This Is a True Story

The older guy in front of me in line has a stack of credit cards the size of a deck of playing cards.

"So how much gas d'ya want?" the convenience store girl asks.

The guy shuffles his stack and tosses out a Capital One card.

With his penny loafers and turquoise polo shirt, the guy is dressed like a typical wealthy coastal Florida 70-year-old. But he might not be as well-to-do as he appears…

"Declined," the girl says.

He reshuffles and tosses again. "Declined again," the girl says.

I glance at his car poking out from behind the gas pump… It looks like a red Mercedes convertible, top down.

One more shuffle of the stack… The guy finally picks a winner and goes out to pump his gas.

"Living beyond their means…" the girl says to me after the guy leaves.

"Yep… He's driving a Mercedes convertible," I reply.

She says, "Ya know… he only came inside because he tried so many cards at the pump that the pump refused him."

I get a few steps out the door and I see the guy still filling his gas tank. It's not a Mercedes… It's a Rolls-Royce.

I can't say what this guy's situation is for sure. My guess is, he was in real estate (like most folks around here). As his properties went up in value, he took out loans to buy stuff. Now his properties have fallen by half, and he's broke. Even selling the stuff wouldn't do him any good… His stuff is worth less than the debts. So here he is, shuffling cards at the gas station.

I can't fix his situation, of course.

But the same set of circumstances that got this guy where he is today is creating an opportunity for anyone who didn't live quite so large. It's an opportunity to collect high income… in part because of the real estate bust.

I've been earning 18% interest here in Florida, and it's safe money (if you do just a little homework). Here's how it works…

When a guy (like Mr. Rolls-Royce) doesn't pay his property taxes in Florida, the county still needs that tax money. To get that money now, the county makes an irresistible offer to investors… It allows investors to pay his taxes for him and earn 18% interest. The interest accrues until either 1) the guy pays his taxes late or 2) the property is sold on the courthouse steps to recoup those back taxes.

The investment – called a tax lien certificate – should be very safe, as long as the value of the property is much higher than the taxes due. The details get a bit more complicated, but that's it in a nutshell.

The opportunity is huge. The returns are high, because the rate is set by the state as a penalty… It's not set by market interest rates.

Collecting 18% interest in a zero percent world sure is attractive to me… In this low interest-rate world, tax lien certificates are now one of the lowest-risk, highest-returning investments out there.

I've been buying them with my own money… You ought to look into them too.

The "season" for auctions starts in late May… so you have some time to get up to speed. Take advantage of it! 

The Greek debt crisis is quietly growing again

Greece has been largely forgotten by the media over the past 2 weeks. This is somewhat perplexing in light of what is happening over in Europe:

1) Greek 10 Year spreads are back to crisis levels, hitting 6.53% today, 50 bps higher than the sub 6% reached in early March when speculation that the EU would fix everything;

2) German disagreements with other eurozone countries on the...

How to Profit from the Coming Plague of Busted Banks

Hundreds of banks are about to fail…

Three banks failed in 2007. Twenty-five banks failed in 2008. One hundred and forty banks failed in 2009. Forty-one have failed already this year… and hundreds more will fail soon.

How do I know this?

Because these banks have already failed, but the FDIC doesn't have the manpower or the funds to officially "seize" them.

"They've got them in a holding pattern," says K.

K. is a senior community banker I spoke with last month (he didn't want to be quoted directly). He says the FDIC is treating these busted banks like aircraft circling a busy airport. They haven't closed them down yet, but they're in close radio contact with the managers making sure they don't do anything stupid until the FDIC's staff finds the time seize their assets.

Meanwhile, the FDIC is rushing to hire staff and open new offices in the most troubled regions of the country. Last year, it leased office space in Jacksonville, Florida, with enough room for 500 staff. Jacksonville sits squarely between Miami and Atlanta. These two cities have the highest concentrations of failed banks in the country.

Last month, the FDIC announced it had leased seven floors and 100,000 square feet of an office building in Chicago for another 500 contractors. They've opened a similar office Irvine, California.

How many more banks are about to fail?

The FDIC is the government branch charged with insuring banking deposits and seizing failed banks. The FDIC maintains a secret list of problem banks. It won't name the banks on the list to prevent bank runs. But it does publish the size of the list. Right now, it has 702 banks on the list.

The Texas Ratio is another way to estimate how many banks might fail. The Texas Ratio indicates how sound a bank is. It compares a bank's problem loans with the money it has available to deal with them. When the Texas Ratio exceeds 100%, it means the bank has more bad loans than it can afford and it's probably going to fail.

Gerard Cassidy invented this ratio in the 1980s after studying busted Savings and Loans in post oil-boom Texas. Cassidy is currently working as an analyst for RBC Capital Markets, and he's still tracking the Texas Ratio.

At the end of the third quarter 2009, 388 banks had Texas Ratios greater than 100%.

Thanks to immense government intervention, the banking sector enjoys more confidence than it has in years. You can therefore consider these current estimates of bank failures the best-case scenario.

In the worst-case scenario, half the banks in the country could fail. This is what happened in the Great Depression. There are approximately 8,500 banks in the nation today, including thrifts – banks that focus on taking deposits and originating home mortgages. Therefore, in a worst-case scenario, more than 4,000 banks could collapse.

There's a major investment opportunity here. When the FDIC seizes a bank, the first thing it does is line up another bank to take over the deposits, branches, and loan portfolio. It's often a local competitor. This way, the FDIC minimizes disruption to the banking system and keeps depositors from panicking. To make sure other banks are willing to take over, the FDIC offers them "sweetheart" deals, including loan guarantees and great deals on the assets.

My favorite way to take advantage of this situation is to buy stock in banks that receive the sweetheart deals. For one thing, the FDIC only awards these deals to the safest banks in the region, so you have an automatic indicator that the bank is safe and has plenty of capital.

Secondly, the bank expands its deposit base, sometimes dramatically, without having to pay any advertising or other "gathering" costs. (Gathering deposits is normally very hard work for a local bank and extremely expensive.) Deposits are like rocket fuel for banks. They can use them to dramatically increase their loan portfolios (using 10-to-one leverage) and their earnings.

And finally, in many cases, one bank takes over another local bank. In other words, now there's one less competitor in what's usually already a small local market.

The FDIC maintains a public record of all the bank takeovers here.

I study the new additions to this list every week and look for opportunities. This is the only way to find them… 

CHART OF THE WEEK: A HUGE BREAKOUT IN CRUDE OIL

The long "sideways saga" of crude oil is over. That's the idea behind our chart of the week.

In late 2008, we told readers to load up on crude oil bets almost on the exact day the stuff bottomed around $35 per barrel. Oil was extremely cheap relative to gold back then. On cue, the black stuff rallied 100% in the next six months. But since June, the price of crude has drifted sideways in the mid-$70s.

Our chart below shows that sideways period is over. Crude just "broke out" to a new high around $85 this week.

Most energy analysts see this price as too high given the supply/demand fundamentals. But as we've highlighted with surging financial stocks, copper prices, and restaurant shares, it's obvious the Fed's great reflation program is boosting the price of everything under the sun.

Canada's Largest Untapped Gold Deposit Now Open to Investors

Mining investors are going to start hearing the words "Golden Triangle" soon.

They're going to start hearing them a lot.

I flew up to this remote corner of Canada – a section of northwestern British Columbia that's roughly the size of Connecticut – in the summer of 2007... to visit the largest gold deposit ever found in the country at that time.

The Golden Triangle isn't just home to the gold deposit I visited. It turns out, another deposit, located practically right next door, contains even more gold, according to the Vancouver Sun.

One of the deposits in the Golden Triangle is so rich, one geologist called it "the highest grade gold I've seen in my career… and I've been in the business since 1976." And its size grew with every hole the company drilled. Since its initial discovery, the resource has increased by almost 500%.

And Pierre Gratton, CEO of the Mining Association of British Columbia, calls yet another find simply "too large to ignore."

Altogether, this tiny area holds an estimated 15 world-class gold deposits... all virtually untapped.

But the Canadian government is going to change all that…

You see, the Golden Triangle has been mostly impossible to mine for the past 150 years because of its remote location and lack of power infrastructure (I had to visit by helicopter). While many folks get excited about big gold discoveries, they often forget that roads and power lines are as important to a mine as ore grades.

Well, roads and power lines are on their way to the Golden Triangle...

The British Columbia provincial government – in conjunction with the federal government of Canada – has approved the construction of a 200-mile power line. The new high-voltage Northwest Transmission Line is scheduled to cut right through the heart of the Golden Triangle... and it's going to bring a mining boom along with it.

You see, British Columbia is great place to build a gold mine. It's mine-friendly – five mines have opened there in the last three years. Another 50 projects are in the engineering stage, and 100 more projects show encouraging exploration results.

Canadian politicians believe the new electrical line will spur the development of 11 new mines that, in turn, will generate $15 billion in private investment, create as many as 11,000 jobs, and produce $300 million in annual tax revenues. It will also send the shares of companies that own prospective stakes in these potential mines soaring.

Right now, a group of small mining companies control the majority of the land in the Golden Triangle. A few years ago, this unique group of companies began buying up all the land in the region, in anticipation of this development. These small companies knew that if a power grid were ever built in the Golden Triangle, the land there would be worth an absolute fortune.

I believe the new line will send some of these mining stocks up hundreds of percent.

You see, because of their remote location and the lack of infrastructure, the market discounts giant gold deposits in British Columbia's Golden Triangle by about 87% compared to the average resources in the gold industry. Despite the sizeable markets caps in some of the companies above, they could get much larger.

By buying shares in some of the companies above, you get enormous gold projects for less than $20 per ounce that will become mines in the next 10 years. Other investors are spending $150 an ounce to buy gold deposits that may never become mines and sit in far dicier political climates – places like Romania, for example. Well, the companies listed above own huge deposits in an extremely mining friendly – and safe – country.

As I mentioned, I had to take a helicopter to visit the Golden Triangle… it's a frontier kind of place. The largest "city" has just 12,000 people. Given its remoteness, the companies that control some of the most valuable and important parts of the Golden Triangle today have virtually zero analyst coverage. I love this sort of speculation.

If you're like me, and believe the price of gold is going to go much higher soon, then use this list as a jumping off point to find "Golden Triangle" plays. These companies are going to see a whole lot more investor interest in the next few years… and they're going to go much higher in value. 

THE FINANCIALS JUST "BROKE OUT"

The latest on the "war of the financials." The XLF just staged an "upside breakout"... and the bulls are in the driver's seat.

About a month ago, we noted how our colleague Jeff Clark expected the financial sector to head lower in the next few months. We also noted how several bright, "big money" investors like John Paulson and Bruce Berkowitz expect the sector to head higher. We pointed out we would know which camp was right when the big financials fund (XLF) moved out of its six-month-long price base in either direction.

As you can see from today's chart, the market says the bulls are right for now. Like copper, XLF recently surged to a new 52-week high. And at $16 per share, this collection of big financial companies is well out of its six-month base.

For traders, this breakout is a sign to go long the sector. You see, for better or worse, the government's giant E-Z-Credit "goosing" has nearly every asset floating on an ocean of cheap credit. As master investor Jim Rogers reminds us, this E-Z-Credit solution to the 2008 credit crisis is a lot like Tiger Woods deciding the solution to his marital problems is to get a few more girlfriends. But it is what it is... and the trend is now UP.

Jim Rogers' Trading Secret

If you're a trader, you're a loser.

That's what a Journal of Finance study found.

As the two Journal of Finance researchers said in their article, "Trading is hazardous to your wealth."

They studied over 66,465 online trading accounts for a period of six years, from 1991 through 1996. They found that the average trader's returns were about 6.5% less than the overall market. That's even worse than most mutual fund managers, who routinely do about 4.8% worse than the market.

Nobody ever tells you that actively trading in and out of stocks every day is too risky and too hard for most people. And the more active the average trader is, the more he loses.

For one thing, there's too much competition. As a trader, you must compete against gigantic firms, like Goldman Sachs, that have billions of dollars of trading capital and armies of people sifting through mountains of information – information they often get before anyone else. Their executives are in touch with the highest levels of government around the world. No wonder traders do so poorly on average.

Another thing is, most traders have no idea that they should use small position sizes and strict stop losses. They take huge risks against the Goldman Sachs of the world… so one bad trade blows them out of the water.

There's a much better alternative to getting involved in all this action…

Building enormous wealth in the stock market is possible – and it's not nearly as complicated as Wall Street, CNBC, and a zillion newspapers and magazines would have you believe.

If you want to get rich investing, you should listen to someone who has actually done it. Jim Rogers knows. Rogers wrote Investment Biker, about how he drove around the world on a motorcycle, looking for new investment ideas. He's not sitting in front of a computer trading his online brokerage account all day.

Here's what Roger's says you should do to get rich:

Take your money, put it in Treasury bills or a money-market fund. Just sit back, go to the beach, go to the movies, play checkers, do whatever you want to.

Then something will come along where you know it's right. Take all your money out of the money-market fund, put it in whatever it happens to be and stay with it for three or four or five or 10 years, whatever it is.

You'll know when to sell again, because you'll know more about it than anybody else. Take your money out, put it back in the money-market fund, and wait for the next thing to come along. When it does, you'll make a whole lot of money.

Billionaire investor Warren Buffett doesn't day trade either. Like Rogers, he's an investor. A few years ago, in Omaha, someone asked Buffett about managing money. As usual, he cut through all the crap and gave simple, easy-to-follow advice that made sense:

Your default position should always be short-term instruments. And whenever you see anything intelligent to do, you should do it.

That just means you should keep your money in cash and wait for an investment to come along which you understand well, is safe, and looks like a winner.

Buffett clearly follows his own advice. His latest Berkshire Hathaway balance sheet shows total cash and equivalents of more than $46 billion, equal to about 27% of the entire company's current market value. That's a boatload of cash. He's been very active the past year or so, but he still keeps plenty of cash on hand. You should do that, too.

There's just one problem with this simple strategy of sitting in cash and investing only when circumstances are ideal: human nature. Nobody wants to be patient. Everybody wants to buy and sell quickly and make a fortune overnight. Judging from the results in that Journal of Finance study, they really just want to buy and sell quickly, whether they make a fortune or not!

Of course, the average investor's impatience is just another easy way for us Extreme Value types to get an advantage. We can sit in cash, wait for something too good to pass up, then buy it and hold on.

What could be simpler than that?