We Thank You for Your Continued Support
Many of our subscribers have been forwarding our commentary to their friends, family, colleagues, coworkers, and clients. We thank you for your continued support and comments and we hope that the commentary has provided some answers in these uncertain markets.
U.S. Awakening to Its Domestic Energy Potential?
In medical terms, farsightedness (hyperopia) is a common problem. You can see distant objects clearly, but objects nearby may be blurry. The definition certainly applies to the way that the U.S. Government has regarded oil. The flawed vision, however may be improving.
To its shame and detriment, America has been largely blind to oil exploitation opportunities right underfoot that could result in a million jobs for domestic workers and at the same time a huge tax windfall. Instead U.S. consumers and companies pay more than $500 billion a year to foreign governments, some of which are patently unfriendly, to import their oil.
Geologists have known about major reserves of oil and natural gas within the continental U.S. for a very long time, but the ability to access these massive energy reserves was limited in the past. These resources lie in and under rock miles below the surface and were thought to be impossible to bring to the surface economically. This has all changed with new technologies developed over the past decade.
The word is getting out to the public about the extent of these energy producing fields that are located in many areas of the country. The fields go by names like Marcellus, Utica, Bakken, Woodford, Barnett, Haynesville, Eagle Ford, Permian Basin, Bossier, Fayetteville, Piceance Basin, Niobrara, San Juan Basin, Monterrey and many others.
The obvious question is this: are they environmentally safe? Some of these fields have been producing oil and natural gas on a long-term basis for the past four decades, and have been proven to be very safe, in part because of the use of high-tech transportation and drilling processes. The technology enhancements are both making energy recovery safer and more reliable.
The good news is that domestic oil production is expanding. The U.S. currently imports less than 50 percent of its energy, down from 65 percent a few years ago. If it continues to expand domestic production, the U.S. can become quasi energy independent (meaning that the country would be able to fulfill more than 70 percent of its own usage and import the remainder from our two close neighbors, Canada and Mexico). We think it is time for the U.S. to make itself genuinely energy self-sufficient.
We are not calling for an end to exploiting economically-viable alternative energy sources, but the reality is that alternatives today only cover about 2½ percent of the country’s energy needs. We are simply saying that until alternative energy solutions become cost effective and large enough to cover a substantial portion of its usage, the U.S. should vigorously pursue the abundant resources of oil and natural gas within its own borders.
Doing this could employ about a million people from all regions of the country in good jobs, running the gamut from oil field hands, accountants, engineers, construction laborers, machine operators, lawyers, negotiators, truck drivers, and mechanics. Hundreds of thousands more would find employment in supporting industries: hotels, restaurants, retailers, and other service industries. Simultaneously, we would be doing a great deal to cut U.S. outflow of capital to other nations. Such a development would go a long way toward improving the U.S. standard of living and national security, while providing new tax revenues to the national coffers.
Europe: Panic Not! Signs of Opportunity Arising
Global investors have been sitting on the edge of their seats for months watching a high-stakes drama play out on the European financial stage. Like many professionals in the investment world, we, too, have been absorbed with the marathon spectacle that seems to have no end. Based on current events and what history has taught us, we have a number of views and suggestions.
The fears of many have already developed into outright panic. No surprise. Panic is virtually guaranteed to surface — like weeds in a not-so-well maintained garden. Fiscally speaking, the Eurozone is such a garden. There is no gardener-in-chief. There is no one powerful overseeing organization, such as the Federal Reserve in the U.S., to take charge and bring all the fear and panic talk, nay-saying, and doubting, to an end with a concrete course of action.
Very little, however, is to be gained by panic. Investors need to keep a cool head in times like these.
Events this week have stoked our optimism and should help cool-down the fear and panic; specifically, suggestions by senior European officials that a plan to recapitalize banks exists and is likely to be implemented. The announcements of potential action have already stirred a rally in world stock markets that were floundered in a bottoming funk. We believe the current up-and-down volatility will be replaced by upward moving prices in certain markets. Watch for that to happen within the next few weeks.
Europe’s banks urgently need more capital, whether it comes from individual government takeover of some banks (as France has done in the past) or by a government-guaranteed recapitalization of banks. Banks can recapitalize by selling stocks and bonds partially or fully guaranteed by governments, or, alternatively, the governments buy shares in the banks. This latter approach was used in the U.S. under the Troubled Asset Relief Program (TARP).
Action is also needed to remedy the predicament of weak, debt-ridden countries. They have to pay such high interest rates to borrow that they are unable to cover the interest and also pay off their debt. Some refinancing mechanism needs to be found, such as bonds backed by a guarantee of the European community. Most could institute spending cuts and repay debts over time if they could borrow more cheaply. Wealthier Eurozone countries, however, tend to lack faith in the resolve of ailing and profligate members — Greece, for example. If no solution is found, a partial default is inevitable, raising the possibility of the defaulting country exiting the Eurozone. Such a development, of course, would create a strong signal to other countries that there are severe consequences for not cooperating.
Europe is now considering refinancing plans, and we believe they will be implemented. The big question is when and in what order.
Recent history — namely, events in the U.S. in 2008 — provides us with a good view of the roadway ahead. The European financial system has shown clear signs of collapse. Politicians have no other option but to belatedly begin implementing a huge bailout along the lines of what we are describing here. Just before the bailout starts, expect to see substantial global stock market rallies. These rallies will look very much like the ones that occurred after the panic of 2008 subsided with stocks, some currencies, gold and commodities reaping the benefits.
Germany’s DAX Index (5 Year)
France’s CAC 40 Index (5 Year)
Stock Market Watch
During market declines, we prefer to pursue the strategy of holding large amounts of cash for clients. We do so in order to take advantage of choice opportunities that inevitably develop after a panic stage has dissipated. Such opportunities have always risen in the past and will develop in the future.
For us, at Guild Investment, the key to good performance is having the courage to buy early in the uptrend phase. We have found that by holding cash we have money available to buy when bargains prevail. In the next uptrend, some of the old favorites will rise and some new companies that have not been recognized in the past will prosper. Along these lines, the present period is revealing some high-yielding income investments that look very attractive.
For about 15 years we have closely watched high yielding companies in Canada, the U.S., and a few in other parts of the world. They meet certain criteria important to us. They may produce large amounts of oil or other commodities, they may own attractive income producing real estate assets or own government backed mortgages, and they pay out handsome dividends as they return some profits to shareholders.
These companies know how to find oil or other resources, manage income real estate, and take good care of their shareholders. They are also skilled at retaining part of their cash flow and using the funds to continue growing asset reserves. These enterprises often trade as common stocks, royalty trusts, or master limited partnerships. Or, they may be just plain income stocks that solidly grow their dividends. What they have in common is high and rising dividends and sound management.
During the course of our ongoing research, we meet in person with representatives of these companies, speak to them at conferences, and have visited many facilities and project sites over the years. We know how they produce and manage. We gain an understanding of their business model, their sales and earnings results, and the risks and rewards of their businesses.
One Thing Is Clear: Not Every Company with a High Yield Is a Good Investment.
Many companies have unsustainable dividends that are likely to shrink. These are not the companies we target. We engage in thorough research before purchasing them and we continue to monitor them at least until we sell them. Often we continue to monitor them for years after selling them and will reacquire some at a later date.
Because of their high dividends, the stocks we do target are not immune to the rises and falls of the markets. Still, they may be less volatile than comparable non-dividend paying stocks in the same industries. A strategy that has been successful for us is buying these companies when their dividend yields surpass 9 percent and then selling them when the stocks rise in price and dividends fall below a certain threshold.
Currently the sour stock market environment has created a strong list of good values with dividends of 9 percent or more.
Gold has taken a bit of a breather — some would call a tumble — after its rapid run up to $1,923 per ounce. We remain optimistic, and see further price appreciation ahead. However, we retain our advice to buy the dips and take some profits on the rallies, thus gradually recouping the cost of investment. As we have said before, riding on profits is always a wise course of action in a volatile bull market.
One strategy that many traders employ is to buy part of their position on dips toward resistance and add more once the base-building period is ending and the commodity begins to resume its uptrend.
Corn, Wheat, and Soybean Watch
In 2011, the farm belt has generally enjoyed good rain that delayed planting and harvesting. As the old saying goes, rain makes grain. We believe that crops will be bumper and the North American grain supply will grow. Indeed, wheat corn and soybean prices have recently been falling due to expectations of large U.S. and Canadian harvests in 2011.
On the demand side, grain demand on a worldwide basis continues to grow rapidly. Consumers in India, China and elsewhere demand more foodstuffs and consume much more grain per capita. At some point grains will once again become attractive for investment, and we will notify you when we see the opportunity.
We thank you for reading our newsletter and look forward to hearing from you. To request information about Guild Investment Management services and offerings please call (310) 826-8600 or email us at firstname.lastname@example.org.
|Investment||Recommended||Closed||in U.S. Dollars|
|Commodity Market Recommendations|
|30 YR Long Term|
|U.S. Treasury Bond||8/27/2010||10/20/2010||0.0%|