"It's twelve o'clock, and all is well!"
It's easy to imagine a medieval town crier walking down Wall Street every day, trumpeting out good news left and right to adoring crowds of investors and analysts. The trouble is, all is definitely not well. We haven't crashed nearly hard enough yet. A few brave observers keep telling you this, and you'd be much better of today if you had listened to them before the crash.
Well, the gloomy contrarians are still talking, and they're still smart. It's still not too late to start paying attention.
Who's who
of financial pessimism
Let's round up the usual suspects:
- Over a year ago, Meredith Whitney of Oppenheimer told Citigroup (NYSE:C) investors to brace for ugly writedowns, dilutive capital hunting, and dividend cuts. These things happened, leading to Citi's government bailout.
- Michael Lewis wrote his best-selling expose Liar's Poker to show how Wall Street's trading houses work from the inside. Then he waited -- in vain -- for two decades on that rotten system to collapse. Now the walls are finally caving in. I can't wait for his next book.
- Steve Eisman of FrontPoint Partners is one of Lewis' heroes, and for good reason: he called shenanigans on subprime bond packages way before it was fashionable. In July 2007, he was telling us all to throw old financial models "in the garbage can" because the fundamentals behind mortgage-backed bands were badly broken. He shorted Lehman Brothers and Merrill Lynch (NYSE:MER) because he knew how knee-deep they were in worthless subprime bond trading, long before they became tiny appendages on more conservative banking giants like Barclays (NYSE:BCS) and Bank of America (NYSE:BAC).
- Peter Schiff, president of Euro Pacific Capital, thinks that the capital markets have a long way left to fall, and stays on message even when fellow panelists on some Fox News or CNBC show laugh in his face. He's been doing this for ten years, through the dot-com bubble and the housing fiasco. Next up, he sees the value of the American dollar falling to perhaps a quarter of the current reading in the near future. Gold (NYSE:GLD) and international stocks would seem to be good bets if he's right.
One Fool's humble contribution
I'll throw my own jingly cap in the ring. The summer of 2006, I spoke up on Novastar Financial's risky "focus on subprime mortgages" and how its juicy 17% dividend yield could come crashing down. I hope that a few Fools out there sold out before Novastar hit financial reality face first a few months later, losing its REIT status and eliminating dividends altogether. The stock itself is now worth less than 1% of the closing price that warm August afternoon.
But subprime risks were still a mystery to many readers back then. My inbox flooded with angry emails and even death threats. You don't get popular by pointing out weaknesses in a massive dividend payer, as many of my detractors had invested their entire nest eggs into that stock. 17% dividend payments on a nice, fat investment base lets that IRA account power your entire retirement forever, you know.
The Foolish takeaway
So I have a couple of things to say. For one, don't go blindly chasing the fattest dividends you can find. Allied Irish Banks (NYSE:AIB) and Diana Shipping (NYSE:DSX) both show dividend yields north of 30%, but are they stable enough to keep supporting those delicious yields? In the case of Diana Shipping, for example, the answer is no. Diana's suspending its dividend after December's quarterly payment.
For another, keep an eye on the "fringe," the "weirdos," and other analysts with unpopular opinions. When the average talking head starts to laugh at some guy that seems to make sense to you, it's time to subscribe to his blog and scour YouTube for any of his videos. Our CAPS universe probably has more material on that dude already.
Those are the analysts who will make you rich and protect your existing wealth. Contrarians are true Fools who dare to tell the king when he's wrong -- even if nobody is listening.
Further Foolishness:
- When Seth Jayson speaks, other contrarians shiver -- and listen.
- Buyout Plays in a Bloodied Market
- Deconstructing the All-American Portfolio
