War Room
Got Income?
24 April 2014
HiddenLevers War Room
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Presentation deck
Open Q + A
Scenario Updates
Product Updates
Got Income?
I.
Market Update
II.
Scenarios – First World Deflation
III.
Got Income?
IV. Do Income Strategies Work?
HiddenLevers
MARKET UPDATE
Market Update
New Cold War
BRICS baton passing
Greece celebration
Canada Middle Class
Macro Snapshot
Nasdaq saw a slight correction - Was that it? S&P earnings good, driving down P/E.
New home sales are bucking the uptrend.
HiddenLevers
SCENARIOS – FIRST WORLD DEFLATION
Deflation Review – How did we get here?
Fed Funds Rate Near 0%
= CDs Near 0%.
Falling 10-Year Interest Rate
= Shrinking Annuity Income
sources: HiddenLevers, TSPstrategies , MoneyCafe
Deflation Review – Global
technology automation
decreasing birth rate
commodities sinking
first world baby bust
sources: HiddenLevers, Economist,
sluggish GDP growth
Deflation Review – USA
ZIRP = Zero Interest Rate Policy
- max that monetary policy can do
- ensures housing loans are cheap
- will outlast quantitative easing
- makes returning to normalcy hard (Japan)
5 years
USD d
5 years
no
inflation
zero rates
ZIRP – the costs
No interest
ZIRP has cost savers 760 billion usd in
interest
Just inflation
Bank customers 100 billion in
purchasing power each year since 2009
because inflation, while low, isn’t zero
sources: HiddenLevers, LA Times, Bloomberg
Scenario: First World Deflation
Good
rates and
inflation at 0
Bad
worldwide
ex-US
Ugly
worldwide
including US
The Goldilocks
scenario – can the Fed
keep the bowl warm
but not hot?
Sweden and Japan
already at/near
deflation – if EU tips,
this might push US to
correction.
If entire first world
falls into deflation, a
global recession is
likely close behind.
HiddenLevers
GOT INCOME?
Got Income? – Overview
MLPs and Energy Trusts
REITs + mREITs
Municipal CEFs
Buy-Write on Dividend Stocks
Got income? – MLPs + Trusts
Master Limited Partnerships
• Many with 7%+ yields
• Almost all in energy sector
• Be aware of MLP tax
complexity
• ETFs and MFs exist as well
Energy Trusts
• Simply a share of royalties in
certain oil/gas fields
• Double-digit yields common
• Beware new finite life trusts!
Older is often better here
source: HiddenLevers
Got income? – REITs
Diversified REITs
Yield
S&P beta
Omega Healthcare Investment (OHI)
5.90%
Arbor Realty Trust (ABR)
Apollo Commercial RE Finance (ARI)
Correlation Screener
source: HiddenLevers
Mortgage REITs
Yield
S&P beta
.80
Hatteras Financial Corp (HTS)
10.6%
.52
7.2%
2.06
American Capital Agency (AGNC)
11.9%
.52
9.6%
.50
iShares Mortgage Real Estate (REM)
15.77%
.92
Got income? – Muni Bond Closed-End Funds
High leverage = risk
Muni Closed-End Funds
• Trade like stocks and ETFs
• Tax-equivalent yields of 10-15% for
many clients
• Less liquid than MFs and large ETFs
source: HiddenLevers, CEFConnect.com
Discount to NAV = opportunity
Got income? – Dividend Equities + Call Writing
Buy-Write Strategy
• Buy the stock, sell the call
• If the call expires, repeat
• If call is exercised, capital
gains realized
• Quarterly writes work well
GE Example
• Sell July $27 call for 0.57
• 4 writes/year = 8.5% income
• 11.8% total yield
• Equity downside remains
source: HiddenLevers, Yahoo Finance
HiddenLevers
DO INCOME STRATEGIES WORK?
Risk versus Income – MLP review
MLPs have generally
outperformed the S&P over
the last 10 years.
5 years shows MLPs keep pace,
struggle to outperform recent
bull market.
source: HiddenLevers
Master Limited Partnerships
Yield
S&P beta
TC Pipelines, LP (TCP)
6.6%
0.83
Fiduciary/Claymore MLP Fund (FMO)
6.1%
1.1
Enbridge Energy Partners, LP (EEP)
7.5%
0.95
Risk versus Income – REITs review
Traditional REITs have
recovered with S&P in
current bull market.
Mortgage REITs have been crushed
by rising rates – bonds in equity
clothing?
source: HiddenLevers
REIT Fund vs mREIT
Yield
S&P beta
Annaly Capital Management (NLY)
10.9%
0.55
SPDR Dow Jones REIT ETF (RWR)
3.2%
1.16
Is income generation really that difficult?
Meredith
Whitney
Bonds + CDs
suck
easy to give up
and chase S&P
short term
thinking
no one wants to
do the
homework
pervasive
marketing of
ETFs and MFs
boomers more
used to volatility
Life of Pi “You might think I lost all hope at that point. I did. And as a result
I perked up and felt much better.” Yann Martel
Got income? – Recap
demographics = destiny
global deflation happening
under your nose
yes, you too can generate income
sky high yields = caveat emptor
HiddenLevers Use Cases
scenario
First World
Deflation
Macro Theme
MLPs with 5%+
Yield
Macro Theme
Mega Caps with
Yield
scenario
Commodities
Perfect Storm
War Room
Tech Bubble 2.0
scenario
End of QE
War Room
Demographic
Shift
Data Center
CPI + 10y rates
Got Income?
Product Update
•
Overall Performance improvements
•
Risk Monitoring – export to MS Excel, re-run stress test
•
Proxy mapping improvements
•
Cross Correlations - Color Highlighting in Matrix
Coming soon:
-
Annuities Support (Fixed / Variable / Equity Indexed)
-
Advisor Fees Support
-
Options Support – Call Writing