Rural Telecoms Pay Big Dividends

Rural Telecoms Pay Big Dividends

If the market been a little too exciting for you lately, it may be time to consider something really boring, say, rural telephone companies.

These phone companies provide old-fashioned local and long distance voice landline services to rural areas with low population densities. Most also offer dial-up and broadband Internet services and some also offer TV and wireless phone services.

What takes rural phone companies out of the boring category, at least for me, is that they pay big dividends. Dividend yields (expected annual dividend divided by the recent share price) range between five and eight percent, and sometimes higher.

Unloved
The major phone companies view the traditional landline business with disdain because it’s not growing. In fact, if you count the number of lines in use, it’s shrinking. Some users are abandoning land lines altogether, relying solely on their cell phones. Others find that they can make do with one less line when they switch from a dial-up Internet connection to DSL.

Consequently, many of the big carriers have sold off their landline businesses to smaller operators or to investment groups who later took them public. As it turns out, things are not as bleak as first thought for the rural carriers. Despite the shrinking need for landlines, most have figured out how to replace the lost business with revenues from new services such as DSL Internet connections, web hosting, digital TV and corporate communications.

Surplus Cash
Now, these rural phone companies find themselves in an unusual situation. Their landline operations are generating large and relatively stable cash flows. But, since, they’re not spending much money on developing new products or expansion, they don’t need all of that cash. So, many of them have decided to pay out their excess cash to shareholders as dividends.

Here's How to Find Them
You can use Yahoo’s user friendly Basic Screener to create a list of high dividend paying telephone companies.

Find Yahoo’s Basic Screener from its Finance homepage (finance.yahoo.com) by selecting Screener in the Stock Research section and then clicking on Launch HTML Screener.

Once there, select “Telecom Services – Domestic” from the Industry menu and specify a minimum acceptable dividend yield. Figuring that you can buy CDs in the mid-four percent range from many banks, I specified 6% for minimum dividend yield. Try reducing that requirement if you want to see more stocks.

High Dividend Telecom Domestic

Symbol	Company	Div/Yld	More Info
CZN	CITIZEN COMM CO	8.40%	Quote, Chart, News, Profile, Reports, Research, Msgs, Insider, Financials, Analyst Ratings
CNSL	CONSOLIDATED COMMUNI	11.00%	Quote, Profile, Reports, Research, Msgs, Insider, Financials, Analyst Ratings
FRP	FAIRPOINT COMM INC	14.40%	Quote, Profile, Reports, Research, Msgs, Insider, Financials, Analyst Ratings
IWA	IOWA TELECOM SVCS	8.50%	Quote, Profile, Reports, Research, Msgs, Insider, Financials, Analyst Ratings
Q	QWEST COMM INTL INC	9.00%	Quote, Chart, Profile, Reports, Research, SEC, Msgs, Insider, Financials, Analyst Ratings
WIN	WINDSTREAM CORP	8.40%	Quote, News, Profile, Reports, Research, SEC, Msgs, Insider, Financials, Analyst Ratings

Finally, select “All Available” from the Display Information menu and click on “Find Stocks.”

Yahoo listed six stocks with dividend yields ranging from 6.7% to 8.2% when I ran the screen. They were: Citizen Communications Company, Consolidated Communications Holdings, FairPoint Communications, Hickory Tech, Iowa Telecommunications Services, and Windstream.

For each company, Yahoo lists the recent price, dividend yield, average analyst recommendations, a variety of valuation ratios, and other information.

Ignore Earnings
Analyzing rural telephone companies requires a different approach than what you’d use for growth stocks.

Most important, these telecoms are not necessarily profitable, at least in terms of reported net income. They all have huge investments in equipment, phone lines, and other infrastructure items that, according to the rules, must be depreciated. The depreciation charges deduct from reported earnings, but are non-cash accounting entries. No cash changes hands as a result of depreciation charges. So, instead of focusing on net income, pay attention to “operating cash flow,” which is the actual cash that flowed into, or out of, a firm’s bank accounts as a result of its normal operations. It’s the operating cash flow that fuels dividends.

Count Cash
You can see how a company is doing in that respect by getting a price quote and selecting “Cash Flow” in the Financials section. About half way down the report, Yahoo lists “Total Cash Flow From Operating Activities” and then further down lists “Dividends Paid.” Since the dividends are paid from cash flow, you want to verify that the operating cash flow significantly exceeds the dividends paid for each reporting period.

Check Dividend History
A firm’s dividend history is also critically important when you’re analyzing dividend stocks. You can see that on Yahoo by selecting Historical Prices (after getting a price quote) and then selecting “Dividends Only.” Yahoo displays a firm’s dividend history going back 30 years or so, if it has been paying dividends that long.

Your best dividend candidates pay dividends either quarterly or monthly, and show a record of steady, and hopefully, rising dividends. Avoid stocks showing an erratic dividend payment history. Many foreign stocks pay dividends only once or twice a year. I avoid those stocks. It would be disheartening to wait a year and then learn that the company decided to skip its next dividend.

Since there are only a handful of high dividend rural telecom candidates, spend some time to learn about each one. Yahoo’s Profile report gives you a good overview of a firm’s operations. For more details, read Reuters’ Full Description report (www.investor.reuters.com). Also, read the recent news reports and press releases that you can find for each company on Yahoo (Headlines report).

The more you know about your stocks, the better you’re results.
published 3/4/07

June 13, 2008

The search for higher yields includes finding the trade-offs

Savers and investors are scouring the markets for better-performing assets because the yields of most interest-sensitive investments—such as money market mutual funds, certificates of deposits (CDs), bonds, and bond funds—have declined in recent months.

As part of that search, they should consider their options:

1. Lower their investment costs.
2. Take on more risk.
3. Sit tight.

The first option is a good idea in any market cycle. The second one involves trade-offs. The third deserves consideration by all long-term investors.

Lower cost, higher yield

The easiest way to squeeze more from an investment is to simply lower your costs.

"Every dollar you pay in expenses cuts into net performance," says Martin Riehl, principal of Vanguard Asset Management Services™.

Of course, choosing the lower-cost strategy means knowing what your costs are.

For mutual funds, the expense ratio is a key factor. Consider a hypothetical comparison of $100,000 invested in a money market mutual fund with an industry-average expense ratio of 0.86%, versus the same investment in a low-cost fund with an expense ratio of 0.20%. Because the difference in costs over the course of a year—$860 for the average-cost fund, $200 for the low-cost fund—would be $600, you'd be paying more to get the same yield even if the performance of the two funds was the same.

Looking for a competitive CD rate?

Through Vanguard Brokerage Services®, you can invest in and research corporate, municipal, Treasury, and agency bonds; CDs; and other debt securities from across the domestic market. Plus, you can take advantage of Vanguard Brokerage's competitive commissions and fees

Read more »

Also keep transaction costs in mind. If you use a brokerage to purchase individual investments, such as bonds, funds, or CDs, keep an eye on costs by choosing a firm that features low commissions and fees.

Higher risk, higher yield

The second alternative recalls a truism of investing: the link between risk and potential reward. "If you try to boost your yield from fixed-income assets, you should be aware of the additional risks you will face," says Mr. Riehl.

Among the risks you may encounter:

• Liquidity risk. This refers to the ease with which you can convert an asset into cash. Take, for example, bank CDs, which you can purchase through a brokerage firm or directly from an issuing bank. Although CDs typically offer relatively enticing interest rates if you hold them to maturity, you'll likely pay a penalty if you redeem a bank-bought CD early. You can't redeem a brokered CD early, but you can sell it—and face interest rate risk and likely incur a fee.
• Interest rate risk. This refers to how the value of bond funds, individual bonds, and CDs purchased through brokerages declines when interest rates rise (and vice versa). A bond, bond fund, or brokerage CD with a shorter maturity has less exposure to interest-rate risk than one with a longer maturity. (You typically would favor longer maturities if you're seeking greater yield.)
• Credit-rate risk. This refers to the possibility that a bond issuer will be unable to pay interest or repay the principal on time or at all. For example, the U.S. government won't go bankrupt, but a corporation can—and that additional credit-rate risk helps inflate yield. You can seek higher yields by favoring corporate bonds over government bonds of the same maturity.

So, if you’re intent on chasing higher yield, be aware that you’ll probably have to accept more of one of these risks.

Tradeoff: Risk vs. yield

More credit risk: Government funds -> Corporate funds

More Interest rate risk: Money Market funds -> Short-term bonds (maturity 1-5 yrs) -> Intermediary-term bonds (maturity 5-10 yrs) -> Long-term bonds (maturity 10+ yrs)

Gov. Funds: 1.65%, 2.41%, 3.71%, 4.37% (MM, short, intermediary, long-term)
Corp. Funds: 2.05%, 4.92%, 5.80%, 6.35% (MM, short, intermediary, long-term)

Sources: Lipper Inc.; Lehman Brothers.

1Average Government Money Market Fund

2 Average Money Market Fund

3 Lehman 1-5 Year U.S. Treasury Index

4 Lehman 1-5 Year U.S. Credit Index

5 Lehman 5-10 Year U.S. Treasury Index

6 Lehman 5-10 Year U.S. Credit Index

7 Lehman Long U.S. Treasury Index

8 Lehman U.S.Long Credit A or Better Index

An eye on the wrong ball?

The third option may seem counterintuitive, but it can be particularly suited to long-term investors: Sit tight.

Your long-term portfolio should be based on the types of bonds—in terms of maturity and credit quality—and allocation of assets among stocks and bonds that you would feel most comfortable with, regardless of interest rate movements.

"Before you search for higher yield," says Mr. Riehl, "don't lose sight of the fact that the interest rates shouldn't be the primary driver of your long-term investment plan if your assets are properly balanced among diversified pools of stocks and bonds, and cash reserves—that is, cash you don't plan to spend. In such a portfolio, bonds and other interest-sensitive investments serve primarily as a buffer from the volatility of stocks."

You can see an aspect of the buffer effect over the short term. As noted above, bond prices move in the opposite direction of interest rates. That is why the total return of stocks dropped –6.1% while bonds climbed 6.9% for the year ended May 31, 2008.

Notes

• Stock returns are measured by the Dow Jones Wilshire 5000 Index; bond returns are measured by the Lehman U.S. Aggregate Bond Index. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
• An investment in a money market mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
• Mutual funds, like all investments, are subject to risks. Investments in bond funds are subject to interest rate, credit, and inflation risk.
• Industry-average expense ratio of money market mutual funds is for non-institutional taxable funds at year-end 2007. Source: Lipper, Inc.
• Bank deposit accounts and CDs are guaranteed (within limits) as to principal and interest by the Federal Deposit Insurance Corporation, which is an agency of the federal government.
• Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
• The hypothetical example does not represent the return on any particular investment.
• Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, Member FINRA.

June 5, 2008

Saving for retirement: One investor's success story

At age 59, José is living a retirement beyond his expectations.

His lifestyle isn't lavish, but his time is his own. He'll have paid off his home mortgage in a few years. And with savings in excess of $650,000, he feels secure financially. "I wake up in the morning and have to kick myself to see if it's me," the New Mexico native said.

How did he do it? Largely through diligent saving and disciplined investing in his 401(k) account.

A modest beginning and a desire to learn

José (not his real name) began saving through his employer's retirement plan when he was in his mid-30s. "Back then, I didn't really know what a 401(k) was," he said. He learned the basics from an on-site presentation by Vanguard, which administered the plan.

He started small, contributing 1% of his salary. "$15 every two weeks," he recalled. "Then every time I got a raise or bonus, I added it." With additional income coming from two separate pensions as a result of military service, the computer systems specialist was ultimately able to sock away nearly 20% of his salary each year. Employer contributions to his account added even more.

José began with just one stock fund, a riskier option than other single-fund alternatives, such as balanced funds. But he felt comfortable with his choice, given his lengthy time horizon and understanding of risk—a perspective that was quickly tested on Monday, October 19, 1987, when the stock market plummeted 23%.

"I thought, 'Holy smokes, I'm dead,'" he recalled. But he stayed the course and in two years saw his savings surpass their pre-"Black Monday" levels. "That showed me the importance of investing for the long run," he said.

He continued to educate himself about investing, through books and Vanguard.com. As his assets grew, he diversified his portfolio with bond funds and added broad-market index funds. He kept a 70%/30% stock/bond allocation into his early 50s.

"Soul-searching and number-crunching"

Then, the unexpected happened: José was laid off. "I was 54 and not thinking about retiring," he said. "I did a lot of soul-searching and number-crunching."

With his modest lifestyle, military pension income, and the cushion of his sizable retirement savings, José realized that he could, in fact, retire. He recently ran his plan by Vanguard® Financial Planning Services to make sure he was on solid footing and to get advice on paring back his portfolio risk.

"We helped José get to a 60%/40% stock/bond mix that he was more comfortable with and simplified the portfolio to four funds, which lowered its overall expense ratio and made it easier for him to manage," said Michele Mazzerle, a CFP® professional at Vanguard. "Given his income, living expenses, and savings, he's in good shape."

José could begin tapping his 401(k) this year, but he doesn't plan to. He is extremely satisfied with how his savings have added up. "I thought it was going to be a great big deal to save, but it really wasn't," he said. "To be where I am today is really something."

Notes

• Mutual funds are subject to market risk. Investments in bond funds are subject to interest rate, credit, and inflation risk.
• Diversification does not ensure a profit or protect against a loss in a declining market.
• When taking withdrawals from a 401(k) before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
• Vanguard Financial Planning Services are provided by Vanguard Advisers, Inc., a registered investment advisor.

DRIP - Dividend reinvestment plans cut out the middlemen

PAUL B. FARRELL
Best-kept secret on Wall Street
Dividend reinvestment plans cut out the middlemen
By Paul B. Farrell, MarketWatch
Last update: 6:57 p.m. EDT April 10, 2005
Print E-mail RSS Disable Live Quotes
ARROYO GRANDE, Calif. (MarketWatch) -- Don't trust brokers? No confidence in fund managers? Cut out the middleman. Here's how: Buy stocks directly from a company. Become one of America's DRIP investors.
Never heard of them? I'm not surprised. Vita Nelson, editor of the Moneypaper newsletter, calls corporate dividend reinvestment programs, or DRIPs, the "best-kept secret on Wall Street."
Most people haven't heard about them for one simple reason -- companies can't advertise their DRIPs. Why? Because brokers and fund managers can't sock you with big fees and commissions if you buy stocks directly from a company. So they won't tell you the "best-kept secret" and they've made sure Congress and the SEC keep it a secret too.
But I can tell you. DRIPs are a great way to get on the dividend bandwagon. DRIPs are a simple way to invest dollars and reinvest dividends. DRIPs are a great long-term saving plan that can help you build a retirement portfolio of solid blue-chips.
And it's "so easy," says Charles Carlson, editor of the DRIP Investor newsletter and author of several books on investing, including "Buying Stocks Without a Broker" and "No-Load Stocks" (another buzzword for DRIPs), both great primers for the new DRIP investor.
More than 1,000 major companies offer DRIPs, including Coca-Cola (KO:
The Coca-Cola Company
News, chart, profile, more
Last: 59.33-0.92-1.53%4:01pm 04/25/2008Delayed quote data
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Sponsored by:
KO 59.33, -0.92, -1.5%) , Disney (DIS:
Walt Disney Company
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Last: 32.36+0.42+1.31%4:01pm 04/25/2008Delayed quote data
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Sponsored by:
DIS 32.36, +0.42, +1.3%) , Exxon Mobil (XOM:
exxon mobil corp com
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Last: 92.46-0.14-0.15%4:01pm 04/25/2008Delayed quote data
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Sponsored by:
XOM 92.46, -0.14, -0.1%) , Home Depot (HD:
Home Depot, Inc
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Last: 29.78+0.86+2.97%4:01pm 04/25/2008Delayed quote data
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Sponsored by:
HD 29.78, +0.86, +3.0%) , Pfizer (PFE:
Pfizer Inc
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Last: 20.43+0.39+1.95%4:00pm 04/25/2008Delayed quote data
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Sponsored by:
PFE 20.43, +0.39, +2.0%) and Walgreen (WAG:
Walgreen Co.
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Last: 35.49-0.33-0.92%4:00pm 04/25/2008Delayed quote data
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Sponsored by:
WAG 35.49, -0.33, -0.9%) . Plus great foreign brands like AXA, BP, Barclays, GlaxoSmithKline and Toyota, all administered through ADRs by American banks, also offer DRIPs.
"In the Dow, Exxon has perhaps the most user-friendly DRIP," Carlson says. "You can make initial purchases directly. Minimum initial investment is $250. There is no enrollment fee and no purchase fees. The Exxon plan also has an IRA option, including a Roth IRA."
And you have to love Carlson's eight-stock "starter" DRIP portfolio. This winner had an 18.8% average annual return the past 10 years, handily beating the S&P 500's 10.3% percent average. Put another way, if you invested $1,000 in each of these stocks 10 years ago -- a total of just $8,000 -- your portfolio would have grown to a loveable $45,040 today.
The portfolio includes Medtronics (MDT:
Medtronic, Inc
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Sponsored by:
MDT 49.42, -0.04, -0.1%) , Popular (BPOP:
popular inc com
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Sponsored by:
BPOP 11.85, +0.06, +0.5%) , Walgreen, Pfizer, Dollar General (DG:
DG
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Sponsored by:
DG, , ) , Exxon Mobil, Regions Financial (RF:
regions financial corp new com
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Last: 22.22+0.36+1.65%4:00pm 04/25/2008Delayed quote data
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Sponsored by:
RF 22.22, +0.36, +1.7%) and Disney. See accompanying chart.
And if you don't have $8,000 to start, Carlson suggests an even simpler four-stock portfolio with a super-low initial investment: Popular, Exxon Mobil, Cash America (CSH:
Cash America International, Inc
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Last: 48.21+2.76+6.07%4:00pm 04/25/2008Delayed quote data
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Sponsored by:
CSH 48.21, +2.76, +6.1%) and Aqua America (WTR:
aqua america inc com
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Last: 18.04+0.05+0.28%4:00pm 04/25/2008Delayed quote data
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Sponsored by:
WTR 18.04, +0.05, +0.3%) : "Buying into these four stocks costs you just $1,100 to start. And all of your money goes to work for you, no enrollment fees and no purchase fees."
Eight stocks may not be enough diversification for your needs. And you may still want some bond funds to build a balanced portfolio for your lifestyle. Carlson's books are filled details about asset allocations, company picks and alternative portfolios to fit all kinds of lifestyles, from young families to mature retirees.
Where to begin
How to get started? You need at least one share of stock to start (DRIP programs are only available to existing investors). There are three great organizations that will show you how to buy that first share or help you find one of the 300 companies that will let you get started buying that first share directly: DRIPinvestor.com, NetStockDirect.com and Moneypaper.com. Visit DRIPinvestor.com. See NetStockDirect.com. Check out Moneypaper.com.
According to these experts, building your stock portfolio using DRIPs is about as easy as opening any other account. Here are Carlson's eight steps for getting started in DRIPs:
Select the best companies
Research the plan's specifics before investing
Buy the first share of company stock
Wait for the stock certificate
Tell the company you want join their DRIP plan
Fill out and return their DRIP enrollment form
Know the rules about making cash payments
Keep good records
After you make your initial investment, you then add to it on a regular monthly basis. In fact, you can make it even easier by setting it up as an automatic deduction from your bank account. And today most transfer agents allow buying in DRIP plans via the Internet.
One drawback to some of the plans, says Carlson: "In recent years we see more companies with no-load stocks implementing fees in the plan. These fees are generally $5 to $18 for enrollment fees and purchase fees of $5 plus $0.10 per share."
Still, that's better buy than paying all the commissions, fees, trading costs and annual operating expenses the middlemen siphon off.
Big savings: no loads, no fund expenses
With DRIPs you can save upfront loads plus those endless annual management fees of 1.5% to 3% you have to pay your broker to buy the stocks and then hold onto them indefinitely.
Plus you'll save even more by buying stocks directly and not investing in a mutual fund. Remember, the fund simply turns around and invests your money in stocks and then charges an average 1.4% annual fee.
Think of it this way, you're creating your own private fund of DRIP stocks. You cut out all the broker's loads and you've eliminated the fund's operating expenses. And on top of that, you'll likely outperform Wall Street's hotshots and the vast majority fund managers.
Simple! But don't tell anyone. Remember, DRIPs are Wall Street's best-kept secret.
Company
10-year growth of $1,000 DRIP
Medtronics
$7,501
Popular
$10,435
Walgreen
$5,563
Pfizer
$4,806
Dollar General
$4,411
Exxon Mobil
$4,429
Regions Financial
$3,934
Walt Disney
$1,965
Total
$45,046

Protection And Profit From Falling Dollar And Rising Inflation

Protection And Profit From Falling Dollar And Rising Inflation

Issue #355 11/7/2003
The U.S. dollar is now vulnerable to a decline on two fronts — against major foreign currencies and in terms of its declining purchasing power in the United States.

Already, based on our recommendations in this column, you should be protecting yourself — and profiting — with:

About 10% of your conservative portfolio in Prudent Global Income Fund (PSAFX, 800-711-1848, www.prudentbear.com/funds_pshfund.html), which has enjoyed nice gains, and/or American Century International Bond Fund (BEGBX, 800-345-2021, www.americancentury.com), which has done even better. But don't let the difference in their relative past performance bother you. Both are still buys. Here's a chart showing their relative progress: Both of these mutual funds are designed to benefit from a declining dollar, but each does so in a somewhat different manner. The American Century fund buys short maturity highly-rated bonds of overseas governments and corporations in non-dollar currencies. Prudent Global Income fund, meanwhile, also includes shares of gold companies in its allocations, along with a modest allocation to US treasuries for stability. About 15% in gold-related investments, which are also doing very nicely. Now, it's time to go a few of steps further. Step 1. Reduce your Treasury-bill allocation from 45% to 30%. That's still more than adequate for good safety and liquidity. Step 2. Open an account with Everbank. It's owned by First Alliance Bank in Jacksonville, Florida, which earns a Weiss Rating of B (good) and is insured by the FDIC up to $100,000. You can reach them via email at worldmarkets@everbank.com or by calling 1-800-926-4922. Step 3. Their minimum account is $10,000. If that's more than 10% of the amount you've allocated to our Conservative Portfolio, add to your dollar-contra funds instead. Otherwise, put the 10% of your Conservative Portfolio into their 3-month euro CD, yielding 1.26%. Although the interest is better than the equivalents in the U.S., the primary goal is appreciation in the value of the currency. I like the euro because it has such a strong uptrend against the dollar. Step 4. Set aside 5% of your portfolio to buy Enerplus Resources Fund (ERF). This is a closed-end investment trust that produces a steady flow of earnings from various royalties it receives from the distribution of natural gas and oil. But don't buy it right away. Wait for it to decline some more and pay no more than $25.75 for it. Portfolio Update To sum up, here's what your Conservative Portfolio should look like: 1. Treasury bills or equivalent money funds: 30%. Buy directly through the Treasury Direct program (for info, call 800-722-2678 or visit www.treasurydirect.gov). One of the most convenient ways to buy is through money market funds specialized in Treasuries, such as: American Century Capital Preservation Fund, ticker symbol CPFXX (800-345-2021; www.americancentury.com) Dreyfus 100% US Treasury Fund, ticker symbol DUSXX (800-645-6561; www.dreyfus.com) Fidelity Spartan US Treasury Fund, ticker symbol FDLXX (800-544-8888; www.fidelity.com) USGI US Treasury Securities Cash Fund , ticker symbol USTXX (800-873-8637; www.usfunds.com) Also consider our own Weiss Treasury Only Money Fund, ticker symbol WEOXX (800-814-3045; www.tommf.com). 2. 3- to 5-year Treasury notes: 15%. No change in your allocation. 3. Dollar-contra funds: 10%. No change. 4. Euro CD: 10% (see above). 5. Gold-related investments: 15% (see Larry's Gold Column). 6. Enerplus (ERF): 5% (see above). 7. Other energy related investments: 15%, including ... Provident Energy Trust (AMEX-PVX), which rose as high as $8.63 in October, nearing my sell targets. Sell half at $8.90 or better and the other half at $9.40 or better. In the meantime, hold on and enjoy the dividends. Pogo Producing Company (NYSE-PPP): Profits rose from $31.6 million to $67.7 million in the third quarter for this company. But the shares slipped as oil prices fell. Hold. Kinder Morgan Energy Partners (NYSE -KMP): 5%. KMP announced third-quarter net income up from $80.4 million to $95.6 million. Hold. 8. FTI Consulting (NYSE-FCN). Last month we recommended that you exit this stock at $18 or better, and it rallied as far as $20, giving you ample opportunity to get out.

Jim Cramer: Dow Could Drop 2000 points

Jim Cramer: Dow Could Drop 2000 points

Yesterday Chris Matthews interviewed Mad Money's Jim Cramer.

http://www.msnbc.msn.com/id/21134540/vp/22734052#227340...

About 2 minutes, 50 seconds into the interview Jim Cramer says the following:

"The stimulus package doesn’t do anything. … But there is an element – there is something I would urge all our candidates to think about and our Treasury Secretary. Which is that there are a group of insurance companies that insure all these bad mortgages. And I think they’re all about to go belly up and that will cause the Dow Jones to decline 2,000 points. They’ve got to be shut down and the insurance given to a new resolution trust. This is going to happen in maybe two, three weeks. It’s going to be in the front of every paper and no one in Washington is even willing to admit it. … This is MBIA and Ambac. … Remember Merrill wrote down a lot of stuff the other day and Citigroup. All these companies are relying on insurance to save them. The insurers don’t have enough money. There is also personal mortgage insurance – PMI is a company that does it – MGIC. … If these companies do not have the capital to make good, when they do fall - and I believe it is when – if the government does not have a plan in action you will not be able to open the stock market when they collapse. … No one is even talking about it, other than the New York State’s Superintendent of Insurance. … I have not heard a single politician mention the fact that these major insurers, who have insured $450B of mortgages, are all about to go under."

Supporting Jim Cramer was an article in yesterday's Wall Street Journal - Default Fears Unnerve Markets By SUSAN PULLIAM and SERENA NG. They describe how these "insurance companies" work:

http://polecolaw.newsvine.com/_news/2008/01/18/1236330-default-fears-unnerve-market

"At the center of these concerns is a vast, barely regulated market in which banks, hedge funds and others trade insurance against debt defaults. This isn't like life insurance or homeowners' insurance, which states regulate closely. It consists of financial contracts called credit-default swaps, in which one party, for a price, assumes the risk that a bond or loan will go bad. This market is vast: about $45 trillion, a number comparable to all of the deposits in banks around the world. … If they default, everyone is supposed to settle up with each other, the way gamblers settle up with their bookies after a game."

It looks like we have a lot more to worry about than how to spend our $800 or $1600 dollars!

Investing with an eye on the Interest Rate Cycle

Investing with an eye on the Interest Rate Cycle