Risk/Reward Vol. 121
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Your European son is gone/You'd better say so long
Your clown's bid you goodbye"---lyrics from "European Son" by The Velvet Underground
"Hello, How are you?
Have you been alright/Through all those lonely nights
That's what I'd say/I'd tell you everything
If you'd pick up that telephone, yeah"---lyrics from "Telephone Line" by Electric Light Orchestra
"Spark and it's like gasoline/I start pumping like a machine
My heart only runs on supreme/So hot, give me your gasoline, yeah"---lyrics from "Gasoline" by Britney Spears
"I loaded sixteen tons of number nine coal
And the straw boss said "Well a-bless my soul"---lyrics from "Sixteen Tons" by Tennessee Ernie Ford
To no one's surprise, Greece has been a head fake all along. The problem is much larger. Indeed, all of the Eurozone, led by Spain, is on the brink of imploding due to the weight of bloated sovereign debt, an undercapitalized, incestuous banking system and the flight of funds out of euros and into the safe havens of dollars and pounds. In response, Eurozone leaders only bicker and dither as their prodigal "European son"--the euro-- marches toward oblivion. Bidding that "clown goodbye" is not beyond the realm of possibility. As a result of this Eurozone mess and a slowing economy in China, May ended as the worst month in the market since 2010. And with a lousy jobs report on Friday, June is starting even worse. All the stock market gains of 2012 have now been erased. Whew! Am I glad to be in cash!
Last week, one reader commented that my reports are becoming a broken record of Euro-bashing and bad news. He expressed interest in learning what I intend to buy once the market stabilizes. Fair enough.
First, I am staying in the US. Even if a Euro fix is instituted, it will take a long time to implement. Second, unlike last winter's re-entry, I will likely shy away from financials. There is just too much uncertainty in that arena and frankly, JPMorgan's recent blunder has shaken my confidence in even the best of that breed.
As always, I will look to dividend payers with steady cash flow. Telecoms fit this bill nicely, providing a safe source of income "through the lonely nights" that may lie ahead. So, I intend to "pick up (some) telephone" stocks. AT&T (T) and Verizon (VZ) have remained market darlings recently, and thus their yields are not attractive to me. On the other hand, legacy land line companies like Century Link (CTL), Windstream (WIN) and Frontier Communications (FTR) have fallen with the market in general. As a consequence, they carry outsized dividends and present excellent buying opportunities. My research leads me to prefer CTL and FTR over WIN. I will open positions once the stock market starts responding to traditional investment criteria (e.g. individual company profitability) as opposed to Eurozone headlines.
Assuming that the price of oil stays at or above $70/bbl (which justifies domestic production) and the price of natural gas continues to move upward from its recent low of $2/mmBTU, I will invest in oil and gas which have taken a beating in recent days. I believe that once the market stabilizes, this sector will "spark like gasoline and start pumping profits like a machine." I like Conoco (COP) since its recent disposition of several non-core assets. It has an excellent balance sheet and pays a good dividend. I also like the high yielding preferred stock of Magnum Hunter (MHRpD) which is a small but aggressive company involved in both oil and gas exploration in the most promising areas in the US. I like Linn Energy (LINE) in the natural gas exploration space, and I like Energy Transport Partners (ETP) in the natural gas and oil transport and storage space. All of these stocks are currently oversold and present excellent opportunities in a more stable environment.
Last, I am intrigued by the most battered of all sectors---coal. Although the abundance of natural gas (thanks to fracking) has made it the electrical power generating fuel of choice, coal still generates 40% of all electricity in this country and is used extensively throughout the world for this purpose. Companies that produce it will be with us for years to come, and some pay very handsome returns. I am a fan of Alliance Resource Partners (ARLP).
And so I end where I began---with Europe, the fate of which will determine the time of my re-entry. Lest we forget, Europe is named after Europa, a Phoenician princess abducted by the Greek god Zeus. Let us all hope she does not morph into another Electric Light Orchestra lyric----(An) "Evil Woman".
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