If you’re reading this, you’re likely invested in mutual funds, stocks, or other “yield-bearing” assets.

So, you know that you will receive a quarterly (or sometimes) monthly benefit. It’s called a dividend, which is typically cash paid to shareholders on a per-share basis.

Take Exxon Mobil Corp. (XOM). The energy giant’s board of directors authorizes an $0.87-per-share payment on its common stock. Thus, on an annual basis, the firm would pay $3.48 per share (four quarters times the dividend).

When you divide the dividend into the stock price, you reach another key number: the yield. On Friday, Exxon’s closing price was $60.40. So let’s do the math: $3.48 divided by $60.40.

This is a 5.76% yield that investors can generate as cash dividends every single year. Based on a company’s performance, its board can increase or decrease its dividend.

Now, if you’re an Exxon investor, you have two choices for what to do with the cash. First, of course, most new investors will pocket the cash. And why wouldn’t they?

If you own 100 shares, that will generate $348 in dividends per year. You can put that money right to work, or you could throw it in a savings account.

But there’s another option for you to consider. It’s a process known as “dividend reinvestment.” Let’s explain what it is, how it works, and decide if it’s the right strategy for you.

Getting the Most from Your Dividends

Companies generate cash flow by earning profits. If they can exceed earnings expectations, they can put that money to work in several ways.

Some companies like to pay down debt to improve the health of the balance sheet. Others might reinvest that money into research and development or expand their business. Companies with a lot of cash can buy back stock or use it for an acquisition.

One final and popular strategy is to pay their investors a dividend. Most companies will pay these dividends every quarter, for a variety of reasons.

A quarterly dividend schedule coincides with earnings announcements. Also, paying four times a year in installments offers companies a better way to manage cash flow.

Investors have an option on how to receive these dividends. First, they can receive a lump sum of cash that is usually taxable upon receipt. (I say “usually” because investors who hold dividend stocks in a Roth IRA can avoid this tax. I will explain in a future issue of TradeSmith Daily.)

The other dividend option is to receive payment of more shares of company stock. But, again, your cash sum is used to buy stock with the money the company gives you.

Dividend reinvestment is a very popular strategy for longer-term investors. The most important benefit: The power of compounding interest.

How It Works

If you’re using a brokerage, you can automatically enroll in a dividend reinvestment plan or DRIP. The process requires no additional capital. It runs on autopilot, and you are always buying shares based on the time of dividend payout.

This gives you the benefits of dollar-cost averaging that I recently discussed.

But the biggest benefit is the ability to generate significant returns due to the nature of the process.

Compounding is a potent tool.

Consider this.

Imagine you have 1,000 shares of a stock on Day One.

The stock is worth $10.

It pays you 5% per year. And for 10 years, the stock doesn’t even move. (We’re not going to speculate that the stock rose 2% a year or the dividend increased as well. The stock stays at $10 for 10 years).

If you just took the cash, you’d receive $5,000 in dividends over the decade.

Your total investment would now be $15,000.

But with dividend reinvestment, look at what happens. 

Each year, you’d take the $500 in dividends over four quarters and reinvest it into 50 shares of stock at $10.

The total portfolio after 10 years would be $16,288.95.

You’d add more than 8.5% more to your portfolio without even doing anything.

Now, keep in mind, this example doesn’t even include annual dividend growth, share price appreciation, or other factors that could increase the success of dividend reinvestment over just taking the cash instead.

When Not to Use Dividend Reinvestment

Now, I’ve told you the financial and transactional benefits of dividend reinvestment.

Let’s talk about why this might not be for you.

First, you might be an income investor close to retirement or living off your portfolio. If so, you might need the cash for expenses. You should always consider your financial situation.

Second, you might want to use your dividends to purchase the stock of another company or invest in another asset. And if that’s the case, go for it. Investors should consider new opportunities, new assets, and new strategies that fit their risk profile. Dividends from existing positions can provide the cash needed to open new positions.

A third reason is simple. You might not be a buy-and-hold investor. If you’re focusing on short-term returns, you might not even want or need these payouts.

Before you take the plunge on a DRIP plan, be sure to call your brokerage or search for “Dividend Reinvestment” on your online platform.

For me, I’m happy to take the money and not run. These plans allow me to boost my returns and take hold of more shares in my favorite income-paying stocks. I’ll be back tomorrow with some fresh insight on the major trends impacting the markets.

One of the troubling things about the financial media is the lack of action.

I watch some of the morning shows; unfortunately, the headline stories are both hyperbolic and inactionable.

I want to shake my screen. If the story they are pushing is so important, they should tell viewers how to trade it. Whether it’s headline inflation, rising corn prices, or crashing lumber prices, I always think: What is the trade? How do I invest?

It appears that journalism and finance don’t always mix well.

One of the most important stories I’ve been following centers around China. While COVID has been the major theme for more than a year, there’s another underlying current that could shock the markets very soon.

I’m talking about the brewing Cold War around technology between the world’s two largest economies.

Today, I’ll discuss it. But more importantly, I’ll show you how to trade around it.

How a Cold War Heats Up

Right now, investors are talking a lot about the ongoing semiconductor shortage. I’ve discussed this as well, but in a much different fashion.

You see, media outlets are blaming supply chain challenges, poor auto manufacturing projections, and a labor shortage for the current semiconductor shortage.

But people aren’t talking about the real elephant in the room.

Relations between the United States and China are strained. This ongoing conflict has created huge problems for both nations’ hardware production, social media companies, and even agricultural producers.

The Trump administration aimed to level the playing field a few years ago. It blocked Chinese companies from the U.S. market and raised significant concerns about cybersecurity and privacy. Such efforts have continued into the Biden administration’s foreign policy.

Biden’s administration has moved to block certain Chinese companies from sourcing certain tech components produced in the U.S. In addition, they have barred financial transactions with some businesses. The White House has even moved to regulate underwater cables on which telecommunications companies in both nations depend.

This is a rare bipartisan issue these days.

Both Democratic Sen. Ed Markey and Republican Sen. Marco Rubio just praised a big decision by the Federal Communications Commission (FCC).

Yesterday, the FCC voted unanimously to ban equipment purchasing proposals across U.S. networks for Chinese companies. The reason: Chinese companies might threaten national security.

Such companies include semiconductor giant Huawei and phone manufacturer ZTE, two massive Chinese tech companies.

China has said the FCC’s decision is “misguided and unnecessarily punitive.” But China’s Communist Party had restricted American technology exports to China long before the ruling.

This Cold War will cost many companies billions of dollars.

But it’s not just the money that’s at stake. It’s what money enables.

If you talk to U.S. tech executives, they’ll tell you that lost sales from China will impact the budgets for research and development.

The United States is the global leader in the semiconductor market. However, broad access to foreign markets enables innovation to occur.

Innovation is what allows a nation to remain at the forefront of an industry.

But U.S. and Chinese companies are about to take a big hit. Boston Consulting Group (BCG) said that the U.S. semiconductor industry hit $226 billion in 2018. And U.S. companies controlled 48% of the market that year.

But the combination of competition from other nations like China and this brewing Tech Cold War could take a hammer to U.S. market share.

BCG projects that U.S. semiconductor industry revenue could fall to $190 billion due to this Cold War.

And market share would decline to about 40%.

In a worst-case scenario where the U.S. completely bans American semiconductors from flowing to China or China bans U.S. companies, the numbers are even more dire.

Revenue could fall to $143 billion for the U.S. semiconductor industry. That figure would represent about 30% of the market share.

Where and How to Invest

The tensions between the U.S. and China appear to be accelerating, not abating. However, the recent Group of Seven (G-7) conference of leading industrial nations suggested that Western nations are working together to tame China’s rise and influence.

While I love American tech firms like Intel Corp., Apple, and Nvidia, tech investors should listen up. Any acceleration in tensions will be bad for the bottom lines of these U.S. companies.

That’s why it’s important to look abroad and reduce any geopolitical exposure from one or two nations.

Remember, it’s a big world out there. So although there might be a desire to always focus on U.S. companies, you can look to other international tech companies.

They will look at this ongoing conflict as a way to increase market share and – naturally – innovation. A cheap stock that has some potential to exploit this Cold War is Nokia ADR (NOK).

This Finnish tech company has been stuck in neutral for a while. It’s largely been forgotten by investors as Apple and Samsung compete for the crown of most-loved mobile phone manufacturer.

But remember, Nokia was once the world’s largest manufacturer of mobile phones. Consider this company “neutral” in the geopolitical scenario. It could look to rebuild its brand and expand its presence in global markets.

This is a really interesting company, especially after its first-quarter earnings call.

Its increasing number of contracts suggests that it is gathering momentum. Recently, an analyst at research firm Liberum Capital wrote a glowing report on Nokia and suggested that it will complete its turnaround in 2022. The analyst also said that he believes the company actually was too conservative with its forward guidance for the year. That means there could be surprise upside here that even the firm’s executives are downplaying.

According to TradeSmith Finance, the stock is squarely in the Green Zone, which signals a buying opportunity. It also has positive momentum and is in an uptrend.

Next week, I’d like to discuss Tesla and an opportunity shaping up for investors.

Let’s dive into that story on Monday.

Yesterday, I made a definitive statement about trading and investment.

I argued that the most critical factor in any position is your exit strategy.

I stand by this.

When and how you sell is the first thing you should consider before clicking the “Buy” button.

I didn’t say that entering a position isn’t important. Instead, I argued that the result is more important than the first move.

That said, how you buy a stock is extremely important.

So, before you dive into a new position and click the “Buy” button, give me a few more minutes of your time.

I want to discuss two of my favorite ways to buy into a stock.

Successful Buying Strategy No. 1: Limit Orders

Every day, would-be investors place orders at their brokerage and make a mistake.

They buy the stock at the “market” price. This is the price that the seller wants.

If you are just buying a stock at today’s market price, you’re likely paying more than you should.

Each stock has something called a “bid-ask” spread.

The “bid” is the highest price that a buyer is willing to pay for a stock, option, or other asset at a given moment. The “ask” is the lowest price that a potential seller is ready to meet.

Sometimes, these spreads are small. I am taking a look at spreads right now from TDAmeritrade.

Today, the bid for Apple stock at 10:30 a.m. was $131.59. The ask was $131.60.

That means the spread was a penny.

Other times, there are wide spreads. Take Citizens Bancshares (CZBS), a small community bank in Atlanta. Its bid was $12.75, while its ask was $12.85 earlier today. That is a 10 cent difference. 

[If you’re looking for the bid and ask spread, you can find it on the screen of a brokerage account or locate it using Yahoo! Finance.]

If an investor buys the stock at the market price, it will fill at the ask price. So in the case of Citizens, you’d pay a premium due to this spread.

So, what should you do instead?

Set something called a buy limit order.

A buy limit order is an order to purchase a stock at the desired level or better. You can set this order level to execute at any time a seller agrees to meet your price. The best part is that you can keep this order open as long as you want and wait for it to fill.

Setting a limit order can ensure that you’re not paying the market or ask price. This can save you a few percentage points on your position if your order is filled.

Limit orders do not require any exposure to options. You can set them in your online broker’s order channel. Also, there are no additional fees associated with this buying strategy.

Successful Buying Strategy No. 2: Cash-Secured Puts

A second way to ensure that you can pay the price you want for the stocks you want to own is by selling cash-secured puts..

A put option contract gives the owner of a stock the right, but not the obligation, to sell a stock at a specific price on or before the contract’s expiration date and gives the seller of the contract the obligation to buy, should the agreed-upon strike price be met.

I’ve outlined the use of cash-secured puts in a previous issue of TradeSmith Daily. But it bears repeating. When you sell cash-secured puts to someone who owns the stock, you are choosing your entry point.

We mentioned Apple earlier. The stock traded above $131 today. It has been on a remarkable run over the last few months. And some investors might think that its current price is too expensive.

On Thursday, the Oct. 15, 2021, $110 put traded at $1.54 per contract. Since every put contract consists of the rights for 100 shares, you would receive $154 (100 times $1.54) for every contract you sell. Your broker will hold the necessary capital in reserves if you do need to buy the stock (why it’s called a “cash-secured” put).

If the stock falls under $110 by Oct. 15, the seller may execute the contract and sell the stock to you. In this situation, you would keep the $154 in the premium you received, and you will have purchased 100 shares of Apple at the price you chose.

But there’s a bonus. What if the stock falls to $115 and never reaches that $110 level by the expiration date? In this case, you get to keep the premium. And you can potentially sell new put contracts later to generate income and choose your next entry price target.

Other Ways to Invest and Trade

As you know, there are other ways to buy into a stock. For example, you can engage in position sizing and dollar-cost averaging over time. But if you’re engaging in these practices, keep buy limit orders and cash-secured puts in mind as you build your positions.

It’s your money, and those bid-ask spreads are an easy way for investors to exploit would-be buyers. But, always remember, the point of any market is ultimately to sell at a profit.

That’s why you need to constantly be aware of the advantages that sellers have. For example, eliminating the risk of the bid-ask spread will help you improve your returns over time.

We’ll talk more soon about supply chains, inflation, and what’s coming down the pipeline in the second half of 2021.

Not long ago, I watched a trading and investment video that caught my attention.

One of the world’s most renowned options traders started a training course for two novices.

He would teach them how to buy and sell call and put options. He would educate them on the ways to purchase stocks and sell options to boost income (a covered call).

His pupils barely understood the stock market. And they were a bit intimidated about the idea of trading call and put options.

Given his expertise, I expected that he would have them prepared for trading greatness.

After all, everyone wants to learn from people who have traded professionally AND successfully for decades.

However, when the three of them gathered for their first lesson, I couldn’t believe my ears.

His first question to them was simple.

“What companies are on your list to buy or trade?”

The students eagerly rattled off meme stocks, Apple, and even a few retail companies that I thought had gone out of business.

Then he asked the following question: “How do you want to enter your position?”

Despite all of his experience, I think he broke a cardinal rule of trading and investing by asking that question.

The most important question is never how or where you want to buy a stock or option.

The most important part of a trade is NEVER the entrance.

It’s the exit.

How Will You Exit This Position?

I don’t care how long you’ve been trading or investing.

Risk management is the most critical component of what we do.

We want to make as much money as possible. But we also want to protect our principal and our gains, should our position go sideways.

And – it doesn’t matter how good you are – a position can always go sideways.

If anyone says that he or she has a perfect trading record, you should ask for proof.

If anyone says that this is the easiest thing in the world, then you should walk away.

Trading is very hard. Investing is equally tricky.

That’s why there is a perception that you need a professional to help you.

But you don’t need them. It’s a myth that you need someone to help you manage your portfolio or assess your risk.

One of the first things you need to learn when doing both is knowing how and when to exit a position.

The markets are littered with stories of people who didn’t take profits off the table and became too psychologically invested in their losses from all-time highs. Instead of taking gains, they found themselves stuck in a situation where a 100% gain retreated to 0% or even went into negative territory.

Keep in mind that in the stock market, no company remains on top forever. The entire economy is marked by cyclical phases, changes in competition, and innovation.

Back in 2000, investors flocked into General Electric (GE), which ran into the $50s.

Today, GE is 75% lower. And I know people who are still holding onto this stock, hoping that it just gets back to $20. Talk about an opportunity cost.

Or take a stock like Nokia.

There was a time that this company traded just shy of $60. It crashed after the dot-com bubble burst. But it did give investors a nice pop in 2007 and pushed back to $40 from the $20 range the year before.

Guess what happened next? Despite being one of the leading mobile companies globally, it suddenly found itself facing new competition from a company called Apple.

Nokia cratered. It hasn’t traded above $10 for a decade.

I could tell story after story after story like this.

How to Exit a Position

There are multiple ways to exit a trade or position to avoid the fate of those who hold on too long.

Option 1: Profit-Booking Exits

The first option is known as a profit-booking exit.

In this situation, a trader or investor sells part of their winning position to reduce risk. So, let’s say that a position increases by 25%.

At that point, you might sell 25% of your stake in your position.

Let’s look at an example of how this works.

So, let’s say that you buy a stock at $100. You own 100 shares. That’s a $10,000 position.

If the stock goes to $125, your position is now worth $12,500. If you sell 25% or $3,125, you now have 75 shares remaining.

In this situation, your break-even stock price is now no longer $100.

It has been reduced to $91.66 because you’ve taken some gains off the table. That $8.34 difference is one-third of your $25 gain, because you still have three equal parts of the original position size.

You’ve protected yourself and lowered the break-even price if the position does fall.

You can choose your profit exits, but I recommend that if a stock position ever gains 100%, you immediately sell half of your position. The reason is that you have secured your original investment capital. You are then playing with house money.

Option 2: Time Stops

A time stop is not as common for buy-and-hold investors. However, it is important to keep in mind if and when big macroeconomic events are on the schedule. Today, for example, saw a significant announcement by the Federal Reserve. If you wanted to reduce your exposure to this event, you might decide to sell a position ahead of this meeting. In this case, you have defined a time period for your trade.

Day traders and swing traders more commonly use time stops. Many day traders I know don’t like to hold their positions for more than 30 minutes. If a stock isn’t moving, the traders might move on to a different position.

Option 3: Trailing Stops

If you’re like me, you don’t have a ton of time to stare at your screen all day. I am a long-term, buy-and-hold investor. So, I’m not engaging in too many weeklong trades unless it’s an exceptional occasion.

I prefer to use trailing stops to ensure that I can protect my principal and my gains. The best part about trailing stops is that they don’t require you to manage your positions actively. So, if you have a position in a company that has gained 25%, your trailing stop will rise higher from your entry position as well. This acts as a protection for your existing profits.

For example, let’s say you buy 100 shares of a stock at $100. You might set a trailing stop at 10% to protect yourself from a downturn. If the stock hits $90, your trailing stop will automatically exit the position. Yes, you’ll have lost 10% on your position, but you’re protected from any further downturn. If that stock falls to $75, well, you’ll be happy that the stop executed at $90.

But let’s say that the stock rises to $125. You’ve now got a position worth $12,500.

With a 10% trailing stop, you now have protected your downside  with a trailing stop at $112.50 per share.

This means that you’ll have automatically protected your gains if the stock pulls back to that level. You’ll exit the position with a 12.5% win.

I highly encourage investors to use trailing stops. The best part about our TradeStops program is that it has a specific trailing stop designed for every company in the market. This is important because not every stock moves with the same level of volatility, so you don’t have to have a specific, uniform percentage stop for each position. I argue that the exit to every position is by far the most important part of a trade. I’m sure that some people think differently. If you do, make sure you catch tomorrow’s TradeSmith Daily. I’ll be talking about the best ways to enter a trade and how to squeeze gains out of every stock you want to buy.

Today, the Federal Reserve kicks off its two-day meeting on interest rate and other policy matters.

The meeting will be critical to investors’ short-term and long-term confidence in the U.S economy and global markets. By now, you’ve likely already heard a lot of speculation about what Fed Chair Jerome Powell’s team must decide.

And, over the next two days, the financial media will bombard you with big words.

They’ll talk about “transitory” inflation elements in the economy (This quoted term means that the Fed believes inflation is not permanent).

They’ll talk about “monetary policy.” (This policy is what the central bank manages in terms of interest rates, the buying and selling of bonds, and its other efforts to maximize employment and control inflation.)

Pundits will even talk about “tapering.” (This term means the eventual decision by the Fed to stop buying bonds and allow the economy to stand on its own.)

But the media owes you more than chatter about the central bank.

They should explain what Wall Street’s largest institutions are doing ahead of this meeting.

While retail investors are putting their money to work…

Institutional investors are moving to cash quickly.

Here’s why.

A Pullback or a Buying Opportunity?

“Smart money” is a term that many people use to talk about institutional investors.

But are they that smart? It depends on whether you let them forget the financial crises of 2000, 2008, and 2020.

These investors matter, not because of their intelligence, but because of their muscle.

Large financial institutions like hedge funds, private equity groups, pension funds,  and banks like Goldman Sachs influence confidence in markets, funds, and individual stocks.

When they put a lot of money into a specific company, many other investors will follow.

And if they pull out of a company, then you’ll see large drops as well.

What’s very interesting is that these institutions are not buying stocks.

UBS Equity Derivatives’ new report noted that institutional investors have added to their cash positions in 14 of the last 17 weeks. These investors have now built a $397 billion position in cash.

What does this tell us? Well, these firms could be looking for clients out of the market; they might be looking for a potential pullback after the Fed’s announcement; or they might be looking to profit from cash.

JPMorgan is generating headlines this week on news that it is sitting on $500 billion in cash.

CEO Jamie Dimon recently said that the bank has been increasing its cash position.

“We’ve been effectively stockpiling more and more cash, waiting for opportunities to invest at higher rates,” he said during a recent Morgan Stanley virtual conference. “So our balance sheet is positioned (to) benefit from rising rates.”

If interest rates rise, the company could be looking to use its stronger dollar to purchase assets. JPMorgan is expecting to have one of its best trading quarters ever. It expects to make roughly $6 billion from its bond and equity trading divisions.

While institutions are moving to cash, however, U.S. retail investors are putting their money to work.

In the same institutional report, UBS said that retail investors put another $5 billion into the markets last week. Investors continue to actively trade meme stocks, buy long-term positions in FAANG stocks, and other positions. In the previous 20 weeks, retail investors have poured about $98 billion into the markets.

Retail investors have been far more active than last year, thanks to the uptick in stimulus money. First-time traders have speculated on Reddit stocks, out-of-the-money (OTM) options plays, and other frantic trades.

This trend is expected to continue. Retail investors are looking for action and fast profits.

But the institutions are acting with a much more guarded approach to the long-term impact on the markets and the Fed’s role. Institutions might sit on the sideline with more cash, looking for new buying opportunities.

Or, they might be looking for the U.S. dollar to find its bottom and aim to benefit from a rising U.S. dollar.

Remember, Cash is a Position

One important thing to remember is that cash is a position. It is a tradable asset like any other commodity in the market. So, it’s worth considering that institutions are sitting on cash because they expect it to rise in value.

Tomorrow’s Fed meeting will be critical due to the ongoing concerns about inflation in the U.S. economy. Although the Fed says that inflation will be temporary, we have witnessed two straight months of historical upticks.

Today, we saw the May Producer Price Index (PPI) rip to a 6.6% increase over the past 12 months. That is the most significant annual increase on record and a sign of huge price jumps across U.S. supply chains.

In addition, the Consumer Price Index hit its highest level in May since 2008.

When it comes to the Federal Reserve raising interest rates, it’s a question of “when” and not “if.” Keep in mind that we’ll need to see some changes in language from the central bank before a sudden increase.

Any chatter about increasing the benchmark rate by the Fed before its targeted date in 2023 could spur a rush to bonds and a downturn in growth stocks. We would look for the yield curve to rise, with increasing expectations for the Fed to take action sooner than later.

If the U.S. economy continues to heat up and the Fed takes action on rates, the U.S. dollar can experience a quick revival. This is something that our Chief Research Officer, Justice Clark Litle, predicted earlier this year. So, if you haven’t understood the impact of dynamic economic growth, take a look at what could soon be in store for the dollar.

Investors should pay close attention to what the institutions are doing with their cash. If we see strong buying into specific sectors, that could push several side-trending stocks into the Green Zone and thus create new buying opportunities.

But if we see more cash pulled from the market, don’t fret. Stay where you are with confidence and ride out any storm with the signals of TradeSmith Finance. Use your trailing stops accordingly and look for new opportunities in stocks that might benefit from higher rates and higher inflation.

We’ll talk more about knowing how and when to exit a trade this week.

Enjoy your day,

Keith Kaplan CEO, TradeSmith

The annual G7 Summit – made up of representatives from Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States – took place over the weekend.

Each year, representatives gather from these seven advanced economies to discuss financial, social, and governmental policies.

During the event, the nations’ leaders pledged to reform vaccine rollouts and called out China on human rights abuses in Xinjiang and Hong Kong.

But the biggest development centered around climate change policy. The seven nations have agreed to a new framework to slash greenhouse gas emissions by 50% by 2030.

The Biden administration has been very active in pushing new policies here in the United States that would transition from traditional oil and gas. As a result, alternative energy stocks continue to enjoy a wave of positive sentiment due to domestic and global efforts to reduce the consumption of fossil fuels.

While the latest G7 pact generated headlines, I want to discuss another Biden proposal that would dramatically impact the U.S. energy sector.

This could shake up the midstream energy sector that we discussed at length last week. But it stands to favor a few select companies that operate in the pipeline business.

Let’s dive in.

Politics, Always Politics

The Biden administration is trying to walk a fine line on energy and environmental policy. Across the country, environmental advocates and lobbyists have pushed for bans on fracking, eliminating exports of liquified natural gas, a ban on permits for drilling on federal land, and much more.

At the same time, reality must be sobering for the administration. The shutdown of the Keystone Pipeline has eliminated jobs for union members – a traditionally solid voter base for Democrats.

According to The Hill, the pipeline would have created about 1,000 jobs and generated more than $8 billion in economic activity. Instead, the pipeline will turn into 48,000 tons of scrap metal valued aft just a little more than $50 million.

In addition, reducing U.S. energy production increases reliance on other nations while emboldening hostile countries that produce oil like Iran and Russia.

The transition away from traditional oil and gas is not going to happen overnight. It likely won’t be complete by 2030. This means that the U.S. will probably need to continue using natural gas as a major bridge fuel until mass adoption of alternative energy systems is possible and reliable.

With that said, the Biden administration is looking to reverse a rather important rule implemented during the Trump administration around liquified natural gas (LNG).

Remember, last week, I showed a map of oil pipelines all across the United States.

The map below is even more vast.

This tracks every natural gas pipeline in the continental U.S. Believe it or not, the United States produces so much natural gas that we don’t have enough pipelines.

Long battles over pipeline construction have made it harder to move natural gas. To make LNG, producers typically ship natural gas to a liquefaction plant. There, refrigeration units chill the gas to negative 260 degrees Fahrenheit. This converts the gas into a liquid and makes it easier to ship.

Then, the companies must get the LNG to export terminals, where it is sent to other nations.

Pipelines aren’t always available. And trucks can only carry so much of the fuel.

As a result, energy companies must turn to rail companies. It can be expensive. But it can also be dangerous, especially in more dense areas of the nation. For years, the U.S. government had not allowed trains to transport these fuels through highly populated areas.

But the Trump administration wanted to expedite the export of LNG. So the administration reversed a long-standing rule that would allow these trains – carrying a highly explosive fuel – through towns to reach export terminals.

And while the new rule required railcar companies to increase the size and thickness of the tanks to secure the fuel, the optics are highly concerning. Rail companies naturally want the business and have said 99.99% of hazardous materials transported by rail reach their destination without incident.

But as we know, it only takes one event to reverse social sentiment quickly.

The Biden administration is looking to make a change here.

While this would just return the supply chains to the pre-Trump guidelines, it will likely also spur both debate and innovation. Moreover, for the midstream – the companies engaged in transporting fossil fuels from production to downstream end-users – we will probably see changes.

• First, pipeline companies that already have existing deals will likely increase their rates as railways get less business.
• Second, we’ll start to see more trucking companies in the space, since these provide the most nimble approach to shipping.
• Third, we may see higher costs for the export terminals, which had counted on these rules to expand their international shipping.

We’ll continue to monitor the Biden administration’s creeping environmental agenda. This remains a critical point of policy that will likely grow more restrictive on energy firms in the year ahead, regardless of the economic impact.

The end of the Keystone Pipeline, the cessation of drilling in Alaska’s Arctic National Wildlife Refuge, and the Biden administration’s commitment to aggressive emissions reductions will profoundly impact the energy sector.

We’ll continue to explore stocks to buy or avoid based on these trends in the weeks ahead. In the meantime, if there is a topic you want to hear about or a question you have that you’d like me to cover here, I’d love to hear from you. You can reach out to me anytime. I can’t respond personally to every email, but I read them all!

I love gold.

Love it.

It’s an incredible hedge against geopolitical tensions around the world.

But if you’re like me, you’re scratching your head when you look at today’s price. It’s currently trading under $1,900 per ounce.

On Friday, gold prices fell despite news that the Consumer Price Index (CPI) hit its highest level for May since 2008.

It fell despite the fact that other inflation trades are breaking out.

It fell despite Bank of America’s aggressive $3,000 price target at the height of COVID.

It fell despite its historical protection against all things uncertain.

What is going on?

I know you want answers.

Let me walk you through why this time is different for gold and inflation.

More importantly, we’ll talk about the best way to generate real income from one of the most common positions among gold investors.

What Is Happening Here?

Want to see an absolutely amazing chart?

Check out the performance of certain commodities over the last 12 months.

West Texas Intermediate crude oil is up more than 273% year-over-year.

As you know, commodity prices have generally gone through the roof this year. The ongoing reopening trade has created pent-up demand across the board.

Yes, we are still recovering from a pandemic. And yes, producers of many different commodities dramatically slashed production last year due to growing uncertainty around the length of economic shutdowns and the expected impact on demand.

Prices of everything have risen over the last 12 months, with few exceptions. Keep in mind, however, that the prices of some commodities that are off sharply (like peanuts down 30% year-over-year) did hit decade-long highs due to a surge in demand at the onset of the crisis.

The reinflation trade around the global economy has sent many commodity prices to nosebleed levels. Chicken prices are up nearly 78%. Copper prices are at record highs due to strong industrial demand. Oil and gasoline continue to rise.

But what inflation play is not performing up to standards?

Gold prices are up just 5.47% over the last 12 months.

How can this be? Isn’t gold supposed to be the great inflation hedge?

Well, we have to better understand the role of gold in this economy.

You see, gold doesn’t have any significant industrial demand. More than 80% of gold is consumed each year in the form of jewelry. Yes, it does have some demand for manufacturing.

For example, Apple uses about 0.034 grams of gold in mobile phones, and it’s even used in replacement teeth.

But for the most part, this is not something used very much as an industrial or commercial metal.

Silver, however, is. It’s up more than 70% in a year. The commodity is commonly used in X-ray machines, solar energy systems, medicine, mirrors, automotive components, and silverware. Yes, it’s very popular in jewelry, but it has that critical industrial component.

I stress the commercial and industrial factors because I don’t want gold investors to get too hung up on the current situation when it comes to  their holdings.

Right now, we’re seeing big moves in other commodities because of economic activity and growing demand in those commodity-dependent industries. One should not ditch their gold holdings or panic because gold has lagged these other commodities.

How to Buy and Hold Gold

I think it’s very important to own gold in any economic environment. It’s also important to balance your portfolio to avoid overexposure to the yellow metal.

I personally hold about 10% of my money in “alternative” assets like gold and cryptocurrency. I think this level represents the most that one should own in these assets.

This provides a nice hedge against the rest of my stocks and bonds. And it provides some upside given current economic events. Although gold has lagged against other assets this year, I expect that it will find its footing.

In a period where interest rates are in focus, gold will unfortunately face some pressure due to its lack of dividends. And keep in mind that it is subject to the same fundamentals of supply and demand as any other commodity in the world.

That said, I do have a solution to help you generate gains from an existing gold position. 

Instead of holding an asset that doesn’t generate interest or dividends, you can use one of the strategies I recently outlined. By selling covered calls on an ETF like the SPDR Gold Trust (GLD), you can boost your income and wait for gold to break out.

If gold prices do rise above the strike price, and you have to sell your stake, you won’t complain. You’ll have made solid gains on your position, and you can rebuy that stake and just start over again selling covered calls for more income. I’ll be talking more about strategies like this on gold and other commodities very soon, and the frequency with which you can earn income from these positions.

And we’re off with inflation.

This morning, the Consumer Price Index (CPI) showed the largest monthly jump for May since 2008.

The CPI increased by 5% year-over-year. That figure topped consensus expectations of 4.7%, according to Reuters.

We’re all feeling the pain of inflation in our wallets.

This “unexpected” inflationary jump is one of the reasons why we need to take active steps to protect our money.

Any cash sitting in a savings account is losing purchasing power.

You’re better off putting it to work in the market.

Yesterday, I outlined an exciting stock pick that has crushed the market and inflation over the last 20 years. Downstream energy giant Valero Corp. (VLO) has drastically overperformed when inflation tops 2% annually.

But some investors might be wary of the energy sector after last year’s massive plunge in oil prices. There’s a solution to help overcome those fears in our Cognitive Bias series [read Part One here].

If I can’t convince you to dive into downstream oil and gas, then let me try something more “alternative.”

Today, we’ll talk about an investment class that has outperformed the S&P 500 over the last 25 years, according to research company Nareit.

Why does this asset class tend to go ignored by retail investors?

Because – well – it’s a little boring to some people.

But boring is sometimes the best way to make money and reduce risk of inflation.

Why REITs Make Great Buy-and-Hold Investments

Today, I want to talk about becoming a landlord in real estate.

Stay with me here…

When people think about being a landlord, they think about taking on residential tenants.

You might conjure the fear of late-night phone requests to change a light bulb.

You might fear having to pay a few hundred dollars because a washing machine broke.

Or you might fear that tenants will miss rent for a few days (or in the case of COVID-19, a few months).

That’s not the landlord role that I’m talking about today.

Today I want to talk about an “alternative” investment called a Real Estate Investment Trust (REIT). 

A REIT is a company that generates income through a range of different property sectors. These REITs pool together investor capital and purchase properties with the intention of generating income from future tenants in the form of rent.

The sectors these companies operate in can include retail centers like malls, hospitals, cell towers and data centers, hotels, and apartment or office buildings.

By owning units of a REIT, you are acting as a landlord.

Think of it this way. If you invest in a mall REIT, you’ll collect rents from companies like Gap Stores (GPS), Abercrombie & Fitch (ANF), and other retailers.

If you invest in cell tower REITs, you’ll collect rent (as a landlord) from wireless tech giants like AT&T (T) and Verizon Communications (VZ).

These are established companies that have weathered the storm of this recent crisis. When a REIT’s tenants are large companies with robust balance sheets, we don’t have to worry about rent.

Now, that’s just the first advantage. You don’t have to personally own and manage apartments or other real estate, collect rents, make improvements, or face any other hassle.

But here’s a second benefit. REITs trade on public exchanges, but provide different benefits to investors than traditional stocks.

The single largest benefit is that they operate under a different tax and dividend structure.

REITs must invest at least 75% of their assets into real estate, cash, or U.S. Treasury bonds. In addition, they must generate 75% of their gross income from mortgages, rents, interest, or the sale of retail estate assets.

These REITs must also pay at least 90% of their net income to their investors in the form of dividends. That’s a huge number, and a rich source of cash flow for income investors.

Because of these rules, the company is able to pass-through the bulk of its income to shareholders and avoid taxation at the corporate level. As a result, you will see that REITs pay much higher dividends than most stocks and bonds.

There are other benefits to REITs as well. These assets are liquid, meaning they trade regularly and at higher volumes on the stock market. You don’t need to take weeks to unload a house or other property like you would in traditional real estate. Instead, you can buy and sell your position in these assets quickly.

In fact, roughly 145 million Americans own REITs through their retirement accounts or other investment funds, according to Nareit. Many investors might own these assets and not know they are getting all of the associated benefits.

Nareit notes that REITs have outperformed the S&P 500 over the past 25 years and delivered higher returns than corporate bonds. The combination of appreciation upside and strong income make REITs an attractive asset class.

The Inflation Benefit

There is one more benefit that I want to share.

Given today’s CPI figure, investors are seeking a hedge against inflation. In times of rising inflation, property values tend to rise.

But also remember that property values have intrinsic value.

Even in the face of a difficult environment like COVID-19, the properties maintain their underlying value if a tenant goes bankrupt. The property itself offers a built-in downside protection even if the property generates no cash flow for a small period of time.

But the most practical way to focus on inflation is simply to look at the dividend offered by REITs. As Nareit notes, REIT dividend hikes have outpaced inflation in 17 of the last 20 years.

“Over the 20-year period, average annual growth for dividends per share [is] 9.4% (or 8.4% compounded) compared to only 2.1% (2.0% compounded) for consumer prices,” the company notes.

This is very promising. When the trend is your friend, ride it.

There are many different types of REITs that provide unique benefits to investors.

However, it’s important to note that different sectors are poised to perform differently in the months and years ahead after this COVID-19 shakeout. Some REITs might face marginal pressures if they are unable to increase rent, while others might operate in sectors that are still facing headwinds in this economy. Next week, I’ll take you through a few that are poised to succeed and others to avoid in the year ahead.

In the last few days, I’ve discussed the three critical parts of the oil-and-gas supply chain.

There are upstream companies that produce oil and gas. For example, companies like ConocoPhillips (COP) and Diamondback Energy (FANG) drill into the ground and extract hydrocarbons. They then sell this crude down the supply chain.

The midstream sector – which acts as a toll bridge for investors – moves fuels across the continent. These companies include pipeline operators, storage facilities, and processing firms. They tend to generate lots of income due to their favorable tax structures.

Finally, there’s the downstream sector.

This is the “end of the road” for crude oil or natural gas and related liquids. To be honest, I think that many investors forget about how important this part of the supply chain is.

When oil prices surge, the headlines focus on the producers, which own gobs of oil and gas. And investors flock to master-limited partnerships (MLPs) in the midstream due to their massive dividends.

But if you’re not paying attention to the downstream, you need to start today. This sector operates a little differently than the other two segments. That’s why you must use every tool available to determine the best downstream companies.

The Consumer’s Oil Trade

The world runs on oil.

So don’t let any doomsday prognosticators tell you that we’re facing a total end of production anytime soon. The world isn’t even close to running out of oil. British Petroleum (BP) says that new technologies can unlock so much oil in the next three decades that we see a doubling of available oil reserves.

Meanwhile, oil isn’t just a fuel required to drive our cars and power our jets. Instead, petroleum refiners use oil to make a large number of different products.

These include WD-40, asphalt, kerosene, waxes, feedstocks for cattle, and other synthetic materials. In addition, 29% of all petroleum used in 2020 was processed for 13 different products outside of motor gasoline, distillate fuels like heating oil, and jet fuel, according to the Energy Information Administration.

Now, we don’t need to talk too much about how oil refining works.

But it’s important to know a few key terms. There are three parts to the refining process. First, refiners “separate” the crude in a furnace to unlock various liquids and vapors. Since different components separate at different boiling points, it’s easy to extract those different units.

Second, these refiners engage in what is known as “conversion.” This is the process of using heat and pressure to break up hydrocarbon molecules.

The third step is “treatment.” This is the process of combining different hydrocarbons to make other products. These end-products will include the examples listed above.

The customers of these end products can include plastics manufacturers, chemical firms, and fertilizer giants.

Refiners can also sell heating fuel and natural gas products to distributors that sell these fuels to consumers.

Why Downstream is Different

Downstream energy companies have an interesting variable that separates them from their counterparts in upstream and midstream energy.

Companies in the upstream and midstream part of the supply chain tend to do better when oil prices are higher.

Upstream companies see higher share prices when oil rises because the vast reserves of crude appreciate in value. This improves the value of the assets on their balance sheet, which increases the stock.

But higher prices also increase demand from the upstream companies that are sending their product downstream.

Midstream companies do better with higher oil prices for a similar reason. Higher prices signal rising demand for end-products, which results inmidstream companies collecting more tolls as they move more crude through pipelines or into storage.

Downstream is different. These companies are likely to make more money when oil prices are declining.

The simple explanation is that lower oil prices will improve their profit margins. This is because downstream companies can buy oil and other feedstocks at lower prices. You see, downstream companies typically aren’t as likely to pass along higher costs to their customers because of existing contracts.

But this is not always the case.

There’s one company that has attracted my attention because of the current macroeconomic environment. And I want to talk about it briefly.

Rising Inflation is Okay for VLO

Now, there’s a difference between large, vertically integrated oil companies and independent downstream companies.

You see, a massive oil company like ExxonMobil (XOM) or Chevron Corp. (CVX) takes part in all three segments of the U.S. energy supply chain.

They own oil fields.

XOM and CVX pump crude out of the ground and send that oil through their pipelines.

And they refine this crude at their own plants before they send end-products like gasoline to Exxon or Chevron fueling stations.

But other companies are independent and operate in various downstream segments. They don’t produce crude or move it in midstream pipelines.

For example, Valero Corp. (VLO) is an independent company that engages in refining crude products, ethanol production, and owns gasoline stations.

Valero produces a very important product with inelastic demand: Gasoline.

Inelastic demand means that consumers are not as price resistant when the price of that product increases.

Since Americans must drive to work and use cars to get places, they will pay whatever the pump says. Other inelastic products might include medical procedures, prescription drugs, or cigarettes.

Elastic demand is different. This means that people are less likely to buy something if the price rises and more likely to buy it if the price drops. 

Examples include airline tickets, sodas, or coffee brands.

Since Valero is refining, processing, and selling an inelastic product like gasoline, it looks like a very successful business, especially with the economy reopening. The stock has been in the Green Zone and an uptrend on TradeSmith Finance for more than six months.

Of course, it has a high risk based on its VQ Score of 38.82%. But I want to put it on a watch list right now because it is a stock that qualifies for four of the TradesSmith Ideas Lab strategies: Sector Selects, Dividend Growers, Best of Billionaires, and Kinetic VQ.

Another interesting fact is that Valero has historically outperformed in periods where inflation has run higher than 2%.

According to a recent report by  SeekingValue Research, the stock averaged a return of 40.4% when inflation topped 2%. Meanwhile, it averaged 46.2% when inflation topped 3%. When inflation is less than 1% for the year, the stock has averaged a negative return.

Given that the Federal Reserve is poised to let inflation run hot, I think Valero may continue its momentum despite the risks.

On Thursday, we’ll get the official reading on the Consumer Price Index (CPI). While the core reading leaves out energy and food costs, we know that inflation has been running hot.

In April, the CPI reading increased by 4.2% year-over-year. If it’s running hot again in May (the month covered in tomorrow’s report), Valero could be an excellent way to play this trend.

I’ll be back tomorrow with some other interesting ideas generated by TradeSmith.

In December 2020, a medical student named Jack Stuef made a startling discovery in the Rocky Mountains.

He uncovered a treasure chest containing gold, diamonds, jewelry, and more valuables worth between $1 million and $2 million.

The discovery is less remarkable than the true story about how the chest arrived in the Rockies in the first place.

About 10 years prior, a mysterious man named Forrest Fenn hid this treasure chest in a still-undisclosed location. (Stuef believes that Fenn, who passed away last year, would have preferred to keep the site secret.)

Fenn’s effort in 2010 set off one of the most extraordinary treasure-hunting expeditions in the history of the world. Some believe it rivaled the search for Blackbeard’s Treasure or the search for the Titanic.

Today, I want to tell you more about this story. I’ll show you a Forrest Fenn treasure map, and then my favorite treasure map that can make you a tidy profit as the economy reopens.

The Legend of Forrest Fenn

Forrest Fenn was a former combat pilot in the Vietnam war.

He flew hundreds of combat missions in less than a year.

After he retired, he opened an art and collectibles gallery that generated millions of dollars in sales of artifacts, paintings, sculptures, and much more.

After surviving cancer in the 1980s, Fenn decided to hide a treasure chest in an outdoor location. He wanted to create something exciting for people. He wanted to create a cultural phenomenon.

Decades later, in 2010, he took to it.

Leading up to the treasure hunt, Fenn wrote a self-published book called The Thrill of the Chase, a Memoir.

The book contained stories about his life. It also included clues about where he was hiding this valuable treasure chest.

Here’s a user-generated map of places where the treasure may or may not be based on all of the engagement by individuals trying to locate it. He also put clues into a poem in a book chapter called “Gold and More.”

He said he took no money from the book sales so that authorities didn’t accuse him of fraud.

In the era of the internet and eager treasure hunters, Fenn’s gambit became an extremely popular search among amateur and professional sleuths alike.

The treasure hunt resulted in thousands of people trekking across the region in search of fabled treasure. Five people died during their search.

Authorities across Western states eventually asked Fenn to call off the treasure hunt, suggesting he was putting lives at risk.

But last year, Jack Stuef found it. He had pursued the catch for three years. He’d read the poem by Fenn over and over. He traveled across the places where other people had died, trying to locate it.

When he did find it, Stuef initially tried to remain anonymous.

You see, plenty of other people who wanted to find the treasure might issue threats, wish him ill, or worse.

And that’s what happened.

He was sued by other treasure hunters who said that the chest was rightfully theirs. One person said that Stuef stole clues from him. His name

would eventually come out. So, he came forward and revealed his success in a series of stories published across different media outlets.

This is Your Treasure Map

Treasure hunting is dangerous, it seems.

Not just finding the treasure, but what comes after.

If someone puts another treasure in the mountains, you can count me out.

I’m not planning on wandering through rough terrain with a compass and a walking stick. I don’t like bears. I’m not a big fan of sleeping in tents or being away from my family.

It turns out, however, that I don’t need to. I already have a real-life treasure map. And so do you.

No, you won’t find diamonds and gold hidden in the mountains.

But if you are looking to increase your wealth and boost your income, then take a look below.

This is a map of the more than 190,000 miles of liquid petroleum pipelines across the United States. The pipelines stretch through all 49 continental states and the District of Columbia.

And don’t underestimate Alaska (included above). Its Trans-Alaskan pipeline is 801 miles, nearly as long as the straight-line distance of Texas from north to south. (Alaska itself is 1,400 miles long.)

What makes this a great treasure map?

All you need to do is point to the map and find profit from U.S. oil pipelines.

Oil pipelines push crude across the U.S. energy supply chain from production fields to refineries and ultimately end producers. Think of these pipelines like you might a toll bridge that generates huge gobs of cash every day. People pay money to cross bridges, ride ferries, or drive in tunnels from place to place.

Energy companies pay pipeline operators the same way. Best of all, pipelines are running 24 hours a day, seven days a week, 365 days per year as they pump crude – the lifeblood of the U.S economy – across the entire nation.

Learn It, Know It, Live It

Now, a quick word.

There is a very important term that I want you to understand. We’re going to be talking about it all this week. It’s called “Midstream.”

The U.S. oil sector is divided into three different sections. They are:

Upstream: These are the producers of oil and gas in fields. They operate in shale fields like the Permian (in Texas) or the Bakken (in Montana), offshore wells like in the Gulf of Mexico, or more developed energy fields like the Canadian sands in Alberta. These producers sit on reserves and pull crude out of the ground.

Downstream: At the end of the supply chain, downstream companies turn fuels into finished products. These include the refineries that turn crude oil into gasoline and plastics. Downstream can also have operations that produce fertilizers for agriculture and critical products in medicine, cosmetics, and more.

Midstream: Finally, we have the midstream. This is the critical part of the supply chain that connects the upstream and downstream. Midstream companies are involved in the processing, storage, and transport of crude oil and gas. They might operate tanker ships, extensive storage facilities, and, of course, pipelines.

Midstream is a sweet spot for investors because crude oil is always in transport. Midstream investments also tend to provide large dividends to their investors because of the incredible cash flow that they generate.

If you’ll recall, last week, I talked about how master limited partnerships (MLPs) are among the best ways to make money in an environment for rising oil prices. Energy MLPs tend to “live” in the midstream. And they make terrific investments because of their tax structure. These tax structures allow them to pass-through income to their investors as long as they generate at least 90% of their revenue through their primary assets.

In MLPs like Enterprise Products Partners (EPD) or Energy Transfer (ET), companies can pay respective dividends of 7.5% and 5.6% due to their rising demand.

Both companies are worth your consideration and provide a very intriguing way for you to play the treasure map that I’ve shown you above. They both sit in the Green Zone on TradeSmith Finance, and they are both in upward momentum conditions.

In addition, Energy Transfer has buy ratings from eight Wall Street research firms with a consensus upside of 23.2%. Meanwhile, Enterprise Products Partners has seven buy ratings with a consensus upside of 17.9%, according to TipRanks data.

They are both part of a midstream segment that can treat you well over the long term and help you generate income in a low-interest-rate environment. But, you can also look at this map every day and picture the millions of oil barrels pumping across the nation. And with it, the gobs and gobs of cash flow that it generates for midstream companies.

This week, I’ll dive deeper into the other parts of the supply chain. With the economy reopening, oil demand rising, and producers being patient with increasing supply, it’s a perfect time to capture potential upside from companies that took a few hits over the last 15 months.