THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Tiny bubbles
In the wine
Make me happy
Make me feel fine
-Don Ho
Fact: Earlier this week, Goldman Sachs (GS) advised its clients to reduce exposure to a host of commodities including copper, oil, platinum and cotton. GS believes a bubble in these items exists and that it is about to burst.
Fact: Also this week, Glencore, one of the largest traders in commodities (zinc, copper, lead, coal, sugar, nickel, oil) announced that it was "going public". The ostensible purpose is to allow access to more capital, but coincidentally it also permits an exit by its current "private" shareholders.
I am feeling deja vu---all over again. I remember vividly how in 2007 I sweated the bursting of the private equity bubble. When the largest player in private equity, Blackstone, went "public" ostensibly for the purpose of accessing more capital, several of its "private" shareholders cashed out just in advance of a significant decline in the private equity market. The smart guys knew when to sell in 2007, and I don't think those of similar ilk have gotten less canny.
But are commodities a bubble like private equity---or real estate were? Maybe some commodities are, but in regard oil, I do not see it falling below $60/bbl. which is the price necessary to justify non-conventional oil production such as shale drilling ( as in the Bakken fields). In fact, oil above $110/bbl equates to $4/gallon gasoline which in turn significantly dampens demand and actually is detrimental to the oil industry. I will be vigilant, but I am sticking with the common stock of major oil companies like Shell, Chevron and Conoco which each pay a dividend that can serve as a backstop to any quick drop in price and with the preferred shares of shale oil plays like Magnum Hunter and GMX Resources. I also am sticking with natural gas transporters (natural gas has not spiked in price) as held by KYN and with the broad natural resource companies held by BCF. KYN and BCF are closed end funds that pay handsome dividends.
For those that believe that commodities are not a bubble, you may wish to buy some Xstrata, a large mining company based in London which trades thinly in the pink sheets in the United States. Glencore owns 34% of Xstrata and many speculate that one reason Glencore is going public is to facilitate a take-over of Xstrata. If that happens, it will be for a price much higher than where Xstrata is currently trading.
On an unrelated topic, one of the hottest areas of consolidation is in the hotel industry where real estate investment trusts are buying properties, funding the acquisitions with the proceeds from selling preferred stock. In 2011 alone, LaSalle Hotels (LHO-H), Pebblebrook Hotel Trust (PEB-A) and Sunstone Hotel Investors (SHO-D) have each issued new preferred shares to fund acquisitions. They all pay above 8% in dividends (not qualified for 15% tax treatment). I bought PEB-A even though it was not rated by Moody's or S&P, but I derived comfort from the fact that it pays a good dividend on its common stock. And remember, preferred dividends are paid before any can be paid to the common. Next week, Ashford Hospitality Trust is selling a new issue of preferred shares, Series E, which is priced to pay 9% at its issue price of $25. I like Ashford preferred stock (I own AHT-D) because it also pays a healthy common dividend and thus gives me comfort that the preferred dividends will be paid. If I can pick some up around $25, I will buy. What's not to like about a 9% return on shares that cannot be redeemed until 2016?
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