Back in March, when the markets were plummeting and Goldman’s senior execs were jumping from skyscrapers (well, not really, but given a choice of descending markets or descending executives, the choice would have been an easy one…) we started buying a number of quality high-dividend companies around the world that trade on US markets, but whose revenues are earned in other currencies. 

I feel about the US Dollar like Tevye (“Fiddler on the Roof”) felt about being poor:  “I realize, of course, that it's no shame to be poor.  But it's no great honor either!  So, what would have been so terrible if I had a small fortune?" 



I don’t dislike US Dollar investments; I am, however, a wee bit embarrassed for my country that we have elected idiots and jackals who have debased what was once The Almighty Dollar.  Of the 80 or so countries I have lived in or visited, in at least 70 I could once have paid in dollars rather than local currency because it was a bastion of strength.  It’s no great shame to pull out Dollars today – but it’s no great honor either…

So where might we want to place at least some of our clients’ hard-earned money if the Dollar continues to bump along right about where it is, and slowly losing value over time versus other currencies?  (Our government says it wants a strong dollar.  They’re lying.  What they really want is a dollar juuusssstt strong enough to keep other nations and investors from abandoning the Dollar in droves but not so strong that it makes our exports more expensive.)

That leads me to believe that, absent a skyrocketing Dollar, the markets will not disintegrate and commodities (and equities in general) will, after a normal correction, move higher.  What will get us through a decline and leave us positioned well for any upside?  I think quality dividend-paying stocks will suffer the least in any decline and will be in demand during any advance.  Most of the companies I’ve previously written about fit this bill. Many of those previously recommended still represent great value today, though some are already up 40-50% and do not warrant new commitments.  

The largest percentage of those strong dividend-payers have been Canadian companies.  That’s still where the bulk of our non-US holdings are.  But in addition to all the great pipeline companies and royalty firms in Canada, here are a few other fine dividend-payers that, like our previously-featured Canadians, will provide global diversification and, if the dollar drifts lower, additional profits when repatriated into US Dollars.  I have selected one company from each of seven different countries in order to provide both geographic and currency diversification.

Alphabetically, by country, we have an oil and gas company from Argentina, a bank in Australia and New Zealand, a hydroelectric power company in Canada, a French telco, a coal-to-liquids giant from South Africa, a telecom from Switzerland, and an electricity and gas transmission firm from the UK.

The oil and gas company is Argentina’s YPF (YPF), the bank is Australia and New Zealand Banking (ANZBY), the hydroelectric power company is Canada’s Brookfield Renewable Power Fund (BRPFF), the first telco is France Telecom (FTE), the coal-to-liquids giant is South Africa’s Sasol (SSL) the Swiss telco is Swisscom (SCMWY), and the electricity and gas transmission behemoth is National Grid (NGG.)

Seven companies, denominated in seven different currencies – the Argentine Peso, the Australian and Canadian Dollar, the Euro, the Rand, the Swiss Franc and the British Pound.  Yet all are traded on US exchanges in US dollars.

YPF is actually a unit of Repsol YPF (REP) the Spanish oil and gas exploration, development and production company – but it enjoys considerable autonomy and has its own float and listing as an ADR on the NYSE.   In addition to running its own E&P program, YPF also refines, markets, and distributes oil, petrochemicals, natural gas, liquid petroleum gas, and bio-fuels. The company has reserves of 1.1 billion barrels of oil equivalent.  I like their prospects offshore where their 3100-mile coastline is barely explored and for their dividend (paid twice a year like most foreign stocks), priced to yield 8.1%.

I wrote an SA article about ANZBY back on March 31 (here).  Nothing has changed except the price, which ran from $11 the day I wrote about it to $23 by November.  It has since backed off to $18 and change, where it yields 5.5%.  I concluded that article: “With its extensive experience in the Australian agricultural sector, I see ANZBY as a natural fit in rural China, at a time and place where the Chinese government is desperate to initiate rural reform… They already hold a 20% stake in two Chinese banks, the Shanghai Rural Commercial Bank and Bank of Tianjin. Finally, with cash in the till, I wouldn't be surprised to see ANZBY pick up some US or European banks' Asian operations for next to nothing. If I had to hazard a guess, HSBC (HBC) and Royal Bank of Scotland (RBS) might come to mind.”   A lucky guess on my part -- they just announced they were buying the Pacific business of RBS…

BRPFF was GLHIF – Great Lakes Hydro Income Fund – until this fall.  They changed their name to reflect the fact that they are no longer just hydro, but produce electricity from renewable resources, including the 27 hydroelectric generating stations they indirectly own, operate and manage as well as their latest acquisition, a wind turbine farm in southern Ontario.  The Fund’s installed capacity is now 1,255 megawatts producing 4,596 gigawatt hours annually.  They yield 6.5% and pay their dividend monthly at just under a dime a share.  BRPFF -- just today -- was added to the S&P/TSX Composite Index.

FTE does what all telephone companies do: use their monopoly status to mint money.  In this case, France Telecom provides service, through various subsidiaries, in France, the UK, Spain, Poland, and lots of places you might be surprised to see a French firm operating -- like Kenya. It also has a 50-50 joint venture agreement with Deutsche Telekom AG.  FTE yields 6.8% and provides steady cash flow.

I’ve also written more than once about SSL, most recently just last week (here).   I noted there, “One way to avoid importing oil and clean up the environment is to use Coal-to-Liquids [CTL] technology, where pollutants are removed at the source. The worldwide leader in this technology is Sasol (SSL), the world's largest producer of synthetic fuels, both CTL and GTL (Gas-to-Liquids.)”  SSL yields 4.4% and is sitting in the sweet spot of research and development for cleaner coal technologies.

What do telco monopolies do?  Oh, right, they mint money.  SCMWY -- Swisscom -- is no exception.  Offering telecommunication services primarily in Switzerland and Italy, they do things quietly, conservatively, and astutely.  Hey – they’re Swiss.  Yielding 4.5%, they report their revenue in Swiss francs…

Finally, NGG also yields 4.5% but earns its money distributing electricity and gas worldwide. National Grid owns the high-voltage electricity transmission network in England and Wales and operates the system across Great Britain. It also owns and operates the high-pressure gas transmission system in Britain and distributes electricity to some five million customers in Massachusetts, New Hampshire, New York and Rhode Island.  (An especially lucrative business this week...)

Seven companies, seven different currencies.  You could do far worse if you are serious about diversifying away from the dangers of over-reliance on a single currency like the US Dollar.  There are many more, of course, some of which I’ve discussed previously, others I will discuss in the future.

In conducting your own research on these firms, I encourage you to visit the companies' websites, paying particular attention to the investor presentations and the most recent annual and quarterly reports.  My first stop is always the footnotes.  That’s where they divulge what they legally must, but in a font they hope you won’t pull out your magnifying glass to read.    

A Merry Christmas and a Healthy New Year to All!

Author's Disclosure: We and/or clients for whom it is appropriate are long every one of the stocks above.  (Well, almost every one.  We’re not long money center banks like RBS and HBC. We’re investors, not masochists.)

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but will not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Oil, natural gas, and coal are anything but fossils.  Mother Nature was kind enough to compress various forms of carbon over centuries, millennia and eons into giant batteries called “formations” for our use. Their age may make them fossil fuels, but their usability and cost make them future fuels.

One day, alternative energy sources like wind, which we’ve used for hundreds of years, and solar, which we’ve used for thousands of years, may be focused and collected and priced to be competitive with oil, gas, and coal.  But for the immediate future, any “subsidies” fossil fuel extraction companies realize in the form of depletion allowances, accelerated depreciation, etc. are more than offset by the massive taxes at the federal and state level that is levied upon their finished products – unlike alternative energy sources.

I applaud private industry’s continuing research into wind, solar, geothermal, biomass, hydrogen, et al, but doesn't seem as if the public funds from Big Government has seen money thrown at alternative fuels willy nilly, with little to show for it?   My guess is that the next big breakthrough in solar will come from an oil, gas or coal company looking to diversify, or from two guys in a garage somewhere.  Big Government?  The billions they have thrown at grants for professors to “study” this and “study” that will come to the same ending as most money disbursed by bureaucrats -- down a rathole.

That’s not to say that public/private partnerships can’t produce another Manhattan Project or TVA – just that it will cost far more than it otherwise would.  Thankfully, we have cheap and abundant natural gas and cheap and abundant coal right here in America.  If we need more, we can turn to our wonderful neighbor to the north which has more of both than their population can use.

And we could probably find more oil in US waters, as well.  But U.S. companies are prohibited from drilling for it.  For instance, US firms are proscribed from drilling within 200 miles of the Florida coast. But Cuba doesn't play by the same rules. So China's state-owned oil company, Sinopec (SHI), has signed an oil exploration deal with Cuba and moved huge drilling platforms to within 50 miles of the Florida Keys, an area where U.S. companies aren't allowed to drill and where a single spill from Sinopec could wreak environmental devastation upon U.S. beaches.

Since Congress "protected" us from U.S. oil companies, we now risk spills from others who play by different rules and are unlikely to hew to the same safety and environmental rules we play by and we are forced to depend upon Arab oil. Smart. Real smart.   That’s what happens when a paternalistic government decides to “protect” us!

So what do many geologists and ecologists recommend? Fossil fuels, cleaned both at the source and at the smokestack.  Green isn't enough. Black and gooey is still necessary. We still need to extract oil and gas, and we need to use coal both to burn and for much cleaner and less-polluting coal-to-liquid technology to power our homes, our cars, and our industry.

We have more coal than any nation on earth. Why are we importing oil from the Middle East when we can as cheaply and more cleanly convert coal to liquid fuels?  Or use cleaner-burning natural gas, which we have in such abundance that there is a glut right now?  Exxon (XOM) clearly doesn’t believe the glut will last.  They just bet $41 million by buying XTO, a major natural gas explorer and producer, that the price of gas will be more stable going forward.  Stability yields greater usage by utilities and fleet buyers.

Worldwide, there are plans to build over 1000 new coal-fired plants.  One way to avoid importing oil and clean up the environment is to use Coal-to-Liquids [CTL] technology, where pollutants are removed at the source. The worldwide leader in this technology is Sasol (SSL), the world's largest producer of synthetic fuels, both CTL and GTL (Gas-to-Liquids.)  Here's the real kicker: three of the world's four biggest energy users also hold the most coal reserves! (The U.S. is #1, China is #3 and India #4.)

While we're at it, let's find smarter ways to extract the oil from the tar sands in Canada (like using the stripped-out carbon dioxide from CTL to inject underground to "bubble" oil to the surface) and the oil shale in the Rockies. Of the world's total oil shale, 89% is in Colorado, Utah, and Wyoming, USA.  And most of the world’s gas shale is in – the USA.  Add that to the largest concentration of coal in the world – in the USA – and then factor in the low cost of transportation, free trade agreements, and friendly relations with our largest trading partner – Canada – and you have to scratch your head and wonder: with all this going for us, how have politicians been able to screw it up so completely?  And why are the hell-bent-FOR-ELECTION (answering our own question) to subsidize ethanol, biomass, solar, hydrogen, et al, when the USA is sitting on massive reserves of fossil/future fuels?

If you agree that this lunacy will continue but it won’t change the basic equation – “fossil/future fuels, at least for the short- and intermediate-term, will be more profitable to your portfolio than alternative fuels” – and will make us less dependent upon foreign despots or idiot politicians, as well, then here are a few oil/gas/coal patch companies I’ve discussed in greater detail in previous articles:

First would be Exxon.  The company has sold off because “the street” considers their purchase of XTO “dilutive.”  Well, duuuhhh, of course it’s dilutive – they paid for it with shares rather than cash.  But if, as I suspect, XTO produces excellent cash flow for XOM going forward, then it won’t remain dilutive at all – it will be accretive.  Did XOM overpay for XTO as some people with no skin in the game (unlike Exxon) claim?  I agree with my friend’s 5-year old, who would disagree by saying, with elegance and understatement, “They stoled it.” 

I imagine XOM’s well-researched and well-reasoned purchase has other great oil firms like Royal Dutch Shell (RDS.B) and BP (BP) looking at other natural gas producers, too.  And I’ll wager they’re looking at big, well-managed firms like Encana (ECA), Chesapeake (CHK), Devon (DVN)  and EOG (EOG.)

If you don't mind suffering the slings and arrows of outraged greens (who think electric cars are cool and ecologically “the right choice” while clueless to the fact that 53% of US electricity is generated by coal) you could always buy some dirty old coal companies.  My favorites are two “royalty” firms that do no mining but merely collect royalties from those who do:  Natural Resource Partners (NRP) and Penn Virginia Resources (PVR).

Finally, for those who are looking for strong dividends today and slow but steady growth today and tomorrow, may I suggest natural gas (and some other) pipeline companies like Magellan Midstream (MMP), Boardwalk (BWP), Enbridge Energy (EEP), Kinder Morgan (KMR), Buckeye (BPL), Enterprise (EPD) and Canadian Royalty firms Enerplus Resources (ERF) and Pengrowth (PGH.)  All of these future fuel plays and all the others above are available in previous SA articles for your research and further review…

Author's Disclosure: We and/or clients for whom it is appropriate are long every one of the stocks above, though recently we have begun to take some great profits on a portion of our positions. 

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but will not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

…as may I.  But when seeking securities that pay an exceptional dividend, one can either chase poorer quality firms that must pay a high dividend to keep their stock price up -- or one can have the courage, vision or luck to look beyond the current valley to find an entire sector of quality firms that are in temporary disfavor.  I choose the latter, and have been beating the drum for buying natural gas companies during what I consider a temporary glut of gas that has left this sector with little investor interest.  It’s nice to have a firm with the vision and long view of Exxon now agreeing.

Of course, value investing can be a lonely business...  If you see value when others are distracted by shiny baubles elsewhere, be prepared to suffer the slings and arrows of outrageous fortune (or at least outraged momentum players and day traders).  Case in point:

And in November’s “Ethanol vs. Natural Gas or Coal: Comparison Not Even Close,” some naysayers’ remarks included “Y'all think this is a great article? Then think again…” and “Tar Sands Oil and Coal are the worst energy sources known to man. Inefficient oil and dirty coal.”

I cite these not to denigrate the honest opinions of those who disagree, but rather to point out that you want to buy precisely when many people disagree with you! I like to see cocksure opinion stated as fact, like "The market cannot go above 9000.  You can take that to the bank."

If they disagree with your analysis, they aren’t buying, so you don’t have to chase a stock moving up in price. A difference of opinion is what makes ball games and stock markets fun to play.

I will continue to buy when others don’t like a sector that I believe has undiscovered value and a near-term catalyst.  (And, no, I did not know that Exxon would provide that catalyst -- I simply saw that prices were reflecting a point where any of a half dozen catalysts, including a major player moving in, would likely move prices higher.)   I’d rather buy quality where the depressed price has raised the yield without the company actually having to increase the dividend than to buy companies who increase their dividends to unsustainable levels.

So where do we stand today with our natural gas holdings?   Long term, there is vast potential remaining.  I don’t want to be completely out of this sector.  But with Exxon giving credibility to the entire natural gas sector, more and more people are finally coming around to what we’ve been saying all along: natural gas, "bottled and produced" in America and Canada, with lower transportation costs and in politically stable nations, will increasingly fire our electrical generating plants, provide warmth in winter and cooling in summer, and fill (at least our fleet) automobiles.

I think the Exxon Halo Effect will create interest and buying in the natural gas explorers, producers and transporters – and we will therefore begin to take some profits.  In three months we are already up 42% in Williams Partners (WPZ), 36% in Enterprise Group Holdings (EPE) and 25% in Boardwalk Pipeline (BWP).  If Exxon’s purchase of XTO sends these up another 10%, as I imagine it might, we’d have to consider selling some portion of our positions and nailing down those profits.

Never forget, in the full flush of excitement that something you own is roaring ahead, why you bought it and what they do for a living.  These are pipeline companies, for heaven’s sake!  Steady, high-yielding, well-managed and dependable – but still just pipeline companies.  Gas comes through the pipeline, they make a profit.  Gas only flows 50% of the time, they only make 50% as much.

Not one of them seeks or has found a cure for cancer; not one of them has found a way to redirect incoming meteors to strike Iran’s nuclear-enrichment facilities; not one of them has found a drug that will make bankers and brokers less greedy. 

A market that has as its leadership pipeline firms and income alternatives is not exactly a rip-roaring bull market.  Where are the techs?  The industrials?  Health care?  Retail?    We know why we bought and what to expect.  Exxon’s purchase of XTO is a gift.  Assuming the skeptics and naysayers now decide to buy, the least we can do is offer some of our shares to them so they can join the party, too.  And when they tire of them because they bought late in the game, and the sector, or more likely the entire market, has a correction, we’ll be only too happy to take them back off their hands at lower prices.

Author's Disclosure: We and/or clients for whom it is appropriate are long WPX, EPE, BWP and the other natural gas pipelines we’ve recommended in previous articles.  But we are preparing to sell some portion of our positions in them and place the money instead in some of those securities that are unchanged in price from a year ago, like those we mentioned in our article of December 11^th.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but will not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

The market has moved ahead rather convincingly.  (Against all logic, but convincingly, nonetheless!)  As I search for quality dividend income for our firm’s clients, I have been drawn to a few companies that have been overlooked as investors embrace risk and abandon slow, steady firms that have not yet enjoyed the catalyst that will drive them higher.

The first two of these are in the oil and gas business.  Oil and gas, both the commodity and the stocks, fell precipitously from mid-2008 into early 2009.  Oil has since recovered about 30% of that decline, while natural gas remains depressed.

I see a rough winter ahead, with warnings from both The National Oceanic and Atmospheric Administration and, more importantly, the squirrels, bears, coyotes, blue jays, raccoons and other denizens of my extended mountaintop back yard.  That means more use of heating oil and natural gas.  With gas prices this low, it also most likely means both winter and continuing changeover from other electricity-generating fuels to natural gas.  I believe a combination of these two factors, plus the increasing scarcity of dependable dividend-paying stocks, may provide the catalyst for greater demand for these firms.  Of course, any shock to the oil-producing regions or the oil transport business would mean an even greater possibility of growth for more secure, closer to home providers.

One such provider is Pengrowth Energy Trust (PGH) a Canadian royalty trust that has 100% of its holdings in Canadian oil and natural gas properties.  The company currently pays a 7 cent dividend every month, or 84 cents a year.  On a stock currently selling at 9.22, that comes to a yield of 8.07%.  Back in January, PGH was selling for 9.14. 

The company has a $2.4 billion market cap, sells at 14 times trailing twelve months (TTM) earnings, has an easily manageable 30% debt-to-assets ratio, and a net profit margin of 22%.

There are two factors beyond PGH – and every other Canadian Royalty Trust’s – control: the price of the underlying commodity, and the tax changes invoked by the provisional and national governments. 

Short term, I couldn’t tell you on a bet which direction the price of oil and gas are headed.  There are plenty of newsletter junk-mail senders who will tell you they can, and my hat would be off to them if they really could.  At this point, my hat remains solidly in place... 

But long term?  To me, that’s a no-brainer.  Is there any question that India, China and the other emerging nations will use more gas, oil, coal, uranium, timber, etc. in the future than they do today? If they are walking today, they covet a bicycle. If tehy have a bike, they dream of a scooter. If they have a scooter, they covet the mobility and independence that comes with owning their own car. There will be cyclical downturns of course, but the secular trend goes only one way: demand up, supply struggling to keep up.  While this trend is beyond PGH’s control, it certainly bodes well for its future.

As for the tax changes coming in 2011, those are beyond PGH’s control, too.  And they will make the yield less attractive  -- if it were happening today.  Who knows if the factor within their control (below) will allow them to increase their dividends even though the taxes will be higher?

That “within their control” factor is: just how fast is the company replacing assets -- faster than it is depleting them, or is it depleting them faster than it is replacing them?   The benefit here goes to the nimble and the better-capitalized.  Those with a relatively low debt-to-equity ratio, like PGH, should be able to both raise equity and borrow from lending institutions to snatch up competitors who are not so thrifty and to acquire properties at a good price.  Many Canadian royalty companies have chosen to lower their payout ratios and conserve cash.  This doesn’t make some individual shareholders happy, but it should: a low payout ratio and a long reserve life mean a steady stream of dividends!

Another Canadian royalty trust I’ve been buying for some clients, that is selling for the same it sold for in January, is Enerplus Resources Fund (ERF).  Enerplus sells at just 6 times earnings, has a market capitalization of just under $4 billion, and pays an 18 cent-a-month dividend, resulting in a yield of 9%.  Its debt-to-equity ratio is just 17% and, while it’s short term net profit margin is nil as it digests some recent acquisitions, its gross margins are 60%.

The last company selling at the same price it sold for in January is Atlantic Power (ATLIF).  Based in Canada, Atlantic owns interests in a diversified portfolio of 14 power generation projects and one 500 kV 84 mile electric transmission line -- all located in major U.S. markets!  Well-known U.S. utilities like Progress Energy, Georgia Power and Tampa Electric are some of the utilities which ATLIF supplies with electricity under long-term Power Purchase Agreements.  Since ATLIF just this month converted from a form of corporate ownership known as an Income Participating Security to the more traditional common stock, U.S. charts will only show the company as having a week or so worth of history.  Look it up under the Toronto Stock Exchange symbol, ATP, however, and you’ll find plenty of data.

The company’s website (here) is a font of information.  Just one example:

Answering the question, “How does ATP's business model mitigate investor risk?”

“ATP’s projects have a diverse base of electricity and steam customers, technologies and fuel types, and operate in multiple regulatory jurisdictions and regional power pools. This diversity reinforces ATP's stability of cash flows by limiting investor exposure to an individual electricity or steam off-taker or to market, regulatory, or environmental conditions in any one region. In addition, all of ATP's electric capacity is being sold to customers with investment-grade credit ratings. Also, its power purchase agreements generally pass through changing fuel prices to the offtakers.”  [JS: “Offtakers” refers to the buyers like Tampa Electric…]  

Makes sense to me.

ATLIF sells at 8 times earnings, has a market cap of $600 million, pays just under 9 cents a month, or right around 10%, has net margins of 36% and, like all capital-intensive electricity providers, however, has a whopping 411% (4.11:1) debt-to-equity ratio.

I’ve searched long and hard to find what I believe are quality high-yield firms that we can buy for the same price we would have paid in January but whose prospects since then are considerably brighter.  I believe these three qualify…

Author's Disclosure: We and/or clients for whom it is appropriate are long ERF, PGH and ATLIF.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but will not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

The answer to the first question is simple: yes.  Assuming that the points, fees, appraisal, title insurance, overnight delivery, dealer prep, the undercoating package, and all the other mortgage paraphernalia don’t eat up all the savings you might enjoy from the refi, go for it.  Rates are being artificially depressed by a national government desperate to get people into homes at rates they can afford.  With the $8,000 gift from one’s fellow citizens for first-time home buyers gone, there’s a new present under the tree: a $6,500 gift for anyone buying a principal residence, first-time or hundredth-time. 

According to Bankrate's 2008 very helpful closing cost survey, the national average for closing costs on a $200,000 loan is $3,118. The fees in the survey don't include taxes, insurance or prepaid items such as prorated interest or homeowner association dues.  (Be forewarned: Some of these unincluded fees and taxes can be daunting.  When I bought our current home in 2007, the county in which I live socked me with a $7000 “transfer tax.”  Now it didn’t take but 20 or 30 minutes of a county official’s time to rubber-stamp the transfer, meaning they are valuing their time at $14,000-$21,000 an hour.  Nice work if you can get it.)

Bankrate.com notes, “When weighing whether to refinance, homeowners typically are urged to consider how many months of lower payments it will take to recoup the closing costs of the new mortgage.  For example, if your monthly payment goes down by $156, it would take 20 months of lower payments to recoup the average closing costs.”  They provide a nifty calculator on their website to let you enter your costs and loan terms to calculate the months it will take to recoup your costs.

Let’s say, after you get all your actual costs lined up, it still makes sense.  Is this a good time to refi?  It is quite possibly the last good time to refi before inflation rears its ugly head and rates begin to rise again.  Right now, our government is terrified that more residential foreclosures will bring down the Too Big to Fail, Too Stupid to Succeed On Their Own banks.  So the Fed is keeping short interest rates artificially depressed at somewhere between 0% and 0.25%.  Horrible news if you are a saver; great news if you want to borrow some money.  Short rates influence Treasury rates which in turn influence longer-term rates on all debt, including mortgages.

The Fed realizes that there are still home “owners” who only qualified for their loans because they got a NINJA (No Income and No Job or Assets) loan.  And they got teaser rates as low as 1% to 4% to get them to sign on the dotted line.  The mortgage brokers and banks didn’t really care since they were going to sell the loan immediately to the now-bankrupt (but still kept alive on respirators by continued infusions of taxpayer earnings) Fannie Mae and Freddie Mac.  If these folks had to refinance at 6% or 8% or the 10% plus that many of us remember from previous years, there’s no way they’d consider refinancing their mortgages.  But with the national average just under 5% for 30-year fixed loans and closer to 4% for 15-year fixed mortgages, the chances are better that they’ll remain in their homes, once burned and twice shy.  Millions of these loans are scheduled to reset within the next 12-18 months.

If you are someone who put a reasonable amount down, got a loan you could afford, and are current on your mortgage, the government doesn’t really care about you.  That’s not exactly fair – more likely, you aren’t the problem, so they simply take you for granted.  The sweetheart rates aren’t intended to entice you – but you aren’t precluded from taking advantage of these low rates, either.  Nobody whose job it is to take money from one set of citizens to give it to another set is going to give you $6500 unless you sell the house you’re in and buy another.  But you can still get a mortgage with an interest rate that may well reduce your monthly nut and, as inflation increases – it will, Wilma, it will – allow you to repay your lender in ever-less-valuable dollars. 

More than 90% of all home loans this year have been purchased by government entities like Fannie Mae, Freddie Mac and the FHA.  Then the Fed bought about 80% of these agency mortgage-backed securities.  (Congratulations, taxpayer -- you're a landlord!)   This maybe-for-the-last-time-in-awhile good deal will last until the Fed stops buying – which could be a year from now or it could be tomorrow.   The more good news you see about housing sales and new housing starts, the more likely it is that The Fed and its on-life-support siblings will start to inch rates higher.

As to the second question – even if you aren’t looking to refinance, are there sectors of the economy that might benefit you, as an investor, if there is high refi activity?

Well, sure.  The few remaining mortgage brokers should benefit.  So should the biggest home mortgage lending banks, although the gains from collecting all those juicy refi fees may be overwhelmed by their losses in other areas, like commercial real estate loans and, for money center banks, loans to such creditworthies as Greece, Dubai, Slovakia, Bangladesh, et al.

According to MortgageDaily.com, the top 10 home mortgage lenders and their 3Q 2009 originations, are:

1. Bank of America (BAC) $98.4 billion

2. Wells Fargo (WFC) $96.0 billion (which has more outstanding mortgages on its books than any other lender)

3. JPMorganChase (JPM) $37.6 billion

4. GMAC $15.4 billion (“We used to sell cars, but now we’re kind of into every money-losing venture we can identify.” -- GM)

5. U.S. Bancorp (USB)  $14.8 billion

6. Citigroup ( C )  $14.3 billion

7. SunTrust Banks Inc. (STI)  $11.6 billion

8. PHH Mortgage $9.0 billion (a very large subsidiary of publicly-traded PHH Corporation  -- PHH)

9. MetLife Inc. (MET) $7.9 billion

10. BB&T Corp. (BBT) $6.9 billion (for those not from The South, that’s the holding company for Branch Bank & Trust.)

Less direct plays might include Farmer Mac (Federal Agricultural Mortgage Corporation -- AGM), Fannie and Freddie’s bunkmate in Intensive Care, which maintains a secondary market for agricultural real estate and rural housing mortgage loans; Ocwen Financial (OCN), which is into all kinds of loans with mortgages just one of those; GE, a company with so many fingers in so many pies that mortgages might easily be lost in the shuffle; and a whole plethora of mortgage REITs that I wouldn’t buy but your research may lead you conclude otherwise.

If you believe that many current “owners” will not be able to qualify for a refi and will seek the refuge of the nicest apartments rather than the travails of another house, you might want to take a look at the quality apartment REITs and real estate vulture-investing funds I wrote far more extensively about in this Editor’s Pick. 

Finally, if you foresee discretionary income being increased in US households as a result of lessened monthly payments for those not forced by contract to refi at higher rates, there are a number of sectors that you’ll want to look at.  In the economy writ large, it may be a wash between those with less income after refinancing because they've been forced to refi at higher rates,  and those with more income after refinancing because, for them, the rate has gone down.

Full Disclosure: We and/or clients for whom it is appropriate are long AVB and MAA.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but will not do so for 2009.  We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

I saw this letter to the Managing Director of the always stimulating and well-written Casey’s Research (caseyresearch.com) today and thought its lessons were worth passing along…

Hi, David,

I'd like to add my 2 cents to the East Germany vs. West Germany topic that you've been discussing for the past two days in Daily Dispatch.

What has not been said is actual example(s) of how fast a former communist society can change with respect to people's attitude toward work. I've never been to Germany, but I've witnessed the change of China as I grew up in Beijing. There are many examples I can think of, but let me just pick the city bus system in Beijing.

In the 1980's and earlier, the buses in Beijing were run by the government, where the employees had guaranteed lifelong employment. It was horrible for passengers. The buses were old, dirty, crowded, slow, and the drivers and ticket collectors were rude and lazy. The same sort of work ethic as described about East Germans.

Then, the government turned some of those same employees into what essentially are commissioned salesmen. They'd get a basic salary, but the bonus money depended on the profitability of the route. The government also loosened up on the structure of bus routes….

The bus employees first complained about losing the "iron rice bowl." Not all employees were switched to the new system. But among those who did, their attitudes toward passengers changed. Suddenly, I find myself being wooed at the bus stops to get on their new, more expensive type of bus. As a consumer in a communist country, I had never been treated like a king before, until then.

So, I can relate to what has been said about East German people. But I think that's just a static snapshot at that moment. Give them free-market economy, not handouts, and I'd bet you'll see how fast people's attitude toward work changes.

Fast forward 20 years to the present, and change the location to Toronto, Canada, where I now live and take the bus to work every day. The bus system in Toronto is run by the government, where the employees have guaranteed lifelong employment in the form of labor union. It is horrible for passengers. The buses and subways are old, dirty, crowded, slow, and the drivers and ticket collectors are rude and lazy. You see a pattern here? I'm told that the public transit in Toronto is one of the best in North America. If that's so, public transit authorities in North America should really learn market economy from communist China.

How very sad that in the 1980s the United States taught the communist world about free markets, entrepreneurialism, and incentives for quality work.  They learned.  Today, Israel, Sweden, Eastern Europe, China, and, in a robber-baron sort of a way, even Russia, all of whom experienced socialism or communism up close and personal, are thriving as never before in their free market economies. 

Meanwhile, many in the USA decided to take a giant step backward and to embrace a system that has failed, is currently failing, and is doomed to fail again and again.  As our government centralizes power and decision-making over the most minute details of our lives, creating massive 5-year plans and taking over banking, auto-making, mortgages, and now health care, our former ideological adversaries are not scratching their heads in befuddlement – they are rubbing their hands with glee.  They, above all, know that we are heading down the path to mediocrity, while those who followed our lead in the 1980s and continue to follow it, even as we have veered off into the Fantasy-land of Your Government Knows Best, will emerge the economic and geopolitical powerhouses of this century.

Disclosure: We own no investments in any of the above markets.  But if current geopolitical trends continue, we will swiftly reconsider.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless –our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but has not yet done so in the more-explosive year of 2009. There is no guarantee that we will continue to outperform on a long-term basis -- though we will do our best!

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.