Over the last several months we’ve seen several ads touting Steve Sjuggerud’s True Wealth Systems, which is apparently a big quantitative screening “supercomputer” that Steve subcontracted to some computer programmers — and which is supposed to identify investing anomalies that he can then write about to his subscribers, who then will profit.
And I can’t tell you exactly what the system is, or how it works — there are a zillion different quantitative systems out there, and they form the basis for thousands of hedge funds, among other investment vehicles. This broad investing idea encompasses not just the hyperactive “high-frequency trading” stuff that is rightly criticized (I think) for increasing volatility to no good end, but also the more traditional “quants” who sift and search through mountains of historic data and attempt to mine valuable causality and predictability from the seams of company and stock data.
Lots of folks do this — it’s effectively quite similar to what Loui Navellier has done for years, using earnings momentum, analyst surprises, valuation and similar metrics to quantitatively winnow the best stocks from the herd in a way similar to the Investors Business Daily CanSLIM technique … and earlier “quants” like Jeremy Grantham pioneered the use of computing power to create predictable stock picking, though those quant models have been often tinkered with and, in many cases (particularly if they become well-known or heavily followed), rely on a human being to wave a yellow caution flag at some point along the road … lest the model drives everyone into the same wall at the same time.
So anyway, that’s the idea — mine the history of company filings and stock trading (and other stuff, including currencies and interest rates in the mix, but mostly company and trading info) to find out what patterns indicate profitable sector, market, or stock bets ahead.
And Sjuggerud is telling us he’s developed one — but as I said, other than the fact that it’s using data feeds from a lot of sources and required the work of a bunch of Belarussian programmers, I have no idea what his quant system is. We know from his past True Wealth and Daily Wealth commentaries that he’s a thoughtful guy who likes to look for the magical indicators and contrarian signs that promise riches ahead, and he’s got at least some academic chops (doctorate in finance, he reports) to sift and sort the data … but I dunno what his system is and he ain’t telling (unless you subscribe, list price $3,500). Probably, truth be told, he’s working with lots of different “systems” that might be effective for different sectors or investment types — we do, at least, know that he’s not doing any of the hair-trigger trading that is so difficult for individuals to reproduce, his system reportedly produces monthly indicators and monthly recommendations … just right for a monthly newsletter, no?
But don’t despair! We do have something for you today — we don’t know the system, but we do know at least one of the “anomalies” he has found that he thinks will be profitable for the next couple years. He didn’t tell us what it is, of course, but he hinted and teased just enough that we can get you some facts … let’s walk you through some of the ad first.
Sjuggerud’s pitch is all about the “Great American Paradox” — here’s how he introduces it:
“The Great American Paradox of 2012
“I believe I know just what’s going to happen in America over the next two years.
“It’s the complete opposite of what most people expect, which means there will be opportunities for incredible gains… and devastating losses.”
So he’s way, way ahead of me — your friendly neighborhood Gumshoe does not have any idea what’s going to happen next week, let alone over the next two years. Except I’m due to put some bleach in the water filter, and one of the little Gumshoes has a doctor’s appointment … so those are high-degree-of-probability events.
The background for all of this is that yes, Sjuggerud agrees with much of the pessimism out there, particularly as it relates to the consequences of US debt and money-pringint … here’s how he puts it:
“The dollar is losing value. Unemployment is sky-high. Our government’s credit rating has been downgraded, and the economy is generally a mess.
“I believe that eventually, all this money-printing, the bailouts and unfathomable debt will have devastating consequences for hundreds of millions of people in this country.
“But here’s the unexpected thing…
“After studying 33 similar situations in both the United States and other countries over the past 150 years, I have found that there is an unusual phenomenon about to take place, which could provide a simple and safe way to make an extraordinary amount of money over the next 18 months.”
That “unusual phenomenon” is the “Great American Paradox of 2012″ …
“What’s most amazing is that although this paradox repeats itself unfailingly throughout recorded history… it’s completely overlooked while it’s happening – because nobody can believe it could actually be taking place.
“That is why I must warn you…
“What I am about to tell you is controversial. It goes 180-degrees against conventional wisdom… And it goes against almost everything you may believe is happening at this very minute.”
Oohhh, gives you little shivers down your back, don’t it? Nothing makes us feel as lovely as going against conventional wisdom.
And better yet, we’re going to make lotsa money!
“Yet, I think it’s also a very safe and conservative way to make serious money. I’m talking about gains of well over 100%, in a matter of 10-12 months, without touching options or anything risky like that. “
He then runs through several charts and examples of what he means by this paradox — which I think I can sum up as, “even when the economy goes into the outhouse, some stocks go up.”
Yes, that’s simplistic, but that’s what I get from his examples — he talks about a few select consumer staples stocks that surged during the Great Depression, Pharma stocks during the doldrum-y 1980s, real estate stocks out of the 2001 crash, gold out of the real estate crash. All winning sectors, surprising to many investors at the time, that far outperformed at a time of heavy pessimism.
But what we want to know, of course, is which “paradox” will make us rich during the current economic dislocation. And that appears to be the point of Sjuggerud’s “system” … here’s how he puts it:
“It was impossible to predict where a paradox was going to appear next. After all, when you’re looking for these kinds of situations while the whole economy is crumbling, you have to continually monitor every area of the financial markets that nobody else thinks of looking at.
“To do that, what I really needed was a super-computer programmed with my 20 years of knowledge and experience… which could search through the thousands of stocks… bonds… commodities… and other markets… processing their information continuously.
“That way, I’d be able to analyze the data to spot any unusual situation forming right at the start.
“But nothing like this existed at the time. So to build such a powerful system, I had to hire an army of 15 highly-trained computer programmers. It took them two years and $500,000 to build it. Most of these guys are from Belarus. And we hired an extremely hard-working computer scientist from Siberia (yes, that Siberia, in Russia), to oversee their work.”
So all of that is designed, we’re told, to help Sjuggerud “locate seemingly invisible market paradoxes.”
And yes, as I promised, we finally do get into the current paradoxical investment that Sjuggerud is teasing …
“For instance, right now, I’m tracking a recurring paradox which, over the past 13 years, could have made you 500% if you had taken advantage of it each time it happened.
“And now, it’s happening again.
“If you want to find out more about it, I’ve prepared a special report with all the details. It’s called, How to grab 100% or more from the American Paradox of 2012. ”
Sounds exciting, right? So what is it?
“It’s the biggest anomaly in the stock market today. And it’s the result of the Federal Reserve artificially manipulating interest rates, just as they are doing right now. This paradox has already started pushing up the price of one stock.
“And I expect this is only the beginning.
“You see, this isn’t the first time I’ve observed this incredible event.
“Since 1998, it’s occurred three times with this stock. And if you had taken advantage of it every time, you could have already made 500%.”
And there’s more!
“… the paradox has pushed up the profits of one company through every recession and bear market for the past decade.
“In 2008 while countless other companies went bankrupt and laid off their employees… this company made a $346 million profit. That’s three times more than it made just two years prior.
“As a result, it’s payouts to shareholders grew also….
“In fact, since 2006, it grew its dividend payouts by 354%.”
Wait, did you say you want more clues? OK, but this is it:
“I expect the paradox will drive this industry up for at least the next two years. In fact, I don’t believe there is a safer or easier way to make money right now, anywhere in the world.
“That’s probably why some of the biggest and most conservative financial institutions, such as Vanguard, BlackRock, UBS, Allianz Global, Bank of America, and the Bank of New York, are investing in this industry. And why they all own at least 10 million shares of this unique company. They know it’s one of the very few ways to safely generate big returns over the next few years.
“In fact, I truly believe it’s the best investment you can make today.”
I don’t have a True Wealth Systems supercomputer handy at the moment, but I did just change the oil in the Thinkolator and it’s purring along just fine despite it’s advancing age … so let me just load in those clues for you, let it chug a bit, and we get our answer: this “unique company” to profit from the latest “paradox” is … Annaly Capital Management (NLY — free trend analysis here from Marketclub, one of our advertising partners).
I know, I know, I can see the virtual tomatoes and beer bottles being thrown at the stage as I type — sorry, just the messenger here! I know that Annaly, the giant of the Mortgage REIT business is no secret … and I know that Sjuggerud has pitched it and the other “virtual banks” like it several times before, with or without his True Wealth Systems supercomputer backing it up. But that’s the answer to those clues — Annaly did make a $346 million profit in 2008, the dividend pattern and the group of institutional holders matches exactly, and they have indeed shown some great performance during the bear markets and recessions we’ve seen in the past decade or so (not that the stock has always gone up, of course).
Annaly and its competitors are mortgage REITs, sometimes called mREITs, they are essentially investment funds that raise capital by selling equity (stock) to folks like you and me, then leverage that capital through short-term borrowing at low rates, and use that equity and that borrowed capital to buy mortgage bonds. The fact that the short term rates are lower than the long-term mortgage rates means that they effectively earn the difference between the two rates (ie, they borrow at 2% and buy bonds that yield 4.5%). If that sounds like a small return, it is — but if you borrow 6-8X your equity (or even more, sometimes well over 10X in past booms), then it gets magnified so equity holders get far greater returns.
And since they’re structured like REITs, they don’t pay taxes and they pay out effectively all of their profits to shareholders in the form of dividends. The dividends for this group are routinely at the top of the list of public companies, Annaly currently yields 14.6% if you annualize the latest payout (they pay quarterly, so “annualize” means “multiply by four”) — it’s worth noting, though, that NLY and many competitors cut their dividend in the last quarter, which isn’t necessarily a predictive move since the dividends tend to fluctuate … but that is the lowest quarterly dividend NLY has paid in two years.
I actually just wrote a brief note about Annaly earlier in the week, in response to a reader who used the Irregulars “start a discussion” feature to get some feedback on the stock (all paid members can do the same thing if you’re interested, either ask a question of the group or submit your own commentary or ideas to the site).
What I told that reader, and what I think most of us who look at Mortgage REITs with some regularity probably already know, is that the big risks for these names are twofold: either their portfolio of mortgages gets less valuable, or their cost of borrowing narrows the gap with the income they’re receiving from the mortgages.
One risk to the first is refinancing. Managing a mortgage portfolio is more complex than just predicting refinancing activity, but that’s part of it, if a bond is repaid at par value and you paid more than par for the bond, or are valuing it at more than par in your portfolio, then you take a hit and it will cost you more to buy that same level of income. The government is the biggest player in that right now, with concern about the possible government refinancing-assistance program hitting the shares to at least some degree (there was a good, brief article on this from Barron’s yesterday).
And the major risk to the second is the fluctuation of the yield curve — which means either that mortgage rates come down, or that short-term rates go up (since it’s the spread between the two that forms the foundation of profitability for any mREIT). Frankly, neither seems super-likely at the moment — but we’ve seen flat and inverted yield curves before, and it’s certainly possible that short-term rates could slowly trickle up and long-term rates could closely trickle further down. Unfortunately for mREITs, they use enough leverage that it doesn’t take much of a narrowing in the yield spread to materially impact their profits.
So those are the risks, broadly put — either the whole mortgage business is shaken up and the existing bonds change value, or the yield curve tightens or flattens or inverts and their margins get compressed. Many of these REITs, including Annaly, buy only or primarily government-guaranteed mortgage bonds (Fannie, Freddie, etc.), so they don’t have a lot of direct exposure to foreclosure problems or to the credit quality of borrowers (some mREITs do have this exposure, either because they also buy non-Agency mortgage bonds or because they do commercial or direct mortgage lending).
As I noted earlier, in a turbulent and changing environment like this I’d be inclined to go with the largest and most experienced players — and Annaly does hold that top spot, and they have been around through a couple cycles (and lived through an inverted yield curve), so if I were to buy a mREIT I’d probably look at NLY first. I haven’t been itching to make such a purchase of late, but you can certainly argue that this is a contrarian bet, and NLY and its peers have certainly done well in the past even when — perhaps especially when — folks like me were afraid of them.
So is Sjuggerud recommending just buying NLY shares for his True Wealth Systems folks? Well, that’s what it sounds like from the copy I read … but then he does go on to add this:
“You see, when I first came across these paradoxes, I took advantage by buying individual shares of the company’s stock.
“But this wasn’t always the best way to take advantage of these situations.
“After all, even if an industry was starting to rise as a whole, there was no telling how any one particular company would do on its own.
“That’s why I found a way to benefit from these paradoxes in a way which removes much of the risk of investing in individual stocks while at the same time I’ve seen examples of it DOUBLING or even TRIPLING, the gains you’d normally get.
“The secret behind all this has nothing to do with using options or anything risky like that. Your risk is actually strictly limited to what you put in.
“Instead, I believe this secret actually increases the safety of your investments because it spreads your stake out in a very precise way amongst the top businesses within the industry.”
That sounds like he’s talking about using primarily ETFs, and also leveraged ETFs, to play these trends that he’s identifying with True Wealth Systems. I know that’s been the case with some “big picture” bets he’s made in the past with his original True Wealth newsletter, so it’s possible that he’d urge an ETF that lets you play on this “paradox” instead of buying the individual stock he teased.
There is only really one “pure play” ETF for mortgage REITs, ticker MORT (trend analysis here), and there is no leveraged ETF for this subsector … so if you don’t want to delve into how each company is managing its portfolio, what types of mortgages they buy, how they hedge interest rates, how they’ve done in changing rate environments, etc., perhaps sticking with the ETF is the way you’d want to go to just play that mortgage spread in an easy and diversified way. Just don’t get too overconfident about the value of diversification in a super-focused ETF like this, I’ll bet that if NLY at some point goes down 10% in a day the ETF will probably fall as well, and probably by something in the range of 9.5-10.5%.
So … no supercomputer for you, but Sjuggerud is clearly teasing Annaly again as a play on the “paradox” and a winner for the next two years — think he’ll be right this time? Have any preference for a different mREIT or different interest-rate-sensitive investment? Let us know with a comment below.
Readers have been generally kind to Sjuggerud’s True Wealth in recent reviews, but we do not have any reviews yet of the newer True Wealth Systems – if you’ve tried it out, please click here to share your thoughts with your fellow investors. Thanks!
Free Financial Dashboard with Great ToolsI check my net worth and my portfolio (combined from several different brokerage accounts) using Personal Capital at least once a week, it's free and brilliantly organized.
Personal Capital has great tools for tracking spending (they can cut your spending by 15%), but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.