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Earn High Yields On Heavily Shorted Stocks

|Includes:FU, L&L Energy, Inc. (LLEN), VISN

L&L Energy Inc. (NASDAQ:LLEN) and FAB Universal (NYSEMKT:FU) were halted by the Exchanges following whistleblower reports issued by GeoInvesting, Alfredlittle.com, and myself (see L&L Energy's Falsely Disclosed Phoenician Deal). Long investors fretting over potential losses on either of these stocks are missing one surefire and simple way that they can earn incredibly high yields while they wait for the Exchanges' delisting determinations.

Fully Funded Stock Lending Programs

In 2010, Forbes highlighted the growing popularity of retail securities lending, citing a report from Finadium:

"Indeed, brokerage firms are sitting up and taking note of increased retail securities lending. Fidelity, Morgan Stanley, Bank of America Merrill Lynch, Charles Schwab, UBS, Pershing and E*Trade are noted in the Finadium report as having lending programs for fully paid securities."

According to Interactive Brokers' Stock Yield Enhancement Program, investors can lend fully paid shares to traders who are short the stock:

"Each day that your stock is on loan, you will be paid a loan fee based on market rates. You share a percentage of this with IB (currently 50%) as a fee for managing the program."

The current loan fees for LLEN and FU (based on market rates) at Interactive Brokers have recently exceed 60% and 90%, respectively. As another example, VisionChina Media Inc. (NASDAQ:VISN), sports a current loan fee of 85%.

The following is a theoretical example of what you could have earned since LLEN was halted, assuming you loaned $10,000 worth of LLEN on beginning on November 18th, 2013.

$10,000 x 62.62% (Estimated loan fee rate for this security)= $6,262.

Minus $6,262 x 50% (Interactive Brokers' fee for managing the stock loan)= $3,131/year in profit.

$3,131/365 = $8.58/day x 66 days= $566.15 profit in just over 2 months.

In the past, only institutional investors could take advantage of such a remarkable program. According to Interactive Brokers, all margin accounts and even IRA accounts qualify for the program. Program participants can still trade their loaned stock with no restrictions.

Even if you currently hold LLEN or FAB shares at another brokerage, you still have the right and ability, despite the current trading halt, to transfer those shares into a newly opened Interactive Brokers account and begin to collect loan fees on them.

Personnel at Interactive Brokers explained to me that the entire process takes only three simple steps:

  1. Open an account. This is done via the application page on the Interactive Brokers website.
  2. Transfer the shares. This is typically done via an ACAT, and can be requested within the application. More information can be found here.
  3. Once the account is open and the shares are transferred, sign up for the Stock Yield Enhancement Program on the Trading Configuration or Trading Permissions page in Account Management.

Note: For further assistance or questions regarding the process, please contact Interactive Brokers' Sales Representative John Cracraft at (203) 618-5971 or jcracraft@interactivebrokers.com. For more details check out the FAQ's on the program and the risks/disclosure statement.

As an alternative to Interactive Brokers, Schwab has actively been involved in fully paid stock lending for over a decade, but do not provide any details of their program on their website. Schwab handles stock loan requests on a case-by-case basis.

One other firm that offers a fully paid stock lending service is Fidelity Investments. Unfortunately for small investors, Fidelity's Fully Paid Lending Program requires a minimum of $250,000 in assets. Fidelity representatives can reached at 800.481.8313.

It is hard to predict what the future holds for the LLEN or FU. Investors are wise to make the most of their investment while they can. Stock loan programs are thus a vital and lucrative way to earn potentially considerable income during long trading halts.

Disclosure: I am short LLEN, FU.

Stocks: LLEN, FU, VISN