Donâ€™t touch these stocks with a ten-foot pole!
Major stock sectors are now in a race for the bottom.
These are stocks on a rendezvous with their lowest lows reached in the debt crisis of 2008-2009 … sinking back into the danger zone that came with red ink, bankruptcy, and financial ruin for millions of investors.
Hard to believe that could already be happening so soon after the market peaked?
Then consider the 25 stocks I’m going to list for you in a moment, starting with PMI Group, one of the nation’s leading mortgage insurers.
Two and a half years ago, at the height of the financial crisis, this leading mortgage insurer plummeted to a low of a meager 32 cents per share.
But in the weeks and months that followed, Washington worked overtime to inject trillions of dollars into the housing market and convince the world that the Great American Nightmare — the worst real estate crash of all time — was over.
Many Americans, blinded by their faith in “almighty government,” actually fell for it: The housing market stabilized temporarily. The economy recovered a bit. Stocks rallied sharply. And PMI surged, reaching a peak of $7.10 per share last year.
But that was just the prelude to disaster …
In the ensuing months, all of the government’s housing support programs and all the government’s mortgage subsidy initiatives failed.
Nothing the government did could stop wave after wave of mortgage defaults and foreclosures.
And even the government’s massive injections of money into the mortgage market were unable to prevent PMI from crashing again, closing at a mere $1.12 per share in late trading hours this past Friday.
That’s down a sickening 84% from last year’s high!
If you had invested $10,000 in this dog at that time, you’d now have only $1,577 in your account right now.
An Unimportant Company? No!
PMI has historically been a huge player with a pivotal function in the housing finance industry — insuring mortgages against default. But now …
If big mortgage insurers like PMI go out of business or refuse to write new policies, most lenders will refuse to extend mortgage loans to anyone except those who are rich enough to buy a home for cash and don’t need a mortgage to begin with.
Moreover, PMI is on the frontline of the losing battle against a flood of bad mortgages in virtually every region of the United States.
So if this company is drowning and its stock is sinking to zero, you can be quite certain that many other companies downstream — lenders and banks, builders and realtors, REITs and other financials — are likely to face a similar fate.
As I illustrated here last week, nearly all bank and financial stocks are now in a race for the bottom — the only difference being, PMI is “winning” that race.
Just a Technical Correction?
If the housing and mortgage markets were holding up nicely, perhaps you could make that argument stick. But the fact is, all three key facets of this giant sector are coming unglued at the seams —
- The finances of homeowners who borrowed the money
- The finances of bankers who loaned them the money
- And the value of the home itself, the underlying collateral that’s supposed to be tapped when folks run out of money.
This is no small technicality. It’s a fundamental deterioration in the underpinnings of the entire sector.
“Why Can’t the Government Come
To The Rescue Again?” You Ask
For the simple reason that the government itself is ALSO running out of money.
But for argument’s sake, let’s say the government does somehow come up with more funds to pump into housing and mortgages.
OK. So what? What difference is that going to make?
Based on the recent history, the answer should be obvious: Not much!
Remember: No amount of government intervention has been able to prevent home prices from plunging to new lows — even lower than the bottom of March 2009, when homes were selling at deeply distressed prices. (See chart to left.)
Similarly, no amount of government intervention can prevent nearly every sector that touches housing and mortgages from suffering a similar fate.
“Martin’s Too Pessimistic.
Don’t Listen to Him!” Say My Critics
Harry Truman once said. “I never give them hell. I just tell the truth and they think it’s hell.”
That’s what my team and I do.
If anything, we’re optimists. We find the few companies that do have the wherewithal to survive and even benefit. And we see silver linings in this crisis that I’ll be glad to tell you more about in future issues.
Moreover, this is isn’t the first time we have given advance warnings about companies like PMI.
In our Safe Money Report of April 2005, well before the housing bubble peaked, we told our subscribers not to touch PMI Group and 24 other stocks with a ten-foot pole. Here they are:
Aames Investment, Accredited Home Lenders, Beazer Homes, Countrywide Financial, DR Horton, Fannie Mae, Freddie Mac, Fidelity National Financial, Fremont General, General Motors, Golden West Financial, H&R Block, KB Homes, MDC Holdings, MGIC Investment, New Century Financial, Novastar Financial, PHH Group, PMI Group, Pulte Homes, Radian Group, Toll Brothers, Washington Mutual, and Wells Fargo & Company.
(Want proof? Click here for the SMR issue of April 2005 and scroll down to page 10.)
Subsequently, 11 of these 25 companies filed for bankruptcy, were bailed out or bought out.
ALL 25 stocks plummeted, with an AVERAGE loss of 81.3%.
And even after more than two years of stock market rally, investors who bought and held these stocks are deep in the red.
(But whether they rallied or not, our advice to anyone who owns the surviving companies today is the same: Don’t touch them with a ten-foot pole!)
Later, in the financial crisis of 2008, we were the only ones who issued negative ratings and warned well ahead of time of nearly every major firm that subsequently collapsed. We warned about …
* Bear Stearns 102 days before it failed (click here for the proof)
* Lehman Brothers 182 days before (proof)
* Citigroup 110 days before (proof)
* Washington Mutual 51 days before (proof), and
* Fannie Mae 4 years before (proof).
That’s history. What counts most now is that …
It’s “Game Over” for the U.S. “Recovery”
Look. From the outset, we knew the U.S. economic recovery was rigged — bought and paid for by the greatest monetary and fiscal extravaganzas of all time.
We knew that no government, no matter how rich, can create corporate immortality: In the real world, companies are born and companies must die. I’m sure you understood that as well.
We knew that no government, no matter how autocratic, can repeal the law of gravity: When sellers are anxious to sell and buyers are reluctant to buy, prices fall. A no-brainer!
We also knew that no government, no matter how powerful, can stop the march of time: With every second that ticks by, more debts come due, more mortgages go into default, more homes are foreclosed.
And I think you knew, too. But still you ask:
“How Could This Recovery End So
Abruptly and Crumble So Dramatically?”
Answer: As we’ve been telling you all along, it was never a true recovery to begin with: