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PRELUDE TO MELTDOWN is a “must read” book for investors, business people, and anyone whose nest egg depends on the future of the economy and the investment markets. This book may save or make you a fortune over the next several years.
It is written by one of the most prescient investment mavens, Bert Dohmen. He considers the current environment the most significant since 1929. It can either lead investors to ruin, or to great riches.
For Bert the ultimate confirmation of his views is that almost the vast majority of analysts doesn’t recognize the dangers. As Bert says, “a dangerous problem which is recognized is a problem that can be handled. It’s the unrecognized dangers that lead to financial panics, recessions, and depressions.”
Publishers have a one year lead time to publish a book. Bert knew his message couldn’t wait that long. Therefore, he published it himself through his own company... Here is your opportunity to be prepared, and to profit.
Following are some valuable excerpts from the book:
This book is a compilation of advice and analysis we gave to subscribers in the first seven months of 2007. We warned of an impending financial storm, which might turn into a crisis later in 2007. It is very useful to look back and see how things developed, and how the warning signs were disregarded by almost all the professionals. One wealthy buyout tycoon, Nelson Peltz, commented on CNBC in early August, 2007: "We all knew that eventually the end would come, and when it came, none of us were ready for it."
At the same time, Wall Street analysts and economists urge investors to buy stocks, talking about the "Goldilocks" environment. That refers to an economy which is growing nicely, but not overheated, inflation which is low, decent corporate profits, and a global economic boom.
Yes, all these factors are very positive. But a financial crisis, produced by massive defaults and dumping of overleveraged derivative positions, has nothing to do with the economy. And that is what all these economists and analysts are missing. Now the evidence is clear for anyone to see that what everyone thought was "liquidity" was actually a credit bubble. And as we wrote early this year, "credit can disappear over night." And that's what's happening now, in July 2007.
January 17, 2007 WELLINGTON LETTER:
LIQUIDITY: THE FUEL FOR THE MARKETS
For over 30 years I have said that the most important factor for the investment markets is "LIQUIDITY." When liquidity contracts in a meaningful fashion, its bad for stocks, and when it is plentiful, and even expanding, it's bullish.
Everything else is primarily a function of liquidity. Questions about the consumer retrenching, home buying plunging, capital expenditures declining, manufacturers surveys, trade deficits, current account deficits, budget deficits, are all a matter of looking at the ripples in the water instead of the center where you can see what caused the ripples.
From the Feb 12, 2007 issue of Wellington Letter
OUR VIEW ON HOUSING
The housing sector reported poor results for 2006. Existing home sales for 2006 fell 8.4% — the largest annual decline in 17 years. The large homebuilder, Beazer Homes (BZH), announced even more dismal results: cancellations of home sales are running at 43%, and new orders are down 55% from last year. The CEO says that "there is no sign of a bottom."
So what happens after every poor announcement from the housing sector? The stocks of homebuilders rally. It's amazing that many of these stocks are up 40% to 50% since last July. Obviously a lot of big money is buying with the expectation of a turn. However, we must ask, what if the turn doesn't come this year, or is weaker than expected? In fact, even if there are good signs of an upturn, these stocks will be sold on the basis of "buying on the expectation and selling on the news." Neither way will you win in this sector from now on.
By September 2007, the stocks of the big homebuilders had plunged 30%-70% from the time of that February issue. Subscribers were protected.
From the same issue:
As we suggested in late December, the private equity game will take a breather in early 2007. That will remove another great source of liquidity. We just had one of the largest deals, with Blackstone buying Equity Office Properties (EOP). There was a bidding competition with Vornado, but Blackstone finally won. However, ultimately, maybe Vornado will be the winner.
You see, the seller of EOP was my old acquaintance, Sam Zell, the smartest real estate guy I know. When he sells, I don't want to be the buyer.
As Barron's points out in this week's issue, the earnings of EOP are insufficient to pay service costs on all the debt that had to be piled on to do the deal. They have to sell a lot of properties, and are already doing this. In our view, the latest private equity deals may have created walking zombies: too much leverage, which will come back to punish the acquirers.
Many stocks of the REIT’s dropped 30%-40% over the 8 months following that issue.
Continued from the Feb. 12 Wellington Letter:
A FLOCK OF CANARIES
In spite of all the bullish sentiment on Wall Street, there are signs of stress in some areas. We are seeing a flock of the proverbial "canaries." As you know, in the old days canaries were used by miners to warn of poisonous gases in the mine. If a canary in a cage died, the miners would rush for the exits. In the financial markets we are seeing a virtual flock of canaries now. We go into that in this issue.
In the U.S. stock market, speculation is surging. Margin debt, which is a great measure of speculation, just reached a new record high of over $303 billion. The prior peak was set in March 2000, which was the market top just before a devastating decline. That doesn't necessarily mean that the market is at a top now, but it does mean caution is advised.
This week, the stocks of the sub prime lenders had big declines. This is probably the beginning of the dumping phase. After that, lenders will become ever more cautious. This means that new buyers of real estate will not be able to get financing unless their credit is rock solid. That means fewer buyers for an increasing inventory of houses.
APRIL 3, 2007 WELLINGTON LETTER:
"THE MAKINGS OF A PERFECT FINANCIAL STORM"
The following is our longer term view. It is not intended to reflect on the near term economic or investment environment. In our issue of December, we warned of a number of major problems coming home to roost in 2007, for the stock market and the economy. Addressing some of the topics, we wrote:
Trillions of investment dollars are looking to achieve superior returns. The way to get them is to ignore risk. The world has never seen such a complete lack of fear regarding risk.
Every week we see public companies getting bought for tens of billions of dollars by private equity firms. Most of the money is borrowed. Obviously, the lenders assume that they will someday be repaid. But when you see how these private equity firms load up the acquired company with debt, in order to make huge capital distributions to themselves, it seems they just leave the carcasses.
Since I started in the business in January of 1977, I have been talking about the one most important item determining the next important trend change in the stock market: a change in the availability of money and credit. The word "change" is very important.
For the past four years, money has been very available. This has produced a mountain of debt, much of it being owed by people who will never be able to repay it. Now the regulators have become alarmed. They always close the barn door after the horses have escaped.
Lending standards are being tightened by the regulators, which means that lenders will become ever more cautious in their lending. The private sector always tightens more than the regulators desire, because no one wants to be charged with violations of guidelines, or even risk going to jail. One major homebuilder, Beazer, is being investigated by the FBI. That's all it takes for lenders to cancel loans that have even been approved already. And that's happening right now.
Fed chief Ben Bernanke told a joint Congressional committee that he doesn't think the sub-prime lending problem will spread to other areas. He is either naïve, or wants to calm the markets.
Two months ago the outlook was negative enough, as the economy was facing a huge hole for consumer spending power, namely refinancing of mortgages, otherwise known as HEW (home equity withdrawal). But now, with the tightened lending standards, withdrawing equity is the least of the problems: the new problem is just making the mortgage payments.
Refinancing is virtually dead. New mortgages will be very difficult to get, except for the most creditworthy. And they are usually the ones who can pay cash.
About $500 billion has been withdrawn (HEW) over the past three years. Home equity is now on the verge of being depleted by the consumer. It was the last piece of unused wealth left. Now even that is mortgaged to the hilt.
Consumers will lose confidence as they get strapped for cash. Many ARMs (adjustable rate mortgage) are now starting to be reset. That process will accelerate next year. Monthly payments for many people have almost doubled. That produces defaults, which causes lenders to stop lending, leading to foreclosures, which causes erosion of confidence, a bear market in stocks and an economic downturn.
The "Virtual Cycle" has come to an end. Over the next two years, this cycle will work in reverse and unwind.
Think of the sub-prime mortgage problem as a huge stone that is thrown into the lake. The ripples spread, until they eventually crash onto the shore. That crash could occur by the fall of this year—or earlier.
Remember, this last part was written in April of 2007. It gave our clients plenty of time to prepare. But it’s still not too late. Order this book now, and find out why the market turmoil is producing the opportunities of a lifetime. But you must ignore all the free Wall Street advice. Wall Street is in the “distribution” business. Their job is to create buyers for the stocks their big customers want to sell. Guess how they do it? You got it: be bullish in the media.
From the April 3 Wellington Letter continued:
Mr. Bernanke's (Federal Reserve Chairman) testimony to Congress on March 28 suggested that all the same mistakes will be made again. There is still the possibility that he was talking tough on inflation just to please the audience. If he wasn't, then the economy is in trouble.
He said: "To the upside, consumer spending — which has proved quite resilient despite the housing downturn and increases in energy prices — might continue to grow at a brisk pace, stimulating a more-rapid economic expansion than we currently anticipate."
I guess he's saying, in the words of a former Senator, "There's too much consuming going on." When those in government worry about too much consumer spending, you know you're at an economic cycle top.
In fact, we can get all the old issues of the Wellington Letter out from previous cycle tops and just copy the warnings issued at those times. It's always the same: inflation pressures continue well into a recession. The Fed only looks at the inflation statistics, not at the deteriorating economy. Many studies over the years confirm that inflation lags statistics and, at cycle tops, gives the wrong warnings. Yet, the guys at the Fed don't remember those studies, or don't believe them.
What About the "Abundant Liquidity" Theory?
As you know, the word "liquidity" is used constantly by analysts, including us, to describe the tremendous availability of credit we have seen worldwide for the past several years. However, almost no one differentiates between "money" and "credit."
Money supply is actually a misnomer, as it really is "credit" supply. Most of the money in "money supply," with the exception of the "currency" component, is credit. And that's the difference we really have to be concerned about.
Real money, like gold, has no liability against it. But credit is a loan. The fact that this credit has to be repaid makes it a liability. And credit can disappear virtually overnight when creditworthiness is questioned, loans are called in and credit lines are withdrawn.
We expect the "huge liquidity" everyone talks about to disappear in a puff of smoke, or bankruptcies. I believe that this will be the great surprise of 2007. The argument for all the bulls has been the great liquidity. When it disappears, the only liquidity they will find is by selling assets. And that includes stocks.
Bert Dohmen has caught every major turn in the investment markets, tops and bottoms, except for the bottom of 1981 where he was six weeks late. His subscribers have done especially well during bear markets. Instead of running for the exit, Bert advised how to profit from a painful market declines.
The Wall Street firm with the smartest traders, Goldman Sachs, announced earnings in mid-September 2007. Ahead of the announcement, the fear was that they could be very bad, because of the severe market turmoil and problems in the derivate markets. Instead the firm reported a huge 71% increase in earnings. Yes, smart traders can make lots of money in times of adversity.
Bert says it’s stupid to start buying in the first part of a bear market. It’s a recipe for ruin, just as it was in the year 2000. But you can profit, as the markets, or sectors, plunge. And Bert has always made money for his readers in bear markets. His outlook for the next years will astound you. Don’t miss it.
In 1990, when the Japanese Nikkei index soared over 39,000, Bert predicted a huge bear market in Japan, and a recession lasting at least 10 years. Well, the Nikkei plunged below 13,000. The recession lasted for 13 years.
That’s the type of vision you get in Bert’s book, PRELUDE TO MELTDOWN and Bert Dohmen’s Wellington Letter. Get both now!
Bert Dohmen is not afraid to go out on limb, and tell it the way it is. He has no axe to grind, and no conflicts of interest. He doesn’t sell investments, he doesn’t manage money for other people, and he doesn’t work for Wall Street.
To order PRELUDE TO MELTDOWN now, go to the "Excerpts" page. It’s only $14.95, plus S/H.
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TO THE "MELTDOWN" SONG: