The Incredible 11.2% Dividend Everyone Has Missed

May 31, 2018 Brett Owens

Today I’m going to take you inside the most disrespected, criticized, lambasted and just plain ignored investments on the market today.

Why would I do that?

Simple. Because if you’re not as rich as you’d like to be, these unloved income plays are the perfect way to get you there.

I’m talking about closed-end funds (CEFs), a group of investments that, with a bit of effort (which I’m happy to put in for you) can hand you big, fast upside, safe cash dividends of 8% and higher—or both.

So why do so many investors see CEFs as perennial money losers?

Let’s take a look, using a pick every dividend fan should know about (but doesn’t) as an example: the Delaware Investments Dividend and Income Fund (DDF), a CEF with a massive 11.2% dividend yield and boasting a history of outperformance nearly everyone has missed.

Never heard of DDF? I’m not surprised. It has only $92.9 million in assets under management and a 2.1% expense ratio. Both of these set off alarm bells in most investors’ minds. Massive fees! A tiny fund!

Worse, if you compare DDF’s return to that of the S&P 500, you’ll see this:

A Complete Dud … Right?

Again, not looking good! But remember, this doesn’t include DDF’s huge dividend, which is about 9 times as much as the typical S&P 500 stock pays. Add that in and we get this:

Dividends Make DDF a Market-Crusher

That’s right: as I said above, this tiny fund is beating the market and has been doing so most of the time over the last decade.

Also, it currently trades 3.5% below its net asset value (NAV, or the real market price of its holdings), so you’re getting DDF’s portfolio, its 11.2% dividend yield and its outperformance at a discount.

And since this performance is post-fees—a point I can’t stress enough—we can say with confidence that DDF’s fund managers are earning their keep, despite how high those fees appear to be at first glance.

Now DDF isn’t looking so easy to dismiss, is it?

The Biggest CEF Investing Fear Debunked

When it comes to CEFs, fear of market underperformance is just one issue I hear from investors. The bigger one is that these funds actually lose money over time.

Again, these folks are looking at the wrong chart. It’s true that many CEFs have had their market price decline slightly over time, although in most cases those CEFs have also paid a big income stream at the same time. If the market price goes down 1%, but investors have had a 9% dividend at the same time, investors still have a strong positive total return of 8%. And that return is given out as cash, investors can use that money however they wish—whether it’s using the money today or reinvesting it in the CEF. The control is yours.

Good luck doing that with your typical S&P 500 stock! And even better, unlike stocks, some CEFs are specifically designed to give you tax-free dividend payouts, like the two funds I reveal here.

But do they still, on average, earn a profit?

The answer is simple: yes.

Of the near-500 closed-end funds tracked by my CEF Insider service, only 37 have suffered a loss over a long period of time. And 29 of those are relatively new funds whose losses have happened over the last couple years. When looking at funds with a 10-year track record or longer, only eight have had a negative return over the last decade.

That’s a miss rate of 1.6%!

And when we look at the eight money losers, the cause of their problems becomes obvious.

Three of these CEFs—the Central Europe, Russia & Turkey Fund (CEE), Latin American Discovery Fund (LDF)and Korea Fund (KF)—are emerging-market funds whose assets have been under attack from a strong dollar, declining energy prices and growing geopolitical instability.

Another three—the Cushing MLP Total Return Fund (SRV), GAMCO Global Gold Natural Resources & Income Fund (GGN) and Adams Natural Resources Fund (PEO)— focus on commodities and energy stocks and have been hit by the crash of 2008–09 and the 2014 oil-price collapse.

That just leaves two funds—the Alpine Global Dynamic Dividend Fund (AGD) and the Alpine Total Dynamic Dividend Fund (AOD). Notice something in common? That’s right: the same firm has managed both and, to put it bluntly, both were poorly run.

There has been pressure on these two funds for years because of this poor management, which is perhaps why Alpine Funds agreed to hand over control to Aberdeen Asset Management in early May 2018. And since Aberdeen has a better track record and high-quality managers, there’s good reason to expect AGD and AOD to stop losing money and finally become profitable.

So what’s the key takeaway here?

Simple: if you avoid CEFs whose underlying assets are being hit by political turmoil, economic headwinds or poor management, you’ll give yourself a great shot at earning a nice gain and a hefty income stream over time.

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Growth Stocks

Buy This Commodity Set to Become More Precious Than Oil

May 31, 2018 Tony Daltorio

Opportunities to grow your wealth do not always occur in the technology sector, although it seems that way at times. Sometimes it is the most common and mundane parts of your life that will present a fabulous way to grow the value of your portfolio.

One such example is something you and I take for granted every day here in the United States… water. You just turn on the tap and it’s there. But that’s not true elsewhere in the world and may not be true even here in the U.S. in the future.

I’m reminded of one of my favorite classic poems (published in 1798) – the Rime of the Ancient Mariner by the English poet Samuel Taylor Coleridge. The best-known verse from the poem is: “Water, water, everywhere, Nor any drop to drink.”

Water is seemingly everywhere, covering about 70% of our planet. Yet, fresh water is extremely scarce – accounting for a mere 3% of the world’s supply. Of that amount, the vast majority is either locked up in glaciers or resides in inaccessible subterranean pockets.

And the fresh water that is accessible is not evenly distributed around the planet. For example, there is plenty of water in Siberia. But few people live there.

Of the amount of fresh water that is available, roughly 70% goes to agriculture to feed the world’s population. The enormous amount of water needed to grow the crops and livestock needed to feed and clothe the world’s growing population is creating a dire global situation.

Global Water Stress

According to the United Nations, more than 1.6 billion people are currently living in places where sustainable water use has already reached its limits. The U.N. believes that, by 2025, two-thirds of the world’s population will live in water-stressed regions.

The World Economic Forum labeled the scarcity of fresh water as the most serious problem globally at the moment in terms of economic, security and environmental risks. And the U.S. Office of the Director of National Intelligence now ranks water scarcity as a major threat to national security alongside terrorism.

And it looks set to get even worse…

Global water consumption is forecast to rise by 85% by 2035, according to a forecast by the International Energy Agency. This could translate to 40% of the world population living with water scarcity by 2035.

Another forecast, from the International Food Policy Research Institute, predicts a 40% gap between water demand and water supplies over the next 15 years.

Water and Health

Let me give you some insight into the severity of the problem currently. In human terms, severe water stress currently affects approximately three billion people worldwide. Consider these very distressing facts courtesy of The Water Project.org regarding water and health:

About 1 in 9 people around the globe do not have access to clean, safe water.
50% of the world’s hospital beds are filled with people suffering from water-related disease.
Every minute around the world, a child dies from some water-related disease.

In April 2017, the World Health Organization (WHO) came out with a startling report. The WHO Director, Dr. Maria Neira, was very blunt about the findings: “Today, almost two billion people use a source of drinking water contaminated with feces, putting them at risk of cholera, dysentery, typhoid and polio.”

She went on, “Contaminated drinking is estimated to cause more than 500,000 diarrheal deaths each year and is a major factor in several neglected tropical diseases including intestinal worms, schistosomiasis (parasitic worms that can attack body organs) and trachoma (bacterial infection of the eye).”

Here is just one such example… residents can’t afford wastewater sanitation facilities, so they just let the sewage flow freely into their backyards from their mobile homes. Human waste lies uncovered in soil, with children playing nearby.

The country in question here? Sadly, it is the United States. These conditions do exist in very rural sections of five southern Gulf states like Alabama, affecting more than 12 million Americans.

One example is occurring in Lowndes County, Alabama, where some people were infected with helminths. These are intestinal worms such as hookworm. Other tropical diseases can be found in this afflicted Gulf Coast region of the U.S. One of these is the infectious disease called chigas, which is spread by triatomine beetles (also known as “kissing bugs”). This disease mimics many of the symptoms of coronary heart diseases, so it often goes undiagnosed.

Water Wars

These numbers are eye-opening and show the importance of water to our health and well-being and our very existence.

Famed international and commodities investor Jim Rogers said in an interview with marketing agency Sinclair & Co., “Water is the single most important determination of civilization.” And he’s right. History shows that without water, no civilization – no matter how advanced – can survive for long.

Water’s importance hasn’t been lost on those that would take advantage of the situation either. The mainstream media has missed the fact that we may have already seen our first ‘water war’. It was conducted in the Middle East by ISIS.

At the height of its power, it controlled large swaths of land around water sources, such as the upper areas of the Tigris and Euphrates Rivers. The Arab region contains less than 7% of the world’s water reserves and less than 1% of the flowing water. Rain there does not exceed 2% of the global average.

And in India in 2016, members of the Jat caste sabotaged a canal that brings precious water to Delhi. The city is one of the world’s largest extended urban areas. The sabotage did not end until the caste got what they wanted from the Indian politicians.

Water More Valuable Than Oil

Access to fresh, clean water is now a major investment opportunity of the 21^st century. Water is currently a $600 billion market that is poised to grow to $1 trillion in a few short years — by 2020. It’s easy to see why…

The CEO of French utility Suez SA (OTC: SZEVY), Jean-Louis Chaussade, says water will become more valuable than oilas rising demand from people, industries and agriculture pressures existing supplies.

Companies worldwide are well aware of the problem they and the planet are facing. To that end, companies are investing in water-related projects at record levels. In 2016, companies invested $23.4 billion in projects to secure their water supplies, according to the environmental impact charity CDP.

The list of companies is like a who’s who of the corporate world and include the likes of Nestle’s, Danone, Kimberley Clark and Colgate-Palmolive. These firms seem to taking to heart a quote from Benjamin Franklin: “When the well is dry, we know the worth of water.” Thankfully, they are acting before the ‘well’ is actually dry.

That $23.4 billion is just the tip of the iceberg. According to the consultancy McKinsey, between now and 2030, there will need to be $7.5 trillion worth of investments needed in the sector to keep pace with the projected increased demand for fresh water.

It’s Water Infrastructure Problem Too

The problem isn’t just a water scarcity problem, but also an infrastructure problem. Globally, the problem is massive, with the World Bank estimating infrastructure spending needs to triple to $114 billion annually. And that is not counting the operating and maintenance costs.

Back here at home, the 2017 report card from the American Society of Civil Engineers (ASCE) gave our wastewater infrastructure a grade of D+ and our drinking water infrastructure a grade of D. These are not grades you would be happy with if your child received these in school.

This is not surprising when you consider that some water systems are more like sieves. Estimates are that leaky water pipes cost America about one trillion gallons of water annually.

The ASCE estimates our country needs $105 billion in wastewater funding now. The EPA says $271 billion will be needed over the next 25 years on wastewater spending. On the drinking water side, the American Water Works Association believes upgrades to our country’s creaking water infrastructure may require an astonishing one trillion dollars!

Overall, the ASCE says there is a more than $2 trillion funding gap between the projected current funding and the $4.59 trillion needed to get U.S. infrastructure up to an overall B grade by 2025.

That is music to the ears of our selection for investing in water – Xylem (NYSE: XYL).

Best Global Water Investment – Xylem

This water technology company was spun off from ITT Corporation in 2011 and included all of ITT’s water businesses. Its corporate mantra is “Let’s Solve Water” and does so through the creation of innovative solutions using ‘smart’ technology.

Xylem’s reach is truly global, generating revenues ($4.5 billion in 2016) in over 150 countries. The U.S. accounted for 46% of revenues, Western Europe for another 27% of revenues, the fast-growing emerging market segment now accounts for 20% of revenues and the rest of the world filled in the remaining 7%. In China, the company experienced a 19% rise in orders last year.

The company garners its business from several sources. Here is the breakdown of where the revenues came from in the 2016 fiscal year: public utilities – 47%, industrial firms – 37%, commercial buildings – 11%, residential buildings – 5%.

Xylem: a Closer Look

Following the acquisition of Sensus in 2016, Xylem now operates in three segments: water infrastructure (49% of 2016 revenue), applied water (31% of 2016 revenue) and Sensus (20% of 2016 revenue).

The Water Infrastructure segment includes the company’s business surrounding the sourcing, collection, treatment, and transportation of water. The primary customers in this segment are public utilities and large industrial companies. These customers use Xylem products including industrial pumps, filtration and treatment equipment, and infrastructure control systems.

This part of Xylem does a lot business in developing countries. Here are just two examples:

It is heavily involved in the world’s largest water reclamation and reuse installation, located in Kuwait.
In Shanghai, a water treatment plant is disinfecting the water using ultra-violet light technology from the company’s Wedeco unit. A similar system has also been installed in New York and Chicago.

Xylem also provides membrane-based desalination technology and components and has done so since 1975. And for more than 24 years, the company has provided pre-treatment systems to improve the performance of reverse-osmosis membranes.

The Applied Water segment involves the Xylem’s products and services sold to residential, commercial, industrial, and agricultural end-users. Some of the products in this segment include pumps, valves, heat exchangers, hydro turbines, and dispensing equipment systems. Its Applied Water business focuses more on the distribution of water to households and businesses.

The third segment of Xylem’s business is Sensus. It represents the company’s largest foray into the smart technology market. Sensus is all about technology and includes a variety of smart meters, cloud-based analytics software, remote monitoring and data management systems, and smart lighting.

Tucked into this business is another 2016 acquisition – the Singapore-based water analytics company Visenti. This firm provides a suite of advanced products and services to enable smart management of water networks.

The logic of the Sensus and Visenti acquisitions is impeccable. Xylem’s smart platform can quickly identify the leaks in a water utility’s creaking water system. Then Xylem can offer its services (pipe fusion, etc.) to fix whatever the problem is.

Xylem: a Look Ahead

In the third quarter of 2017, organic top-line performance improved 5% year-over-year. This was largely driven by very robust demand from public utilities as well as stronger industrial end-market demand; although residential and commercial end-markets also did well.

I expect this number to improve further as the company’s analytics and Sensus business really get rolling. The company itself anticipates organic revenue growth of around 5% by 2020 based on the benefits of the Sensus and Visenti purchases.

Xylem should generate revenues of $4.7 billion for all of 2017. That will be year-over-year upside of about 25%, thanks to the acquisitions. Earnings per share should be around $2.40 a share.

With all the world’s water problems, I see an extended period of robust growth for Xylem, which is so uniquely positioned to meet many of the world’s water woes. Therefore, I recommend you purchase Xylem at a price up to $75 a share.

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Dividends

These Safe Monthly Payers Yield 6% to 8% with 60% Upside

May 30, 2018 Brett Owens

If you feel trapped “grinding out” dividend income with popular 2% and 3% stocks and funds, here’s the three-letter acronym that will fund your retirement:

C-E-F

For whatever reason, closed-end funds don’t have nearly the following – or analyst paperazzi – that dividend-paying stocks boast. This “secret” is one of the last great efficiencies in an otherwise tough-to-beat market.

And we contrarian income hounds will gladly take this edge…

After all, it doesn’t make much sense that we can trade in our “dumb” stocks, ETFs and mutual funds for superior tickers that:

Yield 6%, 7%, 8% or more,
Pay their investors every month,
Often trade at a discount to the assets they each own, and
Are managed for free (I’ll explain more later) by a top-notch investment manager.

Let’s start with an example featuring stock-based CEFs. For those of you shaking your head at your portfolio’s low yield, you can actually 2X or 3X your portfolio’s yield and improve your upside potential to boot using this strategy. And it’s actually simpler than traditional stock picking.

How to Bank 6% Yields From Blue Chip Stocks

Many income investors have mistakenly parked their capital in “safe” consumer staples like General Mills (GIS), Kimberly-Clark (KMB) and Procter & Gamble (PG) in search of yield and security. Their money was safe, alright – their cash has grinded straight sideways for the last five years!

They’d have been better off “outsourcing” their dividend decisions to the great Mario Gabelli. His namesake Gabelli Dividend & Income Trust Fund’s (GDV) tends to pay around 6% or so (it yields 5.8% today). Mario’s dividends show up around the 14th of the month, every month, to the tune of $0.11 per share.

Sounds like a sweet deal, right? His investors get the benefit of a legendary money mind along with his access to ideas and cheap money. And get paid monthly to boot.

It really is quite the opportunity. The monthly dividends plus the boss’ smarts have rewarded investors who made the “one-click” investing decision to buy shares in GDV and let Mario take care of the rest:

In Mario We Trust (for 62% Returns in 5 Years)

His secret sauce is his stock selection. Meanwhile our opportunity lies with the discount – the fact that Mario’s fund tends to trade at a discount to the value of the shares it holds. Over the past three years, GDV has traded at an average discount of 10% to its NAV (net asset value) – which means investors have bought his stocks for just $0.90 on the dollar.

(Since GDV is a CEF, it has a fixed pool of shares – versus a mutual fund, which can simply issue more shares anytime it wants. The restricted supply means the fund’s price trades like a stock – which means it can stray from its NAV.)

Mario’s brilliance at a bargain is one example of our “CEF edge.” With $1.9 billion in assets, this particular fund is too small for big players to put money to work. Which works out perfectly for us.

And in CEF-land, stocks aren’t the only assets with price upside. Let’s now talk about way to further accelerate these returns. As nice as Mario’s 60% in five years is, I’m going to show you how to bank that much in just two!

How to Boost Your Bond Yields to 8%+

There are serious deals available in secure bonds. No safe bond pays 8% itself, of course. But it is possible to generate 8% and even 9% or more from a portfolio of reliable bonds.

You can even diversify your portfolio, bank these safe 8%+ and hire one of the best bond managers on the planet. For free, to boot!

It just requires a bit of contrarian thinking – and knowing which publicly traded funds these guys are managing behind the scenes (via their often-underrated CEFs).

Here’s a real-life fixed income bargain. You probably know the “Bond King” Bill Gross. How about his successor, Dan Ivascyn?

When Gross left PIMCO, a tide of cash followed him out the door. But the flow of money quickly subsided when Ivascyn stepped to the plate and outperformed Gross himself. No wonder PIMCO let the King walk out the door – they had their next superstar in waiting!

A money manager of Ivascyn’s caliber will usually cost 2% annually (plus 20% of profits). And it’d take a million bucks or two to get his attention.

But from time to time you can hire him for free. In fact there are times you’ll be paid up front to give him your money!

And like buying a regular stock or mutual fund, you can buy this super CEF with one-click from your computer (or tap from your phone) by purchasing PIMCO’s Dynamic Credit and Mortgage Total Return Fund (PCI).

PCI charges a 2% management fee. But it’s easy to get the fee comped – if you simply buy the fund when it trades for a discount.

For top-notch managers like Ivascyn, the fund’s price usually wanders above its NAV. Investors are willing to pay more than $1 for a dollar in assets just to get in:

Big PIMCO Premiums Today

But I always demand a discount. A 2% discount means our management fee is comped. A bigger bargain means we have some upside (as the discount window closes) and our yield is higher than it would be if the fund traded for fair value (because income is earned per NAV unit – so the less we pay for it, the better).

The three funds above are trading at big premiums however. Is it possible to ever get Ivascyn’s expertise at a discount? You bet.

First-Level Worries to the Rescue

PCI had been neglected by investors because of its strategy focused on mortgage-backed securities (MBSs), which had the lead role in the last financial crisis. They have recently been immortalized in the book and movie The Big Short. MBSs blew up the financial system in 2008 and have been outcasts ever since.

But a “second-level” look at mortgage payments showed these assets have successfully completed financial rehab. They quietly began to enjoy the benefits of clean living – with mortgage defaults and delinquencies trending down. Ivascyn and his team capitalized on this misplaced despair.

Two years ago, we added PCI to our Contrarian Income Report portfolio. The fund traded at a 10% discount to its NAV and yielded an incredible 10.7%. This “free lunch” was gradually gobbled up as these safe bonds crushed the stock market at large:

Ivascyn Worth Every Penny: +58% Net of Fees!

Our secret here was our “no brainer” purchase of a 10%+ yield at a 10% discount. Ivascyn did the rest – not only did he keep his monthly distribution funded, but he bought bonds that went up in value as rates rose.

Even after we pocketed these generous monthly payouts, the fund’s NAV sits 18% higher today than it was two years ago. Proving that it is possible to bank plenty of upside from secure bonds. You just need to know where to look – and CEFs are the ideal place to start.

Source: Contrarian Outlook

Cryptocurrency

Volume Is Important When Trading Bitcoin

May 30, 2018 Vin Narayanan

“Follow the money” is an old adage in journalism. (It was memorialized in the movie All the President’s Men). It’s a useful saying for investors too. In this week’s chart, we follow the money to see which bitcoin exchanges Americans (or U.S. dollar holders) are trading on.

So why is this chart important? Let’s follow the money.

We should note that this chart is just a snapshot in time. The data is from May 23, 2018. Another thing to remember is that the chart only reflects U.S. dollars being traded as bitcoin. It doesn’t reflect the yen (Japan), won (South Korea), euro (European Union) or other currencies being traded as bitcoin. That chart would look quite different. But neither of these factors affects the value of this chart.

The first thing to notice is the exchanges Americans are using to buy and trade bitcoin. That’s useful information. At Early Investing, we’re fans of Coinbase. But as you can see, there are other exchanges out there that do plenty of business.

The second thing this chart does is approximate overall market activity. This past Wednesday was a pretty busy day. If you had looked at this chart on Friday, you would have seen the highest 24-hour trading volume was $182.7 million. That’s a much quieter day.

Finally, the chart helps measure the volume of trading activity on an exchange, which is an important factor in price volatility. Bitcoin is already volatile enough as it is. But the more trades that are happening on an exchange, the more you can believe that those price gains (or losses) are real.

And in the cryptocurrency world, all you can do is ask for real!

Good investing,

Vin Narayanan
Senior Managing Editor, Early Investing

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ETF, Growth Stocks

2 Robotics Industry ETFs Tapping into Expanding AI and Automation

May 29, 2018 Tony Daltorio

The two ETFs I like are the Global X Funds Robotics & Artificial Intelligence ETF (Nasdaq: BOTZ) and the ROBO Global Robotics & Automation Index ETF (Nasdaq: ROBO). I am very positive on both of these ETFs and have previously recommended them to investors.

As you might surmise, there are a lot of similarities between the two funds as they both focus on what we might generally call robotics and automation.

But there are subtle differences. ROBO is older with an inception date of 10-22-2013, while BOTZ came to market on 09-12-2016. BOTZ is more liquid than ROBO with 88.9 million shares outstanding and an average trading volume of about two million shares a day. That compares with ROBO’s 53 million shares outstanding and average daily trading volume in the range of 700,000 shares.

BOTZ does have an edge when it comes to expenses with a lower expense ratio than ROBO – 0.68% versus 0.95% – which factors into the long-term performance of any fund or ETF.

Portfolio Differences

Most important, of course, when comparing the two ETFs is the difference in their portfolios. And here BOTZ has a more concentrated portfolio with only 29 stocks versus the 93 stocks in the ROBO portfolio. That will likely make it somewhat more volatile and risky.

If you look at the geographic exposure of the two funds – with my preference for exposure to the leaders in the industry, which are Japanese – here BOTZ has the upper hand with about 50% of the fund in Japanese stocks versus only 28% for ROBO.

However, when it comes down to the actual stocks in the portfolios, both are outstanding. That’s why I’m adding both to our own portfolio. Here are the top 10 positions for each ETF:

Top 10 Positions for the Global X Robotics & Artificial Intelligence ETF

Nvidia
Yaskawa Electric (Japan)
Fanuc Corporation (Japan)
Keyence Corporation (Japan)
Intuitive Surgical
Mitsubishi Electric (Japan)
ABB Ltd. (Europe)
SMC Corporation (Japan)
Daifuku Company Ltd. (Japan)
Omron Corporation (Japan)

Top 10 Positions for the ROBO Global Robotics & Automation Index ETF

iRobot
Daifuku Company Ltd. (Japan)
IPG Photonics
Nabtesco Corporation (Japan)
Hiwin Technologies (Taiwan)
Yaskawa Electric (Japan)
Fanuc Corporation (Japan)
Intuitive Surgical
Mazor Robotics
Oceaneering International

Over the past year, BOTZ returned 27% while ROBO gained 21%, both easily outperforming the S&P 500 index. As you can see they were both on a tear and shot up too fast right before the February correction. They’ve since dropped back down in what one might call consolidation. With the bright future I see for the robotics industry, I expect the outperformance to start again and to continue for many years.

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Options

Big Money Is Betting That The Markets Will Remain Calm

May 29, 2018 Jay Soloff

The days of sub-10 VIX may be gone for the foreseeable future, but that doesn’t mean traders have stopped betting against higher volatility. In fact, the short volatility trade seems like it may be returning with a vengeance.

Well, let me step back a bit. The short volatility trade may be returning on the professional level. Retail traders still appear to be wary of selling volatility – and with good reason. It was the retail crowd that mostly got hurt on February 5^th and the aftermath back when XIV, a popular inverse volatility ETN, imploded.

Access to short volatility isn’t quite as easy as it used to be, and I imagine there are plenty of gun-shy retail investors who got burned back in February. Nevertheless, making money on short volatility can be a great way to increase yield and trading returns. Moreover, the big money may be stepping in now and selling volatility in chunks.

XIV, which was basically the inverse of iPath S&P 500 Short-Term Futures ETN (NYSE: VXX), is now out of the picture. ProShares Short VIX Short-Term Futures ETF (NYSE: SVXY) has been redesigned to provide only 50% short exposure to front month VIX futures. As such, it has fallen on VXX and VIX futures options themselves to carry the lion’s share of the volume of volatility trades.

VXX only has exposure to the first two VIX futures months, while any VIX month with a future can be traded using futures options. For the most part, VXX has maintained strong volume since the February 5^th volatility event, trading about 44 million shares a day on average over the last 90 days, while options have traded a brisk 363,000 average per day over the same period.

Now, it’s easy enough to take a short position on volatility by purchasing puts on VXX. Of course, puts make money when VXX goes down, and VXX goes down when volatility retreats. That’s a perfectly reasonable strategy. But keep in mind, buying puts does come with time decay risk. Long options are always decaying as they approach expiration, so you do have a timing variable that comes into play.

On the other hand, selling calls on VXX means time is on your side. Being short calls also benefit from VXX going down (or sitting still). But, being short options means you collect time decay rather than pay it. The risk is if VXX spikes higher, your losses can be staggering.

One way to protect yourself against a spike in VIX but also get the benefits of time decay is by selling a call spread instead of selling naked calls. Selling a call spread (selling a call closer to the stock price, while purchasing a farther out call) lowers your premium collected, but caps your losses.

Take for example, this very large trade that occurred in VXX earlier this week. A trader sold the June 8^th 37-43.5 call spread for $0.59 with VXX trading at $34. Selling the call spread means the trader sold the 37 calls and bought the 43.5 calls. The spread was executed over 6,200 times meaning the trader collected over $367,000 in premiums.

If VXX closes under $37 in the next 17 days, the trader keeps the entire premium collected. On the other hand, if VXX spikes above $43.50, the trader is at risk of losing $5.91 ($6.50 spread gap minus the $0.59 premium collected).

It may seem like $0.59 isn’t a lot to collect versus a max loss of $5.91. However, the trade only lasts for 17 days. Moreover, with the China tariff situation seemingly resolved for the time being, there aren’t a lot of potential volatility catalysts on the horizon.

Still, while I like the idea of selling a call spread, I’d probably go a bit higher out of the money and go farther out in time to compensate. For instance, the June 29^th 39-44 call spread would result in around $0.70 in premium versus a max loss of $4.30. You have to wait a few more weeks until expiration, but it would take a pretty major event at this point to push VXX to $40 or above. To me, that’s a reasonable trade off to make.

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Cryptocurrency

Buy These 3 Leading Blockchain Technology Stocks

May 25, 2018 Tony Daltorio

Even though the mania has cooled a bit, the technology behind Bitcoin – blockchain – is still a very hot sector on Wall Street.

And blockchain has come a long way from its very earliest days when it was a facilitator of drug deals using Bitcoin on the dark web. The market for blockchain-related products and services is forecast to reach $7.7 billion in 2022, according to the research firm Markets & Markets.

That forecast may turn out to be rather conservative. A survey conducted by Juniper Research of 400 executives from the world’s largest corporations found that 60% of them said they were considering using blockchain technology in their business.

Blockchain Technology

Despite all the recent hype, you may be wondering ‘what the heck is blockchain (also known as distributed ledger technology)?’

Briefly, blockchain will enable companies doing business with each other to record transactions securely.Blockchain’s main strength lies in its trustworthiness. In other words, it’s tough to change what has already been recorded.

The main advantage of blockchain over existing processes is its ability to speed up and simplify complex transactions by making changes and updates immediately visible to all parties. A single blockchain-based system is also cheaper to maintain than the myriad of systems that, for example, banks use for transactions now.

The blockchain can also hold many more documents and data than traditional database storage, and it can hold embedded contracts, such as a car lease, whose virtual key could be transferred to a bank in the event of a default.

For a hint about what companies you should be looking at to invest into, a good place to start is to see which firms have either applied for, or have already received patents on blockchain technology. Not surprisingly (since blockchain can make transactions faster and more efficient), banks are among the leaders here.

Number one on the list – according to a study from EnvisionIP, a law firm specializing in analyses of intellectual property – is Bank of America (NYSE: BAC), which has applied for or received over 40 patents for blockchain.

Other American companies in the finance sector, such as Mastercard (NYSE: MA), are also leaders in blockchain patents. Yet, they seem to be slow on implementation.

The first financial companies to actually use blockchain technology in real activities come from across the pond in Europe. Let me fill you in…

European Banks and Blockchain

In April, Spain’s BBVA (NYSE: BBVA) became the first global bank to issue a corporate loan using blockchain technology. The bank said it carried out the entire process for a €75 million corporate loan — from negotiating terms to signing the loan — on a mutually distributed ledger that kept both the bank and borrower up to date on the loan’s progress. And, the process cut the negotiation time down from “days to hours”.

For this pilot project, BBVA used a private blockchain for the negotiation and completion process, and then registered the completed contract on Ethereum’s public blockchain. BBVA’s partner is this test of blockchain technology was the Spanish telecoms company, Indra Sistemas.

Not to be outdone is BBVA’s Spanish rival, Banco Santander (NYSE: SAN), which is Europe’s largest bank as measured by market capitalization. It became the first international bank to launch a cross-border payments system based on blockchain technology in April.

Its “One Pay FX” service is available for the bank’s customers in Spain, Brazil, Poland and the U.K. The four country launch covers around half of the annual foreign currency transfers made by individual Santander customers, and the bank said it plans to expand the services to more countries and types of customer such as small businesses in the coming months. Santander aims to eventually make it available as a standalone app that could be used by customers at other banks.

The One Pay system uses blockchain technology developed by California-based Ripple, which permits users to see the exact amount of money that will be arrive at the destination account before they make a transfer, and it shortens the length of time taken for such a transfer from several days to the same day or next day.

Santander also became the first company in the world to make it easier for investors to vote at an annual meeting. It and Broadridge Financial Solutions (NYSE: BR), a spinoff from ADP that services financial companies, ran a test at Santander’s annual meeting in March. Voting took place by the normal traditional methods, but they used blockchain to produce a shadow register.

This pioneering move could help revolutionize corporate democracy. Currently, investors often have to vote two weeks before a meeting to allow time for ballots to be counted. The process has been criticized, with claims that votes are frequently ‘lost’. It is also difficult at times for investors to vote outside their home market, which affects a company like Santander with shareholders all over the world. Hopefully, the use of blockchain will speed up the process at annual meetings and make it easier for more shareholder participation.

Finally, we have the global banking giant HSBC (NYSE: HSBC), which recently completed the world’s first commercially viable trade finance transaction in one day using blockchain. The blockchain trade was a processing of a letter of credit for the U.S. agricultural powerhouse Cargill for a shipment of soybeans from Argentina.

That seems insignificant, but could really be an industry-changing transaction. The centuries-old trade-finance industry, worth about $9 trillion today, would be enhanced by the reduction of the numerous documents and several days of processing needed for a single transaction to a paperless task that can be completed in hours. The soybean transaction would normally have taken five days to process.

Of course, before that can happen all the participants – banks, shipping companies, ports, and customs agencies – would have to agree to use the same blockchain technology. That is unlikely to happen in the near future. But with HSBC behind blockchain – it is a major player in the sector and took in $2.5 billion in trade-finance revenue last year – the technology may progress quicker than most expect. This could encourage global trade even more, thanks to lower transaction costs.

However, please note the technology HSBC used wasn’t strictly blockchain. The distributed ledger technology in question did use independent computers to record, share and synchronize transactions. But there were some important differences – it used less computer power and can be more easily scaled up than regular blockchain. And it is not truly open – users are required to authenticate themselves. But everyone with access to a ledger can see the same, up-to-date version. And it did take only one day versus the typical five days.

I suspect it is these types of variations of blockchain technology that will eventually adopted by businesses. But, we’ll have to wait and see. In the meantime, it will be interesting to see if U.S. financial firms finally get off their behinds and begin adopting blockchain as their European counterparts are.

From an investment viewpoint, I would only invest in the Spanish banks if you have a high risk tolerance. These banks still have a number of non-performing loans on their books, although they are making progress.

HSBC is a more solid bank and has a juicy 5%+ yield to go along with it and may be suited for conservative investors. For more possibilities of growth, there is Broadridge, whose stock has done extremely well – it is up 58% over the past year and 28% year-to-date. I would choose one of those two instead of a stock that has been hyped-up by Bitcoin mania like Square (NYSE: SQ).

Options

The Latest Gaming Craze Could Lead To a Quick 468% Return

May 24, 2018 Jay Soloff

The video gaming industry is extremely competitive, but can also be immensely profitable if a developer hits big on a certain game or franchise. Success stories in video games range from relatively simple mobile apps to massive projects with huge development costs.

Much like a movie, production costs for video games are mostly upfront. A popular game can scale very efficiently and generate very high margins. However, as I mentioned before, there’s also a ton of competition in the space and relatively low barriers to entry.

Popularity of video games goes in phases, like many other aspects of pop culture. A certain game or type of game may capture the crowd’s attention for a month or a year. Inevitably, copy cats of the most recent successful game or game type will start springing up. Some may even improve on the original concept, although many are just cash grabs.

The latest video game phenomenon is the so-called “battle royale” video game. This is a game where a set number of people (usually 100) are dropped onto an island with no gear. The players then have to run around and find weapons, shelter, etc. and it becomes a last man standing match. The popularity of this genre of game is at least in part because it’s platform agnostic – that is, it’s played about equally on game consoles, PCs, and even smartphones. (I’ve tried out a couple of the popular titles, and I have to admit, they are quite fun and engaging games.)

Here’s the thing…

With the success of several new battle-royale games, it is no surprise that the heavyweights of the gaming industry have turned their attentions to developing new games in the genre. Most recently, Activision Blizzard (NASDAQ: ATVI) has announced its extremely popular Call of Duty series will have a battle-royale mode in the next edition of the game.

Call of Duty titles always sell well when they are released, and often break sales records whenever a new game comes out. Adding a battle-royale mode could move the needle even more significantly. Taking one of the industry’s most popular titles and adding it to the most popular genre is obviously a strong move for ATVI.

The good news did not fall on deaf ears, as investors quickly jumped into ATVI stock. But, the real action was once again in the options market.

A size trader purchased 10,000 ATVI June 15^th 75-77.5 call spreads for $0.44 with the stock at $71.40. The call spread involved the purchasing of the 75 calls while selling the same number of 77.5 calls. This strategy is done to reduce the cost of the trade, which subsequently reduces risk.

Total risk on this trade is simply the amount paid, or $440,000. Max gain on the other hand is $2.06 if ATVI goes to $77.50 or above by mid-June. In that case, the trade pulls in more than $2 million, or a flashy 468% in gains.

As you can guess, especially if you normally read my articles, this is the type of trade I love. It’s low risk, high upside, and has a solid thesis behind it. Needless to say, I would definitely recommend this trade if you believe the company is going to have yet another huge hit on its hands with the next Call of Duty game.

Uncategorized

Buy These 3 Timber Stocks as Lumber Prices Continue to Skyrocket

May 24, 2018 Tim Plaehn

The U.S. home building industry faces a Jekyll and Hyde situation. The good news is that the home construction industry has built much fewer houses over the last decade than are needed by a growing population and new household formations. At the same time builders face headwinds from rising material costs, labor costs, and higher mortgage rates. The opposing forces may make it tough for home builders to grow profits, but material supplies—lumber producers—should continue to see growing profits from higher prices.

A recent news article noted that the National Association of Homebuilders says rising lumber prices have already increased the average price of a single-family home by $6,400 since January of last year. Here is a chart published by the Wall Street Journal showing the lumber futures price.

My expectation is that home builders will be able to build and sell enough homes to stay profitable. There is enough demand from the population needing additional housing to prevent enough of a slowdown to make building new homes completely unprofitable. If homes continue to be built, one of the winners will be the lumber producers.

There are three real estate investment trusts (REITs) that own timberland and sell lumber and other wood products. With the REIT structure these companies will likely pass along higher profits as rising dividends for share owners.

Weyerhaeuser Company (NYSE: WY) with a $27.6 billion market cap is one of the largest companies in the REIT sector. The company converted to a REIT in 2010. Over the last six years, Weyerhaeuser has doubled its timber holdings to 12.6 million acres. These holdings make the company the largest private timberland owner in the U.S.

To process and sell the timber, Weyerhaeuser owns 35 mills and 18 distribution facilities. In 2017 adjusted EBITDA grew by 30%. For the 2018 first quarter, EBITDA was up 20% year over year and net income per share was up 63%.

In December the company increased the quarterly dividend by 3.2%. This year, I expect a high single digit to low double digit increase. WY currently yields 3.5%.

Rayonier Inc. (NYSE: RYN) owns 2.6 million acres of timberland in the U.S. and New Zealand. The company divides its operations into forest product sales and real estate sales. Rayonier will sell land that was once best suited for growing timber but is now more valuable for residential, industrial, commercial or conservation use.

For the 2018 first quarter, adjusted EBITDA of $94.3 million was up 65% compared to a year earlier. Net income climbed by 15.8%. On Monday—May 21—the company announced an 8% increase in the quarterly dividend. Prior to this increase the dividend had not changed for over three years.

If timber prices remain strong there is potential for another increase or a year-end special dividend. RYN currently yields 2.8%.

In February 2018 Potlatch and Deltic Timber Combined to form PotlatchDeltic Corporation (Nasdaq: PCH). The result of the merger is a leading timberland REIT and lumber manufacturer. The company owns two million acres of timberland in the U.S.

The merger converted the Deltic assets to REIT status. As a result, management has already stated a special cash plus shares dividend will be paid at the end of 2018. The regular quarterly dividend was increased by 7% in anticipation of the improved results due to combining the two companies.

PCH currently yields 3.3%.

Uncategorized

The 3 Best Stocks to Invest in Right Now

May 23, 2018 Lawrence Meyers

The best stocks to invest in right now are always a matter of perspective. You should always hold a long-term diversified portfolio that aims to deliver a real rate of return in excess of the real inflation rate of 8% to 10%. That’s the objective of my investment advisory newsletter, TheLiberty Portfolio.

That being said, if you are still building a portfolio, the best stocks to invest in right now are those more likely to outperform the overall market in the long term. By definition, that means value stocks. Because the market has largely been driven by large-cap stocks over the past couple of years, a lot of value stocks and small-cap stocks are being ignored. That helps narrow down the sectors for us to look at for the best stocks to invest in right now.

I prefer to look for stocks that are generally misunderstood, and are overlooked for a variety of reasons. Those are a couple of criteria that the famous fund manager Peter Lynch utilized during his career. They tend to lead to outsized returns.

These criteria alone provide for a very nice selection of the best stocks to invest in right now. However, for the best stocks to buy now, I will narrow my criteria down one further by adding in an area I happen to be an expert in: consumer finance. Now that the Consumer Financial Protection Bureau (CFPB) is being gutted, there are a number of stocks that had been under pressure for a long time that have become hot stocks.

Stock 1: Enova International Inc

Enova International Inc (NASDAQ:ENVA) is probably the top hot stock in this sector. Enova began life as CashNetUSA, the successful state-by-state, licensed short-term consumer lending operation. It was phenomenally successful. It was purchased by Cash America International, and then spun off.

After several years of gangbuster returns, the CFPB started cracking down on short-term lending, also known as payday lending. This happened simultaneously with a crackdown in the U.K. on consumer lending. ENVA stock fell to about $6 per share. ENVA started developing all kinds of new products that were not subject to the CFPB rules, and worked with U.K. regulators to develop new products.

It took a little while, but ENVA stock is back on track and has been delivering stellar results. Not only that, but with the CFPB reconsidering the payday loan rules, and a big industry lawsuit against the CFPB, I believe Enova will be able to ramp up its single pay products again. The stock trades at $32.50, and I believe it can triple in the next three to four years.

Stock 2: Ezcorp Inc

Ezcorp Inc (NASDAQ:EZPW) was, at one point, a leading provider of single pay products as well, and also had a large presence in pawnshops. However, the single voting shareholder got distracted by other companies moving into Internet lending. He took his eye off the ball, fired senior management that has done so well for so long, and put in new management that had no idea what it was doing. This, coupled with a crash in gold prices, sent EZPW stock to under $3 per share.

Brand-new management, which had a host of expertise in pawnshops, was hired and the company engaged in a turnaround. EZPW sold off all the assets it had, other than pawnshops. It continued its domestic expansion, and started breaking ground on pawn shops in Latin America. Latin America is a massive opportunity for pawnshops, and there remains an enormous amount of expansion that is possible in Latin America. EZPW stock is trading at about $13 per share, but I believe it can double in the next three years.

Stock 3: Encore Capital Group, Inc.

Encore Capital Group, Inc. (NASDAQ:ECPG) is a kind of cousin to these other two stocks. It is an international provider of debt collection services. That’s right, if you’ve ever gotten calls from those infamous debt collectors, now you have a chance to get some back.

By investing in ECPG, you are investing in a company that will buy charged-off debt for pennies on the dollar, and then turn around and try to collect on it. You wouldn’t think that this would be a very successful model. But in fact, it is been extraordinarily successful. That’s because if a company is able to buy a debt for, say, 2 cents on the dollar, and is able to collect 6 cents, it made a 200% return on its money. ECPG stock trades at $44.60, and I see a double within three years.

Market Mavens