“Get Back Twice What You Lost” with Ka-Ching! Corp — Stephen Leeb

By Travis Johnson, Stock Gumshoe, March 27, 2009

“The Credit Logjam has Broken. We’re all back in business again. Here is how to get back twice what you lost.”

That’s how our latest ad for investigation opens — and someone forgot to tell Stephen Leeb’s copywriters about the exclamation point, this is not nearly exciting enough. Let’s have a little spirit, people!

The ad has been running for a little while, for Stephen Leeb’s Income Performance Letter — interestingly, Leeb’s group is a bit more “up front” about their publishing strategy than are many of the other publishers. They charge a relatively small amount for this newsletter ($72, they say, “on sale” for $39), and they hope that they wow you with it …

“Why so cheap? Frankly, it’s what they call in supermarkets a “loss leader.”

“Once you start reading it and making real money, I think you’ll be ready to gobble up some of our other services—which are properly priced, at up to $1,000 or $1,500.”

That is, of course, what almost all of the big newsletter publishers do — they publish relatively cheap newsletters down in the $50-100 range, and a lot of folks are willing to pay that amount so they build a big subscriber base, and they use those lists to mine for the folks who they know already like them, and find the ones who will buy their $500, $2,000 or $5,000 newsletters. Apparently it works quite well — or well enough that they keep doing it, anyway.

I don’t know much about this income letter from Leeb, it appears to be brand new, but he has apparently turned very bullish in recent months — most of the leadup in this letter is all about the many reasons why we’re not going to have a depression, and why stocks might have a remarkable bounceback this year of 50% or more (they’ve already almost broken even for 2009, so that’s a start, at least).

You’ll get no complaints from me if that’s true, by the way. This might be a nice time for another Stephen Leeb/Peter Schiff debate if anyone wants to televise it, though perhaps we’ve all tired of that kind of grouching match.

Here’s some of the optimism for you, to lighten up a dreary Friday …

“… you are now in the midst of the biggest buying opportunity of your lifetime.” [ed. note: See? Again, perfect opportunity for an exclamation point, wasted!]

“Already, there are thousands of stocks, bonds, and funds with nice income yields, attractive growth, net profits, cash on hand, low debt—everything you could ask for. You will wait a very long time before you ever see so many bargains so underpriced. Most of the excesses have now been pounded out of the financial system….

“… half to two-thirds of the stocks on the Big Board are buys. Or steals. Starting today, you could hire monkeys with dartboards and make a lot of money.”

All of my monkeys are busy hammering away at their typewriters in the basement, working on the Great American Novel … sorry, you’ll have to find some of your own. Or throw your own darts.

The ad goes on to list the five reasons why a depression “just isn’t in the cards” — they are, to summarize: Credit markets have thawed; the “air” has been wrung out of the system and stock prices are no longer inflated; the money supply is up dramatically; pessimism reigns; and central banks are drowning the world in money.

Don’t know if he’s right or not, but it sounds more fun than the alternative. Leeb and his folks are a bit more cautious in their regular commentaries than they are in their ads, of course — you’ll often see him writing about being bullish on commodities, for example, and about fears of inflation and the damage that could cause to some sectors of the market.

And of course, we get a little stock teaser thrown in, just for grins. Leeb’s folks tell us that they’ve got “7 ways to get back 200% of what you lost,” but they only provide some teaser clues for one of them, so that’s what we’ll look at.

“Leeb’s Income Performance Letter has dug up an extraordinary, government-guaranteed way to rake in money under either of two scenarios:

“A. When interest rates are going up.

“B. When interest rates are going down.

“No speeches to make, no loans to pay back, just buy a few shares in this little money-making machine and kick back. The dollars are all yours.

“The investments of this company , which I’ll call the Ka-ching! Corp., are backed by the US government (explicitly), so it is not subject to any credit risk. I repeat: there is zero credit risk in their portfolio, which consists almost exclusively of AAA-rated, highly liquid paper guaranteed in full by Congress. Ka-ching! is a GSE (Government Sponsored Enterprise), a structure proven in use since 1916.

“…. Ka-ching! is like a REIT, in that it must pay out substantially all of its free cash to investors. Yet it doesn’t actually own any real estate, commercial or residential.

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“Its income flows from the spread between the interest earned on its securities (all mortgage-backed) and the far lesser cost of borrowing to buy them.

“So grabbing its nailed-down, high total return is a no-brainer, especially because the stock is currently yielding almost 13%!

“The beauty of Ka-ching! is that you don’t need to wait for the stock to appreciate. You can still earn your 13% with no credit risk. If you do absolutely nothing and just wait for the market to adjust to the now-safe outlook for Ka-ching’s debt, its yield will come down to more typical levels of 10%, but the stock price could rise by 50% or more.” (you can see the ad here if you want to get all the clues and blather that I didn’t include)

So, what are we looking at here?

This is, in all likelihood, Annaly Capital Management (NLY)

There are a couple other companies that it could possibly be, but NLY is almost everyone’s favorite in this space, it has experienced and respected management, it’s far larger than most similar companies, and, frankly, newsletter editors find it hard to resist … that, and it’s the one whose yield is closest to 13% (most are quite a bit higher right now, and also, arguably, riskier).

NLY is what most people call a “mortgage REIT”, though companies often try to avoid using the “M” word these days (Annaly changed their name in 2006, they used to be called Annaly Mortgage Management). They borrow money at low short term rates, and use that money to buy government-backed mortgage bonds. Those bonds generally yield significantly more than they have to pay for short term borrowing, so they pocket the difference as their profit — leverage up the equity in the portfolio by 10X or so, and that can turn into a pretty good dividend yield.

All the companies in this space work essentially the same way — they take advantage of the general tendency of the yield curve to move from the lower left to the upper right on a chart (meaning, short term interest rates are usually significantly lower than long term interest rates, so they borrow short and lend long). The situation that usually causes them the greatest distress is not high interest rates, or low interest rates, but a flat or inverted yield curve — much like we saw a few years ago, when short term and long term rates were essentially identical. That’s similar to most banks, of course, who like to pay low rates on short term deposits (like savings accounts) and charge higher rates for longer-term commercial or mortgage loans, for example. Right now, the yield curve is nice and orderly and pointing the “normal&