“Spread Trusts … The Perfect Way to Play the Debt Bubble – Revealed”

Checking out the Marc Lichtenfeld teaser for "The 3-Minute Event That Will Change Financial History"

By Travis Johnson, Stock Gumshoe, April 4, 2013

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Call me a cynic, but when I see a looooooong ad presentation about financial armageddon, I skip right through the stuff about collapse and anguish and falling standards of living and economic crisis, and look for what the ad copywriter is trying to sell.

Because frankly, everyone knows there’s a debt bubble. Everyone knows that after interest rates languish below the rate of inflation for a long time it has to eventually stop. And everyone knows that interest rates that are pushing zero are a lot more likely to be higher than lower in the future.

Unfortunately, no one knows quite when interest rates will go up.

Which is a problem.

Because the financial doomsayers and pundits have been lamenting the ridiculously low and unsustainable interest rates for many, many years. We even saw several teaser pushers talk about the fact that the debt bubble was about to pop and the US dollar collapse back in early 2008, before the financial crisis (a crisis that, as they tend to do, sent investors running for bonds … and brought interest rates down even further).

Over the last three years, the ETF representing 7-10 year treasury notes (ticker IEF) is up about 20% — that’s not as good as the broader market, which is up almost 35% during that time (represented by SPY, the S&P 500 ETF), but it’s certainly not a burst bubble. At least, not yet.

And financial catastrophe is the prediction we’re seeing today from Marc Lichtenfeld as he tries to sell his new newsletter service, which is called The Oxford Income Letter. Let’s see what he’s talking about, shall we?

The armageddon bit is probably going to sound a bit familiar to you, we’ll deal with that first:

“The 3-Minute Event That Will Change Financial History

“A ticking debt bomb buried deep in the world markets is getting ready to blow on Thursday, April 4…”

Oops, I was looking at the earlier version of this ad from a few weeks ago. Sorry, it’s no longer April 4 when the ticking time bomb will blow — which is a relief, because that’s today. It’s now June 12, so back to the spiel …

“A ticking debt bomb buried deep in the world markets is getting ready to blow on Wednesday, June 12…

“… the herd is plowing mountains of money back into stocks, like it was 1999 all over again.

“But what they might not know is this.

“Just over the horizon lies an event that will disrupt this rosy equation.

“Like most ‘black swans,’ only a few brave investors will see it coming and prepare in time.

“It will come suddenly too – like an earthquake – in a single three-minute blast. And it will change everything.

“But what exactly am I talking about?

“We’re about to witness the historic moment when some $93 trillion very suddenly rush out of certain investments, and into others.

“Ironically, the ongoing bull market in stocks will hasten this event’s arrival.

“Some investors will get very rich. Others will get crushed – especially when it comes to their ‘safe’ holdings.

“But you don’t have to be one of them – not this time. I’ve created this report to ensure that you come out on the winning side.”

What’s he talking about? Well, the $93 trillion number is a reference to all of the Federal, State, Municipal and individual debt in the United States, which is clearly unsustainable for the long run and maybe even unserviceable, eventually, with a GDP that’s in the neighborhood of $15 trillion.

We know that the debt is unsustainable as the debt service becomes an ever larger part of the federal budget and of the economy … so the question is how the markets react to that — we’ve known it to be unsustainable for decades now, and it becomes less so every year that new folks get added to the Social Security and Medicare rolls as recipients rather than payers.

Short term interest rates aren’t going anywhere anytime soon, at least not unless the Federal Reserve smells a real whiff of serious inflation coming, so it would be in the longer-term rates that the problem rears its head first. That means, and I’m paraphrasing Lichtenfeld’s ad here for the most part, that the problem will arise in the benchmark US 10-year note, the note that drives much of the longer-term interest rates around the world.

When we say “problem” regarding bonds, we mean that prices of those bonds drop because the bond buyers (the lenders) start to demand higher interest rates in exchange for the duration and credit risk that they’re taking on. And since Lichtenfeld is trying to sell a newsletter, and his publisher wants you to subscribe right this minute, while you’re thinking of it, there’s some urgency added … in this case, the urgency is that Lichtenfeld says the next Treasury auction of 10-year notes will fail, with the news cascading around the world in three minutes and bringing massive change to the global economy almost in the blink of an eye.

Oh, did I not mention the name of the letter yet? He’s pitching a new letter that they’re launching right now called The Oxford Income Letter. Don’t know anything about it yet, since it’s new, and Lichtenfeld has generally been around the investment newsletter world as more of a biotech guy than a dividends and income guy in my experience, but it’s relatively inexpensive and Oxford certainly has several income investing analysts who are probably involved as well.

Or, in his words:

“The Powder Keg Buried Deep Inside the Global Debt Markets

“The event has nothing to do with Washington defaulting on its $16 trillion debt.

“Nor am I predicting another crash in stocks.

“You might call it a powder keg hidden deep inside the world’s debt markets. The event will occur here, inside this non-descript office building in New York City.

“It will take only three minutes to spread worldwide.

“But its impact will last for generations….

“When bonds tank, interest rates must soar – it’s inevitable.

“But what most folks don’t realize is: This event won’t happen in an orderly fashion….

“The great bond bubble will come with a sudden force, like an earthquake. And only those who have reinforced their portfolios will survive.

“Just days from now, a single three-minute ‘tremor’ will trigger the ‘debt quake.’

“Eight times per year, the Treasury Department holds an auction for 10-year Treasuries.

“Participants include sovereign governments like China and Japan. They also include the big banks and Wall Street institutions, like Bill Gross’s PIMCO.

“The government might auction off $20 billion worth of Treasuries at a time.

“If demand soars, prices for the bonds soar – and the government can get away with paying very low interest rates.

“But if demand plummets, Washington must jack up interest rates to attract enough buyers.

“Until now, that hasn’t been a problem. The world has sought safety first. And Treasuries have enjoyed a 30-plus-year bull market as a result.

“But the biggest bond buyers on earth are getting nervous now.

“Take China, for example.

“China is the single biggest player in the market for U.S. Treasuries.

“During a single nine-month span ending last year, China quietly sold off $136 billion dollars worth of Treasuries.”

(Just to be fair, the chart Lichtenfeld uses to illustrate that China point indicates that Chinese Treasuries holdings topped off in 2011 and are in decline, which they were for several months to end 2011 — the chart is not that much of a straight line right now, both China and Japan hold more in Treasuries in January 2013 than they did in January 2012, though Chinese holdings are still below the peak level, from before they started actively diversifying more.)

So how does this three minutes happen? Here’s how Lichtenfeld puts it:

“The Spark That Will Set the Treasury Tinderbox Ablaze

“The Three-Minute Event will come in the form of a simple announcement.

“What most people don’t realize is: Announcements, more than any other force, impact Treasury prices and interest rates most directly.

“A recent Economic Policy Review study was crystal clear. Each of the 25 sharpest price changes and each of the 25 greatest trading surges can be associated with a just-released announcement.

“The study further states:

“The market’s reactions depend on the surprise component of a given announcement and on conditions of market uncertainty.”
That’s exactly what we’re about to witness inside the benchmark 10-year Treasury market.

“My research indicates something amazing – something not seen in decades, if ever.

“I’m talking about a virtual failure of an upcoming auction for 10-year notes.

“Now let me clarify. I am not saying nobody will show up for this auction.

“I’m saying almost no major players will show up, willing to pay the government’s asking prices.

“The resulting lack of demand will cause bond prices to tank – and interest rates to soar….

“It will trigger a chain reaction of sell-offs from Moscow to London, New York to Beijing.

“In short, the world’s ‘safest’ investment is about to become its riskiest.

“Those who don’t prepare could get wiped out – even the ripple effects will destroy millions of retirement dreams.”

So … whaddya do?

Lichtenfeld was predicting that the next auction of 10-year notes, which will be on April 10 (They announce the auction on April 4), will start the ball rolling (and now, according to the latest version, he’s moved it out two months to the June 12 auction — presumably our “three minutes” of crisis will skip the May auction, which is tentatively scheduled for May 8).

Maybe the ball is already rolling a bit, since the yield has been on a gradual move up since it bottomed out below 1.5% last Summer (yield is around 1.78% now for a 10 year note, which has fallen a bit in the few weeks since the first version of the ad ran), though it’s beyond me how you can confidently predict exactly when and how the world will demand higher interest rates. And of course, it’s been a lot longer than three minutes since the yield bottomed out.

I do, however, think it’s important to hedge your bets — I think holding any treasuries with durations beyond five years is a little silly at this point, but if we’re talking about prescience it’s also worth noting that I thought buying 10-year treasuries at a 4% yield was ridiculous and they couldn’t possibly get much lower, and that was more than five years ago. Back then, as now, even published CPI rates, which I think understate the real inflation impact for most people, meant that if you lent money to the government for ten years you were essentially saying that you were willing to lose purchasing power on that money for ten years in exchange for the government’s “risk free” promise to return your nominal investment at the end.

Crazy can stay crazy for a long time.

So what does Lichtenfeld think we should do to make money when this crisis happens? He mentions a couple of the standard ideas that we hear touted a lot, including the short treasury ETFs (like TBT or SHV), but he also says that he has a spread play that he thinks is even better. Here’s how he describes it:

“The Perfect Way to Play the Debt Bubble – Revealed

“I’m not talking about stocks or options, or even some kind of exotic bond play.

“I can almost guarantee you’ve never even heard of this unusual investment.

“They are extremely rare. Yet you can now find them listed in a tiny niche on the New York Stock Exchange.

“They’re called spread trusts.

“They’re generating millions for some of the world’s richest investors already. But very soon, the Three-Minute Event will hit. The spread between short- and long-term rates will explode. And these income-producing investments could easily double or triple in value… while spinning off huge, double-digit income along the way.”

OK, so double digit income sounds nice. As does “exploding in value.” So what are these things? No, they’re not really called “spread trusts” by anyone else … the deep dark secret is that they’re called … wait for it … Mortgage REITs.

Oh, these again.

Lichtenfeld describes them like this:

“These trusts make money by playing the spread. The wider the spread goes, the more money they make.

“Here’s how they work…

“First, they borrow money at short-term rates, which track the Fed Funds rate. (Bernanke has promised to keep these rates at the “zero bound” through 2015.)

“Second, they turn around and lend that money out at long-term rates (which track the 10-year Treasury rate)…

“So, for example, you take out a 30-day loan of $10 billion… at 1% interest.

“Then you turn around and lend that $10 billon out, collecting 5% interest… for three years.

“Along the way, you pocket the “spread” between the two rates… every year!

“With short-term rates at the zero bound, spread trusts are making a killing.

“And when long-term rates start soaring, they stand to make even more.”

And that’s more or less true, thought that last sentence is more troublesome … and there is certainly risk in these investments.

Mortgage REITs and similar leveraged investment pools got crushed during the financial crisis not so much because of the spread in interest rates changing (long rates fell fast even as short rates fell, but short rates were low enough already that the spread between the two tightened at times, meaning less room for profit), but because they rely on rolling over those short-term investments. They have to be able to keep borrowing that short-term money to fund the long-term bonds they’re buying.

Which means there are more moving parts to these portfolio managers than just “spread goes up, we make money” — they all have slightly different strategies and portfolios, but at heart they are leveraged pools of mortgage bonds (most of the difference comes in what kinds of bonds they invest in — fixed vs. adjustable, or govt. guaranteed vs. private, or commercial vs. residential, etc., and in how much leverage they use).

So if interest rates spike up on the long end much faster than they do on the low end, they can buy higher-earning bonds and earn more — but book value should be expected to fall, because the bonds they hold suddenly become less valuable, which means that unless they hold them to maturity they have to sell them at a capital loss when they’re rolling over the portfolio to buy the next bond. On the flip side, rising rates mean less refinancing, so they don’t lose money when folks refinance their mortgage before the lender has had a chance to hold it long enough to make it profitable.

That means the book value of these mortgage REITs can certainly bump around a lot, which can mean the stock price fluctuates a lot … but many of them have certainly done quite well, paying out massive dividends over time thanks to their borrow short/lend long leverage. Of course, Mortgage REITs didn’t exist the last time we had a real long-term rising rate environment, so I’m not sure what will happen if we’re going to see interest rates return to the 1960s-1970s levels and spike up with real inflation — but Annaly (NLY), the Godfather of the modern mortgage REITs, did see relatively decent and smooth performance (as long as you look very long term, maybe standing back from the chart a few feet and squinting a little) during the mid-2000s when 10-year interest rates (and mortgage rates) did climb a bit.

So I think there’s probably more uncertainty with what happens to Mortgage REITs in a rising rate environment, but as long as it’s gradual the best of them ought to be able to cope — particularly if the Fed keeps short term rates very low and continues to keep the market awash in liquidity, which will at least theoretically enable folks like the mortgage REITs to continue to get easy and cheap short term refinancing even if the value of their portfolio (those long bonds that are worth less when rates rise) is gradually dropping.

I don’t know if they’ll be able to continue to pay out 11% yields forever, but they can certainly do it right now. And I don’t mean to pick on just Annaly, since I don’t know if that’s the one Lichtenfeld is touting, but they have also cut the dividend many times over the years — it rises and falls as their performance does, so you can’t compare these to the steadier dividend growers or “dividend aristocrats” … they have higher yields than most stocks because folks are at least a bit nervous about them.

Which of the mortgage REITs is Lichtenfeld touting this time? He does provide a few clues, though they’re limited:

“Spread Trust Bonanza #1: This East Coast spread trust is currently paying 15%-plus dividends. It deals only in government-backed securities. During the most recent three-year reporting period, it has exploded cash flows from $2.5 billion to nearly $40 billion… an increase of 1,468%!”

Not enough clues to be 100% certain on this one, but the Thinkolator comes in with a pretty high degree of certainty in saying this is American Capital Agency Corp (AGNC). It does indeed yield 15%, you can make those cash flow numbers fit with the filings, and it holds only government guaranteed securities — which doesn’t help with interest rate risk, but it does get rid of the threat of default (I suppose opinions could differ on that).

It’s also one of the larger mortgage REITs, with a market cap of around $10 billion — which I think puts them second only to Annaly (NLY) in size. Though do keep in mind, the equity in these companies is very, very small — they are primarily debt spread players, so the lever up tremendously with that short-term money and turn that $10 billion in equity into a portfolio of $85 billion in bonds.

What’s the next one?

“Spread Trust Bonanza #2: Vanguard Group… BlackRock… T. Rowe Price… All are quietly starting to pile money into this Southern trust. It yields over 10% already, and it’s poised to spin off huge capital gains in the coming months. In just three years, cash flows have more than tripled, from $2.7 billion to $7.8 billion…”

Well, we’re forced to do a bit more of a guess here … but the best guess from the Thinkolator is that this is probably Hatteras Financial (HTS). Is “Southern”, you can make those cash flow numbers fit, and the institutional ownership, including from those big fund families, has risen lately (they have higher institutional ownership than the really big mREITs like NLY and AGNC). I don’t know the HTS management strategy, but they’re even a bit more levered than the big guys with debt at 10X equity, and they do carry roughly a 10% yield right now.

“Spread Trust Bonanza #3: Our ‘swing for the fences’ spread trust has exploded its dividend payouts… for five years running. Cash flows have soared for three straight years, to more than $1.3 billion. But this little trust could double or triple very fast…”

Well … this one I don’t know and don’t want to hazard a guess. From what I can tell by looking through all the significant mortgage REITs, there are no standard mortgage REITs that have consistently raised their dividend for five years in a row, almost all of them have had to cut their dividends … and most of them cut dividends not just during and following the financial crisis, but also more recently. So if you’ve got a guess about this “spread trust” that Lichtenfeld says is a “Swing for the fences”, well, fell free to toss it out with a comment below — I suspect that it’s not a standard mortgage REIT, but beyond that I don’t know.

So there you have it — we’ll look at the cancer drug he teases in a different piece, since he pitched that as one of the ideas in this “Three Minute Event” teaser ad, but it sounds like his favorite play on rising long term rates is a bet that long term rates and short term rates will both rise in a way that enables the mortgage REITs to profit enough from the spread that they can handle the depleting book value as their portfolios become less valuable. I’m less confident than he is in that playing out so nicely for mortgage REITs, but with yields mostly in the 10-15% neighborhood it’s clear that investors are being awfully cautious about mREITs anyway. My concern is probably a little more mainstream than his optimism — which would mean that you might have a better chance of beating the market if you listen to him, since betting on the same outcome that everyone else is betting on is rarely profitable.

There are lots of other folks who’ve touted mortgage REITs over the years, and some who are publicly still saying good things about them — Steve Sjuggerud comes to mind, I’m pretty sure he’s still positive about Annaly as one good example of what he has been fond of calling “Virtual Banks,” though probably every adviser and pundit has different things they’re looking for as warnings for when it might be time to get out of these high yielders. With my personal worries about future fluctuations in interest rates, and perhaps rapid ones, I’m not comfortable enough to own any of them personally right now — but that’s been true for quite a long time for me, so I’ve missed some nice hefty dividends.

If you’d like more background on mortgage REITs, there’s a good piece from the Wall Street Journal here that provides a nice quick overview of the current situation.

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ShowHide Comments (69)
    1. bmc123
      Apr 4 2013, 02:21:52 pm

      I’m impressed Travis.
      Spread Trust #1: American Capital Agency Corp. (Nasdaq: AGNC)
      Spread Trust #2: Hatteras Financial Corporation (NYSE: HTS)
      Spread Trust #3: Capstead Mortgage Corporation (NYSE: CMO)
      I probably could have saved myself $49 and waited for you to report but on the other hand I think I’ll try Marc’s picks for a year and see how it pans out.

      • 3984 |
        Travis Johnson, Stock Gumshoe
        Apr 4 2013, 02:41:36 pm

        Thanks — Interesting pick for #3, I don’t think of CMO as a “Shoot out the lights” option. They’ve been fairly average among the group over the last five years, in my opinion, though I haven’t looked at them all that closely. And their dividend has not grown over the last five years, the most recent dividend was about 40% lower than their five-years-ago dividend. Leverage is similar to Hatteras.

      • Soaraholic
        Apr 4 2013, 03:59:03 pm

        Think the third might be Realty Income (O) of Escondido California. Own it in some client accounts and the dividend increases have been steady for over 5 years. Current yield is fairly low. Have made excellent capital appreciation in addition to the steady income flow over the years. It is not a mortgage REIT.

      • George Cohen
        May 3 2013, 01:58:05 am

        Hey, bmc123, you paid your $49—and thanks for confirming those picks!
        But, in the many other reports was there anything else worth buying in that package?
        It was such a long teaser, he promised everything including the sun & the moon!
        Thank you–George

        • bmc123
          May 3 2013, 04:23:12 am

          I’d have to go back and pull up the mail with those reports to answer that part of your question. However, I decided to try his picks for 12 months because he’d been running the dividend picks for the Oxford Club for a while and I liked his picks and way of working, so plonking down the $49 is for access to his monthly picks rather than what was in those reports. If you want me to report on the reports just let me know and I’ll pull up that info for you, ok.

          • bmc123
            Aug 3 2013, 09:24:34 am

            The Income Letter Portfolio is split into three different categories; Instant Income, Compound Income & High Yield. Currently each one has about 6 stocks and all position are up bar one (and that’s only down ever-so-slightly), so I guess you can say he’s delivering on his promises. Hope this helps.

      • Greg Hammond
        Dec 5 2014, 02:33:21 pm

        Hey bmc123, the better part of a year later, have you found the newsletter useful? Lichtenfeld is still touting the 3-minute disaster. I already owned two of the three you identified, but am curious whether, apart from the hyperbole, you have found the newsletter useful or it has made you money. Cheers!

    2. sagenot
      Apr 4 2013, 02:31:51 pm

      Hmmmmm, where did LICHTENFELD get the idea that once you begin using your medicare benefits, that you pay no more premiums? We (my wife & I) pay more of a premium now than we’ve ever paid before. All medicare premiums are higher now & being retired doesn’t stop the premiums from being deducted from your monthly Soc. Security payment.

      What say you Travis?

      • 3984 |
        Travis Johnson, Stock Gumshoe
        Apr 4 2013, 02:45:38 pm

        Did he say that in the ad? I glossed over it if so — the big picture budget/fiscal impact is certainly that we have a huge number of people who are going from being net contributors to Medicare to being net beneficiaries of Medicare, though that doesn’t mean beneficiaries pay nothing.

      • Vic
        Apr 4 2013, 03:16:33 pm

        We have graduated levels of medicare premiums payments based a base rate plus affordability. The affordability part is based on earned and unearned income and you have no choice. Another benefit is allowing them to deduct federal income tax on your SSA checks…
        Some think its a free ride. It just aint so.

        • sagenot
          Apr 4 2013, 03:46:37 pm

          I wish that were so Vic, but my SS is more than twice my wife’s SS, yet her medicare premium is the exact $$ figure I pay to the penny. Am I mis-understanding what you mean above?

          • Sandie Bock
            Apr 4 2013, 06:30:36 pm

            The amount they take out is based on income and if married it is the income for BOTH of you so your wife and you would pay the same. IF you were both under a certain income then you both would pay $99 but if you make over their base amount then both Medicare premiums go up accordingly.

            • olivan leach
              Jul 16 2014, 12:25:36 pm

              Sandie what I don’t think is fair is medicare base’s your payment on income from the past year. My wife is planing on retiring next year and because she is making a nice pay check this year she will pay a much higher prem. yet she will be drawing may be 1/4 the money. The other sad fact is she is paying all most as much to blue cross to pay for the 20% as she pays to medicare for the 80%. That being the case the private health care is way to high kind of blowing the ideal that they can do it better than the goverment can.

        • Vic
          Apr 4 2013, 06:01:33 pm

          To further clarify:
          In our state the medicare payment is based on MAGI (Modified Adjusted Gross Income) on our tax form. The premiums we pay are based on that amount. Our MAGI went up past one threshold and therefore our premium payment went up considerably. Yes we pay the same amount for each of us but at an elevated level. I do not know how many levels there are nor what they will be in the future. I hope this helps.

      • olivan leach
        Apr 5 2013, 10:45:07 am

        Sagenot I don’t know where you live,but here in Tx. my wife who is still working has the cheapest insurance we can buy. That being Blue Cross pays out over $500 a month with $2500 deduct than they pay 75% if they want to which most of the time they find a way to not pay. Any way I am on S.S. and pay less than $150 month for 80% covered,and they pay the 80% on any thing they have done so for. Now like I said we live in Tx. were our dear gov. Rick Perry has never seen an insurance co. he doesn’t just love way to much. Meaning he and the rest of the jokers who run this state just love to see insurance co’s raise rates at will since there all so poor from paying out for all the tv adds they run 24,7 around here.

    3. Kevin Durbin
      Apr 4 2013, 02:48:20 pm

      Well thought out and impressive; I’ve been into a couple of REITs courtesy of the Stansberry guys, which include NLY, CIM, and TWO (Although I don’t think they are touting CIM any longer). Got into the REITs when the prices were a bit more depressed than they are now, but the dividends still beat US Treasuries

    4. KennyG
      Apr 4 2013, 03:34:10 pm

      Just wondering what effect Uncle Ben will have since he seems more than capable and certainly willing to buy up every last cent of newly (and existing if necessary) Treasury auction debt. If there is not enough demand coming in from outside bidders, Uncle Ben will not allow the auction to be perceived as failing. The FED will step in (as it has already done in the past) and buy up every dollars worth if necessary at prices that the FED wants to see the 10 year pegged at.
      Just my own humble opinion of course.

      • 3984 |
        Travis Johnson, Stock Gumshoe
        Apr 4 2013, 03:44:57 pm

        That’s been the story so far, though demand has been high for Treasuries in general in recent years. Almost everyone seems to think the Fed bond buying has to stop eventually and demand at these low rates will dry up eventually … it’s the when that’s the trick.

        • KennyG
          Apr 4 2013, 06:15:13 pm

          I tend to agree that the FED POMO has to slow down at some point, but if you look carefully at many of the past auctions of notes and bonds, the FED wids up owning considerable percentages of the newly issued debt, typically weeks or less after the auctions by buying it from the primary dealers. This is done so Uncle Ben is not a perjurer, but I for one believe there is a tacit, unwritten agreement [or maybe just a wink and a nod] between the FED and the primary dealers so that unles the fit really hits the shan, there will be no worries about lousy auctions until well after the 2014 mid-term elections.
          Again, just my humble, and somewhat cynical opinion.

    5. George
      Apr 4 2013, 04:30:21 pm

      Although AGNC and others have made good returns over the last several years, my worry is now that they are being touted by these investment rags, maybe it is time to get out?

    6. Myron Martin
      Myron Martin
      Apr 4 2013, 05:52:10 pm

      Travis is right, it is the “when” that is the trick in virtually all investments. While the aim may be to “buy low and sell high,” there are so many factors that can affect specific timing on investments, including unknowable market sentiments affected by government policies in a precarious financial environment of high debt, making it more of a crap shoot.
      I have never invested in debt instruments simply because I have proven that ultimately our collective DEBTS can never be paid in full in SOUND MONEY, eventually the Ponzi scheme that is fractional reserve banking MUST of mathematical necessity break down.
      To be fair, others may say the sector I specialize in, (junior miners) is also HIGH RISK! Like anything else, you simply need to become an expert in your chosen field to mitigate the risks, which I do by taking SMALL positions until management proves itself by results.

      • 3984 |
        Travis Johnson, Stock Gumshoe
        Apr 4 2013, 11:04:52 pm

        I think we’ll look back on it as a silly fad and social experiment, and perhaps a bubble mania story if it keeps going like this. I think local barter-style currencies are far more real and reassuring.

        • Alan Harris
          Apr 5 2013, 08:09:29 am

          Two things, both slightly off topic, but mentioned above. 1/ Travis, how the heck do you fast forward thru those looooong video teasers ? The screens usully dont even allow you to pause for a pee or rewind, let alone fast forward. I usually set them off, exit to do some house work and set the egg timer for 15mins later.
          Bitcoin. This is an interesting idealistic concept that is supposed to marginalise government control of money . But if anyone imagines that the worlds governments are going to allow anyone to side step their game, avoid tax, become invisible and limit their ability to manipulate your hard earned…..dream on. They will either outlaw it or place a prohibitive sales tax on every transaction.

          • 3984 |
            Travis Johnson, Stock Gumshoe
            Apr 5 2013, 08:22:12 am

            Hi Alan — usually can’t fast forward, but many of them (not all, unfortunately), will redirect you to a transcript if you try to close the video.

    7. john Viotto
      Apr 8 2013, 12:02:44 am

      I believe the tease as mentioned by one of the many fine contributors are;
      -NLY – is the ‘goliath” of mreits – recently made an acquisition. Mr. Market has reacted somewhat favorably.
      -AGNC – is selling at a slight premium with a 15% or so dividend. AGNC has an excellent management team.
      -O – What can I add to “O”. As one contributor mentioned “O” has appreciated significantly thus dividend % has decreased. I do have it on my watch list.

      Another reit is the healthcare field, OHI. With health care costs going up, organizations are looking to reduce operating expenses, thus “sales – leasebacks”. Healthcare reits are increasing in number. For some, they may be worth investigating. OHI, when I first started looking at it as around $12 per share. with a good dividend. I believe it has doubled in less than 18 months. I may be incorrect to my recollection. It is a solid company with excellent management and a captive clientele.


    8. springfield mo mortgage
      Apr 14 2013, 02:05:21 pm

      Just rely in your own analyses don’t be influence by this doomsayers. A balanced portfolio is always good during this times!


    9. 56 |
      Apr 17 2013, 06:38:48 pm

      How will these “trusts” function any differently than an equity or ETF holding when holders either panic and sell when they go down OR get stopped out because of margin calls or set stop loss protection?

    10. Herach
      Apr 19 2013, 12:49:45 am

      All of these trusts are totally susceptable to the interest rates controlled
      by the Fed. We cannot get lower than 0% as promulgated by Ben.
      The most likely change, if any, will be to the upside.
      Have you considered what effect rising rates will have on these trusts?
      I would like to hear your responses

      • KennyG
        Apr 20 2013, 07:11:28 pm

        Not arguing for against an investment in these trusts, but the trusts are not, IMHO, totally dependent on Uncle Ben keeping rates at/near 0%. Their profitability is based more on the spread between short term rates and the rate at which they can borrow and the rates on the mortgage securities they purchase. The “spread” is the key factor. Now Uncle Ben can impact the spread in many ways, but it is not purely a function of the FED’s 0% interest rate policy that determines their profitability. If QE happens to be out there buying up mortgage securities, it will drive down the spread even as fed rates are at 0% and dont change, or if Uncle Ben sells mortgage backed’s the spread will expand. My point is it is not only the potential rise in short rates if QE ends, but many other factors. In fact, a rise in short term rates could in fact help some of the mREIT’s depending on what that does to long term rates and the interest rate curve. A flat or inverted curve will be terrible for them, while a steep curve will typically be beneficial no matter what the short rates are.

    11. Herach
      Apr 21 2013, 02:05:35 am

      Thanks Kenny G for your thoughtful comments. My intent was to call attention to the pobability of r ising short term rates.Ths will occurr only in response to market forces.
      Uncle Ben is committed to keeping the QEs at least until after the 2014 elections.
      The bond Vigilantes cannot influence rates as he have in the past. The Fed is ready to buy what is not sold at auction. The pressure can only emanate from the central banks holding our debt. I am not so concerned with the causative factors of rate changes, but the effect on the sread trusts. I experienced the depths and highs of the 70s and early 80s. Not much fun.
      To repeat my question, if a trust is holding bonds of 10 years or more and rates start to
      slowly rise, the valuations of those bonds will respond negatively. They might be sold at a small loss or held until maturity.
      My intent is to add theis factor to the diligence prior to taking a position in spread trusts.
      My personal experience with NLY has been a great source of income fr many years.
      Bon Chance.
      M\y perrsonal

      • KennyG
        Apr 21 2013, 12:38:27 pm

        Herach.. I think the key point (as you stated) is proper due diligence. There are so many potential factors to influence these mReits in both positive and negative ways. WHat is the cost of funds vs. interest earned (the basic spread) is but a single factor of many. As you stated the duration of bonds held is key, the prices paid for the securitized mortgages is a key factor as well. Are they owned above par? Refi’s and forclosures being paid off at par (or below) can be devastating. Is the overall economy improving such that rates rise and there is less of an incentive to refi? That could be positive. Where is their funding coming from? Is it longer term (as in preferred’s or bonds) which will provide a continuing spread on bonds alredy owned or shorter term as in bank lines of credit that will need to be replaced at ever higher rates to fund held bonds at fixed rates? NLY has been a decent play over the years even with the recent step down in the divi and stock price. Hopefully Mike Farrell’s team can continue his incredibly knowledgeable and good business practices (I am a bit partial to Mr. Farrell having worked with him on the street many years ago long before he began Annaly).
        Anyway. Good trading to you. And may rates stay low, or at least steep…:-}

    12. Greg T
      May 2 2013, 05:13:55 pm

      The Japanese Central Bank’s push is increasing demand for U.S. Treasuries, causing 10 year T-Bills to go down steadily over the last few weeks. This could continue for awhile. As long as it does, demand for T-Bills will be stronger (rates remaining low). Not sure why the June 12th auction is now the target, but doubtful it will occur as projected, just as it didn’t in April and won’t in May.

    13. Richard P
      May 29 2013, 03:25:31 pm

      Hey Travis, herre i am better late than never, but you and the ol thinkolator are A_!_A in my book and it was AGNC HTS and the wild card was CMO. Your cautions and concerns are on the spot, as evidenced by recent price action in all three, especially soince the last Fed “chat”
      Keep up the great work and IMO CAUTION is a worthy headline almost everywhere just now.

      • 3984 |
        Travis Johnson, Stock Gumshoe
        May 29 2013, 03:28:36 pm

        Thanks Richard — yep, most income investments got a bit of a scare this week, we’ll see how it all shakes out.

      • 3984 |
        Travis Johnson, Stock Gumshoe
        Jun 11 2013, 10:07:06 am

        I don’t know. They scare the heck out of me with spreads and interest rates so unpredictable, so I’m not buying them personally.

    14. Steve
      Jun 18 2013, 07:11:43 pm

      Just got my mailed promotion from Oxford…The next date for the “ticking time” bomb is Wednesday August 7…and that just happens to coincide with the scheduled 10 year note auction in August.
      Not sure why it won’t happen on Wednesday July 10…? Thanks for saving me another ridiculous read.

    15. Allan
      Jun 19 2013, 11:03:38 pm

      I received the latest mailing from Oxford today. I am a relative neophyte in terms of understanding how various markets work. As the population increases, and technology advances at a seemingly exponential pace, I look for the “diversions” we are fed by the media, government sources, and mega institutions, such as Bank of America, Archer Daniels Midland, Citibank Monsanto; just to name a few.

      It’s no secret that quantitative easing is shoring up the short-term bond market, nor is a secret a certain level of inflation is needed for the credit markets to grow properly. What if we are merely trying to sustain a holding pattern until we can flood the world markets with cheap oil and cheap natural gas. Pipelines are under way in some areas, with more to come. This will reestablish the U.S. dollar as the world’s reserve currency.

      Just my thoughts, what are yours? I just believe things don’t happen in a vacuum.

    16. Ross
      Jun 22 2013, 11:48:51 pm

      I got this today June 22. The blowup date is now Aug 7. I’ve been an OC member for years and have never been impressed with Lichtenfeld. As for AGNC, it’s interesting how the stock has plummeted since April, soon after this promo came out. But that’s increased the dividend yield to almost 18% and it probably has more downside which means the yield can go to around 23% if the stock touches $18. But the logic eludes me. If Bernanke has now confirmed the obvious, i.e. QE is tapering and long term rates are going up, wouldn’t the spread widen and send the stock price up?

    17. LL
      Jun 23 2013, 03:43:54 am

      Thank you all for shedding light on a novel term: spread trusts. I saw the reits and thought, hummm, it is not so niche after all. Your comments helped to confirm my thoughts that it’s just re-labeled to sound interesting to those who are skittish after being burned badly by this sector.

    18. Drs nils Anders Reinhold van Seventer
      Jun 29 2013, 10:51:49 pm

      Excellent report about the United States financial problems. i am very interest in buying
      these investment trusts.

    19. 99 |
      Jim Skelton
      Jim Skelton
      Jul 13 2013, 08:46:06 am

      Well, well, well. I’m brand new to this site. Found it this AM when I entered a search for “spread trusts.” See, I spent all day yesterday playing the teaser ad that Lichtenfeld put out regarding this “3 minute disaster” and making notes on his tease re these ‘spread trusts.” I was a financial Advisor with three of the largest retail investment firms on the Street and had never, ever heard of any such animal. But he sure did fire up my interest as I am just 4 days away from age 65, retired, ready to start those fabled SS payments, and making adjustments to my holdings to gain a bigger piece of the dividend pie – a strategy I KNOW works and used all during my career for clients. Remember the “Dogs of the Dow?” I designed a quasi-managed platform using that simple little approach for clients in 1990 and did very well for all concerned for about 10 years. But I digress .. what I want to say here is simply THANK YOU!! I had planned to spend today digging down into the weeds to uncover those Spread Trusts and now I don’t have to waste so much time to learn what I already know. Lichtenfeld ought be ashamed of himself for pulling this little feat of deception. Just say what you mean, man! And, I almost pushed the button for a subscription to that new newsletter. That’ll never happen now. Even though $49 bucks is cheap, why waste it on this sort of thing? Hey, Lichtenfeld .. you just lost a potential subscriber to ANYTHING you conjure up going forward. And, as a final note to you; stop using the word “secret” a quadzillion times in your presentations. In case you haven’t noticed – and apparently you haven’t – the word “secret” is now code for either a scam or Bull Puckey.

    20. R CARDINAL
      Jul 21 2013, 01:31:48 pm


      • bmc123
        Jul 21 2013, 03:04:03 pm

        FYI, Marc’s Income Letter got stopped out on AGNC (he runs a 25% trailing stop).
        My own personal opinion on the recent sharp fall in mREIT’s is that it’s a bit of an over-reaction. Their book value will certainly drop in the short term but higher (long-term) interest rates will widen the spread (as the FED can and will keep short-term rates low until at least 2015).
        I’m currently holding shares in Annaly Capital Management (NLY). They are no longer a pure play as they just recently acquired CreXus Investment Corp. That opens up commercial real estate for them. Even though Mike (Farrell) is no longer running the show, I think his successor, Wellington Denahan-Norris, knows what she’s doing as she’s been at the Co. a long, long time.
        I guess what I’m trying to say is – I think there’s still plenty of money to be made in the sector.

    21. Myron Martin
      Myron Martin
      Jul 21 2013, 04:18:09 pm

      After reading all the comments I am willing to go on record as stating that sometime in the next 5-10 years virtually ALL “fixed instrument” debt based investments no matter how fancy the name, or clever the twist, will IMPLODE and hand you massive LOSSES. While not denying the fact that some few, (mostly already wealthy investors) have indeed made massive profits based on the establishment mantra of the “Magic of Compounding” which is a highly deceptive concept that ignores basic mathematics that do not lie or deceive.

      Simple fact #1; as Warren Buffet has so succinctly stated; “derivatives are a financial weapon of mass destruction” WHY, because there are always counter party risks!
      Simple fact #2; Everyone can not be a NET beneficiary of interest, SOMEBODY has to PAY it otherwise there will be none for you or anyone else to receive. So the reality is that there can not be a NET benefit, if you are collecting interest then you are in effect stealing somebody else’s livelihood and forcing them into “debt slavery” to pay that interest.
      The mathematics are relatively simple, the fractional reserve banking system is nothing more than a glorified PONZI SCHEME, and here is the indisputable evidence!
      In contrast to the lies and deception of the Federal Reserve (embodied in the name, neither word being HONEST) Graham Towers, the Central Banker in Canada in 1939 in sworn testimony before Parliament stated this foundational truth; “every bank loan is a new creation of money, and when it is paid back it ceases to exist” in other words it is cancelled out as it is paid back. WHERE DOES THE INTEREST COME FROM? NO banker can honestly answer that question because the INTEREST IS NEVER CREATED! It can only be paid as long as NEW LOANS are being contracted to borrow currency into existence that not only keeps pace with loan paybacks, but also REPLACES the currency in circulation necessary to sustain a viable economy! These new loans must also INCREASE enough to ALSO cover the accumulated interest that was never created in the first place, a recipe for perpetual debt! If you have difficulty understanding and therefore believing this I suggest you “Google” Edward Griiffin author of The Creature from Jekyll Island” and download a copy to get the story of how we have been hoodwinked by unscrupulous bankers since
      1913 when the so called Federal Reserve Act was deceptively enacted in defiance of the Constitution. This Central Banking FRAUD has now been duplicated in virtually every country in the world and unless modified along Constitutional lines will soon come crashing down and leave the world in total chaos.
      DO YOU GET IT, interest can only accumulate as DEBT until the DEBT PYRAMID grows so large it can no longer be serviced except at nominal rates. Does our present world wide financial predicament start to make some sense? Since new loans constantly have to be generated to replace old ones, since our currency is “BORROWED into EXISTENCE as DEBT” it is no different than regular illegal Ponzi schemes like that run by Bernie Madoff as one well known example, and on some unknowable day the “fractional reserve banking system will BLOW UP and all investors in “paper promises” will be left holding the bag! Unless we return to honest constitutional money with intrinsic value this is mathematically inevitable.

      • Bert Penhollow
        Sep 14 2013, 09:22:45 pm

        Comment to Myron Martin rather insightful remarks which I did enjoy.
        Yet I do not agree with all of his remarks.

        The Gold Standard, the “honest constitutional money with intrinsic value ” does not take into account that value is created through the use of money and debt in building roads, constructing houses & building, sewer systems, cable systems, telcom system, etc. All of these solid investments have intrinisic value and this value is not constant but ever increasing. If the money supply is kept constant, growth goes to zero and deflation occurs. It is never been a great economic time to go through a deflationary period. This is not to condone or encourage the DEBT binge our nation and population has been on – too much of anything is bad.

        I do enjoy the article and all the comments.

          • Myron Martin
            Myron Martin
            Dec 1 2013, 05:35:46 pm

            Well Bruce, if you read all my earlier posts and the one below, you probably are already anticipating my likely answer. Before I do however, let me outline my perspective on what should be called money and how much should be in circulation. First of all I make a distinction between currency and actual money. There is nothing inherently wrong with “paper receipts” circulating as currency for trading purposes, as long as they are backed by actual VALUE in useable goods as opposed to just “politicians hot air” which is what the phrase, “backed by the full faith and credit of the U.S. government” really means. The amount of money in circulation should be limited too and determined by the production of the country. In other words enough that all production can also be consumed, but not so much that it cause inflation by excess allowing the bidding up of prices.
            Do you still have “faith” in a symbiotic government/banker cabal relationship system that has produced $17. TRILLION dollars in DEBT, does that impress you positively? I think we are now on a fast track to oblivion when you add to that the $100. TRILLION of promises governments have made for entitlements that will never be paid in sound money with intrinsic value and stable purchasing power. It is simply mathematically impossible even if extended out for the next 2 generations, our children and grandchildren. All we can expect is a growing pyramid of debt.
            Bitcoin is now being offered up as a panacea to these problems and even being compared to gold as an asset. In fact this “promo” video on Bitcoin, which I had just finished watching when I came across your E-mail, and concluded it could be the next “tulip mania ” that gripped Holland a few milleniums ago. It certainly has all the earmarks of just another Ponzi scheme! http://pro.moneymappress.com/NVXBITCOIN49/ENVXPB03/?email=UTAKEPROFITS%40gmail.com&wemail=sti&a=8&o=12461&s=14011&u=1732116&l=199955&r=MC&g=0&h=true It is certainly made to sound very enticing, but look at the facts: we do not know who actually created it. We do not know how government and their banker cohorts will react to it. Where is the intrinsic value? Read a story about a man in England who had a fairly large sum of Bitcoin stored on his computer and in a lapse of memory, threw the hard drive into the garbage when it broke down, so now he has no proof he ever owned Bitcoins. Do you really think the banker cabal that presently has a MONOPOLY on counterfeiting money with paper (as I and many other of the Austrian school of economists see it) will simply surrender their lucrative monopoly they have enjoyed since the Federal Reserve Act was foisted on the public in 1913? What happens in a war, a electrical grid blackout, now one of the greatest fears of central planners given new weapons of cyber warfare? Too many unanswered questions for me, I would still rather have gold and silver whose intrinsic vaule has stood the test of time for over 5000 years.

            I do not doubt for a moment that some nimble traders will make a lot of money with Bitcoin, (but there will probably be just as many losers) and just like the fractional reserve system, it will work for awhile, but probably not for a hundred years, there are simply too many unanswered questions. On the other hand, the government may EMBRACE the concept until they can

            • Myron Martin
              Myron Martin
              Dec 1 2013, 05:52:45 pm

              Went back to correct a previous glitch and forgot I had not finished my thought!
              Government may EMBRACE the concept long enough to condition the public to their own scheme they are probably already working on. At the risk of being labelled a religious fanatic, which I am not, having lost all faith in organized religion, but do believe the Bible offers a great deal of wisdom, which even many agnostics will acknowledge, the description of Bitcoin sounds like it could be the forerunner of the biblical “Mark of the Beast” certainly the objective of the ruling cabal is TOTAL CONTROL where nobody is able to trade without their approved method and share of the proceeds. We do indeed live in interesting times.

        • Myron Martin
          Myron Martin
          Dec 1 2013, 04:41:11 pm

          BERT: How about cutting out the middle man? By what standard or logic should any elite group of men, (even if calling themselves bankers) have a monopoly on creating currency (and that out of thin air) when the same thing that makes a bond good would make a dollar bill good? WHY should we have to pay interest on debt to enjoy the things you enumerated? Every one of them COULD be possible by our supposed representatives in the U.S. Congress or Canadian Parliament by issuing currency directly to utilize our raw materials and provide employment instead of issuing bonds, (a pledge of debt) to a corrupt fractional reserve banking system that systematically STEALS from taxpayers through inflation. Do the bankers own the raw materials needed, or provide the labour to produce these assets? Why then if they neither own the assets or contribute labour to their creation should they get a free ride on all of society for the mere act of printing numbers on pretty pieces of paper? High time their Ponzi scheme was recognized for what it is and a new and fairer system created that favours the tax payer. We should only have to pay for anything ONCE, not TWICE as we do through the fractional reserve banking system.

            • 191 |
              Myron Martin, Special to Stock Gumshoe
              Myron Martin, Special to Stock Gumshoe
              Dec 8 2013, 04:28:36 pm

              VIC: Thank you for posting the piece by Gary North, it is an interesting and worthwhile read. That being said however, having a famous name does not of and by itself mean the opinions expressed are in all counts accurate and creditable. First I will list statements by Gary that IMO pass the test of accuracy and sound thinking.
              1) “Bitcoins are too volatile in price ever to serve as a currency” (alternate currency is meant)!
              2) “classic mark of a Ponzt Scheme”
              3) “no exit strategy for Bitcoins” Below is IMO the most valuable paragraph i his essay:

              “The central benefit of money is its predictable purchasing power. A monetary commodity is not easy to produce. The cost of mining is high. Money is slowly adopted by a large number of participants. These participants use money as a means of exchange. Why? Because it was valuable the day before. They therefore expect it to be valuable the next day. Money has continuity of value. This is not intrinsic value. It is historic value. So, a person can buy money by the sale of goods or services, set this money aside, and re-enter the markets in a different location or in a different time, in the confidence that he will probably be able to buy a similar quantity of goods and services.”

              Here is where I disagree with Gary, and WHY! “Dollars are money” I am sure Gary is sincere in his view but he double contradicts himself; A) Paragraph above has “continuity of value” which rules out “dollars” because the term was applied to a specific weight of gold or silver on original creation and now are worth a small fraction of that in purchasing power, i.e. 2-4 cents depending on whose statistics you accept. 2) Ending statement; “confidence that he will probably be able to buy a similar quantity of goods and services.” In the last 5000 years, only gold and silver have passed that essential “purchasing power “test and therefore Bitcoins like all fiat currencies fails the test of ever being MONEY, so once again Gary contradicts himself and misrepresents Austrian economics when he proclaims that; C) “dollars are money” when in fact they are properly called “money substitutes” really I.O.U’s that since 1971 actually means IOU NOTHING! having no intrinsic value and no reliable purchasing power” precluding them from meeting the criteria for money.

              Here is the URL for those who didn’t read it the first time it was posted.
              The central benefit of money is its predictable purchasing power. A monetary commodity is not easy to produce. The cost of mining is high. Money is slowly adopted by a large number of participants. These participants use money as a means of exchange. Why? Because it was valuable the day before. They therefore expect it to be valuable the next day. Money has continuity of value. This is not intrinsic value. It is historic value. So, a person can buy money by the sale of goods or services, set this money aside, and re-enter the markets in a different location or in a different time, in the confidence that he will probably be able to buy a similar quantity of goods and services.

          • Vic
            Dec 9 2013, 01:47:10 pm

            Thanks for commenting. I can see you gave this some thought.
            I could not find a link to reply to your last set of comments however I feel it is critical subject. Bitcoin like most everything has its plusses and minuses. I think there needs to be a clarification of what money is and what currency is. Unfortunately they are often used interchangeably by most everyone. I believe Gary knows the difference but uses money terminology inappropriately in a generic sense. My personal understanding comes from the link below. It is well worth going through all the exceptionally well done free episodes. Join the one in a million who will “get it” and for others this will also help clarify your comments.

    22. william s. mack
      Aug 11 2013, 03:14:53 am

      I am new to your site but what a breath of fresh air”got to your site while looking up
      what a spread trust was ,thanks for all the comments.

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