March 26, 2017 Petro Politics

Risk/Reward Vol. 346

THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN.

Mr. Market expressed displeasure at President Trump's inability to get health care reform passed.  Both the major indices dropped 1.5% for the week.  The most negative day was Tuesday when the White House hinted that if health care reform were not passed, tax reform was at risk.  The S&P 500 tumbled 1.2% breaking a string of 109 trading days without a drop of 1% or more.  A short lived flight to safety ensued with the yield on the US Ten Treasury Bond ("10Year") dropping below 2.4% for part of Wednesday.  Despite this dip (which usually has a positive impact on interest rate sensitive securities), many of my favorites also sold off.  I took the opportunity to purchase several more positions.  By week's end, the yield on the 10Year stabilized around 2.4%.  And the prices of my favorites (preferred stock closed end funds) re-correlated and rebounded.  This was predictable, but pleasing nevertheless. 

Although the vast majority of my investments/trades are in interest rate sensitive securities (preferred stock, leveraged closed end funds, REIT's, etc.), I remain fascinated by the oil patch.  Less so from an investment perspective and more so as a study in what Bismarck termed "realpolitik".  Petro-politics have dominated the world ever since "Peak Oil" was first predicted in the 1970's.  Remember the oil shortages of 1973?  How about 55 mph on all interstate highways to reduce gasoline consumption?  Or that the first Iraqi war was precipitated by Saddam's move to capture Kuwait's oil fields.  Does anyone believe that we would feign friendship with Saudi Arabia or be so heavily involved in the Middle East were it not for oil?  We need to become energy independent. That is why innovation such as fracking is so important.  Saudi Arabia recognized the threat and started a price war in 2015.  US production fell 5.6%, but the price war also forced US drillers to become more efficient.  So when Saudi Arabia and other OPEC nations recently agreed to limit production in a desperate attempt to raise prices again, US drillers ramped up.  We will be producing more than 9million bbls/day by year end which is more than half our need.  We are even exporting 1million bbls/day something that was prohibited for more than 40 years preceding the lifting of the ban in 2015.  Add to that over 4million bbl/day imported from Canada and Mexico (and still rising) and we are very near to North American energy independence.  Once that is reached you will see a decidedly different approach to the Middle East.   

My favorite plays in the oil patch remain pipelines.  I like two funds in that space KYN and JMF.  I made significant profits on these between December 2016 and March, 2017 and they are looking tempting again.  Another tempting stock is Hi Crush (HCLP).  This is the fracking sand miner that I bought and sold several times a few years ago.  When the Saudi price war began, sand miners were hit very hard,  Indeed, HCLP (which at one time paid a double digit dividend) was forced to suspend all distributions.  Understandably, the stock plummeted.  With the resurgence of domestic production and the development of new fracking techniques that use more sand per well, HCLP is set to resume distributions.  Recently the stock price again tumbled due to an unexpected secondary stock offering.  At the current low price, the temptation to buy proved irresistible.  I am starting small and slow, but I am starting.