September 19, 2013

Dear Member,

Inflation adjusted, and I am talking about government numbers, so we know the situation is actually worse, Dow 15,700 is the same as Dow 11,000 in 1999. So has the Dow really hit an all time high? I guess it’s a trick question, it’s sort of like has a runner on a treadmill really ran a mile in 7 or 8 minutes, technically yes, but he hasn’t moved an inch.

With all this hype about the Dow hitting an all time high, I strongly urge members to stay focused on undervalued large cap companies for longer term investments; as well as a few core speculative positions in small cap or micro cap companies. For a list of our longer term stock suggestions, please take advantage of our 30 day Smart Money Newsletter trial period.

I have to make a quick comment about gold, though I see it as insurance, I can’t help but be so annoyed by the smashing gold took when the FED sent rumors of a change in its quantitative easing policy. We all knew this was a lie, in fact last month I predicted that not only would they not reduce quantitative easing, but by this time next year the FED will have increased it. Gold was up over $55 yesterday as the FED announced that it would keep the printing press humming, nice move yesterday for gold; but let’s not forget it dropped over $300 per ounce on the false rumors we have heard for the past 3 months. I think gold stocks right now are probably the best buy in the past 100 years, look for our special report due out later this month.

Last week’s article on the 3 big financial myths you hear everyday received a lot of feedback and I did my best to respond back to everyone. If you haven’t read it, please do. The 3 myths we covered are…

Your Home is Your Best Investment
Deferring Taxes Saves You Money
Keep Your Mortgage to Maximize the Interest Deduction

I want to take the time to share a few of your questions that kept coming up.

Joe G. – What if my employer does a match? Wouldn’t it then make sense to contribute to my 401k?

Daniel Ameduri – Yes. If your employer is giving you free money, then you have to take it. This gives you an immediate rate of return, sometimes 100%, so you just have to take it. I hate the idea of not paying taxes for 2 to 4 decades since we all know that taxes will be much higher than they are today, but if you are getting free money, take it!

Laura M. – Regarding homes being a horrible investment, what about for people who live in California, Nevada, Arizona, or Florida where home prices tend to see a 10% or higher rate of return. It seems as if these areas don’t apply to your assessment.

Daniel Ameduri – Laura I think you have been jaded by the past 10 years and to a larger extent the past 30 years. Since 1980 we have experienced the largest credit expansion in the history of the world, combined with 1/3rd of the U.S. population increasing their spending, and a steady decline of interest rates. Housing is NOT going to its 2006 highs anytime soon, despite artificially low interest rates, and massive government inflation in the housing sector, the fundamentals just won’t support it.

What you are seeing now in places like California and Arizona is the combination of a dead cat bounce and a new real estate bubble. Of course prices are going to rise off their lows, that’s normal, what’s not normal though is over 30% of the home buyers being investors in many of these areas you mentioned.

Remember, these areas that are seeing double digit appreciation will collapse when rates rise. Not only do investors panic, but I can tell you from first hand experience, home buyers in California are stretched out to the max; with young people paying over $2,500 a month for mortgages with a 4% interest rate. Once rates rise, these prices will decline rapidly.

Like I said, this is a tough one to overcome since every baby boomer in the country has taught this to their kids like religion. Most of the baby boomers I know have moved a few times in their lives, this always worked since houses kept rising, but none of them have ever calculated the real cost of housing. They just live their life with 45 years worth of mortgage payments thinking they actually own the house. Let’s be real, a house is a great investment for the lender, because there is only 1 entity receiving positive cash flow from a home mortgage…and it isn’t the homeowner.

Jose G. – What about for rental properties, don’t I want to keep the mortgage on them in order to maximize my tax benefits? Also, why pay them off when I can do a cash out re-fi tax free?

Daniel Ameduri – No, the math is the same, you are paying $1 of mortgage interest in order to receive 30 cents back. Instead, keep the dollar, at worst you have to pay the government around 30 cents, but you still keep 70 cents of every dollar, which is more than double what you get from the mortgage interest deduction.

My advice is to pay your rental properties off, don’t get caught up into this strategy where you keep refinancing your properties and live in debt to your eyeballs. On paper and at seminars it sounds great, pull out cash tax free and never pay them off, but in real life you will live with chest pains. Everyone I personally know who followed this strategy of debt got hammered in 2008 and nearly lost all the wealth that they had built up. Those who were debt free, 2008 meant nothing, keep your obligations low and live a stress free life.

I have to run now, on a short vacation with the family. Look for new income ideas in 2 weeks as well as two speculative trading ideas in the coming weeks that will be our top picks for 2014.

Have a great week.

Daniel Ameduri