Worldwide Deleveraging

Hedge Fund Selling

Iceland

Outlook

Warren Buffet & Income

We are now witnessing the slow motion crash of 2008.  This is the eventuality we have been concerned about for the last three years.  The defensive investment castle we have advocated has now paid big dividends, much as the ark did for Noah.  However, the sell-off has now spread to all asset classes as investors throughout the world liquidate investments to raise cash.  We believe that this sell-off is a result of a several macro developments analyzed below.

Worldwide Deleveraging

The primary driver in the financial meltdown is a massive worldwide deleveraging of the credit and debt bubbles to which we have drawn so much attention over the last several years.  Two years ago we pointed out that the investment banks’ balance sheets were over-leveraged and could fail.  Still, we did not realize that the leverage ratios for the majority of them were in the range of 35-40 to one.  This nosebleed-high leveraging constituted the height of madness on the part of Wall Street that defied all logic.  It has resulted in Lehman Bros, Merrill Lynch and Bear Stearns being either taken over or failing.  To a much lesser extent, many banks that had increased their leverage are now deleveraging.  This is resulting in a tougher lending climate and the sale of many assets.  We believe that the leverage level is being reduced by $5-10 trillion.  This is leading to lower stock, bond and commodities prices.

Hedge Fund Selling

We are in the midst of a massive hedge fund margin call or selling program.  This is happening for several reasons.  First, hedge funds are seeing a large number of redemptions as clients bail out of leveraged and poor performing stocks or sectors.  An example is commodity-based funds.  In addition, credit is now being restricted and some hedge funds are having their credit lines reduced or are being forced to answer margin calls.  These factors are constraining them to sell assets to raise cash.  This is one reason many of the commodities stocks have sold off to such an extent – over leveraged hedge funds are dumping them.  We believe that this is why many oil & gas stocks have sold off so much. 

We have seen a loss of confidence in the financial system, particularly in highly leveraged companies.  This erosion must be stopped at once before that loss of confidence spreads to institutions around the country.  For this reason, the Federal Reserve has moved to support the commercial paper market.  We believe most banks outside of Wall Street are in pretty good shape and are not overleveraged – most of them never were.  The Treasury and the Federal Reserve should do everything in their power to support them.  This includes reallocation of the TARP bailout program from Wall Street to banks and firms around the country.  Rather than buying the bad mortgage bets of Wall Street firms, the Treasury should purchase stock in the banks and commercial paper of industrial companies.  The money should only be spent where it will stabilize the economy and allow for lending to American companies and consumers.

Watch Iceland

The credit crunch has now spread to Europe, where many companies are in worse shape than the United States.  On the MaxOut Savings Show we have talked about the problems in Iceland and the huge amount of debt they have.  We are watching Iceland closely – as the country is overleveraged with a debt to GDP ratio of twelve to one.  We believe that the Bank of Iceland will fail, as will all the banks in the country.  This could mark a low in the credit crisis.

Outlook

We expect the Federal Reserve and Treasury to act decisively over the next week to stabilize the investment markets.  This will all result in inflation over the long term.  This should help the precious metals and oil & gas sectors.  Both of these groups have been heavily sold off on the expectation of a slower economy hurting earnings.  We also believe we are seeing large hedge fund liquidations of these sectors that should end soon. We would stick to high quality companies with very high cash levels and low debt.  We will see many over-leveraged companies fail over the ensuing months.  Remember that cash is king if it is in the companies you invest in or in your portfolios.

Warren Buffet & Income

Now is when you want to look at high dividends and fixed income.  This credit crunch will take a while to work out and income will help grow your portfolio.  This appears to be the strategy that Warren Buffet is using when he buys these preferred stocks with warrants attached in GE and Goldman Sachs.  Go for income and get growth at the same time.  This way he is paid to wait for deals to work out.  The same approach for stocks goes for the fixed income markets, high quality bonds.  We think US agency mortgage bonds, convertible bonds, TIPS, and US government bonds look interesting.  Municipal bonds offer a great tax-free yield and relative safety.   You can now find tax-free Texas school district bonds that are backed by the Texas Permanent School Fund yielding 5 percent tax-free.  Does anyone really think, regardless of who is elected, that taxes will go down?  Opportunities are also starting to appear in the closed end bond fund markets, as many funds now sell at discounts to NAV of over 25%.  Now is not the time to be a hero but to cautiously make investment changes.

This is a short MaxOut Savings Report because we have been so busy.  We will try to get another MaxOut Savings Report later this month.  I look forward to things slowing down to where I can again write about IRA rollovers and savings.

Who is MaxOut Savings Advisors LLC?

In these volatile times, investing your retirement funds can be difficult and time consuming.  Hiring the MaxOut Savings Advisors team to manage your money or IRA rollover is a great first step.  MaxOut Savings Advisors is an SEC registered, fee-only investment advisor based in Houston, Texas.  Ted Geoca has over twenty years investment experience managing clients’ retirement assets. We invest in stocks, bonds and mutual funds for our clients using a value analysis strategy that we have developed over the last twenty years.   We use Fidelity Investments as the custodian for our clients’ assets. If you would like MaxOut Savings Advisors to manage your retirement investments using our value methodology, I would be happy to meet with you.  To schedule an appointment please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com. 

Remember Save Aggressively and Invest Conservatively!

Ted K Geoca                                    

President

MaxOut Savings Advisors, LLC

Houston, Texas

ted@maxoutsavings.com                                 713-627-0400

Kellan Caldwell

Doug Saam

Remember to catch:

The MaxOut Savings Show with Ted Geoca on Saturday at 11:00am on KNTH 1070AM!

We have expanded the Show to 1 ½ hours from 11:00-12:30!!!