Fwd: How Americans Should React to the Fannie Mae Bailout

July 17, 2008

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How Americans Should React to the Fannie Mae Bailout By Porter Stansberry July 17, 2008 A little prediction I made last year is – unfortunately – coming true. At an annual Alliance meeting in Playa del Carmen, Mexico, I predicted Fannie Mae and Freddie Mac, America's largest owners of mortgages, would go bankrupt. Months later, I urged readers of my investment advisory to "short sell" these two stocks. We're up 67% and 73% on our positions, respectively. The gigantic problem with these quasi-government agencies has Washington D.C. working day and night on structuring a bailout. I'm certain the government will do whatever it takes to ensure Fannie and Freddie continue to operate – but that doesn't mean bailing out the shareholders. All the government will do is guarantee Fannie and Freddie's debts. That means a huge amount of taxpayer money is about to go into troubled mortgages... A huge amount of money the government doesn't have and won't be able to increase taxes enough to afford. The government is going to pay for guns, butter, and housing. I believe this means a big rise in the price of gold and silver... If you haven't positioned yourself against a severe dislocation in the U.S. mortgage system, you're making a big mistake. Writing the most recent issue of my investment advisory (out last week) – my third strong endorsement of buying silver in as many years – I couldn't help but feel like Chicken Little. Are things really this bad? Could the mortgage debacle get a lot worse? ---------- Advertisement ---------- Fannie Mae/Freddie Mac FAILURE Creates Immediate Profit Center! We've all known the dollar has been "under water" for years. But now, the Fannie/Freddie bailouts are going to flush it right down the drain. Why? Because the bailouts mean that trillions more cheap dollars will flood the U.S. economy – only fueling the fire of a weak buck further... But fortunately, with turmoil comes opportunity... Click here to read the full story of how 487 people will turn this "paper–money–printing" debacle into a profitable hobby. ------------------------------------ Well, let me ask you, which do you think is more likely? Scenario One: The U.S. government recognizes its financial mismanagement. It allows Fannie and Freddie to collapse and does not assume their liabilities. Mortgage investors take huge losses. Mortgage rates soar to more than 10%. Housing prices fall 75% – which makes housing affordable for millions of Americans previously priced out of the market. In the meantime, the government cuts spending by 30% and reduces taxes radically to encourage economic growth (which, ironically, increases tax receipts, leading to a balanced budget). It restructures Social Security, moving the age of retirement to 75. And most importantly, the government gets out of health care completely, renouncing all of its Medicare obligations. Hospitals and doctors immediately drop their fees to compete in a free market. Scenario Two: The U.S. government refuses to take responsibility for causing a bubble in mortgage finance. Rather than allow the bubble to deflate quickly, it bails out Fannie and Freddie. Mortgage losses build for five years, reaching more than $1 trillion. Housing prices stabilize in good neighborhoods, but risk-averse lending practices result in ghetto-like conditions and widespread vacancy across broad swaths of America. Refusing to substantially raise taxes, annual deficits surpass $1 trillion in 2010. Total government debt begins to spiral out of control as our interest costs mount. Our foreign creditors lose confidence in the dollar and begin dumping it on the world market. Inflation surpasses 20% annually and prices for energy and precious metals soar. I think Scenario Two is more likely. No government in history has ever repaid debts as large as those already assumed by our government (in terms of GDP). Paying off these debts will put more pressure on the U.S. dollar. The single best way to protect yourself is to buy sliver. When I explained this for the first time in May 2006, gold was trading for $675 an ounce and silver was trading around $14. Today gold is trading for $935 – an increase of 38% in about two years. Silver is now around $18, an increase of 28.5%. These numbers tell me that, while you would have done well in precious metals over the last two years (far, far better than in stocks), the real move into gold and silver hasn't started yet. What should you do? The answer seems obvious and urgent. Make sure you own a substantial amount of gold and silver. I would recommend at least a 5% position in gold and a 5% position in silver. I wouldn't allocate more than 15% of your portfolio. That should be plenty to hedge yourself. Don't forget, well-run companies will also appreciate along with other assets during an inflationary period. So you don't need to dump high-quality stocks and buy a huge position in gold and silver. Why You Must Buy Gold, or Even Better, Silver, Now How to Get an 83% Discount on a Rare Silver Coin The best way to buy gold or silver, in my opinion, is to simply own bullion – plain coins. Buy them and bury them somewhere safe. The gold won't rust. Silver is more difficult to manage, but the best way to own it is to take physical possession. If you can't manage physical possession of the metals, consider ETFs or become skilled at analyzing mining stocks. That's what I strongly recommend you do. Right now. Seriously. I wouldn't be surprised to see prices soar next week if Fannie and Freddie are taken over by the Feds, which is what I expect will happen. Good investing, Porter Stansberry P.S. I'm not happy Americans are facing this situation... but it's the hand we've been dealt. To protect yourself, I recommend owning only the highest-quality businesses and precious metals. Betting against the most vulnerable companies, which I've done in PSIA, is also a good idea to hedge your portfolio. For more on my letter, and the best deal we've ever offered on our research, click here. Email a Friend Del.icio.us Reddit Digg RSS GOLDCORP WEIGHS IN: IT'S A BULL MARKET IN GOLD STOCKS As our friend David Galland predicted four months ago, the gold stocks have arrived. David's argument for a rally in gold shares boils down to this: After years of digesting the costs (hiring workers, buying new equipment, and upgrading facilities) associated with getting a mothballed industry back into fighting shape, big gold producers are finally enjoying lots of cash flow. Add the increasing price of gold, and you've got the ingredients for a big bull market in gold miners. It's a solid thesis... but let's check with old man market to see what he thinks. Have a look at Goldcorp... Goldcorp is one of the "flagships" of the gold-mining industry. It is one of the few gold miners with a market cap over $10 billion... and widely considered one of the best-managed mining companies on the planet. As today's chart shows, the market likes the bull case for gold shares. Goldcorp is showing classic bull-market behavior... the tendency to make "higher highs and higher lows." Shares reached an all-time high this week. Thesis proved.

Rupert Murdoch's Wall Street Journal will raise its newsstand price to $2 from $1.50, in part to reflect an increase in production costs amid high newsprint prices. "The new price reflects the increased value of the paper as we continue to add content and features. It also reflects the increased costs we face in the production and delivery of the Journal," said a spokesman for the paper, which is owned by News Corp. – Reuters Air China said Wednesday that it planned to buy 45 Boeing jets in one of China's biggest airliner purchases. The order comprises 15 Boeing 777s and 30 Boeing 737s, Air China said on its Web site. Air China said that the total list price for the planes was $6.3 billion but that the final price would be lower. Air China said the purchase would increase its fleet capacity by about 35 percent and help to reinforce Beijing's status as a transportation hub. Air travel in China is forecast to grow by 9 percent annually in coming years, driven by an economy that grew by 10.6 percent in the first quarter. Air China's first-quarter profits jumped 147 percent, helped by the travel boom and the rise of the yuan against the dollar. – International Herald Tribune The major U.S. carriers will post losses of nearly $6 billion in the second quarter - and that's before they get around to their losses from operations. The carriers are announcing big one-time charges to write down the value of their goodwill and their older airplanes, to get rid of employees and for a number of other reasons. That's on top of more than $10 billion in write-offs taken in the first quarter, bringing the total to nearly $17 billion for the first six months of 2008. – Dallas Morning News There's a simple 2-word secret to generating bigger, faster gains on every trade you make. In fact, most of the world's richest traders use it to grow and protect their wealth... ... Like the legendary David Ryan - who used this secret to win the prestigious U.S. Investing Championship 3 times with a remarkable 3-year return of 1,379%. Click here to learn how you can use it. DailyWealth is Dr. Steve Sjuggerud's FREE daily e-Letter To receive Steve's best investment ideas each month, try a no-risk trial subscription to his monthly advisory, True Wealth. Get started now. A Letter from General Motor's Chairman By Porter Stansberry The Fine Art of Sitting Still By Dan Ferris Three Investment Questions Answered By Dr. Steve Sjuggerud Why the Oil Services Boom Will Continue By Chris Mayer When to Buy My Favorite Asian Stock Market By Ian Davis Retire rich with just 33 cents a day It's a unique retirement opportunity... one that is actually forbidden by the U.S. government from being advertised to the general public (Don't worry it's perfectly legal... and extremely easy to start). It's designed and supported by more than 200 of America's biggest and richest corporations – and enables you to collect $50,000... $75,000... even $100,000 or more, beginning with as little as 33 cents a day. Click here to learn more. This Gadget Will Revolutionize Our Power Supply July 16, 2008 The Best-Performing Stock Manager in America This Year July 15, 2008 A Visit to the World's Next Agricultural Superpower July 14, 2008 An Extraordinary Income Opportunity in the Energy Market July 12, 2008 The Toughest Day of My Investment Career July 11, 2008

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