Chad Shoop

[chadshoop]

Betting on China’s Middle Class

My wife insists we are going to Vegas for my “Dirty Thirty” next year.

Even though we visited Vegas several years ago, we never made it outside of the city to view the Grand Canyon or Hoover Dam. Instead, we spent the entire week touring the different casinos and attractions the strip has to offer.

We were there for about week, and I think we spent only a few hundred dollars in the casinos — but we lost every penny.

I know, I know … the house always wins.

But if you take a look at the casino sector now, you would think the house has been having a little trouble considering the way the shares have fallen off — and therein lies our investment opportunity…

Since early last year, casino stocks have drifted lower, largely tied to China’s Macau operations — which have seen tourist and gambling revenues plunge following stricter regulations. But this steep sell-off presents a great investment opportunity in one casino stock.

A key characteristic I look for in a possible investment opportunity is dividend payments. It’s a tangible form of earnings that the company hands back to shareholders.

While casino stocks such as Wynn Resorts, which cut its dividend, and MGM Resorts International, which doesn’t pay a dividend, are fetching higher earnings multiples than a stock that boosted its dividend by 30% this year, I’ll take the latter every day.

That’s why the casino stock to own is Las Vegas Sands (NYSE: LVS) — operator of several major hotels and casinos around the world. Most notable to us is likely the one in the states — the Venetian, which has been in Las Vegas since 1999. But for the company, that hotel is just a fraction of its overall operations.

Tapping Into China’s Growing Middle Class

What started out solely as a U.S. company now receives just 13% of revenues from within our borders. Today, the bulk of its revenues flow from China and Singapore, which brings us to the current struggles for the casino operator.

Gaming revenues in China’s city of Macau dropped off dramatically this year, falling by roughly 30% in May as China cracks down on tourism to the city. As a result, Las Vegas Sands shares have plummeted more than 30% over the past year.

The investment opportunity is in the fact that this downside to Macau is going to be short-lived.

China is one of the most prosperous nations in the world. Its middle class alone is greater than the entire U.S. population, and it’s growing rapidly — expected to top 600 million by 2022, up from roughly 300 million today.

As regulations lighten up, and more Chinese flock to Macau for their chance of hitting it big, the casinos in that region will once again thrive — boosting the shares of Las Vegas Sands in the process.

But this trade isn’t just about a rebound; it’s also locking in a significant yield.

Oversold and Underloved

Las Vegas Sands currently dishes out a 5% yield, more than double its average yield of 2.5% paid last year.  The company has increased its dividend by more than 30% in each of the past three years — that’s a great sign of the company’s confidence in continued growth.

Las Vegas Sands also announced an aggressive buyback program last year, which is just another form of boosting shareholder wealth.

Both of these financial developments depict a company committed to growing shareholder value, which is exactly what we want.

After the recent sell-off, the shares now trade at just 16 times earnings — down from more than 30 early last year. The company has generated three-year average revenue and income growth of 10% and 13%, respectively.

While times are tough at the moment, the stock’s price is factoring in these troubles.

Earnings for this year are already projected to fall 25%, yet the security has fallen more than 30%. Once Macau shows a signs of a return to revenue growth, the shares of Las Vegas Sands will rebound quickly.

A return to the highs of just last year would hand us a nice 70% gain — but shares are poised to soar past that in coming years.

Regards,

Chad Shoop is an investment analyst for The Sovereign Society and editor ofPure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

New Data Reveals the Truth About the U.S. Economy

My 6-year-old son has picked up an interesting hobby — following the weather.

In his kindergarten class he became famous as their weatherman, informing them every day of the extended forecast. To be honest, I think he does a better job than the guys on T.V.

The other day he posed a question about a weather forecast: What is the difference between partly cloudy and mostly sunny?

Being a life-lesson type of moment, I explained to my son that it’s merely different perceptions of the same weather forecast. Partly cloudy is a bit gloomier while mostly sunny is more upbeat … but they essentially mean the same thing.

I’m sure for a 6-year-old this is hard to grasp, and it doesn’t get easier as we get older.

The forecasts flowing from the most recent housing stats can puzzle anyone, but this perception has a reality that could unravel the sector…

Mainstream media has concluded that recent housing starts show that demand is strong, and housing is on sound footing — this is a dangerously wrong perception.

This forecast for mostly sunny skies glosses over actual results depicting something much gloomier — a storm is already brewing.

This storm is one that underlines our fragile U.S. economy, and is just further proof thatinterest rates are going to remain low for longer than expected.

Rise of the Renter

Even though housing starts plummeted 11% in May, the media is focused on the only glimpse of positive news in the housing segment — building permits jumped 12%. They completely brush off the 11% slump in actual housing starts and only briefly mention that the 12% surge in building permits is for apartment buildings — not single-family homes, which are the pulse of the U.S. economy.

The problem with having a positive outlook based on permits, starts or anything related to multi-family homes is that those actually increase in times of a weak economic environment, much like we are seeing today.

The recovery has been uneven for most Americans. While the unemployment rate has steadily dropped, so has the quality of jobs that have been created, leaving too manyworkers without the income needed to buy new homes.

Student loan debt is a big contributor to this as well. College students graduating today are the most indebted in history, causing them to push back starting families and buying homes.

This helps explain why rent prices are soaring — up 15% and 11% in places such as San Francisco and Denver.

Even though mainstream media outlets continue to give us a rosy forecast, mostly sunny with a chance of a cloud, we are actually heading into a darker time, cloudy with a chance for a storm.

These are the facts that show you the underlying health of the housing market and the U.S. economy — an economy that is clearly not prepared for a normalized rate environment.

Balanced on the Edge

Normalized rates would put an already weak housing market into a crisis — one that would be worse than the housing crisis we experienced in 2008.

That’s because higher interest rates make purchasing a home less affordable and less attractive to current homeowners.

If a current homeowner has an interest rate of 3.5% locked in today, why trade that loan in for an interest rate north of 5%, which would cost them hundreds of dollars each month? Instead, would-be buyers delay potential home purchases, leading to even higher rent prices due to rising demand.

But, without new demand for housing, the housing market would crumble. Heavily-leveraged builders and developers would go bankrupt, housing prices would plummet and millions would be forced to foreclose on their homes once again. Once again, the U.S. economy would be put into a tailspin.

While the media continues to forecast sunny skies, make sure you are paying attention to the actual data on the U.S. economy that is rolling out — we are in the midst of a storm, and interest rates may be the very thread that is holding it together.

Regards,

Chad Shoop is an investment analyst for The Sovereign Society and editor ofPure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

Your New Opportunity in the German Stock Market

It was one of the hottest stock markets in 2015. In fact, this market gained more than 25% in the first four months alone, compared to the paltry 2.1% the S&P 500 returned over the same time frame.

But, in the last two months, it has done the opposite.

Instead of being a top-performing index, it is now one of the world’s worst-performing stock indexes, falling 11%.

The panic is not grounded, however, and this sudden correction is an instant buying opportunity that you need to be ready to jump on.

I’m referring to the German stock market. It was the place to put your money at the start of this year.

Earlier this year, the European Central Bank (ECB) embarked on its own version of quantitative easing, helping to send European economies into recovery mode — one that topped analyst expectations left and right. But worries over the financial stability of a tiny European nation have sparked a sell-off in the euro zone, causing the German stock market to suffer a correction.

Now is not the time to sell. It is an excellent opportunity to buy on the dip.

Even though I believe the German stock market rebound will be one that benefits all of its stocks, it’s prudent to target a few that will likely outperform the broader index.

To do that, I am looking at Munich Re (DB: MUV2) — the world’s biggest reinsurer.

Before I get into more about Munich Re, let me first explain why the German stock market is set for a bounce back in the coming weeks.

Future of the Euro Zone

The increasing risk of default in Greece is adding to Germany’s sell-off. But, as our Investment Director Jeff Opdyke has explained before, Greece and the rest of the euro zone will reach a compromise rather than allowing Greece to leave:

The Greeks cannot abandon the euro, and Greek polls show that Greeks in large — large — numbers know this. Doing so would be disastrous. The new Greek currency would plunge relative to Europe, China and the U.S. Payments on Greek debt would spiral beyond the government’s ability to pay, so Greece would collapse into default, crushing Greek citizens who would be unable to retrieve money from a banking system in chaos … and with the money they do have would be incapable of affording goods that are suddenly expensive beyond measure…

[The Germans] cannot afford for Greece to leave the euro zone. A Grexit — as a Greek exit is called — would raise questions about the legitimacy of the euro zone and the currency. And Germany must have the euro zone in place to maintain the fuel that drives the German economic miracle. Without the euro, countries all across Europe would not be able to afford German products because the currency disparities would make German goods too pricey in local dinero.

The reality is that each of these countries desperately needs to remain in the union, if only for economic reasons. The European Union allows for the free flow of goods between its members, as well as common currency — this makes a tiny nation such as Greece suddenly relevant on a global economic scale, allowing it to easily be a trade partner and send its goods all over the world.

Without the EU, Greece or any other nation must handle its own trade deal, currency swaps and other nagging paperwork that goes into international trade. In short, Greece likely won’t end up leaving the EU.

That’s why today is the ideal time to use the temporary correction in the German stock market, to add exposure and reap big gains in the second half of the year.

Improving Yield

I, being an income-minded guy, always look to lock in higher yields in periods of temporary market corrections, especially when the correction is unfounded, and Munich Re offers just that.

The stock trades in the single digits at just nine times earnings and dishes out a 4.7% dividend yield. It’s the world’s largest listed reinsurance company. Munich Re’s revenue is tied closely to interest rates, which were nearing negative in Germany at the start of the year.

Those rates have since turned around, rising now 0.85% for the 10-year bund.

That means large insurance companies will be able to generate better returns for the cash they have to park in government debt. Nearly 90% of Munich Re’s investments are in bonds, loans or short-term fixed income. So the recent rise in bund yields is a positive for the company, even though this is over the same period of the broader stock-market correction going on in Germany.

At this point, the correction is overdone. Investors will soon turn the corner on Germany, realizing that not only is the country’s economy sound but that the euro zone will also remain intact. Munich Re is set to return more than 30% in the coming 12 months as it heads back north of highs set just two months ago.

Regards,

Chad Shoop is an investment analyst for The Sovereign Society and editor ofPure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

How to Profit From Oil Volatility

Last Friday, oil surged 4.5% after Baker Hughes announced for the 25th straight week a drop in U.S. oil rig count.

Despite the price spike, oil-related stocks failed to follow suit, which was surprising since these securities have become extremely sensitive to short-term swings in the price of oil. Instead, oil stocks, for the most part, finished the day flat.

That’s because traders have their eye on the Organization of the Petroleum Exporting Countries (OPEC) meeting this Friday.

The group is not expected to make any policy changes. In fact, the 12-member committee will likely reiterate it’s willing to let prices fall to maintain market share, which in turn will keep pressure on lower oil prices.

This can make for a challenging environment to trade in, but there is one strategy that is poised to generate profits…

For long-term investors, your play is easy — go long.

Years from now, $60 oil will be unheard of and we will be back to discussing whether $100 or $150 is the new floor for oil. But, in the short term, I expect oil will see more volatility.

With that said, I have a perfect way to play it. It’s with a rather simple options strategy on an offshore oil service company — SeaDrill (NYSE: SDRL).

The Breakout

Before I get into the instructions for the trade, I want to explain why it’s the ideal time to play SeaDrill.

So, let’s start with a chart.

Since the sharp drop in oil prices that pulled all oil-related companies sharply lower, SeaDrill has succeeded in finding support in December and in January around the $9 level.

But what I want to draw your attention to is the black lines I have added to the chart.

For the stock to be in an actual recovery, we would expect to see it make higher highs and higher lows. In the chart depicted above, SeaDrill has made higher highs, but it has also made lower lows. With increasing volatility in the price of crude oil combined with the stock’s technical patterns, we find SeaDrill poised to breakout in one direction or the other, but the problem is predicting the direction.

That’s why I want us to use a strategy that is called a straddle. This option trade essentially benefits from a stock moving up or down. You only lose money if the stock goes nowhere.

Here are the nuts and bolts of the trade.

Straddle the Fence to Win

Essentially, you are purchasing a call option and a put option at the same strike and expecting a major move. Just be sure to purchase equal amounts of call and put options.

For SeaDrill, I would grab the September 18, 2015 $12-strike put and call option for less than $3.50. At last glance, these two options combined would cost about $3.05.

My upside price target for the stock to rally to is $16.20, or $4.20 above the current price. This would represent a 37% gain in our options. On the downside, I am looking for a decline to $8.45. This would represent a 14% gain. Again, these are initial targets and based on our return at the date of expiration. But, the sooner we hit those price targets, the higher your gains would stand to be as you’re able to close out the option position before time decay has eaten heavily into the value of your options.

The beauty of this trade is that you don’t have to be right about the direction over the next three months. For our trade to be positive before expiration, we need the stock to make a new three-month high or low — either way we will be in the green.

Even though long term I am bullish on oil stocks, in the short term, volatility is going to continue to be the trade to make and trading a straddle is a great way to take advantage of that volatility.

Regards,

Chad Shoop is an investment analyst for The Sovereign Society and editor ofPure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

How Selling Options Can Increase Your Income (via https://www.youtube.com/watch?v=vWYXRZUXIfk) Want to take control of your investments and double your gains? By selling options for income, you can increase your yield without additional risk.

[chadshoop]

How Selling Options Can Increase Your Income

You’ve found a stock that you believe is destined to soar. You’ve done the research. You checked the financials, the charts, the company’s outlook for the future and the firm’s competition.

You buy the shares and …

They just go nowhere.

Do you have a stock like that in your portfolio?

For most of us, that’s an immediate yes. We understand the frustration with watching a stock go up 5% one month only to fall 3% the next. It’s a seesaw battle that makes you a spectator rather than a participant in the market.

Lucky for you, there is a way to take control and turn that paltry gain into a solid double-digit gain.

Many individual investors use stocks and/or options in their personal portfolios to implement different strategies, but only a few combine the two techniques to form one strategy.

While there are different strategies that combine both stocks and options, one of the most common is selling options on stocks you either want to own or already own.

By selling options for income, you can create an income stream that puts extra cash in your account without taking on additional risk.

Let me walk you through an example.

Generate 172% More Yield By Selling Options

A perfect example is a trade that we just closed this past Friday in Pure Income.

Below you will see a chart with three lines: blue, red and green.

The blue line indicates the stock price return — up 2% over the time frame. The red line is the price return with its dividend — a 9% gain. The green line is the gain my readers received. It is the same as the red, but with the added bonus of the option income received — an 18% gain.

The stock was People’s United Financial (Nasdaq: PBCT), a regional bank with a 4.4% dividend yield. Had I just bought the stock, I would have ended up with a 9% gain. That’s not horrible, but that is almost entirely from dividends. The stock itself was up only 2%, virtually flat for over a year. Had I been buying options on them, I would have lost a ton of capital.

Instead, I was selling options.

It started with a recommendation to sell put options on People’s United at $15. We collected 3% in income for the trade. After about three months, those shares were put to us. (In other words, we purchased the shares for $15 a piece.) Later that year, we sold a call option to add additional income. After that, we sold another call option and then another.

I have written about both put sells and covered calls strategies in the past. Just remember when selling puts, you are agreeing to either buy the shares of a particular company at a specific price (strike price). With a covered call, you are agreeing to sell the shares of the company at a specific price (strike price).

All told, we ended up collecting $1.57 in option income per share, or an 11.7% yield. Add to that the dividend income we collected after being put shares of the stock and we are walking away with nearly an 18% gain, all from income.

Produce Stronger Returns

That’s the beauty of how selling options for income can be utilized inside your existing equity portfolio.

By selling options for income, you can generate significant yields from a stock that essentially is going nowhere — in the example above, we collected 172% more yield than the dividend payments alone.

Your risk when selling options for income is never any worse than owning shares of the stock, so it’s a relatively conservative strategy that can boost your yields by 172%.

If you have an equity portfolio that you still believe in but isn’t doing much for you, start selling options for income: You’ll generate some extra income in an income-less world.

It’s easy. It’s effective. And it can enhance your portfolio dramatically.

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor ofPure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income

[chadshoop]

How You Can Profit From Market Volatility

It’s a lesson I will never forget.

I was sitting in a junior level class in college as we watched the daily chart of the S&P 500. We weren’t entranced with the market that day because we had an investment on the line, nor was it even for an investment class. This was an economics class.

And the S&P 500 happened to be more telling than the entire 4,000-word research reports we submitted ahead of the opening bell.

That’s because we weren’t watching it for the usual day-trading opportunities, we were watching it for something far more important…

The Federal Reserve.

On that day, the Fed was concluding one of its many two-day meetings.

A few weeks before the meetings were to be held, our professor gave us a simple assignment: Predict any significant changes in the Federal Open Market Committee (FOMC) statement.

I spent those weeks leading up to the release analyzing past statements, reviewing the Beige Book and pouring over statistic after statistic until I reached my conclusion — that the Fed would use an improving economy to add language indicating an increase in rates.

Clearly I was wrong.

It’s five years later and the Fed still has yet to raise rates.

But, after all my research, there was one item I didn’t analyze — Wall Street.

At the moment, it seems as though many investors are leaving Wall Street out of the equation as well, and that’s where your opportunity to profit comes — it’s time to buy volatility.

A Blind Eye to Risk

Right now, volatility is sitting at depressed levels, with the S&P 500 Volatility Index (VIX) at a near-term low of just 12.3.

The volatility index, sometimes referred to as the “fear index,” is simply a measure of what option traders are willing to pay for those options.

By nature, options are a form of insurance. Investors use them to hedge risk in the market. With the VIX trading at these depressed levels, it tells us investors are not looking to hedge their current positions — in other words, they are not expecting much action in the markets.

Yet, the Fed has a difficult balancing act on its hands already. Fed Chair Janet Yellen & Co.are attempting to keep the market appeased while maintaining low interest rates in the face of growing debt at the same time as trying to rein in a strong dollar. However, if the Fed tips its hand too far one way or the other, the market could react violently.

By seeing how the market reacts in the seconds after the Fed releases its statement, you can learn just about all you need to know on what was in the release.

For example, if the statement was dovish, the markets would rally. A hawkish statement would create a sell-off. And if the Fed is sending mixed signals, the markets would swing back and forth.

But your opportunity today doesn’t rely on what tone the Fed takes. It’s just based on the fact that the Fed moves the markets and investors haven’t been preparing for that.

Protection for Less

Take a look at this chart of the VIX for the past year (the blue dots represent Fed statements):

It may not seem like it at first glance, but almost all of the volatility in the market today is driven by the Fed. The biggest spike, which happened in October, was from the market reacting to the conclusion of quantitative easing (QE).

You can also notice the chart for the past six months remains highly active, a trend I expect to continue going forward despite the current low levels.

More importantly, I expect to see the VIX surge much higher than it did during its October spike as investors grow more anxious and cautious the closer the Fed moves to raising rates.

With the option premiums so cheap, it’s a perfect time for this stock options strategy. You could either use the lower premiums to add call options, or use it to protect your portfolio from losses by purchasing put options. For those with a higher tolerance for risk, call options on the VIX represent a short-term gamble ahead of the Fed’s two day meeting — plus, we get the first estimate for first-quarter GDP Wednesday morning as well, which should fuel volatility in the market.

The VIX is not actively traded, so instead we will use an exchange-traded fund (ETF) that tracks the VIX — the iPath S&P 500 VIX Futures (NYSEarca:VXX). But, it doesn’t track the VIX perfectly. Since it’s an ETF based on futures contracts, it continually decays in value, so this isn’t a trade you want to hold for an extended period of time.

That’s why I want you to close the position by Friday, May 1. It is an extremely short-term play betting on a spike in volatility surrounding the Fed’s meeting.

Action to take: Buy to open the VXX May 29, 2015 $21 call option (VXX150529C00021000) at the market. At last glance, it was trading for about $1.10.

I back tested these results for the past year to get an idea for your risk versus reward picture, and in two cases you stood to bank gains of 190% and 240% in just a short week. In other cases, your losses ranged from 35% to down more than 60%.

Considering investors seem to have forgotten the lesson I learned five years ago on how Wall Street reacts to the Fed, I think today is the perfect time for this stock options strategy.

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor ofPure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

The One Investment You Need to Avoid

After the conclusion of its two-day meeting Wednesday, April 29th the Fed failed to give market and rate watchers a clue as to what to expect next.

That’s because it removed any language that might indicate a date for the first interest rate hike. At this moment, rates could rise as early as June, but I don’t believe the Fed can afford to raise rates until at least October, and maybe not even until next year.

Regardless of when rates rise, the Fed has turned the first interest rate hike into an outright guessing game. This speculation and uncertainty will offer many opportunities to profit, but some investments may suffer from an initial market overreaction.

And a market overreaction is sure to come. Because the Fed is no longer giving guidance on when to expect an interest rate hike, the markets are almost guaranteed to overreact whenever the news is announced — even if it is sugarcoated with dovish comments.

The market overreaction is going to be simple: Stocks will sell off, bonds will sell off — reflecting higher Treasury yields — and the dollar will rally.

Just remember, these swings will be only temporary. I have mentioned many times before why the Fed is in a predicament and must keep rates low (such as too much debt, astrong dollar crushing the earnings of American companies, America’s too-fragile economic recovery).

But these swings will still likely happen. And when they do, they will be quick.

There’s one investment class that will feel the bulk of the pain: high-yield corporate bond exchange-traded funds (ETFs), aka junk bond funds.

Not Worth the Risk

Since the Fed introduced its zero-interest-rate policy, investors have poured money into nontraditional areas. This includes equities in the stock market, as well as high-yield bonds and other riskier investments, all in search of yield that can no longer be generated by the previously favored Treasury note.

While stocks offer capital gains, as well as a highly liquid market and increasing dividends, corporate bonds don’t carry the same benefits. Yet, they have been gobbled up as if they were risk-free income because of other opportunities to collect any sort of stable income.

The big concern is that investors are adding exposure to this junk-grade debt through ETFs. At first glance, this investment vehicle offers many attractions to individual investors. It’s a highly liquid way to benefit from the higher corporate bond yields versus Treasurys.

But looks may be deceiving.

The liquidity is present at the moment because so many investors are buying these bonds and ETFs. If this buying slows, or better yet, reverses as investors overreact to the Fed raising rates, it will cause these ETFs to sell their bond holdings regardless of price — which will result in drastically lower prices, negatively impacting overall returns even if you plan to hold the ETF for years to come.

Already in 2015, inflows into corporate debt are up more than 300% compared to last year — and ETFs have accounted for 45% of those inflows, compared to just 7% a year ago.

That’s a cause for concern.

Especially considering the new regulations imposed after the 2008 financial crisis, banks in the U.S. are now no longer encouraged to hold riskier debt such as high-yield bonds. Historically, banks have been able to step in during sell-offs to improve liquidity.

They won’t be there next time.

Protect Your Investment

High-yield corporate debt is even on the new bond king Jeff Gundlach’s radar for what will be the tipping point for the next financial crisis — and it makes a lot of sense.

Corporate bonds are one asset that benefit the most from the zero-interest-rate policy. Sure, we’ve seen money flow into equities, but corporate debt is a direct relation to government debt for those who are seeking higher yields.

When the Fed decides to raise rates, even if it is gradual, it will likely cause an overreaction in those high-yield corporate debt holdings. The mentality behind the move is that a normalized interest-rate policy will cause U.S. Treasurys to generate greater income. As a result, investors will flood out of high-yield corporate debt in favor of less risky investments.

At this point, it’s about who you trust.

The Fed is trapped in a position where the market is practically begging for an interest rate hike at long last to improve yields versus a situation where a rate hike could destroy America’s financial position completely. Given that the Fed has offered virtually no guidance on the size of an interest rate hike or when to expect one, any move by the Fed could spell trouble for junk bond ETFs.

For now, make sure you don’t have any exposure to these high-yield corporate ETFs either in your 401(k) or personal investment account.

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor ofPure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

The Market Needs to Quit Yellen

My air-conditioning unit went out — just in time for the in-laws to arrive for a visit. If you live in Florida, then you know that last week was not an ideal time to lose AC.

I immediately jumped to the worst-case scenario: I have to buy a new AC unit.

Not an inexpensive proposition, as you know. But once I accepted this possible reality, I was able to move forward to diagnose and attempt to fix the problem without losing much sleep.

Yet, after speaking to a relative who is an expert in AC units, he explained it was probably just a short in a wire. That turned out to be the case, and I fixed it without having to pay a dime.

Since I accepted the possible outcome of the worst-case scenario — that I would have to fork over thousands of dollars to replace my AC — it made any other outcome that much sweeter.

Which brings me to the Federal Reserve today…

What happens if the Fed raises interest rates? The worst case scenario is the recent strength in the U.S. dollar. That’s because as rates begin to rise in America, it is against a backdrop of falling rates around the world. As a result, our fundamentally weak dollar is suddenly in high demand — which is what we have seen in recent weeks even though the Fed hasn’t raised rates or even given a time frame yet.

And that’s where the opportunity comes in.

The markets are acting as if this worst-case scenario is a sure thing — hint: It’s not.

They are buying a brand new AC unit (worst-case scenario) but they haven’t done their due diligence into the dilemma at hand (just a temporary outage).

In the end, dollar bulls will realize there was no need to prepare for the worst-case scenario. Luckily for you, there is no need to wait for that exodus to take place. Now is the time to short the dollar.

Rate Hike Coming … in 2016 or Beyond

It is important to note that the excuse for the strong dollar today is due to expectations for the term “patience” to fall from the statement. That would signal that a rate hike is possible as early as the June 17 Fed meeting. If the Fed keeps the language, expectations will be pushed back to September, and we would see immediate-term weakness in the dollar.

This heightened expectation for a Fed rate hike comes as 24 nations already cut rates this year, with even more expected to follow suit — leaving the dollar as the only one left showing temporary strength.

It’s this dynamic that has caused the dollar to soar to its highest level against a basket of other currencies in more than a decade. The dollar has rallied more than 20% in the past year alone, a substantial move for any currency.

But, if you are following the Fed closely, you know that even if the Fed does indeed drop that “patience” from its statement, it is still leaning towards a later rate hike than June — possibly 2016 or beyond. You can’t forget that Janet Yellen is struggling to keep America from falling apart under more than $18.1 trillion in debt and higher interest rates certainly aren’t going to help.

A Dark Cloud for the U.S. Economy

The truth is that a strong dollar is bad, very bad, for the economic recovery and our unemployment rate.

With a strong dollar, our exports become more expensive — as fewer goods are being sold it leaves less jobs to be had here at home, and in turn, lowers our GDP growth.

It’s also coming at a time as commodity prices plummet. And it’s not just oil prices that are falling. In the past year, natural gas, gold, platinum, silver, copper, corn and wheat have dropped double-digit percentage points, leading to a decline in consumer and producer prices. Don’t forget that a higher dollar means our import prices are falling as well.

This downward pressure on inflation is something the Fed doesn’t want to see. The Fed doesn’t want to chance the possibility of propelling our economy into deflation by raising rates.

These two worries will be enough for the Fed to delay rate hikes. And with any potential rate hikes being pushed farther and farther into the future, the dollar is going to pull back.

Don’t Front Run the Fed, Front Run the Markets Instead

That’s why today is an ideal moment in time to short the dollar.

The dollar bulls are practically in euphoria. Everyone believes the dollar will go higher. Everyone knows the Fed will raise rates in June. And everyone believes this week will make higher rates that much more of a reality.

The only problem is that higher rates aren’t the reality.

The reality is that the Fed hasn’t raised rates. In fact, the Fed hasn’t even dropped “patience” from its language yet. Instead, Janet Yellen & Co. continue to preach an easy money policy will be around for longer than normal.

None of this has stopped markets from pricing in the expected rate hikes.

In short, markets are trying to front run the Fed — but it won’t happen. Instead, we have the opportunity to front run the markets.

Once investors come to the realization that their worst-case scenario (the Fed raising rates this summer and bolstering the dollar) isn’t coming to fruition for some time, there will be instant selling pressure in the fundamentally weak dollar.

Go ahead and grab the PowerShares DB U.S. Dollar Index Bearish ETF (NYSE Arca:UDN) before the market hits the sell button.

Dollar strength won’t last and this Wednesday’s FOMC meeting could be the tipping point.

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor of Pure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

Investing in Utility Stocks the Right Way

Over the weekend I read through Warren Buffett’s Annual Letter to shareholders, an item every investor should read. While it was extremely insightful, there was a bit in it that pertained to the topic I wanted to share with you today.

Warren Buffett has zeroed in on a little niche in the market that he believes has “recession-proof earnings.”

I like to consider it a stock market guarantee…

Unfortunately, there is no such thing as a true guarantee in the stock market. But there are a few little-known and widely overlooked stocks that exist today that are the next best thing…if not guaranteed, they are at least recession-proof stocks.

I would love to say that this group is an entire sector or even specific market, but the truth is there are only a select few stocks that present this opportunity today.

Utility stocks used to fill this small niche — once known as safe, stable income-generating stocks.

But that definition has morphed today.

Now utility stocks, otherwise known as power generation companies, can have volatile earnings and be anything but stable and safe.

That’s because the market has been deregulating over the past decade or so. It’s this unregulated utility market that almost all utility stocks have some exposure to, and there are even some that are completely composed of deregulated assets.

Since the unregulated power generation commands market prices, earnings and revenues tend to swing violently.

That’s not what I’d consider the next best thing to a guarantee.

Luckily, there are a few stocks that still operate in the regulated market, and I found one that is practically 100% regulated — Wisconsin Energy Corp. (NYSE: WEC).

Recession-Resistant Earnings

A regulated power market essentially means that a utility company’s costs are covered. It’s known as a “cost plus” model. Wisconsin Energy can adjust rates to cover its cost, plus an additional amount to generate a reasonable return on its assets.

This isn’t quite an assured profit because management can ruin a company numerous ways, but this is the next best thing.

As the Oracle of Omaha himself proclaims in his annual letter, utilities offer “recession-resistant earnings.” That’s because no matter what economic situation we are in — depression, recession or boom times — we all need power. Barring a management-led mishap, regulated power companies are assured to make a profit.

The regulatory component here is extremely important. The power market is forever changing. With solar, fuel cell and other new technologies coming online, there will have to be some adjustments in the power markets. But I don’t think it will ever fully abate from a regulated market.

The ability to generate additional power on demand to cool your house, refrigerate food, cook family meals, or even just having lighting in your home is not something we want to be on intermittent power.

There will ultimately be some consolidation in the industry through takeovers and mergers; maybe Wisconsin Energy is one of them. It was this time last year that Warren Buffett indicated he was looking to add additional utility assets, and Wisconsin Energy fit his requirements — 13% return on equity, excellent management team and practically 100% regulated power.

But I wouldn’t recommend Wisconsin Energy just on a possible acquisition though; there are plenty of reasons to like the company as is.

Shrinking Shares and Rising Dividends

With the stable and consistent cash flows Wisconsin Energy generates from its regulated business, the company projects to grow earnings per share between 5% and 7% and utilize a dividend payout ratio of 65% to 70% of earnings.

As you can see in the chart below, the company also has increased its dividends and reduced its shares outstanding over the past decade.

Cutting the amount of shares outstanding boosts the company’s bottom line, spreading income across fewer shares. This means increasing dividends, which puts more cash in your pocket.

These are two of the best uses of cash a company can choose. About the only other options are to invest in other companies — and Wisconsin Energy does that as well.

In November, it completed the acquisition of Integrys, a utility operator with $5.6 billion in revenues, to create a more diverse Midwest electric and natural gas power company.

All told, Wisconsin Energy is committed to bolstering shareholder wealth while growing its business. Picking up shares of Wisconsin Energy today is a chance to claim a growing 3.3% dividend yield and capture future profits. In a market where consistent, high-yield income is hard to locate, Wisconsin Energy presents an excellent opportunity to add steady income and growth to your portfolio.

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor of Pure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

Put Options: The Smart Way to Buy

The ability to name your own price for an item you want is a remarkable way to shop. It gives you a sense of control and guarantees you are not overpaying. It’s worked for travel specialist Priceline for years and insurance company Progressive is taking a stab at it as a way of getting your insurance premiums under control.

What’s even better than paying the price you want is getting paid while you wait for the price to fall to your target.

Honestly, it sounds too good to be true, but it’s not.

It’s a strategy called selling put options. Very few know it exists in the market today, and even fewer take advantage of it.

But I believe selling put options will change the way you look at the market. Instead of being forced to pay a high price today or wait and hope it falls to a price you want, you can get paid instantly by simply agreeing to buy it at a price you name.

It’s that simple.

To explain how it works, let’s consider a market everyone is familiar with — the housing market.

Get Paid to Wait

To be clear, this is a strategy to implement as a way to purchase stocks and collect income, but since real estate trades similarly to the stock market, it’s a clear analogy and something everyone can relate to.

Before you bought your current home, there was a price you were willing to pay to obtain it. Let’s keep it simple and say the home was worth $250,000, but you were willing to pay only $200,000.

Instead of checking every day to see where the price of the home is at and if you wanted to make an offer, you could set up a contract — in this case an option contract.

With that contract, you would agree to buy the house for $200,000 if the market value of the home fell to that price or lower during a set amount of months — let’s say four. By agreeing to buy this home for $200,000 over the next four months if the valuation falls, the owner would pay you upfront cash, maybe $6,000, or 3% of the full value.

That cash is yours whether or not you end up buying the home at the agreed upon price of $200,000 because the home owner is using this contract to protect himself from further losses.

In four months, that contract expires.

If the price of the home is still above $200,000, nothing changes. You keep the $6,000 you were paid and the contract is no longer valid. That’s where the beauty of agreements like this come to play. You still don’t have the house you want, but you can start the process all over again. You can sign another agreement and collect more instant cash to put in your pocket, all while agreeing to buy a home you already want to own for the price you want to pay.

Sounds fantastic… but there is a catch.

If the market value of the home falls to $150,000 over those four months, you still have to fork over $200,000 for the house, leaving you with negative equity — but you keep the $6,000 regardless of the outcome, which helps to offset any loss.

Therefore, your risk is no different than if you owned the home, as the value could fall below the price you were already willing to pay.

Generate Regular Income

It would be amazing if this scenario played out for everything we wanted, such as TVs, cars, clothes and food.

But, this exact scenario is available in the stock market today. It’s a concept known as selling put options — and it’s one I have perfected in Pure Income.

I use this strategy to generate significant gains, roughly 15% to 25% consistently for those trading in a margin account, and 3% to 5% for those using cash.

This past Friday, there were two option contracts that expired in my portfolio.

Even though we were unable to buy shares at the price we named, we did keep the cash we collected, earning a 19% and 21% yield based on a margin account in just four months.

You can see how repeating these trades three times this year would net you about a 60% gain on an annualized basis — not a bad return for agreeing to buy a stock you want at the price you named.

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor of Pure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

Finding Income in the Nineteenth Best Country to Retire

Three world leaders walk into a bar… The first leader proudly states: “My nation has one of the narrowest gaps in income inequality.”

Another says: “No one can compete with my nation when it comes to maintaining full employment.”

And the last one speaks up and boastingly says: “Well, my country turns retirees into the government’s ATM machines.”

Not a bad three liner, but the real punchline is yet to come…

According to Natixis, a Paris-based investment company, that’s exactly how a conversation would go between three particular world leaders based on its recently released Global Retirement Index.

If you didn’t realize it, the third leader above was U.S. President Barack Obama boasting about the taxes he generates off of retirees.

While the other two leaders who boast minimal income inequality and low unemployment are Prime Minister Miro Cerar of Slovenia and monarch Emir Sheikh Tamim bin Hamad Al-Thani of Qatar, respectively.

And that’s still not the punchline.

The real punchline in the joke is that the U.S. actually has the same overall rating for standard of living in retirement years as Slovenia and Qatar. That’s right, it’s a tie.

I know, this shouldn’t be made into a laughing matter. But when our government gets it so ass-backwards that we end up being the 19th best nation to retire in and are tied with a small nation off the Adriatic Sea, and a tiny, oil-rich, Muslim nation with about as many residents as New Mexico, laughing can help ease the reality of our dismal retirement years to come.

With that said, it’s important for you to take retirement into your own hands to find prosperity.

Can It Be Done? You Bet

The truth is every one of us should already be doing this — make sure our retirement years are much less dependent on the government, and much more dependent on our own responsibility.

Many of you may be saying that’s nearly impossible to do in this day and age with increased costs.

But it can be done. Just look at the janitor who recently passed away after accumulatingmore than $8 million in personal wealth.

If you didn’t catch the story this past week, Ronald Read was a frugal man, who didn’t live an elaborate, greedy lifestyle. Instead, he lived a regular life, was always careful with his expenses and worked long after he could have retired extremely comfortably. Yet, he managed to accumulate millions to live off of before he decided to retire.

How’d he do it?

It was rather simple to be honest. He started saving and investing early. More specifically, he put his money to work in stable, blue-chip dividend paying stocks.

And he did his research, only buying stocks of the companies he knew.

These have been the bread and butter of middle-class wealth creation for decades — reinvesting dividends, holding blue-chip stocks, and buying what you know. His holdings included the likes of AT&T, Bank of America, GE and Deere … a couple of which frequent my Pure Income portfolio — which brings me to my point.

The simple strategies utilized by a janitor to amass $8 million in wealth, are the same strategies available today — only we have more tools to help you accumulate wealth quicker and in a more stable fashion.

Steady, Fast-Growing Retirement

Granted, Ronald Read had fortune on his side. He was able to save enough cash before moving into the stock market, and just happened to start investing right before the tech boom.

Today is a little different. Markets are trading at their highest prices ever, and amidst extreme volatility and the plummeting price of oil-related stocks, things aren’t looking so pretty.

Thankfully, we have a tool today that is widely used to offset volatility, and stabilize a portfolio.

It’s the exact reason I utilize a simple options strategy in Pure Income.

I focus on the same type of stocks the janitor did — General Electric, Microsoft, BP, CSX, Coke and other stable, blue-chip, dividend-paying stocks.

But by utilizing my options strategy, I am able to generate an even greater yield than the stocks currently pay out. Month after month, I can generate stable income to live off of in retirement years, or to create steady growth to build a retirement account.

Either way, there are plenty of ways for you to amass your millions this President’s Day — just look at the janitor who created $8 million in wealth by buying what he knew and collecting dividends.

And the next time you are wondering how to plan for retirement, just remember the conversations our president would have at the bar with other world leaders — don’t be the butt of his joke.

Regards, Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor of Pure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

S&P 500 Ends 18-Month Streak, Signals Volatility in U.S. Markets

January marked a vital moment for the markets. And with all the major events taking place, I bet it slipped your attention.

It wasn’t the Swiss unpegging the franc. It wasn’t even that the European Central Bank (ECB) embarked on its own version of quantitative easing (QE) or Apple’s (Nasdaq: AAPL) historic quarter of out-of-this-world profits.

However, this moment will prove to be the most important takeaway from January. And by identifying it today, you can position yourself for the troubling times ahead.

The markets thrive on momentum in either direction, pushing shares higher or sending them lower. It’s the classic battle of bulls and bears on Wall Street.

Since 2009, the bulls have won this fight hands down, but January proves that the bears are making their presence felt. After 18 consecutive months of setting new highs, the market finally got tired and closed January without the S&P 500 reaching any new record highs. Even the wild ride in October managed to close at new highs at the end of the month.

While January has been chalk full of historic events, the only one worth your attention will end up being the S&P 500’s failure to crest a new high.

Let me explain…

An End to the Streak

After the S&P 500 reached a record close in 2007, the markets began a steady meltdown that fed into the 2008 crash. In fact, the markets failed to reach a new high again until March 2013.

Then, just a few months later, the market failed to set a high in June 2013 — likely a sign that momentum was waning and investors were quick to recall the pain of 2008 when the markets topped out just months after reaching all-time highs.

But then the S&P 500 was back to setting new highs in July of 2013 as investors’ worries faded — up until last month.

By failing to close at a new high, it marks an end to a historic pace for the S&P 500 — 18 consecutive months with a new high.

What does this mean going forward? Expect volatility.

The battle between the bulls and bears of the market is just getting started. Look for them to cause violent swings, which will happen more frequently and be larger than previous years.

The bulls and bears will pull and tug on each piece of information as it comes available. Whether it’s preliminary GDP data or a statement from the Fed … there will be volatility. Don’t forget that we’re also wading through ongoing sanctions against Russia, economic growth concerns in Europe and low oil prices that are disrupting the market.

Volatility can create difficult trading times because it’s nearly impossible to time these violent market swings. But there are steps you can take to stabilize these volatile times.

Lower Volatility Exposure for Strong Potential Gains

One easy way is to hold stocks that are less volatile compared to the rest of the market. These securities tend to move less when markets get volatile, but they still benefit from the overall rally.

Fortunately, there is an exchange-traded fund (ETF) for that — PowerShares S&P 500 Low Volatility Portfolio (SPLV).

This ETF tracks low-volatility stocks in the S&P 500 and does a good job of reducing volatility.

Take the wild market ride of October, for example. In the middle of October, the S&P 500 Volatility Index (VIX) had spiked more than 100% in just two weeks. Naturally, investors were panicking.

Had you bought this ETF on September 1, you would have been sitting with a 2.7% loss at the bottom in October, while the S&P 500 suffered a 7.3% loss.

At the end of October, SPLV was up 4% and the S&P 500 was up a mere 0.4%.

Clearly this low-volatility ETF works in times of spiking volatility.

Not only do you get a bit of a cushion as we approach volatile times ahead, but you also pick up a modest 2.2% dividend yield, which currently tops the average 1.98% that the S&P 500 yields and the 1.7% a 10-year Treasury yields at the moment.

Let me say that I don’t believe the bottom is falling out on stocks today. But January’s shortcoming signals volatile times ahead.

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor of Pure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

Why Crude Oil Prices Are Guaranteed to Surge Higher

Crude oil prices are creating havoc around the globe. The low price has crushed American shale-oil producers and a number of countries, such as Russia, are suffering as they struggle to make up for the critical lost income.

Traders have proven to be little help. On one hand, you have traders who believe oil will continue to plummet to $20 a barrel. On the other, you have those of us who believe oil must climb to $80 a barrel before it can see any stability.

So who’s right? It’s the million-dollar question at the moment.

And the events that took place last week answered that for everyone…

Last week we had a slew of earnings announcements from several major oil companies — Chevron, Royal Dutch Shell, Exxon, BP and Hess to name a few. In each announcement, billions of dollars were slashed out of spending budgets. Many of these oil companies are basing their cuts on oil settling above $50 a barrel. However, if oil settles lower, we will see further cuts and closures.

Oil reacted, rallying 8% in one day. In fact, black gold climbed more than 20% in the previous four trading days. This came with a bit of volatility, as oil dropped 7% the following day and rebounded by 5% the next.

But the more important factor here is that the markets and oil traders are finally starting to realize that the quickest way for crude oil prices to rise is to lower the price of oil.

This is exactly what Jeff Opdyke, our Investment Director, and I have been saying.  Low oil prices will lead to lower production and ultimately higher oil prices.

In fact, OPEC today adjusted its 2015 outlook according to what is playing out — production declining by 400,000 barrels a day and demand rising slightly faster than anticipated on lower fuel prices.

With crude oil prices sitting just above $50 today, oil is a buy right now … and I have just the stock.

Shrinking Supply

Oil is volatile today for one reason only — an excess of supply. But that reason’s about to evaporate.

Current oil supply sits just above $94 million barrels, compared to current demand of 93.42 million barrels. It’s those 890,000 barrels of oil per day that keep the price of oil lower. While it’s minimal compared to the 90-plus million barrels a day that are pumped out, it’s enough to send prices lower.

As we see the billions in cuts take place on the supply side, production will shrink, and ultimately end up with supply below demand. That means the price of oil will rise, as traders showed us last week during its buying frenzy as major players in oil cut spending.

What’s more, oil demand is not falling as all the Wall Street talking heads would have you believe. Maybe it’s not projected to grow at a rapid pace, but the Energy Information Administration sees oil demand climbing to $94.4 million barrels by the end of the year.  The squeeze that’s coming between supply and demand will cause the price of oil to skyrocket.

In the meantime, expect oil to remain volatile and trade on each news item that comes out — such as the build-up in oil inventories that was announced last Wednesday, which sent the price of oil falling 8%.

But this is why we have been telling you to ignore the noise like pundits calling for $20 oiland a Saudi Prince saying oil will never hit $100 a barrel.

Oil will hit $100 a barrel in less than two years.

The events that took place are the groundwork for the rally, which is why now is an ideal time to add exposure to this volatile sector.

A Strong Dividend Play in Oil

The downside from here is minimal. Oil might make one more leg lower as oil hedges these companies have in place will help maintain elevated production levels into the second half of the year.

The reality of billions in spending cuts, tens of thousands of oil wells already shuttered and hundreds of thousands more to be closed if oil doesn’t stabilize and begin to rebound, is that we end up with higher oil prices — much higher.

To protect against some of the volatility, I would own a strong dividend payer such as BP (NYSE: BP).

After getting beat down from the oil price rout, shares of BP look extremely attractive.

The stock yields a solid 5.8%, which the company made its “first priority” to maintain after slashing billions in spending. It trades at just 14 times earnings and recently was awarded a significantly lower penalty relating to the gulf oil spill.

But on top of the low valuation and strong income it can generate, I really like BP because of its upside potential. As oil rallies, I believe the shares of BP can rally above $50 again, for a conservative estimate.

That implies a 20% increase from here, and a total gain of 26% including the dividend.

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor of Pure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

The Treasury Tradeoff: How to Hedge Against the Fed

U.S. 30-year Treasury yield recently hitall-time lows. The yield on 10-year Treasurys has fallen more than 10% in the past year.

Yet, despite pitiful yield and poor performance, demand for these trades continues. The obvious question is: “Why?”

You could call it a safe-haven trade. With all the market volatility these days, it’s nice to know you can lock in a certain yield for a guaranteed period of time.

Or, you could take it for what it is really worth — low interest rates are here to stay, and people are finally starting to figure it out.

Jeff Opdyke and I have been telling you for months that Janet Yellen and Co. at the Federal Reserve simply cannot raise interest rates by any significant amount.

Finally, it seems as if Wall Street is beginning to catch on.

Despite the fact that these Treasury yields are at glaringly low levels, investors are still plugging into them.

Of course, if you believed that a rate rise was coming, that wouldn’t make any sense — you’d be locking your yield in at a lower rate than you would get otherwise.

So, why are they doing it?

Simply put, the investment world is beginning to believe that nothing worthwhile is coming from the Fed.

The Federal Reserve is set to issue a press release Wednesday. If the Fed were to hint at an earlier rate rise or signal for higher rates than expected, yields on Treasurys would spike — leaving all the buyers today with significant losses.

Sure, if there was a reasonable expectation that the Fed would increase interest rates by any significant degree, it would be worth waiting before plugging into Treasurys.

With 30-year yields at all-time lows, and 10-year yields sub-2%, the only reason to get into these now would be if you weren’t expecting anything more than a marginal increase in rates.

And that’s exactly what’s happening.

There’s simply no point in waiting any longer to get into these trades, and people have figured that out. Now, Wall Street is singing to our tune: Low rates are here to stay.

That’s what’s going on, and here’s how you can play it…

Follow the Smart Money

Throughout the second half of last year, I was cautious about adding interest-rate sensitive investments. They are vulnerable to moves by the Fed, and while I expected the Fed to keep rates low, my worries were over knee-jerk reactions from Wall Street.

That’s why back in October I told you to stay away from high-yield stocks. Since then, many stocks in the high-yield sector have tanked more than 10%, with the broader ETFs down slightly.

But today, I think it’s a good time to get back in.

With Wall Street coming to grips over a lower interest rate period for an extended time, it’s time to lock in high yields from their go-to dividend sector: REITs. REITs have been the golden child in the era of low interest rates.

As I wrote in a recent article, U.S. REITs have risen by more than 300% since the market bottomed in 2009. But they have taken a breather lately, partly from expectation of rising rates.

But now that Wall Street has figured out not to expect much from the interest-rate hike, I believe this is our opportunity to lock in a significant yield before all of the smart money pours in.

Play to the Market’s Response

One of my favorites in the sector is American Capital Agency (Nasdaq: AGNC).

The company invests in residential mortgages for which the principal and interest are guaranteed by either a U.S. government sponsored business or by a U.S. government agency. This significantly reduces the default risk of its loans, but the company still utilizes hedges to take advantage of market swings in interest rate spreads.

While the business model looks solid, it’s the yield that has put American Capital Agency high on my radar.

It is currently dishing out a 12% yield in the form of monthly dividend checks. So each month, you would receive a 1% yield without the price of the shares moving at all.

Considering we are entering a period of low rates for a long time, that’s not a bad deal.

You need a dividend payment of this size to help balance out your portfolio from the volatility in the market.

Not to mention, the REIT will see strong inflows from investors that will send its price even higher as the reality of low rates sinks in.

Either way, if you’re going to go with an investment that is backed by the U.S. government, why not lock in a substantial yield like American Capital with 12%, rather than settle for the sub-2% yields our government’s Treasurys are fetching today?

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor of Pure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

Finding Dividend Paying Stocks During Market Volatility

Since 2009, the U.S. has experienced what seems to be a never-ending, raging bull market. In nearly six years, the S&P 500 Index has soared 154%.

Despite the occasional setback, the S&P 500 continues to make new highs. In short, buying on any of the previous dips would have boosted your overall portfolio every time.

But, we are entering volatile times.

That means sharper, more frequent swings in the market. Down 5% one day, up 3% the next … this will be the new normal. It will be enough to spook anyone from jumping back in.

However, if you are willing to test the waters, there is only one particular type of stock to pay attention to…

In the coming volatile times, it will be more challenging to pick the winners and losers. They will change from one week to the next based on the latest news that has the financial pundits and media a buzz. But that doesn’t mean you can’t add some stability to your portfolio.

To do that, you want to focus on strong, dividend paying stocks when the market dips.

This strategy will not only give you capital appreciation when those stocks rebound thanks to the low-rate environment we will be in for several years, but, perhaps more importantly, you are locking in a higher yield by buying these stocks on the dips.

Let me explain.

Lock in a Higher Yield With Dividend Paying Stocks

When the market becomes volatile, it is not the time to join the panic. As the saying goes: “Cooler heads prevail.” Instead, it’s better to use this as a time to grab great dividend-paying companies on the cheap.

As stocks fall, you’re not only able to grab great bargain stocks, but you can also lock in a higher yield.

It’s important to remember that you’re not settling for any old company that occasionally tosses out a pittance of a dividend to shareholders. The trick, however, is to spot companies that have a long history of increasing or maintaining their current dividend payments through tough economic spots. For example, a company that managed to maintain or raise its dividend through the Great Recession (2008 to 2009) is a good indication of strength.

If a company was able to pay out a dividend during the Great Recession then it most likely can do it again through present day global turmoil.

It’s a testament to their overall financial operations as well as their commitment to returning capital to shareholders in troubling times.

That’s why it’s important to find these companies on days when the market insists on acting like a skittish colt. This allows you to take a temporary situation and not only participate in a stock market rebound, but also lock in a significantly higher yield than the company had just a few months ago.

Past Performance is Key

As I said, the trick to finding the right companies to add on the dips is in its history of returning cash to shareholders. Let’s look at a perfect example:

Shares of AFLAC (NYSE: AFL), the supplemental insurance company with the talking duck commercials, have fallen 8.5% since July of last year, and dipped more than 6% since the start of 2015.

But, as share prices fall, dividend yields rise.

And if you were waiting for a time to buy AFLAC, now is perfect.

Its current yield, roughly 2.7%, is sitting 17% higher than it was in July and 8% higher than it was just a few weeks ago.

You can compare that modest 2.7% yield AFLAC currently pays to what your greenback fetches elsewhere — 0.24% in a one-year U.S. Treasury, 1.15% in a one-year bank CD and an average yield less than 2% for the S&P 500.

That makes placing your money with one of the industry’s leading insurance giants an easy way to lock in gains that are significantly better than what else you can get for your greenback.

And it passes my history test. Take a look at what AFLAC has returned to shareholders since 1990:

Clearly AFLAC is committed to increasing our wealth, even in difficult times such as 2008 and 2009. And while share buybacks may not act as an instant return like a dividend check, it reduces the amount of shares outstanding, which boosts the bottom line of the company.

On top of these wealth increasing effects the company has maintained, we are also in for capital appreciation. AFLAC has grown earnings by more than 8% on average for the last three years, while its stock is trading at just 9 .5 times earnings, a ridiculously cheap valuation.

AFLAC’s historical earnings multiple is running at an average of 16 times earnings.

If investors simply gravitate towards this historical average, we are looking at a 70% increase from current prices.

The shares recently fell more than 12% in just a few months, only to recover nearly all of those lost gains in the following couple of months. Today the stock has fallen down some and is trading at $58. But I believe we are about to see shares bounce again, and I don’t think they will stop until they hit a price north of $70.

So don’t just buy the dip.

Make sure you use the dip to lock in significant yield for your portfolio.

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor of Pure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.

[chadshoop]

How to Play the Stock Market in 2015

If you’ve never experienced turbulence on an airplane, I can tell you, you’re not missing much.

It rattles your insides, makes you feel like you’re going to fall out of the sky, shakes the interior of the plane such that you think the whole thing is going to shatter.

Truth be told, I’d never really experienced what many would call a turbulent flight until last year. That white-knuckle, stomach-dropping moment was only helped by the Captain’s warning a few minutes earlier — but at least I knew it was coming.

Turbulence — it’s what many investment strategists are calling for in 2015.

Simply put, the crosscurrents and trends that are overwhelming the outlook for 2015 are sure to act as air pockets for stocks this year.

But I have uncovered a great way for you to profit from the coming volatility.

Basically, you have three legitimate options to add some stability to your portfolio during the turbulent times ahead: You can increase your cash holdings, buy more gold and/or pile into Treasurys.

Each has their own benefit, with gold being the only real insurance policy to an all-out collapse.

But there is another opportunity to make some solid profits if you understand that those three safe-haven options will be bided up in 2015: You can buy an option on U.S. Treasurys.

In Times of Turbulence, Treasurys Outperform

U.S. Treasurys have always been a safe-haven asset. Even though the yield is minimal compared to what you can find in the stock market, your principal is considered as good as cash if you hold the Treasury until maturity, because it is backed by the U.S. government (but I won’t put much emphasis on that). In Treasurys, you escape the volatility and uncertainty of the stock market.

Truth is, I would never recommend U.S. Treasurys as a holding instrument. It is currently yielding less than 2%, and that’s not looking to change dramatically anytime soon. Plus, I don’t put much faith in our government honoring its debts down the road.

But, other investors and traders love to pile into Treasurys, especially when there is uncertainty in the market — and 2015 is set to hold plenty of uncertainty. Traders are anxious about what the Fed will do, when Russia’s sanctions will go away, the future of oil prices … the list goes on.

And even though Treasurys are thought of as a long-term retirement holding, they are extremely liquid and react in real time to market movements. Take a look at this chart below:

It’s almost an identical replica of an inverse S&P 500 Index, except it moves up along with the S&P 500 in some instances. The key thing to focus on is that in periods of a downturn in the stock market, the Treasury exchange-traded fund (ETF) rallies.

Profit From Uncertainty

As we get into the second quarter of 2015, I believe we will see Treasurys rally from more than just a downturn in the U.S. stock market. We will see worries about the developing crosscurrents cause investors to pour into Treasurys even if stocks are performing well.

But, as I said before, I don’t want you to go out and buy a Treasury, or even the ETF.

Instead, we are going to make a leveraged bet that volatility and turbulence will be present in the first half of the year.

The trade is simple: buy the iShares 20+ Year Treasury Bond ETF (ARCA: TLT) June 2015 $126 call option (TLT150619C00126000) at the market.

If Treasurys perform as I expect they will over the first half of the year, TLT will add about 30% in the coming six months — leaving this option with a 300% to 500% gain.

The option is currently trading around $7. If TLT increases 30%  in the next six months, the intrinsic value of the option would be approximately $43.90, or a 527% return.

Not a bad return as we head into the clouds and ride out these turbulent times.

Regards,

Chad Shoop

Chad Shoop is an investment analyst for The Sovereign Society and editor of Pure Income, a newsletter tapping into the best off-the-radar opportunities for safe, steady monthly income.