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  • Assessing The Growth Scare At Kinder Morgan [View article]
    Yeah, that was a surprise. As always though, exact timing and catalysts are always uncertain. What matters is assessing value. Note that the shares/units were rallying even before the deal though.

    What was interesting was that amazing ground-swell of negative sentiment in late March. Sure enough, that marked the bottom.
    Aug 17 07:16 PM | 1 Like Like |Link to Comment
  • Assessing The Growth Scare At Kinder Morgan [View article]
    "Expect the units and stock to re-visit and ultimately eclipse their May 2013 highs within the next 12-18 months for low-risk capital gains in the ballpark of at least 30% with current yields of 7.5%, 8.0% and 5.4%, respectively."

    He-he, I nailed it perfectly!
    Aug 17 01:13 AM | 2 Likes Like |Link to Comment
  • This Might Be A Stock Bubble, But Valuation Metrics Won't Help You Understand That [View article]
    On the purported subjectivity / uselessness of valuation measures, it's worth noting that there are several sophisticated value investors, such as Jeremy Grantham, John Hussman, Seth Klarman and Doug Kass, who are on public record in real-time as having been bearish (based on overvaluation) from 2005-07, making "fair value / undervalued" calls in late 2008 and early 2009 and then become cautious / bearish once again (citing overvaluation) at various points between late 2010 and early 2013.

    Therefore, these guys are not perma-bears even though they have been bearish based on over-valuation for most of the past 15 years (and rightly so). The simple reality is that the S&P 500 has been overvalued most of the time for the past 15 years and has generated weak long-term returns (even calculated into the current bubble as the end-point--once this one bursts, those long-term returns will be even worse) unless you bought very selectively (i.e. during the end-phase of one of the two massive bear markets when valuations did indeed become very reasonable).

    The last two over-valued bull phases (late '90s and '05-'07) each ended with historically epic bear markets (declines of 50% and 60%, respectively) and have generated disappointing long-term returns even calculated into the recent buoyant recovery. Valuation is worth paying attention to, unless you're blasé about locking in minimal long-term returns with stomach-churning draw-downs along the way.
    Jul 20 11:08 PM | 3 Likes Like |Link to Comment
  • The Energy Paradox: More Is Less [View article]
    Question: how much of this is energy-specific structural (e.g. the depletion of easy-to-exploit oil fields) and how much of this is a broader impact of US dollar depreciation over the past decade (both currency depreciation and an increase in the relative buying power of emerging market consumers via higher nominal growth rates in those countries)?

    When people make arguments about oil or gold in isolation, I'm sort of struck by the fact that just about all internationally traded commodities went up roughly four-fold over the past 12 years or so--gold, silver, oil, lead, zinc, ag commodities, etc., not to mention emerging markets stocks and real estate.

    Since 2011, all of these things have also consistently been side-ways to soft at the same time. Seems like it's all one big trade to me. Assessing the trajectory of the dollar over the next few years seems like the key to the kingdom. USD strength/weakness will be driven by a combination of monetary policy and economic growth rates in the US (relative to elsewhere). My guess is the long-term trajectory is probably down though the shale revolution does throw a monkey wrench into the equation.

    The increase in the oil price since 2000 has been considerably less dramatic in Euro or Yen terms.
    Jul 9 01:48 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Time For A Mid-Course Correction? [View article]
    No, I wouldn't call the last bear market a black swan event. Imbalances and fragilities, excessive leverage and unsustainable high buy-back-driven profit margins built up over the years, and ultimately you had a psychological catalyst that unleashed violent negative feed-back loops. Perhaps the Lehman failure could be called a "black swan", but if it wasn't that, it would have been something else. Bad debt is bad debt, and it was bad long before Lehman failed. Note that the bear market and 2007-09 recession also started well before Lehman failed.

    That's like saying that after snow has built up to the point where an avalanche is likely, the eventual avalanche is a "black swan" because one more snowflake fell and set off the avalanche.

    Put it this way--if, in the next year or two, there's some trust product default or scandal in China, and it sets off a real estate price collapse or financial crisis in China, would you consider the whole affair to be a black swan (i.e. attribute the whole thing to that particular unforeseeable catalyst)? Anyone with eyes can see the imbalances and risks building the past few years. Maybe there's a solid possibility that it resolves with a long sideways period or slow bleed over many years, but certainly, gaming the probabilities, there's a significant risk of a large price decline and/or financial crisis. It's certainly not unpredictable nor is it a trivial probability.

    Overvaluation is relative--arguably, stocks are over-valued right now relative to historical norms even if less over-valued than big-cap growth and tech stocks were in 2000. US stocks in 2000 were less over-valued than Japanese stocks in 1989, but that didn't keep them from collapsing.

    To manage risk in this later-stage bull market the past couple of years while still earning solid returns, I'm personally using a concentrated stock / sector approach overlaid with a seasonal strategy. In other words, for the most part, I only go long from late fall through May/June, and only in things where I'm comfortable with the valuations and biz risk profile. The past couple of years, that's been mostly large-cap midstream MLPs though I also bought a good batch of Russian stock ETFs during the Crimea invasion crisis and will go wherever I see value (not many places these days.

    During the seasonally risky summer-fall period, I go mostly to cash for about six months and then re-enter new positions in the late fall. Yes, it's not as tax-efficient, and yes, there's the possibility of missing out on some extra gains, but that's fine by me. In all likelihood, I'll miss any severe declines as they always happen in summer or fall. I've already locked in a nearly 15% gain YTD and am comfortable sitting mostly in cash (plus my modest RSXJ position which is still dirt-cheap) and looking for new opportunities in late fall.
    Jul 7 09:58 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Time For A Mid-Course Correction? [View article]
    Note that we did see the share-buyback and related profit margin inflation dynamic in 2006-07 as well. What was inflated wasn't the P/E per se but the profit margins. The market was only at PE 16/17 in 2007 as well before collapsing. Markets never "look expensive" to the casual observer (based on current PEs) at market tops just like they never look cheap (based on current PEs) at market bottoms.

    The key difference between now and 2007 is that we have a lot of slack (i.e. not much over-heating) and lower interest rates. How that all plays out in this stock market cycle is anyone's guess.

    Bill Gross is out recently suggesting permanently higher multiples based on permanently lower interest rates (I can see the theoretical argument though am skeptical--it seems like wishful thinking). Others suggest that sooner or later, profits roll over, and we get hit with some type of destabilizing liquidity crisis given the prevalence of self-reinforcing negative feed-back loops in our leveraged economic/financial system (more in line with history and the cyclical nature of capital markets) with a catalyst that's as yet unforeseen.
    Jul 6 06:48 PM | 1 Like Like |Link to Comment
  • Is It A Good Time To Buy MLPs? [View article]
    Oil production will top out by then, but not natural gas or NGLs. Much longer runway for nat gas. Note that refined products have already topped out which is why MMP's growth projects have been mostly in crude oil.
    Jul 5 09:13 PM | 1 Like Like |Link to Comment
  • Is It A Good Time To Buy MLPs? [View article]
    Oh, one more question. Which MLPs are you comfortable holding "for the rest of my life"? That's certainly a sign of confidence in the longevity of the shale revolution. You don't seem that old!
    Jul 5 02:34 AM | 3 Likes Like |Link to Comment
  • Is It A Good Time To Buy MLPs? [View article]
    Timely article, and I agree that many of the high-growth MLPs are looking rich--investors may be making the classic mistake of capitalizing recent growth rates and near-term strong growth prospects indefinitely into the future which means growth MLPs trading at low yield multiples might be overvalued.

    One question though: how do you conclude that MLPs were in a bubble in 2007 given that they have generated outstanding returns since then (much better than the stock market)?

    I now think inflation is coming back, and higher rates with it, and that may well provoke a temporary sell-off much like last year. However, at the end of the day, MLPs are much more attractive than utilities, REITs and staples given the superior growth prospects and should do fine for the next several years. My bias would be toward the quality large-caps as I believe that the smaller ones are rich and will suffer greatly during the next bear market (no more than a couple of years away) as access to capital dries up. Note that the managements of PAA, EPD, etc. are suggesting the same thing on recent conference calls--they're getting their dry powder ready for this eventuality.
    Jul 5 02:24 AM | 7 Likes Like |Link to Comment
  • 2014 Strategies And Stocks: Mid-Year Review, Part 1 [View article]
    What do you think of the offshore drillers here? Cheap and ready for an up-cycle? Do you think oil prices go higher from here? Per the typical business cycle, that's what we should expect.

    These things tend to move explosively when they move (see 2005-07). For a related example, see what WFT and NBR did the past few months.

    I think the offshore drillers are next. They're even paying good dividends now and have insider buying. Higher inflation/oil will be the catalyst, and money will be eager to flow into stuff that hasn't participated in the rally of the past couple years.
    Jul 5 12:10 AM | 1 Like Like |Link to Comment
  • 2014 Strategies And Stocks: Mid-Year Review, Part 1 [View article]
    Hi Ray,

    Perhaps the most important turning point of the recent cycle has been the three-year disinflation and growth slow-drown trend since spring of 2011 which has been reflected in weakness in mining / materials, emerging markets, gold, CAT, etc. There are now some indications that inflation is finally on the verge of accelerating (see ECRI FIG at a 70-month high) after being MIA the past three years. Curiously, only a couple of months ago, things seemed deflationary (bond yields, copper prices, lousy US GDP print, etc.), and then it turned on a dime, probably due to China's stimulus measures in March.

    Note that Tepper also suddenly reversed course as well due to ECB NIRP and China stimulus after getting nervous a couple of months ago due to deflationary forces. He must see what I see.

    I'm now thinking materials, oils and precious metals are likely to take off over the next year or two and play catch-up to the rest of the market. Some have already started, such as AKS, AEM and AA. Rates will rise some (but lag the rise in inflation), and utilities will probably get creamed.

    I'm thinking these deep-water drillers (RIG, ESV, NE) as an undervalued, leveraged play on oil prices and gold/silver are likely to take off much like at the 2005-06 inflation turning point. Both have done poorly the past three years and are still only 10% above their lows.

    I also think Russian stocks, which are incredibly bombed out anyway and which benefit tremendously from higher global energy prices / US inflation, have a lot of potential upside. I own RSXJ.

    Of course, on a secular basis, I love mid-stream MLPs which seem to do well in both deflationary and inflationary / rising rate environments due to the secular tailwinds.

    Ultimately, this coming resurgence of inflation and higher rates will end the bull market perhaps in a year or two.

    Thoughts?
    Jul 4 03:39 PM | 1 Like Like |Link to Comment
  • Attractive Alternatives To Kinder Morgan For MLP Investors [View article]
    I find the KMP/KMI vs. ETP/ETE comparison fascinating. Going back to the 2007 peak, ETE has now tripled while ETP and RGP have not even quite gotten back to their 2007 peak levels. Basically, ETE screws over its LPs, treating them as fixed-income investors (sort of like fixed-coupon pref stock) to be leveraged for the benefit of ETE.

    KMI actually plans/operates for the LPs to achieve a reasonable return (KMI div grows at 1.5x the rate of KMP). If KMI ever changed course and froze the KMP div while issuing tons more KMP units, I would bail on KMP.
    Jul 3 04:09 PM | 1 Like Like |Link to Comment
  • Attractive Alternatives To Kinder Morgan For MLP Investors [View article]
    KMP has not lagged quite so much as some would suggest. The better comparison would be a full-cycle one--2007 peak prices for each MLP to current prices. On a dividend-adjusted basis, my back-of-the-envelope math suggests that KMP, NGLS and MWE have each returned the following since then:

    KMP: 2.4x
    NGLS: 3.6x
    MWE: 3.3x

    I would note that the gap with NGLS has also been narrowing in recent weeks as KMP plays some catch-up while NGLS cools off a bit.

    So, why own KMP? Risk profile and certainty of cashflows/business prospects (the same reason someone might own stuff like JNJ and PG rather than pour their entire portfolio into high-growth, high-risk small-caps). In this multi-year bull market with an abundance of cheap capital to lever up on and juicy trailing returns on risky securities over the past few years, most have become fixated on growth prospects while ignoring downside risks. Here's another comparison--the peak-to-trough drawdowns of KMP, NGLS and MWE during the last bear market:

    KMP: -37.6%
    NGLS: -82.8%
    MWE: -82.8%

    When adjusted for risk and volatility, the moderate underperformance of KMP does not seem quite so objectionable at all particularly for those who like to sleep at night.

    I would also note that aside from macro-risk and market volatility, these smaller, riskier MLPs have more company-specific risk (i.e. a higher likelihood that things go wrong) as Brucejfern suggests himself when mentioning CMLP.

    I find all of this backward-looking "growth fever" suggestive of a market top. Not surprised that KMP has started roaring higher the past month or so--it's very attractive at these levels as a relatively safe, inflation-protected (both pipeline PPI escalators and some upstream oil assets) 7% yielder in a yield-starved world.
    Jul 3 03:11 PM | 2 Likes Like |Link to Comment
  • 'Ending In Tears' Doesn't Mean The Market Goes Down Right Away (Part 2) [View article]
    Excellent article. There's just one problem with the "nervous bulls" of which there are certainly a great number these days. By definition, most will fail to get out of the way of the next bear market whenever that hits, yet each of them believes he can outsmart everyone else looking to make the same nifty, well-timed exit. You can't squeeze a herd of thundering elephants out of a mouse hole at the same time. It's the same reason that speculative momentum investing/trading doesn't work for most people--by definition, it can't, because not everyone can find the next "greater fool" to dump his holdings on.

    This dynamic, plus the levering up / buy-back sham (similar to 2006-07), high investor leverage and high valuations based on normalized earnings will ensure that the next bear market is unusually severe, probably comparable to 2007-09's 60% drop.

    I would add one more risk that is especially important for even long-term investors to consider. Those who invested in 2006-07 have been restored to-date and achieved modest positive returns only as a result of extraordinary central bank stimulus pushing valuations to levels even higher than in 2007.

    This whole "wealth effect" policy regime of juicing the markets is relatively recent from a historical perspective--it started with Greenspan and has really only been in vogue for the past 15 years starting in the late 1990s as public participation in the stock market soared. Both politically and in some policy circles, it's become increasingly discredited--it engenders extreme boom-bust cycles and contributes to wealth/income inequality while providing questionable benefits to long-term economic growth. If/when we have another giant bust and the central banks are yet again proven to be clueless (or disingenuous?), there's a serious chance that this whole radical stimulus / asset reflation / ponzi economics approach will be finally discredited, and there will be no giant multiple expansion out of the next bust. In other words, if you get caught long going into the next big bear market and get creamed, you may not get another giant bubble rally over the next few years to bail you out.
    Jul 1 09:16 PM | 4 Likes Like |Link to Comment
  • Kinder Morgan: Vast Untapped Opportunity Looms [View article]
    Those are all fine choices. Very rock solid and well-run. That portfolio looks suspicious--did you pick those up based on my article last summer?
    Jun 20 01:52 AM | Likes Like |Link to Comment
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