Archive for 2016

Market Outlook 2017: Where to Invest – and What to Avoid – in the New Year

13 | By Shah Gilani

Where to Invest – and What to Avoid – in the New Year

As we head into 2017, markets are still rallying on the back of Donald Trump’s unlikely ascendance to the White House.

But, as with most rallies, the rising tide is not going to lift all boats; some will remain in choppy seas for the foreseeable future, while others will sink to the bottom.

While markets seem to favor a Trump presidency, there’s still plenty of uncertainty that’s giving investors pause.

Today, I’ll show you what I see coming down over the horizon as we approach 2017. I’ll show you which sectors are going to continue to benefit in the Donald Trump era, and which will be lost at sea.

Before I tell you which sectors are going to be good to your money, I want to make sure you know where not to invest.

So let’s get started by talking about what investments you should steer clear of in 2017… unless you want to make a couple of speculative bets that could make you a bundle.

Avoid These Investments at All Costs

China

While the full year numbers have yet to be tallied, economists expect China’s economy to have grown by 6.7% in 2016, down from 6.9% in 2015.

I expect 2017 to be even worse, with the growth rate falling to at most 6.5%.

If that number sounds familiar, it’s because it is the lowest that President Xi Jinping has said the ruling party will tolerate, as it must stay at or above 6.5% in order to achieve the country’s stated goal of doubling GDP and per capita income from 2010-2020.

The Chinese yuan is already suffering thanks to the election of Donald Trump. And the specter of the Federal Reserve continuing to raise interest rates is pushing safety buyers into the dollar.

This has led to massive capital outflows from China and intervention from the country’s central bank.

China’s current housing boom is actually a bubble that’s ready to pop at any moment. And the government can’t spend its way back to double-digit growth numbers (for lots of reasons – chiefly, there’s a long list of interventionist policies from 2015 that haven’t seen the light of day as of yet, and probably won’t thanks to turnover in local party leadership positions in the coming year).

This will continue in 2017. Stay out of China (unless you want to go short – more on that below) at all costs.

Additionally, there’s a good chance President-elect trump will kill TPP. Some analysts worry that will turn Asia towards China and away from the U.S.

But that argument doesn’t fly.

The emerging markets economies in Asia and hard-charging Asian economies that aren’t technically emerging (because they’re already players on the world stage) would gladly fall in with China on trade deals, but that’s not going to help them if China falters further.

In fact, they are already so dependent on China, they’re increasingly looking to the U.S. for trade deals. They’ll negotiate them separately with the U.S., which is what President-elect Trump would rather do as opposed to let TPP benefit multinational corporations in Asia and disadvantage American workers.

Killing TPP will be a plus for American workers and strengthen manufacturing growth here at home.

Speculative Short Play

The best way to play China’s decline is to buy ProShares UltraShort FTSE China 50 (NYSEArca:FXP), a leveraged ETF that seeks two times the inverse (-2x) of the daily performance of the FTSE China 50 Index.

Keep in mind that the leverage that allows for greater returns will also contribute to tracking errors with the benchmark; the longer you hold it, the less likely your returns will correspond to the index.

That means it pays to pick your entry point carefully.

Good news is, FXP is just a shade above its 52-week low, trading around $32. Any negative news out of China could send this inverse ETF into the stratosphere.

I recommend buying FXP at market and using a 20% stop.

Emerging Markets

There’s some chatter out there that 2017 will see a rebound in emerging markets… but don’t believe the hype.

First, if history tells us anything, picking the next big emerging market is like drafting professional athletes – there’s all this untapped potential, but whether they’re successful depends on a number of factors that are out of our control.

Remember the BRICs?

Brazil’s battling a shrinking economy and political turmoil following the impeachment of former President Dilma Rousseff.

Russia’s economy is in shambles thanks to Western sanctions following its invasion of the Crimean Peninsula

The cash crisis in India – the result of Prime Minister Narendra Modi’s ban of the country’s 500 and 1,000 rupee notes – has ground commerce to a halt and is threatening its economic boom.

China, formerly the 800 pound gorilla of emerging markets, isn’t running full bore any more. China’s once-extraordinary, almost other-worldly impressive growth numbers continue to slide – and that’s just the beginning.

One elephant in the room for emerging market success is – like most other things – the election of Donald Trump. During the campaign, Mr. Trump promised to rip up various trade deals if the terms were unfavorable to American interests. Being effectively locked out of the American marketplace will cost these emerging economies serious dollars.

The other elephant in the room is rising “populism” across the globe.

Europe is seeing the rise of populists pushing back on the “Union” and state control by Brussels. One populist issue – the destiny of state banks – is a tough nut to crack – they need the backing of the European Central Bank, which leans on all member countries for its legitimacy, and is the only reason big banks across Europe aren’t imploding along with the euro.

At the same time, they want to break free of the euro and be able to devalue their own currencies to become more competitive on the world stage, which would help them export their way out of high unemployment and high structural debt.

If you don’t see where that leads, or what that means for emerging markets, I have two words for you: Currency wars.

If Europe implodes and countries fall back on their own currencies, there will be currency wars, globally. Emerging markets economies will falter first and fall the hardest.

Capital flight out of emerging markets has always been a problem. Back in August 2015, we all saw how quick – and how devastating – it can be.

Donald Trump’s election was just the latest evidence of a growing global populist movement.

Its spreading – and emerging markets’ currency vulnerabilities are right in its path.

Just take a look at what happened to the iShares MSCI Emerging Markets Index (NYSEArca:EEM) following the election…

chart

The Euro/European Financials

It doesn’t appear as though the European Union is going to just rip off the Brexit Band Aid – this is going to take a lot more time than anyone thought, and could get more contentious than we’ve seen so far.

But at the end of the process, neither British taxpayers nor the Bank of England will be a backstop to the European Central Bank, and the euro is going to suffer for it.

And Brexit was just the beginning. With a wave of nationalist rhetoric sweeping across the globe, we’re seeing more talk of Western European countries considering cutting ties with Brussels.

Italy, the Eurozone’s third-largest economy, is currently beset by political turmoil following a December 4 referendum on constitutional reform that proposed to give more authority to Italy’s lower parliamentary house, which would shift power from the country’s regions to the central government.

The country voted “no”- meaning they didn’t want to change the corrupt, self-serving, do-nothing system of government in Italy that shockingly has seen 60 (about to be 61) different governments since the end of World War II. That’s how mired the Italians are in their own mess.

Now, a new government is going to have to accommodate the 5-Star Movement, a populist bloc claiming 30% of the population as supporters.

It’s entirely possible that Italy would vote to exit the European Union, just like the Brits did. After all, looking across the pond at the Brits, faring as well as they are after the Brexit, the possibility of Italians following suit is more than just a threat… It’s a bet worth taking.

France, according to some polls, could be next to go. A reported 55% of French citizens want to leave the European Union. It’s possible the French will beat the Italians to the exit door.

Political instability in France or Italy, would send tremendous shocks through the system. And European banks, many of which are already in crisis or teetering on the brink (I’m looking at you, Deutsche Bank, and almost every big and mid-sized Italian bank), would implode.

Whatever happens, any safe haven status the euro has enjoyed is going to shift over to the yen and especially the dollar (more on that below).

Speculative Short Play

The best way to play European banks right now is to short iShares MSCI Europe Financials (NASDAQ:EUFN), an ETF that tracks the investment results of an index composed of developed market European equities in the financials sector.

Sell short EUFN and use a tight 10% stop on this very speculative play.

And while we wait for the euro drama to play out, take a long position on the ProShares UltraShort Euro (NYSEArca:EUO), an ETF that seeks a return that is -2x the return of daily performance of the U.S. dollar price of the euro.

When the euro goes as I know it will, you will be well positioned to rake it in. Buy at market and use a 20% stop.

Passive Investing Strategies

Over the past couple of weeks, I’ve been telling you that passive investing strategies run by robots for “average Joe” investors- tracking the market rather than trying to beat it – are becoming increasingly popular but could be heading for a cliff if all the lemmings are in the same ETFs. Simply tracking the market – moving into and out of the same investment vehicles as everyone else at the same time as everyone else – just isn’t going to cut it in 2017. 2017 is going to be dangerous on account of it ultimately being a real “stock pickers” market.

Money managers, pundits, and experts have been spending the last decade or so convincing ordinary investors that attempting to beat the markets is not a profitable strategy. There are too many smart, accomplished traders out there the experts say you’ll never beat.

But they’ll change their tune soon enough. In fact, in a very short time, experts are going to talk about the new wave passive investing the way they talk about “buy and hold” – an outmoded strategy that just doesn’t work the way it used to.

Right now, I’m working on a new way to invest that will combine the best tenets of Modern Portfolio Theory, Random Walk Theory, and Efficient Frontier Theory to create the perfect portfolio for today’s markets. Call it your own personal hedge fund.

I’ll have more on that for you very soon. In the meantime, avoid new wave passive strategies like the plague.

Health Care Stocks

There’s nothing the markets hate more than uncertainty. Candidate Donald Trump campaigned on a policy of repealing and replacing the President Obama’s signature health care law, the Affordable Care Act. Early indications suggest there is no guarantee he’ll make good on his promise. In short, nothing is set in stone – and the markets have responded accordingly.

While health care ETFs like Health Care Select Sector SPDR ETF (NYSEArca:XLV), Vanguard Health Care ETF (NYSEArca:VHT), and Fidelity MSCI Health Care ETF (NYSEArca:FHLC) enjoyed an initial bump in the post-election rally, all have begun to slip as the question has emerged: What will Donald Trump actually do?

Take a look at these charts for XLV, VHT, and FHLC – they’re eerily similar:

chart chart

chart
Look at the pattern – all jumped after the election, only to sink back down on November 10, when news surfaced that Trump was already walking back his promise to repeal and replace the law.

One of two things could happen in the next few months:

  1. Trump could leave the law – a financial boon to a few health care companies, which benefitted from an untapped market of nearly 21 million uninsured Americans – in place, tweaking it here and there to allow for more competition across state lines. Fixing what’s broken could boost insurance stocks.
  2. Trump could repeal and replace Obamacare with some as yet undetermined legislation or regulation, which would pull 21 million people off the rolls… and billions in subsidies out of the pockets of the insurance companies. That could spell doom for some insurance stocks.

While it’s dangerous to place any big bets on what might happen, one thing’s for sure, there are going to be lots of health care winners and losers in the not too distant future, which is why being a good stock picker in 2017 will be critical to making a fortune.

Get Into These Opportunities

Commodities

As the United States prepares for a Trump Presidency, we’re already seeing a recovery in what has been a severely beaten down commodities sector. That should continue; as America gears up for an infrastructure rebuild the likes of which we haven’t seen since the 1940s, demand for commodities will follow suit.

From the World Bank:

Metals and minerals prices are expected to rise 4.1 percent next year, a 0.5 percentage point upward revision due to increasing supply tightness. Zinc prices are forecast to rise more than 20 percent following the closure of some large zinc mines and production cuts in earlier years. Gold is projected to decline slightly next year to $1,219 per ounce as interest rates are likely to rise and safe haven buying ebbs.

Agriculture prices are expected to increase 1.4 percent in 2017, slightly less than expected in July, as food prices are projected to climb more gradually than anticipated (1.5 percent) and beverage prices are seen dropping by a greater extent (0.6 percent) on expectation of a large coffee output. Among food prices, grains prices are forecast to rise a steeper-than-anticipated 2.9 percent next year, while oils and meals prices are anticipated to rise a slower-than-expected 2 percent.

Here are the best opportunities in commodities right now…

The smartest take on commodities for 2017 will be in metals suited for coming infrastructure upgrades, like zinc. Buy PowerShares DB Base Metals Fund (NYSEArca:DBB), an ETF that seeks to track changes in the DBIQ Opt Yield Industrial Metals Index ER.

It’s balanced in zinc, copper, and aluminum – metals that have all been performing well after lows in early 2016.

Get in now at market and use a 20% stop.

For a more speculative play, you can go right to the source…

Teck Resources Ltd. (NYSE:TCK) recovered well after commodity prices bounced back from their lows at the beginning of the year, and the company is looking forward to a strong first quarter thanks to rising prices and its own cost-cutting efforts.

TCK should have a good year thanks to rising zinc prices – a full 31% of the company’s gross profits come from zinc, so a 20% rise (per the World Bank) should do wonders for TCK’s bottom line.

To ride zinc’s coming highs, buy TCK at market and use a 20% stop.

Energy

Energy should see a continued recovery in 2017. OPEC just cried uncle and voted to limit oil production. And they got non-OPEC producers to tag along, which is the first time that’s happened since 2011. That means that as the demand for crude rises – American producers, who have taken it on the chin for the past 18 months – should benefit greatly.

Meanwhile, we can expect that the Trump administration will be kind to coal, oil, and natural gas producers, cutting both corporate taxes and environmental restrictions.

Here’s the single best energy play right now…

The best energy play right now is Valero Energy Partners (NYSE:VLP) – it’s part of the Trump-designed future, but it hasn’t been overbought during the post-election rally.

VLP owns and operates a variety of oil and gas assets, mostly in the Midwest, Texas, and Southeastern U.S.

Valero Energy Partners is a master limited partnership that was spun out of Valero Energy Corp. (NYSE:VLO) in 2013. As an MLP, Valero Energy Partners pays out most of what it earns as dividend income to holders. That suits Valero Energy just fine because they have a majority interest in VLP and want their dividends to flow just as much as we do.

VLO isn’t a bad stock to own and has a good dividend yield too, but VLO has gone up considerably as the price of oil has risen and is subject to an oil price pullback.

That’s why we’re going with VLP and not VLO.

The first thing that strikes us about VLP is that it hasn’t gone parabolic along with the oil and gas producers. That’s because it’s an infrastructure play and not a high-flying explorer that wins big when oil prices soar and struggles when they sink.

Sure, the price of oil rising is good for the whole industry, but there’s no guarantee that OPEC members won’t cheat or that non-OPEC producers won’t cheat on their recently agreed-to production cutbacks to support higher prices for crude.

A sure thing, however, is that President-elect Trump wants America to be energy independent. No matter what the price of oil and gas is, they have to be transported around the country if we’re going “domestic.”

To me, that makes Valero Energy Partners a smart bet.

The stock’s had a hard time and is trading close to its 52-week lows, which is fine with me today. The chart shows support at its recent lows – and if it has just made a double-bottom and can get above $42 and hold there, it has an excellent shot of heading back towards $50, and then some.

Meanwhile, the dividend yield on VLP is 3.8% which is a good payout and easily handled by the company from its cash flow and profits.

I like buying VLP at market and holding it for its big dividend.

Infrastructure Stocks

I’ve talked about this at length already, telling you in November that the best way to profit from the coming Trump-fueled infrastructure boom is to play to win no matter what happens:

That means buying solid companies with a history of getting government contracts, a history of making money and, for me, a history of paying dividends.

There are plenty of other companies whose stocks may become high-fliers, but we’re just at the starting gate, and it doesn’t make sense to speculate on what we don’t know.

By getting into infrastructure stocks that have been lagging, which usually means investors will rotate into them to catch their move up and out of the doldrums, that also have a decent dividend yield, is the smart way to start building your rebuilding portfolio.

I like Caterpillar Inc. (NYSE:CAT), Deere & Co. (NYSE:DE), Emerson Electric Co. (NYSE:EMR), Cummins Inc. (NYSE:CMI), and Nucor Corp. (NYSE:NUE) all for their dividend yields and because they are proven winners.

Too bad they have have already been bid up substantially, however winners can keep going up.

One way to get into highfliers is by selling put options with strike prices 5% to 10% below where the stocks are trading now. If they go down, you get to buy them lower at cheaper prices because you collect option premium money when you sell puts you don’t own, and that cash lowers your cost basis if you buy at the strike price. If the stocks keep going up, you just get to keep the money you take in when you sell put options.

I’ll show you exactly how this works below.

The U.S. Dollar

Warts and all, the U.S. dollar is still the world’s no.1 safe haven in terms of currency. With Donald Trump at the helm, chaos in the Eurozone, shenanigans in China, and an absolute disaster brewing in Japan, that perception isn’t going to change any time soon.

In fact, I believe that as crises continue to pop up around the world, the dollar’s recent surge will continue unabated. In fact, the strong Japanese yen could reverse course, letting a crisis ensue that could result in trillions of dollars’ worth of yen sellers plowing their proceeds into the U.S. dollar.

Why? Several reasons…

Wages are up in the U.S. Consumer confidence is on the rise. Second quarter GDP numbers were revised upwards to 3.2%. The latest non-farm payrolls report was more than encouraging.

What’s more, interest rates are headed back up, which means the yield on Treasuries will rise right along with them. That will move the needle on the dollar, for sure.

How high the dollar goes will depend on a number of factors, but most significant will be the Federal Reserve’s schedule of interest rate hikes. If the central bank initiates regular quarterly rate hikes geared toward normalizing the markets (whatever that means), then the dollar’s going to continue to be bid up.

If 2017 looks like 2016 – when, you’ll recall, the Fed lost its collective nerve and put off rate hikes following the market crash in January and February -the dollar’s appreciation could falter somewhat, but should continue to climb, just not as quickly.

Whatever happens, I believe the dollar’s uptrend (after nearly two years of consolidation) will remain intact.

One way to play the dollar’s strength…

PowerShares DB US Dollar Bullish ETF (NYSEArca:UUP) ETF tracks changes in the Deutsche Bank Long US Dollar Index Futures Index – Excess Return, plus the interest income from the Fund’s holdings of primarily US Treasury securities and money market income less the Fund’s expenses. It’s the best way to track the value of the dollar relative to six major world currencies, including the euro, yen, British pound, Canadian dollar, Swedish Krona and Swiss franc.

I like buying UUP at market and using a 20% stop.

U.S. Financials

On the campaign trail, Donald Trump made no secret of his disdain for 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act.

The law brought the most significant changes to financial regulations since the reforms passed in response to the Great Depression, changing the American financial regulatory environment that affects all federal financial regulatory agencies and almost every part of the nation’s financial services industry.

Dodd-Frank is one of those pieces of compromise legislation that satisfies almost no one. Opponents on the left felt the law didn’t go far enough (and would not prevent another financial crisis), while opponents on the right argued that it placed an undue burden on financial institutions.

Whatever the case, Donald Trump has vowed to repeal the bill, which would free the big banks from its most stringent reforms.

And that’s good news for bank stocks, which continue to rally. Take a look at the charts for a few of America’s biggest banks…

chart

chart

chart

Again, you should notice a pattern – all have benefitted from the election of Donald Trump.

Even Wells Fargo & Co. (NYSE:WFC), whose stock has been plagued by scandal this year, has bounced back considerably, and now sits within 5% of its 52-week highs.

And I expect as Trump takes office and begins the herculean task of dismantling the web of regulations currently hampering the big banks, this trend will continue.

Here’s how to play the big American banks…

Right now, the big banks are enjoying the “Trump Bump,” and have been bid up quite a bit in the last eight weeks, so they’re a little expensive.

The best way to play them is to try to pick them up on the cheap.

Here’s how to get bank stocks on the cheap…

Just as with infrastructure stocks, I like selling puts as a way to reduce your overall cost – both by targeting the stock at lower levels and collecting a premium on the puts you sell.

I recommend targeting the best dividend yielding American banks, and selling puts with a strike price 5%-10% below where they’re currently trading.

For example:

JP Morgan Chase & Co. (NYSE:JPM), which was recently trading around $84.73 and yielding a decent 2.25%, you could target the following puts:

If you’re looking for a close to 5% dip, you could have gone for the JPM March 17, 2017 $80 puts (JPM170317P00080000). They’re were trading around $2.00, meaning you would be credited $200 for every contract you sell.

If you were  assigned JPM stock at $80 when your puts expired, your cost basis per share would have been a mere $78.

If you want to try to really pick up the stock on the cheap, you’d go for the JPM March 17, 2017 $77.50 puts (JPM170317P00077500). They were recently trading at $1.40, meaning you’d be credited $140 for each contract you sell.

If you were assigned JPM stock at $77.50 when your puts expired, your cost basis per share would have been just $76.10.

That’s all there is to it – and if you’re not assigned stock when the puts expire, you keep the premium you received when you sold them.

Just make sure you stay domestic, avoid Citi, and don’t chase them right now.

My outlook for 2017 is very positive – and this list of opportunities is just the beginning.

We’ll have lots of chances to hit home runs holding great long positions and also shorting collapsing currencies, countries, and companies.

Happy New Year!

Sincerely,

Shah

How You Can Profit from Trump’s Energy Deregulation Agenda

1 | By Shah Gilani

The incoming Trump administration is widely expected to upend a lot of energy regulations put into place by President Obama, as well as rules that have been in place for decades.

Investors have already bid up energy stocks in anticipation of regulatory rollbacks.

But some of those bets look premature now that we see not all of President-elect Trump’s cabinet nominees are on the same page when it comes to the environment and climate change – two issues, however you look at them, driving U.S. energy policy.

Today, I’ll tell you how principal cabinet nominees generally look at the issues, and why U.S. energy and environmental policies can’t be effected in a vacuum.

Then, I’ll show you where the safe investments really are…

Trump’s Deregulation Agenda

Besides threatening President Obama’s executive orders implementing energy, environmental, and climate change regulations, the Trump administration is going to have to look at decades-old rules and regulations affecting the environment and energy.

One old set of rules, The Clean Air Act Amendments (1990), implemented to address acid rain, urban air pollution, and toxic air emissions, required retrofits for power plants and imposed other costs on energy generation polluters.

More recently, the Clean Power Plan (CPP), which establishes CO2 emission performance rates for power plants to address global climate change, is hugely contentious, for one reason: at present there’s no viable environmental control technology to manage CO2.

These examples show how energy and the environment aren’t easily separated and how energy policy is a proxy for environmental policy, or vice versa, depending on your starting point.

In terms of the U.S. as a global leader, American energy policy can’t be conducted in isolation because of potential global environmental impacts.

We see clearly today that policies designed to regulate carbon emissions have generated conflicts involving politics, science, the energy industry, U.S. national interests, and America’s leadership role in the world.

Realities of political and global ideologies, as well as ever-changing political transitions, must be considered by U.S. lawmakers and the administration to avoid short-lived policies that only create more uncertainty for the U.S. energy producers and environment shepherds.

Where Mr. Trump’s cabinet nominees are on the issues and how malleable they may be in forging healthy compromises on energy and environmental policies is critical to determining where investment capital should be applied.

Energy vs. Environment: Where Trump’s Cabinet Picks Stand

Rick Perry, Mr. Trump’s nominee for Energy Secretary, while overseeing a massive expansion of oil and gas development during his tenure as governor of Texas from 2000 to 2015, also made the Lone Star State the country’s leading wind power developer.  Mr. Trump’s transition team noted Governor’s Perry’s push into alternative energy sources when his nomination was announced.

As far as climate change, at a 2011 event in New Hampshire, Governor Perry noted the world’s climate has been in flux “ever since the earth was formed.”

He’s been pegged as a climate change denier, saying, “There are a substantial number of scientists who have manipulated data so that they will have dollars rolling into their projects.”

Scott Pruitt, Oklahoma’s Attorney General and Mr. Trump’s nominee to head the Environmental Protection Agency, famously joined other state attorneys general in suing the Obama administration over the Clean Power Plan, a federal rule aimed at curbing carbon emissions from power plants, and joined a lawsuit to block an EPA rule on methane emissions.

In spite of Mr. Pruitt’s history of confrontation with the EPA and his detractors’ claims that he’s a climate change denier, his view of climate change may be more agnostic. He’s written that “Scientists continue to disagree about the degree and extent of global warming and its connection to the actions of mankind. That debate should be encouraged – in classrooms, public forums, and the halls of Congress.” Hopefully, Mr. Pruitt will lean towards the majority consensus of scientists as research continues.

Still, there’s no denying his distaste for the Agency he’s slated to head. “The American people are tired of seeing billions of dollars drained from our economy due to unnecessary EPA regulations, and I intend to run this agency in a way that fosters both responsible protection of the environment and freedom for American businesses,” Pruitt said after accepting the nomination. Citing “responsible protection of the environment” doesn’t comport with claims he’s a total climate change denier.

Montana’s sole Congressional House Representative, Ryan Zinke, President-elect Trump’s nominee to head the Interior Department, says of climate change, “It’s not a hoax, but it’s not proven science either. But you don’t dismantle America’s power and energy on a maybe. We need to be energy independent first. We need to do it better, which we can, but it is not a settled science.”

In Congress, Zinke backed the Land and Water Conservation Fund, a federal program that protects public lands and water, and last July resigned as a delegate to the Republican National Convention after the GOP’s platform called for the transfer of federal lands to the states.

“Most Republicans don’t agree with it and most Montanans don’t agree with it,” Zinke said at the time about giving states control over federal lands. “What we do agree on is better management.”

Zinke’s push for energy independence and his desire to shepherd America’s vast wilderness areas, our national parks and resources, means he’s going to be at odds with himself at times and sometimes on the other side of the energy and the environment debate.

Finally, Mr. Trump’s nominee as Secretary of State, Rex Tillerson, head of the world’s largest oil company, ExxonMobil, will weigh in heavily on the energy-environment debate, and not necessarily on the side you might think.

In a keynote speech at an energy conference earlier this year, Tillerson said the “risks of climate change are real and warrant serious action.”

Not long after that, ExxonMobil came out in support of the Paris climate agreement, an ambitious deal to curb global greenhouse gas emissions reached by 195 countries.

The company said of the Paris agreements, “ExxonMobil supports the work of the Paris signatories, acknowledges the ambitious goals of this agreement and believes the company has a constructive role to play in developing solutions.”

As Secretary of State, Tillerson would be a key player in international climate negotiations and some domestic energy projects, such as cross-border oil and gas pipelines.

The Best Way to Play Trump’s Energy Deregulation Agenda

From the outside, Mr. Trump’s calls for energy independence, his skepticism over climate change, and his cabinet nominees portend an upcoming energy deregulation push to achieve his campaign goals of creating jobs and reducing America’s reliance on outside oil.

But, as we’ve seen since his election, Mr. Trump’s hardline campaign promises are subject to the hardcore realities of domestic policies and international geopolitics. Nowhere are those two realities more clearly in focus and on the front-lines of the future than with energy and environmental policies.

To clear the way for energy growth and job creation across all aspects of energy production – from oil, gas, and coal to wind and solar – Mr. Trump and his cabinet are going to have to steer energy proponents and environmental proponents towards long-term compromises that satisfy, as best they can, both groups and the American people.

The only smart way to invest in whatever those compromises end up being is by investing in big energy producers with big dividend yields, as well as infrastructure plays.

When it comes to big producers, you can’t go wrong with the world’s biggest integrated oil companies like, ExxonMobil Corp. (NYSE:XOM), which yields 3.3% and BP plc (NYSE:BP), which yields a fantastic 6.5%.

As far as infrastructure plays, I like Valero Energy Partners (NYSE:VLP), the pipeline, transmission and storage master limited partnership that yields 3.75%.

Sincerely,

Shah

Who to Watch in Trump’s Energy Deregulation Agenda

3 | By Shah Gilani

President-elect Donald Trump’s nominee for Energy Secretary, former Texas Governor Rick Perry, can’t singlehandedly make energy great again by deregulating the industry.

That’s because the U.S. Energy Department (DOE) isn’t the only government agency that oversees oil, gas, coal, wind, solar, and nuclear energy.

Making big investment bets on the future of energy production in the U.S. requires an understanding of which agencies really hold sway, who will head each department, how they will (or won’t) work together, and where paths of least resistance and black holes are.

Proponents of energy deregulation couldn’t believe it when Rick Perry, who led the country’s biggest energy producing state, was tapped to head the Energy Department.

That’s because in a 2011 presidential primary debate, Perry – then a candidate – vowed that if elected he would eliminate the Education Department, the Commerce Department and… He forgot what the third department was.

He was reminded by the moderator it was the Energy Department. Perry’s response was “Oops, I forgot.” That embarrassing moment ended his 2012 presidential run.

Nominating the man who once vowed to eliminate the Energy Department to actually head it seems (to fans of energy deregulation) like a dream come true. Perhaps the message to the industry, they hope, is the Energy Department might be dismantled from within. That’s highly unlikely.

Here’s the three agencies that control energy, and who might be tasked with deregulating them…

The Energy Department

The Energy Department was created under President Jimmy Carter in 1977 following the ill effects the country faced after the 1973 oil crisis. While the DOE oversees energy conservation, energy-related research, and domestic energy production, its top priority isn’t energy. Nor is it overseeing the reliability of the country’s electric grid, or – surprisingly – even the research it directs in genomics, including the Human Genome Project.

It’s shepherding America’s nuclear arsenal.

A sub-agency of the DOE, the National Nuclear Security Administration, is tasked with maintaining the safety of America’s nuclear stockpiles. In fact, more than half of the DOE’s annual $30 billion budget goes to protecting the nuclear arsenal and cleaning up nuclear waste and contamination sites around the U.S.

President Obama’s DOE’s secretary, Ernest Moniz, was even pivotal in the administration’s successful efforts to negotiate a deal with Iran curtailing its nuclear program.

That deal, Mr. Trump says, gives too much to the Iranians, and he’ll renegotiate or do away with it altogether.

Even if it is possible to dismantle the Energy Department, unfettered deregulation of energy would be impossible given the other government agencies overseeing energy.

The Environmental Protection Agency

The Environmental Protection Agency (EPA), created by an executive order penned by President Richard Nixon in 1970 and ratified by committee hearings in the House and Senate (so it can’t be overturned) is a bigger thorn in the side of energy than the DOE.

The EPA oversees the nation’s Clean Air and Clean Water Acts, and sets fuel economy standards for automobiles, among its many mandates.

According the EPA’s website, with its proposed 2017 $8.2 billion budget, the Administration “seeks to further key work in addressing climate change and improving air quality, protecting our water, safeguarding the health and safety of the public from toxic chemicals, supporting the environmental health of communities, and working toward a sustainable environmental future for all Americans.”

President-elect Trump recently nominated Oklahoma Attorney General Scott Pruitt to head the EPA. Mr. Pruitt, a staunch opponent of the EPA, sued the Agency twice over executive orders authorized by President Obama.

Mr. Pruitt says he supports “rescinding all job-destroying executive orders.” He is known to be a close ally of oil and natural gas explorers and producers, as well as climate change doubters.

As far as efforts to combat climate change, President-elect Trump has indicated that he’s is not a fan of the Environmental Protection Agency or its proposed regulation of greenhouse gases, including the Clean Power Plan (CPP).

Mr. Trump has suggested eliminating the EPA’s new source standards for power plants, and the Clean Water Act. Candidate Trump also said he would “revoke policies that impose unwarranted restrictions on new drilling technologies,” a reference to new restrictions proposed on methane emissions from oil and gas production.

But even if the Environmental Protection Agency can be brought to heel so energy companies can rule the roost, there’s another huge government department that dictates energy moves around the country.

The Interior Department

The United States Department of the Interior (DOI), which houses the Bureau of Land Management, the U.S. Geological Survey, the Office of Surface Mining, the Bureau of Ocean Energy Management, the Office of Natural Resources Revenue, the Bureau of Indian Affairs, and oversees the National Park Service and the Fish and Wildlife Service, to name a few of the dozens of operating units of the DOI, has a lot of power over energy rules and regulations.

The Interior Department has been aggressively focusing on what they call America’s “New Energy Frontier,” assessing their responsibilities for managing more than a fifth of the U.S. landmass while managing energy resources under their charge.

A page from Interior’s New Energy Frontier reminds us:

The Bureau of Land Management is responsible for coal leasing on about 570 million acres of BLM, national forest and other federal lands, as well as private lands where the federal government has retained the mineral rights.” And says, “The U.S. Geological Survey is beginning a national assessment of the geologic storage capacity for carbon dioxide in oil and gas reservoirs and saline formations. This effort will provide the foundational information needed to expand the technologies of carbon-capture projects and to understand impacts of such expansion.” And that, “The Office of Surface Mining Reclamation and Enforcement works with states and tribes to balance our nation’s need for continued domestic coal production with protection of the environment.

President-elect Trump just nominated Montana’s Congressional Freshman Ryan Zinke to head the Interior Department.

Although Zinke – who was elected to Congress in 2014, was a Montana state senator prior to becoming Montana’s sole House Representative, and a Navy SEAL commander for 25 years before that – is a Republican, he’s no pushover when it comes to protecting the environment.

Zinke (who broke with the GOP, quitting the platform committee rather than sign onto calls to transfer control of federal lands over to the states) also backs full funding of the Land and Water Conservation Fund.

The outdoorsman accepted Mr. Trump’s nomination saying, “As inscribed in the stone archway of Yellowstone National Park in Gardiner, Montana, I shall faithfully uphold Teddy Roosevelt’s belief that our treasured public lands are ‘for the benefit and enjoyment of the people,'” according to a statement released by Trump’s transition team. Zinke added, “I will work tirelessly to ensure our public lands are managed and preserved in a way that benefits everyone for generations to come.”

Mr. Trump hasn’t been inaugurated yet, and his cabinet nominees aren’t all shoe-ins for confirmation. So, the early betting on energy plays may be dangerously premature in some cases.

While Ryan Zinke seems to be well-liked by both Republicans and Democrats, and may slide into his office unscathed, Rick Perry and Scott Pruitt won’t be so lucky.

On Friday, I’ll tell you what the future of energy is up against and where the safest bets are going to be, no matter who gets to head what departments and what policies prevail.

Sincerely,

Shah

When Markets Do the Unexpected, They Call Shah Gilani

0 | By Wall Street Insights and Indictments Staff

Varney & Co. host Stuart Varney gave Shah a call Tuesday morning to see if he’s standing by his original claim… Can the Dow really make it all the way to 21,000 before the end of the year?
To see how Shah responds, as well as get three picks you can get into before the year is done, click to watch below.


Trump Can Deregulate the Banks Without Crashing the Economy – Here’s How

7 | By Shah Gilani

The chance of the banking deregulatory locomotive – which is ready to leave Washington Station when Donald Trump is inaugurated – running off the tracks is high.

Very high.

If that happens, the train – including big banks, capital markets, consumer protections, and the whole American economy – could crash and burn.

America’s been taken down the financial services deregulation path many times before. Everything goes well for a while, and sometimes a good while… But eventually the embers of greed that fuel financial services gamers turns into a conflagration, consuming everything in sight.

I’ve got an easy, five-step approach to avoid catastrophe and make deregulation great again.

But before I show you, I want to talk about what usually goes wrong with deregulation juggernauts – why what can happen always happens.

And most importantly, what the American public must demand of our new President and his lieutenants to ensure we’re not headed off another cliff…

Banking Regulation Is a Reaction to Bad Behavior

First, it’s instructive to understand that the regulation of banks and financial services in the United States has never been arbitrary or capricious. All the rules and regulations that have ever been put in place have resulted from what’s gone wrong – from the banks and the greed-mongers screwing up.

In other words, if banks didn’t blow themselves up on a regular basis throughout the history of our republic (and in the process blow up depositors, borrowers, businesses and the economy), there wouldn’t be any need for the seemingly over-the-top regulations financial services companies subsequently try and wrangle out of.

Take the U.S. Banking Act of 1933, more commonly known as Glass-Steagall (named for Senator Carter Glass and House Banking and Currency Committee Chairman Henry Bascom Steagall, who shepherded the Act through Congress).

Glass-Steagall became the law of the land on the heels of 5000 banks failing between 1929 and 1933. Those failures hit depositors with more than $400 million in losses. Things were so bad that President Franklin Roosevelt took the extraordinary step of shutting down the entire banking system for four days to calm the public and stem costly bank runs.

Prior to the 1933 Act banks were free to traffic in securities. But a congressional investigation led by prosecutor Ferdinand Pecora unearthed a culture of recklessness, cronyism, and fraud in the use of depositor funds and in the promotion of securities for sale to the public.

A top executive of Chase National Bank (the precursor of today’s JPMorgan Chase) enriched himself by short-selling his own bank’s shares during the stock market crash. National City Bank (now Citigroup) took millions of dollars of failed loans to several Latin American governments, packaged them as securities, and unloaded them on unsuspecting U.S. investors.

That’s what spawned the encompassing wet blanket regulation regime known as Glass-Steagall – it was all because of what the banks did.

But old rules don’t always make sense when the economic landscape expands.

Round Two: Lessons from 1980

The economy expanded rapidly after World War II. The 1950s saw extraordinary growth of the economy and America’s middle class. The 1960s spawned the seeds of inflation when the Johnson administration payed for the Vietnam War by having the Federal Reserve print money (because Vietnam wasn’t a declared war, which would have to be funded by an act of Congress, it was a “police action”).

At the same time, Johnson launched his Great Society with all its social services, which inflated the budget and country’s deficit. In the 1970s, the Arab oil embargo and the quadrupling of oil prices triggered uncontrollable “stagflation,” sending interest rates through the roof.

It was time to deregulate banks and free them to better serve a public in need of credit.

The Depository Institutions Deregulation and Monetary Control Act of 1980 was just the thing. It allowed banks to merge across state lines, eliminated the interest rate cap banks could pay depositors, created “NOW” (negotiable order of withdrawal) savings accounts with check-writing, lifted deposit insurance from $40,000 to $100,000, allowed credit unions and savings and loans to offer checkable deposits, and it allowed institutions to charge any loan interest they could.

Most of those changes were long overdue and good, in general, for the country.

But deregulation went full bore with the Garn-St Germain Depository Institutions Act of 1982.

Shepherded through Congress by Donald Regan, the former head of Merrill Lynch Pierce Fenner & Smith, who became President Ronald Reagan’s Treasury Secretary in 1981, deregulated savings and loan institutions (whose assets were a bunch of 5% mortgages while their cost for money was 20% after Fed Chairman Paul Volcker raised interest rates starting in 1979). The 1982 Act let banks offer adjustable rate mortgage loans, as some critics have said, “leading the safe and staid home mortgage business right into the casino.”

The new legislation didn’t solve the problems of the thrifts. On the contrary, the bill turned the modest-sized troubles of savings-and-loan institutions into a catastrophe that saw the failure of 747 institutions, many of them because of fraud, and cost taxpayers $132.1 billion.

With another bad genie back in his dark bottle, another period of calm ensued.

Only this time modernization and computers and things the world had never seen before made the old landscape look like a mud field the forces of capitalism shouldn’t wade through.

In the late 1990s a new flag-bearer for deregulation, former Goldman Sachs CEO, Treasury Secretary, and greed monger Robert Rubin pushed through the Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act (GLBA).

The crazy thing about the GLBA was that it wiped away the last vestiges of the old Glass-Steagall Act, which made the illegal merger in 1998 of Citibank and Travelers Insurance (which became Citigroup) legal.

The merger, a violation of the Glass-Steagall Act and the Bank Holding Company Act of 1956, got a temporary waiver form the Federal Reserve in September 1998. Less than a year later, GLBA was passed to legalize those types of mergers on a permanent basis. The law also repealed Glass-Steagall’s conflict of interest prohibitions “against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank”.

And then Robert Rubin went on to earn over $100 million at Citigroup after he left the Treasury. He left Citi after the too-big-to-fail bank became technically insolvent in 2008.

Those are just the most recent history lessons to be taken from our not so far off past.

So here we are again, with the deregulation train getting ready to pull out of the station.

As Yogi Berra would say, “It’s like deja vu all over again.”

Only this time we should know exactly what to do. It’s easy – just five simple things…

Five Ways to Make Deregulation Great Again

1) Get rid of the Federal Reserve System. It’s a private central bank, a criminal enterprise that backstops the too-big-to-fail banks when they crash. Without a Federal Reserve there would be no downward manipulation of interest rates that allows banks to extend credit to anyone dead or alive and cause the bubbles and bank failures the Fed has to clean up with taxpayer money. The Fed could be replaced by a computerized version of the Taylor Rule that adjusts the money supply in real time according to economic expansions and contractions.

2) Reintroduce Glass-Steagall.

3) Eliminate Dodd-Frank – It’s way too complicated, and for good reason. It was written mostly by bank lobbyists so banks could dance in between the 1500 pages of grey writing.

4) Turn banks into utilities. Require them to have “liquid” (able to be sold with less than a 10-15% haircut within 30 days) capital reserves that scale up with the amount of “assets” they carry. For example, banks with $25 billion in “assets” (define them mathematically and compartmentalize them by maturity and liquidity) might have a 20% reserve requirement, banks with assets of $50 billion a 30% reserve requirement, and banks with more than $75 billion in assets a 40% reserve requirement.

5) Rewrite all remaining regulations into black and white rules to make it easy to convict and jail criminals for acts that are clearly identified as criminal.

It really is that simple.

If you agree with me, write, email, text, or tweet the President-elect, his army of deregulators, and your member of Congress so that while they’re making America Great Again they don’t screw us over to enrich themselves.

If that’s the track the deregulation locomotive runs down, we’ll get our free markets back and eliminate the boom and bust cycles caused by the Federal Reserve and its big swinging banks.

Sincerely,

Shah

It’s Not Too Late for These Three Stocks

0 | By Wall Street Insights and Indictments Staff

If you’re looking for opportunities to buy into this rally and still make money, Shah Gilani has the answer for you. On this latest appearance at Varney & Co, he shares three

positions the average investor can still get into that have not yet been affected by the Trump Bump.

Stuart Varney also asks Shah if he wants to stand behind his comments predicting a possible Dow 21,000 before the end of the year…

To see Shah cover all this and get those three stock recommendations, click below to watch.


The Fed Is Political – But Not in the Way You Think

0 | By Wall Street Insights and Indictments Staff

When Making Money host Charles Payne wants to talk about the Fed, he calls Shah Gilani.

On December 14, Fed Chair Janet Yellen announced the latest interest rate hike – and three additional rate hikes coming in 2017. Charles asked Shah if this was a political move.

His answer will come as no surprise if you’ve been following along.

Everything the central bank does is political – but not in the way you might think…

Click below for the full video.


Making Deregulation Great Again: The Future of Banking Under President Trump

4 | By Shah Gilani

President-elect Donald Trump’s campaign slogan was “Make America Great Again.”

One of the axes candidate Trump promised to wield to hack away impediments strangling America’s growth prospects and its greatness was “deregulation.”

The two industries most often cited by then candidate and now president-elect Trump ripe for deregulation are banking and energy… But judging by the number of banking executives Trump has nominated for cabinet positions, it’s the sprawling regulatory regime covering banks that’s first and foremost on the Trump agenda.

What Mr. Trump said on the campaign trail versus what he is saying now about bank deregulation – and what his cabinet nominees are likely to hack at – will have a huge impact on how this goal is reached.

Here’s whether or not bank deregulation is going to make America great again…

The 21st Century Glass-Steagall

Before he was elected, candidate Trump’s website said, “It’s time for a 21st Century Glass-Steagall.” In other words, Mr. Trump wanted to somehow revert to the 1930s legislation that separated investment banks and trading operations from commercial banks where depositors parked their savings.

The Financial Services Modernization Act of 1999, which tore down the last remaining vestiges of the old Glass-Steagall Act, (principally to smooth the way for the illegal 1998 Citibank and Travelers Insurance merger) was spearheaded by then Treasury Secretary Robert Rubin, the former Goldman Sachs CEO, who would earn over $100 million when he subsequently joined Citigroup.

Mr. Trump even wanted his call for a 21st century Glass-Steagall to be part of the Republican Party’s platform. It wasn’t.

In August, Mr. Trump called for a moratorium on new bank regulations. His supporters said it wasn’t at odds with his call for a revamped Glass-Steagall, but a signal that overregulation was different than prudent regulation.

After berating Hillary Clinton on the campaign trail for taking money from the likes of Goldman Sachs and being in the pocket of big banks, once elected he quickly changed his tune.

His post-election website said: “The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”

President-elect Trump appointed Paul Atkins, a former Republican SEC commissioner and deregulation advocate, to lead his Financial Services Policy Implementation team.

Soon after, Mr. Trump tapped former Goldman Sachs alum Steven Mnuchin as Treasury Secretary and current Goldman President and COO Gary Cohn as director of the National Economic Council. Stephen Bannon, Mr. Trump’s chief strategist and Anthony Scaramucci, his principal Wall Street backer, are both Goldman alums.

President-elect Trump’s website no longer mentions Glass-Steagall.

Trump Vs. Dodd-Frank

The Dodd-Frank Act, passed largely along party lines in 2010, established hundreds of new rules and regulations covering financial services companies and banks. Since its passage, it has been attacked relentlessly by House Republicans who believe the legislation went too far and that new regulations slowed America’s economic recovery.

Republican legislators have introduced dozens of bills to repeal parts of Dodd-Frank, and have attempted to eliminate it entirely. Besides oversight hearings to criticize regulators for overreach, Republicans have refused to approve appointments of top regulators and threatened budgets of the Securities and Exchange Commission and the Commodities Futures Trading Commission, hampering development of Dodd-Frank rules.

Another tactic used by Republicans to slow or kill new regulations amounts to calling for studies of the “costs” of regulatory compliance, which can take years.

The Donald, as he used to be called in his New York circles, will be appointing new heads of the SEC and the CFTC. He’s also expected to appoint new members of the Federal Reserve Board of Governors and may call for the resignation of Chair Janet Yellen… thought that would be an unprecedented move.

Dodd-Frank also created the new post of vice chair of supervision at the Federal Reserve, the internal group that oversees the largest banks. That post remains unfilled, however, Daniel Tarullo, the Fed’s regulatory champion, has been effectively overseeing supervision of the country’s biggest banks. Mr. Trump will likely appoint someone more big-bank friendly than Mr. Tarullo.

Most of the financial services regulatory changes sought by Republicans are embedded in the Financial CHOICE Act, drafted by Rep. Jeb Hensarling (R-Texas), chair of the House Financial Services Committee, who was under consideration for the Treasury Secretary job.

The act would gut Dodd-Frank by:

  • Reducing the number of banks under its supervisory umbrella;
  • Ending the special failed-bank resolution mechanism;
  • Gutting the Consumer Financial Protection Bureau;
  • Forcing regulatory agencies to be funded specifically by congressional appropriations;
  • Requiring detailed cost-benefit analysis of proposed regulations;
  • And repealing the Volcker Rule, which prohibits proprietary trading and places bank limits on investments in hedge funds and private equity funds.

But Mr. Trump’s deregulatory push isn’t going to be all smooth sailing, even for the President-elect’s “Government Sachs” team.

Even though Republicans have a majority in both houses of Congress, they are short of the 60 votes needed to pass major legislative reforms like the Financial CHOICE Act in the Senate. And not all Republicans will be on-board the deregulation train.
Sen. Susan Collins (R-Maine), for one, voted for Dodd-Frank in 2010 and isn’t about to start cutting it up now.

History May Not Be Doomed to Repeat Itself

Besides, big banks are still distrusted and hugely unpopular with the voting public.

Continuing scandals like the recent Wells Fargo fiasco, revelations that big banks have been fixing the price of silver, more settlements based on charges of mortgage fraud, foreign exchange price fixing, and interest rate manipulation aren’t as prevalent as they were a few years ago, but are still in the news on a regular basis.

The public’s going to be reminded by Democrats and regulatory zealots that overly zealous deregulation in the form of the Depository Institutions Deregulation and Monetary Control Act of 1980 (which led to the country’s huge savings and loan crisis), and The Financial Services Modernization Act of 1999 (which led to the mortgage crisis and the insolvency of most of America’s giant banks), is what happens when bank lobbyists get to re-write the rules for their masters.

If the champions of deregulation win the day, there’s likely to be a tremendous tailwind pushing the economy and bank profits through the roof. But we’ve been up to that mountain top before – and we know the other side leads straight down a slippery slope.

On the other hand, if the Trump Team reduces costly and overly burdensome regulatory and compliance regulations to straightforward rules and laws and serving up prison sentences for executives and fraudsters instead of hitting shareholders in their pockets for wrongdoing, the United States can get on fostering “The principal business of the American people,” which President Calvin Coolidge said, “is business.”

Sincerely,

Shah

We May Hit Historic Dow 21K Before the New Year

0 | By Wall Street Insights and Indictments Staff

We are a breath away from making history, and the rally shows no signs of stopping. On this latest episode of Varney & Co, Shah was asked what he recommends new investors keep their eye on while the Dow continues to soar.

To see what Shah has to say about Vodafone, Sturm Ruger & Co, and more… click below.


SCOTUS Just Tightened the Insider Trading Rules – Here’s What it All Means

3 | By Shah Gilani

Let’s say you’ve got a friend, a friend who works as an investment banker, and he gifts you with some inside information. Not for any compensation, just because he wants you to make some bacon, and you make $1.5 million on the trade. Is that cool?

Believe it or not, it used to be. But it’s not any more. The United States Supreme Court just decided that the free gift of inside information is illegal for you to trade on.

The questions before the court was, if the person passing along the inside information isn’t paid or compensated for gifting you with it, how can that be a crime? And, if the person acting on the tip doesn’t know the tipster is breaking some fiduciary duty they have, how can the person who makes a trade on that information be committing a crime?

Those questions were answered previously by a New York Appellate Court in the negative- no, it wasn’t a crime.

So what happened?

Here’s what you need to know to stay on the right side of the new law…

Determining the Value of Inside Information

Prosecutors in California had charged one-time Chicago grocery wholesaler Bassam Yacoub Salman with one count of conspiracy to commit securities fraud and four counts of securities fraud, alleging Salman earned $1.5 million trading on inside information.

On September 1, 2011, Salman was convicted on all counts in the United States District Court for the Northern District of California.

The government said the tips Salman got originated with Maher Kara, then a Citigroup investment banker who gave the information to his brother, who in turn passed it on to his brother-in-law, Salman.

Salman appealed, to no avail. Then, another case came up on appeal that gave Salman’s attorneys hope.

In 2014, The United States Court of Appeals for the Second Circuit vacated the insider-trading convictions of two individuals on the ground that the Government had failed to present sufficient evidence that they knew the information they received had been disclosed in breach of a fiduciary duty.

In the United States of America, Appellee, v. Todd Newman and Anthony Chiasson, Defendants-Appellants  – AND -Jon Horvath, Danny Kuo, Hyung G. Lim, Michael Steinberg, Defendants, the Court said:

…we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he  did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties. Accordingly, we reverse the convictions of Newman and Chiasson on all counts and remand with instructions to dismiss the indictment as it pertains to them with prejudice.”

While Federal securities fraud statutes don’t specifically mention insider trading, in 1983 the Supreme Court said prosecutions could be based on an insider’s breach of a duty to the company’s shareholders. The ruling, known as Dirks v. SEC, also said the insider had to receive a “personal benefit” from the disclosure.

The 2014 Todd Newman and Anthony Chiasson appeals victory in effect established new requirements for insider trading cases. First, “the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.” Second, those acting on a tip had to know they “were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.”

Salman’s attorneys used the new benchmarks to take their case to the Supreme Court.

SCOTUS’s Ruling Toughened Insider Trading Rules

The High Court’s ruling, handed down earlier this week, affirmed Salman’s conviction, and in doing so resolved questions that had divided federal appeals courts.

The ruling, more importantly, restored prosecutorial and SEC powers lost in 2014 when the New York Appellate Court established new requirements for insider-trading cases.

The Supreme Court didn’t center on Salman’s conduct, instead it zeroed in on the tipster’s motivations.

Justice Samuel Alito wrote, “By disclosing confidential information as a gift to his brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup and its clients.”

Essentially, the Supreme Court rejected the New York court’s suggestion that a tipster must “receive something of a “pecuniary or similarly valuable nature in exchange for a gift to family or friend.”

Preet Bharara, the U.S. Attorney for the Southern District of New York and the toughest cop on the Wall Street beat said, “The court stood up for common sense and affirmed what we have been arguing from the outset – that the law absolutely prohibits insiders from advantaging their friends and relatives at the expense of the trading public, today’s decision is a victory for fair markets and those who believe that the system should not be rigged.”

So, if you’ve got a Bad Santa trying to be good to you this Christmas and gift you with some unwrapped inside information, you might want to come up with another wish.

Sincerely,

Shah