“Alpha Contracts” — Agora hints, “Could It Really Be This Easy to Collect $5,092 a Month?”

New Contract Income Alert ad teases that "You MUST Act By Monday, July 22nd At Midnight"

By Travis Johnson, Stock Gumshoe, July 22, 2019

Alpha Contracts! That’s what’s being teased by the Agora Financial folks these days, all as part of a pitch for Zachary Scheidt’s Contract Income Alert. And they’ve been teased before, but I had a bunch of readers pile on with questions this week — probably thanks to that new “July 22” deadline — so I thought I’d take another look.

They start by narrowing it down to pretty much everyone who’s interested in investment newsletters:

“If you’re over the age of 50 and planning to file for Social Security…

“This is a story you’ve got to see…

“It could show you how to net thousands of dollars of legally guaranteed income…
starting just minutes from now…”

Guaranteed income! Woohoo!

And, of course, they include a deadline — if there wasn’t a deadline, they’d be taking the risk that you’d think it over… always bad for impulse purchases.

More from the ad:

“Could It Really Be This Easy to Collect $5,092 a Month?

“NOTICE: You MUST Act By Monday, July 22nd At Midnight”

So what is this? More from the ad:

“They call this technique an “Alpha Contract”…

“And it allows any American a simple way to collect thousands of dollars a month
in income…

“Without ever buying a single stock… selling an option… collecting a dividend…

“And a local man says he expects to collect a whopping $250,000 of income
this year using it!”

OK, so yes, we know that if we’re not “touching” stocks or options, then the opportunities for income that you can pitch to a large group of possible investors are pretty limited. What, then, is this “secret” way of generating income?

Don’t worry, we’ll get to your answers… but just to get you revved up all the way, here’s some more of the pitch (which is signed by publisher Matt Insley, though it’s about Zach Scheidt’s newsletter and strategy):

“… what he’s uncovered with ‘Alpha Contracts’ is the closest thing I’ve ever found to a ‘holy grail’…

“They allow you to ‘lock in’ income checks without exposing yourself to the whims of the market, corrupt CEOs and fraudulent accounting practices.”

And he gives several examples of the income you can “lock in” from some companies that you’ve heard of…

“We’re talking about checks of…

  • $12,700 from Coach
  • $12,995 from Ford Motor Co.
  • $14,000 from Sabine Pass
  • $12,305 from Bank of America

“All in under 90 seconds and four clicks of the mouse.

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“And… 100% safe from the stock market!”

Sounds miraculous, right? Who wouldn’t want to be able to get that kind of income without risking your money in the stock market? Brilliant!

Oh, wait, they didn’t mention how much you have to invest to get that income.

That’s pretty typical of income-focused newsletters — they love to trot out big numbers and talk about the regular folks who pulled in $50,000 or $200,000, counting on the fact that you’re probably going to assume that those folks invest similar amounts to you… and if you happen to have $100,000 in your retirement portfolio, for example (the average for folks near retirement, the people who generally sign up for investment newsletters, is about $160,000), then $50,000 in income sounds FANTASTIC.

Sorry, that’s not what they’re talking about here. To make 50% returns over anything less than a decade, you’d probably need to take risks with the stock market… not rely on the lower-risk-of-loss “Alpha Contracts.”

More on these “Alpha Contracts”….

“Fill in the ‘Alpha Contract’ number…

“You can instantly lock in promised gains ranging from $5,092 to as much as $29,285 each and every month!”

And a few examples of past recommendations they’ve made…

“February’s recommendation, Alpha Contract 63530QAH2, locked in $22,031

“January’s Alpha Contract 16412XAG0 locked in $59,440…

“All told, over the last 18 months you could’ve locked in over $360,720 in legally guaranteed income checks!”

And it’s not until after you’ve got those numbers like “$5,092 to as much as $29,285 each and ever month” in your head, that they pull out probably the most important sentence:

“Of course, the more you put in, the more you stand to collect…”

And the corollary, added by yours truly: “The less you put in, the less you stand to collect.”

Makes it sound a little less exciting, right? That is the only time in the ad that the mention this little buzz kill, but, of course, we all know that “there’s no free lunch,” and that “it takes money to make money” in the investing world.

Still, sometimes we also hope, just a wee bit, that there’s a secret that we can use to get past those laws of the investing jungle.

There’s not, really.

Sorry.

Get lucky, save more, achieve some brilliant insight into market dynamics and don’t tell anyone your trading strategies, or watch the fees and let your investments in quality companies compound for decades, those are pretty much the main four ways to get rich by investing, which is a lot harder than getting rich by doing actual work or building an actual business.

This all assumes you’re not in the “born rich” camp, of course — if you’ve got that $50 million trust fund, you can afford to do what you want, to be either extremely conservative or extremely aggressive as your heart desires.

Sorry… lets get back on track — so that’s the basic promise of these “Alpha Contracts” …

“You can lock in thousands of dollars in income checks… with ZERO risk from the stock market.

“You read that right…

“With Alpha Contracts, you NEVER have to worry about a stock market crash again!”

So what, pray tell, are they talking about? Now that I’ve made you wait this long, I can confirm that yes, what they’re talking about are bonds.

Yep, sorry. “Alpha Contracts” are just corporate bonds. And really, it’s pretty certain that they’re all going to be what we often call “junk bonds.”

And he does squeeze in that technicality, presumably required by Agora’s lawyers, that yes, this, too, could lose money:

“Heck, even if the stock loses 99% of its value overnight…

“YOU ARE OBLIGATED TO GET PAID! ….

“Of course, no investment is completely risk-free, including this one. But I’ll explain how this is one of the best plays you can make.”

And he runs through a bunch of examples of when these “Alpha Contracts” (bonds) were better than stocks — here’s a taste of one of those:

“… iHeartMedia…

“This is a new company struggling to find their niche in the online media world.

“This company was highly overvalued, and in just over two years it lost close to 87% of its share price…

“And while analysts wanted to point at falling revenue, overvaluations or the plummeting P/E ratio…

“If you punched in the Alpha Contract number, that’s all irrelevant…

“While stockholders lost almost 90% of their investment…

“Alpha Contracts could’ve ‘locked in’ a legally guaranteed $8,400 windfall!”

That’s true, I suppose. iHeartMedia (IHRT) filed for bankruptcy back in mid-March of 2018 because they could no longer pay their debt obligations (that would have required about $1.8 billion in interest payments this year). According to this article, folks thought it likely at the time that they would sell off some of their radio stations, sell the equity they own in Clear Channel Outdoor, and distribute that to the debt holders, along with some new debt to replace the old senior debt, and essentially all of the equity of the company. So whatever’s left after they clean everything up, the bondholders will own.

Close-up scan of bond certificate.

And yes, that’s all a bond is — a stock is buying part ownership of a company, a bond is lending money to a company.

And all of the stuff about the income being “required by law” is true — bonds are contracts, and once you’ve bought a bond the company has to keep paying your interest and pay back the full principal at the end of the term. That does distinguish bonds from stocks, since dividends are essentially voluntary — companies can and do change their dividend all the time, or stop paying a dividend if times get bad.

Of course, in almost all cases bond coupon payments are fixed for the life of the bond, too — so if the bond matures in ten years, you’ll be getting the same interest payment each year (they usually pay in two installments per year, technically) until maturity… if inflation soars to 8% in five years, for example, and checking accounts are paying 8% interest, you’ll still be getting the same income of, for example, 6% on your investment, even if it doesn’t look as appealing in that environment. As long as the company stays solvent and can repay the principal at the end of the term, you’re still technically doing OK and haven’t lost any money — though that principal that’s returned to you at maturity could have substantially less buying power than it did when you bought the bond.

I haven’t looked at the filings or the formula for that iHeartMedia bond, or how the bankruptcy worked out, but heavily indebted companies can be dangerous both to the equity holders and to the bondholders who lend them money — the equity gets wiped out first if the company can’t handle their debt service, so iHeartMedia has given up the $500 million or so in equity value they had as recently as 2015, but that $500 million in equity was riding on more than $20 billion in debt, and as far as I can tell they’ve never really made enough money to cover the interest payments on that debt. Anyone lending money to iHeartMedia in recent years was just playing for eventual bankruptcy and betting their assets would be worth well over $20 billion, or hoping that the bonds they held could hit maturity and be repaid (refinanced, really, though with someone else’s capital) before the end game finally hit, it was clearly not a sustainable business with that much debt.

I have no idea what those “Alpha Contracts” were worth once iHeartMedia came out of bankruptcy earlier this year and they were exchanged for equity in the new iHeartMedia, but they ones that I looked at as bankruptcy proceedings were just beginning last year had certainly lost value — they traded at pretty close to their maturity value of $1,000 as recently as 2015, and were far below that after they declared bankruptcy. Most companies have more than one class of bonds outstanding and usually also several different maturity dates for their outstanding bond tranches, and bonds are slotted somewhere in the hierarchy, with more senior or higher ranking bonds getting preference in the bankruptcy settlement or in any potential liquidation, so you’ll often see similar-sounding bonds from the same issuer that trade at quite different prices, particularly if the market believes that a bankruptcy filing is a real near-term possibility.

So it won’t be surprising to hear that the bonds from Clear Channel (that’s what iHeartRadio used to be called) sometimes traded at very high yields over the past couple years before bankruptcy, often 10-20%, depending on the bond. If you think there’s a good chance that you’re not going to get your principal back at maturity, or that your $1,000 bond might be renegotiated to give you a chunk of (often falling in value) equity instead in a workout, you demand a higher yield. And it’s also quite possible that someone who bought that bond a couple years ago with that 20% yield could still end up losing money on that investment when the bankruptcy process is worked out.

That’s how this is all supposed to work, if you haven’t dealt with bonds before — they have a principal amount, typically $1000 (they often quote them as if the base is $100, but they usually trade in increments of $1,000), and you are supposed to get that principal back at the end of the term, in addition to the (usually twice a year) coupon payments.

These bonds trade in the secondary market, so the coupon payment is fixed in dollar terms but the price of the bond and the premium over the principal value (or discount to principal) will fluctuate. Bonds can also become “junk” when they started out life as “investment grade” — if you had a high-caliber company with a high debt rating from Moody’s or the other ratings agencies, and it was able to borrow money by issuing bonds with a 3% coupon, and then the business falls apart a few years later, the market might push those bonds down enough in price that their coupon more closely approximates the yields offered by their new peers, other “junky” lower-rated issuers.

If you bought a $1,000 bond with a 3% coupon for, say, 10 years, then that bond would pay you $30 in income per year and, at the end, you get your $1,000 in principal returned.

If suddenly that company gets lousier a year or two into the bond term, and people begin to insist on a 6% yield, then suddenly the value of that bond on the open market drops precipitously… theoretically it could drop to $500, since that’s what the price would have to be for the $30 annual interest payment to provide a 6% yield. It probably wouldn’t drop that far, since investors will also have in mind that the principal of $1,000 will be repaid at the end of the term as long as the company remains solvent… but it will drop. If there are five years left on the bond, for example, then the price would probably drop to the $800-850 range, since the five years of interest payments plus the final bump-up in value at maturity (another $150-200 to get you your $1,000 back) would approximate a 6% annual coupon.

So the bonus appeal of “junk bonds” that are a little bit unloved is that you can get capital gains as well as high income — you get the coupon payment, which, in the case of one of the bonds I was looking at would be $112.50 per $1,000 of principal per year (that’s a very high 11.25% coupon), and that’s pretty good, and you get your $1,000 back at the end. But if you can buy that bond in the secondary market for less than the principal amount, because people perceive higher risk (of inflation, or insolvency, or whatever), and they’re demanding higher effective interest rates to deal with that risk level, you also get a boost at the end when the bond is paid back at the full principal amount.

Assuming, of course, that the company doesn’t file for bankruptcy or otherwise fail to meet its end of the contract. So that iHeartRadio 11.25% coupon bond could have been bought back in 2016 for $750, for example, and that would have given the buyer a 15% yield… with, if the company survived, an additional 30% bonus when you were paid back $1,000 in principal for your $750 investment at maturity.

So that was a rather long screed about what corporate bonds are and how they make money (coupon payments plus return of principal), what else do they say about the kinds of bonds they’re going to be recommending? More from the ad…

“And while so-called experts may tell you it’s impossible to get these types of yields in today’s zero-interest-rate world…

“As you’ve seen, Alpha Contracts allow you to lock in checks of…

“$1,000, $2,000 or even $10,000… with ZERO risk from the stock market!”

And he runs through some examples…

“… some of the most recent Alpha Contracts I’ve seen in the markets…

+ $4,000 from Southern States Corp.
+ $3,500 from Neiman Marcus Group
+ $4,700 from Armstrong Energy
+ $2,600 from JPMorgan Chase
+ $4,400 from Exide Technologies
+ $2,520 from Hasbro
+ $3,950 from Alliance One Intl.”

And apparently we’re not being told about them because Wall Street makes too much money to share…

“Wall Street brokers make a ton of money handing out ‘Alpha Contracts’ to major institutions…

“Prompting Bloomberg to say this about instruments like ‘Alpha Contracts’:

‘…profit is one of the last vestiges of Wall Street dominance, which banks guard fiercely.'”

So yes, that’s true — the banks do make quite a bit of money on bond trading, though the reason they hold onto the traditional trading systems (phone and texting, essentially) is not necessarily that they’re trying to keep individual investors away… it’s that they’re trying to keep their piece of the trade and avoid the efficiencies that come with more open electronic trading.

Individual bonds are not all that liquid, it might take you a few days to fill a position if you decide to buy one, and you might even have to call your broker… perhaps that’s part of the reason why individual investors almost never get interested in corporate bonds, as the newsletters know well (lots of publishers have launched bond-buying newsletters over the years, but they always make up wacky names for them — if they call them “bonds,” presumably nobody signs up).

Here’s a little more from the ad, to give some background;

“Alpha Contracts are quite simple.

“Think of them as an alternative way for companies to raise money.

“Although they were initially established in 1917, under the First Liberty Loan Act…

“They took their current form in the 1970s….

“With stagflation, increasing fuel costs, tight credit markets… capital was not easy
to come by.

“In response, one of Richard Nixon’s top advisors, W. Braddock Hickman, Ph.D., stumbled upon an ingenious solution called the ‘Alpha Contract'”

And more about that “low risk” nature…

“… when academics T. R. Atkinson, Ph.D., and O. K. Burrell, Ph.D., studied ‘Alpha Contracts,’ they were…

‘particularly struck by the fact that Alpha Contracts earned a high risk-adjusted rate of return.'”

That’s a quote about junk bonds from an older edition of the Concise Encyclopedia of Economics… and, indeed, if you want to get any meaningful level of income from corporate bonds just now you pretty well have to go with “junk bonds.”

Which is a bit of nasty term, I suppose, but all it means is “riskier bonds” — the bonds issued publicly by less credit-worthy companies, and which were very rare until about 30 years ago, when the Michael Milken crowd really started promoting these higher-yield bonds.

And yes, “junk bonds” have only really been widely available for 30-40 years — but that’s not because the idea of debt is new, of course, or because such companies didn’t want to borrow money in the past, it’s because distressed companies weren’t really able to issue bonds until that market opened up back then.

It used to be that junk bonds existed just because of “fallen angels,” the companies tha