This Left for Dead Sector is About to Explode Higher

By Justin Spittler 

A revolution has begun. It’s going to change America in ways you can’t possibly imagine. 

No, I’m not talking about a political revolution. I’m talking about an energy revolution. Rick Perry, President Trump’s energy secretary, explained this revolution in a press conference last week:

For years, Washington stood in the way of our energy dominance. That changes now.
We are now looking to help, not hinder, energy producers and job creators.

Perry makes a good point. From 2009 to 2016, the Obama administration held back America’s energy sector. The Environmental Protection Agency (EPA) alone enacted nearly 4,000 regulations during Obama’s tenure. These measures severely handicapped the energy sector. They even killed some companies. Of course, Obama’s no longer running the show. Trump is. And he wants to put American energy companies first.

This might sound like an empty promise. But if there’s one thing Trump’s done consistently since taking office, it’s support the energy sector. This is great news for oil and gas companies. But it’s even better news for an industry that many investors have left for dead.

I’m talking about the coal industry.…
The coal business is what Doug Casey likes to call a “choo-choo train” industry. It’s a dirty, dangerous, and downright difficult industry. It hasn’t changed much since the Industrial Revolution, either. That’s why environmentalists hate it. It’s also why the EPA passed more than 33,000 pages of regulations under Obama. These measures have cost coal companies $312 billion since 2009. That’s nearly $40 billion per year.

Obama basically tried to regulate the coal industry out of existence.…
He nearly succeeded, too. Just look at all these coal companies that have gone bankrupt in the last few years.

• Patriot Coal
  
• James River Coal
  
• New World Resources
  
• Walter Energy
  
• Alpha Natural Resources
  
• Arch Coal
  
• Peabody Energy
  

Just so you know, these aren’t second or third tier companies. They’re some of the biggest U.S. coal producers.

U.S. coal production fell almost 35% between 2009 and 2016.…
It’s also why the percentage of U.S. electricity fueled by coal plunged from more than 35% in late 2014 to less than 25% a year later. When most people see these statistics, they write off coal completely. They assume it’s finished. But coal isn’t going anywhere…at least not anytime soon. This dislocation between fact and fantasy has created a huge investing opportunity. Here’s why…

Trump wants to help coal companies.…
Everyone knows this. It was one of his biggest pledges during his campaign. But unlike many other things Trump’s promised, he’s actually delivered on this. In fact, one of the first things Trump did as president was roll back the Stream Protection Rule in February. A month later, he called for a review of Obama's Clean Power Plan. He also wants to make it easier for U.S. coal companies to export coal and build coal plants overseas. So far, Trump’s efforts have worked.

U.S. coal production is up 19% this year.…
Coal companies have also added 1,300 jobs since December. This tells us that Trump is breathing life back into the coal industry. Still, you should understand something important. The coal industry will never make a full recovery. That’s because natural gas and renewables have become much cheaper in recent years. Because of this, more and more U.S. power plants are using less coal.

That’s the bad news for the industry. The good news is that coal doesn’t have to return to its glory days for you to make a fortune. It just has to go from “terrible” to “not so bad.”

Here’s why that will happen.…

The rest of the world still needs coal.…
Right now, 1.2 billion people on the planet lack access to electricity. That’s 16% of the world’s population. That’s also 3.5 times more people than there are living in the United States right now. Most of these people live in China and India. These are two of the world’s fastest-growing economies. But these countries can’t keep growing like this without a lot of electricity. And that means huge demand for coal.

Why, you ask? Simple. Coal is still one of the cheapest, most abundant, and most dependable forms of energy. It’s also easy to store and transport. It’s the natural choice for emerging markets with massive energy needs. Just look at what China’s doing. It already burns 4 billion tons of coal every year. That’s four times as much as we burn in the States. And its appetite for coal is only going to get bigger.

This is a huge opportunity for the United States.…
After all, the U.S. has more than a quarter of the world’s coal reserves. Not only that, we have the desire and infrastructure in place to export coal. But don’t take my word for it. Take it from Corsa Coal, a major U.S. coal producer. Their CEO recently said that they plan to export 85% of the coal they produce this year. Most investors don’t realize this. They think the U.S. has to burn more coal for coal stocks to soar. But the industry just needs the government to leave it alone and for the rest of the world to keep burning coal.

Sooner or later, the masses will figure this out. When they do, money will pour into coal stocks. You’ll want to be ready for that. Here’s how you can set yourself up for big gains today….Buy the VanEck Vectors Coal ETF (KOL). This fund invests in 27 different coal and coal-related stocks. It’s a way to bet on a rebound in coal without gambling on one stock. That said, you could still make a killing in KOL. To understand why, look at the chart below. It shows the performance of KOL since it went public in 2008.

Two things jump off the screen here. Number one, KOL’s up 116% since the start of 2016. That tells us the bottom in coal stocks is already in. Number two, KOL is still down 74% from its 2011 highs. This means KOL could more than triple from here and still be cheaper than it was six years ago.

In short, there’s still plenty of upside in KOL. Still, you should understand that this is a speculation. Don’t put more money into them than you can afford to lose. Have an exit strategy. And use stop losses. This will allow you to capture coal’s massive upside while limiting your downside.

The article This Left-for-Dead Sector Is About to Explode Higher was originally published at caseyresearch.com

What Chimpanzees Can Teach Us about Convertible Bonds

By Dennis Miller

In a renewed commitment to finally learn Spanish, one of my colleagues spent quite a bit of time this week awkwardly saying, “Qué es eso?” into the headset Rosetta Stone provides with its language learning programs. Translation: “What’s that?”

Here in the US, the 10,000 or so people reaching retirement age each day often find themselves asking the same question—though maybe not out loud—when advisors use terms of art or casually mention sophisticated investment options. What’s that? Most of these folks didn’t earn their living in the financial services sector, so they don’t speak the language—nor should they feel embarrassed about it.

That said, no one—particularly risk-adverse retirees—should ever invest in something they don’t understand. So let me add one more type of investment to your “I know about that” toolbox: convertible bonds. Despite their obscurity, they’re not the least bit complicated.
Put simply, convertible bonds:

• have, as a rule of thumb, two-thirds of the upside of common stock and one-third of the downside; and
• can be an excellent way to diversify your portfolio.

Convertible bonds are bonds an investor (let’s say it’s you) can convert into common stock of the issuing company under certain circumstances. Imagine, for example, that Rosetta Stone wants to finance a new project—maybe it’s doing R&D on how to teach humans to speak the language of chimpanzees (hey, this is purely hypothetical). So Rosetta Stone (RST), which has a current stock price of about $8.80, issues a convertible bond and sets the conversion rate so that it’s not profitable to convert your bonds unless the stock price rises, say to $11.

Then more people start to feel a burning need to learn Spanish—or Mandarin, or Farsi—and RST’s price passes $11. At that point, you can convert your bonds into shares of RST worth more than the stream of payments from the bond alone. You own bonds with upside potential.

If RST’s price goes up, the value of your convertible bond goes with it. If it goes down, the discounted stream of underlying cash flows (the bonds’ coupon payments plus return of the principal at maturity) act as a price floor.

Now imagine that speaking multiple languages goes out of vogue, and instead of rising past $11.00, RST drops to $4.00. You’ll still receive interest and principal—meaning your convertible bonds can’t be worth less than those payments.

Of course, there’s always the threat of default. Say Rosetta Stone goes bankrupt for one reason or another (maybe it overspent on the chimp project, and it failed). The silver lining is that you’ll have a better chance of getting some money back than if you owned common stock.

What You Trade for the Option to Convert

As with any investment, there are trade offs: convertible bonds have slightly lower yields. The company pays a lower interest rate, and in exchange you have the option to convert your bonds. Also, convertible bonds often fall into the high yield/junk-bond category.

What’s more, it’s often only feasible for individuals to invest in convertible bonds through convertible bond funds. And you know what that means: fees. With an average expense ratio of 1.25%, fund managers have to get past that hurdle before they can start making you money.

With that, why would anyone want to buy a convertible bond fund? In a word, diversification. We hold one convertible bond fund in our retirement-specific portfolio for downside protection and the diversification it provides. With a gross expense ratio of 0.4% and one-third of its holdings in investment-grade bonds, this particular fund avoids the major pitfalls of most convertible bond funds.

Less common investments are worth knowing about, but understanding them doesn’t mean you should jump in whole hog—particularly when you’re investing your retirement nest egg. And that’s our focus at Miller’s Money: plain-English financial education and smart retirement investing. Read our free weekly e-letter, Miller’s Money Weekly every Thursday by signing up here.

The article What Chimpanzees Can Teach Us about Convertible Bonds was originally published at millers money

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The Age of Transformation

By John Mauldin

One of the many luxuries that my readers have afforded me over the years is their willingness to allow me to explore a wide variety of topics. Not all writers are so blessed, and their output and responses to it tend to stay focused on specific, often quite narrow topics. While this approach allows them to dig very deep into particular subject matter, it can reduce the total scope of their research, vision, and advice. But don’t get me wrong; these types of letters are very important. I benefit greatly from being a subscriber to a number of letters that give me detailed analysis for which I simply don’t have the time to do the research. There’s just too much going on in the world today for any of us to be an expert in more than a few areas.

I seem to find the most enjoyment and elicit the best response when I try to give my readers the benefit of my broad scope of reading and research as I try to figure out how all the various and sundry pieces of the puzzle fit together. For me, the world is just that: a vast and very complex puzzle. Trying to discern the grand themes and detailed patterns as the very pieces of the puzzle go on changing shape before my eyes is quite a challenge.

To try to figure out which puzzle pieces are going to have the most influence and impact in our immediate future, as opposed to languishing in the background, can be a frustrating experience. I often find myself writing about topics (such as a coming subprime crisis or recession) long before they manifest themselves. But I think it is important to see opportunities and problems brewing as far in advance as we can so that we can thoughtfully position ourselves and our portfolios to take advantage.

Today I offer some musings on what I’ve come to think of as the Age of Transformation (which I have been thinking about a lot while in Tuscany). I believe there are multiple and rapidly accelerating changes happening simultaneously (if you can think of 10 years as simultaneously) that are going to transform our social structures, our investment portfolios, and our personal futures. We have had such transformations in the past. The rise of the nation state, the steam engine, electricity, the advent of the social safety net, the personal computer, the internet, and the collapse of communism are just a few of the dozens of profound changes that have transformed the world in which we live.

Therefore, in one sense, these periods of transformation are nothing new. I think the difference today, however, is going to be the simultaneous nature of multiple transformational trends playing out within a very short period of time (relatively speaking) and at an accelerating rate.

It is self evident that failure to adapt to transformational trends will consign a business or a society to the ash can of history. Our history and business books are littered with thousands of such failures. I think we are entering one of those periods when failing to pay close attention to the changes going on around you could prove decidedly problematical for your portfolio and fatal to your business.

This week we’re going to develop a very high-level perspective on the Age of Transformation. In the coming years we will do a deep dive into various aspects of it, as this letter always has. But I think it will be very helpful for you to understand the larger picture of what is happening so that you can put specific developments into context – and, hopefully, let them work for you rather than against you.

We’re going to explore two broad themes, neither of which will be strange to readers of this letter. The first transformational theme that I see is the emerging failure of multiple major governments around the world to fulfill the promises they have made to their citizens. We have seen these failures at various times in recent years in “developed countries”; and while they may not have impacted the whole world, they were quite traumatic for the citizens involved. I’m thinking, for instance, of Canada and Sweden in the early ’90s. Both ran up enormous debts and had to restructure their social commitments. Talk to people who were involved in making those changes happen, and you can still see some 20 years later how painful that process was. When there are no good choices, someone has to make the hard ones.

I think similar challenges are already developing throughout Europe and in Japan and China, and will probably hit the United States by the end of this decade. While each country will deal with its own crisis differently, these crises are going to severely impact social structures and economies not just nationally but globally. Taken together, I think these emerging developments will be bigger in scope and impact than the credit crisis of 2008.

While each country’s crisis may seemingly have a different cause, the problems stem largely from the inability of governments to pay for promised retirement and health benefits while meeting all the other obligations of government. Whether that inability is due to demographic problems, fiscal irresponsibility, unduly high tax burdens, sclerotic labor laws, or a lack of growth due to bureaucratic restraints, the results will be the same. Debts are going to have to be “rationalized” (an economic euphemism for default), and promises are going to have to be painfully adjusted. The adjustments will not seem fair and will give rise to a great deal of societal Sturm und Drang, but at the end of the process I believe the world will be much better off. Going through the coming period is, however, going to be challenging.

“How did you go bankrupt?” asked Hemingway’s protagonist. “Gradually,” was the answer, “and then all at once.” European governments are going bankrupt gradually, and then we will have that infamous Bang! moment when it seems to happen all at once. Bond markets will rebel, interest rates will skyrocket, and governments will be unable to meet their obligations. Japan is trying to forestall their moment with the most breathtaking quantitative easing scheme in the history of the world, electing to devalue their currency as the primary way to cope. The U.S. has a window of time in which it will still be possible to deal with its problems (and I am hopeful that we can), but without structural reform of our entitlement programs we will go the way of Europe and numerous other countries before us.

The actual path that any of the countries will take (with the exception of Japan, whose path is now clear) is open for boisterous debate, but the longer there is inaction, the more disastrous the remaining available choices will be. If you think the Greek problem is solved (or the Spanish or the Italian or the Portuguese one), you are not paying attention. Greece will clearly default again. The “solutions” have so far produced outright depressions in these countries. What happens when France and Germany are forced to reconcile their own internal and joint imbalances? The adjustment will change consumption patterns and seriously impact the flow of capital and the global flow of goods.

This breaking wave of economic changes will not be the end of the world, of course – one way or another we’ll survive. But how you, your family, and your businesses are positioned to deal with the crisis will have a great deal to do with the manner in which you survive. We are not just cogs in a vast machine turning to powers we cannot control. If we properly prepare, we can do more than merely “survive.” But achieving that means you’re going to have to rely more on your own resources and ingenuity and less on governments. If you find yourself in a position where you are dependent upon the government for your personal situation, you might not be happy. This is not something that is going to happen all of a sudden next week, but it is going to unfold through various stages in various countries; and given the global nature of commerce and finance, as the song says, “There is no place to run and no place to hide.” You will be forced to adjust, either in a thoughtful and premeditated way or in a panicked and frustrated one. You choose.

I should add a note to those of my readers who think, “I don’t have to worry about all this because I am not dependent on Social Security.” Wrong. A significant majority of the retiring generation does depend on Social Security and also on government controlled healthcare, and their reactions and votes and consumption patterns will have an impact on society. Ditto for France, Germany, Italy, and the rest of Europe. The Japanese have evidently made their choice as to how to deal with their crisis. If you are a Japanese citizen and are not making preparations for a significant change in your national balance sheet and the value of your currency, you have your head in the sand.

There’s no question that the reactions of the various governments as they try to forestall the inevitable and manage the crisis will create turmoil and a great deal of volatility in the markets. We have not seen the last of QE in the U.S., but Japan is going gangbusters with it, and it is getting fired up in Europe and China.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – Please Click Here.

The article Thoughts from the Frontline: The Age of Transformation was originally published at Mauldin Economics

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