“Virtual Banks: Government Economic Security Fund”

by Travis Johnson, Stock Gumshoe | October 3, 2007 2:20 am

Well, here’s another teaser that appears to have been resurrected from the backfiles, for a government-created “economic security fund” that “could help you safely earn 180% or more over next 2 years.”

The last time around, more or less the same teaser email, for Steve Sjuggerud[1]’s service with Stansberry and Associates, went around with the promise of an “F-Series Government Bond.” It was a bit different, but the gist was the same. Back then, Annaly Capital Management was at least one of the firms teased[2], and they may well still be one of the favorites teased below.

And of course, this is advertising — so we’re talking about another pretty strong promise:

“In short, what I’m going to show you how to do is make 30%-100% annual returns over the next few years, beginning right now… and practically risk-free.”

Obviously, if such a thing were so easily doable — and predictably so — just by following a few newsletter suggestions, we’d all be on board. And cheering.

Now, instead of calling these investments “F-series bonds,” we’re apparently calling them “Virtual Banks.”

The clues given about these banks, and the rest of the teaser, make it fairly clear that we’re still dealing with the mortgage banking business. And though they tease that some of these stocks are up 25-35% or so since mid-August, that becomes less impressive, of course, when we remember that in the days before that many mortgage-related companies fell by 50-80%.

Most of these investments are likely to be mortgage REITs[3], since Sjuggerud is talking about high yielding investments with a government guarantee (the guarantee is implied, since the loans are generally securitized by Fanne Mae and Freddie Mac[4] … everyone thinks the government will always stand by the implicit guarantee granted to these entities by the US Government, a promise that has never really been tested).

And I guess it makes some sense to call mortgage REITs “Virtual Banks,” since for the most part they’re really just investment funds that buy up or trade mortgage bonds.

Now … the sad part. I didn’t track down all the clues for you to tell you which is which of the four virtual banks teased. Even the Gumshoe has only so much patience for digging through filings. But I’ll give you a head start.

Here’s a list of mortgage REITs by state[5], that should help.

“Virtual Bank #1: based in New York … fewer than 40 employees … In roughly the past year, this company has made $220 million… and during a recent 4-year span, returned 518%, including 109% in dividends[6].”

“Virtual Bank #2: based in New York, and has just 15 employees … They’ve made $15 million in the past 12 months. And during a recent 4-year span, have paid 368% total gains… including 34% in dividends.”

“Virtual Bank #3: based in California, and is worth about $400 million. They have just 11 employees … During a recent two-and-a-half-year period, this virtual bank paid investors gains of 461%, including more than 100% in dividends.”

“Virtual Bank #4 is based in Texas. They have just 12 employees, and during one three-and-a-half-year period, paid investors gains of 327%, including 140% in dividends.”

So, feel free to jump right in if you’re hyped up about figuring out a few interesting mortgage and finance REITs to invest in right now — there are some folks at the forum who posited a few ideas[7] — and you wouldn’t be alone, the bottom fishers have been thick in the water[8] for a couple weeks, ever since the subprime implosion brought many of these companies near bankruptcy. Thornburg Mortgage[9], the most respected jumbo lender, nearly went under because no one would buy what seemed to be perfectly fine securitized bonds for the homes of the wealthy, RAIT financial, which we’ve seen before when the ChangeWave[10] folks recommended it, lost almost all its value … and got so cheap that Third Avenue picked up a bunch of shares. There are dozens of housing finance and mortgage companies that have more or less the same chart, with a massive crater to close out their summer.

I’d agree that the prices on a lot of these investments got very compelling over the last month, but I’d also caution that we are just leaving what was a spectacular period of somewhere in the neighborhood of 6-8 years of truly extraordinary returns for Mortgage REITs. I would take some care in avoiding projecting those extraordinary returns into the future — I would be surprised if the housing and mortgage climate over the coming several years allows for another 180% return for Annaly, for example, not because of any problems with that company but because such perfect working environments don’t come along very often for very many companies — twice in a decade would be pretty remarkable for a fairly staid company that buys mortgages and uses leverage[11] to improve returns.

Good luck to you, let us know if you feel like sniffing out these specific companies or want to share other wisdom about this kind of investing.

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