Russell and yield chasing

Today the quest for yield, any kind of "safe" yield, goes on and on. The Fed has taken short rates down to zero. This allows the banks to borrow at extremely low rates and then to buy Treasury bonds at yields near to 4%. This allows the banks to accumulate fat, almost risk free, income. Thus the Fed has taken care of its own.

The big banks are flush with cash again. And all the while Americans are gasping for income like fish out of water. Leading bankers are making more money than ever, while the poor slob on the street is lying awake at night wondering how he's going to make the overdue payment on his home. Of course, his home is "underwater," since his home is worth less than his mortgage.

Yield chasing is one reason banks like Barclays and Bank of America bought CDOs. Some Wall Street genius sliced and diced a giant stack of mortgage paper, bumping up the yields with low-quality mortgages, while getting the ratings agencies to rate the whole thing triple-A. Government regulators did their part by requiring more capital to hold prime mortgages than triple-A-rated securities. That gave the banks just the nudge they needed to chase a few more points of yield, selling lower-yielding prime mortgages and buying slightly higher-yielding CDOs.

Today, I'm going to show you why I believe this community bank is the safest stock in America... it happens to be sitting on a gargantuan hoard of cash that represents almost 65% of its total market cap... This bank's stock is about to rise 50% or more... and you can get dividends as high as 11% a year if you invest today...

The CEO of this bank saw the real estate crisis coming, and steered his bank away from bad mortgages. In fact, he never bought a single subprime loan. Also, this bank has no debt, and it's made a profit every year since 2000 – as far back as we can find data. This is the safest financial stock we've ever seen. And you won't hear about it anywhere else.

A few days ago, we walked through a gorgeous 2,600-square-foot home, high in the hills. The valley and mountain views on two walls in the enormous great room are stunning. The seller bought the lot and built the house for $470,000. Now, he's asking $369,000. If I make an offer, it won't exceed $350,000. He's highly motivated since he was transferred to another state.

My wife felt bad when she heard how much the owner spent. At the risk of sounding downright crass, I felt giddy. I spent less on my house than he spent on the lot.

At the peak of the housing bubble, when all her friends were selling and buying new houses, my wife dragged me and our realtor around the valley, looking at one perfectly lovely, overpriced home after another. I said no, no, no to all of them. She was disappointed. Life was tense around here for a while.

Then, I paid off our mortgage because I wanted our personal balance sheet to be a financial fortress, like the businesses I admire most. My wife still didn't quite understand. Her friends were taking out second mortgages to buy boats and motorcycles and take big fancy vacations. They were happy and living the high life, and she wanted to live it, too. Truth is, so did I. But I knew I was doing the right thing, even though the right thing felt bad a good deal of the time.

Then, the world fell apart. Suddenly, some of my wife's friends were in trouble. Some are divorced now. Others are trying to stave off bankruptcy. And now, I look a lot less like a dream crusher to my wife than a guy who was playing it ultra-safe and doing the right thing. Sometimes now, when she hears a new story of someone losing his house, she says she's glad we'd be able to keep our home if our fortunes reversed. She understands I did the right thing. And now, she'll get her wish of a big, new home in a great neighborhood.

Being financially disciplined against the wishes of my own wife was the hardest thing I've done since we got married. But it's also the best thing I've done. We've seen one divorce after another since the financial crisis broke, and we're closer than ever. Who knew being stingy was an aphrodisiac? (Takes a couple years to kick in, though!)

These days, when I say we can't afford something, my wife just smiles and says, "OK." She's a diehard convert. She gets it. I'm lucky to have married someone smart enough to learn this lesson and learn it well.

Due to ignorance and the horrible decisions that logically followed from it, not to mention the $100 round-turn commissions, I closed my account with $268.32 left, just six months after I started. That hurt. I remember it well and think of it several times a year.

Playing it safe since then led me to the excellent financial condition I'm in now... in stark contrast to those all around me, who spent money they didn't have on things they didn't need.

I own plenty of gold bullion and gold stocks. And now I'm about to get a new house, maybe for less than the cost of the materials. And I'm going to buy it with money that's essentially a free gift from the Federal Reserve.

I've got a ticket on the inflation train. Thank you, Mr. Bernanke.

"But go ahead and lay it at 'Comrade' Obama's feet. Old saying: It's not the guy who lights the fuse that gets hurt, it's the one holding the bomb when it goes off. George W. Bush couldn't wait to hand over that pile of steaming s..." – Paid-up subscriber ("although I don't know what for – you haven't made a decent call since I signed on") John E.

Ferris comment: First of all, you must have signed on AFTER I picked International Royalty, which was bought out within months at a 239% profit for my readers. You must have signed on AFTER I picked IMS Health, about two months before it was bought out at a 70% premium.

Second, does it make a difference if he's a socialist or a fascist? They both share the same root assumption, the centralization of life via autocratic rule. Everyone believes the state is a magic panacea for all ills. And what does this belief get you? It gets you people literally dying from the notoriously long wait for medical treatment in Canada. You get the police being called out in Sweden because of the violence in the waiting areas of medical centers.

The financial services industry in the U.S. is the most regulated industry in the world. Point to any of the causes of the meltdown, and you will not find unfettered capitalism. You'll find the heavy hand of government, preventing the market from doing what it always does.

There were a dozen or so banking panics in the 19th and early 20th centuries. Each time, a few banks went under, and we quickly recovered. Then, the government and its banker buddies created the Federal Reserve. The Fed eased credit, causing the 1920s megabull. It tightened credit, causing the ensuing crash. Then, St. Roosevelt interfered in every aspect of American life, causing the Depression to linger on and on. With unemployment at 25%, and people literally starving, he raised the price of food. With people desperate for money, he raised taxes. Then, he shoved arms down China's throat so he could get us into WWII, which he did by ignoring a warning that Japan would attack us, an attack which probably saved him from being thrown out of office.

In the recent debacle, the Fed kept interest rates low for years. Banks and other investors chased yields, and the market for CDOs blossomed. The government shoved housing down the throats of people who couldn't afford it, and home prices soared. The government refused to allow a liquid trading market for credit default swaps, and three large financial institutions created an oligopoly.

Name one aspect of the financial system that's "deregulated." You can't.

As for Komrade Obama and Herr Bush... politicians all look alike to me. They all do the exact same thing: Create more laws and regulations and grow the government burden on you and me.