Good Bye Stocks – Hello Bonds

Poor Richard’s Report
Over 300,000 readers

My Mission: God has uniquely designed me to seek, write, and speak the truth as I see it. Preservation of one’s wealth while continuing to provide needed income is my primary goal for these unsettled times. I have been given the desire to study and observe global money progressions and trends for the last 50 years. I evaluate possible future trends in order to provide positive concepts for you to form your own conclusions. The main purpose of this letter is to warn you of possible financial sinkholes.

Good Bye Stocks – Hello Bonds

We are leaving the golden era of free enterprise due to unmitigated greed and chicanery. We can easily adjust if we accept the true meaning of what awaits us. If we fight to retain our old dreams and fantasies we will see ourselves being spoon fed by fat socialist bureaucrats for the “common good”.

In this letter I will present some facts for your perusal and then you can make up your own mind in regards to your financial decisions. Those willing to change their offensive strategy can become winners in life’s never ending battles.

The result of these recent price disturbances (all the bubbles bursting) is the falling value of the property that has been borrowed against. The value of the property’s income also falls. We have come from extreme over indebtedness and now find ourselves in a hole – we should stop digging.

This is a hard lesson that our grandparents learned in the 1930’s, but sadly has been forgotten as satanic greed took over our souls. We now find ourselves caught between a recession and a depression. I call it a MESSYSESSION.

All the corporations whose bubbles have burst must work down their inventories; since many are in the financial sector this will take time. Individuals must use their earnings to pay down debts to save their homes instead of spending money on frivolous purchases. The Rule of 72 has the deck stacked against them, unless the Usury Law is resumed. The lack of the Usury Law is quicksand for our economic recovery.

The working down of inventories alone can be deflationary, however, the Federal Reserve has been pumping money into our supply pipeline at super speed. When an entity goes bankrupt, those debts do not go back into circulation, they go to money heaven. This is why the Fed has to keep the supply pool full and why this action should keep us out of a depression.

Having to pay down all this debt slows down our economy and hurts our suppliers worldwide. This is why we have a world wide Messysession.

Corporations that have borrowed from the Government will have a hard time maintaining their common stock dividends because their first priority is bond interest. Their second priority is preferred dividends. What is left over will then be distributed to common stock holders or used for debt reduction. Debt reduction means job security.

Sooner or later the US Government will have to go on a massive borrowing campaign. This could weaken the dollar and send interest rates soaring along with the price of Gold – for a while.

Some recessions are “V” shaped, which means stocks fall down hard and come back up quickly. Stocks tumble, but recover because there are people looking across the valley. If the recovery is like an elongated “U” or “L” one needs binoculars to see across the valley to a recovery. This could cause price to earnings ratios to shrivel, since analyst’s earnings estimates will be suspect at best. The economy can take a year or two to recover based upon how responsible Congress is. It will be years before our economy fully recovers from all the bubble bursting. What we need is a cheap new energy invention.

The only period, since 1872, where stocks substantially outperformed bonds on a prolonged basis was the 1950s to 1960s. This was a golden era for stocks and it has taken many abuses to wind down.

These are some of the many issues that President Obama faces on the home front. Now we shall look at some of his international problems.

Europe is changing. It used to be that France and Germany were the major players, with Great Britain looking on. The United States has encouraged the expansion of the European Community to diminish the power of the two largest countries. Poland is emerging as an economic power and if Turkey is admitted, as they should be, they will bring new found political clout for the first time since the demise of the Ottoman Empire 90 years ago. Their inclusion could bring stabilization to the chaotic Middle East situation. Turkey has freedom of religion, a vigorous economy (17th largest), and a solid government. Their influence is growing. They also have a strategic location to insure peace long term.

Then, there is Russia, who can throw all kinds of money around, but when it comes to signing on the dotted line – they cannot be trusted. Turning off gas supplies in mid-winter and canceling major contracts with world-renowned companies are actions that are hard to forget. Obama has pledged to focus US military power on the war in Afghanistan. The bulk of supplies must come from the north. Russia does not want a ballistic missile defense system in central Europe. It wants a halt to NATO expansion and reduced American influence in the Caucus and central Asia. They also want a broad renegotiation on non-trivial treaties that are terrible for Russia in 2009. (Anyone want to be President?)

We must come up with a way to renew confidence for the consumer. First and foremost is the renewal of our Usury laws that were dropped because disintermediation was wrecking the banking system in the 1970s. Creating lasting jobs will not happen by just building roads. These programs must be done so that they promote or improve future growth. It is difficult to do this on a national level because there are too many fingers in the pie. Programs done on a state level are easier to control. It is more realistic to meet regional needs.
Lowering corporate taxes when a corporation moves into intercity areas would mean better roads, and businesses to support them. Raising taxes invites tax avoidance schemes that only benefit the issuer. It also removes money from the private sector. Today, pricing power has evaporated.

There must be global reorganization of the securities laws, most importantly the Uptick rule. Countries that do not participate should be banned from trading within the member countries. Today hedge funds and institutions have spent millions of dollars on sophisticated trading programs. This makes for an uneven playing field and has driven the small investor to the sidelines, as witnessed by declining volume on the exchanges. The small investor becomes the ultimate bag-holder at the bottom of markets when they have no one to sell to.

If a country’s Gross Domestic Product (GDP) is declining that means the average on corporate earnings will be declining also. This means fewer companies will be showing an increase in earnings and therefore there will be fewer securities that have an investment grade value. Since there are already too many mutual funds and they all cannot buy the same stocks, that game is over. I would sell your mutual funds while you can if you are over 55 years old. If they get too many orders for liquidation they have the option of delivering stock of the same value to you. That is an easy way to get rid of their losers. If you are under 55 and own a balanced fund where the income can be reinvested on a periodic basis you are in the catbird seat. Lower prices will mean more shares and 10 to 15 years from now when the market recovers you could be a wealthy person. Other low income on non paying funds should be sold. It could be 20 to 25 years just to breakeven and that is only if it is a survivor.

First quarter earnings are going to be a disaster. I suspect this is when many will throw in the towel and give up.
Gold should be considered a hedge – possible short term.

Here are some moneymaking ideas. A successful portfolio can be 20% equities 50% fixed income and 30% cash.
By equities I mean income-producing securities yielding over 5%. There are a few out there that are “stupid” cheap versus dirt-cheap. Then there are preferred stocks, many of which are 85% tax-free. Many are selling below their call price. This means if a company wants to improve its balance sheet, they can do that by calling your preferred from you by paying the call price. If they fail to pay a preferred dividend it becomes cumulative. To resume payments they must make up the back dividends first. One that falls into this category is: AMERCO Pfd A (NYSE) 20 (2-6-09) pays $2.125 which yields 9.41%. gives you a tax free yield of 8%. If they call the stock at $25 you will have a $5 gain which amounts to a 25% gain. You won’t be able to have this return with common stocks over the next several years.

Tax free bonds were good when income tax rates were 55%-92%. The low tax rates today are beaten by preferred stock’s rates, such as the one I mentioned above. You have a ready market and real value. What you see is what you get. There was an issue on Long Island that defaulted in the depression. A default like that today would wreck havoc in the entire sector. For safety reasons, please avoid tax-free bonds.

Since the US has to borrow around a trillion dollars or more, Government bonds could be an instant loss. For now, I would avoid these also. That leaves us with corporate bonds. Many corporate bonds have a better balance sheet than the United States. Buying bonds in the five year range is the safest place to be. As the bond gets closer to maturity the price fluctuations are at a minimum and easily salable. You are better off buying an individual bond than a fund. The fund will charge a yearly management fee as well as anything else they can get away with. Also, some funds simply dump bonds into a portfolio and walk away. There was a case where a fund dumped their holdings of an issue right at the very bottom, only to have the bonds called a few months later. Please remember that corporate bond holders have first lien on a corporation’s asset.

I suspect that in a few months you will see a stampede out of many mutual funds and a proliferation of all types of bond funds trying to cash in on the new trend. Keep it simple- buy your own.

I know I have thrown many ideas your way in this letter and I apologize, but I feel the times warrant such thinking. I will be available, free of charge, to anyone who would want to discuss any of these ideas at the addresses below.

CHEERIO!!!!
Richard C De Graff
256 Ashford Road
RER Eastford Ct 06242
860-522-7171 Main Office
800-821-6665 Watts
860-315-7413 Home/Office
rdegraff@coburnfinancial.com

This report has been prepared from original sources and data which we believe reliable but we make no representation to its accuracy or completeness. Coburn & Meredith Inc. its subsidiaries and or officers may from time to time acquire, hold, sell a position discussed in this publications, and we may act as principal for our own account or as agent for both the buyer and seller.