Global Market Comments
January 17, 2013
Fiat Lux
Featured Trades:
(APRIL 19 CHICAGO STRATEGY LUNCHEON)
(MLP?S ARE ON FIRE),
(CVRR), (SXCP), (AMJ), (EEP), (KMP), (TLP)
(ALL I WANT TO DO IS RETIRE)
Master Limited Partnerships have been on fire since the beginning of the year. Once the deal on the ?Fiscal Cliff? was done, and these instruments? special tax treatment protected, it was off to the races. These unique and versatile instruments combine the tax benefits of a limited partnership with the liquidity of publicly traded securities.
The explosion in demand has created a new issue boom. SunCoke Energy Partners (SXCP) makes coking coal used in the steel production process, came to market this week boasting an 8.25% yield. Then, CVR Refining (CVRR), which specializes in petroleum refining in Texas and Oklahoma, upped the ante with an eye popping 18.8% yield. These things can?t be that high risk!
Enbridge Energy Partners (EEP) is run by some of my former colleagues at Morgan Stanley and offers a 7% yield. Kinder Morgan Energy (KMP) posts a healthy 5.8% yield, while Trans Mountain (TLP) ups the ante with an 8% return. Linn Energy goes all the way up to a healthy 6.3% yield.
Why the enticing cash flow? The problem is that these partnerships suffer from their guilt by association with Texas Tea, which is notorious for its volatility. Although they have no direct exposure to the price of oil, investors tend to incorrectly classify them as energy stocks and dump them whenever oil falls. The great thing about these high yields is that you get paid to wait until crude makes a comeback, which it will always do, as long as there is a China. Not a bad game to play in a zero return world.
To qualify for MLP status, a partnership must generate at least 90 percent of its income from what the Internal Revenue Service deems ?qualifying? sources. For many MLPs, these include all manner of activities related to the production, processing or transportation of oil, natural gas and coal.
Energy MLPs are defined as owning energy infrastructure in the U.S., including pipelines, natural gas, gasoline, oil, storage, terminals, and processing plants. These are all special tax subsidies put into place when oil companies suffered from extremely low oil prices. Once on the books, they lived on forever.
In practice, MLPs pay their investors through quarterly distributions. Typically, the higher the quarterly distributions paid to LP unit holders, the higher the management fee paid to the general partner. The idea is that the GP has an incentive to try to boost distributions through pursuing income-accretive acquisitions and organic growth projects.
Because MLPs are partnerships, they avoid the corporate income tax, on both a state and federal basis. Instead of getting a form 1099-DIV and the end of the year, you receive a form K-1, which your accountant should know how to handle. The only problem with this set up is that the partnerships are required to send you a K-1 for every state in which they do business. Own enough of these, and your tax return will end up as thick as the Houston telephone book.
Additionally, the limited partner (investor) may also record a pro-rated share of the MLP?s depreciation on his or her own tax forms to reduce liability. This is the primary benefit of MLPs and gives MLPs relatively cheap funding costs.
The tax implications of MLPs for individual investors are complex. The distributions are taxed at the marginal rate of the partner, unlike dividends from qualified stock corporations. On the other hand, there is no advantage to claiming the pro-rated share of the MLP?s depreciation (see above) when held in a tax deferred account, like an IRA or 401k. To encourage tax-deferred investors, many MLP?s set up corporation holding companies of LP claims which can issue common equity.
Since 2003, MLPs as an asset class have grown astronomically, from $30 billion to over $250 billion, and have also been the best performing asset class in the world over the last 10, 5, and 3 year periods. The recent discovery of new, massive gas and oil fields in the US and the rapid expansion of shale fracking should auger well for the rising popularity of this instrument.
If you don?t want to bet the ranch putting all you money into a single issue, you might consider the JP Morgan Alerian MLP Index ETN (AMJ), with a 5.35% yield. You give up some yield here in exchange for a broader diversification of risk across many issues in this quasi index fund. For many, it will be worth it to just to sleep at night.
Nope, Don?t See Any Yield Yet
I have always believed that if you don?t have a sense of humor, then you better get the hell out of this business. Below is a link to a YouTube video entitled ?All I Want to do is Retire? which covers the decline of the brokerage industry over the last 20 years. The video is currently going viral and sent to me by a subscriber. Watch this during your next coffee break. The run time is five minutes. Sometimes the truth can be hard to swallow. Click here
?If we?re in a bubble, then we?ll act bubbly,? said legendary hedge fund manager,
David Tepper.
Global Market Comments
January 16, 2013
Fiat Lux
Featured Trades:
(VIX), (VXX), (AAPL), (SPY), (IWM), (BA), (TLT), (USO), (FXY), (YCS), (FXE), (YCS), (EUO), (GLD), (SLV)
I?ll give myself a ?B? on this one. Sure, with the Trade Alert Service generating a 14.87% net profit for the year, I was able to bring in double the Dow average, and triple what most hedge funds delivered, including some of the biggest ones.
But for once, I did not achieve true greatness. I feel that, given the amount of work I did, I should have done much better. I issued 230 Trade Alerts in rapid-fire succession with a ?to die for? success rate of 70%.
I managed to capture these gains with half the market volatility of 2011. While the Volatility Index (VIX) reached the lofty height of 49% in 2011, in 2012 we managed to eke out a peak of only 27%, and that was only for a few nanoseconds. In fact, volatility was down for almost the entire year, save for a brief spike in May, and some yearend short covering.
In 2011, I had a much higher range in the market to work with, the high for the Dow coming in at 12,850 and the low at 10,400, for a total range of 2,450 points. In 2012, the range was only 1,630 points, making it a much more difficult market to work with. This meant shifting from outright call and put option positions to spreads, in order to keep the dosh reliably rolling in.
Nevertheless, I made some serious money in 2012. The best trade of the year was a call spread in the S&P 500, which nicely caught the yearend rally in equities, producing a 4.75% profit for the notional $100,000 portfolio. The worst was a short position in Boeing (BA), which cost me a gut wrenching 8.70%.
In terms of asset classes, foreign exchange trading was far and away my biggest earner, adding 11.85% in positive performance. This was because I shorted volatility in the Japanese yen (FXY), (YCS) for the first three quarters of the year when it flat lined, and then went aggressively short when the big break to the downside came. Thank you Mr. Shinzo Abe, Japan?s new prime minister, who championed the beleaguered country?s assertive weak yen policy during the December elections! Shorts in the Euro (FXE), (EUO) also chipped in.
Gold (GLD) was my second income producer, taking in 6.40%. I timed the summer rally in the barbarous relic perfectly, and shook it by the lapels until its gold teeth came chattering out. I would have made more, but the yellow metal then died on the announcement of Ben Bernanke?s QE3, much to everyone?s surprise.
My five years spent drilling for oil and gas in West Texas came in handy once again, netting 4.75% in gains. This was entirely made on the short side. Friends calling me from the Lone Star State with tales of endless oil gluts gushing forth from North Dakota encouraged me to be more bold in selling the (USO) than I might have otherwise.
I was also a fairly nimble bond trader in 2012 (TLT), (TBT), harvesting another 1.62% in profits. I correctly called the top in prices/bottom in yields in August, but failed to capitalize with bigger short positions. This could be a big trade in 2013.
Ah, now for the hard part. Not every trade was a winner in 2012, although many of the losers were hedges for long side plays that ultimately made money. Trading in the index ETF options for the S&P 500 (SPY) and the Russell 200 (IWM) lost -1.30%. An early long position in the volatility Index (VXX) eroded -3.42% from the performance. Fortunately, I bailed from that strategy quickly.
Options positions in individual equities bled me by another -9.54%. Almost the entire loss came from one stock, Apple (AAPL), which is still perplexing the street. I managed the first $150 decline in the stock admirably. After that, it was a bloodbath. Never have I seen a share price divorce itself so dramatically from the underlying fundamentals. Either something terrible is about to happen to Steve Jobs? creation, or the stock market has got it all wrong.
This was one tricky year to trade. I started off all right, clocking gains in January and February. I correctly anticipated another ?Sell in May, and go away? year. But I underestimated the extent that volatility would fall. Melting option premiums absolutely took me to the cleaners in March and April.
When I realized the problem, I switched from outright options to spreads, which included a short volatility element to every single position. That launched a white-hot run of 25 consecutive profitable trades from April to September.
Then Ben Bernanke caught me by surprise, launching QE3 sooner than expected, just before the presidential election. That forced me to stop out of positions that turned good only days later. I correctly called the outcome of the election in all 50 states. But the big Obama win caught many portfolio managers by surprise, who responded by dumping positions to realize capital gains and beat expected tax increases. That took the (SPX) down 10%, leaving the market unchanged on the year by mid November. This cost me more money.
I redeemed myself by accurately calling the yearend rally and going aggressively long. In the end, the ?Fiscal Cliff? that was supposed to crash the market was little more than a media invention. Stocks closed on their highs.
It was one of the tougher years in my career, so I was quite happy to deliver double-digit profits for my readers. It was also a learning experience. After slogging through 45 years in this business, I still occasionally commit the same blunders as a first year trainee. Don?t we all.
Hopefully, you learned something too from my outpouring of 400,000 words in the 250 daily letters that I penned during the year analyzing every investment theme under the sun. You should have also gained some insight from the 22 biweekly webinars I produced. You also had a chance to expand your horizons at by 26 strategy luncheons and speaking engagements held around the world.
2013 will be better, as our blistering gains so far testify.
The Dow in 2011
The Dow in 2012
The Volatility Index in 2012
Good Luck and Good Trading
John Thomas
The Mad Hedge Fund Trader
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
Global Market Comments
January 15, 2013
Fiat Lux
Featured Trades:
(ON EXECUTING TRADE ALERTS),
(THE FINAL WORD ON THE ELECTRIC NISSAN LEAF)
(NSANY), (TSLA)
From time to time I receive an email from a subscriber telling me that they are unable to get executions on trade alerts that are as good as the ones I get. There are several possible reasons for this:
1) Markets move, sometimes quite dramatically so.
2) Your Trade Alert email was hung up on your local provider?s server, getting it to you late. This is a function of your local provider?s capital investment, and is totally outside our control.
3) The spreads on deep-in-the-money options spreads can be quite wide. This is why I recommend readers place limit orders to work in the middle market. Make the market come to you.
4) Hundreds of market makers read Global Trading Dispatch. The second they see one of my Trade Alerts, they adjust their markets accordingly. This is especially true for deep-in-the-money options. A spread can go from totally ignored to a hot item in seconds.
On the one hand, this is good news, as my Trade Alerts have earned such credibility in the marketplace. On the other hand, it is a problem for readers encountering sharp elbows when attempting executions.
5) Occasionally, emails just disappear into thin air. This is cutting edge technology, and sometimes it just plain doesn?t work. This is why I strongly recommend that readers sign up for my free Text Alert Service as a back up.
The bottom line on all of this is that the prices quoted in my Trade Alerts are just ballpark ones with the intention of giving traders some directional guidance. You have to exercise your own judgment as to whether the risk/reward is sufficient with the prices you are able to execute yourself. Sometimes it is better to pay up by a few cents rather than miss the big trend. The market rarely gives you second chances.
Good luck and good trading.
John Thomas
After driving my all-electric Nissan Leaf four-door hatchback for two years, my final conclusion is that it is absolutely the perfect second car for most American families. Some 90% of all US driving is less than 40 miles a day, and this car is targeted at that market.
If a spouse has a reliable daily round trip commute of less than the car?s 80-mile range, this is your car. The ideal combination is to own a Leaf and a hybrid SUV for those long distance ski weekends, visits to out-of-state relatives, and road trips in general.
The real revelation comes when you realize that this is a car that creates its own fuel. When I depart the Berkeley Hills and reach the entrance to the Oakland Bay Bridge ten miles away, I have more power than when I started. That?s because the trip is entirely downhill. Wow!
There are other benefits beyond flipping your local Exxon station the bird when you cruise by. I often find handwritten notes stuck under my windshield wipers from young women asking for rides. When you are 61, such offers come increasingly few and far between. That alone is worth the cost of purchase. Now, I only use gas station for their toilets and air pumps, which somehow seems appropriate.
You can get all of this for $38,000, of which $7,500 can be applied as a federal tax credit. Or you can go to your local Nissan dealer, where you can pick up a used model in new condition with 16,000 miles on the clock for $20,000. Given that you are no longer spending $4,000 a year on gas and tune ups, you easily amortize the entire cost of a new car in in ten years. Expect to get a lot of thumbs up from bystanders as you silently drive by.
This is not a souped up golf cart by any means. After comfortably sliding my 6?4? frame behind the wheel, I asked the salesman to pack the car with beefcake so I could give it a real test. Three farm boys from Tennessee, real heifers, dutifully piled in. It made no difference; the car took off like a Porsche.
When I first got the car, I tore off down the freeway at 90 mph, gleefully weaving in and out of the lumbering, gas guzzling GM Suburban?s, Cadillac Escalades, and Ford Excursions that inhabit California state highway 24. Eventually I throttled off, lest I get California?s first zero emissions speeding ticket.
The Leaf can be recharged from dead flat at home on a 240-volt plug in eight hours, or at your friend?s house in 16 hours at 110 volts. A GPS mapping system constantly displays your remaining range, as well as the locations of the nearest charging stations. If you run out of juice on the freeway, Nissan offers free roadside service with an immediate recharge. With a 600-pound lithium ion battery lining the bottom of the chassis, it has tremendous stability, and corners like it is on rails. The battery comes with an eight-year warranty and a ten-year life.
One problem is that the car is utterly soundless. That is an issue driving in shopping mall parking lots, when clueless kids, especially those wearing ear buds, walk directly in front of a moving car. It is just a matter of time before the state mandates required cartones for electric cars in motion.
When I took delivery of one of the first American Leaf?s, I was a pioneer. The entire San Francisco Bay area had only 25 public charging stations. More than a few times I ducked into sushi shops with a 100-foot extension cord in search of enough juice to get home. Once, I convinced the bemused parking attendants at the San Francisco Opera House to unplug their coffee machine to recharge my car. Even then, I coasted into my garage on my last couple of electrons, the car shouting warnings at me all the way. The pathfinder days are now long gone. Today, there are over 500 charging stations in this part of California.
I have to say that it helped being a pilot and a scientist. Calculation of range and fuel consumed to destination come as second nature to me. If I didn?t, I would have found my place at the bottom of the Atlantic, the Pacific, or the Persian Gulf, ages ago. So I would think twice about buying one of these for a right-brained high school English teacher with no technical aptitude whatsoever.
Figuring out the car?s actual performance was a mutual learning experience for both Nissan and me. There were quite a few calls to their engineers to discuss glitches and workarounds in the early days. Finally, Nissan sent a product development guy from Japan to discuss design of the second generation Leaf. By the way, their stock has been on fire for the past three months, up some 25%, as the weakening yen boosts their global competitiveness.
My local utility has been cheering from the sidelines. PG&E is offering a special Plug-in-Vehicle rate of only 4.6 cent per kilowatt hour from 12:00 am to 7:00 am, compared to the standard top tier rate of 40 cents per hour, an 89% discount. That means the Leaf?s 80-mile trip cost me 92 cents. This is the same as buying all the gasoline I want at 23 cents per gallon! In other words, the fuel is basically free.
When I asked the chief engineer about maintenance costs, I got a blank stare. Then he answered in a deadpan fashion, ?there is no maintenance?. During the first 100,000 miles, the only expenses will be for brake pads and tires, as the 107 horsepower electric induction engine only has five moving parts operating at room temperature. Even the brake pads last forever, since the regenerative braking system does most of the stopping to generate more electric power. Instead of tune-ups, you get software upgrades. Only the tires need to be rotated every 8,000 miles.
Alas, it is time for me to move on from my beloved Leaf. As with a first high school love, the excitement of the unfamiliar eventually wears off, and you start looking to trade up. I also could use more performance. In the electric, zero emissions car world, that means buying a brand Tesla S-1 performance model (TSLA), which I will pick up at the Fremont, California factory as soon as I finish writing this letter. I?ll let you know how she works out, once I have broken her in.
