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Monday Mailbag: Lithium Boom, Bond Bubble, 401k Ripoffs… and More

By John Persinos on May 29, 2017

Many people nowadays have the attention span of a Chihuahua on crystal meth. In today’s digital world, every human impulse is fiber-optically connected for instant gratification. Consumers want what they want… and they want it now.

Which is why I enjoy getting your letters. In an impatient era such as ours, we tend to forget that letter writing once played an important role in everyday life. To be sure, letters to the Investing Daily Mailbag aren’t written with goose quill pens on parchment paper, but I still appreciate the time and effort that readers make in reaching out.

Let’s see what’s on your minds.

The lithium gold rush…

“I’ve been reading a lot about lithium these days. Demand for the substance seems to be picking up. Is it really a good investment or just a lot of hype?” — Tony D.

I have a keen eye for spotting hype and I can confidently tell you that investor excitement over lithium is wholly justified.

Lithium is used to create heat-resistant glass, ceramics and lubricants. It’s also used in a variety of industrial applications, such as steel and aluminum production. In the field of drug treatment, it’s widely used to alleviate depression and bio-polar disorder.

However, the biggest growth driver for lithium is the burgeoning demand for lithium-ion batteries used in electric vehicles (EVs) and renewable energy.

Elon Musk, co-founder and CEO of Tesla (NSDQ: TSLA) has indicated that he seeks a lithium supply to fill enough batteries to power 500,000 of the company’s EVs per year by 2020.

Tesla leapfrogged the competition by constructing its own lithium battery Giga factory that’s on track to produce 35 gigawatts of lithium batteries per year by 2018. Tesla broke ground on the gigafactory in 2014 outside Sparks, Nevada, and officially launched battery cell production in January 2017.

The optimal way to invest in lithium is through well-capitalized mining stocks. For specific lithium plays, see my February 15 issue: Here’s Your Chance to Invest in “The New Gasoline.”

Beware the “bond bubble”…

“From somewhere my brain has been programed to beware a ‘bond bubble!’ Please explain to me what they mean by bond bubble. Do we need to still be cautious about one?” — Kent B.

I’ll let Jim Pearce, chief investment strategist of Personal Finance and director of portfolio strategy for Investing Daily, answer Kent’s question:

“Yes, you do need to be cautious about the bond bubble. All bubbles are caused by a long-term imbalance in supply and demand, whether it applies to stocks, bonds or tulip bulbs. Central bank intervention since the Great Recession has contributed to a bond bubble in two ways: (1) by pushing interest rates to nearly zero, bond prices soared thereby increasing demand for them that otherwise would not have occurred, and (2) by buying trillions of dollars of Treasury securities the Fed decreased the supply of bonds on the open market that would otherwise have tempered soaring bond prices.

The Fed has started raising interest rates so the first condition is gradually unwinding, but the second condition is still in place. Declining investment-grade bond prices is a mathematical certainty if rates continue to go up, and would be compounded if the Fed decides to lighten up its balance sheet.”

Bristow hits turbulence…

“Can you share your thoughts on BRS stock? On May 24 it fell by 35%.”— HBD

Offshore transportation provider Bristow Group (NYSE: BRS) is still a strong company. The drop is a temporary overreaction to its latest operating results.

BRS reported a fourth-quarter loss of $1.15 per share after the close on May 23, compared to the profit of 13 cents per share in the same period a year ago. Analysts expected a loss of 48 cents per share. Here’s the key factor that the investment herd seems to have missed: Bristow’s revenue results very nearly matched estimates and costs are on a downward slope.

The culprit for the greater-than-expected loss is clear: expenses in the past quarter didn’t come down fast enough. However, the company is implementing aggressive cost-cutting measures that should bear fruit in coming quarters. As the offshore oil and gas sector recovers and Bristow continues slashing overhead, we should see an improvement in the company’s results.

Bristow already is starting to experience an increase in offshore contract offers from major oil companies. That said, the firm operates in a cyclical and volatile industry and the stock isn’t appropriate for risk-averse investors. For the time being, BRS requires patience as it rides out this rough patch. If you already own shares, hang onto them. If you don’t, avoid the stock until oil and gas prices recover further and the company’s operating results stabilize.

401k landmines…

“How can I protect myself from the hidden fees and costs that chip away at my 401k investment gains?” — Terry C.

You’re right to be concerned. If any reader thinks their 401k is free, think again. In fact, it’s quite the opposite. These plans are jam-packed with costs you probably don’t even know about.

Do you know how much you’re paying for your 401k? If you’re like most people, the answer is no. According to one study, 401k fees were so high (compared with an index fund) in 16% of the plans that, for young employees, these fees consumed the tax benefit of investing in a 401k plan.

Most 401k plan participants aren’t even aware that they’re paying 401k fees, but many mutual fund providers charge more than 1% of your total assets in investment management fees.

To maximize your long-term wealth building strategy, you need to understand these fees and scrutinize your 401k plan packet for them. Here’s a checklist:

Contractual plan fees. This is a plan created for periodic fixed dollar investments over a specified period of time, such as 15-20 years. A major portion of the total investment fee charge is usually deducted in the early years of the plan’s designated time frame.

Back-end load. This is the redemption charge an investor pays when making a cash withdrawal from a 401k plan. It’s typically associated with fund redemptions.

Front-end load. A sales charge applied to an investment at the time of initial plan purchase.

Management fee. The amount charged against investor assets for investment advisory services. The standard industry mutual fund management fee is between 0.5% and 2% of total fund assets. Don’t ever agree to pay more.

Sales charge (or sales load). This is the fee charged on an investment, and it varies according to the fund and the investment. The charge is added to the net asset value of the fund.

Transaction costs. These are costs incurred from the buying and selling of fund securities. They include brokers’ commissions and “dealer spreads,” the difference between the price the dealer paid for a security and the price the security can fetch on the market.

12b-1 fees. These are the annual fees mutual fund firms charge 401k plan participants for the costs they incur marketing their funds, specifically advertising and marketing costs. The 12b-1 fee is considered an operational expense and is therefore included in a fund’s expense ratio. It is generally between 0.25%-1% (the maximum allowed) of a fund’s net assets. The fee gets its name from a section in the Investment Company Act of 1940.

Selling put options…

“When you sell a put, is there always a possibility that it might be assigned and you would have to buy the stock? Does this only happen if it is a losing trade with little time left until expiration? Under what circumstances is it more probable that the short put would get assigned?” — Marty L.

When it comes to the intricacies of options trading, the best person to consult is Jim Fink, chief investment strategist of Options For Income and Velocity Trader.

Jim is an options maestro; here’s his answer to Marty’s question:

“Stock options can be assigned at any time and for any reason (rational or not), so you are always at risk when you sell a put option. However, early assignment is unlikely until the last few weeks prior to expiration and even then it only tends to occur if the put is deep-in-the-money (i.e, stock price below put strike) with no time value remaining (i.e., option price = intrinsic value only = put strike price – stock price).

Time value = (option price – (strike price – stock price), when stock price is equal to or less than the put strike price.

Time value = option price, when stock price is greater than the put strike price.”

If you have questions on any investment-related topic, please don’t hesitate to send me a letter: — John Persinos


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R.I.P Bull Market—Here’s How To Protect Your Wealth

I hope you’ve enjoyed the phenomenal bull market of the past eight years…

Because it’s about to come to a screeching halt.

The Federal Reserve’s nearly decade-long spending spree has finally come to an end.

With no other options left at their disposal, the Fed has no other choice than to raise interest rates to keep inflation in check.

And that leaves you with two options…

Do nothing and suffer the agony of watching the profits you’ve accumulated over the years evaporate right before your eyes…

Or reposition your portfolio and invest in companies which prosper as inflation rises and interest rates soar.

I think the choice is clear. And I’ll show you the best new positions you can take if you click here.

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  1. avatar
    Peter Reply May 26, 2017 at 12:35 AM EDT

    Are there any energy-focused closed end funds trading at a discount you could recommend?

    • John Persinos
      John Persinos Reply May 29, 2017 at 4:10 PM EDT

      Peter: Houston-based Kayne Anderson Energy Total Return Fund (NYSE: KYE) looks appealing. With net assets of $442 million, the fund’s top holdings include solid energy companies such as Enbridge Energy Management (NYSE: EEQ) and Kinder Morgan (NYSE: KMI). The fund invests in several master limited partnerships, midstream corporations, marine transportation, energy-related debt and Canadian income trusts. KYE has gained 15.4% over the past 12 months and currently trades at a discount to the value of its underlying portfolio.