And We’re Off……..
9 Days Into 2015 And Here’s How We Should Be Making Money For The
Remaining 356.
For those first few days of the new year it wasn’t looking
pretty. The S&P 500, already slipping a bit on the closing day of 2014 was
looking like it was all over.
And few investors really were panicked – there were a great
number of investors that were thinking maybe something is wrong. I say that
from my interactions with friends, family and neighbors that know I’m in the
business of prognosticating in which I’ve been pebbled with queries that were
coming with concern that perhaps they might need to do something before its too
late.
And in their eyes I could see plans running in their minds
ranging from selling everything and loading up on canned goods and junk silver –
to just sitting on more cash.
So after discussing how I see things playing out in both the
near term and for the coming year – I thought that it would be a helpful idea
to write some of it down to start my ongoing missives on the markets.
A Well-Oiled Market
No market or economy does well in the near term with drastic
and dramatic moves in any major segment. And with Oil prices down over 50% in
just 6 months – it has had a big impact on everything in most markets.
Now in a pending issue, I’ll go into how I see oil playing
out and how each and every one of my oil-related companies are going to fare –
for now know that I see oil prices remaining lower unless an unforeseen dramatic
move occurs such as a true action from OPEC or the easing of US export
restrictions comes forth.
But the key for now is that the quick plunge in oil has
upset a lot of companies’ budgeting and planning from producers to consumers
and everyone in the middle.
This upheaval means that many companies that were set to
profit from or at least deal with prices like we were seeing last summer are
now having to throw out their plans and start all over.
Producers that were hedged like my one and only US producer,
Vanguard Natural Resources (VNR) were set up to deal with lower prices. In fact
as I wrote in Lifetime Income Report, the company changed how it did business
back in 2010 in preparation for the recent price moves.
It began to shift its focus from being a primarily oil with
some gas to being primarily gas with some oil. And it began to aggressively
hedge its production of gas and oil by various transactions that for much of
last year in particular cost them from making more money with the then much
higher oil prices.
But now as many of its peers have been slaughtered in the
market, while Vanguard is down a lot from its recent highs – from the trough on
December 15 to date it’s recovered some 18.2% and so far this year – it’s up
some 5.1%.
Moreover, while I do see that it should reduce some of its
hefty payout – due to its hedging, it will still be able to rake in lots and
lots of cash this year and for the following years to support a very nice
dividend.
But the companies that haven’t hedged as well – this year
looks dire. And it’s not just passthroughs including MLPs – but the big oils as
well. In fact, I’ve read a recent review of the industry this week that
suggests that cashflows from their operations will be short some 24% on average
than what they will need to pay for basic capital maintenance and their
dividends.
That’s going to be a problem.
Meanwhile, companies that pipe and process should be doing
fine. And that will continue to work out well for the collection of companies
that I have that continue to do just that including Enterprise Product Partners
(EPD) Sunoco Logistics (SXL) and Kinder Morgan (KMI).
Now, these are merely toll takers that do not have to worry
about the price of what gets pumped through. But there still is the risk that
if producers stop producing, then there may well be less being piped. For now,
that’s not happening as even the most challenged of non-hedged producers need
cash to keep their businesses running even at a loss near term.
But there are some major beneficiaries to the oil market.
Sure transports including my favorite Airline, American Airlines Group (AAL)
which is up some 77.71% over the last 365 days comes to mind.
But also retailers should fare well given that consumers in
the US have suddenly a lot of extra spending cash that isn’t being pumped into their
cars’ tanks to spend elsewhere.
That’s why we’re seeing even the more challenged of
retailers including JC Penny stepping up with their recovery.
And as an aside, I’ve been following this company for a
while and for those of you that would like to take a little flyer on a minibond
of JC Penny – look at the company’s minibond trading under the symbol KTP which
is now around $18.20 which will pay you twice a year for a yield of around
10.50% with the next payout set for March 1.
Beyond US companies – there are whole economies that should
be getting a nice boost from lower energy costs. One of my favorites that I’ve
been writing about more recently is Indonesia which went from being an exported
to an importer some years ago.
This is a great economy to invest in before the cheaper oil
story, as electoral stability is there and it has a well-educated, younger
population eager to produce and consume.
My easy to buy play on this continues to be the Aberdeen
Indonesia Fund (IF) which is paying a cumulative annual dividend of just shy of
7% and is trading at a discount to the fund’s actual market value by more than
10%.
Bonds, Still Better
With all of the upheavals in the stock markets as well as
the political strife in Europe, The globe’s serious money has been pouring into
US Treasury bonds. The 10 year is down to 1.9% in yield which makes much of the
rest of the bond market even more compelling to buy.
And with the concerns in Europe over the state of the euro –
the dollar has been on a tear – heading back up where it should be. This sets
up even more demand as investors around the globe will seek to cash in on a
healthy dollar or at minimum hedge their portfolios with more dollars.
And those dollars start being put to work in bonds.
Treasuries might be fine for trading or for central banks –
but for us, I continue to like US dollar corporate bonds from non-oil related
companies including my collection of minibonds such as the Solar Capital
(SLRA).
And for municipal bonds – last year was great for munis and
so far in the first 9 days – they continue to be positive.
With state’s finances increasingly more flush, munis should
continue to gain in credibility. And with yields still well above US Treasury
rates and taxes remaining ever higher – they will make more and more sense to
buy.
My three favorite muni closed-end funds are the way to go.
They include the AllianceBernstein (AFB), Blackrock (BLE) and Nuveen (NQU).
Together they pay a taxable equivalent around 10% and still trade at a
collective discount making for great buys right now.
What I Really Want Is
Real Estate
Last Christmas I watched “A Charlie Brown Christmas” and I
always enjoy the scene in which Lucy van Pelt tells Charlie Brown why she’s not
so high on Christmas. Sure, she gets toys and stuff – but not what she really
wants….real estate.
Real estate should be exactly what you should want for the
rest of the 356 days of the year as well.
REITs in the US turned in a return last year of some 29% and
so far in our first 9 days they’re up some 4.63%.
The two areas that I continue to focus on in particular
include commercial real estate – where in the US we continue to see progress
and even in the EU – despite all of the challenges in their economies –
commercial real estate investments are well in demand. And the other area is
rental residential real estate.
Households renting their primary residences is becoming the
new norm in the US. Demand is rising and even with new construction being done –
the vacancy rate in the US is only 4.2% - the lowest since 2000.
Rents keep rising with many markets seeing climbs as high as
7 to over 9% with the national average of nearly 4% last year.
And the average rent now is sitting at $1,124 per month –
which is seen to be the highest ever since the residential real estate industry
tracking company REIS (REIS) began to track rent rates.
On the commercial real estate side – I continue to love WP
Carey (WPC) with its continuously rising dividend yield of over 5%. The company
does business like no other. It operates as a sale lease back company.
This means that it buys properties from major corporations
and in turn leases the properties right back to them. The companies get
financial and other benefits from the deals – and WP Carey gets properties with
locked in clients that pay for all of the expenses of the properties.
And on the residential side – there’s my newer favorite
Independence Realty Trust (IRT). This REIT has a very stable portfolio of
mid-level apartment buildings in well-defended markets around the US.
Nice dividend and it is well capitalized and makes for a
great buy with its yield running at 7.7%.
Stock Up?
Last year, anybody in the general stock market that just put
cash into the S&P 500 got lucky if they held on despite some big dips to get
a return of 13%.
That’s better than many actively managed portfolios which
got the attention of many short-sighted managers and investors.
Managers got edgy later last year and piled into the general
market index helping to propel the S&P higher. They did it as fears of
investors pulling their money out and doing the same thing was coming into
fashion.
And the same thing is plaguing the market so far in the
first 9 days. Investors (both professional and amateur) kept betting on the
general market and that’s one of the reasons for the dramatic ups and downs we’ve
had so far. And I see that trend continuing throughout this year.
With the economy in good shape, lower interest rates
remaining for the year, employment better and consumer spending coming back – I
see the potential for the S&P to turn in a positive number 356 days from
now.
But that positive will not come without similar
gut-wrenching volatile times along the way. And it will be during those times
that way too many investors will panic and sell at the absolutely wrong times.
The key for me for 2015 is just like for 2014 and all the
way back to the ‘80s – the best way to make money through bull and bear markets
with the lesser of risks is to focus on bigger dividends.
And as I’ve also written, one of the core parts of dividend
investing for stable returns includes my preferred stocks.
For if you plot preferred stocks against the general stock
market – you’ll see that not only do they turn in consistent returns – but they
remain a whole lot less volatile along the way.
And while I have plenty of individual preferreds – an easy
way to start is with my favorite closed-end fund – the Flaherty & Crumrine
Preferred Securities Income Fund (FFC).
This owns a nice collection of good paying preferreds that
combined dividend yield of over 8% which is paid monthly as well.
That’s my lay of the land for the next 356 days. But in the
coming days, look for more specific write ups in this website.
And if you have a comment or a query – please email me
directly at neil@neilgeorge.com.
Thanks for reading.
All my best,
- Neil George
The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit. Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at neilgeorge.com or at 01-703-679-7180.
