Volatility Equals Opportunity

Hello ,

This market volatility could give us all whiplash by the time the year is over.

Last Wednesday, the S&P 500 was teetering on support at 2050.  By Friday, it was back to 2100.  Today, we’re right back in the middle.

And all the while not much has changed from a macro standpoint.

These are the types of random gyrations that can lead to an analyst or advisor spending all day watching his quote machine and the charts, worrying about whether all this volatility is going to end with a substantial decline that could hurt his clients’ portfolios. 

I’ve even found myself getting caught “watching the tape” too closely at times and I’m sure you’ve done the same.

But, we’ve got to avoid this “analysis paralysis” if we all want to seize opportunities in the markets, and the key to seizing those opportunities is to:

1. Step back from the noise and stay focused on macro trends

2. Look past short term influences to find attractive risk/reward set ups across markets that should help clients outperform once all the volatility subsides.

It’s how you turn markets like this into an opportunity for yourself and your clients, and by doing so strengthen that advisor/client relationship.  

And, we’re looking to do just that with MLPs, which have fallen substantially over the past year but now offer unbelievable yields relative to where bond yields are.

To be clear, we’re not calling a “bottom” in energy broadly as that is going to be very difficult, given the conflicting influences of supply/demand, OPEC, speculators, ETF holdings, etc.

Instead we are focusing on finding value in high yielding MLPs with three specific criteria that we think make them attractive over the medium and longer term for income hungry investors.  In order to meet out criteria, the MLPs must:

1. Be Well Capitalized

2. Own The “Right” Energy Assets

3. Have Experienced Management Team

If an MLP meets these three industry conditions, we believe there is a strong argument for a favorable risk-reward buying opportunity. And, this is a prime example of our broad investment strategy which is simply:

Watch macro indicators to identify tactical opportunities across asset classes that can help our subscribers outperform the market and their competition.

We don’t call tops and bottoms, as we’ve learned in our years in this business that’s a fool’s errand.  Instead, we focus on catching the big trend changes that can offer months of outperformance. 

So far, we’ve done well in our 3+ years in business, which is one reason our retention rate is still over 90%.

And, our subscribers have told us how our focus on medium term, tactical opportunities has helped them outperform for clients and grow their books of business. 

In three years of doing this, the absolute best feedback I’ve ever received was when a client (an FA from a bulge bracket firm based in Florida) called me late last year and said our Report helped him land a 25 Million dollar client!

Obviously that’s an extreme positive case, but the bottom line is our job is to watch all asset classes each and every day so we can do two things for our subscribers:

1. Get the overall direction of the market “Right’ so they can have the appropriate broad allocation for clients and

2. Do the hours of research needed to identify attractive risk/reward set ups across any and all asset classes:  Stocks, Bonds, Currencies, and Commodities.

Last week, we finished our research on MLPs and think there is an opportunity for longer and medium term investors – but selection is important, because not all MLPs will fare well in this environment, and some are an outright value trap.

Below we’ve included an excerpt last week’s Sevens Report that describes the criteria we are using to select MLPs.

MLP Thoughts (Sevens Report Excerpt)

Given the substantial decline in MLPs and the respective rise in yields (above 7% on the Alerian MLP Index) these names are now worth a serious look for medium- and longer-term investors. Although there are more short-term headwinds, we think that the risk/reward is attractive enough in some specific names to warrant some risk capital.

Near term, the fact that oil hit new lows today is a problem. Regardless of the fundamental justification or reasoning, MLPs trade with oil momentum in the very short term. So, it’s likely that a bottom in MLPs isn’t “in” just yet.

That said, the risk/reward at these valuations and these yields does appear attractive, because longer term, MLPs trade off 1) cash distribution growth (basically a dividend growth model of valuation) and 2) the Macro influence of energy infrastructure trends in the US.

Starting with the macro, US infrastructure spending is in an upward trending cycle, and US energy demand is rising (remember oil is falling because of a supply glut, not demand).  So, there will be a longer-term macro tailwind on midstream assets like pipelines and gathering facilities held by midstream MLPs.

Reconciling that down to individual MLP selection, we want to focus on companies that are:

1) Well Capitalized

2) Have midstream assets (a lot of MLPs have popped up over the years that aren’t true pipeline or gathering infrastructure plays, so it pays to know the assets) and

3) Have experienced, conservative management teams with a proven history of distribution growth.

Last week we identified four specific MLPs that paid subscribers should consider.  These four MLPs have an average yield of 5.9%, an average market cap of 43 Billion dollars, with experienced management teams that have a proven history of maintaining and increasing payouts.

For those seeking some more diversification we have identified, for paying subscribers, MLP closed-end funds that contain a mix of the four MLPs referenced above, and other high quality MLPs.

We’ve identified three closed end funds that, based on their holdings and the weight of certain MLPs, we think can also offer high quality exposure to the MLP sector.

The average yield of these three MLP closed end funds is 9.4% and virtually off them are trading at or near 52 week low valuations compared to their NAV’s, so there is a potentially compelling valuation argument there.

Again, short term, we aren’t saying that the bottom is definitively “in,” but we do think we’re much closer to a bottom in oil than a top.

And, while there may be some more short-term pain in these MLPs, by going with well-capitalized, proven management teams in the right space we can avoid the “distribution cut” that is the death knell for these names, and longer-term secure some very compelling yields.

Finally, there is a bullish wild card out there to consider. 

We have read from several reputable sources lately that the idea of lifting the ban on US oil exports is gaining traction in Congress. We’ve been talking about this for nearly a year since a small rule change last year allowed the exporting of minimally refined oil products (condensate).

But, it seems like some momentum is building behind actually doing something, and that was further reinforced over the weekend when the Department of Commerce approved exporting oil to Mexico – another small step towards the total repeal of the export ban put in place 40 years ago.  Again this isn’t a key tenant of our general thesis, but it is a potential wild card positive lurking out there.

The Sevens Report doesn’t just provide macro analysis – every day at 7 AM, in addition to that independent macro analysis we also identify specific ETFs and stocks that we think can help tactical investors outperform – and we monitor those picks and provide constant updates.

Subscribers now have a “menu” of four MLPs and three MLP closed end funds that they can discuss with their clients, and even if the client chooses not to take the position, at least they know their advisor is working hard to provide original, well research ideas.  That’s how you keep clients for life.

Click there to start your quarterly subscription and get the four MLPs and three MLP Closed End Funds we think can outperform over the medium term.

Increased Market Volatility Will Be an Opportunity for the Informed Advisor and Investor

We aren’t Market Bears, but we have said consistently that things are going to continue to be volatile in 2015 and we’ve been right!  

Over the next few months, the advisor who is able to confidently and directly tell their nervous clients what’s happening with the markets and why stocks are up or down, and what the outlook is beyond the near term (without having to call them back) will be able to retain more clients and close more prospects. 

We view the next few months as a prime opportunity to help our paying subscribers grow their books of business and outperform markets by making sure that every trading day they know:

1) What’s driving markets,

2) What it means for all asset classes, and

3) What to do with client portfolios.

We monitor all asset classes, break down complex topics, tell you what you need to know, and give you ETFs and single stocks that can profit from these trends.

All for $65/month with no long term commitment.

I’m not pointing this out because I’m implying we get everything right.  We don’t.

But, we have gotten this market right so far in 2015, and it’s helping our subscribers outperform their competition and strengthen their relationships with their clients – because we all know the recent volatility and drop in stocks and bonds has resulted in some nervous client calls.

Our subscribers were able to confidently tell their clients 1) Why the market was selling off, 2) That they had a plan to hedge if things got materially worse and 3) That they were on top of the situation. 

That’s our job.  Each and every trading day.

And, we are good at it.

We watch all asset classes to generate clues and insight into the near term direction for stocks, and while we are happy stocks are grinding relentless higher, our job is to remain vigilant to the next decline.

While we spend a lot of time trying to identify what’s really driving markets so our clients can be properly positioned, we also spend a lot of time identifying tactical, macro based, fundamental opportunities that can help our clients outperform.

If you want research that comes with no long term commitment, yet provides independent, value added, plain English analysis of complex macro topics, click the button below to begin your subscription today.

And, if for any reason over the next two weeks you’re not totally satisfied, you can receive a full refund.  With retention over 90% and hundreds of satisfied subscribers, we are confident you’ll see the value in our daily Report. 

Begin your subscription to The 7:00’s Report right now by clicking this link and being redirected to our secure order form.

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65 dollars.  To sign up for an annual subscription, simply click here.

Best,
Tom

Tom Essaye,
Editor of The 7:00’s Report

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