Video games have certainly come a long way from the table tennis-inspired game Pong that was introduced in 1972. Today, people are actually being paid a lot of money to play computer games.

Welcome to the world of e-sports where millions of fans worldwide watch professional gamers in action. There are about 300 million people worldwide that watch competitive e-sports events regularly… a number that the consultancy Newzoo expects to double within five years.

And Goldman Sachs estimates that revenues for e-sports from ads, box office tickets and other sources may hit $3 billion by 2022.

Both may be a conservative estimate when you consider that Walt Disney (NYSE: DIS) gave competitive gaming its first test before mainstream sports viewers on primetime US television in July by broadcasting the finals of Activision Blizzard’s (Nasdaq: ATVI) Overwatch League on ESPN.  Activision has signed a multi-year broadcast deal with ESPN, although the terms were undisclosed.

This is a major step forward for e-sports as Morgan Stanley analyst Brian Nowak told Bloomberg, “We view reaching audiences through linear media as the key next step in legitimizing and monetizing eSports. We continue to see licensing and streaming revenue as the largest component of Overwatch League monetization.

Related: 3 Stocks for Profits from People Playing Video Games All Day

E-Sports Bonanza

High viewership numbers attracts advertisers and sponsorship — $500 million worth in 2017 according to Newzoo — raising player winnings. An example of this was on display in May when Epic Games said it would provide $100 million in prizes for its popular Fortnite Battle Royale. Sponsorship, media rights, in-game purchases and tickets make free-to-play games lucrative. Fortnite generated about $300 million in revenues for its owner Epic Games.

Of course, there are many competitors in the fast-growing e-sports segment. Besides Epic Games and Activision Blizzard, another company leading the way is Electronic Arts (Nasdaq: EA). Consider that many e-sports fans are young men that also follow regular sports too. That plays right into the strength of EA with its sports games such as FIFA 19. With the real soccer World Cup ended, EA’s FIFA eWorld Cup 2018 championship took place this past weekend (August 4) at London’s 20,000-seat O2 venue.

However, neither EA nor Activision happen to be my favorite e-sports stock. Instead, it is the company that owns 40% of privately-held Epic Games and that is bringing the massively popular Fortnite to China – Tencent (OTC: TCEHY).

Tencent Dominates

E-sports is taking off globally, with even the International Olympic Committee considering adding e-sports as an event.

But it is absolutely exploding in China where over 400 million gamers are fueling viewership equal to or exceeding that of professional sports in the U.S. Consider that last year in China, there were more than 11 billion e-sports videos streamed. And there are more than 10,000 teams across the country despite just 12 spots in this year’s marquee King Pro League tournament. Last year’s matchups garnered as many as 240 million daily views — double the U.S. audience of the Super Bowl — on TVs, phones and computers.

No wonder then that Tencent has become one of the most aggressive promoters of professional e-sports. It is teaming up with Under Armour on game apparel and the National Basketball Association for a show that features top gamers. It’s adapting Honour of Kings into a fantasy novel and producing a TV series and film centered on players. And taking a page from Blizzard’s Overwatch League, it’s also decided on a more typical professional set-up where select clubs are guaranteed spots in tournaments such as for the King Pro League. Of course, it helps that the company is in the unique position of owning and backing signature titles such as Fortnite and League of Legends.

At the center of Tencent’s ambitions is the two-year old franchise, Honour of Kings. It is a blockbuster that took China by storm and is now being pushed abroad under the title Arena of Valor. The title combines elements of Chinese historical characters, heroes and culture and is the first mobile game developed in-house that has a chance of becoming a global blockbuster.

The international version will be one of six titles for the upcoming Asian Games. To boost its visibility globally, the company is inviting teams from South Korea, Malaysia and North America to join in another gaming showdown later this year.

Of course, e-sports is still a mere drop in the ocean for one of the world’s 10 largest companies and its expected $50 billion in revenue. But it’s a fast-growing segment that feeds Tencent’s core gaming business, while driving engagement across its many online platforms from WeChat (with one billion active users) and media to advertising.

Related: Here’s Where to Find Triple Digit Returns from Your Kids’ Video Game Habit

Tencent, like its rival Alibaba (NYSE: BABA), is involved in nearly aspect of Chinese life such as e-payments where it is battling Alibaba for supremacy. E-gaming is a core business for Tencent, which is a must-own Chinese stock like Alibaba. And it’s a growth engine that is just revving up.

If you are interested in getting a piece of the action, do not be put off by the fact that Tencent trades on the over-the-counter market. It is the most active stock there on a daily basis with average volume of nearly five million shares. So there is no problem with liquidity.

And with Wall Street selling or shorting everything China-related, the stock is at the lowest level in over a year. That makes it a good time to buy.

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When I taught in night school my professor insisted I attend a full-day conference on “Effective Teaching Methods”. The speaker list was full of well accredited academics.

The morning consisted of 3-4 speakers outlining their intellectual theories. They rambled on, under the illusion the audience was enthralled with their brilliance.

The afternoon speaker told a story of a father and young son at a graduation ceremony. The boy looked at the program and asked, “What does BS, MS and PhD mean after their names?”

Dad thought for a moment and said,

Most of us roared with laughter as we stood and applauded, while others nervously shifted around in their seats.

The investor’s challenge

Unfortunately, many investors must sort through too much BS that is attempting to deceive the public.

This week’s reading stack included eleven articles – like this New York Times piece, “Cash-Rich Companies Set Record for Buybacks”. They contained a common theme. Time reports:

“We’re starting to learn what America’s biggest companies are doing with the huge windfalls from President Donald Trump’s tax cuts. And the answer is great for investors – but not so great for workers.

That’s because many companies are returning huge portions of their billions in tax savings to shareholders in the form of share buybacks and dividend increases – not necessarily new hiring and investment.”

CNN Money reported on a speech by recently appointed Securities & Exchange commissioner Robert L. Jackson, Jr. at the Center for American Progress:

“An analysis released Monday by SEC Commissioner Robert Jackson Jr. found that the percentage of insiders selling stock more than doubled immediately after buyback announcements.

…. Daily stock sales spiked from an average of $100,000 to more than $500,000 per executive, researchers found.

“Right after the company tells the market that the stock is cheap,” …. executives overwhelmingly decide it’s time to sell.”

Buybacks have exploded this year thanks to Trump’s tax law, which lowered corporate tax rates and gave companies a break on returning foreign profits.

S&P 500 companies bought back a record $187.2 billion of stock during the first quarter ….

…. The tax law was supposed to encourage companies to spend on job-creating investments. But economists see little evidence so far that the tax overhaul has sparked an acceleration of investments in equipment, factories or other projects.

Jackson, who was appointed by Trump to fill a Democratic seat at the SEC, called on the agency to update its rules to limit executives from using buybacks to cash out.”

Is this a problem or political BS?

Scott A. Hedge, at the Tax Foundation offers a different perspective:

“Much has been made recently about the stock buybacks that companies have engaged in since the enactment of the Tax Cuts and Jobs Act (TCJA). To critics of the tax plan, stock buybacks are a sign that companies are not using the tax savings to either increase worker wages or to invest in new plants and equipment.

…. While the TCJA seems to have made stock buybacks a political issue, (Emphasis mine) little attention has been paid to whether companies are repurchasing more of their own stock today than in past years. That is why an article last week in The Wall Street Journal, “Record Buybacks Help Steady Wobbly Market” (under a paywall), caught my attention.

Despite the headline, the actual data contained in the chart accompanying the article shows that stock repurchases by S&P 500 firms in the first quarter of 2018 are on par with past peaks over the past six years.

We’ve re-created The Wall Street Journal chart in full, except that we adjusted the figures for inflation.

…. no matter how you look at the data it seems to show that the first quarter of 2018 is in no way an outlier when it comes to share repurchases by companies. What has changed is the political environment following the passage of the Tax Cuts and Jobs Act.” (Emphasis mine)

While I’m fed up with the political innuendos, I’ll leave the political debate to others. There is not much we can do about it anyway.

Here is a link to Commissioner Jackson’s talk:

“Basic corporate-finance theory (Emphasis mine) tells us that, when a company announces a stock buyback, it is announcing to the world that it thinks the stock is cheap. That announcement, and the firm’s open-market purchasing activity, often causes the company’s stock price to jump, so the SEC has adopted special rules to govern buybacks.”

The theory behind stock buybacks is the stock is cheap, however today stocks are being bought back for different reasons. Theory and practice are miles apart.

One former client had a rule; earn a minimum of 10% return on invested capital – 5% for dividends and 5% reinvested for growth.

For years it worked well. However, what happens when the business is no longer growing. What if they are not producing close to capacity?

When sales are flat, they may want to invest to improve operational efficiency and reduce their costs. Companies should not invest in their business if they see no real growth on the horizon.

Hewlett-Packard was once like many technology companies, flush with cash, a darling of Wall Street, good profits and high stock prices. They made a series of acquisitions, and many were sold at a loss down the road. They reinvested their capital poorly; their business and investors suffered.

In our 2015 article, “Buyback shares = BS 101” we discussed companies buying back their stock (reducing their number of shares outstanding) to make their Earnings Per Share (EPS) look better. Many borrowed money to buy back their shares at their all-time highs. The BS was not limited to a political agenda, it was an attempt to deceive the stockholders and increase their compensation.

How do investors know if a stock buyback is a good thing?

Fortuna Advisors produced a terrific “2018 Fortuna Buyback ROI Report”. They coin the terms Buyback ROI (Return on Investment) and Buyback Effectiveness. Many companies do a poor job:

Fortuna Advisors introduced Buyback ROI on June 3, 2011 in an article published on CFO.com titled “What’s Your Return on Buybacks?” For the first time, investors and corporate observers could look clearly past the overly simplistic and often misleading Earnings Per Share (EPS) accretion assessment and determine if remaining shareholders benefit from a buyback. (Emphasis mine)

…. All EPS growth is not created equal.

When interest rates start to go up, investors worry about the value of their higher yield dividend stocks. A defense against higher interest rates is to own dividend stocks that will grow the dividend payments. The challenge is to know in advance which stocks will make a higher dividend announcement before the rest of the market finds out.

Real estate investment trusts (REITs) pay attractive current yields and regularly increase their dividend rates. I maintain a database of about 140 REITs, out of which about 100 have histories of dividend growth. Most of these companies increase the quarterly dividend once a year, and then pay the new rate for the next four quarters.

Even though individual REITs increase their dividends just once a year, those announcements are spread across almost every month of the year. To capture those share price gains, you want to buy shares a few weeks to a month before the next dividend increase announcement is published. Now in mid-July, it is a great time to look at those REITs that should increase dividends in August.

Here are three REITs from my database that historically have boosted their payouts in August.

Federal Realty Investment Trust (NYSE: FRT) is a $9 billion market cap REIT that owns, operates, and redevelops high quality retail real estate in the country’s best markets. FRT has increased its dividend for 50 consecutive years, the longest growth streak of any REIT.

Over the last 5 years, the average annual dividend increase has been 6.55%. Last year the dividend was increased by 2.0%. Based on management guidance, an increase close to the 5% annual average is in the cards for this year. The company announces its new dividend rate in early August. The ex-dividend date will be in mid-September with payment about a week later.

The FRT share price is down by 4% over the last year. This is a very high-quality REIT currently on sale. The stock yields 3.25%.

Eastgroup Properties Inc (NYSE: EGP) is a $3.3 billion market value REIT that focuses on development, acquisition and operation of industrial properties in major Sunbelt markets throughout the United States with an emphasis on the states of Florida, Texas, Arizona, California and North Carolina. Industrial properties is currently one of the best performing real estate sectors.

The company has increased its dividend for 22 of the last 25 years, including the last six in a row. Last year the payout was increased by 3.3%. This year my forecast is for a 5% to 7% increase. The new dividend rate should be announced in late August or early September, with a mid-September ex-dividend date and end of the month payment date.

EGP yields 2.7%.

Healthcare Trust of America, Inc. (NYSE: HTA) is a $5.4 billion REIT that acquires, owns and operates medical office buildings. The company reduced its dividend in 2012 and 2013, which was followed by small increases in each of the next four years. Last year the dividend was bumped up by 1.7% which is comparable to the increase of the previous year.

In 2017, the funds available for distribution per share increased by 1.2%, and for the 2016 first quarter, FAD per share was flat compared to a year earlier. Management has been very conservative with the dividend growth and I expect a small increase comparable to the last couple of years.

Last year the new dividend rate was announced in early August, with an end of September ex-dividend date and early October payment date.

Earlier this week, I visited my old stomping grounds in Washington, D.C. to cover a pair of Congressional hearings about cryptocurrencies.

If you’ve never been to a Congressional hearing, you should try to attend one. They’re actually open to the public. And there’s no need to sign up or get tickets. But show up early! Seating is extremely limited. At the House Committee on Agriculture, there’s room for about 25 spectators – not including a press table that seats about six reporters (that’s where I was). At the House Financial Services Committee, there’s room for about a dozen spectators. The remaining dozen chairs are reserved for Congressional staff and reporters.

I’ve covered my share of House and Senate hearings – and it never gets old. The rooms that hold these meetings are impressive, awe-inspiring and intimidating. And that’s by design.

The witnesses testifying before Congress are typically the smartest, most accomplished professionals in their field. Members of Congress are not usually described that way.

That’s why the legislators sit on raised platforms and desks while the witnesses testifying before them sit at the bottom of the room, staring up at the bright lights and people in power. It’s a power play – a not-so-subtle reminder that it doesn’t matter how rich or accomplished you are. In that moment, you are answering to Congress.

If you think that such an obvious and dramatic power play wouldn’t rattle truly accomplished people, think again. As I talked to the crypto experts who testified on Wednesday, their reactions ranged from “that was terrifying” to “well, that could have gone worse.”

So how did the “crypto double-header” go on Wednesday? Actually, way better than expected.

For the first time, there seems to be an emerging consensus from the crypto industry about how cryptocurrencies should be regulated. Even better, the suggested framework was either tacitly accepted or (at worst) unchallenged by the politicians in attendance.

In oral and written testimony to the Agriculture Committee, Perkins Coie Managing Partner Lowell Ness outlined a two-phase approach to regulating cryptocurrencies (emphasis mine):

1. Pre-Functionality – Until the token achieves full functionality, offers and sales of tokens would generally constitute investment contract type securities under Howey, unless a reasonable purchaser is purchasing with consumptive intent. In this case, the token should generally be treated as a security unless use of the token (as opposed to resale) is reasonably certain.
2. Full Functionality – Once the token achieves full functionality, offers and sales of tokens would generally not constitute investment contracts under Howey. Software networks, however, generally require ongoing updates and upgrades, so it may be appropriate to create limited but ongoing investor protections.

This regulatory approach to cryptocurrencies is both innovative and remarkably practical. It allows for cryptocurrencies to be defined as securities (and regulated by the SEC) when they’re being created and developed. Once the development phase is over, so is the “third party” work that adds value to the coin (that’s the Howey test at play). At that point, the cryptocurrency becomes a commodity and can be traded without SEC oversight.

This new “hybrid” asset class formalizes a conclusion the SEC has already reached about ethereum. Here’s what the SEC’s corporate finance division director, William Hinman, said about ethereum in a speech in San Francisco (emphasis mine):

And putting aside the fundraising that accompanied the creation of ether, based on my understanding of the present state of ether, the ethereum network and its decentralized structure, current offers and sales of ether are not securities transactions. And, as with bitcoin, applying the disclosure regime of the federal securities laws to current transactions in ether would seem to add little value.

Reading between the lines, the SEC’s view of ethereum matches up pretty nicely with the proposed regulatory scheme. In the minds of the regulatory agency, when ethereum was in its development phase, its initial coin offering (ICO) constituted a sale of securities. The coins were an investment that investors hoped would rise in value based on the work/efforts of a third party. But once ethereum launched, its decentralized nature and usage made it a commodity.

If this seems like pretty technical stuff, well, it is. But it’s also critically important. The marketplace needs clarity and certainty in order to mature. It also needs a light regulatory touch. Anything less than that will stifle growth. And this path potentially walks that tightrope.

In many ways, Wednesday’s hearings mark a sea change in the government’s approach to cryptocurrencies. It was a significant effort to create a positive, constructive framework for cryptocurrencies.

At previous crypto hearings, much of the discussion (by politicians) centered on people using bitcoin for nefarious purposes like money laundering, dodging U.S. sanctions, smuggling drugs and whatever other shady activities people could think of.

And there was still some of that on Wednesday. Over at the House Financial Services Monetary Policy and Trade subcommittee hearing, Rep. Brad Sherman (D-Calif.) said:

There is nothing that can be done with cryptocurrency that cannot be done with sovereign currency that is meritorious and helpful to society. The role of the U.S. dollar in the international financial system is a critical component of U.S. power. It brought Iran to the negotiating table… We should prohibit U.S. persons from buying or mining cryptocurrencies… As a medium of exchange, cryptocurrency accomplishes nothing, except facilitating narcotics trafficking, terrorism and tax evasion.

Sherman wasn’t the only member of Congress who shared that sentiment. Fortunately, it’s both laughable and provably false. As Andreessen Horowitz Managing Partner Scott Kupor noted in the Agriculture Committee hearing, the digital trail created by bitcoin allows law enforcement officials to track down criminals – including Russian hackers.

Sherman (and others like him) is now the outlier in Congress. Even his fellow subcommittee members looked like they were just humoring him because he put on a good a show. Far more prevalent was the approach of Agricultural Committee Chairman Mike Conaway (R-Texas):

For the first time, we have a tool that enables individuals to reliably exchange value in the digital realm, without an intermediary. We can have assets that exist – and can be created, exchanged and consumed – in digital form. The promise of being able to secure property rights in a digital space may fundamentally change how people interact with one another. This technology holds the potential to bring enormous benefits to each of us, if we are willing to give it the space to grow. Providing a strong, clear legal and regulatory framework for digital assets is essential.

We’ve moved from the “bitcoin is bad” era to the bitcoin acceptance era. That’s a huge step forward. Let’s celebrate that before we think about the next step – getting Congress to pass crypto-friendly legislation.

Good investing,

Vin Narayanan

Senior Managing Editor, Early Investing

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I’ve been thinking a lot about recessions lately.

It’s pretty hard not to, because warnings about recessions are coming from financial pundits and big banks with increasing frequency. Most recently, an economist at Citigroup warned in a research note that a recession was likely to come in the next 18 months, because the US Treasury yield curve is flattening.

This person isn’t a lone wolf.

Many economists, including a lot of wonks at the Federal Reserve, are fiercely debating whether our flattening yield curve is a sign that a recession is around the corner. And the fear is intensifying, since the difference between the yield on the two-year and 10-year Treasuries is a meager 25 basis points, the narrowest in over a decade.

This panic isn’t new—and it’s exactly wrong. For instance, Morgan Stanley was warning investors that a flattening yield curve was a serious risk back in 2015, meaning, in their view, that a recession was likely in the next couple years.

They were wrong.

That year, the world’s GDP rose 3.2%, then rose again, by 3.1%, in 2016, according to the International Monetary Fund. The US didn’t do too badly, either, growing 2.6% and 1.6% in those years, with additional 2.3% GDP growth in 2017 and over 3% GDP growth expected for 2018.

The economy’s improving growth shows that we aren’t anywhere near a recession, and, as I wrote in a June 20, 2017, article, it signals a great time to buy stocks. (The S&P 500 is up 17% since that article was published.)

Strong stocks and higher GDP growth are a far cry from Morgan Stanley’s warning. “Recessions follow expansions like night follows day,” warned the bank’s chief global strategist of emerging market equities, Ruchir Sharma, at a Bloomberg summit in 2015.

Except they don’t.

Nights follow days at regular intervals governed by the laws of physics. Recessions follow expansions because of human nature, and human nature is impossible to predict. Sharma’s grave warnings from two years ago prove the point.

49 Recessions—and Holding

Where does the seven-year myth come from? Recent history.

In 1969, 1990 and 2008, there were three recessions that were about seven years apart. We also saw a 2001 recession that came a decade after the previous one—near enough to seven years if you’re not looking too closely.

But that’s a misleading selection because we also saw recessions in 1973, 1980 and 1981 that weren’t anywhere near seven years after the preceding one. You could try to fudge the numbers to make them fit, but an even closer look at history shows just how foolish that would be.

Let’s take a look at the full list of every recession in US history.

That’s a long list!

In America’s near 250-year history, there has been no shortage of crises and panics. But the good news is that they’re getting further apart. It’s almost as if the economy is getting more efficient and businesses are getting better at avoiding downturns.

If you lived through 2008, you probably wouldn’t think that things are getting better, but they are. As bad as that crash was, we didn’t have bread lines like we did in the Great Depression; we didn’t have homeless camps in Central Park; and we didn’t have food riots like the Flour Riot of 1837 in New York City.

Of course, things aren’t perfect nowadays, but our downturns tend to be more measured, more controlled and further apart. Take a look at this chart of each recession in US history and the time that elapsed since the previous one:

Notice how the lines tend to get longer over time? That’s because we’re getting smarter about capital markets, fund flows, business cycles and ways to cushion the economy when things get really bad.

That doesn’t mean recessions are destined to happen every seven years, but it does mean that we can expect recessions to be spread even further apart in the future. Maybe someday, recessions will even stop happening altogether.

Life in the Slow(er) Lane

It’s now been nine years since the Great Recession officially ended in June 2009. That isn’t the longest gap we’ve had between recessions (that award goes to the post–dot-com recession of 2001), but I’m betting that the next recession won’t happen until it’s been a bit more than 10 years since the last one ended.

There are a number of reasons why I think the next recession is pretty far off, but they all come from the same starting point: the slow recovery we’ve seen over the last nine years.

Whether you call it “the new normal,” as ex-PIMCO bond genius Mohammad Al-Arian does, or you prefer “secular stagnation,” as Harvard professor and ex-presidential advisor Larry Summers does, everyone has noticed an uncomfortable truth about our economy since the Great Recession: it’s been recovering at a glacial pace.

That slow improvement has resulted in a delayed business cycle and slow growth in consumer spending. It has also caused overall wage growth following the recession to rise at a very slow rate—though it is now starting to increase significantly. That’s not a recessionary trend, but it isn’t a bubble either. It’s ho-hum.

And ho-hum is likely what we’re going to see for a few years to come. Again, not great, but not a recession either.

Steady Gains Ahead

What does ho-hum mean for investors? It means lower returns—but no major downturn.

Slowly, investors have begun to realize that this is a good reason to buy stocks. If you’re going to get lower average annualized returns over the next few years and you’re not going to get a major downturn anytime soon, that means it’s a really good time to buy stocks—especially since many are oversold due to fear mongering and too many individual investors keeping their cash out of the market.

(You could start with the 10 dividend stocks my colleague Brett Owens says are set to double. Click here to read all about them.)

Most retail investors haven’t gotten the memo that this is the new reality of investing, but the stock market has. Take a look at the volatility index known as the VIX. Called the “fear gauge,” this is an indicator of just how scared the market is of a major downturn in the near future. And its average has been trending down ever since the financial crisis began:

Volatility Still Falling

Despite the headlines about volatility rising earlier this year, fear is still going down over the longer term because the market is continually realizing that there are too many safeguards in place, too many checks and balances and too much at stake in the new world economy to let another 2008 happen. That doesn’t mean it won’t, but it does mean it won’t anytime soon.

And without a recession, there’s not going to be a bear market in stocks in the short term, meaning investors need to buy now and watch their portfolios grow. The only trap in today’s new normal is sitting in cash on the sidelines, where rising inflation will eat up your net worth.