September 26, 2005
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THE SOVEREIGN SOCIETY OFFSHORE A-LETTER
Your Link to Freedom, Privacy & Prosperity in the Offshore World
Monday, September 26, 2005 - Vol. 7 No. 194
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In This Issue:
* COMMENT: Breaking the Bank (Part 1)
* OFFSHORE: Tax Havens are: a) Moral b) Immoral. Panama Good News.
* WEALTH: The Forbes 400. Murder Affects Estate Planning.
* PRIVACY & RIGHTS: $2.45 Million Awarded Falsely-Accused Terrorist.
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COMMENT: Breaking the Bank (Part 1)
Dear A-Letter Reader:
We at the Sovereign Society often make the point that you can get better returns in overseas investments. Now, I'm getting big blips on my radar that tell me investing in US banks could be painful on your portfolio in the months ahead. At the same time there are overseas banks that are looking downright cheap.
We'll get to the overseas bargains in our Wednesday Comment. Today, let's look at a few reasons why things might go bad for US banks.
Hurricanes - but not in the way you think. The banking industry has trotted out professional worrywarts to fret about property damage in the affected areas. Many borrowers whose properties were outside the federally defined flood zone did not have flood insurance, and others don't have enough, the bankers say. This raises the risk they may drop off the keys at the bank and walk away from their ruined property.
This is a real risk, but mainly for smaller institutions. The kinds of banks that are listed on the New York Stock Exchange don't have their loans concentrated in one area, like Texas or Louisiana. Their problem - a serious problem - is going to be the collapsing difference in yield between the 2 year Treasury yield and 10 year Treasury yield. The difference has gone from 166 basis points a year ago to just 24 basis points last week.
Basically, banks borrow money from depositors and the money markets at low, short-term yields and lend it out at higher long-term yields. When the difference, or spread, is wide, banks coin money.
When it collapses (as it is doing now) interest margins contract. The interest rate spread is collapsing because bond buyers are losing faith in the economy. The areas slammed by Katrina account for 1.1% of America's gross domestic product (as I write this, there's no way to know how much effect Rita will have on GDP). That doesn't seem like a lot, but that translates into jobs for 1.6 million people who produce goods and services valued at about $130 billion a year. And cargo shipped through the region's ports is valued at about $150 billion annually - 20% of US import-export traffic.
Figuring the economy and stock market are going nowhere, investors lock in returns by buying long-term bonds. This drives up the price of those bonds and drives down the yields. At the same time, the Fed keeps raising short-term interest rate. And bank profits get squeezed.
Consumers are tapped out. In two columns last week, I told you how wages are stagnant, prices of energy and food are rising, and consumers are caught in the middle. This makes them less likely to run out and buy a big screen TV on credit. Recently passed bankruptcy legislation, which doubles the minimum credit card payment, should clamp down on new consumer spending as well. This will hit banks where it hurts. Heck, if the new bankruptcy rules are as bad as critics say, there is the potential to dispossess homeowners AND borrowers. "Losses up the Gazoo."
Speaking of homeowners, the housing bubble is potentially bad news for banks and home lenders. Golden West CEO Herbert Sandler recently described himself as "scared to death" about the quality of certain mortgage loans, especially adjustable rate loans, that some in the industry are pushing. Sandler also warned that red hot markets such as Las Vegas, parts of California and Southern Florida could see real trouble when and if the housing bubble bursts.
"You're are going to see losses up the gazoo on those loans and you've got to be very careful about lending you do in any lending you do in those geographic areas," Sandler said.
The Sarbanes Oxley Conundrum. The Sarbanes Oxley act of 2002 was supposed to add transparency to the financial world, but it's been a big headache for companies of all types - including banks. And thanks to Sarbanes-Oxley, bankers are decreasing the money they set aside to pay for future loan defaults. Not because they want to - but because Sarbanes-Oxley won't let them set aside cash for loans that have gone bad yet. That would smooth earnings, and if you interpret Sarbanes- Oxley stringently, that's just what corporations aren't supposed to do anymore.
We're at the top of a credit cycle now. Mortgage defaults have droppedoff, as have bad loans, just what you'd expect to see at the top of a credit cycle. It's all downhill from here. The banks know what's coming next. They'd like to put more money aside for bad loans. But Sarbanes- Oxley, as interpreted by pin headed bureaucrats in Washington, won't let them.
Maybe we don't want MOST corporations to smooth earnings. But banks are different. Traditionally, they raise their bad loan reserves at the top of a credit cycle - when they expect loan delinquencies are going to rise. That keeps banks stable and solvent.
In short, banks are going into the down leg of the credit cycle without enough money set aside. What if something bad happens? Maybe a terror attack on a financial center. Maybe a monster hurricane slams into Florida (we still have 9 weeks left in hurricane season) and the American economy is then reeling from a triple whammy. The fact is, if large numbers of loans go bad down the road, US banks seem poorly prepared for it.
Now, let's look at the weekly chart of the Bank Index...
You can see that the bank index seems to be tightening its range, squeezed between an uptrend from May 2004 and the downtrend it's been in all this year. RSI, which measures momentum, is below 50 - bearish.
Add in a collapsing interest rate spread, gloomy, hard pressed consumers and a credit cycle that has peaked and is on a slippery slope, and I'd say we're looking at a sector that could see lower prices in a hurry. We might see another bounce. I'd use that to get out.
But where do you put that pile of money you have when you sell your US banking shares? On Wednesday, I'll tell you about some bargain priced banks in an extraordinary economic environment. While US banks are wobbling, these foreign institutions look strong and ready to get stronger. These shares are there for the taking - you just have to know where to look.
Best wishes,
SEAN BRODRICK, Investment Director
The Sovereign Society Ltd.
E-mail: seanbrod@bellsouth.net
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* FROM THE EDITOR'S DESK: BOB BAUMAN SAYS:
OFFSHORE:
* THE MORAL CASE FOR TAX HAVENS
Dan Mitchell of the Heritage Foundation, using Freedom House evaluations of various nations, states that tax havens not only enable oppressed taxpayers to escape to freer climbs, but also provide a refuge against discrimination.
* The moral case for tax havens. LINK:
http://www.freedomandprosperity.org/blog/2005-09/2005-09.shtml#235
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* But two radical Welsh politicians now want to abolish all tax havens
which they insist are robbing the world's poor. LINK:
http://icwales.icnetwork.co.uk/0100news/newspolitics/tm_objectid=16168317&method=full&siteid=50082&headline=-plaid-mp-sets-his-sights-on-offshore-tax-havens-name_page.html
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* GOOD NEWS FROM PANAMA
PANAMA CITY: A new law extends the 20 year tax exemption on all new construction in Panama until 9/2006 for permits, and 9/2007 to complete building. That means the housing boom will continue.
* 20 year tax exemption on new construction extended. LINK:
http://primapanama.blogs.com/_panama_residential_devel/laws/index.html
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Meanwhile, the Colon Free Trade Zone, the world's largest after Hong Kong, located at the Atlantic entrance to the Panama Canal, is showing huge growth, thanks to China's economic boom and increased regional political stability.
* China boom, Latin stability boost Panama trade zone. LINK:
http://financialexpress-bd.com/index3.asp?cnd=9/26/2005§ion_id=8&newsid=1828&spcl=no
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WEALTH:
* AMERICAN RICHEST; THE FORBES 400
For the 3rd consecutive year the US rich got richer. In the 24th annual
edition of The Forbes 400, the collective net worth of the US wealthiest climbed $125 billion, to $1.13 trillion. Here's who they are.
* The Forbes 400 List.
LINK: http://www.forbes.com/forbes/2005/1010/089.html
* Don't Blink. You'll Miss the 258th-Richest American. LINK:
http://www.nytimes.com/2005/09/25/business/yourmoney/25trail.html
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* AN UNUSUAL ARGUMENT FOR ESTATE PLANNING
It's not often that a wife kills her husband, leaving three young children with $30 million and no clear estate plan for their upbringing. If your contemplating spouseacide, please plan ahead for the kid's sake.
* For 3 Little Millionaires, a Series of Painful Events
LINK: http://www.nytimes.com/2005/09/24/nyregion/24kissel.html
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PRIVACY & RIGHTS:
* JURY GIVES $2.45m TO TERRORISM ACCUSED
Jury awards $2.45 million to man cleared of terrorism link. An Egyptian born doctor was a target of unjustified 9/11 probe.
LINK: http://www.post-gazette.com/pg/05266/576467.stm
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* WELCOME TO THE U.S.A. - MORE OR LESS.
Passengers on flights to the United States could face further delays at check-in after next week, when US immigration authorities will require extra information about travelers as part of increased security measures said to counter terrorism.
* Increased airport checks could cause US entry delays. LINK:
http://www.telegraph.co.uk/travel/main.jhtml?xml=/travel/2005/09/24/etnewscheck24.xml&sSheet=/travel/2005/09/24/ixtrvhome.html
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THE SOVEREIGN SOCIETY OFFSHORE A-LETTER.
* Bob Bauman, Editor * Daniel Aponte, Jr. Editorial Asst.
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