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Avi Morris became interested in stocks while in high school when he started an investment club. It made him a few bucks and his interest in stocks continued. Over the years, Avi earned a portfolio between savings
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Very Smart Investing
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  • Gold Glitters at Record Levels
    Gold has been a store of wealth since the beginning of history.  Today that is recognized in Asia and Latin America (where money is flowing) but to a lesser degree in the US.

    The price of gold has had an impressive rise over the last 35 years (after price supports were lifted), growing at a compounded annual growth rate of 6%.  But it's growth has been uneven as with all commodities.  The spike up in the early 1980s is exceptional, relating to a terrible recession along with high unemployment and high inflation rates.  After falling to the 300s it has risen to the 1350s today, shown below.

    Gold prices:

    1975___$160
    1980____615
    1985____368
    1990____383
    1995____383
    2000____279
    2005____444
    2010___1290
    Today__1344


    In recent years the transfer of wealth geographically has fueled increasing demand for gold.  Asia, in particular, has a majority of the world's population with big population countries such as China and India.  Their wealthy investors, along with governments, invest in gold because it is viewed as a store of wealth, safe haven investment and for capital appreciation.  This transfer of wealth is an important factor for the rise in gold during this decade.

    There are many ways to invest in gold besides buying commodity futures.  One simple way is to buy GLD, an ETF that tracks the price of gold.  There is no hassle associated with margin requirements or expiring monthly contracts.  The leading and oldest fund tracking gold is GLD.  Its growth in recent years has been outstanding especially through the financial crisis and the resulting recession.  Even though it does not pay dividends, few stocks can match this performance and even fewer are at record levels.

    GLD:

    Dec 30, 2005__$51
    Dec 29, 2006___63
    Dec 31, 2007___82
    Dec 31, 2008___86
    Dec 31, 2009__107
    Oct 8, 2010 ___131


    Another way to participate in rising gold prices is to purchase stock in major companies that mine and process gold.  While not replicating gold prices directly, these companies will prosper with rising gold prices.

    I first heard about gold as investment many years ago, but didn't take it seriously.  At that time, it was based on investing 5-10% of a portfolio in gold primarily as a hedge.  That advice remains valid today, although aggressive gold bulls might raise the percentage after its price appreciation.  Growth of over 4 times in the last decade to new record levels is impressive when popular stock averages have not been profitable.  Dow is up a meager 3% and the S&P 500 is lower.

    Because gold is a commodity there will be high volatility over the short term.  10% price swings need to be tolerated because they are common.  But long term investors will ride out these swings with the overriding thought that gold's value is growing (as with growth stocks).  Replicating 4 times growth in the last 10 years would take gold to $5400, difficult for most to fathom.  But annual increases of 5-10% is a more realistic expectation.  In addition, gold has high defensive qualities if inflation increases from massive annual government deficits.




    Disclosure: Disclosure: no position
    Tags: GLD, gold
    Oct 11 10:43 AM | Link | Comment!
  • The MLP Primer, 2 years later
    This is the second anniversary of writing my first article for SeekingAlpha, a short primer on MLPs.  It's reprinted below as an introduction for those who have joined SeekingAlpha since then.

    MLP businesses remain pretty much the same, but MLPs have gone through an exremely volatile period not characteristic for their equity units (known for their low beta characteristics).  When the original article was published, the stock market began plunging highlighted by the collapse of Lehman which hurt MLPs very badly because Lehman had been a big supporter of MLPs.  The Alerian Index (AMZ) began the month at 273 (70 below the record in July 2007).  By mid October it had dropped to 163, a decline which could not have been imagined.  A month later it had fallen to 152, its lowest level during the selling period and almost 200 below the record reached 16 months earlier.  Since then the index has marched forward, with only a few pause periods, to only 4% below its record.  The comparable index including reinvested income (AMZX) has rebounded from 370 at its low to over 900 (record territory), an increase very few stocks can match.

    Despite all the financial gyrations, the MLP businesses remain the same.  MLPs build long term energy assets (largely pipelines) financed by long term debt and equity.  During the financial crisis, MLPs were able to attract equity and debt financing to continue their expansion programs.  The 7 companies at the end of the article have provided investors with excellent gains over the last 2 years.  Teppco was acquired by Enterprise Products (NYSE:EPD) last year.  The remaining 6 have each risen about 30% and all but Linn Energy (NASDAQ:LINE) have increased distributions (LINN held theirs flat).

    For new investors, the tax preferred status of MLPs units needs to be understood because tax issues can be complex.  Typically 80-90% of distributions are not taxed in the current year, record keeping is necessary for future taxes and state taxes should be dealt with.  Index funds are available for those who want to invest in a portfolio of MLPs and are willing to receive dividends (ordinary income).  The yield for the Alerian index is 6.7%, an average yield relative to yields in recent years.  The future for MLPs is bright because the US needs more infrastructure to move energy which will require more pipelines and capital expansion. 

    The website for the Alerian MLP Index is:

    www.alerian.com/index-data-2/


    ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

    Why buy Master Limited Partnerships?

    Master Limited Partnerships (NYSE:MLP) are a new type of investment with an excellent record of high rates of stable growth & mostly tax-free (until the ultimate sale) high yields.  Despite this performance, they are still little appreciated & understood partially due to poor investor relations by the companies.

    Emerging Asset Class

    Their business typically involves building pipelines & terminals for transporting oil & gas.  Capital additions are their form of addiction.  They have to keep investing in more assets to build more pipelines & terminals, a national priority.  Spectacular growth for MLPs is forecasted to grow many fold going forward because of a growing demand for energy needing more infrastructure investment. 

    MLPs emerged from a small industry with only a handful of participants in the middle 1990s to a large industry with over 50 companies today.  Below is market capitalization of publicly traded MLP's value calculated by Standard & Poor's:

         Market Capitalization  ($B)               

    1995            6
    1996            8
    1997            9
    1998          11
    1999          11
    2000          16

    2001          26         
    2002          27
    2003          42
    2004          53
    2005          64
    2006         102    
    2007         127
    2008         115

        (All values are year end except for 2008 taken on August 7)

    December 31, 1995, was the beginning of the Alerian MLP Index (AMZ) at 100.  The index has risen to 273 with only modest swings around the trend line, including the extremely volatile period in the early 2000s.  A recent measure of the beta for MLP is only 0.35.  They have a second index, AMZX, which includes reinvested income.  That index at 648 yields a compounded annual growth rate over 16%, double the comparable rate earned by the S&P 500.  In recent years, MLPs gained attention & fans with this growth record.


                   AMZ      AMZX      Yield

    12/31/96       108       117        8.7%
    12/31/97       127       147        7;9%
    12/31/98       115       143        9.0%
    12/31/99        99       132       10.9%
    12/31/00       131       192        8.8%
    12/31/01       176       276        7.1%
    12/31/02       159       266        8.2%
    12/31/03       214       385        6.5%
    12/31/04       235       449        6.3%
    12/31/05       237       478        7.0%
    12/31/06       283       602        6.4%
    12/31/07       301       679        6.4%
    08/29/08       273       648        7.7%


    MLPs typically offer high yields, maybe because of their association with utilities.  For most companies, 80-90% of the income is not taxable in the current year.  However, tax advantages brings tax hassle.  These companies are limited partnerships which pay distributions, not dividends.  Instead of sending 1099s, companies issue K-1 tax statements around March 15.  The portion not taxed is used to reduce cost basis.  After cost basis is reduced to zero, years in the future, distributions will be taxable.  In addition, these businesses compete in many states which may require dealing with various state taxes.  However, these tax numbers can be handled by popular tax packages.

    Valuation

    One way to value MLPs is based on the spread of their yield over the 10 year Treasury bond.  The yield on the MLP  index is expected to be 200 basis point above the yield on the Treasury bond.  This relationship has gone through a lot of trials in the last year.  In mid 2007, Treasuries fell in price sending their yields to 5¼% while the MLP index was marching to a record level of 342, driving down its yield so the two yields came within a few basis points of being equal (the spread was essentially zero).  As it turns out, that would have been an excellent time to buy Treasuries & sell the MLP index component companies.  With the increase in Treasury bond prices & fall of the MLP index, the yield spread has widen to 390 basis points currently, 7.7% for MLP index vs 3.8% on Treasuries.  Years from now, people will look back on this time with fond memories about this unusually wide spread, remembering the good old days when these high yields on were available on MLPs . 

    Correlations with commodity prices

    Commodity prices do not correlate with MLPs.  For example, oil prices doubled in the last year while MLPs have been sliding.  Changes in oil prices are similar to changes for other fuel commodities and they also do not correlate with the MLP index.  In addition, MLPs have a very low beta, unlike the high volatility for fuel prices.  However, especially this year, changes in the MLP index have followed or at least took cues from changes in oil & other fuel prices. 

    Complications

    Limited partnerships take a little getting used to because they are complicated.  Generally they are composed of limited partners & general partners.  The limited partners supply 98% of the capital expecting to get a return on their passive investment.  The general partners supply 2% of the total capital.  They are the active managers who are rewarded when profits achieve goals.  They get a low percentage on first earnings earned.  As income rises, they receive a higher percentages of profits for achieving goals.  Income is divided into tiers, income in the higher tiers brings bigger rewards to general partners.  At some companies, general partners receive 50% of profits in the highest tier.  Profit sharing agreements vary from one firm to the next.  Each investor will have to decide what is reasonable on splitting profits.  An alternative is not to worry about the profit splits, instead accept the arrangement as satisfactory if they have a good track record.

    Two companies, Kinder Morgan (NYSE:KMR) and Enbridge Energy (NYSE:EEP), also have I-unit shares.  Each share of I stock is backed by one unit from the partnership.  Distributions paid to unit holders are paid as stock dividends to shareholders of the class I stock, similar to a company dividend reinvestment plans.  These stocks do not issue K-1 or 1099 statements, making them friendly for individual shareholders and retirement accounts (such as IRAs).


    Distributable Cash Flow

    Distributions paid to unit holders come from distributable cash flow, a measure which is not consistently defined.  Real estate trusts (REITs) pay dividends from an alternative earnings metric, "Funds From Operations or FFO."  FFO has an industry definition used by all REITs for determining how much cash earnings are available for dividends.  Some MLPs talk about distributable cash flow.  Even when there is a definition, there is no accounting standard to supply a number consistent from one company to the next.  Lacking an accounting standard makes it difficult to evaluate a company's ability to pay & raise distributions.  Companies have a constant need to sell more units for more capital to build more pipelines.  Thus management has an incentive to increase distributions frequently (i.e. 2, 3 or even 4 times a year).   An investor will have to calculate alone that $3 of earnings plus depreciation & other non cash items accruing to all units holders justifies a distribution of $4.80.  If that distribution is increased to $4.88, it is difficult to understand the rationale for the increase (especially when earnings decline).  The industry needs a standard, similar to FFO in real estate, to be used by investors for better understanding discipline used to determine distributions.

    For those interested in learning more, some investment firms have written primer reports on MLPs with more information about the industry.  These free reports are available on the web.


    MLP securities

    Below is a list of 7 MLPs

    ______________________________Price     Div   Yield    Market Cap (billions $)
    BUCKEYE PARTNERS LTD   (NYSE:BPL)     43.31    3.45    8.0%     2.0B
    ENBRIDGE EGY PT LP         (EEP)     48.54    3.96    8.2%     4.6B
    ENTERPRISE PT UTS           (EPD)     29.45    2.06    7.0%    12.6B
    KINDER MORGAN ENERGY  (NYSE:KMP)     57.54    3.96   6.9%    14.9B
    LINN ENERGY LLC UTS       (LINE)     21.63    2.52   11.7%   2.4B
    PLAINS ALL AMER LP         (NYSE:PAA)     47.65    3.55    7.5%     5.7B
    TEPPCO PARTNERS LP       (TPP)     32.09    2.84    8.7%     3.0B

    Prices are closing prices on 8/29/08

    MLPs have excellent track records with relatively mild price fluctuations around their growth trend line, high yields (largely tax free) with excellent prospects for rapid growth going forward from strong demand for more oil & gas pipelines.  These prospects have attracted many investors and this investment should gain popularity in the future.




    Disclosure: Disclosure: no positions
    Sep 06 10:24 AM | Link | 5 Comments
  • Gold: a growing importance for investment portfolios
    Stocks are having one of their best years in history, Gold isn't doing badly.  However, gold didn't suffer the large setbacks that many big stocks had in the last year.  Fundamentals for owning gold are changing in its favor.

    In the past, gold has been a passive, defensive investment to be held in times of high inflation.  Now that the weak dollar is becoming more important in global investments, there is less interest by foreign governments in holding US dollars as part of foreign reserves.  Euros € and other foreign currencies (i.e. Japanese yen ¥) are being considered as alternatives.  In eastern Asia, where gold is more trusted as a storehouse of wealth, there is greater interest in holding gold as a reserve (currency).  Just 2 weeks ago India bought 2 tons in gold.  The balance of trade is going in the direction of eastern Asia suggesting growing new demand for gold.

    Investing in gold has been made much easier for individuals with a wider array of investment products.  My website features ways to learn more about gold investment products.  A simple way using stock skills is to buy gold's ETF, GLD.  Its shares can be purchased like any other stock.  Hassles associated with buying commodity and future contracts are eliminated.  When gold goes up (or down), the ETF will track gold commodity price changes.

    In the old days, some advisers would recommend that good diversification should include 5-10% invested in gold.  In a new world of investments, when the federal government is running massive deficits with large growing Treasury debt, gold may have more appeal for a portion of investment portfolios.
           
    Disclosure: No positions
    Tags: GLD, gold
    Nov 19 10:15 AM | Link | Comment!
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