TAKING STOCK: A 2nd round of stupid

Dear Mr. Berko:

More than a year ago, I wrote and asked you about Annaly Capital Management, Hatteras Financial and American Capital Agency, which were all paying more than 12 percent. I invested $16,600 in each even though you told me not to. Now it seems that I was wrong. I'm down $22,000, and my dividend income is down by 30 percent. Today each of these issues yields better than 14 percent. I know that President Barack Obama will appoint a new Federal Reserve chairman this January - probably either Janet Yellen or Larry Summers. Do you think that either Yellen or Summers plans to keep interest rates low? If you think so, would you recommend that I invest another $16,600 in each of those issues?

HR, Cincinnati

Dear HR:

Forrest Gump's "stupid is as stupid does" said it better and more succinctly than anyone, including the highly esteemed bard William Shakespeare, whose plays always bored me to the marrow. Unfortunately, there's no cure for stupidity, though I'm told selective breeding (which takes too much time) works well.

Interest rates have been marching steadily higher. A year ago, the 30-year residential mortgage rate was 3.5 percent. Today those rates are 4.5 percent and may be headed higher. In that same time frame, the 10-year Treasury bill rate nearly doubled - rising from 1.55 percent to nearly 3 percent - and it may be headed higher. And neither Summers nor Yellen has indicated that he/she will maintain these low rates; rather, each has indicated that rates could move higher. However, it's the president who makes the final decision. So stop tilting at windmills. Interest rates are going to rise even higher, and most Fed watchers believe that Summers would raise them faster than Yellen if named to head the Fed next year. But there's a 35 percent degree of probability that neither Yellen nor Summers will be Obama's choice. Stanley Fischer, the No. 2 man at the International Monetary Fund, is a possibility, and so is Roger Ferguson (former Fed vice chairman). Both of them would be amenable to helping the state of Illinois and the cities of Chicago and Detroit with federal guaranteed funds.

Frankly, it's not a matter of "if" but rather "how soon and how much rates will rise." Higher rates are as certain as your reflection in the morning mirror. I frequently have cautioned readers about higher rates in previous columns, whereas other financial columnists, some wiser than I, have expressed their concerns and caution. In April and June of this year, when Fed Chairman Ben Bernanke spoke of reducing the second and third rounds of quantitative easing, the Dow Jones industrial average took a monstrous dive.

I told you last year - when Annaly Capital Management (NLY-$11.83) was $17, when Hatteras Financial (HTR-$22.57) was $28 and when American Capital Agency (AGNC-$22.91) was $35 - to sell them or place open-stop sell orders at 10 percent less than their trading prices. And I told you that having rising short-term rates means lower dividends for those exchange-traded funds because their portfolios are highly leveraged. Since then, their dividends have been slashed, and their market values have crashed. Yet for some reason I doubt even your psychiatrist understands, you're compelled to invest another $16,600 in each of them. Yes, I know their yields are close to 14 percent, but what I told you last year still stands. Interest rates will continue to move higher; NLY, HTR and AGNC will continue to lower their dividends; and their prices will continue to fall. If you invest this second $50,000, it's likely that a year from now, you will have lost another $22,000. So please have your psychiatrist double your dose of Prozac, which will cost you a lot less. If you don't have a psychiatrist, I know an experienced professional in your city, whom I can recommend. He'll suggest that you have a condition known as the financial Doppler effect. This describes the tendency of stupid investment ideas to seem smarter when they come at you rapidly. Sell the three issues you own before they move lower.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

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Published: Fri, Sep 20, 2013