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Last month, while stocks lost ground, we’ve pointed out that Bitcoin’s volatility has dropped considerably. At a time when most assets experienced extreme moves (down), the biggest cryptocurrency has been as stable as it never been before.
In our last article covering Bitcoin, we’ve concluded that:
Bitcoin’s long-term trend lines suggest that the downswing isn’t over yet. The most valuable cryptocurrency has dropped more than 60% this year, but divergence analysis doesn’t portend for a positive future.
Bottom line: Not yet. Make it times two:
Certainly not yet boring, but also not yet worthwhile buying.
Sudden Flash Crash
After two months that saw Bitcoin trading relatively calmly inside a rough range of $ 6,200-$ 6,800, we had an over 10% flash crash. On November 14th, the price dropped from ~$ 6,300 to ~$ 5,500, and on the next day the leading cryptocurrency traded as low as ~$ 5,300.
This was the first time that Bitcoin traded below $ 6,000 since August, falling to its lowest level this year.
Analysts emphasized uncertainty surrounding hard fork that is scheduled to take place in bitcoin cash.
Overall, the Bitcoin correction is now -73% over the past 333 days. Although the magnitude of the correction is not unusual, the tenor is.
Out of past 11 corrections that Bitcoin went through:
1. Four had a deeper correction and another one saw (more or less) the same magnitude.
2. Only one correction spanned across more days than the current correction.
Interestingly, the average time it took for Bitcoin to reach a new record high post a correction is only 216 days. While this might be an evidence that we are past due, it took no less than 1181 days for Bitcoin to set a new record post the longest correction (410 days), which is (as mentioned above) the only correction that lasted longer than the current correction we’re in.
The broader cryptocurrency market also suffered notable losses, declining from total value of $ 210B (a week ago) to $ 164B.
The combined market-cap of the 20 largest cryptocurrencies is down over $ 346 billion YTD, a decline of 68% (!) since the end of 2017.
Bitcoin annual returns for 2011-2018 show that, unless we see a miraculous recovery over the next six weeks, 2018 has a good chance to become the second year (only) with a negative return.
As a matter of fact, as it stands now, 2018 might go down in history as the worst year in Bitcoin’s history.
Funny thing is that when one is looking at the 2018 YTD returns of cryptocurrencies, Bitcoin doesn’t look that bad… As a matter of fact, Bitcoin is one of the better performers in the space.
Bitcoin Investment Trust
At its peak last year, the Bitcoin Investment Trust (OTCQX:GBTC) was trading at a premium to NAV of over 100%. Today that premium moved down to 5%.
The Bitcoin Investment Trust is now down over 84% from its December 2017 peak. Putting it differently, GBTC is under-performing its underlying asset.
Even with all the noise and negative return, Bitcoin’s annualized volatility continues to trade relatively calm. Bitcoin’s rolling 30-day annualized volatility was (until Nov. 14) only 14%. That is/was an all-time low!
To put things into the right perspective, 14% is so low that recent Bitcoin volatility equals that of both stocks and oil.
Even bonds, in spite of remaining less volatile, aren’t too far off.
When it comes to cryptocurrencies, it’s hard – perhaps impossible – to time things perfectly.
Therefore, much of the in-and-out swings is about guts feeling, rather a clear, coherent, analysis.
As such, what we wrote recently in an article where we explain our shift from a short-term bull (Q4/2018) to a longer-term bear (Q4/2019) seem very relevant for Bitcoin too:
Remember: Timing is everything…
Allow me to finish with two quotes – a very old one and a fresh one.
The old one is attributed to King Solomon who was most famous for his wisdom:
For everything there is a season, and a time for every purpose under heaven – World English Bible, Ecclesiastes 3
The fresh one is from Michael Batnick, aka The Irrelevant Investor:
When you were born might be the single most important factor when determining your experience in the market. It’s also the one that is completely out of your hands. – Michael Batnick
…so is Risk Management!
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
(This is a guest post from Appilco Head of Platform and Modern Monopolies co-author Nicholas Johnson.)
This week, the dream for what WhatsApp could have been was officially pronounced dead. What happened? Facebook announced a host of new business-oriented features that are coming to WhatsApp in a push to finally have its biggest acquisition generate meaningful revenue. Ads are included, contrary to the original vision for WhatsApp, whose founders once called advertising an “insult to your intelligence.”
As I’ve written previously, WhatsApp’s original direction presented an opportunity for a true Facebook competitor to emerge. But since Facebook’s $ 19 billion acquisition, it’s become increasingly clear that WhatsApp will inevitably end up looking like yet-another Facebook platform. That is to say, it will be driven by ads and the mass collection of user data, as required by Facebook’s main revenue model.
With the WhatsApp Business API, this transition has kicked into high gear.
Show Me the Money
WhatsApp’s business API will enable businesses to establish an official presence on WhatsApp, similar to how they exist on Facebook today. However, this doesn’t mean you’re suddenly going to start getting spammed by messages from companies, as customers still have to contact a business on WhatsApp first before the business can send them messages.
After that, using the API, businesses can respond to messages from customers. They can also send them updates such as order confirmations, delivery notices, appointment reminders and more. Many businesses will also use it for customer support, and the API will likely enable WhatsApp to plug into existing CRM solutions that businesses use for that purpose.
As for cost, the API will let businesses respond to customer inquiries for free within 24 hours. After that they will pay a fee per message sent of between half a penny to 9 cents, depending on the country. This framework will encourage businesses to respond to customer messages quickly. It also helps eliminate the incentive for businesses to spam customers after the initial outreach, as each message will cost them money. If that message doesn’t create real value for the customer, you won’t want to send it.
Additionally, WhatsApp will also be introducing ads, not all of which will appear within the WhatsApp app itself. How does that work? Business accounts on WhatsApp will soon be able to place ads on Facebook (and likely Instagram too) that let customers click to open up a WhatsApp message with that business. Additionally, WhatsApp will be adding advertisements to its Status platform, which is its version of Facebook’s many Snapchat Stories clones. Facebook has been testing these ads already with Instagram Stories, and WhatsApp Status ads will tie into the same Facebook ad system as Stories.
Facebook’s Stalling Revenue Engine
Taken together, these moves remove much of what made WhatsApp stand out from the rest of the Facebook ecosystem. Following the departure of WhatsApp’s founders, every new change makes WhatsApp more and more like Facebook.
At its core, Facebook, much like Google, is driven by a giant money-making advertising engine. Eventually, everything that Facebook touches gets pulled into its vortex. Now WhatsApp, despite promises to the contrary to both users and regulators, will be no different.
For Facebook, the shift comes on the back of a poor showing in its latest quarterly earnings and as increasing investments in safety and community monitoring are likely to compress its profit margins in the years ahead. Facebook appears to be moving decidedly out of growth mode and into profit-taking mode with all of its platforms. Now that WhatsApp is one of the largest messaging platforms in the world, it’s well positioned to turn into the monetization engine Facebook likely envisioned when it shelled out $ 19 billion.
Looking for a new deal? In MLP land, there have been a few GP/Yieldco consolidations over the past few months, and we just came across another one, which looks rather interesting for income investors.
Tallgrass Energy GP LP (TEGP) is the parent/GP of Tallgrass Energy Partners LP (TEP) and has interests in a group of energy-related entities. On 3/26/18, TEGP announced a merger with TEP, in which TEP unitholders will receive two TEGP units for each TEGP unit they own.
TEGP’s earnings are virtually synonymous with TEP’s, which stem from midstream operations in the western U.S.
(Source: TEGP site)
Tallgrass Energy GP LP, through its interests in Tallgrass Equity LLC, provides crude oil transportation services to customers in Wyoming, Colorado, and the surrounding regions of the United States. The company operates through three segments: Natural Gas Transportation; Crude Oil Transportation; and Gathering, Processing & Terminalling.
Tallgrass owns and operates more than 6,700 miles of natural gas pipeline and about 760 miles of crude pipeline across a broad portion of the U.S. It also has one of the industry’s leading water reclamation programs situated in close proximity to producers. (Source: TEGP site)
To say that the Tallgrass corporate setup was complex would be an understatement – trying to decipher this setup reminded us of those Franz Kafka novels we read in English Lit. 101:
This is one of the reasons that management is doing this merger deal – to simplify the group’s structure for investors, in addition to reducing its cost of capital:
As mentioned above, TEP unitholders will receive two TEGP units for each unit that they own. In addition, management raised TEGP’s quarterly distribution to be exactly half of TEP’s, so there will be no distribution loss to TEP unitholders.
Tallgrass Energy Partners LP will be merged into a new entity, Tallgrass Energy LP, which will trade on the NYSE under the ticker “TGE.”
The new entity will be taxed as a C-Corp, which eliminates K-1 hassles for investors, and can give the combined companies broader market exposure.
The deal has already been approved by the boards of both TEGP and TEP, in addition to the TEP conflicts committee.
On the Q4 ’17 earnings call, management referenced the fact that there’s a potentially valuable tax shelter available for the company.
“TEGP has a deferred tax asset of $ 313.0 million which is the expected tax benefit of available future deductions that offset future taxable income. It is currently expected that no cash taxes will be paid by TEGP for a period estimated to exceed 10 years”.
However, it’s uncertain if regulators will allow the new entity to use this asset or not.
Here’s how the upcoming May distributions look for TEGP and TEP.
TEGP increased its quarterly payout by 37%, from $ .3675 to $ .4875, and was currently yielding 9.87%, at a price/unit of $ 19.75, as of 4/12/18 intraday. TEP’s distribution is $ .975, (2x TEGP’s). Both payouts go ex-dividend on 4/27/18.
Both companies have good quarterly distribution hike streaks going – TEP has raised their payouts for 19 straight quarters, while TEP has an 11-quarter streak.
We’ve added these two tickers to our High Dividend Stocks By Sectors Tables, in the Basic Materials section.
Arbitrage anyone? Unlike many mergers, in which the acquiring company pays a fixed price/share for the target company, this one is based upon a 2X multiple of the buying company’s price, TEGP, which arbitrage players may want to try to profit from. As of 4/12/18 intraday, there was a -$ .30/unit variance between the two unit prices, including the effect of the upcoming distributions:
The yieldco, TEP, had huge growth in 2017, as new assets kicked into earnings. EBITDA rose 57%; DCF grew 50%; and revenue grew a more modest 7%. Management continued raising the quarterly distributions, which grew 20% in 2017, while TEP’s distribution coverage improved by 16%.
You can see part of the reasoning for the merger in the GP Interest & IDR payout figures below. These payouts grew by 43% in 2017 and were ~24% of TEP’s DCF. The total distributions payout was ~$ 563M, which should decrease after the elimination of the GP and IDR payouts post-merger.
Looking back further, it’s clear that TEP has produced some outstanding results, with EBITDA growing by over 6X from 2014 to 2017:
(Source: TEGP site)
This filtered into the Tallgrass group’s earnings:
(Source: TEGP site)
This is what supported all of these distribution hikes for TEP, which had a CAGR of 31% since 2013:
Analyzing the Deal
Here’s how the merger shakes out, if management leaves the new entity payout at $ .4875/quarter, ($ 1.95/year). There will be 152.2M publicly held units and 126.7M LLC equity exchanged units, which would receive a total of ~$ 546M in annual distributions:
They had slightly different guidance figures on the S-4 document for this deal – $ 807M for adjusted EBITDA, and a DCF figure of $ 662.00 for 2018.
We looked at it three ways, using low, high, and S-4 guidance figures. Since there wasn’t a DCF figure given in the deal presentation, we used a 90% multiple of EBITDA guidance, (which is the same as 2017’s ratio), in the low-end and high end columns.
As the merger presentation stated, the new entity should have solid distribution coverage:
On the low end, using a $ 1.95/unit annual payout, the new entity would have coverage of ~1.24X. The high end coverage would be ~1.20X, if management raised the distribution to $ 2.24/year (which they haven’t stated as of yet).
If they hit the high end of their EBITDA target, and DCF is 90% of it, and they leave the payout at $ 1.95/year, their coverage would be a very robust 1.38X.
Using the S-4 doc’s guidance figures of $ 807M in EBITDA, and $ 662M in DCF, we inferred that coverage would be ~1.21X, if the distribution was $ 1.95/year for the new entity:
Here’s a look at the 2015-2017 income statements for Rockies Express Pipeline LLC, often referred to as “REX” in the company docs. After a revenue and operating income dip in 2016, REX came roaring back in 2017, with revenues up 18.7% vs. 2016, and up 8.7% vs. 2015. Operating income also bounced back, rising 36% in 2017 vs. 2016, and 10.8% vs. 2015:
TEP unitholders must approve the deal. However, Tallgrass Equity owns ~35% of the TEP units, so the deal should go through. The TEP and TEGP boards, and the conflict committee also already approved the deal. The other holdup might be regulators, but as of yet, we’ve heard no negative news about this.
New Entity Debt Load
The new entity would own 75% of Rockies/REX, so we took a look at how the combined debt loads of TEP, TEGP, and REX would affect the new entity’s debt leverage and interest coverage.
Both TEP and REX had good interest coverage in 2017, at 8.12X and 5.48X, respectively. The new entity would have ~3.6X interest coverage, based upon 2017 figures, which, of course, will change. It’ll be lower coverage, but still reasonable.
They also had reasonable debt leverage of 3.17X and 2.76X, respectively, which is roughly in line with other midstream companies we follow. (See Financials section for more on this.)
The new entity’s Net Debt/EBITDA leverage looks like it’ll range from ~5X to 5.6X. The company’s 10-K mentioned that there’s an upper end limit of 5.5X leverage. Timing is often tricky in these deals – the new entity may experience higher levels of leverage initially for 1-2 quarters, depending upon when the deal is finalized. However, it doesn’t appear that operations management will be changing, so that’s an advantage.
Management also mentioned on the earnings call that,
“REX’s board has agreed to repay the July 2018 maturity of $ 550 million. At TEP and Tallgrass equities current ownership that will amount to approximately $ 275 million and $ 137.5 million, respectively. This debt reduction will further strengthen REX’s balance sheet for the long-term and should be the next step towards returning REX to an investment grade pipeline. The less interest at REX is paid at the entity, the more cash there is to distribute.”
On the earnings call, management detailed several new growth projects:
On January 3, we announced an agreement to buy 51% interest in the Pawnee Terminal from Zenith Energy from $ 31 million and also announced the acquisition of a 38% interest in Deeprock North for $ 19.5 million. This past week TEP announced the acquisition of water infrastructure assets in the Bakken for $ 95 million, a prime customer there being XTO with an additional $ 45 million of capital expenditures expected.
We also announced the formation of a joint venture in the Powder River basin with Silver Creek midstream for the development of the Iron Horse crude oil pipeline. Iron Horse will transport crude oil from the PRB to Guernsey and then on into Pony Express. We expect to invest approximately $ 150 million into the joint venture and its associated Guernsey terminal.
Analysts’ Estimates And Price Targets
TEGP has received some upward earnings estimate revisions over the past month, as details of the deal were digested. 2018 estimates rose from $ 1.30 to $ 1.44, while 2019 estimates rose from $ 1.25 to $ 1.61.
At $ 19.75, TEGP is ~23% below analysts’ average price target, and ~42% below the $ 28.00 highest price target:
TEGP (candlesticks) and TEP (lavender line) are both down in 2018 but have moved higher since the March 26th merger announcement.
Two other strategies to potentially profit from the merger deal, on a short-term basis, are selling covered calls and/or cash secured puts.
If you want to be aggressive but still get a lower breakeven, this in the money May put trade offers a $ 1.25 bid premium, roughly 2.5X TEGP’s $ .4875 quarterly payout, with a breakeven of $ 18.75.
Our Cash Secured Puts Table can give you more details for this put trade and over 25 other put-selling trades.
We’ve added this July trade to our Covered Calls Table, which tracks over 25 covered call trades on a daily basis. With the heightened volatility in 2018, we’re finding higher option premiums, which help to hedge vs. price declines.
The July at the money $ 20.00 call strike pays $ 1.20/unit, for an annualized yield of ~22%.
- Static, in which TEGP doesn’t rise to or above $ 20.00 near the ex-dividend date or the expiration date, and you keep your TEGP units. In this instance, you’d collect $ 1.69/unit, the combination of the option $ and the distribution.
- Assigned pre- ex-dividend date. You’d collect the $ 1.20 option premium, and $ .25, the difference between TEGP’s $ 19.75 price/unit and the $ 20.00 strike, but no distribution.
- Assigned after the ex-dividend date. You’d collect all three profit streams, for a yield of 9.81% in this 100-day trade, or ~35% annualized.
You may be wondering why we didn’t detail selling options for TEP. The problem is that, since TEP’s eventual buyout price is tied to 2X TEGP’s price, you could end up with a downdraft once you buy TEGP. We’ve been down that road before, and it wasn’t pretty.
Since you’ll end up with TEP’s assets anyway, we prefer to own TEGP. Although the conventional wisdom is often to short the acquiring stock, and buy the target stock, we don’t feel that this will work in this case.
Since it’s TEP’s earnings and operations that are mainly driving the Tallgrass group, we compared TEP’s valuations and yield to those of other midstream high-yield stocks we’ve covered in other articles. These include DKL Logistics Partners LP (DKL), Summit Midstream Partners (SMLP), Holly Energy Partners, L.P. (HEP), MPLX LP (MPLX), PBF Logistics LP (PBFX), Martin Midstream Partners L.P. (MMLP), and Green Plains Partners LP (GPP), Energy Transfer Partners LP (ETP), and Williams Partners LP (WPZ).
in 2017, TEP had far and away the best distribution coverage, at 1.47X. As detailed above, the new entity, TGE, will probably have coverage of ~1.20X, which is in line with this group’s average. TEP’s Price/DCF of 7.41X is lower than the group’s 8.82X average, as are its Price/Book of 1.97X, and its EV/EBITDA of 7.54X:
TEP’s Net Debt/EBITDA of 3.17X is the second lowest in this group, and its ROE and Operating Margin are above average. Its Debt/Equity leverage is also better than the group average.
On the Q4 earnings call in February (which was prior to the merger deal announcement), management detailed TEP’s liquidity status, as of 12/31/17:
At the end of the fourth quarter, TEP had nearly $ 1.1 billion of liquidity available on its revolver. TEP’s leverage as of quarter end was approximately 3x based on the trailing 12-month adjusted EBITDA as calculated according to our credit agreement provisions. As you know, this continues to be on the low end of our 3x to 4x long-term leverage target indicating ample leverage capacity at TEP to fund third-party acquisitions, organic growth projects, and TEP’s share of REX’s July 2018 debt maturity of $ 550 million.
We rate TEGP a buy, based upon its attractive, well-covered and improved yield, its sound management, and the oncoming merger deal, which will lower the cost of equity, and its ultimate overall organizational simplification – it’ll remain a C-Corp as the new combined entity, with no K-1 hassles for income investors.
All tables furnished by DoubleDividendStocks.com, unless otherwise noted.
Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
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Disclosure: I am/we are long DKL, TEGP, MMLP, PBFX, ETP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Buying a drone for fun just got a little less complicated.
A court ruling has declared that civilians c no longer need to register their non-commercial drones with the Federal Aviation Administration (FAA).
On Friday, the U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of drone user John Taylor, who filed an initial petition challenging the drone registration rule back in 2015, just days after the FAA’s drone registry went live in December of that year.
The rule required drone hobbyists to pay a $ 5 fee to register their drone with the FAA’s website. Read more…
Hays County Records Division has a new Land Records management system that will enhance the County’s ability to serve its citizens.
(PRWeb July 18, 2016)
Read the full story at http://www.prweb.com/releases/2016/07/prweb13559187.htm
The 13-second preview of Mike Posner-produced track shows off an edgier side of Bieber.
By Jocelyn Vena
<P>Is it killing you that you have to wait until Monday to hear what <a href=”/news/articles/1680882/justin-bieber-boyfriend-single-buzz.jhtml”>”Boyfriend” sounds</a> like? Well, <a href=”http://www.mtv.com/music/artist/bieber_justin/artist.jhtml”>Justin Bieber</a> feels your pain and decided to release a teaser for the lead single off his <a href=”/news/articles/1680373/justin-bieber-believe-album.jhtml”>album, <i>Believe.</i></a> </P><P> </P><P>The 13-second, blink-and-you-might-miss-it tease is spare in terms of instruments, just bleeps and thumps, no singing or rapping. But it does play up Bieber’s love for hip-hop; as it nears the end of the tease, a drum line-style beat kicks in. Come Monday, of course, the whole song will drop for Beliebers’ listening pleasure. </P><P> </P><P><center><embed src=”http://media.mtvnservices.com/mgid:uma:video:mtv.com:744691/cp~id%3D1680192%26vid%3D744688%26uri%3Dmgid%3Auma%3Avideo%3Amtv.com%3A744688″ width=”460″ height=”260″ type=”application/x-shockwave-flash” allowFullScreen=”true” allowScriptAccess=”always” base=”.”></embed></center> </P><P> </P><P>The video teaser also includes footage of Bieber in the studio, recording “Boyfriend,” which was co-written and co-produced by Mike Posner. The clip premiered on Justin’s <a href=”http://www.justinbiebermusic.com/boyfriend” target=”_blank”>website</a> late Thursday night. </P><P> </P><P>”This record is different in a very good way,” said producer/writer Mason Levy, who also worked on the song. “Definitely edgier, it’s more grown-up, it’s more developed and it’s sexier. It’s just like really dope. It’s gonna definitely surprise people. People aren’t really expecting that. They’re going to like it.” </P><P> </P><P>It’s clear from the teaser that <a href=”/news/articles/1681595/justin-bieber-boyfriend.jhtml”>Bieber is using</a> influences from urban music and that he’s looking to grow up sonically. The music in the new clip also seems to pay homage to Justin Timberlake, and even Chris Brown. Bieber has confirmed that he raps on the song. </P><P> </P><P>”It’s more just the verses [that he’s rapping on], and the rest he’s singing,” Levy told MTV News. “It’s dope. It’s hip-hop, but with great acoustic R&B, pop guitar with very hip-hop, clubby drums and really dope Justin Timberlake-y melodies.” </P><P> </P><P><i>What do you think of “Boyfriend” so far? Tell us in the comments!</i></p>
- Justin Bieber
Hoping to capture business from fast-growing Bay Area firms such as Uber and Tesla, IBM Thursday will announce plans to open a center in San Francisco dedicated to its Watson artificial-intelligence-driven computing service.