The $500,000 Question

By Charles Delvalle

Dear Reader,

Would you lend $500,000 to someone who might not pay you back?

I don’t know anyone who would do that, unless they were rich, knew the person, and didn’t expect that money to come back.

Now imagine you’re a business that depends on the loans you give people.  You make money on the interest you charge that person for the loan.

Would you lend $500,000 to someone who might not pay you back?

Wait, let me take that back for a minute.

Would you lend $500,000 to someone when you don’t even know their financial situation?  Only an idiot would do that … idiots like Countrywide Financial, New Century, and some of the other 153 lenders that have gone bankrupt since late 2006.

These companies all went bankrupt for one simple reason: they issued some of the dumbest loans in the world.

I have to wonder what in the world these bankers go to school for.  I never grew up wanting to be a banker.  But by using nothing more than my common sense, I know that if you lend a lot of money to people you know nothing about, you’re bound to lose most of the money you lent.

I’ll admit I may be a bit harsh here.  But you can’t say these bankers don’t deserve it.

After all, when your business depends upon people paying you back, you’d think to be more careful about whom you lend to.

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And to make this whole exercise in backwards logic even more illogical, the economic top dog who started this whole thing - you know, Alan Greenspan - acknowledged that he failed to see early on that an explosion of mortgages to people with questionable credit histories could pose a danger to the economy.

And we trusted this guy to run our economy since 1987???!?!?!?!

WHAT IS WRONG WITH THIS PICTURE?!!!!!!!

How could you not understand that if you lend money to people with questionable credit, you probably won’t get paid back?

I remember when President Bush saw home ownership rising, he was beaming like a father who just watched his son hit the game-winning home run.

In reality, increased home ownership meant that the wrong people were buying homes.  These are people who would have been better off renting and not defaulting on a $200,000 mortgage three years later.

But these people were lured in with teaser rates they didn’t quite understand.  And money-hungry lenders were more than willing to make sure that these people got the loans that would screw them later.

Here we are today with more than $1 trillion worth of mortgages that will reset next year to higher interest rates.  And if just 10 percent of them default, that’s another $100 billion lost and possibly another 156 lenders claiming bankruptcy next year.

How did Greenspan not understand that this could happen?  Was he drunk on the power of letting markets rally for years on end?  Or was he all too willing to bail out the market any time a slowdown peeked its head around the economic corner?

Whatever the case is, the truth is that bad lending practices are sometimes too easy to point out.  But the problem lies in the perceived reward lenders collect by making these bad loans.

They could either take a five-percent interest rate on a good customer or a nine-percent loan on a bad customer – nearly doubling their profit.

In the end, it was nothing more than greed that drove this entire mortgage meltdown.  And now fear is starting to come back in vogue.

How long will it last?  It’s hard to say.  All I know is that the market is fundamentally different than just a few months ago.

I won’t bet on a Dow Jones that just keeps rising.  I won’t bet on amazing Christmas sales saving the market.  And I won’t bet that homebuilders and banks are out of the woods yet.

But there is one thing I would bet on … but you’re going to have to wait until next week to find out what it is.

In the meantime, I’d like to hear some stories about lending gone wrong. If you or someone you know has recently gone into foreclosure or been a victim of bad loans, let me know by shooting a response over to feedback@investorsdailyedge.com.

Good investing,

Charles

[Ed. Note:  Charles is the editor of IDEs Global Profits Hotline, a service dedicated to protecting your portfolio while letting you have the chance to make gains of 90%, 109%, even 133%. To learn how you could make consistent gains by betting on the winners and losers of our new global economy, click here.]

Market Watch

The Oil Move You Must Make

By Charles Delvalle

I love seasonality in the markets because it makes it so easy to make money sometimes.  And if you take advantage of the seasonality move in oil, you’re bound to make some good green.

Here’s how the seasonality works.  In the summer, oil prices rise, as hurricanes, summer driving, and refinery shortages (as they switch from one fuel to another) take their toll on demand.  But right around mid-September, oil prices start going down and bottom out in January or February.

Due to hurricane Humberto, oil hit a new record high today of $80.20 a barrel.  This new high is happening right when oil prices naturally start moving lower.

While hurricane season won’t be over until November, if you buy at today’s prices, it’s a near certainty that by the time you sell in January, you’ll make some good money.

My suggestion, short the United States Oil Fund (USO) ETF and hold until next year.

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