Dear Subscriber,

When we reloaded our Ultra Income Portfolio (after selling it ALL Feb 24th with our "GO-TO-CASH NOW ALERT") none of us really had an idea of how fortunate we were to build our cash in order to step into the firestorm meltdown in energy MLPs, preferred stocks, and mortgage REITS (aka "mREITS").

Over the next 45 days, we saw the entire MLP, Preferred Stock ETFs, Business Development Companies (BDCs), and the mREITS capital markets freeze up worse than all but the worst of the Great Recession--especially the highly leveraged mREITS and 2X leveraged mREIT ETN or "exchange-traded notes".  

BUT--the minute the Federal Reserve cavalry arrived to literally save the day and proclaim to the world "we will do ANYTHING and EVERYTHING" to get these $trillion capital markets working again, we opportunistically jumped into the meltdown with both hands for once-a-generation bargains burning at the feet of the COVID-19 panic and market crash.

I wish you could see the texts and emails I get from our long time "OG" TR PRO subscribers astonished at the monthly and quarterly dividends they are getting in their brokerage accounts. I know of many of our subscribers and our managed account clients who, with just $100-$200k, have locked up $75,000-$125,000 in annual dividends and their original investments have doubled and in some cases tripled in value (off insane lows priced for liquidations). 

But, for a few days, it was not apparent that the mortgage REIT industry was going to survive. Dozens of margin calls hit the industry. 20 different ETNs in all these spaces blew up and terminated in April--popular ETNs like MORL, MRRL, BDCL (and its successor LBDC) were redeemed by their sponsors.

The reality is IF we had not acted on February 24th to sell ALL our income positions, our blood would have been on the streets, too.

But it wasn't. And armed with a PILE of cash we took our knowledge of these unique high-income spaces and piled into the securities all of which we could prove were NOT going out of business (thank you Fed) or, in the energy patch, were being priced as if North America was going to be a 50% smaller consumer of hydrocarbon fuels forever (which until 2050 at least we are not). 

Is it too late to still get into the game? Nah--we can still put together a 25%ish annual yield portfolio with securities with 50%-200% upside as we move into 2022 IF we see a vaccine that at least 50% of sane Americans will take (and with the 20% other Americans who got the virus and developed antibodies).

When we will get to that magical "herd immunity" nirvana where energy consumption returns to 90-95% of 2019 consumption (and friends this not going to happen until 2022 at the earliest unless we are amazingly lucky--here is the ONLY infectious disease expert I follow Dr. Michael Olsterholm because he has been DEAD right on this novel coronavirus since early January ) and unemployment rates dip back to 6-8% again. This all happens when Americans are not afraid to go out to dinner or get on an airplane (and sorry folks but America back to 3-4% unemployment rates are off the table until we see how many 62+ aged workers and physically compromised folks of all ages have sadly left the labor force for good OR been replaced by a wave of younger and more importantly cheaper millennial age labor.) 

But (I emphasize) the great news for us is thanks to the FED and Congress this is NOT the 1930's Great Depression. Thanks to the Fed in "What Ever It Takes" and "No Thought of Rate Hikes Till 2023" mode, and the Federal Government (eventually) coming in with Federal Households & States Anti-Economic Depression 2.0 and 3.0 (oh yes we WILL have another bailout AFTER bailout 2.0, trust me), the net result is to be an optimist; our damaged economy has not received a mortal economic wound.

BTW--an economic depression is when a GDP contraction is so large that it becomes a self-perpetuating vicious downward spiral. It starts when people hoard their money afraid of spending it and GDP contracts every month. That demand contraction sparks business sales contraction and business closings which lays off more labor which, in turn, accelerates the economic GDP contraction. In other words, economic depressions are a negative economic feedback loop; stock markets crash wiping out savings and financial asset wealth. Raising growth capital drys up. Capital destruction means depositor withdrawals at heavily leveraged commercial and investment banks that fail and lending dries up--which is the third leg of business and consumer consumption contraction. Homes are foreclosed and more businesses go belly up.

In short, an economic depression is economic Armageddon. If this concept is not clear in your mind, search "America's Great Depression" and "Germany's Great Depression" and watch a few videos and read some Wikipedia summary content. It was only the quick work of the Fed and Congress that kept the Great Recession from becoming worse. I will never forget interviewing a senior Congressman who had just left a meeting with Ben Bernanke, Hank Paulson, and Alan Greenspan who looked scared to death. He told me "IF we do not pass the TARP bill tomorrow, people will not be able to withdraw money from ATM's by next week."

Here is another thing I learned from the Great Recession--no civilian knew how close we were then, or now, to sliding into another depression. That Congressman I spoke of understood economic reality--the TARP plan was designed to stop the next Great Depression 2020 from a nationwide run on the banks. 

The silver lining today is this: 15-20% of America's 32 million Small Businesses and legacy retail chains are folding like bleachers after a basketball game (remember those?) is a tragedy for millions of American families. But the brutal but magic secret sauce of American style capitalism is the "seeds of creative destruction" which are being planted now and they WILL grow into millions of new small businesses!

Moving capital from weak zombie business hands and poor operators to strong hands and strong operators in EVERY industry is the ONLY economic good news in this horrific tragedy of Mother Nature (and of course IF our Warp Speed efforts with 150 biotech companies in the hunt to innoculate hundreds of millions of Americans and Europeans by Q1 2021, then that is a BIG long term benefit to society and our economy too, obviously.)

So let's build you a 25%+ yielding portfolio with 50%-200% upside!

Energy Transportation MLPs
 USA Compressor  USACAction to Take: Buy Under $12 or Better with $16 target and $4.05/17% annual dividend

 Our full report on USAC is on the web site, but here is the short version:

1) USAC provides a must-have service to natural gas operators and pipeline transport. Without compression, nat gas does not flow out of fracked wells and does not move down a pipeline-period.

2) USAC bills their clients one month in advance and with $3 billion billed since 2012 they were only stiffed for $1.2 million when a producer declared bankruptcy (and even then the bank took over the wells and released the USAC compressors at a higher rate!). 

3) USAC contracts are "take or pay" meaning the leasee gets guaranteed compressor capacity whether they use it or not that month. There is NO commodity price risk for USAC.

4) USAC is buying compressors from MLPs that need the cash--at GREAT deals--and then lease them back!

5) The General Partner in USAC is the giant Energy Transfer (ET)--they call the shots on the dividend and they need it to keep theirs high, too. 6) USAC's core business model is more stable than that of a traditional pipeline and is less impacted by changes to production. The company is paid for horsepower usage which actually increases with lower pressure in a natural gas pipeline (given no change in volumes). Note: as gas wells age and resources are consumed, pressure naturally declines which boosts USAC's demand/revenue. 

Key point: With lower production of natural gas, volumes will be on the decline but horsepower demand declines much less. This largely unknown physical attribute has the effect of shielding USAC from substantial revenue declines given a substantial decline in drilling activity. It will also likely cause the company's revenue to rise in the future even without additional CapEx. USA Compression Partners is my favorite nat gas MLP. With rising long-term demand and the production of natural gas due to the end of coal-based power production, the company's growth prospects remain strong. Capital expenditures among it and its competitors are in decline which should enable better rates in the future. Key point: If you just reinvest the dividends, you will at least double or triple the value of your positions over the next 5-6 years guaranteed!  

Nat gas producer Antero Resources (AR) 

Action to Take: SELL & Take Profits

Nat gas midstream Antero Midstream (AM)  

Action to Take: Buy Under $6 with a $15 target and 22% annual dividend

We are highly optimistic about the future for natural gas in America and around the world due to its environmentally friendly profile for electric power generation vs. coal. Additionally, recent oil drilling/fracking rig shut-ins have curtailed the availability of associated natural gas which was the main cause of <$2 nat gas prices. Associated gas is the natural gas that is created when an oil well is fracked--and the nat gas that is not flared goes into a nat gas collection and transportation pipeline (and YES that is due to USAC's 1,0000 horsepower compressors!) With up to 22% of oil fracking production offline overall and 35% in the highest producing Permian region, higher natural gas prices in the Fall futures market tell me higher nat gas prices are locked in 2021 after hitting a historic low in the last week.  We are taking profits on Antero Resources (AR) from our $3.05 purchase in May.

But Antero Midstream (AM) is a 22% yielding midstream play with significant upside if natural gas prices simply return to just $3 per mcf (million cubic feet of natural gas). AR is Antero Midstream's only customer and combined are the largest exporters and second-largest natural gas producers in the US. Both are highly leveraged, but, due to $2 BILLION in nat gas hedges for 2020 and 2021, AR has an improving operating outlook that is NOT priced into AM shares. Antero Midstream has a $0.3075 quarterly dividend that was NOT cut, which implies $1.23 in annual distributions and a 22% yield, based on its $5.74 share closing price. AM now has 1.2 distribution coverage and lower leverage than its comparable midstream operators. Antero Resources, in addition to $2 billion in nat gas hedges, also has another $billion hidden asset. AR sold just 1% NWI (net-working interest) for $450mm in July.  Key Point: This contracted NWI sale will alleviate any bankruptcy risk that the market has feared. We said when we bought AM that "this NWI transaction should change the risk perception associated with AM’s 28% yield and drive it toward 15%.) It HAS..and we believe that AM’s yield will drop to 10% resulting in a triple in AM’s stock.  So needless to say (but I will anyway): The appeal of a triple in AM with a 28% dividend and a six-fold move in AR is WAY better risk/reward today than buying Zoom (ZM) stock at 35X revenues, eh?  Natural Gas midstream NGL Preferred C: NGL.PC  Action to Take: SELL and take $8 per share profits (on $8 cost basis)  NGL.PC preferred stock took off for us from our $8 entry and nearly doubled to $15 on the announcement that they were paying full dividends. Time to take our profits and move on!
The 50% Dividend Cut Club MLPs
 The following midstream companies (aka The 50% Dividend Cut Club) have temporarily cut their dividend (which gives us big upside and 2X current when it is restored) DCP Midstream DCP-which announced a 50% quarterly dividend cut from $.75 to .39 which now is paying a 12.5% yield--and the stock was up on the news! 
 Action to Take: Buy Under $11.75 target with $20 target by 2022 and 22% annual dividend now $1.56 but upon return to its .75 quarterly/$3 annual dividends but 50% higher in 2022

 Enable Midstream Partners, LP (NYSE: ENBL) slashed its dividend by 50% to $0.16525/share but at $3.26 share price that 64 cent dividend is now covered by long term contract cash flow by 2X!.
Action to Take: Buy Under $5 target with $22 target and 22% annual dividend on $5 cost basis
Similar to many of their peers, Enable Midstream Partners halved their distributions during the coronavirus turmoil, but even now, they still offer a massive 12% yield. Since their leverage is only moderate, they can afford to direct the entirety of their free cash flow towards paying unitholders.
 AMZA - InfraCap MLP ETF--Buy Under $18 with 17% yield with $38-40 TARGET 2022

AMZA is an ETF that is a mirror image of the midstream MLP world. They used to sell call options against certain equities but the brain damage was insane once $60 oil and $3-$4 nat gas started their stairway to price Hell. In addition, Jay Hatfield the portfolio manager will use low-cost margin/leverage to juice the yields when hydrocarbon pricing firms. BUT--we are getting paid to wait for the real 2022 recovery. Also many of its largest holdings...Energy Transfer #1 at 5% ish--has NOT cut their dividend by 50%.

AMZA already increased its monthly dividend in June. In addition, with Fed buying non-AAA corporate debt, ET and the other major pipeline plays will refinance long term debt at lower rates. AMZA got religion on their out-of-the-money call option selling--and in this 24-month recovery, we get at least 35% of our money back in dividends (which in my accounting lowers our cost of the investment by 35%). 

Personally, since we repurchased around $12 I am reinvesting the monthly dividend.
 Preferred Stock ETFs ALL preferred stock is issued at a $25 par value and the nominal dividend yield is factored as a percent of that $25 par value. Preferred stock is the safest equity security in a whacked world; IF a company has to re-organize, secured and unsecured debt gets paid first, then preferred stock is redeemed, and the stockholders get what is left.  

Because preferred stock normally has higher and more regular dividends, it is less volatile than common stock and carries less risk. A preferred stock with a guaranteed dividend is often considered a fixed-income investment similar to a bond.

Another advantage of owning preferred stock is when a company stops paying a preferred dividend. Preferred share dividends are cumulative, meaning the company must repay all the money it would have paid to preferred shareholders before it can pay any dividends to common shareholders.

On the flip side, if a company grows, the stock value can appreciate and so can dividend payouts. For investors, this fixed-income characteristic makes the preferred stock a good choice for long-term retirement investments, like an IRA.

Another important characteristic of preferred shares is that sometimes, but not always, they give their owners the right to convert that preferred stock into common stock at a prearranged price. This is attractive to preferred stockholders because they are entitled to the steady stream of dividends, plus they can enjoy appreciation in value if the company's common stock rises.

What are the downsides of preferred stocks? Preferred stocks carry less risk than common stock, but they have more risk than bonds and may not offer a better income from dividends than the interest on bonds. And as mentioned, preferred stockholders are behind bondholders in line for a company's assets if it runs into a financial problem. If a company fails, money is repaid to bondholders first. This adds default risk to preferred stock.

Key Point: When times are back to normal, solid paying preferred paying coupon rates way above similarly rated bonds will sell at a premium to their $25 par value. THAT is why we also own preferred ETFs 20-30% below their $25 par value like PFFA PFFR and PFFL.  

PFFA Buy Under $19 with 11% Yield 45% Upside With Return to >$25 Par Value

PFFR SELL --Take Profits From $14 Buy Under 
PFFL (2X Leveraged) Buy Under $17 with 13% Yield 50% Upside  

SELL NYMTO Preferred and take 60% profits!

Actions to Take: BUY Mortgage Reits at STILL Insane Valuations and Yields 18%-72% One of my investing heroes and mentors is billionaire distressed debt investor Howard Marks always says (as he did today in a note to his investors today)  "I always buy distressed debt and equities buy where there is unambiguous compelling value--why wait on a fat pitch down the middle?" That's the opportunity we still have in the mortgage REIT space right now. Like Mr. Marks says, with blown-up residential mortgage REIT equities and preferreds we have UNAMBIGOUS 50%+ upside valuations when we get to the "other side" aka the post-COVID 19 economy next year. Better yet, we are getting paid 20-40% to wait for a real vaccine for the COVID 19 virus.  These mREITS and their preferred stocks are a fat pitch because:1) The FED is buying mortgage-backed securities (MBS) at $80 billion a week with an unlimited capability to buy as much as they feel they need to ensure book values and liquidity 2) We just updated book values from our mREIT research boutique provider and the panic selling has our favorites still 40-60% or more below new book value (mREITS in a calm world sell at a slight premium to their book value because of their hedge ultra-high yields) and3) The FHA came into the market and said they will become the servicer of record for the mREITS that own mortgage servicing rights (SRs) that they are still liable to pay bondholders if mortgages they are servicing are in temporary forbearance (PS--forbearance is not a forgiveness of payments--they get tacked onto the existing mortgage note or added to a mortgage note paid off at property sale)
4) Since Fannie MAE, Freddie Mac and Ginnie Mae guarantee ("The Agency") securities, the mREITS have little or no risk of mortgage defaults   

Buy 2X mREIT REML Under $4 with 72% YIELD and $12 target 

The easiest way to play the mREIT comeback is this ETN. The yield has not changed--including a big $1+ distribution in January. While MORL and MRRL mortgage bond ETNs were dissolved, REML restructured their terms and survived (with a GIANT help from the US Fed). 

HOLD Annaly Mortgage (NLY) with $10 target

 Buy New Residential (NRZ) Under $8.25 with $15 target + 13% Yield


 SELL Two Harbors TWO & Take PROFITS 
 SELL NYMT & TAKE PROFITS
 Chimera (CHMI) & Take Profits
OK that is it! We will add 2-3 more screaming Ultra Income plays in the August to round out our 20% yields. 

All the best!

Toby