Risk/Reward Vol. 136
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"On a day like today/We pass the time away
Writing love letters/ In the sand."---lyrics from "Love Letters in the Sand" sung by Pat Boone
"Kick your feet up/Swing your arms up too
Move your head both ways/Like you see me do
Then jump three feet to the swinging beat
Do the Freddie/Do the Freddie"---lyrics from "Do the Freddie" by Freddie and the Dreamers
"It's like thunder, lightning
The way you love me is frightening
I'd better knock, on wood, Baby"---lyrics from "Knock on Wood" sung by Eddie Floyd
With its high court affirming Germany's participation in the Eurozone bail out (at least so far) and Federal Reserve Chairman Ben Bernanke announcing an open ended, $40billion/month round of quantitative easing (QE3), the Dow Jones Industrial Average (DJIA) shot skyward, ending the week up 287 points. The DJIA closed on Friday at 13,593, its highest point since December, 2007. The events necessary to underpin a rising stock market are coming to pass with two more left to go: 1) further Chinese stimulus and 2) resolution of the U.S. Fiscal Cliff, both of which I have discussed extensively in previous editions. Look for announcements relating to the former after next month's Chinese Communist Party Congress. The latter will not be addressed until after our elections. If these two events happen, and no major disaster occurs (e.g. Israel strikes Iran), I look for a stable to upwardly moving stock market for the remainder of the year. As the Eurozone and the US compete in a contest to determine who can debase its currency more, staying in cash looks to be the riskiest of all investment strategies no matter how the Fiscal Cliff is resolved. Resolving the Fiscal Cliff is what matters--no matter who sits in the White House. In the interim and assuming a resolution is reached, dividend paying stocks should do well as yield hungry investors seek refuge from low interest bonds. Inflation hedges such as gold and commodities should shine as well.
From 2006 to 2009, I commuted each week to Eau Claire: from Milwaukee by car; from South Haven by airplane through Minneapolis. I often "passed the time away" by marvelling at the beauty of Wisconsin's rolling landscape, especially that between Mauston and Menomonie. Little did I realized that underneath those mounds lay "love letters" in the form of Northern White "sand". These monocrystals found just below the fertile top soil are the perfect proppant or medium for fracking, that newly exploited horizontal drilling process that, since 2008, has revolutionized oil and gas production the the United States. Indeed, in the past 3 years, the number of frac sand mines (approximately 90) has doubled in Wisconsin, the Saudi Arabia of Northern White. Few sand mining companies are available for investment, but last month HiCrush Partners (HCLP) offered partnership units in its Wyeville, Wisconsin operation to the public. I read the prospectus and was impressed by the likelihood that it will exceed its projected 7.8% dividend for many years to come. But, what prompted me to buy was the fact that Kayne Anderson Capital Advisors, the saviest of all of the oil and gas investment fund managers, purchased 15% of the units.
Speaking of fracking, the year to date performance of Indianapolis based, Calumet Specialty Products, LP (CLMT) ( founded by none other than my high school classmate, Fred Fehsenfeld) is reason to "kick your feet up, and to swing your arms up too". This refiner of specialty petroleum products (plastics, cosmetic bases, crayons, ski wax, jet fuel etc.) has taken advantage of inexpensive oil and natural gas liquids emanating from the fracking fields to improve its production and profits. The shares I bought last January would have appreciated 34% if I had not sold them (for a profit) in May, and have appreciated 14% since I repurchased them in July---all the while paying an 8%+ dividend. CLMT is a good reason "to jump three feet to the swinging beat." Thank you, Mr. Fehsenfeld! In your honor, I "Do the Freddie".
In the aftermath of the 2008-2009 financial crisis, commercial real estate (CRE) was in the dumpster. As a result, banks eschewed underwriting CRE mortgages as part of their own de-leveraging. Hearing opportunity "knock", several savvy investment funds formed commercial real estate mortgage investment trusts (mREITS) as quickly as "thunder" follows "lightning." The largest and one of the most successful of these post 2008 mREITS is Starwood Property Trust formed by Barry Sternlicht of Starwood Hotels fame. Recently, STWD has been underwriting commercial mortgages in Europe to great advantage which leads me to believe it will increase its already impressive 7.4% dividend.
This week, in addition to HCLP and STWD, I added more AAPL in advance of the iPhone 5 launch and more Vanguard Natural Resources (VNR) on a secondary offering dip. I also initiated a position in a newly issued preferred stock of Annaly Capital. In anticipation of a rise in commodity prices, I bought shares in a closed end fund, BCF, which holds positions in all of the major commodity players. Frankly, I am sorry that I sold my iron ore mining stocks (CLF, RIO and BHP) two weeks ago. Proof again that timing is everything.
The stock market has performed beyond expectations since my re-entry in June, especially this week thanks to the QE3 "sugar high". Although I remain cautious and ready to exit if necessary, I must admit that today, when I think of the stock market, I channel Freddie and the Dreamers who sang:
"I'm telling you now/I'm telling you right away
I'll be staying for many a day/I'm in love with you now."
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