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This Unloved Fund Defies Inflation, Yields 7.4%

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As difficult as this selloff has been for all of us, it has left some attractive (and discounted) dividends on the board, especially in high-yield closed-end funds (CEFs).

I know it’s tough to buy in a market like this, but the dividends we’re going to talk about today actually benefit from rising inflation, posting higher and higher cash flows as the CPI shoots higher and higher, too.

These are the companies we want to be in now, both to collect their high dividends through today’s tire fire and to profit when the market waters (inevitably) calm and investors finally take notice of these stocks’ sturdy cash flows.

REITs Are Underappreciated All the Time—Especially Now

I’m referring to real estate investment trusts (REITs). These “landlords” are by far my preferred way to invest in real estate—much better than buying a home yourself and renting it out (unless you enjoy replacing broken appliances and unclogging toilets, that is).

Let’s start with the rent checks all landlords (REITs included) are collecting today, because they’re on the rise, due to many trends that don’t look like they’ll subside soon. The first is rising interest rates, which, when mixed with still-high home prices, are pushing many Americans into the rental market. That, in turn, is causing rents to skyrocket.

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Data from a variety of sources points to the same fact: while government data (through the overall cost of housing—see the chart above) indicates that rent is going up faster than in the past, private companies are showing a more dramatic turn of events, with Zillow and Apartment List (the yellow and dark blue lines below) showing double-digit increases from a year ago.

No matter how you slice it, rent is soaring, and the Federal Reserve is doing what it can to stem the trend—although some would say that by raising borrowing costs for everyone, it’s just making matters worse. But either way, this amounts to sharply rising profits for landlords.

REITs Let You Sidestep the Pricey Housing Market

There’s just one problem for would-be landlords: if they don’t own rental property now, they’ll have to pay elevated prices to buy a home to rent out. So the better move is to buy into a REIT that already rents housing to others. And instead of buying at an elevated price, thanks to the market selloff, we can buy into these firms at a discounted price instead.

For example, Invitation Homes INVH (INVH) owns thousands of single-family homes across the country, with a portfolio worth over $20 billion. That gives it a lot of diversification, which individual landlords, typically limited to one or a handful of properties in one, or at most two, markets, don’t have. Invitation also has the advantage of having its portfolio professionally managed by a team of real estate pros.

That diversification and management acumen have sharply increased the REIT’s funds from operations (FFO, which is a better measure of REIT performance than earnings per share).

However, the company’s high, and rising, cash flow is being punished by a market fueled by fear, causing the REIT’s share price to tumble nearly 25% this year.

See how Invitation’s share price has fallen almost exactly as much as that of the benchmark REIT ETF, the SPDR Dow Jones Real Estate ETF (RWR RWR )? That’s no coincidence: Invitation’s selloff has been the result of indiscriminate selling of REITs everywhere, meaning it isn’t the only bargain to be had these days.

For diversification’s sake, buying a fund of REITs over Invitation makes sense, because you’re getting exposure to REITs across various industries, as well as the different management teams taking care of those properties.

RWR is an option, but it’s not one we CEF investors would ever consider, mainly because its 3.4% yield is pretty low by our standards.

A Savvy CEF Play on Rising Rents (That Yields 7.4% Today)

Instead of an ETF, we much prefer CEFs like the Cohen & Steers Quality Income Realty Fund (RQI), which yields a rich 7.4% as I write this. RQI is a major holder of Invitation Homes (it’s one of the fund’s top-10 holdings), plus it holds a range of other types of REITs, like data-center operators and self-storage owners, which are also producing rising FFO. That diversification, plus the REIT’s sharp human managers (Cohen & Steers is a leading name in the CEF space, which helps it attract top talent) has helped it beat RWR over the last decade.

Bear in mind, too, that because of RQI’s high yield, the bulk of the return you see above has been in dividends.

RQI’s outperformance has been rewarded with a big premium to net asset value (NAV, or the value of the REITs in its portfolio) in the past (at one point, its premium was more than 15%). But it currently trades at a 4% discount, although it traded at a premium just a few years ago.

That means we can buy RQI at a discount today, wait for it to go back to the premium it normally has when the market stops panicking, and then sell at a potential profit. In the meantime you can pocket its dividend, which boasts a 7.4% annualized yield and is paid monthly.

Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Safe 8.4% Dividends.

Disclosure: none

Finance

Teacher, Police And Firefighter Pensions Are Being Secretly Looted By Wall Street

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America’s severely underfunded public pensions are allocating ever-greater assets to the highest cost, highest risk, most secretive investments ever devised by Wall Street, such private equity, hedge funds, real estate, and commodities—all in a desperate search for higher net returns that, not surprisingly (given the outlandish fees and risks), fail to materialize. Transparency—public scrutiny and accountability—has been abandoned, as pensions agree to Wall Street secrecy schemes that eviscerate public records laws.

Our nation’s state and federal securities laws are premised upon full disclosure of all material risks and fees to investors: “Read the prospectus before you invest,” is the oft-cited warning by securities regulators. Nevertheless, teachers, police, firefighters and other government workers today are not allowed to see how their retirement savings are managed or, more likely, mismanaged by Wall Street.

For nearly a decade, the United States Securities and Exchange Commision has warned investors that malfeasance and bogus fees are commonplace in so-called “alternative” investments and, more recently, Chairman Gary Gensler has called for greater transparency to increase competition and lower fees.

Gensler has asked the agency’s staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets. “More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets,” he said. “This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”

Gensler has stated he would like to see a reduction in the fees these investments charge and has also commented on industry abuses such as ”side letters” which permit private funds to secretly give preferences to certain investors—preferences which harm public pensions.

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But that’s not good enough to protect public pension stakeholders.

No one—including the pensions themselves—seems to care that the government workers whose retirement security is at risk are being kept in the dark.

The SEC needs to do more—actually alert public pensioners as to those abuses the Commission knows full well are rampant, at a minumum. Advise them, Chairman Gensler, to demand to see and read prospectuses and other offering documents related to their hard-earned savings.

Does the SEC think it’s kosher for Wall Street to conspire with public pension officials to withhold this information from investors—any investors?

Since my 2013 forensic investigation of the Rhode Island state pension exposing gross mismanagement by then General Treasurer Gina Raimondo which I accurately predicted would cost workers dearly; my 2014 North Carolina state pension investigation exposing that $30 billion in assets had been moved into secretive, offshore accounts and, most recently, my investigation of the State Teachers Retirement System of Ohio, I have provided my expert findings to the SEC staff for their review. Each and every public pension forensic investigation I have undertaken has extensively discussed Wall Street secrecy schemes that enable looting. In my book, How To Steal A Lot Money—Legally, I quote disclosures from SEC filings that detail industry abuses.

Join me, Chairman Gensler, in giving government workers a clue, a glimpse, a peek, at the alternative investment abusive industry practices that are carefully guarded by Wall Street and being hidden from them.

Teachers, police and firefighters deserve a fighting chance to protect their retirement savings.

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Finance

It Is Time To Buy Bonds

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US 10-year note prices are likely to rise through August. The monthly histogram below shows that July and August have been the two strongest months for the note price.

Monthly Return- US 10-Year Notes

Blue: Average Percentage Change

Red: Probability of a rise on that day

Green: Expected Return (Product of the first 2)

These numbers are static in the sense that they change little over the years. This is only one cycle, the one-year cycle, whereas there are many cycles operative at any one time. In order to get a reading on such other rhythms, a scan is run to identify other profitable price cycles. The graph below reveals the most valuable cycles that are operative at any one time.

10-Year Note Monthly Cycle

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These cycles reinforce the seasonal tendency for notes to rise. Prices have risen in 60% to 65% of the time in these summer months. With the dynamic cycle also in ascent, the probabilities rise to about 65% to over 70%. There are similar and supportive developments in the Japanese and German fixed income markets.

The cycle projection must be confirmed by market activity. The daily graph reveals that price broke through a downtrend line.

10-Year Notes Broke Through Resistance

Here is a helpful sentiment indicator that supports the bullish view. The cover page of this week’s Barron’s points to much higher rates. Applying contrary opinion, this suggests lower rates and higher note and bond prices. The first objective is 123.0.

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Finance

Will There Be War Over Taiwan – The Next Spy Thriller

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I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.

Thrillers

Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.

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Secret World

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

Asia next?

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

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