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.
Are you getting our free Daily Update
"reveal" emails? If not,
just click here...“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 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 that were creditworthy and issued bonds to raise money, but then later fell on hard times and had their credit ratings fall and saw their bonds start trading at much lower prices in the secondary market because of the risk, giving much higher yields.
The innovation of Michael Milken et al was not in trading junk bonds, it was in promoting the high yield bond market in general and helping companies with worse credit raise money by issuing junk bonds with higher coupons, which created a much larger marketplace for debt that had a little “distress” in it even when the bonds were initially offered. Over the past ten years, more than half of bond issuance has been in “speculative grade” companies, some of which are just barely below investment grade but a lot of which is from much less creditworthy companies (since 2009, according to Moody’s, 40% of bond issuance has been B1 or lower — which they define as “speculative and subject to high credit risk”).
In case you’re curious, the default rate for these bonds is high but not astronomical — at least, most of the time. Defaults wax and wane with the economy, which is why junk bonds are more economically sensitive to things like recessions than investment-grade bonds are (makes sense — companies are worse credit risks because they’re less successful than better companies, so they should be the first to suffer if the economy gets worse). AAA bonds and other top-tier investment grade bonds essentially never default, the percentage is minuscule and it’s obvious that AAA companies like Johnson and Johnson are not going to go bankrupt (even with the talc scandal)… but the average default rate for the top tier of junk bonds has been about 4% (it varies pretty widely — close to 10% of junk bonds defaulted in 2009 or 2001 during darker days, less than 1% in 2007 when all seemed well and it was still easy to refinance debt before the financial crisis). And for the lowest tier it can be dramatically higher, for some of the junkiest CCC stuff the default rate over long periods of time has sometimes been well over 20%. Usually defaults are preceded by downgrades from the ratings agencies, which investors rightly take as a warning sign and which tend to bring the price of the bonds down (and the effective yields up).
And, of course, the lower the rating, the less likely it is that a default will lead to a satisfactory return of your money in bankruptcy if the company liquidates or has to recapitalize… unless the sentiment is irrationally bad, companies with strong and vital assets backing up their debt don’t often fall to the lowest level credit ratings and trade at massive yields, though it does sometimes happen if the market is in turmoil or panic or the company is just small or misunderstood. Frequently in default situations, the bondholders get no cash repaid on their loan and just end up with stock in the new company that emerges from bankruptcy… in which case you might end up owning shares of a junk stock instead of your junk bonds (or take pennies on the dollar in liquidation, if the company just sells its assets and shuts down).
That’s why you need diversification as a bond investor — or great analytical acumen and wisdom, perhaps. If you’ve got bonds from 12 issuers and one of them defaults, that might mean you have a losing year but it probably won’t be catastrophic… but if you have bonds from just two or three issuers and one of them defaults and it ends very badly, as happens rarely but not never, you might lose 30-50% of your capital and it will take a long, long time to make that up with coupon payments.
We get some more examples, too, though not anything in the way of hints about which particular bonds he might be recommending now…
“… how about the media giant Viacom…
“This multinational company owns some of the most well-known broadcasting companies around, including…
“CBS, Time Warner and Disney…
“But take a look at their stock chart and it’s pretty uninspiring.
“Despite pulling in more than $12 billion in revenue, their stock price was up just 4%.
“But take a look at what happened if you’d skipped all that and just cashed in on their
Alpha Contract…“You could have instantly locked in an easy $2,270.”
That Viacom story shows a stock chart that runs from October 4, 2010 to February 7, 2017… I have no idea why they chose that random time period, but it’s true, the share price of Viacom only went up by about 4% over that 6-1/2 year period. We’ve all known stocks like that, I imagine, and most of us have probably owned them from time to time.
What would it have taken to “lock in” that $2,270? Well, the 6-1/2 years of coupon payments aren’t knowable for me, since I haven’t looked at their historical bond offerings, but let’s assume that those bonds in 2010 were available with a coupon of 4.5%, which is the coupon I know they were offering on a 10-year bond in 2011, so it’s probably pretty close. If you’re “locking in” $2,270 over 6.5 years, that’s just about $350 a year. So to earn $350 a year from a bond that pays a 4.5% coupon, you’d have to invest $7,777. That’s an odd number but round it off to say you’re buying eight bonds at close to principal value and there you have it, for about $8,000 you “lock in an easy $2,270” over the ensuing 6-1/2 years and end up with a total of something in the neighborhood of $10,270 when the bond matures at the end
Alternatively, you could have bought Viacom stock (VIA), which on October 4, 2010 closed at exactly $40 a share. If you held it until that day in February, 2017, you would end up with shares that are worth about $44 (that’s about 10%, not sure where Scheidt’s 4% comes from)… and you would also have collected your dividends along the way, which, if you kept them in cash, would have brought your total return to just over $50 a share if you sold everything and went home. Or, to put it another way, your $8,000 turned into $10,000 in the stock, too, though the story could easily have ended differently — you could have sold the stock near $80 at the peak in the middle of that period, or held it through thick and thin and today be sitting on a $35 stock and a frustrating long-term loss.
The bond position (sorry, “Alpha Contract”) is certainly a lot more predictable, and lots of people like that… but it’s not magical, that was almost $8,000 you put up for income of just $350 a year, remember, which sounds a lot less dramatic than those $5,000 to $30,000 “locked in income” deals per month.
And that’s really for two reasons — first, they don’t tell you how much you have to invest, because that takes away the magical thinking that sometimes inspires people to sign up for newsletters… and second, though they repeatedly mention these deals where you can “lock in” income every month, they don’t say how long it takes to earn that income. You could easily lock in $30,000 in income today by buying a big chunk of bonds, but that isn’t the same as saying that’s monthly income. That $30,000 could be paid out over 20 or 30 years.
Let’s leave you with a look at what they say is the last “Alpha Contract” they hint at, the recommendation they made in February of last year. Remember that? They said “February’s recommendation, Alpha Contract 63530QAH2, locked in $22,031.”
The number is just the CUSIP number, which is to bonds what the ticker symbol is to stocks. You can use it to look up that bond on your broker’s website, or on my favorite bond data source, the Finra site (Finra’s data on this bond is here). That’s a bond offered by theater owner National Cinemedia (NCMI), it was offered up in October of 2016 at a 5.75% coupon, and matures in August of 2026. It’s currently trading at a discount to the principal, last trade was quoted at $96.25 (which really means, $962.50 for one bond), so the effective yield would be 6.4% if you bought this bond today.
I dont’ know much specifically about the company, but it doesn’t look like it’s in disastrous shape — the market cap of NCMI is about $500 million, and they have about a billion dollars in debt outstanding (this particular bond is $250 million of that). The bond is rated as junk (B3 from Moody’s, B- from S&P), which really just means that it’s not safe enough for banks to rely on as “investment grade”, though obviously lots of institutions, including banks and insurance companies, do invest in “junk” bonds.
But how would that investment work? You could buy it at $962.50 now and, assuming the company remains healthy, get back $1000 in 2026… so that’s $84 right there as a nice little maturity bonus. And for each bond you buy, you’d get $57.50 in annual income for the next 7-1/2 years — so that’s about $430 of income over the life of the bond, for a total of $514 of income spread out over those seven and a half years. That’s obviously not $22,031… but it could be if you bought about 43 of those bonds instead of just one bond, investing $41,387.50 up front.
So that’s a pretty decent return, right? You could indeed “lock in” $22,000 of income by making an investment today of a bit over $41,000… it’s just that the income will come in installments every six months of about $1,235, and then you get a little bonus at the end — instead of just getting your $41387.50 back at the end, you round it up to $43,000.
That ain’t bad… it’s not magical, and you would be frustrated if you had to sell the bond back at a lower price someday before maturity for whatever reason, or if they go into bankruptcy and the company isn’t worth as much as they borrowed, and the fear of rising interest rates and rising inflation does give some qualms about committing big amounts of money for eight years… and it can be pretty tough to build a diversified portfolio of individual corporate bonds unless you’ve got at least $100,000 or so to commit to that part of your portfolio… but every portfolio needs some balance from guarantees and solidity to let you sleep at night with all those great dividend growth stocks and other investments that will, we hope, provide the inflation protection over time.
What’s that inflation risk? If inflation stays at 2.5% a year for the next decade, which the Fed would love, that would mean that the $40,000 you get back in 2026 is only worth about $33,000 in 2018 dollars… but that’s true of pretty much all fixed income investments, they provide the stability and the assured return of principal, and you get your growth and your inflation protection from somewhere else. If inflation is a lot higher than that for any length of time, well, it gets a bit uglier and almost all bond investments turn out to be terrible.
Personally, I worry about another financial crisis hitting junk bonds — both because some companies who are on the edge (and therefore pay the highest interest rates on their bonds) will have trouble refinancing their debt as interest rates rise, and because ETF trading now dominates much of the “high yield” segment of bonds, and if investors flee those junk bond ETFs all at the same time, the ETFs will have to sell lots of bonds into a market without liquidity, perhaps at fire sale prices. That, I suspect, will be the more appealing time to be a buyer of junk bonds, so perhaps now is a good time to go out and educate yourself.
Be careful what you pay for the education, though — if you’re dedicating “only” $100,000 to a corporate bond portfolio right now, then paying $1,250 for Scheidt’s newsletter (that’s the current “on sale” price — it was $2,000 when I covered a similar ad last year) would mean you’re paying 1.25% of your portfolio for investment advice from someone who is not a fiduciary and not personally beholden to you (like yours truly, he’s a writer and analyst, not a personal financial advisor or portfolio manager).
Thought of another way, if you invest $100,000 and get a fairly average income of 6% from that portfolio (that would be $6,000 a year, for the math challenged among you), then you’re giving up almost a quarter of the income to pay for that newsletter. That’s a lot of money — I have no idea whether or not this will end up being an effective product for those who want to pick and choose individual bonds, but it’s hard to justify it unless you’re making a substantially larger commitment than that to the junk bond part of your portfolio. Most brokers have a good education section for bond investing (Fidelity’s is here, for example, or Finra’s more basic stuff is here), so those are good places to start if you want to learn more about building a bond portfolio and are sick of listening to my blatheration.
And, of course, the one big of context you need when someone teases you about earning a huge amount of income is how much do I put in? Current yields from the high yield bond ETFs are in the 5-6% neighborhood, so that provides a ballpark for rational expectations — if your portfolio of bonds is average, you’d expect to have to invest roughly $1 million up front in order to earn that teased $5,000 a month in income.
Enough? I’m tired of writing this, and I suspect you’re tired of reading it — but yes, “Alpha Contracts” are high-yield bonds, often called junk bonds, and they do provide stability relative to stocks, and a guaranteed return of principal at maturity along with a fairly high coupon payment… with the biggest risks being the solvency of the company (you don’t want them to go bankrupt, bondholders are first in line if they do but often don’t get all their money back), and the same inflation and interest rate risks that plague all fixed-income investments. We don’t know specifically which ones Scheidt is pitching, since he didn’t hint about any current picks, but if you have any favorite bonds or have any questions or thoughts to add, please feel free to throw them on the pile by submitting your comment below. Thanks for making it this far!
P.S. What does that “July 22” deadline mean? As far as I can tell, nothing — it’s not mentioned again in the ad after that headline threat… so perhaps that’s the last chance to subscribe before they issue their next recommendation, in which case there’s no rush because there’s no reason to pile into buying individual bonds at the same time that all of your closest friends are trying to buy the same bond… or perhaps it’s just the end of this “promotion” for the newsletter, in which case there’s no rush because you don’t rush to buy stuff sight unseen just because of a deadline, right? They do offer a 90-day refund term on this particular newsletter, so there is, at least, a little “sample period” if you want to find out whether or not you find Scheidt’s bond portfolio and analysis compelling, but I’m sure they’ll also be back peddling it again in the future, so you won’t miss out if you decide to be patient and think things over (and heck, the price of the newsletter dropped by 37.5% in the past 15 months, so maybe it’ll cost less the next time you’re tempted).
Disclosure: I own shares of Disney among the companies mentioned above. I won’t trade in any investment covered for at least three days, per Stock Gumshoe’s trading rules.
Hi Travis, hope you had a nice vacation. You mention here that your allocation to fixed income is very low. Also, on your Real Money Portfolio page, I don’t see any mention of your allocation to fixed income. Could you discuss your thoughts on this a bit more, perhaps in the next Friday File? Why not have a higher allocation to fixed income, especially now that the market seems to be valued so richly, and talk of a possible recession seems to be increasing? Thanks!
Mostly it’s my risk tolerance, age, and inflation expectations that keep my fixed income allocation small — I’d just as soon have cash earning 2% as “safe” 3-4% income from investment grade bonds, and generally prefer equities to junk bonds — but that’s a good topic for future discussion, thanks.
I don’t know where else to ask this question. I have been reading a lot about Tom Gentile’s marijuana “lots” and would like to know if you could enlighten us. Thank you.
Fixed income is great for those of us in retirement, but I got here by investing in growth. I now regularly collect 10-13% div’s on my income stocks. Mostly REIT’s, which are volatile at times, but the div’s are steady regardless
Stansberry is coincidentally also making a huge push of this same research right now. Wonder if there is any relationship.
Porter seems to be a big believer in corporate bonds, and has tried to launch a bond advisory newsletter probably three or four times in the past decade, though they haven’t ever stuck around for very long. I expect it’s probably a hard thing to sell, with relatively modest returns and a heavy education component but pretty high investor expectations based on silly ads like this one (trading bonds is a much higher friction business than trading stocks, with lots of variables and often phone calls required with brokers). The other one that has lingered and been pitched off and on is Oxford’s bond newsletter from Steve McDonald, I think it’s called Oxford Bond Advantage now (at least he’s willing to use the “b” word).
Yes, footwork involved — finding a service which trades it and having to wait perhaps weeks to get a good price. Porter’s bond message really only works when people expect a major downturn. Meanwhile, the world’s central banks acting in concert have exceeded all expectations in just how powerful they are in imposing false markets, no end currently in sight. Stansberry offers value but obnoxiously aggressive marketing.
I recently subscribed to Stansberry’s unrefundable (Undisclosed Minimum Investment) Bond Opportunities, and I called them to get a refund, and they gladly refunded my $1500 due to my incapability of investment into this type of bond stragety. I was grateful for their understanding of my situation, and look forward to investing that money in other areas for my retirement.
Stansberry=snake oil
Travis, Good to have your sane voice of reason back on-line. Glad that I waited till I got more information about this “approach” before being sucked into their marketing / sales pitch. I continue to get value from your service, and the community of your readers. Thanks again.
welcome back Chief.
Best newsletter out there.
Woodrow
Hi Travis. Could the July 22nd be derived by the amount of time remaining to bond expiration which would be needed to fulfill the total income suggested?
You never know for sure, but bond coupon payments are linear and the price will be adjusted based on the timing of the coupon payment… there’s should’nt be a key date to “get in” unless a bond has dropped very temporarily in value for some strange reason.
To put it very bluntly, I’m just sick and tired about hearing the virtually meaningless term “Alpha Contracts!” As a former professional bond trader, I’ve commented here before about the inherent risks and land mines of bond investing. So, I will not repeat myself. Travis may choose to unearth those comments and share them again, should he wish to do so. However, from reading this excellent analysis by Travis, I want to share just two observations that, hopefully, will cause people to stay away from these sales pitches for many moons to come. First, I doubt very strongly that any of these “pitchsters” who want you to believe they really know a lot about bond trading has any real, hands-on, in-depth experience in that arena. It’s a whole different world my friends than sitting at your laptop and putting in orders with an online broker to buy or sell equities. The professionals have their ways of trading debt instruments that, by design, exclude the retail investor (or “sucker”) — you don’t stand “a snowball’s chance in hell” of getting a good fill. Secondly, at least in my day, the spreads between bid and asked prices were very narrow for the professionals and multi-lane freeways wide (at best) for the retail customer. There were “many fingers in the pie” from both ends of a transaction — no one involved was excluded from making money except, of course, the retail customer who was funding those payments at every level. And, if you think for a moment that by getting involved with any sort of bond trading that you are joining the ranks of professional traders, think again — you’re not and you never will be, unless you get to park one of their Ferraris at the six=star restaurant where you’ll end up working as a car hop! Caveat Emptor!
Thanks George. Yes, you can buy and sell corporate bonds — but if you’re used to stocks you’ll definitely be surprised with how hard it is to fill small orders for all but the most liquid bonds, and yes, the bid/ask spread can be terrible and the traders keep it opaque and silo’d to protect their information, connections and profits. Demand is so strong for bonds these days that I imagine it’s even harder for individual investors than usual.
Thanks, Travis!
I have subscribed to such a service with either the Palm Beach or Stansberry people a couple of years ago and while there were some gains there were also some lumps and it wasn’t worth it to me.
Very well put — “…. it wasn’t worth it to me.” That sort of says it all! Spread the word and trust that investors’ intelligence will prevail.
One thing came out today, Perth Gold Mint ETF
https://finance.yahoo.com/quote/AAAU?p=AAAU
Why, beats me, but it jumped something like 3 pts., for nearly a record. It’s been trading since last year in Australia I believe.
Just a general comment Travis…just love what you do. Keep up the great work my friend!
Thanks!
Knew these invisible hand income promos were hot air trying to inflate a leaky wallet! That would have been be my wallet! But the explanation made it worth it; worthy of a file!
Bad deal.
Now for the promos re perpetual bill (as in legal tender) counting machine!
What about the magical income flow source from the Trump Tax reform?
Remember the story about an intentionally secret buried amount of $17B put there st the end of the bill ; as in legislative) by President Trump!
In the promos it showed pictured images of large checks made out to retiring House members!
Seemed pretty crookedly pitched to people who really do not need extra money! Your trust fund holders you noted in your discourse who can do what they want with their money, must be the targets ?
Maybe you have that investigation in your archive!
Glad you had a break!
Marion
Thank you, Travis, for this Corporate Bonds 101 Crash Course and for the reality check that one will need to allocate ~ $100K exclusively for such bonds in order to collect the levels of monthly income teased by the newsletter. My hunch is that there aren’t very many people on this site wondering what to do with $100K just sitting around and then willing to risk that much on high-yield, non-investment grade bonds, plus the annual fees paid to the newsletter to boot.
I wish to thank ex-bond trader “George C” as well for the sneak peek into what goes on at the Bond Desk unknown to the retail investor. (Unfortunately, the Gumshoe system did not provide him with his own Reply buttons). His missive brought to mind how the typical brokerage house sales rep’s spiel advises a retired client to allocate 60 to 80% of their portfolio (depending on age) into bonds, and the rest into stocks or cash. I get somewhat angry by such institutions that turn Seniors (and their hard-earned cash) into Suckers (as George C aptly put it). Ok, I’ll step down from my soap box now.
I can’t believe that they’re still running this alpha contract ad. I got sucked in, but I got my money back. The ad is deceptive misleading and fraudulent. Nowhere in the ad is the word bonds used. To get the annual returns They are talking about, you have to invest hundreds of thousands of dollars in bonds.
My thanks to bunion132 and dadams1234. If Caveat Emptor ever applied, you’re looking at prime examples right now with these pitchsters — there otta be a law! And, just to re-emphasize, if you think trading bonds is for the big guys, you’re absolutely right! Let’s finish the sentence — at the expense of all others and it’s NOT for the retail “trader”.
Hey, Travis, I hope your vacation was enjoyable; I took a lot of time off this year, though it had more to do with a bad post-operative course than a vacation. But I digress. I saw this pitch also, and I had pretty much figured out the same thing as you. Buying individual bonds can be good if you find one paying a good interest rate, AND at a decent discount to par. Otherwise, inflation may eat away at your principal, thus eroding your true yield. That’s the benefit of bond mutual funds.
I even bought one bond, recommended by the Stansberry Credit Opportunities “product’. And, wouldn’t ya know, that was the one bond in their portfolio that crapped out (Monitronics, I think it was). I lucked out selling it and not losing too much on the principal, but never got a penny in interest. One of these years I’ll go to the Stansberry extravaganza in Las Vegas so I can tell him what I think of their portfolio, not that it will get me a refund.
Hi Travis, I love reading your articles about certain companies and how people sometimes don’t see the whole picture. With your research you can give people a peace of mind with out spending outrageous amounts of money on products with broken promises. I love that you give more insight to help people steer the right direction.
I do have one quick question for you and many out there. What is your opinion about monthly dividends that are reinvested instead of spent?
Which companies do people that have out their that have a good yield and good return?
Monthly vs. quarterly dividends is largely a pointless distinction. Dividends are good, reinvesting dividends is a great way to get long-term compounding, but focus more on the quality of the company and the potential for dividend growth than on whether they pay monthly or quarterly.
Monthly dividends do compound slightly faster, all else being equal, but it’s a very small difference of a few basis points — not enough to make a decision between two similar stocks.
I have quite a few dividend growth/compounding positions in my portfolio, including IIPR, AAPL, KW, MPW, COR, CCI, NOK and others… I look for a combination of high current yield, good dividend growth potential, and a dividend that is easily covered by cash flow or earnings.
Travis,
Like always I appreciate your advice. I am invested in a company called oxford lane capital. It gives a monthly dividend of 13 cents a share.
I will check into the ones you have mentioned.
I appreciate your advice. You have saved me tons of money.
Not a big fan of Zach Scheidt. Was a sucker and paid $2,500. for 2 years of his “Buyout Millionaire Club”. Huge mistake. He promised over & over he was 98% accurate and average payout for a $500. Investment would be $15,437. Needless to say that was a bucket of hog manure. With his wonderful picks like,…WIFI, MRO, SOHU, and countless other “Loser
Stocks”,….you can forget about any profits. Then Zach has the nerve to boast, when one stock returns 30%, IF you took a huge risky “option” trade, and waited for months.
Then he bombards you with this “Alpha Contract” pitch, …. Inner Circle pitch that only costs
$1,776., &… Trumps Tax payments to “Patriots”. If you don’t respond, he sends a 2nd email, basically calling you a dummy for passing up his “incredibly generous” offer,……plenty of sarcasm intended. This young Zach is about as accurate as a blind folded monkey, throwing darts ……and that’s being very generous. Steer clear of his pitches is my strong advice.
Thanks to Travis, as usual, and also to George C for his common sense comments about bonds. I was a sucker who got roped into some of Stansberry’s pitches early on, but rather quickly realized these were the entry level newsletters and almost everything from him from then on was another upsell pitch. Stansbury is nothing but a Snake Oil Salesman
Travis, thanks for all you do. You are the investment guru from realville. Agree completely on bonds. My only experience was many many years ago. I actually think Stansberry had a bond section, recommending about 7 or 8 high yielding bonds. I read all the information how they assures us that there were plenty of assets to offset any defaults. Long story short, bought 2 bonds investing $5K each. They both folded and some judge ended up shutting out all equity and bond holders, Stansberry never mentioned that possibility. And I looked into Zack’s income on demand, problem is if you follow it religiously, it requires about $10k per position. Same as above, at times he had 20 positions open. I don’t want that much $$$ exposure to investments in uncovered put positions.
FYI: There’s a financial technology startup now operating in the UK called WiseAlpha who offer a portfolio of corporate bonds to private investors on their trading platform. I’ve had a look at what’s on the market and they cover a wide spectrum of UK companies mostly in the top two tiers of the market. If anyone is interested in trading UK corporate bonds, this seems to be a relatively easy way to participate.
aaah-it now Gum Shower’s
Travis, what’s this about talk about vacation? I thought I better ask or someone would call me an asshole for not a mention of it, but yes I’m always interested in where you would have a good story about someplace.
But to the speech of AGORA FINANCIAL, I run like hell the other way. With the team of :
RAY BLANCO
JIM RICHARDS
ZACH SHEILDT
TIMOTHY SYKES
AND A FEW OTHERS, but JIM RICHARDS claims to be President Ronald REAGANS right-hand-man and if it were not for JIM most of REAGAN presidency would not have come out so good. And Timothy SYKES well he’s just TIMOTHY SYKES. ZACH SHEILDT little black box, which will tell you weeks in advance, stocks that are going to jump 578% or 829% or even 1545%. But like I say, run like hell the other way. But let me go fetch what Matt McCall said about the 10X fold. Aww shit Travis and Steve I believe I babled again!?!
Thank :-: You
FRANK eight MORRISS
A long and therefore challenging analysis and explanation, but readers who stick with it will learn something. That’s not the case with this unapologetic pitch for “Alpha Contracts.” If nothing else, it should make more understandable the compulsions of athletes who inject steroids or turn to a chemicl that’s “steroid in effect without any risk” and eventually find their health, morals, mental clarity and legal status seriously compromised.
The pitch begins with a wild claim about incredible wealth without risking a dime in the stock market. Then, in the next sentence, the poor agent (who would want to get paid for resusitating P.T. Barnum for an employer going to shocking lengths–yes, “shocking” even on a morning when the news is all about 2 mass killings –to pry loose $1250.00 from some of the less experienced, more gullible readers of Yahoo financial pages?)–but that 2nd sentence is probably the only “honest” one in the pitch, because as the mouth of temptation says, “Sounds crazy, doesn’t it?” Then instead of a “logical 3rd sentence”–i.e. an explanation of why the first sentence is NOT crazy, or any sort of “defense” of an unbelievable claim, the pitch bombards the reader with hedonistic pleasures supported by photos of people enjoying wealth by traveling, playing, even donating large sums to their church. In fact, the explanation never comes. You’d have to be sufficiently informed to check it out on stockgumshoe.
It’s that 3rd sentence that should instantly aleart the reader to a potential scam–and possibly reason enough to move on. If the seller can’t deliver on the implicit promise of that 2nd sentence: “Sounds crazy, huh? with a connected 3rd sentence: 3. Well, it isn’t crazy because . . . But there is no such 3rd sentence. Instead the sentence following the 2nd is a wild deviation into the pleasures available to those with a big, steady, risk-free income. The point, simply, is this: If the company can’t be trusted to fulfill the promise of the 2nd sentence with a logical 3rd sentence, how can you trust them with your wealth (from $1250 to hundreds of thousands in junk bonds!)?
Under our current President, who would have you believe the Mid-East turbulence, the sub-par health care and inefficiency of the V.A. and practically everything else is now great (because he gave to his son-in-law, Jared Kushner, the responsibility of taking care of these problematic areas )–if you’re not feeling it, you’ve missed the boat–and here’s your chance to get back on it.
On the other hand, if the President’s tariffs and tweets are not enough to ensure a prosperous and stable financial future, or if his wisdom does not extend to predicting the future, the state of the nation may not be as stable and rosy as we hear from the White House. (This is not to suggest he is to blame for actual conditions–only that such promises and assumptions might be taken with 2 rather than 1 grain of salt.). A few years ago, a fellow musician could talk about nothing but the “Turbo Bonds” that someone had persuaded him to invest all his savings in. Simply saying the word “Turbo Bond”–a term the rest of us were unfamiliar with– seemed to inspire inner confidence that he had access to privileged information leading to certain prosperity. Sadly, the bonds did more poorly than a savings account and, even sadder, I now must carry on without benefit of a good bass player–one of the few who knew chord progressions to songs composed before 1960.
I have spent a lot of money on expensive software lifetime memberships in places like Indigo, Agora Zacks and others but it turned out that the Agora lifetime membership only lasted for about 4 years then the newsletters stopped. They weren’t that great anyway for an active trader like me. I did not make any money on any of it over the past 20 years. I am really hesitant to put a lot of money in any overpriced software or newsletter. They sound great but do not produce profits.