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THIS IS NOT INVESTMENT OR TAX ADVICE. THIS IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"But far more numerous were the herd of such,
Who thinks too little, but talks too much."---John Dryden (1631-1700)
"Oh, give me a home where the buffalo roam
Where the deer and the antelope play
Where seldom is heard a discouraging word
And the skies are not cloudy all day"---"Home on the Range"
FBN Reporter: " Mr. Secretary, is there a risk that the United States could lose its AAA credit rating--yes or no?"
Timothy Geithner: "No risk of that, no risk." -- April, 2011
"There is no chance that the major countries of Europe will let their institutions be at risk in the eyes of the market. There is not a chance.---There is no chance of that."---Timothy Geithner on CNBC, September 14, 2011
"I'm as corny as Kansas in August, high as a flag on the Fourth of July
If you'll excuse an expression I use, I'm in love , I'm in love, I'm in love , I'm in love, I'm in love with a wonderful guy."---Nellie Forbush, South Pacific
Was that a herd of bulls that passed me while I sat on the sidelines this week? With the Dow experiencing its second best week of the year, it sure looked like it. Boy, would that be good news! As my long time readers know, all I want is some stability. I left the market 6 weeks ago in anticipation of a substantial market drop arising from the threat of a US default and a credit downgrade---a drop that did occur. If I could be assured that we are now in reasonably safe waters (not subject to an 8% drop in a matter of days), I would gladly re-enter. Nothing would make me happier than re-acquiring my cadre of lovely dividend payers.
Now that the dust has settled, let's examine what has happened.
One troubling fact is that the market has acted like a herd--literally. During August and September, stocks have moved up and down in lockstep or "correlated" to an extent not experienced since the the October, 1987 crash. In other words, stocks have not traded on the strength of each's fundamentals---demonstrably bad stocks have gone up or down at the same time and in the same proportion as excellent stocks. All have traded in sync (which is usually indicative of a bear market)--and this week upwardly so in response to perceived good news from Europe. This week, there was very little news (and none of it good) from the US or China.
Upon reflection, was the news from Europe really positive?
Does anyone really believe that Secretary Geithner is a good prognosticator? I don't. Yet, the markets increased immediately after his encouraging words (see above) spoken to Cramer on Wednesday morning. Moreover, is it actually good news that on Thursday the world's central banks had to guarantee an unlimited supply of dollars to the major banks of Europe because they were unable to attract dollar deposits on their own? (Note: As discussed in last week's edition, many US money market funds are now refusing to make deposits of dollars into European banks.) This bespeaks continued and deepening weakness to me; yet, on Thursday, the stock market skyrocketed, the Euro appreciated and gold dropped. (I used the occasion to buy more GLD and to add to my Euro short, EUO.) Lastly, did the mixed messages from the G-7 meetings in Poland warrant a 76 point rise in the Dow on Friday? If you think so, please enlighten me. Are the markets refusing to hear "...a discouraging word" about anything?
OK, OK. I am the first to admit that no one is smarter than Mr. Market (and especially not a novice like me)---but c'mon does any of what happened this week make sense? Maybe it does, and it is just beyond my ken. If so, and if the market rises--or just remains flat-- for the next week or so, I soon will be repurchasing my dividend paying "lovelies"---and happily so. Lord knows that I have the liquidity, and my trigger finger is itching.
But-- my brain believes and my gut feels that what I saw this week was not a herd of bulls confidently charging toward prosperity, but a herd of overly optimistic buffaloes blindly charging toward a cliff. Time will tell.
When I do re-enter, I will not hesitate to allocate a significant portion to one of my favorite sectors---oil and gas. On the natural gas front, the price has stabilized at $4/million BTU, and any company that has made money at this level should do well into the future. I like storage facility and pipeline master limited partnerships such as Kinder Morgan Partners (KMP), Plains (PAA), ETP, Boardwalk, etc. (These may not be appropriate for tax deferred retirement accounts)
On the oil front, "big" international oil players such as Shell, Chevron and Conoco price off of the Brent benchmark ($110/bbl as of Friday) which has remained consistent and relatively high as a result of the lessened supply from Libya. These "big" boys should be able to maintain acceptable levels of dividends and will be repurchased.
The smaller, US domestic oil exploration plays are hostage to the more volatile WTI pricing benchmark ($88/bbl as of Friday) which has been depressed because of the glut of oil in Cushing, OK which is the storage hub at which WTI is priced. This glut should be eased over time as new pipelines are built to handle the huge increase in domestic production occasioned by the explosion of horizontal drilling (fracking) in shale formations. On the domestic side, I like the dividends that come from oil trusts (which do not hold drilling rights per se but hold royalty interests from active oil fields). I will re-purchase Sabine Trust (SBR, paying 7.5%) which holds royalties from traditional oil fields, and will initiate positions in two new trusts sponsored by a horizontal driller, Sandridge: the Perminan (PER) and the Mississippian (SDT). Sandridge has found success in applying horizontal technology in what were believed to be exhausted traditional oil fields. This success has come at less cost in part because the pipelines needed to transport the oil are already in place. At current prices, each of these pays over 10% in dividends.
Overlooked in the cacophony of Euro news this week was the announcement from the USDA that due to the hot and dry weather this summer, corn harvests will be below expectation--well below that needed to meet demand. Farmers are reportedly re-allocating more of next year's acreage to corn. This means that fertilizer will be in demand, especially ammonia and urea ammonium nitrate which are nitrogen based products of particular use in corn production. In this space, "I'm in love, I'm in love, I'm in love, I'm in love, I'm in love" with CVR Partners (UAN), a limited partnership with production facilities centrally located in Kansas. At current prices, it pays a 6+% dividend. Remember-- as a partnership, CVR may not be appropriate for a 401k or IRA.
OK, bulls (or buffaloes) bring on the week!!! I am ready---either way.
Remember past editions are available at http://riskrewardblog.blogspot.com
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