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Jim Cramer Says Management Change at Target Not a Reason to Buy Stock The Street’s Jim Cramer, Portfolio Manager of Action Alerts PLUS, answers viewers’ Twitter questions from the floor of the New York Stock Exchange Monday. Cramer Sees ‘Well-Run’ Mobileye, Kroger Going Higher Kroger is putting a lot of pressure on natural and organic grocers, while Mobileye has plenty of growth potential, Cramer says. Cramer Wants You to Buy Wal-Mart on a Pullback, Avoid Micron for Now Wal-Mart should benefit from a falling Chinese currency and lower gas prices, Cramer says. Buy the stock on a pullback. 5 Rocket Stocks to Beat the Summer Doldrums These stocks have both short-term gain catalysts and longer-term growth potential. BABA, YHOO, GIS, SWKS: Jim Cramer’s Views Jim Cramer shares his views on emotions controlling the tape and skepticism. Alibaba, Yahoo!, General Mills and Skyworks Solutions are among the many stocks discussed here. Is Tesla Building Its Own Uber? Morgan Stanley Thinks So Elon Musk refused to answer whether Tesla was creating its own Uber, but Morgan Stanley gives the as-yet-to-be announced service a name – Tesla Mobility. MRO, CLB, M, W: Jim Cramer’s Views Jim Cramer shares his views on the importance of yield and online advertising. Marathon, Core Labs, Macy’s and Wayfair are among the many stocks discussed here. Cramer Remix: May be the best trade in week ahead Cramer: When to sell a sizzling hot stock Cramer: How to recognize a screaming buy Cramer: Here’s my secret to picking stock winners Cramer game plan: I smell profit in this next week Before the Bell: Position your day ahead with all the financial markets information you need. Monday – Friday, plus a weekend roundup. Midday Bell: Get a lunchtime update of market news and events. Monday – Friday. After the Bell: Catch a recap of who and what moved the market each day. Monday – Friday.	The Bulls Are in Danger of Turning Into Lemmings Few are heeding the warning signs of a possible global economic crisis. J.C. Penney Is Back and It’s Got Fight to It How much damage can it do to the rest of retailers? A Lesson From Oil: the Consensus Can Be Right Demand is good, but we’re pumping far more than I thought. Can This Market Handle a Rate Hike? Thursday’s close shows what happens when you know a tightening is coming. What’s Working (and Not Working) in Retail Winners like Wayfair tell us a lot about the sector. Mad Money Recap Mad Money Stock Screener Action Alerts PLUS Real Money Real Money Pro
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August 17, 2015     |   Follow Us On:

Apple Jumps on Reports of Self-Driving Car; Stocks Rise on Bullish Housing Data Stocks wrapped up Monday’s session to the upside on the heels of encouraging housing data. Starbucks Investors Shouldn’t Get Intoxicated Over Plans to Sell Wine and Beer Starbucks wants to become an evening destination in a bid to increase sales and profits, but it won’t be without significant challenges. Data Breach Forecast: Expect Bigger and Worse Financial Problems Why you are the target of today’s hackers. 3 Signs That We’re Heading Into a Stock Market Bubble In today’s current market with investor overconfidence, these three recent events point to signs that serve as good proxies for impending market volatility and a possible stock market bubble. 5 Real-Estate Investments for Higher Returns With lofty stock prices and paltry bond yields, investing in real estate is a way to follow the smart money. Jim Cramer Is Watching Wal-Mart Tuesday TheStreet’s Jim Cramer says he’s ‘warming up’ to the retailer ahead of earnings. What Does It Take to Love Your Job? Not Everywhere Is an Amazon Tear-Zone Everyone wants to love his job, but that may be even harder than getting that raise. But how do you find meaning? China Explosion Disrupts Toyota’s Operations About 8,000 vehicles belonging to several manufacturers are destroyed in the blast. Is Tesla Building Its Own Uber? Morgan Stanley Thinks So Elon Musk refused to answer whether Tesla was creating its own Uber, but Morgan Stanley gives the as-yet-to-be announced service a name — Tesla Mobility. How to Profit From Low Oil Prices Now With Phillips 66 Phillips 66 stock has stagnated — despite a 16% rise in adjusted earnings over the last year. See how to profit from low oil prices now with Phillips 66. 5 Rocket Stocks to Beat the Summer Doldrums These stocks have both short-term gain catalysts and longer-term growth potential. Chelsea Clinton Aims for the Economic Progress of Women and Girls Around the World The former First Daughter is working on a new initiative to aggregate data on female progress over the past 20 years and make it accessible to the masses. How ‘Straight Outta Compton’ Scored Another Huge Win for Comcast The N.W.A. biopic debuted as No. 1 at the box office, and has already doubled its reported $30 million production budget in one of the year’s biggest surprises for Universal. 26 S&P 500 Stocks to Buy Before September, From MKM Partners The stocks on this list all have ‘charts that are above all of their rising moving averages, and have good relative strength vs. the S&P 500.’ Jim Cramer’s Daily Booyah: Get the best articles and videos from Jim Cramer – Right to your inbox twice every business day. Monday – Friday, plus a weekend roundup. Before the Bell: Position your day ahead with all the financial markets information you need. Monday – Friday, plus a weekend roundup. Midday Bell: Get a lunchtime update of market news and events. Monday – Friday.     Apple, Tesla Pull Markets Higher After Earlier Declines Earlier pressure subsides throughout the session as high- momentum players such as Apple and Tesla pull their weight to push markets higher. The Dow and S&P 500 Charts Remain Favorable After Bears Lose Steam A technical look at the latest Dow and S&P 500 charts. Building Boom Hits the Hamptons: Buyers Want Plug-and- Play Homes The Hamptons’ real estate market usually ebbs and flows with fortunes on Wall Street. But this latest construction craze is a bit different from years’ past. Bull Charts of the Day — Occidental, EOG, Cisco These are the top three bullish daily charts for holdings in Jim Cramer’s Actions Alert PLUS portfolio. Stock Market Today – Japan Economy Weakened in Q2, Recovery in Doubt Also: Agribusiness firm Cargill buying Norway’s fish feed maker Ewos for $1.5 billion. Germany’s Merkel fighting rebellion in her party to ensure third Greek bailout passes parliament vote on Wednesday. Oaktree Capital, Tesla, Facebook: Doug Kass’ Views Doug Kass shares his views on Oaktree Capital Group and why he favors bonds over social media and new economy stocks like Facebook, Tesla and Netflix in the current environment.

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August 18 Premarket Briefing: 10 Things You Should Know U.S. stock futures are sinking Tuesday as a drop in Chinese stocks concerned investors, who are also looking to construction data. Wal-Mart reported earnings that missed expectations. Stock Futures Slip Despite Jump in Housing Starts Stock futures slid on Tuesday even after construction on U.S. houses in July climbs to its highest level since before the recession. Panera Bread and Starbucks Go Head-to-Head With New Pumpkin Spice Lattes Both quick-service chains are upgrading what goes into their popular fall drinks to appeal to more health-conscious customers. Shanghai Composite Sinks 6%, Bonds, Gold Should Rally as a Result The Shanghai Composite has been moving higher since July 28, but this trend suddenly ended on Tuesday. U.S. bonds and gold should benefit. Analysts’ Actions — CBS, Coach, Disney and More Here are Tuesday’s top research calls, including downgrades of CBS and Disney. Warren Buffett’s Top 10 Dividend-Paying Stocks for 2015 These 10 dividend stocks are some of the highest-yielding holdings in Warren Buffett’s Berkshire Hathaway portfolio. Salesforce.com Doesn’t Have a Buyer — but Its Stock Is Still a Buy Cloud specialist Salesforce.com is up 23% this year, and trades at a high P/E ratio. But given that all signs point to growth ahead, there’s still money to be made. Alaska Air Does What Wall Street Wants, Prompting Share Price Gains Alaska Air shares have gained 36% year to date because the carrier does what Wall Street wants, posting strong unit revenue and buying back shares. Estee Lauder Leads Pack of 3 Personal Products Stocks to Buy With Estee Lauder reporting earnings earlier this week, we decided to check TheStreet Quant Ratings for stocks in the ‘personal products’ sub-industry, that would be good investments. European Stocks Tugged Lower by a Drop in Chinese Stocks European stock markets fell on Tuesday, taking their cue from Asia, where Chinese indices led the region lower. Jim Cramer’s Top Takeaways: CyberArk, Blackhawk Network, Plains All American, Energy Transfer Partners Cramer says out of the rubble that is the energy master limited partnerships, he holds a winner in Energy Transfer Partners. Jim Cramer’s Daily Booyah: Get the best articles and videos from Jim Cramer – Right to your inbox twice every business day. Monday – Friday, plus a weekend roundup. Midday Bell: Get a lunchtime update of market news and events. Monday – Friday. After the Bell: Catch a recap of who and what moved the market each day. Monday – Friday.     Anthem, Aetna and Other Health Insurers Throw Caution to the Wind With New Deals With consolidation already a concern, four of the five largest U.S. health care providers are getting together. Strategic Hotels Asks JPMorgan to Explore Options as Bill Gates Eyes REIT The Chicago-based REIT is considering a number of strategic options, including a potential sale. Potential Morgans Hotel Group (MHGC) Sale Raises Questions From Major Investor Gregory Cohen of Rambleside Holdings, wrote to the board that his company was concerned that Morgans would be undervalued in a transaction. Morgans has been for sale since May 2014. Stock Market Today – China’s Stock Markets Sink Chinese home prices increase but recovery in struggling property market mixed. Also: U.S. may unveil rules requiring new oil and gas wells take measures to prevent unintended leaks of methane. Bull Charts of the Day — Occidental, EOG, Cisco These are the top three bullish daily charts for holdings in Jim Cramer’s Actions Alert PLUS portfolio. Stock Market Today – Japan Economy Weakened in Q2, Recovery in Doubt Also: Agribusiness firm Cargill buying Norway’s fish feed maker Ewos for $1.5 billion. Germany’s Merkel fighting rebellion in her party to ensure third Greek bailout passes parliament vote on Wednesday.

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Summary

• Investors holding interest rate-sensitive issues have become more nervous as they anticipate, rightly or wrongly, that the Fed may step back from the Zero Interest Rate Policy (ZIRP).
• Income investors seeking a fair return on savings are hard-pressed to find safe places to find decent income as most investments offer little income, are unsafe or both.
• While most pair trades are created to create capital gains, this is a pair trade, targeted at income investors, to identify a way to generate income while taming the risk.
• A long MTGE, paired with a short TLT position (at half the MTGE dollar value), delivers a hedge against future interest rate hikes while providing an outstanding 20% cash return.

Introduction: Income investors have just "celebrated" six and one-half years of the Federal Reserve Bank’s "Zero Interest Rate Policy" (ZIRP). This policy has rendered "traditional safe" investments, where savers could get a decent return while ensuring no capital impairment, useless in their search for income. CDs, savings accounts, and money market funds are yielding zero, leaving savers parched for income from investments appropriate for "traditional savers."

Worse, other types of long-trusted tools for "traditional savers" and retirees have been turned into speculative trading vehicles with this policy. Long the trusted companion of retirees, 10-30-year Treasury bonds are also yielding meager returns of less than 3.5% while posing a serious threat to the capital invested once rates begin to move to higher levels, simultaneously driving down investment values of these nominally "safe" securities.

Municipal bonds offer no safer alternative. Not only do they pose the same interest rate risks for a given maturity length, but the balance sheets and funding capability of many jurisdictions (think Puerto Rico, Illinois, Chicago and the treatment of unsecured municipal bond holders of Detroit debt) do not provide the financial security that has funded secure retirements for past generations of retirees.

This has forced "traditional savers" to move away from the decades-old toolbox of "traditionally safe" investments.

Why I’m Buying MTGE…:

One instrument that continues to provide a very high-income level is the mREITs. Many have expressed concern about the risk of owning such "speculative, unsafe" securities. For example, when I last checked, a broadly-read Seeking Alpha author, Brad Thomas, cannot bring himself to buy mREITs and prefers the safer, "high-quality" REITs that have reliable, steady income (admittedly a very attractive attribute). It is obvious that the market in general agrees with Brad, given the market valuations of the mREITs in general, and MTGE specifically.

While this article concerns a pairs trade, I actually own a very significant position in American Capital Mortgage Investment Corp. (NASDAQ:MTGE) "naked," beginning to build the position last March. Even on its own, MTGE looks to me much more solid than its low market price would suggest; of course, this makes it also a solid core for a pairs trade. Be that as it may, let’s consider MTGE as a "standalone" investment prior to discussing the "paired trade."

One way to do this is to compare MTGE to an investment recently heralded as "one to hold for 10 years" by that same Brad Thomas (full disclosure: I read every one of Brad’s articles that I can find and believe his research high-quality and detailed; however, we just seem to have a different investing philosophy):

Comparing Key Metrics: MTGE vs. STAG

As one can see, MTGE provides a yield 80% higher than STAG while selling at a 23% discount to book value. STAG has a 45% lower yield and sells at nearly twice the value of the underlying assets of the company. It seems that everyone perceives that MTGE is very risky and STAG is very safe. This is reflected in the "comfort premium" pricing at which STAG is selling, for which the market appears to be prepared to pay. I am not, preferring those securities that have already had the stuffing knocked out of it, leaving little remaining risk.

Indeed, MTGE had the "stuffing knocked out of it" during the recent "taper tantrum" in the first half of 2013. During the period from April 22 to July 1, 2013, MTGE dropped from $25.86 to $16.42 or a decline of 36%. At the same time, TLT (a surrogate for long-term rates, as we will discuss) dropped from $123.39 to $106.26 or a decline of 14%. That is, MTGE dropped by a factor of 2.5 times faster than the benchmark (NYSEARCA:TLT) for long-term rates. As of June 11, 2015, MTGE now stands 5% above the level reached at the depths of the taper tantrum, so there is not much recovery in the price of the stock from the 2013 "taper tantrum" low point.

However, it is now a much less risky investment than it was at that time. At the end of 2012, the ratio of total liabilities to net tangible assets was 7.3 (total liabilities = $6,770,578 and net tangible assets = $925,562); in sharp contrast, that same ratio stands at 4.9 (total liabilities of $5,745,206 and net tangible assets = $1,180,705) at the end of Q1’15. Clearly, the managers have also heard that the Fed may be raising interest rates and have acted decisively to prepare for that eventuality.

Evidence of that preparedness can be seen in the period January 26-June 8, 2015, another period of concern about interest rates. During that period, the TLT (benchmark) fell from $138.28 to $115.52 or 16.5%, while MTGE fell from $18.64 to $17.23 or 7.5%. During the more recent decline, MTGE fell at only half of the rate of TLT, as opposed to falling at two and one-half times the rate of the interest rate benchmark in the earlier decline. This suggests that the stock is more prepared for the upcoming interest rate shocks. {Parenthetically, the "high-quality, more stable" STAG fell in that same latter period from $26.20 to $21.21 or 19%, perhaps suggesting that it may not the "fortress of value" that it is purported to be.}

Another potential criticism of the mREITs is that they may be a "sucker yield" (borrowing Brad Thomas’ term), with a decline in dividend yield in the offing. American Capital has managed expectations and existing reality by prudently reducing the yield in line with the income generated by the lower-risk balance sheet. The dividend has already been cut from $0.90/share in Q1’13 down to $0.50/share to reflect the lower earnings. Even at the reduced dividend, the yield is 11.8%. It could be cut by nearly half again and still yield nearly what STAG is providing; alternatively, one could have a portfolio of 50% cash and 50% MTGE, nearly equaling the STAG dividend with only half of the capital at risk. Perhaps speculating on future growth in an uncertain future, STAG (as the company) may or may not do well; on a value basis (and I believe on a return basis on the investment), MTGE is the hands-down winner as it is delivering twice the income (almost) and starting at half the valuation.

So I am buying MTGE, unhedged, as it appears to be an excellent value:

–selling at a 23% discount to net tangible assets,

–providing an 11.8% yield (with a payout less than 100%),

–having de-risked the security by significant de-levering and

–realigning their payout to conform to the "lower earnings but much lower risk" debt to equity profile.

As such, it is a solid investment on its own.

However…

Why I "Am Selling" TLT to Hedge MTGE:

… as Jon Snow had said in recent episodes of "Game of Thrones," "Winter is Coming." Higher interest rates are being signaled as on their way at some time in the intermediate future and we as investors need to face up to that eventuality. Therefore, there is a case to be made for hedging the MTGE position to preserve capital (and probably most other investments as well). That MTGE can be argued to be a good stand-alone investment makes it a good core investment for a hedged, "pair trade" construction as well.

In addition to hedging to avoid losses in portfolio value, there is also an "income enhancement" play that one can secure by pairing a purchase of MTGE with a short on iShares 20+ Treasury Bond that I find attractive as an "income guy" (generating value predominantly through securing income as opposed to focusing exclusively on capital gains).

Consider per-share data for MTGE and TLT:

Data on MTGE and TLT

From current pricing, it requires 6.85 shares of MTGE to equal the dollar value of TLT. That is,

6.85 * 17.23 = $118.03, nearly equal to the value of TLT ($117.95).

Secondly, as we saw in the discussion above, the recent period of concern about interest rates saw TLT decline twice as fast as MTGE. If that relationship would come close to holding again, given the de-levered state of MTGE at a price only 5% above the "taper tantrum" level, one can hedge MTGE with TLT at half of the MTGE value. That is,

1 share of TLT at $117.95 to hedge

2 * $117.95 = $235.9 worth of MTGE or 13.7 shares

The combination of 1 share of TLT should offset positive or negative moves of 13.7 shares of MTGE to yield the following "pair trade":

MTGE, Hedged with TLT

This hedge should minimize losses (or gains). However, it has an even more profound impact on the income per net assets. MTGE has a very high income and the TLT has a very low income, as we pointed out at the top of the article, making TLT cheap financing as a "short." Of course, shorting requires the short seller to replace the income due to the owner of the borrowed stock; in other words, the short seller would need to be providing the $3.306/share dividend due the security owner from whom it is borrowed, setting up the following net income scenario:

Net Income Generated from Long MTGE-Short TLT "Pair Trade"

Calculating "dividend yield" on the "pair trade" hedge, one generates:

Net Dividend from the pair = $24.09 divided by the

Net Asset Value of the "Paired Trade" = $118.10/share yields

the "Pair Trade" Dividend Yield

= $24.09/$118.1 = 0.204 or a 20.4% yield on the "hedged" pair.

As such, pairing a high-yielding long with a very low-yielding short can generate a very high-yielding hedged construction by virtue of the "cheap" money "borrowed" through the short position. ZIRP can work for you, in this specific situation, to really amp up the income and yield.

Summary:

Savers have struggled to find yield since the financial crisis of 2008. Now, the "other shoe is ready to drop" with the potential for the Federal Reserve to raise interest rates threatening the very high valuations of most assets, resulting from using historically low discounting rates, to which savers have resorted in a chase for yield.

One security that seems to offer a better balance of value, security and return is MTGE, even if the market does not perceive it as such. This security offers good valuation (23% discount to net tangible assets), high yield (11.8%), a lower risk balance sheet through de-levering the fund by a third in three years relative to assets and re-aligning the payout to the lower earnings profile (through prudently reducing risk). Standing about 5% above the post "taper tantrum" low point, MTGE as a standalone security looks to me to be an excellent value, even if the market doesn’t think so.

MTGE also provides a solid core for a "pairs" trade to hedge upcoming interest rate increases. Pairing long MTGE with a short position in TLT at half the dollar value of the long MTGE position provides a construction that should be relatively robust to the upcoming interest rate increases. It enables the "pairs holder" to capture the very high income of the long MTGE position while mooting the risk that one is supposedly being paid to take. Finally, due to historically low interest rates, TLT as a short provides a low cost funding in the paired trade, enabling the "paired trade" to generate a 20% cash return on the net asset value of the "pair." While not generating a large (or any) capital gain (given the "pairs trade" design to avoid "pair" value movement in either direction), a 20% cash return, net of interest carry on the short TLT position, provides an outstanding risk-reward offered by few other trades.

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