Since the storm this week, I’ve seen a recurring, disturbing bit of advice surface on those cable news investment shows. The pundits are hard at work prognosticating on what is likely to spike in the aftermath of Hurricane Sandy. They are peddling a belief that this natural disaster will produce shortages -- and that those shortages can be exploited for a short-term windfall.
But this is a mistake.
In fact, this is one of the most persistent errors made by investors during such a period. In the medium term, however, there is sometimes a consequence of a hurricane or other disaster that translates into genuine opportunity. There is certainly one this time. And I’ll talk about how to position for that in a moment.
First, we need to explore what you as an investor should not do right now.
The Myth of Exploiting Shortages
Given all the images on the news, you might think an investor could profit from buying near-month futures -- or exchange-traded funds (ETFs) that deal with them -- that track gasoline, oil, or even timber in the wake of the hurricane.
I hope you haven’t done that. If you did, you would already be in the red.
Authorities opened the Port of New York and New Jersey this morning to allow oil products into the besieged region. Gasoline lines swelled, augmented by continued power shortages affecting the ability to pump. Well, wouldn’t that be a good reason to expect rising prices? After all, it would seem to be a textbook case of supply and demand pushing prices up.
The price of gasoline futures contracts did spike in the days before the storm hit, with NYMEX futures contracts for RBOB (Reformulated Blendstock for Oxygenate Blending, the gasoline futures contract traded in New York) jumping almost 20 cents a gallon at one point.
But they did not stay there.
The futures stabilized, and the ETFs following them actually started to retreat. More of that downward movement is expected today, since -- in the current environment -- nobody really wants to be left holding inventory they cannot move over the weekend. That is about as unprofitable game of "market musical chairs" as there is.
Crude oil and timber futures followed suit. Yes, gasoline, oil, and timber are needed and, yes, the supply is in question. Unfortunately, that is not where the problem lies -- at least not the problem you can exploit for profits.
This is not about lack of supply. It is about a lack of logistics.
The Almost Incalculable Value of Logistics
Oil prices have leveled for one simple reason. There is no need to extract additional volume if there is no place to store it, or no clear access to transport it to refiners. The storm’s aftermath not only impacts the retail or end-user’s side, but it also pressures the entire upstream/downstream process.
Timber futures tanked. That was in direct contrast to comments widely circulating, that the need to repair extensive damage would produce a run on available lumber. Of course, that will be true in the long run. While there will likely be a pop at some point, now -- in the shadow of the storm -- is not it.
The same inventory, storage, and transmission problems attending oil and gasoline are also evident here. The value of inventory is significantly discounted if you cannot get it to where it is needed.
That’s the importance of logistics.
OK, so how should an investor play this? If the problem is logistics, how do you position yourself to benefit?
Two Ways to Profit
First, this is the midstream consideration. As I’ve written before, the midstream is the component that provides the services connecting the fields (upstream) with refineries and processors, wholesale distribution, and direct market sales (downstream).
Within the midstream segment resides components in gathering, transport (pipelines, both feeder and trunk), storage, terminals, initial processing, separation, and fractionating (all designed to separate the main volume flow from value-added products, on the one hand, or waste, tailings, and the like on the other).
There is opportunity in this sector. I continue to advise my Energy Inner Circle subscribers on some of the best moves. A rising number of these are equity issues from Master Limited Partnerships (MLPs), which we like so much. Many of them combine a good return with well above-average dividends -- I call that the "sweet spot" of energy investing.
One of my favorite shares has been the JPMorgan Alerian MLP Index ETN (AMJ). This is an exchange-traded note that allows average investors to partake in the profits from a number of pipeline systems controlled by MLPs. We have also moved on other specific midstream servicers, and they are all in the black, despite recent gyrations and instability.
Second, there’s the developing -- potentially very profitable -- logistics play.
There are about 600 stocks on my "trigger list" and "tasking list." These are energy sector companies I follow and analyze but are not yet part of investment recommendations. Of the two lists, my "trigger" stocks are those closest to action. Each stock there has already hit several indicators that make it a prime candidate for recommendation. And it is here that the next move in midstreams is under way.
To date, it has been physical facilities that have been the primary midstream focus -- pipelines, storage, processing locations. However, Sandy is the latest lesson about the need for something else -- logistics in its purest sense.
Two companies on the trigger list provide those logistics. These companies offer the planning, equipment, and approaches to combat bottlenecks, the single biggest problem in moving product from field to refinery to market.
The packaging of services to increase efficiency in the transport, storage, and distribution of oil, gas, and even electricity (of the three the one with the most pronounced storage problem) was once put on the back burner, with ideas about smart grids and just-in-time management. It is now becoming a major need. Indeed, I believe it to be the next major advance in midstreams. Both of these companies have been rising in value over the past several months, by 7% and 11% in the last week alone, as the New York area wrestled with Sandy. When it’s time to move on these two stocks, my subscribers will be the first to know.
This is likely to be a major profit center moving forward. The need certainly will not be going away. In fact, word now is that a Nor’easter is barreling down the Eastern seaboard. It may reach some of the same areas hit by Sandy just in time for Election Day.