Conflicts between consumers, central banks, and traders
This is not an OT note, but instead a discussion about how to invest when investing is dead in the age of computerized, model-based trading which leads to rapid, wild price movements.
The central banks are all printing money (so to speak) trying to keep the short rates low to encourage commerce and improving economies that will create jobs and avoid discontent and civil strife (witness riots in Greece, France, England…). The "value" of the major currencies are decreasing from such dilution, and in fact that is one of the traditional ways that countries reduce debt--by paying the borrowers back with inflated currency.
In reaction, institutions and traders alike are moving out of debt instruments, bonds, treasuries, etc.,. Where are they redeploying funds taken from bonds (which have started to drive up the long rates on bonds and mortgages)? Ordinary corporate stock investments (common shares) are too treacherous while the economies of Western nations remain poor, so funds are going into tangible commodities such as gold, copper, silver, oil, and agricultural goods.
Consumers, who as a lot are in bad shape with house debt, lower wages for new jobs, and unemployment are having to pay more for less. Paying more for gasoline and food means there is less money for other goods, and a general depression of economic activity.
Higher oil prices are bid there at th margin by traders, but the more massive market from users is too weak to sustain oil much over $90. Demand is rising in Asia, which does serve to support higher prices at the margin. The net result id that while oil pricing will bounce around, it will tend to stay high while Asian demand is growing. India and China are creating billions of new users.
The net result of these forces will be to prolong weak economies in the West and Japan. Fed Gov borrowing is coming to a natural end as prospective buyers will demand substantially higher interest rates that will accelerate debt levels, and so borrowing will have to be curtailed.
I'm open to ideas on how to "invest" in such troubled economic times. The best investment I continue to see is Linn, with its five-year hedging programs, and its expansion of production at costs far below the average E&P can manage. For example, the Michigan NG properties are able to produce in the dollar range of costs, so Linn can be profitable with "low" gas prices. Costs for producing condensate at the GW and oil from the Permian basin are low enough to be profitable well below current oil prices ( I suspect that with $60 oil Linn would do just fine until prices turn up again).
Low end-user demand for NG and oil create a buyers market as the weak producers sell out to better financed, strong buyers. I believe that the equity Linn just raised precisely represents this model.
wOULD NOT SELL MY lINN for anything! With OPEC BEING LED BY iRAN next year, anything goes. Omg! Take your gold, I will take an American company that grows distributions! PS. I also have some gold that I bought 3 years ago when Obama came into the race.
I have no in depth knowledge of these two recently recommended MLPs by Barrons (primarily because they were sector laggards that ought to catch up. Offer a few general thoughts about thes and other pipeline/processor MLPs.
In contrast to Line which is organized as an LLC, these MLPs havr General Partners as a separate management organization that is poised to suck off their profits when they hit a threshold in earnings. KMP is now in this boat, so its ability grow profit is now curtailed, and many retail unit holders appear to be clueless.
The pipeline MLPs are generally fully valued, but with continuation of low NG prices are probably overvalued for a couple of reasons.
First, with inflation looming, they will not be able to fully pass along their infrastructure cost to weal producers, so their income will not be able to keep up with inflation. Line, by contrast, has a lower cot and maintenance basis that it can better manage to keep up with inflation.
Second, because the pipeline MLPs are now paying in the range of 5-6.5% yield, if they cannot keep up with inflation and higher interest rates, you get a poor yield, and the prices of their units will get hit; so you get the bad combination of low yield and capital loss on units (shares) held.
Back to the issue of having a separate GP as the company's boss instead of the company managing itself with direct fiduciary responsibility--I think that stinks. The GP has a fiduciary responsibility to manage its enterprise for its owners, and that entails conflicts with the MLP unit owners. For example, it has the Incentive Distribution Rights (IDR) arrangement that limits the profitability of the MLP it controls. A company should be able to run itself to advantage its owners, instead of being run to be bled by others.
Finally, the pipeline MLPs are locked in to the particular land where they operate. If the EPA decides that the gas producers are damaging the ecology in their area of operations and so must reduce output are stop output, the pipeline cannot pick up sticks and move elsewhere--they get crushed. The Marcellus shale production is under threat by local politicians, and environmentalists, with EPA in a study mode.
There are many conflicting influences that effect investments. However I feel that in troubled times you look at basics of investment in a business.ie 1 Low cost of production to survive low market prices. 2 Ability to grow with a product whose consumption is not totally discresionary. 3.Quality of management. 4.Dividend yield 5.Positive cashflow from operations. If the company can satisfy the above it will outperform in good times. The above is a simplistic set of criteria I adopt in turbulent times, which Jack covers in his post.