What is “The Only Escape Route Left for Your Money?”

Sniffing out Roger Conrad's solutions to the "Triple threat" of a looming "crash in bonds, a sell-off in stocks and a blowup in inflation"

By Travis Johnson, Stock Gumshoe, January 23, 2013

There is often turnover at investment newsletters, as editors either have a few really bad years and get canned or get tired of working for a publisher and set off to start independent publications, and the folks at Investing Daily have recently seen more turnover than most — Elliott Gue and Yiannis Mostrous, who have in recent years made up half of their heavily promoted team of editors and generated a lot of teaser stocks for us to unravel, have left …

… and now their flagship letter Personal Finance, one of the long-standing “entry level” letters that has introduced investors to “alternative” investments and broad asset allocation strategies for decades under Stephen Leeb and Neil George and others, is being helmed by Roger Conrad, who made his name as a dividend hunter in Canada and in the utility sector (Investing Daily’s global letter that had been helmed by Mostrous, by the way, is now run by Benjamin Shepherd, who previously had written about ETF investing for them).

This is the first time a Personal Finance teaser ad has caught the eye of your friendly neighborhood Gumshoe in many months, so since we’ve got a new editor and a new teaser and a new year all joining together I thought we’d take a gander at this pitch.

You can see from the first part of the spiel that it’s a familiar “big picture” idea that backs the investments they’re recommending — and the big picture is, “we’re scared:”

“The Collapse of Obamanomics…

“Why the Next 4 Years Will Be Even Worse…

“and the Only Escape Route Left for Your Money

“In this special report from the longest-serving and most widely-followed advisory in the country, we explain…

“Obama’s 16-year curse on the stock market…

“Why stocks could drop in half from here and…

“7 obscure escape routes to profit from the coming collapse, including one yielding 10.1%.

“Below, urgent instructions on how to face the looming triple threat to your wealth.”

This is catnip for most readers of investment newsletters, who are ready to believe that Reagan singlehandedly created a growing economy and Obama is singlehandedly destroying it — we won’t go into that oversimplified look at history very much, since that then becomes the only thing that folks can think about as the chatter on one side of the aisle or the other turns their eyes red, and seeing red rarely helps investors to see green … but the point is that the economy is weak and still recovering very tepidly from the recession, the country is overleveraged, we’re hurt by unemployment, and hurt by an increasing “us vs. them” divide across any dividing line you can come up with.

Conrad sees us at a tipping point, with a “bloody endgame” that will have few “escape routes” … here’s how he puts it:

“A couple of years ago Harvard professor Ken Rogoff conducted a massive study covering 44 countries over 200 years. He found that economic growth always hits a brick wall when a nation’s debt climbs above 90% of GDP.

“At that point, it is almost impossible to grow your way out of the hole you’re in. The trend doesn’t look good for us. Total United States debt has just hit 102% of GDP.

“In other words, we’ve crossed the critical 90% tipping point… and are heading toward a debt-to-GDP ratio higher than the one that pushed Greece into bankruptcy.

“In 2009 Greece’s national debt reached 115% of GDP. Within a year, banks refused to lend Greece any more money. The Greek crisis was on.

“Look at how the world panicked over a tiny country with an economy half the size of Ohio’s. Can you imagine the carnage we’ll see when the world realizes that the biggest economy in the world is in the same sorry shape?

“The EU is trying to put Greece back on its feet with a trillion-dollar bailout. But we already borrow $1.2 trillion per year just to keep the wheels turning. When our next recession hits, who will bail us out? Who is big enough to even try?

“What’s worse, we won’t be alone. Many other overextended countries will be looking to borrow trillions, too. All these debt hogs will be crowding around the same trough trying to outbid each other for the available funds with higher and higher interest rates.

“Higher rates will sink bonds, hurt stocks, raise mortgage payments and depress home sales even more. Obamanomics could play out in a bloody endgame that will throw millions into poverty.

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“Again, there are very few escape routes. And I can’t think of any that the average investor is familiar with. But I’ve found a handful of obscure lifelines so perfectly suited for what happens next that they could make the coming few years the most lucrative investment stretch of your life.

“So many desperate investors will be crowding into these rare financial lifeboats that all you need to do is get in now… and watch as a flood of buying pressure pushes them higher.

“I’ve moved a significant amount of my own money into these investments. I urge you to at least consider doing the same.”

Those concerns are all perfectly logical — unfortunately, the logic of them doesn’t mean they’re particularly predictable. Very much the same things were being said about US debt and the inevitability of higher interest rates three years ago, and in the years before that even I thought more than once that we were absolutely due to see higher rates — I thought it was ludicrous that people would lend money to the US government at less than 4% a year for ten years, and now that 10-year note is down to well below 2% as bonds continued to be an incredibly and shockingly good investment over the past couple years.

But yes, I have to agree that it will end sometime — it is just such an absurd bubble building in fixed income investments, particularly in the US but also elsewhere around the world, that it seems inevitable that it must deflate, if not pop. Eventually. Unfortunately, there are so very many moving pieces, and so much that can and has been done by governments to manipulate the currency and debt markets, that I have no idea whether interest rates in the US will go up in 2014 or 2015 as the Fed is expecting, or this year, or in ten years.

So that being said, what is it that Roger Conrad thinks we should do? What are those “obscure lifelines” that can protect our investments? He teases three of them in this ad, so we’ll try to ID them one at a time:

“1) Protect yourself from out-of-control U.S. government debt… turn the problem on its head… and make some money off it instead.

“Some people say they don’t feel right betting against Uncle Sam. But I don’t think you need to apologize for protecting yourself from reckless politicians who threaten to bankrupt every one of us.

“These politicians have hung a $16 trillion yoke of debt around our necks. When you add in the unfunded liabilities of Social Security, Medicaid and Medicare, our debt is actually a staggering $120 trillion. That’s $385,000 for every man, woman and child in America….

“… U.S. Treasuries aren’t the risk-free safe haven they’ve been considered for so long.

“As the perception rises, the government will have to start paying higher yields to compensate buyers. That means lower bond prices ahead. Maybe much lower.

“If the bond market crashes, that’s bad news for every investor—even if you don’t own bonds. If credit markets freeze and interest rates spike, everybody gets hurt.

“I want to protect my cash. So I’m buying a unique security that goes up when Treasuries go down. I think the market is about to give Treasuries a beatdown. So I’m buying this one now.

“There is almost zero downside to this trade, because Treasuries literally can’t go much higher.

“One-year Treasuries are yielding a minuscule 0.16%… and 10-year bonds are paying the lowest rate in 60 years. If you want a once-in-a-lifetime chance to get in at the bottom, you’re looking at one.

“Do yourself a favor and pick this one up soon. When the bond market snaps, its owners will make tremendous profits.

“How much upside are we talking about? Bond investors have made about five times their money since money started flying into bonds about five years ago… so you could also make five times your money as bonds crash. And the profits will probably come fast. Bonds tend to crash faster than they rise.”

“… This one is already starting to rise….”

There are several different ETFs that you can use to bet on changing prices of treasury bonds, and if you want an inverse ETF — an ETF that moves opposite to the underlying index — then there are a couple ETFs that effectively sell these bonds short. The one that is most conservative and unleveraged is ProShares Short 20+ Year Treasury (TBF), which is designed to move opposite to long bonds (the big fund for betting bullishly on long bonds is the iShares Barclays 20+ Year Treasury Bond, ticker TLT), so you can illustrate the difference with a quick look at the charts of the two together:

ProShares explains this bond bear fund here. This is an ETF that seeks to have inverse moves to the Barclays U.S. 20+ Year Treasury Bond Index every day, so it doesn’t necessarily track as a perfect short over the long term but it is supposed to be pretty accurate for daily moves. And it will track the index far more closely, one expects, than the leveraged ETFs that try to do something far more dramatic — there are also several levered ETFs that aim to produce 2X or 3X the same result on a daily basis, but when you lever daily moves like that the tracking error grows substantially over time. The other “unlevered” short ETF for long-term Treasury bonds that I know of is the Direxion Daily 20 Year Plus Treasury Bear 1X (TYBS), and that has dramatically lower trading volume so there doesn’t seem to be a reason to stray from TBF if a simple bet against Treasuries is your goal.

The levered ETFs include the big one, TBT, which is the UltraShort version of that ProShares fund or the UltraPro Short TTT (“Ultra” at ProShares means “Twice as much”, I guess, UltraPro means 3X) and the more levered (and lower volume) Direxion Daily 20 Year Plus Treasury Bear 3X (TMV), which uses a slightly different long bond index. You could also, if you prefer, also just simply short TLT on your own, or buy puts against it or some other similar way of betting against the rise in bond prices. You’ll note from the chart above that the tracking is pretty good for any particular move in the index, but that over time the bear fund has tended to do slightly worse than the bull fund does well — ie, TLT is up about 3-4% for the last twelve months so TBF might be expected to be down 3-4%, but it is instead down about 8%. That’s the nature of funds that track daily moves, they lose some of their tracking over time. That is a fairly minor difference compared to the levered funds, as you can see when you throw TBT into that chart as well.

Interestingly, there’s now an ETN that rebalances the leveraged short bet monthly instead of daily, I’ll be curious to see if that holds to the index more accurately over time and over big moves, but it’s pretty new still. That’s the PowerShares DB 3X Short 25+ Year Treasury Bond ETN (SBND).

I don’t know precisely what Conrad would be recommending here, but my guess, given the generally conservative nature of Personal Finance and the danger you can run into if you use leveraged ETFs without understanding what they are, is that he’s suggesting the TBF fund for a simple bet against long-term Treasuries. And though that bet has been logical but wrong over the past year I’d agree that it eventually should be right. Of course, I probably would have said that it should be right 2-1/2 years ago when the fund was launched, too, and it’s down about 40% over that time, so if you can get the timing right on the eventual rise of long-term interest rates, well, more power to you.


“2) This unique ETF will soar if a plunge takes the market by surprise. Like any “inverse” ETF, it moves in the opposite direction from the market. But this one has something extra going for it. Instead of passively shorting a market index, its managers dissect financial statements looking to cherry pick individual stocks to short that are overpriced and vulnerable. So it can go up even more than the market goes down.

“The fund has already made a fortune shorting Green Mountain Coffee Roasters. Before its fall from grace, GMCR’s stock had surged from $6 to over $115 in just a few years, boosted by booming K-cup coffee sales.

“That put GMCR’s value close to Starbucks—even though its margins were narrower and there wasn’t a GMCR on every corner.

“Turns out GMCR was being a tad aggressive in accounting for its revenues. After an SEC investigation, the stock crashed to below $20 and our pick cleaned up.

“The fund’s biggest short position right now is Citigroup, which is being sued for its role in the Libor interest rate scandal. Three studies show that Citi manipulated Libor more than any other U.S. bank. Total fines and legal settlements for all 16 banks involved could reach $35 billion.

“They are also short CarMax, which could take it on the chin if we dip back into recession. Heck—it could even if we don’t.

“So this fund is a perfect vehicle for the road ahead. It’s the second must-buy security you’ll find in your free Crash Protection Package.

“It should do better than ‘bear market’ index funds in a down market. What’s more, because it is shorting weak stocks, it can even make you money if the market rises, which inverse market index funds will never do.”

This one, sez the Thinkolator, must be the Range Equity Bear ETF (HDGE), also sometimes called “Active Bear” — this is one of the relatively new class of ETFs that use active management to run their portfolios instead of just following an index and, as you can guess, it does just what Conrad says — it bets against specific stocks by taking on short positions.

I haven’t ever looked at this one before, and since shorting is tough for individual investors to manage sometimes it seems like a worthy candidate for consideration — but as with regular short selling, it’s more expensive than just investing in stocks. The expense ratio is over 3% a year, which seems to include shorting costs, but there may also be hidden trading costs in there because short sellers typically have to pay interest or fees to short stocks to get their borrow, and they also have to pay the dividends of the stocks they short.

The fund is too new to judge it very well, but it has generally gone down when the market goes up, which makes sense … I wouldn’t be entirely certain that their active management will turn out to be better than a broad-based hedge — it has sometimes done better and sometimes worse than the S&P 500 Short as represented by the ProShares Short S&P500 ETF (SH). I’m curious about this as a potential hedge, but can’t generate much of an opinion on it just yet — more info on their website here if you want to read up on them. They do have some of the same short positions on as do famous short hedge fund investors like David Einhorn, with short positions in Chipotle, Green Mountain Coffee Roasters, and Cliffs Natural Resources, but as Einhorn’s investor letter today reminded us, sometimes the market goes against you when you bet against what you think are overvalued companies.

Hedge funds like Einhorn’s can hedge by going both long and short, this ETF is just short … so remember that these kinds of investments are probably best to use in balancing a portfolio against risk (if you presume that they pick the right shorts, which will go down even more than the overall market if there’s a downdraft), not in throwing all your money at them to make a directional bet that the market has to fall. I’m going to keep an eye on this one for a while, I like the general idea of an active short ETF like this but don’t know much about their management strategy or stock selection yet.

I also own shares in Einhorn’s Greenlight Capital Reinsurance (GLRE), for full disclosure, and continue to have limit orders in to buy more — Einhorn had a weak Q4, so perhaps those orders will trigger soon.

And Conrad teases one more:

“3) The perfect inflation hedge—and an asset class not one investor in 100 is aware of: bank loan funds.

“These funds buy loans made by major banks such as JP Morgan to large corporate borrowers. But they only buy loans issued at floating rates, which reset every 60 to 90 days. So if inflation increases and interest rates rise, you’ll earn more. And even at today’s low rates, I’m finding floating-rate bank securities that offer steady yields of 7%. If inflation starts bucking up, you’ll be earning 8%, 9%, even 10% or more on these notes.

“In your Crash Protection Package I reveal a fund full of floating-rate loans that pays 6.9%. What’s more, it should keep giving you higher and higher yields as inflation gains steam.

“If interest rates don’t rise… no problem. You’ll still be paid 6.6%. At best, you’ll get the high yield and a capital gain as inflation ramps up.”

Bank loan funds have gotten a lot of attention as income from most other debt instruments has withered, there are two ETFs I’m aware of that hold floating rate bank loans, FLTR for the higher-grade loans and BNKR for the “junk” bank loans to riskier borrowers. Neither one yields 6.9% (FLTR is down near 1%, BNKR is right around 5%), so I suspect he’s teasing a closed-end fund for this — and indeed, closed-end and mutual funds for bank loans have been around for a lot longer than these ETFs. There are several funds available from big shops like Nuveen and Eaton Vance, but I’m going to throw out the Thinkolator’s best guess on this one: Eaton Vance Senior Floating Rate Trust (EFR)

This is a floating rate bank loan fund, it’s pretty liquid and reasonably large, and it yields about 6.7% at the moment, with a monthly distribution that has recently been rising slightly. There are a handful of other closed-end funds in this small sector that have similar yields, ranging from about 5-9% depending on various factors, and most of them trade at a premium to their net asset value at the moment (EFR trades at a premium of about 5%, some are close to fair value but most are at premiums of 2-5%). If you’d like to sniff around the various closed end funds to find a favorite floating rate bank loan candidate, the other tickers I have at hand for these funds are EFT, AFT, BGT, EFR, JRO, JFR, and PHD. And there are probably a few I’ve missed, but that’s a good start. I don’t personally have any money invested in debt right now, but if I were going to wade into corporate debt I would definitely feel more comfortable with a floating rate bank loan fund than with the high-yield junk bond funds that have gotten so much attention lately.

Conrad also throws in one of his ideas for free, one of the new crop of US oil trusts — here’s what he shares:

“I won’t hold back on this one. The company is called Pacific Coast Oil Trust. It trades on the NYSE as “ROYT.” It gives you an instant stake in 276 oil wells. Even better, it’s yielding 10.1%. There aren’t many opportunities like this.

“Most oil companies are complex affairs. They own land. They own wells, derricks and trucks. They have thousands of employees. They have to deal with spills and regulators. They have to pay lobbyists to grease the wheels in Washington. That’s a lot to handle and still pump out a profit.

“But this oil investment couldn’t be any simpler… or more lucrative.

“It was created for one reason—to pay out 100% of the royalties it earns from a proven oilfield littered with wells. It has none of the headaches of running a company.”

I don’t know this trust at all — if you’d like to research it the question to ask about oil trusts in general is how long they’re going to produce, and whether the production can stay stable or grow. These are depleting assets, and trusts do not have the freedom to reinvest or acquire new territory, they have to pass all the income through to shareholders and at some point those fields run dry or start to produce much more slowly. The most prominent example of this now in the energy space is the first Whiting Trust (WHX), which is nearing the end of its life and is expected to stop producing royalty income at some point in 2015 — so now you see a stock that has a $6 price and yields $2+ a year in dividends, but the shares have been in steady decline as folks calculate the end date of the trust and how much they can earn before that end date, when the trust dissolves and stops being worth anything at all.

That’s very unlikely to be a substantial concern for any of the new trusts that have started up over the last several years like Pacific Coast, but it’s important to remember that the idea of these trusts is that they help the operating company to monetize a slowly depleting asset, letting those who prize income and stability pay more for the oil field than a producer focused on this year’s production growth would, so don’t “set it and forget it” for a decade or two, pay attention to the terms of the trust and the expected life of the trust.

So there you have it — three “secret” ideas revealed and one freebie from Conrad for the end of days when both bonds and stocks crash … think these are good investments for your portfolio? Let us know with a comment below.

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Viktor M
January 23, 2013 8:23 pm

It’s not obvious to me how bonds can crash when Bernanke and the Fed can not only purchase bonds ad infinitum, but are now in a position where any rise in interest rates would create an explosive rise in debt service costs on the $17,000 billion national debt.
It looks like they have painted themselves into a corner where there is no escape from the zero interest strangle hold. It’s zero or die !!! Perhaps the Fed’s debt portfolio will have to receive a HAIRCUT like the Greek creditors, thus suffering the fate of the Creditor of Last Resort (or is it the Greatest Fool?). It would seem that the damage from a Fed Haircut would be contained within the Fed without causing a bond meltdown.

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Ira Cotton
Ira Cotton
January 23, 2013 8:51 pm

Rates will rise when a recovery takes hold – as it inevitably will – either here or abroad. With recovery will come an increasing demand for capital, which will naturally flow to where rates are highest. We are not immune to a global competition for capital.

January 23, 2013 9:05 pm

What is your Stocktwits name Don? Would like to follow you. Thanks.

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