Category: Oil & Gas

How Pilgrimages Are Increasing the Saudi Arabia Economy

David Jackson

More than 2 million Muslims from all over the world are gathering annually to complete the fifth and final pillar of Islam, which is the Hajj pilgrimage. Until the 1950s, the number of pilgrims coming from overseas was not bigger than 100,000, but by 2013 the total number passed the 3 million mark.

The cities of Makkah and Medina represent a major slice of Saudi Arabia’s non-oil economy, providing annual incomes of around $12 billion from food, transport accommodation and fees. But with these numbers looking to increase in the next years, how will the local population be affected by the on-growing development of commercial and accommodation sites?

Makkah And Madinah Pilgrimages

To better understand why these areas attract millions of religious visitors yearly, we must first take a look at the meanings behind the pilgrimages.

Makkah is the birthplace of Prophet Muhammad and hosts the Grand Mosque, house of the Kaaba. The Kaaba is Islam’s holiest ground, a stone structure clothed in black silk, built by the Prophet Abraham. Here, over 3 million Muslims gather once a year, on the last month of the Islamic calendar to complete the fifth and last pillar of the Muslim practice. The pilgrimage begins on the 8th day of the month and ends on the 12th or sometimes the 13th. All Muslims who are financially and physically able to make the pilgrimage, also known as Hajj, are expected to do so at least once in their life.

To complete the Hajj, every Muslim must first enter ihram (the sacred state of a pilgrim), wearing plain robes. Before crossing the outer boundaries of Makkah, the pilgrim must follow certain rules, such as restraining from anger or sexual activities. After entering Makkah, the pilgrims must follow an 8km journey to Mina, where they will be accommodated in tents. On the second day, they make a 14km journey from Mina to Arafat, where prophet Muhammad gave his last sermon. The second day of Hajj is considered to be one of the most important days of the Islamic calendar. The third days marks the longest day of the Hajj. Pilgrims return to Mina, where they perform the symbolic act of stoning the devil, by throwing seven pebbles at the Jamarat, the largest column. On this day, the men trim their hair and all pilgrims remove their ihram clothes. Many choose to return to Makkah to circle the Kaaba and walk between the hills of Safa and Marwah. Both actions are performed seven times. On the last two days, the pilgrims will stone the devil again, this time stoning each of the three pillars seven times. They will spend the rest of their pilgrimage days in Mina. Before leaving, the pilgrims return to Makkah to circle the Kaaba one more time.

Although not mandatory, after the pilgrimage in Makkah, many pilgrims chose to head to Madinah, where Prophet Muhammad is buried. Madinah is the place of another pilgrimage that, although not mandatory, is performed by millions of pilgrims yearly. The Umrah pilgrimage was performed by almost 7 million pilgrims in 2017.

While the Hajj is performed during a specific time of year, Umrah can be performed year-round and is much less time-consuming. It can be performed both in the Hajj period, prior to the actual Hajj pilgrimage, or separate. During the Umrah, similar rituals as those included in the Hajj are performed, such as circling the Kaaba and walking between the hills of Safa and Marwah.

Increasing Economy and Expansion Plans

One of the most important roles in Vision 2030, a development plan aiming to turn the focus of Saudi Arabia’s economy away from oil incomes, are played by Makkah and Madinah, as religious tourism represents 20% of the Saudi’s non-oil income. The plan, initiated by the Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud, aims to increase the number of pilgrims traveling to Makkah and Madina, especially for the Umrah pilgrimage.

One of the important steps taken to increase the number of religious visitors was the ease of the quota system that was very strict until 2017. The visas were reduced by 20% in 2013, in order to ease the infrastructure works done at the Grand Mosque. By 2030, over 6 million pilgrims are expected to enter the gates of Makkah. Although the number of visas decreased, the demand for luxury hotels in Makkah increased, which left the Saudis confused. In 2016, the occupancy percentage in Makkah hotels was around 90% and if the expected targets for the following years are met, there is no wonder the hospitality sector is evolving at a rapid pace. But that is not the only sector expected to benefit from the increased number of religious tourists. Airline companies, telecom operators and catering firms are looking to expand their business, as the demands increase.

Another way of increasing revenue is the introduction of Umrah visa fees. While first-timers are exempt, future visits require a fee of around $500. There is also an Umrah Plus visa, which allows pilgrims to visit other non-religious sites across Saudi Arabia, combining religious and non-religious tourism. The number of Umrah pilgrims is expected to reach 30 million by 2030. Infrastructure upgrades are also ongoing, to facilitate the pilgrims’ arrival in Makkah and Madinah.

But as tourism increases and the demand for accommodation is at raise, another challenge arose. How is the on-growing population of Saudi Arabia going to fit in with the increasing number of religious visitors? A large number of both Makkah and Madinah residents found themselves overwhelmed by the extending number of developments made to meet the needs of pilgrims. The areas around both cities experienced a decrease in residential capacity, as various changes were developed, to make room for accommodation and commercial spaces. Vision 2030 appears to have a solution for this as well, as by 2020 home ownership is expected to increase from 47% to 52%. A solution is to utilize government-owned land to provide housing units at an affordable price. This is expected to decrease the price discrepancy between residential proprieties in the holy cities and Jeddah, the major urban center in the area.

James Dean of MONEY.CA and Money Magazine found this important link and website helpful https://www.saudiarabiavisa.co.uk/

 

Crowdfunding Coming to the Mining Sector

Richard Warke

Once reserved for charities, individual causes and fundraising, crowdfunding and crowdsourcing has become a viable way to bring startups to fruition and raise investment capital. Crowdfunding has also been fairly successful in creating a buzz, spreading word of mouth and increasing interest in philanthropic projects, new technologies and entertainment and media sector.

As the popularity of crowdsourcing grows, it’s interesting to note that other industries are beginning to look to crowdsourcing, one of those is the mining and resource industry.

Traditionally, mining investments are facilitated through various alternative financing tools, such as streams, off-take agreements and royalties. While these have proven to be tried and true strategies, the allure of technology is always tempting, especially when it promises to bring new financing tools. Mining companies that have turned to a crowdfunding platform to finance their ventures are certainly evidencing this trend.

Crowdfunding is different from traditional financial tools that mining companies are used to, in part because it uses a web-based platform to raise funds through small contributions from a large pool of registered users. Under this new financing method, investors can purchase shares from both private and public companies and derive profits from those shares, should the companies perform well financially.

Over the last year, we have begun to see the emergence of equity-based crowdfunding platforms specifically targeting the mining sector. In Canada, Toronto-based Klondike Strike Inc. was the first to offer a mining-centric equity crowdfunding interface. Its proprietary platform, Red Cloud, operates through the offering memorandum exemption pursuant to section 2.9 of the National Instrument 45-106 Prospectus Exemptions (NI 45-106). 

“I believe we are the first to create this type of website and that is a bit daunting but I believe this is going to be the future of financing, not just in the mining sector but in all sectors,” said Chad Williams, Klondike Strike’s president and chief executive officer.

Late last year, Australia began looking seriously at using crowdfunding to alleviate the pressure junior mining companies were feeling from a decrease in capital. The potential capital that can be raised through large groups of investors is also appealing to the country’s larger resource and mining industry which have been suffering from capital issues.

But, what is the catch, Richard Warke, is something I’m asked when crowdsourcing and mining are combined in the same sentence.

The catch is that crowdfunding in the mining industry is new and unknown. Is there potential risk when we get investors who are naïve or unaware of the operations and protocols of a given sector?  Yes.  Should crowdsourcing investor do their due diligence?  Absolutely.  Should they be made absolutely well-aware of the risks associated with investing in the mining industry?  Again, absolutely.  These are all questions to contend with.

It’s still too early to tell how crowdsourcing will affect the mining industry.  However, it does promise to be an alternative investment method to those that are popular now.

“This is a revolutionary event and opens the door for almost any Canadian to directly invest in a mining project,” said Mark Ayranto, chairman of the board of directors for Banyan, an international gold producer. “I don’t know if this will completely replace traditional financing but it enhances what is already in place.”

Why a strong management team is key

Richard Warke

As any good CEO will tell you, success hinges on having a dedicated and talented management team. As poet John Donne once wrote, “No man is an island entire of itself; every man is a piece of the continent, a part of the main.”  A statement like that is especially true when running a large national or multinational business.

I think a great deal of my accomplishment can be credited to the management teams I’ve had the pleasure of working with over the years. They have been able to see issues I have overlooked and have been able to recognize areas of need in my various business ventures. Clearly, that’s very important.

When asked, “How did you go about building your management team, Richard Warke?,” people are often surprised at the answers I provide.

First, I realized long ago that in order to grow my company the way I wanted to, I would need to surround myself with professionals who had differing views, interests and specialties than myself. I think the number one mistake executives and business leaders make is hiring people with similar traits, backgrounds and even points of view.

“The input of the labor, capital and raw materials can never become production without the catalyst of management,” notes business management expert Dee Kay. “In its absence, the resources of production remain underutilized, in fact, without efficient management, no country can become a nation.”

In today’s complex business climate, it’s more than ever to have a diverse business team, one that includes varying skill specialties, professional backgrounds, and I believe most importantly, different views of how we see the world.  Why?  Because from my experience, when making important decisions that impact the growth and future of your company, you want to know as many sides of the equation as possible, and you want to make a decision having considered all points of view, not just one.

In my experience, when building a management team, the second most important element in doing so is building a team that can enjoy a positive and communicative relationship. The rapport within a team is incredibly significant, so much so that business success really hinges on just how healthy and open a team’s communication is. A healthy working team can contribute significantly to the overall success of a business and facilitate its growth. Unfortunately, as pointed out by the Board of Trade of Metropolitan Montreal, “a disjointed management team could well put off anyone involved with your business, e.g. employees, customers, clients or suppliers. This could ultimately lead to corporate failure.”

Because growing business is at its heart a group activity, like a sports team, management plays a critical role in ensuring that a company runs smoothly and effectively. Management plays both coach and cheerleader when it comes to forming a dynamic environment filled with teamwork and team spirit. This is achieved by developing a sound organizational structure that brings the human and material resources together and motivates staff toward achieving a common goal.

Lastly, it’s crucial to remember that a management team serves as a company-wide example and is responsible for fostering motivation levels. If managers are uninspired, lackadaisical or indifferent, this will quickly reflect in employee morale and engagement. The motivation level of the employees is directly related to strong management. In turn, management creates and maintains an environment conducive to higher efficiency and performance.

Regardless of the type of business, whether it’s retail or in the mining sector, a skilled management team will foster an environment where a business can flourish and thrive.

Returning to the Importance of Due Diligence

Richard Warke

While due diligence is paramount for success in any business endeavor, few industries in the world need the level of due diligence required in the mining and minerals sector. Years before any precious metals or gems are extracted from the earth, a rigorous research, vetting and exploration process is held to establish the viability of the project.

The comprehensive examination serves not only as a risk assessment, it also covers a variety of areas aimed at providing the company, shareholders and likely investors information regarding the potential investment quality. Preliminary Economic Assessment (PEA) reports, technical reports and environmental studies are only a few of the steps involved in the actual exploration of a given site.

The process may also include a number of protocols, such as thorough geologic studies, mineral resource reports, mining and geotechnical engineering analysis, hydrogeology/hydrology, mineral/metallurgical processing, zoning for tailings, refining and smelting facilities, infrastructure and capital projects reports, human resource management, occupational health and safety, operation and capital expenditure reports, engineering, procurement and construction management projections, and mineral economics.

Off-site due diligence comes in the form of knowing all the legal requirements and obligations related to the area of the prospective mine. As many new mining opportunities are based in foreign jurisdictions, knowing the laws that pertain to the specific country and jurisdiction can mean the difference between keeping on schedule or spending additional years in court battling over land rights.

“Complying with and fulfilling the requirements of local corporate and mining law is essential, but it can be extremely difficult to do so when these may be subject to wholesale and unexpected change. This as explained in a 2010 due diligence report from the Institute for Materials, Minerals and Mining. “Even some of the most experienced and respected British, Canadian and Australian lawyers have found themselves caught out and their clients severely disadvantaged when legislation has been implemented, removed or given a different interpretation by an unstable political regime.”

I have heard stories from colleagues about political unrest hindering their extraction schedules by months and even years, and I am occasionally asked, “Richard Warke, what is your number one tip for those interested in succeeding in the resource sector?”

I cannot be more emphatic when I say that practicing due diligence in every aspect of a given mining prospect is crucial. It is easy to get excited and carried away with an optimistic economic assessment report; but, if the resources are located in a politically unstable area, extraction will be the least of your worries.

This has been evidenced in the case of Myanmar, where resources are abundant, but legal and government regulations have kept international investors out.  Recent changes to Myanmar’s Mining Law aim to promote foreign investment and introduce cutting edge mining resource tools, which the country desperately needs.

“Myanmar’s first Extractive Industries Transparency Initiative (EITI) Report, issued late in 2015, is a promising baby-step towards openness,” says Marius Toime, an attorney specializing in resource law.   “There is a long road ahead, but with new political leaders taking the stage, Myanmar has the opportunity to focus on reform and reconciliation with renewed vigour.

The revitalized interest in Myanmar’s resource industry will also highlight the way mining industry due diligence can benefit a variety of sectors. 

In fact, remembering the true importance of proper due diligence is crucial in every industry, not just the mining industry.  Do we really know the risk involved in a given financial investment?  Do we really have a comprehensive and clear understanding of all the facts that influence a given business decision?  Have we taken a step back and tried to look at our business and investment choices from a different and fresh perspective?  These are all points along the road of doing true due diligence, and for the benefit of one’s business and/or investments, these are all due diligence steps that should be taken.

Cold Fusion: The Latest Insane Idea in Monetary Policy

Wayne Wile

Cold fusion used to be a zany term in the physics lab for generating endless cheap energy.  Alas, no longer. Now it is the latest nutty idea from economists to create endless amounts of free money. Hold onto your wallets, this is an idea from the twilight zone.

World-wide, central banks have engineered 635 interest-rate cuts since the financial crisis of 2008 and purchased more than $23 trillion of assets, primarily sovereign bonds, according to Bank of America Corp. Nonetheless, the global economy is sliding into recession. Again this month, the IMF and other major international agencies have cut global growth estimates. So, when a policy of flooding the financial system with cheap money clearly doesn’t work, whether in Japan or Europe or America, what do you do? Why, more of the same of course! Are you kidding me?

According to Stephen Englander, global head of currency strategy at Citicorp., the answer is to focus policy more on boosting demand rather than just increasing liquidity in the hope that consumers and companies will find a need for it and borrow more. He advocates what he calls “cold fusion” in which politicians would cut taxes and boost spending with central banks covering the resulting rise in borrowing by purchasing even more bonds. “The next generation of policy tools is likely to be designed to act more directly on final demand, using persistently below target inflation as a lever to justify policies that would be anathema otherwise,” Englander said. I have news for Steve; they are anathema now.

In a similar vein, Hans Redeker, head of global foreign exchange strategy at Morgan Stanley, says it’s time for central banks to begin using Quantitative Easing to buy private assets having previously focused on government debt. “I would actually look into the next step of the monetary toolbox,” Redeker said in a Bloomberg Television interview. “We need to fight demand deficiency.” He wants to put more money directly into the hands of consumers.

Dear reader, please understand what this means. To boost the economy, they are prepared to destroy the currency. What is more, curing the problems of too much debt with more debt is why the economy is slowing down in the first place. Encouraging borrowing and consumption–fighting demand deficiency, as Redeker calls it—is working in precisely the wrong direction. Savings and investment drive growth, not consumption.

Cold fusion= more confusion. My answer is gold, something they can’t print. Keeping money in the bank is a bad idea as I will explain tomorrow.

Stock Market Corrections Are Beautiful… When

Steve Selengut

A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I’m told, corrections adjust equity prices to their actual value or “support levels”. In reality, it’s much easier than that.

Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more self-directed money out there than ever before. And therein lies the core of correctional beauty!

Mutual Fund unit holders rarely take profits but often take losses. Additionally, the new breed of Index Fund Speculators over-react to news of any kind because that’s what speculators do. Thus, if any brief little market hiccup becomes considerably more serious, new investment opportunities will become abundant!

Here’s a list of ten things to think about doing, or to avoid doing, during corrections of any magnitude:

1. Your present Asset Allocation should be tuned in to your long-term goals and objectives. Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Asset Allocation decisions should have nothing to do with stock market expectations.

2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move lower in price— Investment Grade Value Stocks. I start shopping at 20% below the 52-week high water mark— the bargain bins are filling.

3. Don’t hoard that “smart cash” you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies.

4. Take a look at the future. Nope, you can’t tell when the rally will resume or how long it will last. If you are buying quality equities now (as you certainly could be) you will be able to love the rally even more than you did the last time— as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most Wall Streeters are still just scratchin’ their heads.

5. As (or if) the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There’s more to Shop at The Gap than meets the eye, and if you are doing it properly, you’ll run out of cash well before the new rally begins.

6. Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor’s Creed (look it up). You should be out of cash while the market is still correcting— it gets less scary each time. As long your cash flow continues unabated, the change in market value is merely a perceptual issue.

7. Note that your Working Capital is still growing, in spite of falling prices, and examine your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities). Examine both fundamentals and price, lean hard on your experience, and don’t force the issue.

8. Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on Investment Grade Value Stocks; it’s just easier, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this advice years ago—

9. Examine your portfolio’s performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model (look this up also), because it is based upon your personal asset allocation. Remember, there is really no single index number to use for comparison purposes with a properly designed portfolio.

Unfortunately, only Self Directed 401k and IRA programs are able to use Market Cycle Investment Management.

10. So long as everything is down, there is nothing to worry about. Downgraded (or simply lazy) portfolio holdings should not be discarded during general or group specific weakness. Unless of course, you don’t have the courage to get rid of them during rallies— also general or sector specifical (sic).

Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of like men, I’m told); the long and slow ones are more difficult to deal with. Short ones (those that last a few days, weeks, or months) are nearly impossible to deal with using Mutual Funds.

So if you overthink the environment or overcook the research, you’ll miss the party. Unlike many things in life, Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight.

Because amid all of the uncertainty, there is one indisputable fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction—

Think cycle instead of year, and smile more often.

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Income Investing: “Feed Your Head… Feed Your Head”

Steve Selengut

Jefferson Airplane has never, ever, been mistaken for a band of financial advisors, but the White Rabbit lyrics can be incredibly instructional to the generation of investors who experienced the classic first hand — as a description of their own college days’ lifestyle. If only they had heeded the dormouse’s call to “feed your head.” For the sake of your retirement sanity and security, you just have to make income investing an intellectual exercise — not an emotional one.

The Brainwashing of the American Investor has its own tale of an Alice whose “logic and proportion” had “fallen sloppy dead”. Many years ago, when interest rates soared into double digits, elderly Alice was well advised to invest her stash in a portfolio of Ginnie Maes. Broadly smiling, she bragged to her friends about the federally guaranteed 13% interest she was receiving in regular monthly intervals — much more than she needed to cover her living expenses.

But interest rates continued to move higher, and the decreasing market value of her Ginnie Maes was more than she could tolerate. “If rates continue to go up, I’ll have nothing left” she cried to her White Knight financial advisor who suggested patience and understanding. The very same pill that made her income grow larger was also making her market value become smaller.

Yet the income kept rolling in, higher yielding unit trusts were purchased with the excess, and major redemptions were nowhere to be seen. The income kept growing, the market value kept shrinking, and Alice was seeing red from seeing red on her account statements.

So Alice went to her local bank and traded in her absolutely government guaranteed 13 per centers for some laddered, non-negotiable, 8.5% CDs. “No more erosion of my nest egg”, she toasted proudly with the hookah smoking bank caterpillar who orchestrated her move to lower income levels. Within a few months, she was liquidating CDs to pay the bills that never seemed to be a problem with those terrible Ginnie Maes.

Don’t let such uniformed thinking sabotage your retirement program; don’t let the selfish advice of a product sharpshooter send you chasing rabbits when IRE (interest rate expectations) or other temporary market conditions shrink the market value of your income portfolio. Feed your head; feed—your—head.

Income pays the bills, and if the income level is both steady and adequate, there is no need to change investments. Market value should be used to determine when to buy more (at lower prices) and when to take profits (at higher ones). It is almost never necessary to take a loss on a high quality (government guaranteed in Alice’s case) income security.

More recent experimenters in much more sophisticated potions have addressed the issue with similar results, reaching mind-numbing conclusions such as these:

  • I know the income hasn’t changed throughout the debacle in the financial sector but I don’t want to buy anymore of these securities until the prices go back above what I paid for them originally. Translation: I’d rather stick with my 4.5% tax-free yield than increase it by adding to my positions at lower prices.
  • Sure, I understand the relationship between IRE and the prices of income CEFs but individual bonds and Treasuries haven’t suffered nearly as much. That’s where we should have been. Translation: I would be much happier with a 3% than with an 8% rate of realized income.
  • I’m tired of seeing all the negative positions in my portfolio. Let’s keep all the income we receive in money market until we’re back in positive territory. Translation: I’d rather accept 0.5% or so, than reduce my cost basis and increase my yield by adding to my positions at lower prices.

Modern brokerage firm monthly statement “pills” were developed during the dot-com era, when Wall Street was trying to emphasize the brilliance of its speculative prescriptions by making us all feel ten feet tall, month after month after month.

But the geniuses on the institutional chessboard produced too many mushroom product varietals and the Red Queen of corrections lopped off many of their sacred heads. The papers that were designed to make our chests burst with pride have turned on us as a haunting reminder of the reality of markets and the cycles that push them in either direction.

It should be easy to navigate a quality income portfolio through whatever circumstances, cycles, and scandals come at you, but a clear head and a clearer understanding of what to expect is required. Most brokerage firm statements make it difficult to monitor asset allocation using any methodology, including the Working Capital Model, and I don’t think that it’s by chance.

Confusion breeds unhappiness, and unhappiness brings about change, and the masters of the universe encourage you to fritter around from mushroom to mushroom in perpetual motion. To whose benefit?

It would be wonderful if an investor’s monthly statement would organize his securities based on their class and purpose, but Wall Street doesn’t want such distinctions to be made easily. It would be great if the institutions would help investors formulate reasonable expectations about various types of securities under varying conditions, but that’s not likely to happen either.

It would be spectacular if the media would produce information and explanation instead of news bites and sensationalism, but you guessed it — not much chance of that.

Income investing can be easy. Ask your hookah-smoking caterpillar to give you the how?

Income Closed End Funds and Total Return Analysis

Steve Selengut

What are the two main reasons mere mortals invest in income purpose securities: one is their inherent safety compared to equities… a 50% income asset allocation is much safer and theoretically less volatile than a 100% equity exposure.

There is less risk of total loss in XYZ company bonds or preferred stock than there is in XYZ common stock… a major fact of investment life roundly ignored by most investors/speculators in overpriced stock markets.

Equally important (as retirement looms larger) is the income these securities produce, first for compounding and then for spending.

  • Compound interest/dividends/realized capital gains is the most powerful retirement income force known to mankind… neither total return nor market value can pay your bills, take you on vacation, or pay your grandkids tuition.

Unlike Tom Wolfe’s “Masters of the Universe”, most of us are not bond traders. If our income inventory shrinks in market value, we don’t have to sell our positions. Wall Street fixed income pros don’t care about income production… buying and selling inventory is their business model, and they set the market prices.

The “higher interest rates are coming panic” you are hearing about in the media is a real problem for MOTUs, but it may be an investment opportunity for the rest of us. If I buy an Exxon 4% debenture, a 3% 30 year municipal bond, or a 10 year treasury note, three things are inherently true:

If interest rates rise, their market values will go down and it will be difficult to add to my positions… BUT my income (and their safety vis-a-vis equities) will not change; MARKET VALUE CHANGE HAS NO IMPACT ON INCOME, in high quality securities.

It is this “Interest Rate Expectation (IRE) Sensitivity” that CEF Investors are uniquely well positioned to take advantage of. All income focus securities (and funds that contain them) are impacted by IRE:

“Market Value Varies Inversely With Interest Rate Expectations”

The Net Asset Value (NAV) of CEFs is the sum of the values of hundreds of securities, inside a virtual “protective dome”, where only the manager can trade them. BUT we can “trade” the dome itself, reducing our cost basis and increasing our yield as we choose… something totally unimaginable in any othe income investment medium.

So this is precisely what is going on “inside” income CEFs right now. Individual security prices are being forced down by the expectation of rising interest rates and a significant discount is available. Absolutely nothing has changed with respect to the quality of the securities or the income being produced “Under The Dome”. The price of the dome has been reduced, and its “IN YOUR POCKET” income is rising.

Yes, that observation is correct, we can now accelerate the growing power of our Compound Earnings Machine

No change in the securities, their quality, or contractual payments… only the price of the package has changed. So there they are, investors, opportunities just waiting for you to pad your retirement portfolio pocketbooks with income over 6.5% tax free and up to 8.0% taxable.

These sweet discounts are only available through the financial genius of CEFs. Only here can “mere mortals” turn Wall Street’s blood bath into an income portfolio worth bragging about. There has been no news that suggests there is anything wrong with the “securities under the dome”.

So don’t be concerned with the “OMG, bond prices are falling” headlines… that’s Wall Street’s problem. This is the biggest CEF sale since 2011, and… the “Call to the Mall” has sounded!

The Investment Gods Are Furious

Steve Selengut

Market Cycle Investment Management (MCIM) is an historically new methodology, but with roots deeply embedded in both the building blocks of capitalism, and financial psychology— if there is such a thing.

The earliest forms of capitalism sprung from ancient mercantilism, which involved the production of goods and their distribution to people or countries mostly around the Mediterranean.

The sole purpose of the exercise was profit and the most successful traders quickly produced more profits than they needed for their own consumption. The excess cash needed a home, and a wide variety of early entrepreneurial types were quick to propose ventures for the rudimentary rich to consider.

There were no income taxes, and governments actually supported commercial activities, recognizing how good it was for “Main Street” — as if there was such a thing.

The investment gods saw this developing enterprise and thought it good. They suggested to the early merchants, and governments that they could “spread the wealth around” by: selling ownership interests in their growing enterprises, and by borrowing money to finance expansion and new ventures.

A financial industry grew up around the early entrepreneurs, providing insurances, brokerage, and other banking services. Economic growth created the need for a trained workforce, and companies competed for the most skilled. Eventually, even the employees could afford (even demand) a piece of the action.

Was this the beginning of modern liberalism? Not! The investment gods had created the building blocks of capitalism: stocks and bonds, profits and income. Stock owners participated in the success of growing enterprises; bondholders received interest for the use of their money; more and better skilled workers were needed — the K.I.S.S. principle was born.

As capitalism took hold, entrepreneurs flourished, ingenuity and creativity were rewarded, jobs were created, civilizations blossomed, and living standards improved throughout the world. Global markets evolved that allowed investors anywhere to provide capital to industrial users everywhere, and to trade their ownership interests electronically.

But on the dark side, without even knowing it, Main Street self-directors participated in a thunderous explosion of new financial products and quasi-legal derivatives that so confused the investment gods that they had to holler “’nuff”! Where are our sacred stocks and bonds? Financial chaos ensued.

The Working Capital Model was developed in the 1970s, as the guts of an investment management approach that embraced the cyclical vagaries of markets. This at a time when there were no IRA or 401(k) plans, no index or sector funds, no CDOs or credit swaps, and very few risky products for investors to untangle.

Those who invested then: obtained investment ideas from people who knew stocks and bonds, had pensions protected by risk-averse trustees, and appreciated the power of compound interest. Insurance and annuities were fixed, financial institutions were separated to avoid conflicts of interest, and there were as many economics majors as lawyers in Washington.

MCIM was revolutionary then in its break from the ancient buy-and-hold, in its staunch insistence on Quality, Diversification, and Income selection principles, and in its cost based allocation and diversification disciplines. It is revolutionary still as it butts heads with a Wall Street that has gone MPT mad with product creation, value obfuscation, and short-term performance evaluation.

Investing is a long-term process that involves goal setting and portfolio building. It demands patience, and an understanding of the cycles that create and confuse its landscape. MCIM thrives upon the nature of markets while Wall Street ignores it. Working Capital numbers are used for short-term controls and directional guidance; peak-to-peak analysis keeps performance expectations in perspective.

In the early 70s, investment professionals compared their equity performance cyclically with the S & P 500 from one significant market peak to the next — from the 1,500 achieved in November 1999 to the 1,527 of November 2007, for example. Equity portfolio managers would be expected to do at least as well over the same time period, after all expenses.

Another popular hoop for investment managers of that era to jump through was Peak to Trough performance —managers would be expected to do less poorly than the averages during corrections.

Professional income portfolio managers were expected to produce secure and increasing streams of spendable income, regardless. Compounded earnings and/or secure cash flow were all that was required. Apples were not compared with oranges.

Today’s obsession with short-term blinks of the investment eye is Wall Street’s attempt to take the market cycle out of the performance picture. Similarly, total return hocus-pocus places artificial significance on bond market values while it obscures the importance of the income produced.

MCIM users and practitioners will have none of it; the investment gods are furious.

Market Cycle Investment Management embraces the fundamental building blocks of capitalism — individual stocks and bonds and managed income CEFs in which the actual holdings are clearly visible. Profits and income rule.

Think about it, in an MCIM world, there would be no CDOs or multi-level mortgage mystery meat; no hedge funds, naked short sellers, or managed options programs; no mark-to-market lunacy, Bernie Madoffs, or taxes on investment income.

In MCIM portfolios, lower stock prices are seen as a cyclical fact of life, an opportunity to add to positions at lower prices. There is no panic selling in high quality holdings, and no flight to 1% Treasuries from 6% tax free Munis. In an MCIM portfolio, dividends and income keep rolling, providing income for retirees, college kids, and golf trips — regardless of what the security market values are doing.

Capitalism is not broken; it’s just been overly tinkered with. The financial system is in serious trouble, however, and needs to get back to its roots and to those building blocks that the Wizards have cloaked in obscurity.

Let’s stick with stocks and bonds; lets focus on income where the purpose is income; let’s analyze performance relative to cycles as opposed to phases of the moon; let’s tax consumption instead of income; and let’s not disrespect the gods, the “Bing”, or the intelligence of the average investor…

So sayeth the gods. Amen!

Wall Street’s Even Dirtier Little Secret

Steve Selengut

As of Close of Business May 8th, no less than 57 multi-year experienced, Taxable Income, Closed End Funds (CEFs) were paying 7% or more in 401k and IRA eligible income to their shareholders.

31 issues (54%) paid 8% or above, and the average for the Heinz-like group was 8.56%. All of these portfolios are professionally managed by this long list of well respected, long experienced, investment companies… their purpose is dependable income production.

Blackrock, Nuveen, Pimco, Putnam, Invesco, Alliance-Bernstein, MFS, Calamos, Eaton Vance, Deutsche, Pioneer, Western Asset Management, Wells Fargo, Flaherty & Crumrine, 1st Trust, Brookfield, John Hancock, KKR, Babson Capital, Allianz Global, Neuberger-Berman, & Cohen & Steers

The investment portfolios include all forms of Bonds, Preferred Stocks, Mortgages, Senior Loans, etc, domestic and global, high yield and normal…

How difficult could it be to put together a well diversified, retirement income portfolio? If you only knew…

Most of these funds have paid steady, dependable, income for more than fifteen years, even through the financial crisis… several have been around since the ’90s

Yet your financial advisor has probably never mentioned them to you as a viable alternative to low yielding income Mutual Funds or stock market dependant funds and ETFs… she probably isn’t familiar with them either.

The DOL (and other retirement plan “specialists”) have effectively banned these programs from 401k Plans, and it’s likely that you have never heard them advertised or even mentioned in the most popular financial newsletters…

One could conclude that Wall Street (even the CEF providers themselves) would prefer that you didn’t even know that they exist.

Now here’s “the rest of the story”: 

A May 15th data search at cefconnect.com reveals that nearly 90% of all Taxable/Tax Deferred Closed End Funds (CEFs) were selling below their net asset values (NAVs), and of those, 63% were available to all (yes, IRA and 401k investors, too) at discounts above 8%.

Income Mutual Funds (I believe) are never available at discounts from NAV, and how many discounted securities has your advisor suggested to you since 2012 or earlier? ETF prices, I understand, are manipulated by their creators to present within pennies of their NAV.

But tax-deferred/taxable CEFs historically sell at discounts as often as not, and this morning, nearly 62% of them were available to MCIM taxable, IRA, and self-directed 401k account investors at discounts of 7% and higher.

SO, WHY THE WALL STREET COVER-UP? 

And, why aren’t you asking for more information?