I will be adding more shares of AHR to my personal portfolio, which is already my largest holding.  This is my all-time favorite stock, and is very cheap now below $8.  Let’s look at the fundamentals:  Anthracite Capital is a REIT that invests in mortgage-backed securities.  Hold on now…after all the turmoil lately, why am I buying a company that invests in mortgage-backed securities?  Because AHR invests only in commercial MBS’s…which typically hold much lower risk of major defaults.  It holds little to no residential securities.  From its EDGAR filing, about 30% of its holdings are in non-US retail, 22% in non-US office, and 16% in US multifamily CMBS’s. 

Priced below $8, this stock is paying a dividend above 14%, so right off the bat you are getting a huge return.  It has a P/E of 5.5, earning $1.40 per share.  Because it is classified as a REIT, it must pay out 90% of its earnings, so it is currently paying out $1.20.  They continue to grow revenues, which will likely lead to higher earnings, dividends, and share price.  So I see three ways that this investment will pay you…the 14+% in dividends, capital growth based on its revenue growth, and increases in the dividend amount as profits grow.

How about cash?  Yes…positive operating and net cash flows, growing significantly in the past three years.  Insider buying?  They’re going nuts over there with this low price…9 purchases vs. 0 sales in the past six months.

What about the risks?  I think shares can stay low for a while until investors realize that the mortgage mess is limited to residential.  As I said before, I don’t foresee major defaults in CMBS.  Commercial is a much more responsible environment than residential.  Otherwise, this company is managed well and likely to continue to reward its shareholders for a long time.

Now that we're in the middle of the housing market downfall, I'm just now starting to wonder what the next mania will be.  After the collapse of the dot-com bubble, you would think that we as a country would learn to show a little bit of restraint  with our investments.  That did not happen.  What happened is that some people started to make good money with real estate.  Then you had the followers, then more followers.  Suddenly, you had real estate professionals in half of the SUVs at every intersection with window letters promising to make me rich with real estate.  Then the suckers who believed the SUV drivers and were the last to enter the real estate market.  By this time, the leaders and the first several groups of followers got out, and the suckers are the ones that now can't give away their real estate holdings.  This is exactly what happened with internet stocks, if you didn't already forget 1999 when your co-workers, hair stylist and plumber were touting pets.com.

So why does this continue to happen?  We're a get-rich-quick society.  That is not a bad thing, because this is the foundation of the United States' greatness.  This culture creates winners and losers, and it creates manias like the dot-com and real estate bubbles.  We all want to get rich quickly and easily, and when we see others getting rich, we think that we can do it also.  What many people do not realize is that the people making the most money are the ones that get in before the mania begins, and get out before the mania reaches its peak.

Nobody wants to be the loser of the mania...the last one in that buys at the peak.  So how do you win from this mania economy?  First and foremost, don't be the loser.  Don't be the one that gets in when we are in the midst (near the peak) of a mania.  If your co-workers (unless you work at Berkshire Hathaway), plumbers and hair stylists are talking about the market, don't buy.  If you see SUVs and signs on the street corners talking about how to make money in a particular market, get out or don't buy.  Better yet, start looking at short positions to take advantage of the upcoming downfall.  You can bet on a downfall because when regular people are already in the market, there's no money left.  A market can't grow without money ,and don't bet on anybody else coming out of the woodwork to drive the market higher.

Another way to make money is to pick up the scraps after the collapse.  Manias don't just go up.  When a bubble collapses, everything comes down.  There are casualties of collapses that are not justified.  After the dot-com mania, you could have bought Yahoo for less than $5 per share or Western Digital for $2.  With the real estate market collapsing, start to look for foreclosures or even houses with owners desperate to sell.  Start looking at homebuilders or responsible mortgage lenders who with strong balance sheets and cash flows who will weather the storm.

The winners are the ones who take advantage of the followers, so don't be a follower.  And make sure you look for trends early.   And the most important lesson of all...absolutely do not over-leverage yourself to get into the market.  This is what creates manias.

We're just about at the end of 2007, so it's time to put a little thought about the day coming up in April when you have to prepare your tax return.  Most of us don't like to think about this until at least March, but now is you last chance to take some actions to reduce the amount you have to pay later (or increase your refund).  Although taxes should not be a reason to sell a stock, the end of the year can give you an opportunity to improve your portfolio and realize some capital losses to offset gains (Keep in mind that this advice is for investors, not traders.  Traders who treat their trading as a business work under a different set of tax rules than a normal investor).

If you sell a position to realize a capital loss, the IRS does not allow you to claim that loss if you purchase that same position within 30 days.  you can wait 31 days and buy again, but much can happen in those 30 days.  You may be leaving potential gains behind by closing your position in the investment.  so what are your alternatives?  One option is to buy a similar investment, and potentially a better investment. 

Suppose you purchased some shares of Citigroup last December when it was trading around $55.  By now, you're holding a loss of about $15 per share of a company that is experiencing some executive turmoil and seems to be making some poor decisions with its operations.  Rather than continuing to hold a loser, you can sell your Citigroup shares and buy shares of a similar investment...for example JP Morgan Chase or Deutsche Bank.  This way, you still hold a position in a major money center bank, you can claim your tax loss, and you now hold shares in a company that may be better positioned to provide you capital gains in the future - 3 wins after a year of losing.

Like many people, I am opposed to the bailout of ARM borrowers proposed by President Bush.  Not because it is not fair and that people should suffer from their poor decisions.  Well, I do believe that people that take risks need to understand that often times the risk does not pay off.  But that is not why I oppose this plan.  I oppose the plan because of the consequences that the bailout will create.  It is simple for the government to pass a bill that will force banks to freeze the interest rates on ARMs for a period of time to help the borrowers.  What is not simple is dealing with the repercussions of this freeze. 

A quick tutorial on mortgages:

Every transaction has at least two parties.  A mortgage has several.  The bank enters into an agreement with the borrower to loan money at a particular interest rate.  The bank loans the money to be paid back in the future with interest.  So how does the bank get its money to pay the borrower?  It borrows from people that want to save and invest money, and pays these people interest on the money they invest.  The bank makes its money by paying investors lower interest than the borrowers pay the bank.  But the bank does not want to deal with the risk that the person may not pay back the loan.  In addition, the bank does not want to take on the risk that a change in interest rates will leave them paying more to the investors than it makes from borrowers.  So what does a bank do to reduce these risks?  One way it reduces these risks is to "swap" the borrowers mortgage and interest payments with another entity.  With a swap, this other entity pays the bank a payment and interest (perhaps a fixed interest rate) in exchange for the adjustable rate that the bank receives from the borrowers. 

Another way to reduce risks is to create a type of investment (Mortgage Backed Security) that allows the investors to assume the risks that the borrower may default on their mortgage (or pay their mortgage early, which is another risk of a mortgage).  The bank or other financial institution then sells these investments to investors willing to assume the risk that the bank does not want to assume. 

The consequences of the bailout:

So what does the bailout have to do with all of this?  Many intelligent investors recognized that there were too many people taking mortgages that they would not be able to pay in the future.  They took positions in mortgage backed securities that would pay off when people who took risky loans eventually defaulted.  With the bailout, these investors that made the correct decision will not reap the benefits of their foresight. 

The consequence that the economy will suffer is the loss of confidence in various types of investments.  Why would you invest money in a security when there is a chance that the government will step in to reduce your profit?  Loss of confidence leads to less investment in the markets, leading to a decline in the market.  A decline will reduce the amount of money banks can lend to other borrowers looking to purchase a house with a mortgage, reducing the potential profits of the banks (and investors in banks).

I can continue down the line of all of those who will suffer negative consequences of bailouts, since it affects all of us.  Money is never free, so somebody has to pay for those being bailed out.  The problem is that the bailout will only postpone the problems of the perhaps 250,000 borrowers in trouble.  But you can rest assured that the total cost to the economy from the bailout will far exceed the benefits to these borrowers.  In the end, all of us will be paying dearly to help these borrowers who made a poor decision.