conviction investor with his long-term holding pattern is an endangered species.

The day trader, the momentum player and the trend chaser have replaced him. By definition, these players are short-term stockholders. Their iron conviction is not that you should buy great stocks and hold them. But that you should only buy stocks that are going up. After all, if the stock is not going up why would you want to own it no matter how great it is? And if the stock is going down how great can it be? I can remember when I thought this was so wise that it should be carved into the sides of mountains in granite.

It took me years of painful losses to learn the error of my ways. When you have been around for a while, you learn a very inconvenient fact. Stocks rarely go up more than 15%-20% without having a correction and that correction can eat up 50% or more of the prior advance. Indeed, it often eats up the whole prior advance and more.

This results in the trend chasers dilemma. After all, he is not a conviction investor. The only reason he bought the stock was that it was going up. How does he keep his profits from turning into losses? The answer is a sell discipline. It is called a stop-loss order. The stop-loss order is an automatic sell order that your broker executes to sell your position if your stock falls to a predetermined sell point. Depending on what the trend chasers tolerance for losses is it will almost always be set at one of three selling points. It will be set at either 5%,7.5% or 10% below the current market price. Setting the loss at 10% is the most common sell discipline by far.

The sad truth of the matter is that trend chasers don't do nearly as well as advertised. The reason is that the market refuses to cooperate with their stop-loss orders. You see, "the boys" have a pretty good idea of where the stop-loss orders have been placed. Their favorite game is to blow the trend chasers out of their positions by hammering the stock down 15%-20%.This false decline that they have created blows all the trend chasers out of the water. As soon as they stop selling the stock returns to its old trend line this time with "the boys" on board. This is called "painting the tape." The trend chasers just never wise up. It is truly remarkable how many times they can have their head handed to them on a silver platter and they can never figure it out. Then again most of them are punch drunk from all the 10% losses they are being hit with.

To get an idea of just how flawed the short-term trading strategies of the day-trader, and momentum player are let's see what happens when we apply it to some of today's super stocks.

Let's start our analysis with Research In Motion, largely because I have just read Fortune Magazine's article on the 100 fastest growing companies not just in the United States but in the world. Research In Motion is ranked number one with a three-year average annual earnings per share growth rate of 84%. During the last five years, this stock with its titanic growth rate has risen from $20 a share to $75 a share. An increase of 3.75 times. A $10,000 investment in the company would have grown to $37,500. During this run, it had 9 declines of 10% or more. Three declines of 10%, one decline of 20%, one decline of 22%, two declines of 25%, one decline of 32% and one horrific decline of 70%.

Our next high-powered dream stock is Google, a darling of the momentum players with fantastic relative strength. If there is any stock that would make trend chasing work this is the stock. In the roughly five years that Google has been listed, it has risen from $85 a share to it s current price of $469 or an increase of 5.52 times. A buy and hold investment of $10,000 in this stock would have risen in value to $55,200. Of those lucky and wise investors who bought the stock when it was issued at $85 I would estimate that only about 5% still own the stock and all of them are buy and hold, conviction investors. There are no trend chasers who still own the stock. How do I know this, by following the price action of the stock? In the five years that it has been traded, This super stock in spite of its fantastic relative strength has had an amazing 15 declines of 10% or more. It has had 6 declines or 10%, two declines of 12% and one decline of 15%,17%, 19%, 22%, 27%, 30% and 40%.

Apple is another high flier of repute. In the last five years the stock has risen from $17 to $174 currently. A rise of 10.24 times. A buy and hold investment of $10,000 would have risen to $102,400. During this time, it has had 14 declines of greater than 10%. Apple's declines are as follows: one decline of 10% and 11%, two declines of 12%, one decline of 14% and 15%, two declines of 16%, two declines of 20%, two declines of 26% and one horrific decline of 40% and 45%.

Our last jewel is Amazon in the last five years this stock has gone from $38 to $84 an increase of 2.21 times, which would turn an investment of $10,000 into $22,100. This stock has also had 14 declines of 10% or more. I was surprised at the consistency in the number of declines for each stock. I was expecting more deviation. Amazon has had five declines of 12%, one decline of 14%, 20%, 22%, 24% and two declines of 27%, and one decline of 35%, 38% and 42%.

Now let us examine the S&P 500 index. I think it did the job it was created to do. Diversification worked. There were only four declines of more than 10% in the five year period. There was one decline of 11%, 18%, 22% and 32%. In addition, all of these declines occurred after September 2008 when the market crashed.

People have very delusional expectations of what kind of return they can expect with these super growth stocks. I reached that conclusion close to forty years ago and have been a conviction investor of contrarian-value plays ever since.

If you can stand the pain, I am sure that buy and hold is the best strategy for growth investors. However, I doubt if more than 5% of buy and hold investors can stand the pain and zero percent of trend chasers. What invariably happens is that the trend chasers are repeatedly blown out of their positions with 10% losses each time.

When you stop to think about it how many 10% losses can you take?

Fred Carch is the author of Forty Years A Speculator.

"Why You Keep Getting Killed in Growth Stocks - The Eternal Error" by Fred Carach

2009-09-17T12:43:00.002-04:00

If the stock market has an eternal myth it is that the way to get rich quick in the market is by buying growth stocks or even better super stocks. It all seems so plausible. Except for the curious and always denied fact that you keep getting your head handed to you on a silver platter every time you invest in these whiplash babies.

The trend line for most growth investors is both short and ugly. I would estimate that most growth investors have a career that does not exceed three years. Those who survive learn to change their investment strategy to a more balanced approach.

The first thing that the newbie growth stock investor quickly learns is that the corrections on the super stocks that he thinks are going to make him rich are horrific. After getting killed a few times,a wise old hand introduces him to the charms of the stop-loss order. He is ecstatic. This is the answer to his prayers. The grim reality is that this is like progressing from marijuana to heroin.

A stop-loss order is an automatic order given to your broker to sell your position if the stock falls to a predetermined price. The stop loss-order is almost always set at one of three price points. It is set at either 5%, 7.5% or 10% below the current market price. The most common price point by a country mile is 10% below the current market price. A price point of 5% or 7.5% below the market results in your being stopped out every time you turn around. This is regarded as being intolerable by most investors. There is a theoretical problem with the stop-loss order which most users never discover. The problem is that they become an addictive crutch and slowly destroy the judgment of the investor.

Let's now take a look at the two alternatives that the super stock investor has available to him.

After all why klutz around with mere growth stocks when you can get rich quicker with super stocks.

We can quickly dismiss the now allegedly discredited buy and hold strategy. Or so it is now widely assumed. That leaves us with just one tool in our tool box, the stop-loss order.

Let's take a look at the five-year performance of $10,000 invested in some of today's most highly regarded super stocks.

Amazon = $24,100

Apple = $102,400

Google = $55,200

Hewlett Packard = $25,300

Oracle = $22,300

Research in motion = $37,500

S&P 500 Index = break even

One thing that is immediately apparent is that these super stocks delivered the goods in comparison to the break even performance of the S&P 500 Index. Other super stocks did not live up to their reputation. Such as Cisco, Intel and Dell and are not included in the above list.
Bear in mind however, that this performance was only available to the now despised buy and hold investor. The $64,000 question is what would our shrewd, super sophisticated, trend chaser with his vaunted 10% stop-loss discipline achieve.

In the last five years, Amazon has had 14 corrections of 10% or more. Six of these corrections were of 10% plus, five corrections of 20% plus, two corrections of 30% plus, and one very ugly correction of greater than 40%.

Apple also had 14 corrections of 10% or more. It had 8 corrections of 10% plus, four corrections of 20% plus and two brutal corrections of 40% plus.

Google had 15 corrections of 10% or more. Eleven corrections of 10% plus, two corrections of 20% plus, one correction of 30% plus and one brutal correction of 40% plus.

Hewlett Packard is our star performer. It had only seven corrections of 10% or more. Five corrections of 10% plus and two corrections of 20% plus.

Oracle had twelve corrections of 10% or more. Nine corrections of 10% plus and three corrections of 20% plus.

Research In Motion is of particular interest. According to the most recent issue of Fortune Magazine. It is ranked number one in the magazine's top 100 list of the fastest growing stocks over the last three years, Not just in the United States but in the world. This proven super stock has had nine corrections of 10% or more. Three corrections of 10% plus and four corrections of 20% plus, one correction of 30% plus and one horrific correction of 70% plus.

How about that, pick the number one stock and get a 70% loss for your effort! Actually it was 72%, but who is counting. Of course this was quickly followed by a powerful snap back rally of 65%.

The S&P 500 Index did the job it was created for. It had only four corrections greater t 10% plus. Two corrections of 10% plus, one loss of 20% plus and one loss of 30% plus.
I think it is safe to say that these brutal corrections on proven, high performing, super stocks is not exactly what the typical growth investor was expecting. Remember these stocks were selected because thay had gone up from two to ten times in value in the last five years.

Compared to breakeven on the S&P 500 Index. These stocks are the holly grail of growth investing. They are proven winners.

According to growth investor stock lore, the wise investors in these stocks should have been rewarded with fabulous profits. The buy and hold investor who stuck it through to the end was indeed rewarded handsomely. I have grave doubts however, about the performance of the dancing slick investor with his stop-loss orders and his easy assumption that there is some rational means of timing stock swings. In more than forty years of looking, I never found any method that out performed a coin toss over the long run. Though I grant you that there are many methods that appear to work in the short term. Until they blow up in your face.

I submit to you that the typical dancing slick, growth investor with his stop-loss orders does not get rich in super stocks. His typical experience is to repeatedly get blown out of his positions every time his stop-loss orders are triggered. Taking a 10% loss each time. In due course his mangled body is dragged out of the arena floor feet first. The shell-shocked victim of one too many 10% losses. After all how many 10% losses can you take? Think about it!

At least that was my experience until my conversion.

The astute reader will recall that there is one strategy that does work. Buy and hold. The problem with buying and holding super stocks is that you need nerves of steel. I doubt if more than 10% of the investing public has what it takes to make this strategy work in the growth stock arena.

There is of course an alternative strategy. The strategy, which I advocate. Conviction investing with a long-term bias in contrarian-value plays. In more than four decades of speculating in the blood-splattered battleground that they call a stock market. It is the only strategy that I have ever found that works consistently, but only if you hold on for at least two years. Nothing works if the holding period is less than two years and I have the battle scars to prove it.

The essence of this strategy is that you are buying stocks that are residing in the gutter. That are current bargains based on today's price and not on tomorrow's price. When you buy growth, you are paying a premium, often a vast premium over its current intrinsic value. A premium that is based on the always-chancy assumption that the current superior growth rate will be maintained. A growth rate that in many cases must be maintained for five or ten years to justify today's extraordinary price.

Fred Carch is the author of Forty Years A Speculator.

"The Case Against Professional Money Managers - Why They Are Ruining You" by Fred Carach

2009-09-17T12:37:00.002-04:00

Not so long ago there was a golden age of professional money managers when giants like Sir John Templeton and Peter Lynch delivered superior performance year after year to investors IRA and other retirement accounts. This golden age is now over with and the question is why?

Investors today are paying for performances that they are no longer receiving. You are essentially paying these people to duplicate the market averages. The overwhelming majority of investors today would be better off if they fired their professional money managers and invested in an S&P 500 index fund. The question that has to be answered is what went wrong? Why are today's money managers unable to duplicate the superior market beating performance that they used to be able to produce in the past?

The short answer is that the rules have been changed. Not so long ago it was possible for superior money managers like Templeton and Lynch to march to their own drummer. They were given the freedom to make long-term bets and pick out of favor and non-index stocks. They were given the time to invest in contrarian plays that might not work out for a year or two. They could actually invest real capital in small-cap and micro-cap stocks instead of the Godzilla nifty-fifty blue-chip stocks.

The horror of it:

In those days managers would be given X million dollars and two or three years to show what they could do. In today's brave new world the report card comes due every 90 days, Not in two or three years. The benchmark that your performance is always measured against is the S&P 500. Failure to duplicate or exceed that average for even a couple of quarters can end your career. The only way a manager can be certain that he will duplicate or exceed the S&P 500 is to own the iron core of that index, the nifty-fifty. These fifty blue-chip giants, IBM, General Electric and Microsoft etc. dominate the S&P 500 to an extent that is hard to imagine. He then cleverly encases the nifty-fifty hard core with careful collection of promising non-index stocks that are designed to give the impression that he is clued in and is not operating a closet index fund in drag. The weighting however, is such that the fund will always mimic the index. In other words truly superior performance is highly unlikely unless the non-index stocks put in a spectacular performance.

Strangely enough it is hard to blame these frauds. You can almost say that investors deserve to be cheated. Imagine a superior money manager today with the courage to invest in non-index stocks and to take long-term bets. Who then delivers a return 20% better than the index for four straight years and on the fifth year delivers a performance 15% worse than the index. That superior manger would be thrown out into the street like a dog. While Joe-average manager who always buys index stocks and has performed in line with the index because he owns the index will never be fired.

In other words our current system guarantees mediocrity. It is hard for people to believe this but today's managers make no real attempt to beat the averages. Their only concern is to guarantee that they never do worse than the averages. Which they know only too well could be a career ending experience. In other words, superior performance is only rewarded temporarily.
While inferior performance is punished permanently.

It is indeed fortunate that I was never a money manager. With my contempt for nifty-fifty stocks and my passion for small-cap and micro-cap stocks, I would not have lasted very long. But I digress. The issue is what is today's investor to do? The first thing thing you can do is to dump your "alleged" professional money manager. You can get the same performance simply by buying an S&P index fund.

The next thing to understand is that you can't get superior performance by investing in nifty-fifty dinosaurs. Their day is done. Their superior performance is in the past it cannot be in the future. How much bigger can a dinosaur get?

Recently, I was listening to a finance program on the radio as I was driving my car. An investor called the program bemoaning the recent rotten performance of General Electric. He could not understand how such a splendid company could be doing so poorly. The answer you fool I screamed at the radio is because General Electric is the economy and the economy struggles to grow at 3% a year.

Of course if you are really daring, you can enter my world. The world of the small-cap and the micro-cap investor where superior performance is truly possible. A world where you can make a fortune on a chump-change investment.

I wrote my book because I wanted people to know that there is an affordable alternative to buying blue-chip stocks at $40-$60 a share. A price that renders many blue-chip stocks unaffordable. Most of us cannot afford to buy these stocks in sufficient amounts to ever make us financially secure.

In my book I put in my email address so that readers could contact me. The first reader to contact me was Bill from Buffalo. Bill told me that he was forty years old and had a wife and two children. He owned a modest home and had $8,000 in life savings. He told me that he knew what his future was and it terrified him. He was going to be working at a fast food place when he was 69 years old. That was his future. He didn't have enough time or money to buy enough blue-chip stocks. Stocks that he knew could be expected to go up 10% in an average year to enable him to retire at 65.

My way provided him with an answer. He could easily afford to buy my low priced, unknown stocks in amounts big enough to make a difference. In addition my smallcap and microcap unknown stocks had better growth prospects than the old, tired blue-chip dinosaurs that everyone else is forever touting. I don't do guarantees. If you want guarantees go to the bank and see if you can get rich on the miserable returns that they offer. If you want opportunities then I am your man. I offer my readers a chance to make serious money on a chump-change investment.

Fred Carach is the author of " FortyYears A Speculator."

"Asian Mercantilism and the Decline of America" by Fred Carach

2009-09-17T12:34:00.003-04:00

Adam Smith is justly regarded as the father of economics, in 1776 he wrote his masterpiece, "The Wealth Of Nations." The primary purpose of his book was to level an attack against the prevailing economic doctrine of Mercantilism. This doctrine held that the way to national prosperity and power was to have a favorable balance of trade. The theory stated that if your exports exceeded your imports, this would result in a flow of gold and silver into your country since in those days money was coined gold and silver.

Another happy result would be that you would also export your unemployment to your trading partners. In other words, it could be described as waging economic warfare against your trading partners. A war in which you would first steal their silver and gold and later their jobs as well.
Adam Smith argued in his work that in the long run this doctrine could not be made to work, that it was counterproductive and that it would lead to chronic warfare. In its place he advocated the concept of free trade. If you talk to most economists, they will tell you that the doctrine of free trade has swept the world. I don't know what cave they have been living in for the last 35 years or so, but I can assure you that Adam Smith would never buy it.

It all started to go terribly wrong in 1971 when the gold exchange standard that had been established at the Bretton Woods Conference of 1944 was abolished and replaced with the fiat money standard. Fiat money is paper money that is not backed up by gold or silver.

If Adam Smith were alive today, he would look at the world and weep. What he would see is not the free trade that he championed, but rampant Mercantilism.

The easiest way to prove this is simply to look at the United States balance of trade. For more than 40 years now we have run an unfavorable balance of trade. If free trade was being practiced, such a thing would be impossible, but such a thing is very possible under Mercantilism. Under a regime of free trade, if the most backward nation on earth trades with the most advanced nation on earth over any extended time period, the trade between the two nations would balance out. Trade would not be a zero sum game as it is under Mercantilism, but a win-win scenario as each nation would specialize in producing whatever it had a comparative advantage in producing. Both nations would be better off by trading with each other than they would be by not trading with each other.

The way it works today is that every nation pegs its currency to the dollar below its fair market value. By pegging their currency below fair value they guaranteed that the United States cannot compete.

The asian nations are of course the most blatant abusers of the system. I am sure that they cannot believe how stupid we are to allow them to destroy our industrial base.

The game however is over with. Our industrial base has been virtually destroyed. The world-wide crisis that we are now witnessing is proof that this intrinsically unsound system is now in its death throes. The asians have spent way too much time giggling stupidly at each other as they have congratulated each other at how brilliant they have been and not enough time consulting the thought of Adam Smith who they undoubtedly regard as a useful idiot.

Adam Smith would have informed them that to maintain such a system in the end would require them to lend America the money to buy their products. Such a system is basically unsound. All unsound systems must fail in the end. The asians today are sitting on the greatest mountain of dollars that the trading world has ever seen. They don't have a clue as to what to do with these dollars. I am reminded of the dog that chases the car. When the car stops the dog doesn't have a clue as to what to do.

Their greatest problem however, lies in the bloated export industries that they have created.

Industries that employ millions and that can only export if they lend America the money to buy their products.

How brilliant is this?

Fred Carch is the author of Forty Years A Speculator.

"Betting Against the Dollar Will Make You Rich" by Fred Carach

2009-09-17T12:29:00.001-04:00

For generations we Americans have looked down with scorn upon the other currencies of the earth. And with considerable justification we could correctly say that something was as sound as a dollar. Those happy days are now ending and we will be the last people on earth to figure it out. This does not mean that the other currencies of the earth have suddenly become virtuous. Far from it. The dollar has simply joined the race to the bottom. All the world's currencies are garbage and the world is just starting to figure it out.

Money today has a fatal flaw. All of today's money is fiat money. In other words it is not backed by gold or silver. It is only backed by the ever more hollow promises of the state to be responsible in issuing more of it.
Only a drooling idiot could believe this promise today. Then again, there seems to be no shortage of drooling idiots in this world. What I really want to know is who are the cretins who are willing to buy 30 year treasury bonds for a return of about 4%? Who are they? What cave have they been living in for the last thirty years?

I am old enough to remember when it was different. In my navy days when we pulled into a foreign port we would be issued what we called " funny money." Little did we realize that the day would come when the mighty dollar would become "funny money."

Historically speaking there have only been three really sound currencies. The dollar, the pound and the Swiss Franc. All the rest were correctly regarded as being garbage. Don't talk to me about the German Mark, that currency went to zero twice in the 20th Century.

The first paper currency was created in China during the 13th century. Marco Polo reported on it in amazement. The only reason why it was accepted was that the death penalty was imposed on those who refused to accept it. Since that time every paper currency without exception has gone to zero. There are no exceptions. None!

The superior performance of the dollar, the pound, and the Swiss franc has been very much a relative performance rather than an absolute performance.

The pound used to be worth a pound of silver. That's how it got its name. An ounce of silver today sells for about $15. What does that tell you? By law twenty dollars used to be worth an ounce of gold.

I am a coin collector. I can still remember when I could buy a twenty dollar gold piece with almost an ounce of gold in it for $70 and silver dollars for five dollars. What a fool I was not to buy more. Today a twenty dollar gold piece goes for about $1,300.

The holly trinity of the dollar,the pound and the Swiss franc can no longer be trusted. Governments can no longer be trusted. Only gold,silver and natural resources can be trusted. Wealth in the ground will make you rich. Those who place their trust in the paper promises of their governments are engaged in a riverboat gamble. What is comical is that they think they are playing it safe.

I wrote my book because I wanted people to know that there is an affordable alternative to buying blue-chip stocks at $40-$60 a share. A price that renders many blue-chip stocks unaffordable. Most of us cannot afford to buy these stocks in sufficient amounts to ever make us financially secure.

In my book I put in my email address so that readers could contact me. The first reader to contact me was Bill from Buffalo. Bill told me that he was forty years old and had a wife and two kids. He lived in a modest home and had $8,000 in life savings. He told me that he knew what his future was and it terrified him. He was going to be working at a fast food place when he was 69 years old. That was his future. He didn't have enough time or money to buy enough blue-chip stocks that could be expected to go up 10% in an average year to enable him to retire at 65.

My way provided him with an answer. He could easily afford to buy my low priced, unknown stocks in amounts big enough to make a difference.

In addition my smallcap and microcap unknown stocks had better growth prospects than the old, tired blue-chip dinosaurs that everyone else is forever touting. I don't do guarantees. If you want guarantees go to the bank and see if you can get rich on the miserable returns that they offer. If you want opportunites then I am your man. I offer my readers a chance to make serious money on a chump-change investment.

Fred Carach is the author of "Forty Years A Speculator.

The Benefits of Global Warming

2009-09-17T12:27:00.001-04:00

It has been truthfully said, "that it is an ill wind that blows nobody any good." The global warming crowd has not been exactly honest about the impact of global warming. Indeed there could be more winners than losers. Here is an independent viewpoint.

Most people are not aware of the fact that there have been two great warming periods in the last two thousand years. In both of these warming periods the weather was warmer than it is today.

During the Roman warm period parts of North Africa that are today desert wastes were the highly productive granaries of the Roman Empire.

Vast areas of the central Australian desert were grassy savannahs. Much vaster areas of what is today the nearly worthless permafrost tundras of Northern Canada and Siberia were productive grasslands.

The primary cause of this phenomena in the case of the desert areas was that the direction of the prevailing winds changed somewhat and thus blew over more sea water and due to the greater warmth carried more water vapor than they do today.

When the weather cooled vast areas of North Africa and Central Australia turned to desert. In Canada and Siberia vast areas of productive grasslands turned into areas of nearly worthless permafrost.

In the Medieval Warm Period which lasted from 800-1300 the weather was so warm that England was exporting wine to France. The vineyards grew as far north as York in England.

Farmers grew wheat as far north as Trondheim, Norway. Oats and barley were grown in Iceland. Today none of this is possible. It is too cold.

When Leif Ericcson's Viking ships discovered the new world they landed in what is now Newfoundland. THey called it Vinland. For centuries historians refused to believe it because it is too cold for vineyards to grow anywhere near Newfoundland but it was possible during the Viking period.

If the Romans and Vikings were alive to hear our hysterical prattle about the threat of global warming, they would kick us until we stopped moving. The great threat to humanity is not Global Warming but Global Cooling. The Little Ice Age of 1300-1850 was a calamitous disaster during its first two centuries. There were mass famines until the population had declined enough to enable it to be adequately supported by the shorter growing seasons. The Greenland settlements had to abandoned.

If you stop to think about it the loss of a couple hundred feet of shoreline may be a small price to pay in return for a green and productive Central Australia and North Africa not to mention the vast new productive lands in Northern Canada and Siberia that would now be open for human development. Not to mention Greenland. Take a look at the map.

Like the saying says, "it is an ill wind that blows nobody any good."

I wrote my book because I wanted people to know that there is an affordable alternative to buying blue-chip stocks at $40-$60 a share. A price that renders many blue-chip stocks unaffordable. Most of us cannot afford to buy these stocks in sufficient amounts to ever make us fianacially secure. I put my email address in my book so that readers could contact me.

The first reader to contact me was Bill from Buffalo. Bill told me that he was forty years old and had a wife and two kids. He lived in a modest home and had $8,000 in life savngs. He told me that he knew what his future was and it terrifed him. He was going to be working at a fast food place when he was 69 years old. That was his future. He didn't have enough time or money to buy enough blue-chip stocks that could be expected to go up 10% in an average year to enable him to retire at 65.

My way provided him with an answer. He could easily afford to buy my low-priced, unknown stocks in amounts big enough to make a difference. In addition my smallcap and microcap unknown stocks had better growth prospects than the old, tired blue-chip dinosaurs that everyone else is always touting.

I don't do guarantees. If you want guarantees go to the bank and see if you can get rich on the miserable returns that they offer. If you want opportunites then I am your man. I offer my readers a chance to make serious money on a chump-change investment.

Fred Carach is the author of Forty Years A Speculator.

The Recession May Not Be Over With But the Bear Market Is

2009-09-17T12:24:00.001-04:00

With every passing day, it is becoming more and more apparent that the bottom of the bear market occurred on March 9, 2009 when the Dow bottomed at 6547. Since that day, it has been rallying strongly. There are two very strong reasons for believing that the bear market is over. To begin this is a very old bear market.

The crash that began when the Dow reached its peak at 14,164 on October 9, 2007 is now 20 months old. The average bear market lasts 18.5 months and has an average decline of 36%. At its March 9 bottom the Dow had fallen a horrific 54% and the S&P had fallen an even more horrific 57%.

As market declines go this is the second worst market decline since 1885, a period of 124 years. Only the Great Depression decline of of 1932 was worse. It declined an amazing 89% from the 1929 peak to the 1932 low. Since 1885 their have only been nine bear markets that have exceeded 40%.

Market declines of greater than 40%

August 1896 bottom down 44%

November 1903 bottom down 44%

November 1907 bottom down 47%

August 1921 bottom down 44%

July 1932 bottom down 89%

April 1938 bottom down 46%

April 1942 bottom down 51%

December 1974 bottom down 44%

March 2009 bottom down 54%

When you look at the figures, you realize how extraordinary and brutal this crash has been. If you do not believe that, the March bottom was the low then for all practical purposes you have to believe that we are heading for a second great depression.

I just do not see how this is possible. There are just too many safety nets that have been built into the system that did not exist in the 1930s. In the 1930s, there was no FDIC insurance on bank deposits and 5,000 banks failed which crushed the economy. The Federal Reserve Board did almost nothing and did not lower interest rates, which the economy desperately needed. When people lost their jobs there was no buffer, all spending stopped.

Without spending the economy hit a brick wall. There was no unemployment insurance and there was no social security as there is today, which allows people to keep on spending even during a severe recession like this one. Lastly, there was no activist government that was willing to spend whatever it takes to keep the economy running.

Fred Carch is the author of Forty Years A Speculator.

The Case Against Day Trading

2009-09-17T12:22:00.002-04:00

Things have not been going well for the day traders for quite some time. Indeed probably since the stock market Internet bubble blew up in 1999. Vast numbers of them have departed the scene since then having been whipsawed one time too many. The strange thing is that for every departure there is a replacement and sometimes two replacements or more. The lure of easy money is strong indeed. The overwhelming majority of these rookies are going to be blown out of the water in short order.

This essay is not addressed to this soon to be road kill. It is addressed to the old timer day traders who remember the glory days of the 90s when they had the world by the tail with a downhill drag and who can't figure out what went wrong.

The first thing to understand is the wisdom of the old Wall Street saying. " To never confuse genius with a bull market. " A bull market makes everyone look good except for the shorts. I am afraid however, that the problem goes much deeper than that. The simple truth of the matter is that there isn't much to learn about day trading. Everyone tries very hard to conceal this basic fact by using a great deal of mumbo-jumbo theories and strategies. These strategies can be broken down into two major subsets. These two strategies are technical analysis and "chasing the news" or if you are kinder than I am "trading the news." Mostly it is a concoction of both fortified with the latest, hot black-box formula. Which is usually but not always technical in nature that some propeller-head is promoting.

My dark suspicion is that the brutally short-term charts that you are compelled to use in day trading is so short as to render technical analysis worthless. Almost everyday some system seller comes up with a new system, which he claims has been back-tested to biblical times with great results. The back-testing that these system sellers are using is a joke. And for a very good reason. The truth is so ugly that no one wants to believe it.

All day trading systems without exception break down if you keep going back in time with your analysis. Every system in the end, no matter how well it works in the short term, is over the long term no better than a coin toss. The promoter will only back-test his hot, new system to the point were it starts to break down. He will then promote his system as having been back-tested from that point forward. He will of course remain silent about the problems that were encountered if you go back in time any farther. When this system breaks down, he will have a hot, new, improved system to sell to the same jerks who bought the original system.

After all the prior system did work well enough in the beginning! There are promoters who make a career of selling new systems after their old systems break down. What makes all this work of course is that everyone wants desperately to believe that there are systems that work.

The real problem of course that everyone is so desperate to avoid is that the shorter the time period under consideration the more unpredictable and random market action becomes. Consider Powerhouse Industries the wonder stock of the day. It has a relative strength that will knock your eyeballs out. If your holding period is six months, the strong probability is that the stock will be up. We don't care what the stock does six months from now. We need to know what the stock is going to do in the next five minutes, in the next hour.

In the time period we are forced to consider the strongest momentum or relative strength is virtually worthless. Stock market action in periods this short is essentially random. It can not be predicted. It is a coin toss.

There is not much to be said about chasing the news except that it seems to work less and less well all the time. As more and more idiots try to make this alleged strategy work. The strangest thing about chasing the news is that anyone would be stupid enough to think that something this childish is going to make you money. Yet armies of day traders are trying to make a career out of buying every positive news report and selling every negative news report. One of the few absolute rules on Wall Street is that you can't make serious money by stampeding with the herd. How can you expect to get rich by doing what every Tom, Dick and Harry are doing? I hope we all know that the more people that are employing a strategy the less well it works. Everyone in the world is trying to make this strategy work and therefore it cannot work.

If you expect me to reveal a day trading system that works, you are out of luck. In the more than forty years that I have been hanging out in the blood splattered battleground that we call a stock market. I have never found a day trading system that works. The only thing I have ever found that works is being a contrarian-value player.

Those interested in technical analysis will find my essay on technical analysis in today's world well worth your time.

Fred Carch is the author of Forty Years A Speculator. His blog is http://www.fortyyearsaspeculator.blogspot.com

"An Intriguing Speculation In Coal- The Goldsource Saga" by Fred Carach

2009-09-12T22:32:00.005-04:00

There never was anything special about Goldsource Mines. It was incorporated in 1987 and was listed on the Toronto Stock Exchange. For years it drifted around at well under a dollar a share. Then something very strange started to happen.
On April 17, 2008 it closed at 22 cents a share with only 15,400 shares trading. By April 24,it was selling at 78 cents a share on a volume of 1,620,000 shares. By May 12,it was selling at $4.67 a share on a volume of 2,021,000. By June 9, it was selling for $9.20 a share on a volume of 175,700 shares and on June 24, it peaked at an incredible $19.09 a share on a volume of 196,900.
From its April 17,2008 price of 22 cents a share it had risen in value an amazing 86.77 times. An investment of $10,000 would have been turned into a staggering $867,700 in just two months time. Now you know why I have been speculating in penny mining stocks for more than forty years.
In April of 2008,Goldsource was drilling not for gold mind you but for diamonds of all things. Then the unexpected happened. Its drill bit intercepted a coal seam that was an amazing 23 meters thick at its Border Property in Saskatchewan,Canada. It was a bonanza strike. The more they drilled the more they found.
But Goldsource's parabolic ascent was over with. The market began to have second thoughts. The market always has second thoughts after every bonanza strike. Some of the intercepts were disappointing. There are always disappointing intercepts.
You can almost set your watch by it. I know I did. You see I choose to hang out in the land of the ten bagger. At least that's what I call it.Obviously,a play like Goldsource only occurs about once every four or five years, but you would be amazed at how many five and ten baggers occur every year in my world. In more than forty years of looking I have never seen an arena that has the risk-reward characteristics that speculating in penny mining stocks gives you. This is a world where your maximum risk is 100% but your maximum rewards are multiples of 100%. What other class of investment has these risk-reward characteristics?
By October 28, 2008 Goldsource's stock price had fallen to $1 a share on a volume of 198,200 shares. It was classic bonanza strike action. First the parabolic spike upward followed by the equally inevitable post-discovery collapse.
Today Goldsource has recovered somewhat and is selling at about $1.60 a share.
Let's see what I am getting for $1.60 a share. According to its last annual statement,Goldsource has 19.4 million shares outstanding. This means that the corporation has a total stock market capitalization of about $31 million. That means that you can purchase the whole company,lock,stock and barrel for $31 million.
Goldsource has three major properties,its flagship Border Property and its Ballantyne and Pine River claims,all of which are located in the coal rich Durango Trend.
The Border Property alone is 1,300 square kilometers in size,most of which is unexplored. At the present time about 115 holes have been drilled on the property about 50% of which have struck bituminous thermal coal. Some of the intercepts were up to 100 meters thick. Thermal coal is primarily used to power electrical power plants.
To put this in perspective many coalmines in North America have coal seams that are only a few meters thick. Goldsource has some coal seams that are the height of an eight-story building. Based on current data a total of at least 100 million tons appears to be a reasonable expectation and they are targeting 500 million to one billion tons.
Let's be conservative and estimate 100 million tons. Powder River Basin Thermal Coal, which may be the closest match, is selling for roughly $8.75 a ton. Multiply that figure by 100 million tons and you get a value of $875 million. Divide that figure by 19.4 million shares and you come up with the staggering figure of about $45.10 of coal per share.
Now I know what you are thinking. You are thinking gee,that's not very smart. It is not the value of the coal in the ground that matters but what it will cost you to extract and deliver the coal to its destination that matters. True enough,but I was not trained as a geologist and in any case, that is above my pay grade.
I have been investing in mining stocks for more than four decades and I currently own about 95 mining stocks. Do you know what I have discovered? You don't really need to know the technical stuff. The only thing you need to do is to acquire mining stocks at bargain prices that have properties in strategic locations in mining camps or mineral trends with some indications of an ore body present. Do that and you will do well.
My investment in this stock is 1/2 of 1% of my investment capital. If you put more than 1% of your investment capital in any penny stock, you are on your own.
Those who have found this article of interest will find the following companion articles well worth your time.
"An Intriguing Speculation In Tungsten" and "Amazing Profits Investing In Microcap Stocks"

"An Intriguing Specualtion In Tungsten" by Fred Carach

2009-08-21T14:42:00.007-04:00

Tungsten is a minor metal that is seldom thought of as an investment. Indeed most of us would think of it as a dubious investment. After all,the only use anyone knows about is its historic use in incandescent light bulbs and they are going the way of the Dodo bird.
This steel-grey metal has most intriguing properties.It has the highest melting point of all metals, in addition it imparts enormous strength when used as a super-alloy.It is critical for many high-tech,space age uses primarily when used as a super-alloy. Critical uses are for machine tools, gas turbines, space vehicles,nuclear reactors and jet engines. Anything where high strength and heat Resistance is required.
The metal is not cheap. It is currently selling for about $14,000 a ton.
Since the Second World War China has dominated world production producing about 75% of global production.
When China emerged as a capitalist power,one of its first actions was to crush the global tungsten market. It put most of the the world's producers out of business by undercutting them. In recent years, it has radically changed its tactics. There is a considerable belief that China is having difficulties in maintaining production. In any case,it has raised its prices for the metal.
This brings us to the hero of our story. A little gem called North American Tungsten.In 2003,the last turn of the wheel it was driven out of production by China. The company was founded in 1979 and is listed on the Toronto Stock Exchange Venture Market. Since it was founded in 1979 and meets the listing requirements of the Toronto Exchange. I think it is safe to say that it is not a fly-by-night or a pump and dump scheme.
It currently has about 129 million shares outstanding. Its recent annual high was about $1.07. As the result of the world wide recession it announced the temporary closure of its mine. The market responded to this news in its usual calm and reflective manner. It hysterically hammered the stock down to 10 cents a share. It is now selling for about 14 cents a share.
The result is a market capitalization of about $18 million dollars. What this means is that you can buy the whole company lock,stock and barrel for about $18 million dollars. I think it is safe to say that this is below replacement cost. What I love about micro caps in this category is that even a modest amount of buying will propel the stock to the moon. I think we can safely say that the stock is now in the gutter. This is where I buy my stocks. I don't do trend chasing.
Until its recent closure, North American Tungsten had one producing mine. The fairly high cost Cantung Mine in northern Canada. Until it closed this mine which is now on a care and maintenance basis it produced about 4% of the world's tungsten and was the western world's largest producer of tungsten. Its future star is the Mactung tungsten project also in northern Canada. This flagship project is the largest known,high grade,undeveloped tungsten project in the world. It has about 1,430,000 tons of probable and indicated reserves.
According to its most recent annual statement it has six mining properties. To be conservative I place a zero value on the other four properties.
In my penny mining stock speculations I place tremendous importance on the stock's five year trading range and the concept of "reversion to the mean." Let us examine the stock's annual low and high for the last five years.
(2004) .06-.30 (2005) .17-$1.87 (2006) .50-$1.80 (2007) .53- $1.64 (2008) .10-$1.28
(2009) to the present .10-.80.
The astute observer will notice that every time the stock is selling for 10 cents or less it is a bargain. The stock also shows a repeated ability to sell for more than a dollar a share. As long as the price of tungsten does not collapse, this stock should revisit the one-dollar area. When it does I will be aboard.
My position in this stock is 1/4 of 1%. Why so little? I own about 90 penny mining stocks. These are the ultimate high-risk,high-reward vehicles. Diversification is mandatory. If you place more than 1% of your investment capital in any penny stock you are on your own.

"WHY THE REAL ESTATE CRISIS HAD TO HAPPEN" By FRED CARACH

2009-05-16T12:05:00.011-04:00

We cannot understand the present unless we understand the past. The first question to be asked is when did the real estate crisis become inevitable? The correct answer is in the time period between 1980 and 1982. It has been forgotten today but the last real estate crisis in this country were the twin real estate crises of the 1980s. In the early 1980s the first crisis was brought on by double-digit mortgage interest rates. Then in the late 1980s there was the savings and loan crisis, which in those days provided most of the nation's mortgage capital. In response to these twin crises congress passed two laws that made today's real estate crisis inevitable.
After these acts were passed it was only a question of time until the stars aligned correctly for the volcano to erupt.
In 1980, congress passed the DIDMCA Act. Prior to this time, it was illegal to charge less credit worthy customers a higher rate of interest on their mortgage. Then in 1982, congress passed the AMPT Act, which allowed adjustable rate mortgages or ARMs for the first time. Prior to this act adjustable rate mortgages had been illegal.
If you go back to 1896 when reliable housing records first began to be kept you will find that from 1896 to 1996 housing prices tracked the rate of inflation. Then suddenly from 1996 to 2006 housing prices doubled. The problem of course in that the income of the American people did not come anywhere near to doubling in that time period.
When you stop to think about it, you will realize that it is impossible for the price of housing to exceed the rise in the income of the American people for any sustained period of time. Unless there is an enabler, a speculator's tool that allows this to happen. What was the speculator's tool or device that enabled this process to occur? What was the enabler?
In the whole of American history there has only been one prior real estate bubble that resembles the real estate boom and bust that we are now witnessing. It was the great Florida land boom of the 1920s. Real estate has always been expensive. What has always held real estate prices in check was that people just did not have enough money to bull prices up for very long. The money is just not there. The device that enabled the Florida land boom to occur was the "binder." This is a real estate term that has gone out of use today. In the manner in which it was then used it was essentially an option payment on the down payment if you can conceive of such a thing.
What it boiled down to is that people thought they were speculating on real estate but in reality they were speculating on real estate options.
The stock market has long been the ultimate proving ground for speculative tools. Those of us who are stock market speculators are very familiar with stock options. The only thing that the reader has to know about options is that they are speculating tools that possess tremendous leverage. In other words, you can make a killing on a chump change investment.
Both the binder of the 1920s and the ARM are in reality real estate options. All options expire worthless if they are not exercised prior to their expiration date. Most ARMs were written to expire in two or three years, the fixed interest rate period. At that moment the option had to be exercised or rolled over because the option would become worthless. People were deluded into believing that they were buying real estate. When in reality they were speculating in real estate options. As we have seen, the tools for the bubble were in place by 1982. the only thing lacking now was the mania. The boom years from 1991 to 2007 provided the mania. Real estate prices rose relentlessly. It was a boom that seemed like it would never end. You couldn't lose in real estate because no matter how much you over paid because rising prices bailed out everyone.
Today in the aftermath of the boom, we are already discounting the impact on the human psych that manias and bubbles produce. To put it bluntly by the end of the boom almost no one could believe that real estate prices could fall. This nearly universal belief gradually eroded prudent behavior. The more risks you took the more you were rewarded. There was no down side.
In the early 90s the use of sub prime mortgages and ARMs were limited-since almost all sub prime mortgages were also ARMs they will be considered as a unit- but as the boom progressed their importance grew and grew.
Mortgage brokers just could not stay away from sub prime mortgages. They were three to five times more profitable than standard mortgages. Once they had sold one they didn't want to sell anything else. The caution that lenders had originally shown toward the new mortgage products was relentlessly ground away as the endless boom continued. Caution wasn't being rewarded, it was being punished. There was a Gresham's Law in effect- Gresham was an economist-in which bad or reckless behavior which was constantly being rewarded by lush profits drove out good or cautious behavior because the profits were inferior. In the final years of the boom, conservative firms could not even keep their mortgage brokers from bolting to subprime lenders.
Then around the year 2000 Minsky's Law kicked in. Hyman Minsky was a Noble Prize winning economist.

Minsky's Law

Over periods of prolonged prosperity the economy evolves from financial

relationships that engender a stable financial system to financial relationships

that produce economic instability. The longer the trend persists the more

violent the correction when the trend reverses.

As the boom rolled on the most important factor was that almost everyone was a winner. This was true in spite of the fact that subprime mortgages were constantly defaulting at the higher rates that had been predicted. Not only was the higher default rate not a problem but everyone was making out like a bandit with subprime mortgages. This included the subprime borrower. As soon as he fell behind his friendly subprime mortgage broker would be there to write him a new subprime mortgage. In fact he often got to take out new money when he refinanced the mortgage. It was not unusual to have subprime borrowers take out new mortgages every two or three years during the boom.

If there wasn't enough equity to suit the lenders, real estate speculators would be pounding at his door offering to take the property off his hands as soon as the notice of default had been published. Often at a profit over his purchase price.

The banks were the greatest winners of all. They were making a killing. It is obscene how much money a bank can make during the foreclosure process as long as someone buys the foreclosed property. Not only do they receive all the back payments but the brutal penalty fees as well. Indeed the most profitable scenario that can be imagined for a mortgage lender is to make nothing but high profit subprime loans and then to have them all default. Their profits would be enormous. That is, so long as the lender never has to take back the property.

When the boom ended, things became incredibly ugly for the banks with amazing speed. One of the most important favors that real estate speculators did for the banks when they bought a foreclosed properly was that in addition to paying the obscene penalty fees they also paid the nearly as obscene attorney foreclosure fees. Not to mention repairing the often seriously vandalized property. An angry homeowner can easily do $20,000-$30,000 in damages.

When the boom ended all these expenses landed on the banks head like a falling safe. The banks never knew what hit them. I am sure that they still think that they were run over by a Mack truck.

Fred Carach is the author of the book, " Forty Years A Speculator." His blog is fortyyearsaspeculator.blogspot.com

"WHY THE BANK WILL NOT MODIFY YOUR MORTGAGE" BY FRED CARACH

2009-05-14T14:26:00.007-04:00

We cannot understand the present unless we understand the past. To understand today's banking and real estate crisis you have to go back to the last banking crisis. The savings and loan crisis of the late 1980s resulted in a new banking paradigm. Under the old paradigm almost all banks were "full service banks." In other words all real estate lending functions were handled in-house. By the time the crisis was over with the typical bank had been transformed beyond recognition. Banks went from being full service institutions to limited service institutions that had farmed out to others many banking functions that had hitherto been regarded as being important core functions.

However,none of these dramatic changes were visible to the typical bank customer. It looked like the same old bank to them.

This transformation was part of a much broader transformation that was taking America by storm. This new business philosophy held that every business had a core competency and that the way to maximize your profits was to concentrate on your core, high profit skills and to farm out to other institutions your low profit, non-competency functions. It was taken for granted that the activities that were earning you the greatest profits were your core competencies and that anything that was low profit was a low competency skill that was bested farmed out to others. The flaw in this system was that in times of crisis you no longer had the in-house skills to cope with the crisis because the skills had been farmed out to others.

It has to be admitted that in normal times the new paradigm delivered on its promise of lowering costs and increasing profits. This is why today when you make a call to complain about a product or service you end up talking to a speaker who lives in Calcutta, India.

The Old Bank Model

In-house staff real estate appraisers

In-house mortgage originators

In-house servicing of mortgage payments

In-house warehousing of mortgages

The New Bank Model

No in-house staff appraisers

Very limited amount of in-house mortgage originating

No in-house mortgage servicing

Almost no warehousing of mortgages

(mortgages were sold off rather than kept)

Under the old banking model when a mortgage got into trouble the bank had all the expertise needed to solve the problem in-house. Under the new banking model not only was the bank clueless but it was enshrouded in total darkness as well.

Under the old system when a mortgage problem arose the bank knew exactly what to do. Under the new system it sits around and sucks its thumb. Under the old system the first thing the bank would do was send out one of its in-house staff appraisers to do a complete inspection of the home and a complete professional appraisal. Under the new system they call up a real estate broker and ask for a BPO, a broker's price opinion. No doubt you are wondering why they don't hire an appraiser? The answer the bank will give you is that they are way too smart to pay the $275-$350 a complete appraisal would cost. This standard appraisal also includes a complete interior and exterior inspection of the property.

A BPO they craftily inform you will only cost them about $75. That's because the broker never leaves the office. He spends fifteen minutes scanning comparable sale listings on the MLS system. Eyeballs what seems to him to be an appropriate number and another fifteen minutes writing up the one or two page BPO. As the bankers will proudly tell you they are way too smart to get the job done right. Guessing is so much cheaper.

I speak with an insiders knowledge on this point. You see I was one of the in-house appraisers that were thrown out on the streets like a dog.

Let's step back in time and continue our analysis. In the old days when a client asked for a mortgage The in-house appraiser and loan officer would carefully scrutinize the deal. Due diligence was taken seriously because the mortgage was going to be warehoused by the bank until maturity and not sold off. If the mortgage blew up the bank took the loss. In this case the appraiser and the loan officer give the deal a thumbs down. The appraised value is below the sale price and there are problems with the buyer's earnings and credit. The bank turns the deal down.

A month later, an independent mortgage broker shows up at the bank with the same deal. Only this time as if by magic the appraised value hits the purchase price and the earnings and credit problems have disappeared from the mortgage application. Now you know why the banks fired all their staff appraisers and most of their in-house loan officers. Prior to this time the banks originated about 90% of all mortgages. By the bull market peak independent mortgage brokers originated over 70% of all mortgages.

Of course, if the banker has a brain in his poor,stupid head he has suspicions. However his hot, little hands are now holding an appraisal done by a licensed appraiser and a mortgage application that has been done by a licensed mortgage broker. The bank accepts the deal but there is no way he is going to warehouse this mortgage or the ever growing number of dubious mortgages that the bank is accepting from outside mortgage brokers. These mortgages are going to be pooled and securitized into various types of mortgage-backed securities ( MBS and CDO) as quickly as possible.

Let's now return to the present. The bank now realizes that the outside appraisal was dubious and the mortgage application was even more dubious. It has probably sold off the mortgage servicing rights and kept the mortgage or it may have sold the mortgage and kept the mortgage servicing rights. Do not underestimate the importance of mortgage servicing rights. This is what gives you control of the mortgage. Others may own the mortgage but the mortgage servicers control the mortgage. There are about 8,500 banks in this country. The vast majority of which do not service their own loans. The 27 largest mortgage servicers dominate the service industry.

You now know why the banks are responding so poorly to urgent requests to modify mortgages even when it is in their overwhelming interest to do so. It is the common assumption that the reason why banks will not help out their clients is because they are just being mean or greedy. The reality is that in today's brutal real estate market it is almost never in the bank's interest to foreclose. Yet, the foreclosures continue because they are on automatic pilot. It is often the case today that the mortgage servicers start and often finish foreclosure proceedings without prior approval from the bank.

You see mortgage servicers are paid for foreclosing on the mortgages that they are servicing but until a recent change in federal regulations, they were never paid to modify a mortgage.

You now know why the banks and troubled mortgage payers are in such trouble. The reason why banks appear to be wandering around in a stupor, is because they are in a stupor. To a shocking extent they have lost control of the ability to manage this crisis. They are in trouble because they are as blind and dumb as a fence post. The expertize that they once had is gone with the wind.

Fred Carach is the author of "Forty Years A Speculator. His blog is fortyyearsaspeculator.blogspot.com

"WHAT WALL STREET DOESN'T UNDERSTAND IS THAT THE LAW OF SUPPLY AND DEMAND IS STARTING TO FAIL IN NATURAL RESOURCES" BY FRED CARACH

2009-05-09T20:47:00.005-04:00

Correctly understood the law of supply and demand works like a pair of scissors. Each blade of the scissors are interrelated and must work together for the law to work.Wall Street does not regard the law of supply and demand as being a pair of scissors. It thinks of demand as a faucet and water as the supply that flows through the faucet. In this model, supply is the always- obedient slave of demand. It is only necessary to turn the faucet handle and supply the ever-obedient slave of demand flows through it in the required amounts.
It must be admitted that this model works quit well in the world of manufacturing and services. What Wall Street doesn't understand is that this model has started to break down in the world of natural resources and that this breakdown is not a temporary phenomenon. To the extent that it is even considered at all, the late bull market in natural resources and commodities is thought of on "the street" as a one-off event that will not soon be repeated.
It is on the contrary the opening gun of a new world order. A world order of semi-permanent natural resource scarcity.
Every one will of course admit that in theory the supply of natural resources is ultimately fixed. But that unhappy day is always assumed to be centuries in the future. This fact is always assumed. No attempt is ever made to prove it.
We are now more than two hundred years into the industrial revolution with its ravenous demand for natural resources and with the greatest population the world has ever known. At the vanguard of this revolution is the rapidly industrializing BRIC nations of Brazil, Russia, India and China. With a gigantic combined population of 2.5 billion people. When the global recession ends their voracious demand for natural resources and commodities will once again kick in. The sheer size of this demand on the existing natural resource base is without historical precedent. The populations of Western Europe and North America when they were industrializing were minuscule in comparison.
The cheapest and the most easily accessible mineral fields are always put into production first. As these fields are slowly depleted away, they are replaced with ever poorer and less accessible fields. One of the favorite ploys of the natural resources in abundance crowd is to confuse potential pie in the sky assumed reserves in remote and far distant locations as proven reserves. And then to assume or more accurately to insist that these assumed reserves can be developed at the same costs that current producers enjoy. It should be obvious that for the most part, they cannot possibly be developed at anything like the costs being enjoyed by current producers.
A good example of this is the now notorious Kashagan oil field in Kazakhstan on the Caspian Sea. This estimated ten billion barrel super giant field, one of only three such super giants discovered since 1970 was found in the year 2000. It has had political and geologic problems galore. It is now estimated to go into production in 2014 at the earliest.
What I am trying to say is that the mere fact that natural resources exist does not mean that they will flow out of the faucet on demand.
But the real game changer is the greens. Who are convinced that it is their destiny to stop every new discovery from coming on-stream. Their success rate has been astonishing. And not just in the developed world as so many believe but in the third world as well.
The Northern Miner, which is the Wall Street Journal of the mining industry, has been reporting for years on the truly remarkable ability of a handful of green zealots to mobilize peasants all over the third world. Green field projects from the Andes to Outer Mongolia have been stopped again and again.
There will be consequences!
The most important consequence of course is that in the new emerging world order natural resources that can be brought into production will be golden. Wealth in the ground will make you rich.
Fred Carach is the author of " Forty Years A Speculator." his blog is fortyyearsaspeculator.blogspot.com

"THE STRANGE RISE OF THE TREND CHASERS AND THE DEATH OF RATIONAL MARKETS." by Fred Carach

2009-04-08T14:38:00.008-04:00

When I broke into the stock market in 1961 the world of investing was radically different than it is today. The market was dominated by the individual investor and not by the institutional investors. In addition, I would strongly argue that the markets were far more rational than they are today. By rational I mean that stocks fluctuated in a rather tight band. They would oscillate in a reasonably tight range of value for a reasonable period of time and then gradually rise or fall in value based on market dynamics as investors assimilated new information and data.

In other words markets made sense. What did not exist is today's whiplash markets. Which remind me of nothing so much as a monkey being violently jerked around on a chain.

There has been tremendous damage done by this change. And it has hurt our economy badly. Our markets are no longer delivering honest prices that can be trusted. These violent gyrations make it impossible for investors, businesses and governments to engage in rational planning and make rational decisions. Something has gone seriously, seriously wrong with our markets.

When I look back across the decades and ask where did it go wrong? Two changes stand out. One change is fairly obvious and the other is hiding in plain sight.

The obvious change of course is the rise of the institutional investor to market dominance. In other words fewer and much larger decision makers results in more violent price fluctuations. When you combine this fact with their undeniable tendency to engage in cattle stampede behavior, you have solved one part of the puzzle.

I addressed the institutional part of the puzzle in a companion piece called, "TODAY'S IRRATIONAL MARKET AND THE RISE OF THE PROPELLER HEADS." This companion essay can be found at my blog fortyyearsaspeculator.blogspot.com.

The stranger and perhaps the most important part of the puzzle is hiding in plain sight and no one recognizes it. And what a strange puzzle it is. It is the law of unintended consequences writ large.

On May 1, 1975 fixed commissions were outlawed on Wall Street. Stock commissions immediately dropped 40% and have been falling ever since. Prior to this time the commission,to trade a stock had been so expensive that the type of in and out trading for small profits that is so common today would have been impossible. The commissions would have eaten you alive. The only people who could afford to be day traders or to trade for small profits were the professionals who owned seats on the New York and the American Stock Exchanges and therefore paid no stock commissions. In those days the NASDAQ scarcely existed.

The unintended consequences of this change were amazing. Prior to this time if you were wise,you had to have a strong opinion about a stock before you invested in it. Hopefully, an opinion based on your research. Unless you had a strong conviction you could not afford to sell a stock just because it fell five or ten percent. You could not buy a stock for no other reason than it was trending up in the absence of a strong conviction. If you did this the commissions on excessive trading would kill you.

Today the commissions are so low that people can buy and sell on the weakest of whims. Changing your mind about a stock today is almost cost free as far as the commission is concerned.

The combined impact of institutional investing and today's low commissions has had a devastating impact on rational markets. It has given rise to the cult of the trend chaser or price chaser. This buffoon neither knows nor cares what the intrinsic market value is of any stock that he buys or sells. Why should he? Research and having a soundly arrived at opinion of value is now regarded by armies of investors as a dangerous waste of their valuable time.

After all having an opinion of value is dangerous. What happens if your opinion is opposed to the trend of the market? The horror of it all! Why it would interfere with your trend chasing. And where would you be then?

In a world in which the huge majority of investors are trend chasers sound market values are obliterated. There are fewer and fewer investors who are engaging in honest research and who are making their investment decisions based on their own estimate of market value. Yet, this is precisely what is required for markets to function correctly.

The result is today's whiplash markets where thundering herds of mindless trend chasers stampede stocks way above and then way below any intelligent estimate of market value in oscillating cycles. The stock market has become a perpetual overreaction machine.

Markets are no longer delivering honest, reliable estimates of intrinsic value that can be trusted. Investors, businessmen and governments can no longer engage in rational investing,business planning or government decisions based on these highly flawed markets.

Indeed as the numbers of investors who are actually attempting to ascertain market value keeps shrinking. The mindless herd of trend chasing, stampeding cattle who have the nerve to call themselves investors keep growing, in both numbers and influence. It is calling into question how much longer we will have anything that truly resembles a market as we have understood the term.

Fred Carach is the author of the recent book, "Forty Years A Speculator." His blog is fortyyearsaspeculator.blogspot.com

"THE PARADOX OF THE UTOPIAN MICROSTATES OF EUROPE AND WHY THEY CAN NEVER BE A MODEL FOR THE REST OF US." BY FRED CARACH

2009-03-11T13:54:00.008-04:00

Since the end of World War Two, a very select group of very fortunate European micro states have been held up as a model for the rest of the world to emulate. There is a high degree of unanimity as to which states qualify for the exalted status of earthly garden paradise.
The usual suspects are the Scandinavian nations of Norway, Sweden and Denmark plus Switzerland . With Finland and Iceland usually granted honorable mention. Overall, it is a very short list when you consider that there are 195 nations on the earth.
The first thing that hits you is that all these nations have a very small population. They all have a population of less than ten million. Why are they all so small?
The answer is that a population of less than ten million as we will make clear is the iron-core requirement for earthly garden paradise status.

Sweden 9 million

Switzerland 7 million

Denmark 5 million

Finland 5 million

Norway 4 million

Iceland 300,000

This averages out to a princely average population of about five million. This is considerably smaller than New York City.

The next requirement for divine status is a homogeneous population without an alienated minority group. All the above countries meet this requirement. It is surprising how few nations do not have an alienated minority group. Do not underestimate how few nations there are without a minority group and how costly this condition is. Social-strife is deadly to national prosperity and advancement. Examples that come to mind are the US riots in the 60s and the recent riots in France. Israel and the Kurds in Turkey and elsewhere in the Middle East are other examples.

It helps to be Lutheran. It is interesting to note that with the exception of Switzerland all the above nations are overwhelmingly Lutheran. One of my closest friends is a Norwegian atheist who keeps claiming that he is a Lutheran. What he means by this is that even though Scandinavians may be atheists the impact of the relentlessly moralistic Lutheran religion has seeped through the whole of Scandinavian culture. I also keep hearing this from other Scandinavians.

The cumulative impact of the above factors; of a very small and homogeneous population coupled with a culture of very high morality results in a bureaucracy of exceptionally high honesty, integrity and efficiency.

Every additional layer of bureaucracy costs the world in added costs,increased corruption and reduced efficiency. The small populations of the micro states insures that they will have the fewest layers of bureaucracy and their small size allows the sun to shine through the bureaucracy like a powerful searchlight eliminating graft and corruption in a manner that is impossible in states with populations above ten million.

The combination of these factors results in the venerated Utopian micro state with a very high standard of living.

GDP PER CAPITA AND WORLD RANKING 2008

6) Norway $57,500

10) United States $48,000

15) Iceland $42,600

19) Switzerland $40,900

22) Sweden $39,600

25) Denmark $38,900

27) Finland $38,400

Certain caveats are in order about the above list. First to a considerable extent, Norway's number six position is based on its North Sea oil bonanza, which is now in decline. Iceland is currently undergoing a horrific financial crisis, which will probably effect its position.

The astute reader has probably noticed that Singapore is not on this list. It is not on this list because it is not an object of veneration. Only European micro states are objects of veneration. However, it certainly has the credentials of the exalted micro states. It is ranked ninth in the world with a population of four million people who are almost 100% Chinese and has a GDP per capita of $52,000. Everyone who reports on Singapore comments on the extreme honesty and integrity of its bureaucracy.

Contrast this with China's far from corruption free bureaucracy and its GDP per capita of $6,100 and world ranking of 132.

I submit to the reader that it would be impossible for China to ever convert itself into a Goliath-sized Singapore. No matter how hard it tried or how sincere its efforts. It would fail.

Liechtenstein is the top ranked nation with a GDP per capita of $118,000.

It is telling that of the top ranked 17 nations, the only one with a population above ten million is tenth ranked United States.

The paradox of the Utopian micro states of Europe is that you must have a population of less than ten million. Fail that test and you never get in to their exclusive club. Thus it can never be a model for the rest of us.

Fred Carch is the author of Forty Years A Speculator. His blog is fortyyearsaspeculator.blogspot.com

" Forty Years A Speculator,Northern Miner Book Review " by Fred Carach

2009-02-20T09:51:00.007-05:00

Picture this; the year is 1968, the place is the USS Little Rock, the flagship of the mighty U.S. sixth fleet. We were sailing in the Mediterranean Sea off the west coast of Italy somewhere between Rome and Naples. I was waiting to go on watch in the CIC (the Combat Information Center) or as we fondly call it: the center of intense confusion. I was reading a magazine article; I think it was Saga magazine that had my undivided attention. The article was written by someone who had just made a killing speculating in penny mining stocks. I have always been fascinated with the concept of making big bucks on a chump change investment and this was right up my alley. The most important part of this article was that the writer informed the reader that if you were going to speculate in penny mining stocks, you had to subscribe to the Northern Miner, and what is even more important, he gave the address. I sent off a letter requesting a subscription. I remain a subscriber to this day.

Now I know what you are thinking. You are thinking; why penny mining stocks? Why not penny stocks in general? What is so great about penny mining stocks?

I thought you would never ask. First, it needs to be understood that I only invest in mining stocks that are listed on the Toronto stock exchange or its related junior stock exchange the TSE Venture exchange. Contrary to popular belief, our northern friends do an excellent job of policing and regulating their mining industry so long as perfection isn't expected. And they provide an excellent filter by mandating minimum requirements that the companies must adhere to. How many penny stocks do you know of that are listed on an exchange and have to meet minimum requirements that aren't mining related? The correct answer is almost none. Another advantage is that only a tiny percentage of these stocks are producers. The vast majority of these stocks have no operating income at all. I regard this as a plus because then they can be analyzed strictly as an asset play; and they are asset plays with a vengeance. There is no other investment on earth that routinely has such colossal asset values in relation to their stock prices. Then there is their astounding ability which no other type of stock possesses to go into hibernation for years, if necessary for decades, and maintain their listing. All other stocks perish if they can't maintain operations. Lastly I am of the belief that we are entering a golden age of natural resources that should last for at least another decade. I have already given you the example of Getty Copper.

Let's take a look at Moneta Porcupine mines. It was incorporated in 1910, and I believe it has been listed on the TSE since 1926. It was a gold producer from 1938-1943, but since then it has produced nothing. It owns ten gold properties on which there are a total of 26 past producing mines. It has 1679 mining claims. Each mining claim is 40 acres, for a total 67,160 acres. The stock currently sells for about 16 cents a share. At that price the entire market capitalization is about $11,860,000. That is for the whole company, lock, stock, and barrel; not to mention the 67,160 acres! At that price the market is placing a value of $176.59 for every acre that Moneta owns. Of course Moneta hasn't earned a penny in operating income since 1943, but somehow it doesn't seem to matter. In the last five years the price has fluctuated between 6 cents a share and 22 cents a share. Where else are you going to find asset values like this?

Let me tell you about another penny stock that will illustrate some points that I want to make. This was back in the early days. There was this jewel called Arctic Gold and Silver mines. When I bought it I remember thinking that the name was worth the 46 cents a share I was paying. I was wrong. The company was delisted and I wrote off the investment. But it wasn't a total loss. I had this rather attractive stock certificate that they had mailed me. In those days they still mailed you the stock certificate. I was going to frame it on the wall. It would make a wonderful conversation piece, but it wasn't to be. I never got around to framing it because about a year later Arctic Gold and Silver mines rose from the dead. In Canada, mining companies can reconstitute themselves. If they pay their back taxes and fees, they can reclaim their charter, mining claims, and listing. Provided no one has acquired their claims in the interim. This happens more often than you would think. Arctic Gold and Silver mines was back in action, but I was no longer a believer. When the stock had struggled back to about 25% of what I had paid for it, I took the money and ran. The stock was delisted again, this time forever. I now regret sending back the stock certificate, it would look wonderful on the wall. The amount I received for the stock was trivial. In those days my standard investment was 500 shares.

At this point you are probably wondering how it is possible for penny mining stocks to survive for years and indeed decades without any operating income. It is tied up with the ability of penny mining stocks and penny mining stocks alone of all other investment categories to hibernate or go into suspended animation. It isn't unusual for a penny mining stock to have only three employees, the president, the secretary, and the geologist who usually doubles as the vice president. Until recent years it was possible for a determined president to operate a bare bones operation like this for as little as $250,000 a year or less. Today it can be done for $500,000 a year or less. Only the fact that penny mining stocks are the purest asset plays on earth allows this type of set up to be feasible.

Since they typically earn no income, the normal means of funding by a broker-promoted secondary offering doesn't work for mining stocks once they have been around for a few years and their stock is still selling for pennies. The standard method by which penny mining stocks raise capital is by way of what is called a private placement. In this model the president solicits money directly from private investors every year. Under ideal circumstances it can work like this. The president invites say four to six serious investors out to investigate the mining site. If he is smart, he will provide each investor with one of those cute geologist's hammers and a jeweler's loupe with a chain so that they can wear their new status symbol around their necks. A jeweler's loupe is a small ten-power magnifying glass that is the status symbol of three professions; jewelers, coin collectors, and geologists. Each profession loves these status symbols and never misses an opportunity to employ them with great ostentation. At the mine site the investors will be invited to chip off rock samples with their cute little hammers and examine them under their jeweler's loupe. For lunch they go down to the lake and have a picnic. If they are lucky, they can watch soaring eagles capturing fish while they lunch. How do I know that there is a lake? There are hundreds of thousands of lakes in Canada; I kid you not. Every mine I have ever owned has been within sight of a lake and two of them were located on islands in the middle of a lake. In the afternoon, time will be set aside for some fishing, and late in the afternoon or evening there will be fried fish over an enormous fire. If the weather is good, getting the investors to write a check is like shooting fish in a barrel. A determined president can keep his company solvent for years using this technique.

Let's now take a look at the type of profits that penny mining stocks can generate by looking at three of my recent successes.

Exall Resources was a stock that was an old favorite of mine. I had sold it twice before at a profit. This time I purchased it at 18 cents a share. Exall was now under new management and the new management had decided that it would re-deploy its assets into the oil and gas sector and place all its gold assets into a new gold company that would be called Gold Eagle mines and then spin Gold Eagle mines off to Exall's owners. This was fine with me. I am a big energy fan. Now Gold Eagle's mine was located in the fabulous Red Lake mining camp. This is Canada's most prolific gold mining area. At this time a new drilling program was underway at Gold Eagle. The stock was rising nicely, but nothing out of the ordinary. When suddenly the stock jumped overnight from about 30 cents a share to $1.20 a share. For an old salt like myself it wasn't too difficult to figure out what had happened. The arrival of the Northern Miner provided the answer. The drill program was a success and reported high-grade gold intercepts, much higher than anybody had expected. The president hastily informed the owners that the program to spin off Gold Eagle had been canceled, a wise decision. At this point my normal procedure would be to take the money and run. Normally after a report like this the stock blows off and then declines. A decline back to the 60 cents to 80 cents a share range would be normal. But this was the Red Lake mining camp and the core samples were very rich. Against my better judgment I held on. To my considerable surprise the stock didn't decline as I expected; it continued to rise. There were now three drills on site instead of one. This was highly unusual action for a penny mining stock, which must hoard their limited resources. And they were reporting bonanza grades. It looked like Gold Eagle was a mine in the making. I was holding on. As this is being written, Exall Resources is selling for $2.00 a share. Not bad for an 18-cents-a-share investment and this move may not be over. Exall Resources 2005 annual report was a joy to read it began like this.

Our company has not seen a year like 2005 in its entire 71-year history. With a major discovery at the Gold Eagle property, the very property that formed the foundation of Exall's incorporation as a company on February 13, 1934, we have come full circle co-incident with a very exciting time in the gold business.

But the part I liked best in the annual report was the part that said that Exall's stock had climbed 1,100% during the second half of 2005 based on positive drill results.

Another favorite that I am very keen on is Canadian Zinc. The saga of Canadian Zinc, and it truly is a saga, begins with the famous Hunt brothers and their attempt to corner the silver market in 1980. In the process the price of silver was driven to $50 an ounce. As this was going on the Hunt brothers were building what is today's Prairie Creek mine in Canada's Northwest Territories. The Hunt brothers sank $50,000,000 into building the mining infrastructure, which was 90% complete when the Hunt brothers declared bankruptcy and lost the mine. Over the years a total $100,000,000 has been spent to build the infrastructure that is now complete. The ore body is extraordinary, 11.8 million tonnes of lead, zinc, and silver. If silver were a base metal the deposit would probably rank as the richest base metal deposit in the North American Continent that wasn't in production. The deposit contains 70 million ounces of silver, three billion pounds of zinc and 2.2 billion pounds of lead.

I know what you are thinking: "Fred, how much did you have to pay to buy into this treasure trove?" I made my initial buy in 2002 for nine cents a share, but my average cost is now 20 cents a share. As this is being written, silver is selling for about $10 a ounce, zinc is selling for $1.02 a pound, and lead is selling for 53 cents a pound. Now if my figures are right you come up with a total ore body value of about $4.86 billion rounded. Currently Canadian Zinc has about 93.4 million shares issued. Therefore each share represents about $52 in ore value. As this is being written, Canadian Zinc is selling for about 80 cents a share. The best is yet to come. Now the astute reader is going to point out that what is really important isn't the value of the ore body, but whether it can be extracted at a profit. And this is of course true, but when you own 40-50 penny mining stocks and each position is considerably less than 1% of your investment capital, you need a quick and useful indicator of value, and this is one of the best. For years I struggled with this problem. There are many mining claims for which no reliable ore estimates exist. How do you estimate value? For a real estate appraiser this was a serious matter that I couldn't resolve.

One day, plus or minus two years from the time of my Koger Equity crisis, I was reading the Northern Miner. I was trying to make sense out of the core drilling samples that had just been reported to the press by a company that I was following, but of course I wasn't having any luck. The only thing I know about geology I learned in a college course. As I agonized over the data, the second great revelation of my stock market career occurred. In a flash I realized that penny mining companies weren't mining companies at all unless they were producers; and this is very rare. They are in reality real-estate companies in drag. They are "location plays." And I had always been too stupid to figure it out.

In real estate the classic location play is raw acreage. You find out in what direction the city is growing and you drive out in that direction until you reach the point where the land is sold by the acre rather than by the lot, then you just buy and wait for the city's growth to reach you. Penny mining stocks only asset is their mining claim, which is real estate. And the value of that mining claim is overwhelmingly determined by its location in a mining camp or proven mineral trend. When a mining camp reports a rich strike, all the mining stocks go up in value and the cheapest stocks go up the most. Armed with this knowledge I was able to take bigger positions and bet with more confidence than had ever been possible before.

There is one last penny market play that I have to tell you about. The reason why is that it is the greatest profit maker I have ever had on a percentage basis. It started out in an unusual manner.

In the year 2001 I bought a little jewel called Pioneer Metals for 12 cents a share. I liked the stock because it had a nice package of properties and it was being run by the highly regarded mining promoter Stephen Sorensen. A year later in 2002 the owners of Pioneer Metals received a most intriguing letter. We were informed that the company had decided to spin off its uranium properties into a new corporation to be called UEX. I was only vaguely aware that it even had uranium properties. I had purchased the stock because it had an interesting stable of gold properties. But what blew me away was their brilliant analysis of the coming boom in uranium. Until that time uranium didn't even appear on my radarscope. By the time I finished reading the report, I was a raging bull on uranium. At that time uranium was selling for about $18 a pound, today it is selling for $45.50 a pound. The shortage is so acute that $60 a pound is in the bag in the next two years; at its birth in 2002 UEX was blessed with about 247,000 very strategic acres in Canada's Athabasca basin in northern Saskatchewan. The Athabasca basin is the richest, but not the largest, uranium camp in the world and produces about 30% of the world's uranium. I was so impressed with UEX's potential that after the spin off, I increased my position by an additional 25%. Because the value of Pioneer Mines was worth more after the spin off than when I purchased it, I decided that for accounting purposes I would regard the cost of the spin off shares as zero. Currently Pioneer Metals is selling for about 57 cents a share. When I consolidated the free spin off shares with my purchased shares of UEX the average cost of my position was seven cents a share.

I wasn't the only one who was impressed with the potential of this new creation. From the moment it went public, its rise was relentless. UEX currently sells for $4.25 a share. My investment has increased in value about 60 times and the sky is still the limit. As I have stated before, it is possible for an investment to be too good to be true if people are unaware of its existence. The penny mining stock universe is the secret citadel of stocks that the investing public would regard as being too good to be true if they knew it existed. Where else can you routinely make microbets or chump change investments and get returns like this? I rest my case.

Fred Carach is the author of Forty Years A Speculator, and his blog is fortyyearsaspeculator.blogspot.com.

"WHO RUNS THE COUNTRY? WHO IS RESPONSIBLE FOR THE ECONOMY?" BY FRED CARACH

2009-02-17T13:47:00.004-05:00

In American history there have been two great defining elections. All other American elections are insignificant in comparison. The first great defining election was the election of Abraham Lincoln in 1860 that ushered in the great period of Republican Party dominance, which lasted from the civil war until the Great Depression. The second great defining election was the election of Franklin Roosevelt in 1932, which ushered in the great period of Democratic Party dominance.
This dominance has just been re certified by the recent election of President Obama. After the historic election of 1932, the Democrats faced a shattered opposition. Just as they do today. The Democratic Party then dominated politics at every level of government. The overwhelming majority of all the mayors in the country were Democratic . The overwhelming majority of all the state legislatures were Democratic. The overwhelming majority of all the state governors were Democratic. Democrats dominated both houses of Congress and the president was a democrat. Nothing has changed in 77 years. Eight decades later the dominance of the Democratic Party at every level of government is almost as total as it was in 1932.
Nothing better demonstrated their strangle hold on political power than their absolute domination of the House of Representatives for 62 straight years from 1932 to 1994. Under our system, command of the house alone granted Democrats perpetual blocking power over all legislation.
What two party system are people talking about? The simple truth of the matter is that we do not have a two party system in this country and have not had one since 1932. What we have is a one and a half party system, which is pretending to be a two party system. The only level of government at which the Republican Party is competitive is the presidency. Remove that and there is nothing left.
The question that has to be asked is how has the press missed this? Are they really that stupid or are they just pretending to be that stupid? The truth of the matter is that I just do not know. Both presumptions seem equally plausible to me.
As for the Democrats, the Republicans serve a very useful purpose. They are the perpetual fall guy and whipping boy of the Democratic Party whenever things go wrong. Just ask yourself what would the Democrats do if it ever dawned on the people that the lion's share of everything that has gone wrong in this country since 1932 was the fault of the Democratic Party? Things could get very ugly. Besides they like having the Republicans to kick around.
We now come to the vexing problem of the alleged power of the presidency to influence the economy. This idiotic belief is something that the Democrats have had a field day promoting ever since they rose to power in 1932 with their vicious attacks on President Hoover. Since their control of congress since 1932 has been almost perpetual and the presidency is the only branch of government in which the Republicans are competitive. There are enormous rewards for the Democrats in shifting the blame for economic hard times from congress where it belongs and in promoting the myth of presidential economic responsibility.
This domination not only extends to their control of the press but to popular beliefs as well.
Consider this, all my life I have wondered why the Hoover Dam was called the Hoover Dam
instead of the Roosevelt Dam. After all, we all know that after the stock market crash of 1929 President Hoover and the Republicans sat around in a stupor and did nothing while the country went to hell. Don't we? Then the heroic Democrats took over and saved the country in the 1930s with their huge public works projects. The most massive of which was the Hoover Dam and the magnificent Golden Gate Bridge.
Recently, I was stunned to discover that the Hoover Dam and the Golden Gate Bridge and god only knows what other major public works projects of the 1930s were authorized not under Roosevelt which is what we all believe but under President Hoover!
How sweet it is!
This is domination, total and complete.
When the Democratic Party took control of the country in 1932 their position was ideal. They had assumed power when the country was at rock bottom. Things could not possibly have gotten any worse. The stock market had lost 91% of its value and 5,000 banks had failed. The unemployment rate was at 24%. If they had done nothing for the rest of the decade except giggle stupidly at themselves the economy would have improved.
They instead embarked on the most advanced economic thinking of the day. Keynesian economic theory, which held that vast government public work programs was the solution to the depression. It should have worked but it didn't.
I would have supported these programs. Just as I support public works programs for today's recession.
The failure of these public works programs to end the depression is astonishing. The unemployment numbers are so bad that it is hard to believe them. In 1932 the unemployment rate was 23.6%. In 1933 it was 24.9%. In 1934 it was 21.7%. In 1935 it was 20.1%. In 1936 it was 16.9%. In 1937 it was 14.3%. In 1938 it was 19%. In 1939 it was 17.2%.
Then salvation came. It was the armaments production of World War Two that saved the day. Not Keynesian public works projects.The 1929 GDP was not exceeded until 1943 well into the war. It was not until 1955 that the 1929 stock market peak was exceeded.
The Democratic propaganda machine is a Juggernaut. Almost everyone believes that the Democratic Party and its vast public works projects saved the country in the 1930s after the stupid, do-nothing Republican Party had wrecked it.
The Republicans don't stand a chance. They don't have a chance!

The American people in their ignorance have been adamant since day one that when the economy goes south the person to blame is the president. The problem with this cherished belief is that when the economy blows up the president cannot possibly be blamed because the constitution does not grant the president economic powers. Only congress is granted economic powers. There can be only one possible explanation for this belief. At least 80% of the American people must have been in a stupor when the constitution was being explained to them in civics class.
The president is commander-in-chief of the armed forces and the chief executive officer or CEO of the federal bureaucracy. And he is the co-equal with the congress in diplomacy and foreign affairs. And that is where his powers end. His powers to influence the economy for good or ill are zero, Nada, zip.
The constitution grants congress total political power to influence the economy through its monopoly power to write laws effecting the economy and its power to spend money. Consider this; congress has the power to remove the president from office. But the president cannot remove one single member of congress from office. Congress can override the president by overriding his veto and thus impose its will on the president.But the president is powerless to override the will of congress if his veto is not sustained.
At this point some cretin will step forward and allege that while all this is true it is usually the case that congress follows the will of the president. You cannot be serious! What fantasy land have you been living in! Everything depends on which party controls congress. If his party controls congress, the president has a reasonable chance of getting something that vaguely resembles his proposal through. And this holds true only if you do not make the mistake of reading the legislation. If you read the legislation you are in for a rude disappointment. You will find that there is a yawning gap that looks like the Grand Canyon between what the president proposes and the legislation that he finally ends up signing. If on the other hand the president's party does not control congress, forget it.
Recently, we have had a textbook demonstration of who holds the whip hand. When Treasury Secretary Paulson on September 20, 2008 presented President Bush's now notorious $700 billion TARP program to congress. The proposal was written on three and a half pages. After he got through whining and begging the imperial congress presented the president with its own TARP program. A 450 page detailed document that after the president signed it had the force of law. Case closed!
Who runs the country,the Democratic Party? Who is responsible for the economy, the United States Congress?
Fred Carach is the author of the book, "Forty Years A Speculator" and his essays and pod casts can be viewed on his blog at fortyyearsaspeculator.blogspot.com

"AMAZING PROFITS, INVESTING IN MICROCAP STOCKS,PART 1" BY FRED CARACH

2009-01-31T10:30:00.000-05:00

For more than forty years, I have been investing in microcap stocks. I currently have about ninety positions in microcap stocks. Almost all of these investments are in a subset of the microcap universe. This subset is an offshoot of penny stocks. It is the strange and unknown world of penny mining stocks. It is also hands down the most profitable and as strange as it might seem to you the safest sector in the penny stock category. And I have the battle scars to prove it, reaching back more than forty years.
Allow me to introduce you into the strange and wondrous world of penny mining stocks.
For the price of a night on the town you can be a player.
Their greatest attraction of course is their proven ability to earn enormous profits on a chump-change investment. In my investing, I refuse to accept a profit of less than 300% on my penny stock investments and five and ten baggers are common.
let's see how I play the game. First, I eliminate the fly-by-night and the pump and dump frauds by only buying stocks that are listed on the Toronto Stock Exchange and the junior venture exchange. Then I insist that they have been listed on the exchanges for a minimum of five years. This eliminates virtually all the scams. It is a rare scam that is in existence for more than five years. And contrary to our popular belief,our northern cousins in recent years have done an excellent job of protecting investors from scams.
Compare this with the typical pink sheet penny stock that does not have to meet any exchange requirements at all. And that all too often prove to be little better than vapor stocks when compared to the hard asset penny mining stocks with true wealth in the ground potential.
I have always believed in making my points with a sledgehammer. Currently the cheapest stock that I own is a little jewel called Copper Ridge Explorations. It is currently selling at about 2 cents a share. Now before you go nuts and stampede for the nearest exit maybe you should know why I own the stock.
It is listed on the Toronto Venture Exchange and was Incorporated in 1983. This pretty well eliminates the-fly-by-night and the pump and dump schemes. Next, I look at the total float or the amount of outstanding issued stock, which is about 79 million shares. This is higher than I like. I prefer less than 50 million shares. Multiply that amount times 2 cents and you come up with a total market value or capitalization of about $1.8 million.
Contemplate this figure. It means that you can buy the whole company, lock, stock and barrel for almost nothing. A ridiculously small amount of buying power can send this stock to the moon. Three investors each buying say $10,000 worth of stock on the same day could easily send this stock into orbit.
I then take a careful look at the 52 week high and low for the stock. Remember the only way to make money on a speculation is for the stock to fluctuate. The 52 week low for the stock is about a half a cent a share. The high is 14 cents. The stock moves. Another test passed.
In my investing I place tremendous importance in the stock's trading range and in the concept of "reversion to the mean."
Let us now examine the stock's annual high and low since the year 2000 (2000 .11-.41) (2001 .03-.16) (2002 .03-.12) (2003 .05-.27) (2004 .07-.33) (2005 .06-.21) (2006 .07-.25) (2007 .10-.23) (2008 .005-.14).
What is of absolute importance here is the fact that Copper Ridge Explorations has shown the repeated ability to post annual highs in the teens and often in the 20's. The only thing that is required for a "reversion to the mean" to occur is for the current stock market panic to abate and the stock should revert to the mean.
Since I am a hard assets guy let's see what we are getting for 2 cents a share. Copper Ridge Explorations has a nice stable of ten properties. Most of the properties have been optioned out to other parties. If any of these parties get lucky,there could be a nice payday for both parties.
Since I am not a geologist I never concern myself with ore bodies unless they rank in the category of proven & probable reserves. It is seldom the case in penny mining stocks for there to be proven reserves.
What I do concern myself with are "location plays" and acreage size for obvious reasons. My ideal is mining claims that are adjacent to a producing mine or the ownership of an ex-producer.
To me their most intriguing property is their Copper Ace property of 31,000 acres which is adjacent to the important producing Gibraltar Copper Mine. Of lesser importance is the Lucky Joe copper and gold prospect with 22,000 acres and the Yukon Olympic copper and gold prospect with 14,800 acres or a total acreage of 67,800 acres. To be conservative I throw out all the other mining claims and give them a zero value.
If you divide the total market capitalization of $1.8 million by 67,800 acres you arrive at a value of $26.55 per acre. Not too shabby is it.
Now because I am psychic I know what you are thinking. You are thinking that all this is very impressive but it is clear to you that any corporation that is selling at 2 cents a share must have an outstanding chance of going bankrupt. Not the least of the virtues of penny mining stocks is that they have virtually no chance of going bankrupt even if they are selling at a penny. At least 90% of all penny mining stocks are dormant, they are not generating an income stream and therefore cannot qualify for a loan. The only way they can raise capital is to issue stock. The only exception to this is penny stocks which have an operational mine. Which is very rare.
Now let's take a look at book value. The book value of the stock is 7 cents a share yet the stock is selling at 2 cents a share. For purposes of illustration lets compare this amount with General Electric which is currently selling for $12.18 a share and has a book value of $10.00 a share. According to its most recent annual report Copper Ridge Explorations had a working capital of $1,391,773 this is very close to the market valuation of $1.8 million. Divide that amount by 79 million shares and my calculator rounds it off to 2 cents. Working capital is cash on hand or cash in the till nearly equals the market value of the stock.
There you have it. I have 1/4 of 1% of my investment capital invested in Copper Ridge Explorations. In the weeks to come it is my intention to introduce the reader to the blood-splattered battleground where I choose to hang out. I have chosen this battleground because in more than four decades of searching I have never found an arena where the risk- reward ratio is greater than it is for penny mining stocks. It is my strong conviction that the world is entering a great age of inflation. The greatest inflation hedge is natural resources. Wealth in the ground will make you rich.
Fred Carach is the author of the recent book; "Forty Years A Speculator" his blog is fortyyearsaspeculator.blogspot.com

"A CONTRARIAN'S VIEWPOINT OF TECHNICAL ANALYSIS IN TODAY'S WORLD" BY FRED CARACH

2009-01-09T14:54:00.001-05:00

When I broke into the stock market in 1961 if you wanted to learn technical analysis you were immediately pointed to Edwards & Magee's book," Technical Analysis Of Stock Trends" which was the bible of the industry from its first edition in 1948 until its last edition in the 1970s. Of course technical analysis really got its formal start with the publication of the famous "Dow Theory" in a series of articles written by Charles Dow in the Wall Street Journal between 1900 and 1902.

However, until the 1970s technical analysis was frowned on by the street as being somewhat akin to astrology. Then for reasons that I don't pretend to understand it suddenly became respectable. This respectability has come at a high cost. As a contrarian I regard today's popularity of technical analysis as a curse and not a blessing.

The founders of technical analysis regarded it as a tool for an elite minority in a world in which fundamental anlaysis reined supreme. They regarded themselves as savvy predators who would hide in the weeds and knock off the big game fundamentaltists as they came thundering by with their high powered technical rifles.

As many Wall Street professionals are only too well aware of, the more popular a market indicator becomes the more useless it becomes as a profit making indicator as every Tom, Dick and Harry jumps on the hitherto sucessful indicator and beats it to death. To put it simply what everybody knows isn't worth knowing. It is what everybody doesn't know that is of decisive importance.

Regretably, the current over popularity of technical analysis is not its only problem from the contrarian viewpoint. Other very ugly problems exist. The worst of these problems is today's overwhelming domination of moving average charts. This domination is recent. The final edition of Edwards & Magee's book contained a remarkable 324 charts of which only 49 charts were moving average charts. These were stuck on at the end of the book as a sop to the growing power of the moving averages crowd. The earlier works contained far fewer moving average charts.

Technical analysis was regarded by the old masters as an art that had to be mastered. In those days before the triumph of moving averages swept everything before it a technician was an expert in "pattern recognition analysis." He was someone who had a hard earned ability to analyze bullish or bearish chart patterns. Among the more common types of patterns that technicians had to be able to master were head and shoulders, tops and bottoms, W patterns,triangles,rectangles,wedges, fans and gaps.

The trouble with moving averages is that they are way too popular and even worse way too easy to analyze. Let's be honest! How much talent does it take to analyze a moving average? Not much. And everyone who looks at a moving average sees the same thing. The stock is either above the moving average or below the moving average.

The triumph of technical analysis and moving averages has resulted in the worst of all worlds. A world in which everyone sees the same thing and what is truly ugly acts on it.

If you are technician who uses moving averages what is your edge?

The edge that the founders of technical analysis once had is now gone. Even worse there is reason to believe that technicians are now the prey of choice for a new group of predators who are hiding in the weeds and who's favorite big game animal is the technicians who are now kind enough to show the world their poker hand.

Or is it just my imagination that stocks are no longer breaking through their moving averages with the power and authority that they used to? Those long decisive runs which are the bread and butter of technical analysis seem to occur less and less. Could the reason be unseen predators?

How difficult is it today for savvy predators with enough capital behind them to lie in wait until the final minutes of trading and then "paint the tape" with their concentrated action creating a false breakthrough. Knowing full well that many technicians will fall into the trap like plump pigeons. After the trap is sprung of course the stock reverts back to its old mean.

What is to be done?

I have two answers and you are not going to like either of them.

As a contrarian I am obsessed with seeking out and finding valid metrics that are either ignored or unknown by the public. If you see what everyone else sees you have no edge. At all costs you must find an edge. You must find metrics or indicators that are valid and don't appear on everyone's radar scope.

My first suggestion is to use Point & Figure charts. I know what you are going to tell me. Point & Figure charts went out with the horse and buggy. They are way too simple. Why they don't even have Bollinger Bands or MACD. No serious technician would consider using something that pathetically simple in today's modern world.

Exactly! That's the whole point. I would like to remind the reader that technicians were using Point & Figure charts with success for generations until moving averages swept away all the alternatives.

To the best of my knowledge the most recognized proponet of Point & Figure charts today is Jim Dines of the highly regarded Dines Letter. The dean of investment letters Richard Russell also uses Point & Figure charts on a fairly regular basis.

If you thought my first suggestion was horrifying. You are going to love my last suggestion. As I am writing these words I have a comical image of a hardcore technician blasting out of his chair in outrage and doing a triple summersault and bouncing on his head three times.

My last suggestion is that when a stock drops below its 200 day moving average it should be regarded as a bullish rather than a bearish event. There I said it.

Before going nuts I challenge the reader to pick at random a dozen 5 year, 200 day moving average charts and to see them for the very first time. Ask yourself a revolutionary question. Why isn't it better to buy a stock when its selling below its 200 day moving average rather than above its 200 day moving average. Study the charts and see them for the very first time.

I told you I was a contrarian. We are always told that we should buy low and sell high. Now is your chance.

When we buy above the 200 day moving average we are buying high in the hopes of selling to an even greater fool. Think about it!

Fred Carach is the author of the recent book "Forty Years A Speculator." His blog is fortyyearsaspeculator.blogspot.com

"AMAZING DIVIDEND PLAYS" BY FRED CARACH

2008-11-12T13:41:00.003-05:00

In 47 years as an investor I have never seen the amazing dividend plays that are available in today's market. The dividend plays that I am listing below are paying dividends that range from about 12% to 25%. When investors see stocks that are paying dividends in this range their automatic assumption is that the dividend is too good to be true and that the stock should not be bought because the dividend is about to be eliminated. They are so certain of this that they don't even consider researching the stock. And in ordinary times this would be a reasonable assumption.
It is not a reasonable assumption today. The stock market has collapsed dividend paying stocks to such an extant that their dividend yield has exploded to mind blowing levels. If the dividends that these stocks are paying are reinvested in a dividend reinvestment program the rewards over a five year period are staggering.
At 10% interest compounded money doubles every 7 years, at 15% money doubles every 4.8 years. At 20% money doubles every 3.6 years. At 25% money doubles every 2.88 years.
In my opinion there is almost no chance that any of the stocks that I have listed below will have their dividends cut by more than 50%. Indeed I will be amazed if any of these plays have their dividends cut by more than 25%. My worst case assumption is that the group as a whole will have a dividend cut of no greater than 20%. I would not be surprised if at least half of the stocks in this group did not cut their dividends at all.
Indeed most of the companies on this list have already savagely slashed their dividends. During the next turn of the wheel these companies should recover and will have the capacity to reinstate their old dividends. If this happens their dividend return will be phenomenal.
It goes without saying that I own these stocks. I have invested about 1% of my investment capital in each of these plays. All data is from S&P and was collected recently.

MEDICAL PROPERTIES TRUST-sells at $5.00 and pays a dividend yield of 16%. It is a REIT or real estate investment trust as are all the below plays. This is a sector that has been absolutely hammered by the market. It is important to realize that in analyzing REITS the key metric as to whether a dividend is covered and can be maintained is not EPS or earnings per share as so many mistaken investors believe but by a metric called FFO or funds from operations. This is the cash that is actually in the till and that is available to pay dividends. According to S&P this stock has an estimated FFO of $1.15 per share in 2009. This stock is currently paying a dividend of .80 cents per share. Its tangible book value is $9.85 a share

SUN COMMUNITIES-sells at $13.00 a share and pays a dividend yield of 19%. This REIT specializes in high quality mobile home rental communities. It has an estimated 2009 FFO of $2.88 per share. Its current dividend is $2.52 per share. Its tangible book value is $1.27 per share

PENNSYLVANIA REAL ESTATE INVESTMENT TRUST- sells at $4.85 per share and pays a dividend yield of 23%. This REIT specializes in retail malls. It has an estimated 2009 FFO of $3.41 per share. Its current dividend is $1.16 per share. Its tangible book value is $16.70 per share.

HRPT PROPERTIES TRUST- sells at $3.30 per share and pays a dividend yield of 14%. This REIT specializes in office and industrial properties. Its estimated 2009 FFO is also $1.03 per share. Its current dividend is $0.48 per share. Its tangible book value is $9.75 per share

NORTHSTAR REALTY FINANCE CORPORATION- sells at $3.08 per share and pays a dividend yield of 12%. This REIT specializes in commercial mortgages. Its estimated 2009 FFO is $1.32 per share. Its current dividend is $.40 per share. Tangible book value is $5.96 per share.

CBL & ASSOCIATES PROPERTIES-sells at $5.80 per share and pays a dividend yield of 25%. This REIT is a large owner of regional malls in mid-sized markets. Its estimated 2009 FFO is $ 3.51 per share. Its current dividend is $1.48 per share. Tangible book value is $13.91 per share.

I know that these dividends appear to be too good to be true. Indeed they are so high that they frighten me. Nonetheless, within the parameters that I have laid out I believe that these dividends are sustainable.
I can't help thinking about what Clint Eastwood said in one of his "Dirty Harry" films.
"Well screw do you feel lucky?"
Well do you?

Fred Carach is the author of the book Forty Years A Speculator. His blog is located at fortyyearsaspeculator.blogspot.com

"BANKRUPT NATION, WHATEVER HAPPENED TO AMERICA" BY FRED CARACH

2008-08-21T20:16:00.000-04:00

I was born in 1942. I was born into a nation in which even the poor saved. I now live in a nation where even the rich cannot save. To understand what went wrong you must understand the past. To an amazing extent our financial ruin was caused by the creation of two debt instruments, the credit card and the 30 year mortgage.

Prior to the 1930s the only mortgage that existed was a 5 year mortgage with a 50% down payment. The usual mortgage interest rate it is interesting to note was 6% . And yes everyone put 50% down or they could forget about buying a home. When the 5 years were up you went down to the bank and kept rolling over the mortgage until you were able to pay it off. In those days Americans were ferocious savers. It was common for people to pay off their homes in 15 years or less.
The only notable exception to this was the well known Sears kit-built homes. These homes were in vogue in the two decades prior to the depression. Since Sears knew the cost of construction of these homes they sold them for only 25% down.

In the depression 1930s the government stepped in and created the 20 year mortgage and reduced the standard down payment to 10%. You will notice that I said 20 year mortgage and not 30 year mortgage. That hideous beast had not yet been created.

Under the old mortgage system of large down payments and a 20 year payoff your equity accumulation was rapid. Under the new 30 year mortgage system you were in debt forever. On a 30 year mortgage after 15 years of payments you have amortized only about 24% of the mortgage. What is even worse is that the average American moves every five to seven years. In those years there is almost no repayment of principal at all. It is almost all interest. And the impact of this mortgage on your ability to accumulate wealth was brutal.

On a 20 year $200,000 mortgage @ 6 1/2% you pay a total of $260,000. On a 30 year $200,000 mortgage @ 6 1/2% you pay $390,000. That is an additional $130,000 in payments. Now you know why it is so difficult to get ahead. The 30 year mortgage is killing you.

The other doomsday weapon of financial destruction started out very innocently. In 1950 two businessmen started the Diners Club, the first credit card company. Its primary purpose was to enable businessman to prove to the IRS how much money they spent taking out clients.
And until about 1960 only businessmen and rich playboys had credit cards.

I still remember how shocked I was when I went home on leave in 1961 and discovered that my mother had acquired a credit card. She didn't look like a rich playboy to me.
I was a hard case. I was 30 years old before I broke down and acquired a credit card.

The credit card has wreaked havoc on the American people. It has transformed us from a nation
of savers into a nation of debtors with dire consequences. As late as the 1980s the US savings rate was 10%. Throughout our history we were routinely able to save 10%-15% of our income. Not any more. Since 2005 our savings rate has been less than 1% and now hovers at zero.

Total credit card debt is up an astounding 435% since 2002. Those credit card households that carried a balance in 2007 averaged $9,840 in credit card debt. A new record. Total household debt is now 131% of disposable income. Another record to be proud of is that 25% of all college graduates owe at least $20,000 of tuition and credit card debt. An astounding one in seven households has either filed for bankruptcy or is under the protection of a court appointed credit counselor.

None of this is surprising when you take a gander at the brutal interest rates that credit card companies charge. The best credit rates are about 9.9%. The rates for bad credit are a suicidal 22%-28%.

There are many Americans who are walking around today that are bankrupt and don't know it. The debt loads that millions of Americans today regard as normal are not normal at all. They are suicidal over the long term. At 10% interest compounding debt doubles every seven years. How many Americans can double their income every seven years? At 22% compounding debt doubles every three years. These are suicidal numbers.

The subprime crisis is not the end of our debt problems but only the beginning. The only reason the debt crisis has been staved off for as long as it has is because the American people were able to use their homes as an ATM machine. An astonishing number of Americans are living in homes they cannot afford and are carrying debt loads that can no longer be sustained.

There is only one question that remains to be answered. What were the banks thinking of? For generations banks have possessed the know how to ascertain how much debt their clients could safely carry. They have insanely violated these tried and true standards on a massive basis in return for abnormally high short-term profits. And they are now reaping the whirlwind.
Fred Carach is the author of " Forty Years A Speculator." His blog is located at fortyyearsaspeculator.blogspot.com

"TODAY'S IRRATIONAL STOCK MARKET AND THE RISE OF THE PROPELLER HEADS" BY FRED CARACH

2008-08-08T19:45:00.001-04:00

When I broke into the stock market in 1961 the stock market was a far more rational market than it is today. The type of news that will send a stock up or down four or five points today would have in the 60s and 70s only sent the stock up or down a half point. The stock market today resembles to an ever increasing degree a" perpetual overreaction machine". It is forever being jerked around like a monkey on a chain.
One constantly hears alleged market authorities proudly proclaiming that the market is always looking forward six months. Not any more! Today's market is too stupid to anticipate anything. It does not anticipate it reacts in shocked surprise and with with ever increasing violence. The question is what has brought about this dramatic change in market behavior?
The answer is that the market players and their relative strength has changed. And the most important new factor by far has been the rise of the "propeller heads" as they are fondly called on the street. Their common name is Quants because they are engaged in quantitative analysis.
By the 80s it had became fashionable for Wall Street firms to raid college campuses for math PhDs. Then stick these certified geniuses into a room with a high-powered computer and tell them to come up with a sophisticated black-box algorithm that would enable them to beat the market. And in many cases they succeed. And thus computer-generated program trading was born.
The other key players in this drama were the day-trader and the momentum player. Both of these players had long existed but until the 80s they were small potatoes.
In the 60s when I started out the stock market was dominated by the individual investor. The individual investor in those days was overwhelmingly a "conviction investor". He researched stocks as best as he was able to and based on this research and his convictions (he liked the product). He bought the stock. By long-term I mean at least five to ten years. Today long-term means I might own the stock six months as long as it doesn't go down 5%. If it goes down 5% I am out of there.
It is important to understand the distinction between a market and mob-action. A market requires the prudent, informed, carefully calculated and above all else "independent-opinion" of the entire mass of the decision-makers who make up this market. In the absence of these independent decision makers you don't have a market you have a mob that is pretending to be a market. This results in ever more violent reactions to the news of the day that can not possibly be justified when you analyze the economic realities of both stocks and the market. This assumes of course that anyone is still paying attention to tried and true fundamental analysis. After all why waste your time with this boring stuff that may only pay off in the long term when you can participate in the excitement of the street's latest cattle stampede. Even if it is heading off a cliff. After all we are smarter than the average herd animal aren't we? There is no doubt that we will spot the cliff before the rest of these clowns. Did you ever see a more confused herd of sheep and goats? I don't think they could find a cliff if they tried to!
My god how did that cliff get there? Help!!!
Historically the stock market was soundly based on masses of independent decision makers. As time passed however, these independent decision makers were gradually replaced by the rise of the institutional investors who for all of their alleged vaunted sophistication showed a much greater tendency than the individual investor to stampede with the herd. The transfer of market making power from the individual investor to the institutions resulted in a vast reduction in the number of independent decision makers.The growing tendency of the institutions to concentrate on short term profits and to participate in every cattle stampede went on steroids when the propeller heads arrived on the scene. Their magic black boxes based on their secret algorithms promised and more often than not delivered superior short-term returns. Long term investment went out the window. The future was now.
As this bias took over the market the day traders and the momentum players exploded in importance. As time progressed many of the black box programs seeped down the food chain and became more readily available to them. It was found to be impossible to keep the most successful programs secret for long. As a result everyone began to march to the same drummers.
During this period the ranks of the old time conviction investor with his independent viewpoint and long-term holding pattern shrank to insignificance. And thus was born today's whiplash market. Strangely enough for an old school investor like myself this new world order is a gold mine.The only thing I have to do is hide in the weeds and pick off the game as they thunder pass me in one of their mindless stampedes.
Fred Carach is the author of Forty Years A Speculator. His blog is located at fortyyearsaspeculator.blogspot.com.

"STOPPED OUT. THE CASE AGAINST STOP LOSS ORDERS" by Fred Carach

2008-07-21T21:05:00.000-04:00

Nothing is more devastating to today's investors than being "stopped out" of their stocks. Or as I fondly call it, being blown out of your position.
When I broke into the stock market more than 40 years ago only professionals used "stop loss orders". Today it appears almost everyone uses it. And in my estimation most investors would be far better off if they had never heard of a stop loss order. A stop loss order is an automatic order to sell your stock if it falls to your pre-set authorized selling price.
Upon learning about stop loss orders, Joe Investor is wildly enthusiastic. It sounds like the greatest thing since sliced bread. Joe investor will almost always set his stop loss at one of three price points. At either 5% below his entry point or at 7.5% or at 10%. Joe is convinced that he is now running with the big boys and doing the smart, sophisticated thing. Not exactly. Quite the contrary. Joe has now put himself into the clutches of the "smart money boys", who are going to introduce Joe to whipsaw city. Whipsaw city has many skyscrapers and the smart money is going to throw Joe and his compadres off of every one of them. The falls are brutal. In the end Joe will drag his broken, mangled body out of whipsaw city and never be heard from again. He will have been broken by stop loss order hell.
What does the smart money know? It knows that there is a range of between 5%-10% below every stock that is a mass of stop loss time bombs waiting to go off. The only thing they need to do to ignite this mass of stop loss time bombs is to simply drive the stock down 15%-20% and they will all be ignited. They are the stock market's "weak sisters". Buyers whose only conviction is that all falling stocks are going to zero and must therefore be sold at once.
This is why if you stick around for very long you will notice that stocks rarely fall 5%-10%. They almost always fall 15%-20% to insure that they have blown all the weak sisters out of their position. Having blown the weak sisters out of their position, the smart money is now ready for part two of operation whipsaw. The comeback.
The smart money knows that the stock is now in the "strong hands" of the conviction investor. The conviction investor is the investor who actually knows why he owns the stock. Isn't that a refreshing change. The smart money knows better than to tangle with these hard cases. And why bother. They know that a strong floor now exists in the stock. The existence of a strong floor means it is now safe to buy the stock
The smart money now begins to buy the stock with a vengeance. Three months later the stock is selling at 30% higher than Joe's purchase price. Joe should have a 30% profit on his stock. Instead he has a loss of say 10%-15%. Welcome to whipsaw city Joe. There is only one way out. You must become a conviction investor. I will show you how.
One final word of warning is required. This strategy only works with value plays. It doesn't work with momentum or growth plays. The boys have a real scorn for these type of investments. And why not? The only conviction these investors have is that you should buy a stock if it is going up and sell a stock if it is going down. When you stop to think about it that is not too impressive is it? The boys ask themselves why should we take the stock down only 15%-20%. When we know we can take it down 50% or 80%. After all these clowns are not just clueless but are living in total darkness.
Fred Carach is the author of the book " Forty Years A Speculator". His blog is located at fortyyearsaspeculator.blogspot.com.

“KISS REAL ESTATE GOODBY” A real estate appraiser’s viewpoint by Fred Carach

2008-07-15T22:13:00.000-04:00

Today we are told that the real estate crisis is in the 8th or 9th inning. I don’t think so.
The 3rd inning is more like it. I have a rather a unique insight on the problem. For thirty years I was a State Certified General Appraiser. That means I was licensed by the state of Florida to appraise everything from a chicken coop to office towers. I guess you could say I was there at the creation.
Those who champion a quick recovery are quick to trot out trite statements. The one I find the most amusing is the one that proudly proclaims, “that you can’t lose money in real estate”. The other one is that, “they aren’t making any more land and therefore it is a sure thing”. The quick recovery exponents foresee a V-bottom recovery. In other words after hitting bottom the market will immediately bounce strongly upward like a rubber ball that has fallen from a great height. I think an L-shaped bottom is far more probable. I think that after we hit bottom we will bounce along the bottom of the L for possibly five years. Beyond that point my crystal ball becomes very dark. What everyone appears to be missing is that in every type of investment transaction except for real estate there are only two decision makers. The buyer and the seller and if they agree the transaction takes place. In real estate however for a transaction to take place four players have to agree. And this is what everyone is missing.
It is not surprising that everyone is missing this important fact because for fifteen years the other two parties did nothing more than to rubber stamp the deals that the buyer and seller had agreed to. The other two parties to the transaction are of course the lender and that weird creature that no one knows anything about the real estate appraiser. The function of the lender is obvious. The function of the real estate appraiser is not so obvious. In theory the function of the appraiser is to estimate the market value of the property, so that the lender can recover his investment if the buyer defaults on his mortgage. And in olden days when lenders, that is the banks warehoused their mortgages this is actually how it worked. That world came to an end when mortgages were converted into securities and then sold all over the world. The lenders simply pooled these mortgages into financial instruments called MBS (mortgage backed securities) and sold them to increasingly clueless parties all over the world.
It is amazing how disinterested lenders became in honest estimates of market value once they knew they could dump these mortgages on the unsuspecting and the clueless. The appraiser now had a new function. His new function was to rubber stamp the decision of the buyer and the seller. And woe to the appraiser who did not rubber stamp the deal. I spent my last fifteen years as an appraiser having mortgage brokers point a gun to my head.
Now let’s see how things worked before the crisis. Lucky seller has found a fool who will pay $30,000 more than the property is worth. The appraiser tells the lender that the sale price is $30,000 too high. The lender couldn’t care less because he knows that his mortgage will he believes be lost in the 5,000 other mortgages that are being pooled and sold to some clueless bank in Europe. No one will ever be the wiser. He casually informs the appraiser that if he ever wants another appraisal assignment from him he will rubber stamp the deal. The deal is rubber stamped.
What is even more important however is that this new sale is now regarded as a “comp” or comparable sale by appraisers working in the neighborhood. This new higher sale now bleeds through the neighborhood and results in higher prices for all comparable properties in the neighborhood. This powerful engine for increasing real estate prices was at work throughout the great real estate boom.
Contrast that happy state of affairs for the seller to what happens today to lucky seller who has found a buyer willing to pay $30,000 more for his property than market value.
Our lender is now drowning in foreclosures. The last thing he can tolerate is to foreclose on another over priced property. He will inform the lucky seller that under no circumstances will he underwrite a mortgage for one dime more than the appraised value. Under the new world order the appraiser has also found a reason to develop a backbone he now knows that almost all appraisals are now being reviewed by an independent appraiser. There is nothing that will make an appraiser more cautious than the realization that his appraisal is being reviewed by another appraiser. Outside of the industry very few people have any idea of just how difficult it will be to raise real estate values as long as these conditions exist.
But it gets worse. It gets far worse. For real estate prices to advance it is first necessary for non homeowners to be able to purchase starter homes. For the first time in decades these young, first time purchasers are being told that they have to have a down payment. The horror of it! These pampered darlings have never saved a dime in their lives and they are now being told that they have to come up with a down payment of 10% or more. When you tell them this they look at you as if you have lost your mind. In reality what this means is that a large chunk of people who would have qualified to purchase real estate before the real estate crisis are now frozen out of the market.
Then there is the FICO score crisis. During my career the magic number was 620. Anyone who had a credit score of 620 or above could qualify for a loan. Today for the first time that score has been raised to the 660 or 680 range. There is nothing that will tell you how terrified lenders are today than this statistic. For most of the last twenty or thirty years lenders were beating the bushes looking for borrowers and constantly lowering their standards to get them. Today they are kicking them away. And this is happening at a time when the credit scores of the American people are in a death spiral from an avalanche of foreclosures and bankruptcies. Perhaps another 10%-15% of potential buyers are now frozen out of the market who would have qualified prior to the real estate crisis.
The ugliest reality of course is that the median income American family cannot afford to purchase the median priced American home. Most Americans today could not afford to purchase the home that they live in. At the peak of the boom the median priced home sold for about $230,000. The median American family can afford to pay up to $175,000 for a home using tried and true mortgage parameters. Since booms and busts almost always overshoot I suspect that the slow, relentless, decline in housing prices that we are experiencing will not end until the median priced home is selling for somewhat below $175,000. As this is being written the median price American home has fallen to about $195,000 not too far from the $175,000 requirement. I think we could reach $175,000 sometime in 2009.
That brings us to the last point. What was the device that enabled buyers to bull the price of homes to an unsustainable median price of $230,000? It was of course the phony-baloney mortgage. More popularly known as the ARM or the adjustable rate mortgage, which existed in several varieties but in all its varieties its sole function was to enable home buyers to buy homes that they were otherwise unable to afford and thus bull up real estate values. These ARMS are now an endangered species as lenders have discovered to their considerable horror that lending money to home buyers who cannot possibly afford to pay off the mortgage is a suicidal business practice.

When you analyze the unique set of circumstances that enabled the real estate bubble to occur it is hard to see how we can have sustained price increases as long as terrified lenders and real estate appraisers refuse to cooperate and return to their old and now discredited practices. Sellers can rant and rave all they want to. They are not going to get their price, at least not in the next five years. Let me repeat myself, sustained price increases in real estate are very, very difficult to achieve without the willful cooperation of the appraiser and the lender. As I have stated what makes real estate unique among all investment categories is that what buyers and sellers want is irrelevant without the concurrence of the lender and the appraiser.

Fred Carach is the author of the recent book “Forty Years A Speculator." His blog is located at fortyyearsaspeculator.blogspot.com.

FRED CARACH

2008-05-03T21:44:00.000-04:00

I have been a speculator for more than forty years. I am not a Wall Street professional. In real life I am a State-Certified General Appraiser. That means I am qualified to appraise everything from a chicken coop to the Empire State building. This is the story of my transformation over more than four decades from a conservative blue-chip investor into a steely-eyed riverboat gambler with nerves of steel. As the years progressed I realized that blue-chip investing wasn't the answer. It couldn't be these Godzillas don't move. I wanted to buy stocks that would go to the moon.
Gradually I discovered what I was looking for in the unreported and unknown world of small-cap and micro-cap investing. Allow me to introduce you into my world. The strange and wondrous world of the river boat gambler.
In a world in which most investors are happy to earn 15% a year I shoot for the moon. Stick around and I will show you how it is done. After all, you might make the same amazing discovery that I made.
You might discover that you are a riverboat gambler, with nerves of steel and ice water in your veins ,but you never knew it.