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Got Income? 24 April 2014 War Room
24
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Page 1: Got Income War Room Slides

Got Income?24 April 2014

War Room

Page 2: Got Income War Room Slides

HiddenLevers War Room

Open Q + A

Macro Coaching

Archived webinars

CE Credit

Idea Generation

Presentation deck

Product UpdatesScenario Updates

Page 3: Got Income War Room Slides

I. Market Update

II. Scenarios – First World Deflation

III. Got Income?

IV. Do Income Strategies Work?

Got Income?

Page 4: Got Income War Room Slides

HiddenLevers

MARKET UPDATE

Page 5: Got Income War Room Slides

Market Update

Canada Middle Class

New Cold War

Greece celebration

BRICS baton passing

Page 6: Got Income War Room Slides

Macro Snapshot

Nasdaq saw a slight correction - Was that it? S&P earnings good, driving down P/E. New home sales are bucking the uptrend.

Page 7: Got Income War Room Slides

SCENARIOS – FIRST WORLD DEFLATION HiddenLevers

Page 8: Got Income War Room Slides

Deflation Review – How did we get here?

sources: HiddenLevers, TSPstrategies , MoneyCafe

Fed Funds Rate Near 0% = CDs Near 0%.

Falling 10-Year Interest Rate= Shrinking Annuity Income

Page 9: Got Income War Room Slides

Deflation Review – Global

sources: HiddenLevers, Economist,

technology automation

commodities sinking

first world baby bust

decreasing birth rate

sluggish GDP growth

Page 10: Got Income War Room Slides

Deflation Review – USAZIRP = Zero Interest Rate Policy

- max that monetary policy can do

- ensures housing loans are cheap

- will outlast quantitative easing

- makes returning to normalcy hard (Japan)

sources: HiddenLevers, LA Times, Bloomberg

5 yearsno

inflationzero rates

5 yearsUSD d

ZIRP – the costsNo interestZIRP has cost savers 760 billion usd in interest

Just inflationBank customers 100 billion in purchasing power each year since 2009 because inflation, while low, isn’t zero

Page 11: Got Income War Room Slides

Scenario: First World DeflationGood

rates and inflation at 0

Badworldwide

ex-US

Uglyworldwide

including US

The Goldilocks scenario – can the Fed keep the bowl warm but not hot?

Sweden and Japan already at/near deflation – if EU tips, this might push US to correction.

If entire first world falls into deflation, a global recession is likely close behind.

Page 12: Got Income War Room Slides

HiddenLevers

GOT INCOME?

Page 13: Got Income War Room Slides

Got Income? – Overview MLPs and Energy Trusts

Municipal CEFs Buy-Write on Dividend Stocks

REITs + mREITs

Page 14: Got Income War Room Slides

Got income? – MLPs + Trusts

source: HiddenLevers

Master Limited Partnerships• Many with 7%+ yields• Almost all in energy sector• Be aware of MLP tax

complexity• ETFs and MFs exist as well

Energy Trusts• Simply a share of royalties in

certain oil/gas fields• Double-digit yields common

• Beware new finite life trusts! Older is often better here

Page 15: Got Income War Room Slides

Got income? – REITs

source: HiddenLevers

Correlation Screener

Diversified REITs Yield S&P beta

Omega Healthcare Investment (OHI) 5.90% .80

Arbor Realty Trust (ABR) 7.2% 2.06

Apollo Commercial RE Finance (ARI) 9.6% .50

Mortgage REITs Yield S&P beta

Hatteras Financial Corp (HTS) 10.6% .52

American Capital Agency (AGNC) 11.9% .52

iShares Mortgage Real Estate (REM) 15.77% .92

Page 16: Got Income War Room Slides

Got income? – Muni Bond Closed-End Funds

Muni Closed-End Funds• Trade like stocks and ETFs• Tax-equivalent yields of 10-15% for

many clients• Less liquid than MFs and large ETFs

source: HiddenLevers, CEFConnect.com

High leverage = risk

Discount to NAV = opportunity

Page 17: Got Income War Room Slides

Got income? – Dividend Equities + Call Writing

Buy-Write Strategy• Buy the stock, sell the call• If the call expires, repeat• If call is exercised, capital

gains realized• Quarterly writes work well

source: HiddenLevers, Yahoo Finance

GE Example• Sell July $27 call for 0.57• 4 writes/year = 8.5% income• 11.8% total yield• Equity downside remains

Page 18: Got Income War Room Slides

HiddenLevers

DO INCOME STRATEGIES WORK?

Page 19: Got Income War Room Slides

Risk versus Income – MLP review

source: HiddenLevers

MLPs have generally outperformed the S&P over the last 10 years.

5 years shows MLPs keep pace, struggle to outperform recent bull market.

Master Limited Partnerships Yield S&P beta

TC Pipelines, LP (TCP) 6.6% 0.83

Fiduciary/Claymore MLP Fund (FMO) 6.1% 1.1

Enbridge Energy Partners, LP (EEP) 7.5% 0.95

Page 20: Got Income War Room Slides

Risk versus Income – REITs review

source: HiddenLevers

Mortgage REITs have been crushed by rising rates – bonds in equity clothing?

REIT Fund vs mREIT Yield S&P beta

Annaly Capital Management (NLY) 10.9% 0.55

SPDR Dow Jones REIT ETF (RWR) 3.2% 1.16Traditional REITs have recovered with S&P in current bull market.

Page 21: Got Income War Room Slides

Is income generation really that difficult?

boomers more used to volatility

pervasive marketing of ETFs and MFs

easy to give up and chase S&P

no one wants to do the

homework

short term thinking

Bonds + CDs suck

Life of Pi “You might think I lost all hope at that point. I did. And as a result I perked up and felt much better.” Yann Martel

Meredith Whitney

Page 22: Got Income War Room Slides

yes, you too can generate income sky high yields = caveat emptor

global deflation happening under your nose

Got income? – Recap

demographics = destiny

Page 23: Got Income War Room Slides

HiddenLevers Use Cases

scenarioEnd of QE

War RoomDemographic

Shift

War Room Tech Bubble 2.0

scenarioCommodities Perfect Storm

scenarioFirst World Deflation

Got Income?

Data CenterCPI + 10y rates

Macro ThemeMega Caps with

Yield

Macro ThemeMLPs with 5%+

Yield

Page 24: Got Income War Room Slides

• Overall Performance improvements

• Risk Monitoring – export to MS Excel, re-run stress test

• Proxy mapping improvements

• Cross Correlations - Color Highlighting in Matrix

Coming soon:

- Annuities Support (Fixed / Variable / Equity Indexed)

- Advisor Fees Support

- Options Support – Call Writing

Product Update