Income ETFs, funds and MLPs: tide going out

Low interest rates, relentless central bank confidence pumps and a runaway investment sales machine have all served to herd income-searching investors into income-producing assets over the past 3 years. In the process, unit valuations that were already high in 2012 moved to outrageous by 2014. The trouble is that capital risk rises in lock step with price, even as income products have been sold to those who can least tolerate losses. The marketing mantra is that income/dividend paying securities are ‘defensive’,’stable’ places to park savings.

Just as in previous investment cycles, fund cos and issuers ramped up sales campaigns as prices rose, rolling out an ungodly barrage of artfully wrapped products. Sadly many customers who had bitten similar baits in 2005-08, lost heavily and swore off the risk-sellers for a few years after that. Then in the past couple of years as finance trolled for suckers, many hopefuls have been lured back in, just as the price cycle crested once more.

Some of the most reckless financial advisers and firms (unfortunately there’s lots of them) have been looking after their own sales targets by recommending that their customers borrow to “invest”. With loan rates so low, they argue it’s a no-brainer to use a lender’s money to increase buying power. In truth the strategy is more typically a recipe for financial disaster.

The fall out this cycle is just starting to show as high yield debt, preferred shares and MLP’s (Master Limited Partnerships) concentrated on the energy sector, have been selling off over the past 9 months.  See:  MLPs yield headaches for advisers who bought them for income.

The capital tide is retreating. As usual it starts slowly at first; then all at once, as losses shock the hearts and minds of holders.  See: Is this the beginning of the end for dividend funds?

Dividend ETFs are on fire, and not in a good way.

Exchange-traded funds that employ a variety of strategies to invest in dividend-paying stocks have been a no-brainer since the financial crisis, as income investors have confronted artificially low interest rates. But after years of inflows that swelled assets to $100 billion, dividend ETFs have seen an outflow of $2 billion this year.1 If that isn’t quite apocalyptic, it is scary, and if it keeps up, this will be the first year of outflows ever.

The outflows aren’t from just one ETF or the result of one massive trade. It’s a slow and steady burn from most of the largest and most beloved dividend ETFs.

investors flowing out of dividends






When dividend products from the Big Three in ETFs—Vanguard, BlackRock, and State Street—are hurting, it shows that no product is safe when investors anticipate a big change in the markets. Not even dividend ETFs.

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Which countries are at risk in commodities rout?

Which countries stand to hurt the most from plunging commodity prices? That’s easy: the same countries who benefited the most as prices rose 2001-2011. Unfortunately most of them, like Canadians, became over-confident during the boom and went deeply into debt. Now they will struggle over the next several years during the ‘payback’ period. ‘Twas ever thus. Universal life lesson to be learned for future cycles: use boom periods to pay down debt and build up savings. Not the opposite.

Deltec Chief Investment Officer Atul Lele discusses his outlook for commodities. Here is a direct video link.

For those who would like a recap on the reasons behind current trends, I explained it in detail in this interview last January.  The Canadian financial index is the next part of the story to reprice, and that seems to be now underway. Look out below. Canadian bank shares and REITS fell more than 50% in both of the last two US recessions. This time could potentially be worse. Believe it or not…

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Driverless cars to further disrupt status quo

Less spending on insurance premiums and auto repairs means more cash staying in the pockets of consumers. All of this will help households to pay down debt and build up savings once more. Then there are all the accident injuries that won’t be happening from human error and inadvertence. Win, win for consumers, and taxpayer funded health care.

Three insurance suppliers and an auto parts maker have warned in their most recent annual reports that driverless cars and the technology behind them could one day disrupt the way they do business.Here is a direct video link.

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Faber on Asia, commodities and why US stocks could “easily drop 20-40%”

Faber made many useful observations in this interview this morning.

The U.S. stock market could “easily” drop 20 percent to 40 percent, closely followed contrarian Marc Faber said Wednesday—citing a host of factors including the growing list of companies trading below their 200-day moving average.

In recent days, “there were [also] more declining than advancing stocks, and the list of 12-month new lows was very high on Friday,” the publisher of The Gloom, Boom & Doom Report told CNBC’s “Squawk Box.”

“It shows you a lot of stocks are already declining.”

Faber said U.S. stocks are on the “high side” right now, despite Tuesday’s decline, and expectations are quite high, which can lead to big disappointments…

CNBC broke his appearance up into 3 segments of just over a minute each. Here is a direct video link to part 1.

Here is Part 2 and here is Part 3.

Faber doesn’t refer to Canada in this discussion, but his comments apply to the great white north in spades.  The Canadian stock market has been falling slowly over the past year, but presently remains dangerously overvalued on banks and REITS. The downside from here is easily as big (or bigger) as for the S&P 500.

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Danielle on The Financial Survival Network

Danielle was a guest today on The Financial Survival Network with Kerry Lutz talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.

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Power to people, directly from the sun

How about on demand printing of solar cells? See: Paper thin printed solar cells could provide power to 1.3 billion people.
solar cell“The cost of solar power has declined dramatically over the past few decades, from $40 per watt in 1977 to $0.74 per watt in 2013. This trend is expected to accelerate as improvements in efficiency and new technologies come online. This is good news for citizens of developed countries who want to make the switch to a cleaner and increasingly cheaper energy source. The shift to solar may be most dramatic for those living in developing countries. Thanks to inexpensive printed solar cells, 1.3 billion people currently without electricity may be able to plug in for the first time.”

No wonder commodity prices are plunging. Not only is the indebted, global economy slowing, but the world is using less and less energy to do more and more all the time. Technology innovation is allowing the developing world to leapfrog conventional systems and infrastructure and go straight to the sun. Power to people, while cutting out traditional fees to brokers, producers and transporters. This is a world changer.

There are thousands of entrepreneurs and scientists working passionately on these solutions every single day.  Here is another:

All Solar Lights CEO Paul Hitchens discusses bringing solar lighting solutions to some of the poorest and most remote communities on earth. Here is a direct video link.

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