THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Listening to the gurus on Squawk Box (Buffett, Zell and Dalio) this week and seeing the market's continued, albeit bumpy, vitality in the face of international troubles, it appears that, absent an upheaval in Saudi Arabia, oil trading on a sustained basis above $110/bbl or a disruption in supply lines, 2011 should be a good year for equities. With the vast majority of my equities having the safety net of a good dividend yield, I feel ok----for now. But, if you listened carefully to the gurus, you noted a less rosy prognostication for late 2011 and 2012 when inflationary pressures and a weak dollar could spell trouble for companies directly or indirectly dependent on US consumer discretionary spending.
Let's talk a moment about inflation. As brilliantly described by Ray Dalio (founder of one of the world's largest hedge funds), inflation is the inevitable result of our debt situation. QE2 (quantitative easing) is nothing more than expanding the money supply to refinance debt in cheaper dollars. Face it folks, that is what we are doing. It may be the only way we can "kite" our crushing debt, but it is eroding the value of the dollar. Moreover, the erosion of the dollar's value (absolutely or in comparison to other currencies) will ultimately detract from the dollar's role as the "world's currency" (virtually all international transactions, more particularly oil transactions, are effected in dollars). As the dollar ceases to be the world's "coin of the realm", its value will fall even greater. Dalio places as much a 25% of the dollar's current value on its international role as the safe haven currency. What can an individual investor do to overcome inflation?
First, over the next several months, I am buying gold, the most tried and true hedge on inflation, on dips. I buy gold mining stocks and the gold etf, GLD. I may even prevail on my bride to allow me to invade our 25% cash position and to convert some of it into gold. In times past, people of a certain age (such as myself) liked a bit of inflation because it usually resulted in a spike in U.S. treasury rates which in turn impacted bank cd's. My mother believes the greatest president of the 20th century was Jimmy Carter because when my dad was my age (1981) they purchased long term, insured cd's paying 16-18%!!! But, thanks to the Fed's buying of treasuries and its decision to keep the discount rate low (QE2), "treasuries" are no place for me to be now or in the near future.
Second, I am continuing to look for opportunities in oil, my favorite commodity and another hedge against inflation. I have long been long on oil (e.g. BP, Conoco-Phillips, Chevron, Permian Basin (PBT), San Juan Basin( SJT), Prudhoe Bay (BPT), Shell, etc.). Recently, I have been fascinated by the prospects of increased domestic production. See the second of two attached articles. In particular, I like the Bakken oil fields in North Dakota. Several weeks ago, I invested in Enerplus (ERF) a former Canadian royalty trust that trades flat but pays a 6.8% qualified dividend and which continues to invest in Bakken assets. As part of my investigation, I have studied companies that are leaders in "non conventional" technology such as that used in the Bakken fields. I happened upon Weatherford, Intl (WFT)., a leading manufacturer of fracturing and horizontal drilling equipment. This week it uncovered an accounting snafu that sent its shares tumbling. Normally, I stay away from such situations, but the confluence of study and opportunity was too much to resist. I bought some on Thursday. On the international front, I am still long in Seadrill (SDRL), an owner of off shore drilling rigs, which continues to pay handsome dividends. Thank you John Fredriksen! I did sell another Fredriksen company for a profit, Knightsbridge Transport, on Suez fears.
Third, I am starting to study coal, both metallurgical and thermal. Read the first attached article which is the type of background story that piques my desire for deeper study. There are a variety of ways to play this--mining, transportation, etc.
Coulda, woulda, shoulda. This week B&G Foods (BGS) spiked to $18 while carrying a 5% dividend. I first looked at this company in June and again in September when it was trading at $10 and decided to wait for a dip. By waiting, I became a dipsh#t.
Ford fell below $15 and I bought more. I hope not regretfully. Also, note that REITS of all types are improving. I have long been in "agency" REITS like NLY (buys government agency, FNMA, guaranteed mortgages) which pays a double digit dividend and will continue to do so as long as short term interest rates are artificially depressed. I also like CIM which is not an "agency" REIT, but which prospers from the difference between short term borrowing rates and long term mortgage rates. For more traditional REITS, I like preferred shares (NRFpA, NRFpB, FRpJ). I may buy some health care REIT preferreds because of a recent change in the tax laws that allows them to operate long term care facilities in addition to collecting rents. A lot of acquistions and mergers are happening in this space.
I outlined this piece at lunch on Friday after reading the attached articles in the FT and IBD. That said anyone who listened to Cramer last night would swear that I merely plagiarized his show. He endorsed WFT and spent a great deal of time on coal, especially Walter Energy (WLT). I do like the fellow, but this is creepy. If I start looking like Comrade Lenin, let me know. BOOYAH
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