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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • THE UNSUSTAINABLE RALLY-NOW WHAT? COMMODITIES FOR INCOME INVESTORS 7 comments
    May 28, 2009 11:11 AM | about stocks: SDS, SKF, SRS, TWM, BP, CEO, E, TOT, ENY, ERF, PBA, ARLP, NRP, PVR, TNH, GGN
    1. Introduction

    What does the past week’s market activity tell the high dividend income investor who is considering taking new long positions to get some return on cash that’s lying fallow? What follows is nothing fancy, people. Just a simple follow up and update to last week’s post Notes on a Scandal: High Dividend Investor's Survival Guide to This Unsustainable Rally, and some practical tips on what to do now.

     

    Caveat: I’m not a prophet. The following conclusions are just based on the evidence I present below that this is not the time for new long positions.  I’m still innocently (naively?) assuming we have a free, open and transparent market operating. However, given the degree of market manipulation we’ve seen (see Notes on a Scandal: High Dividend Investor's Survival Guide to This Unsustainable Rally) and mentioned in recent posts, one could argue otherwise and try to bet on a continuing rally aided and abetted, legally or not, by team Washington & Wall Street. 

     

    2. What The Charts Suggest

     

    A. Chart  1

     

    Overall market broke its long term downtrend at the end of March, and the rally has stalled out in early May.

     

     SEE: http://highdividendsto... for image.

     

     

    B.  Chart  2

     

    For the past 6 months the market has traded in a range between 680 and 940.

    See http://highdividendsto... for image

     

     

     

     

    C. Chart 3

    See http://highdividendsto... for image

     

     

     

    Since the rally stalled in early May, volume on down days is greater than that on up days, and there have been about 3 times more down days than up days. This suggests lack of conviction by market participants.

     

     

     

    3. Conclusions

     

    A. Be Cautious Taking New Long Positions

     

    From a very simple technical perspective, the current rally has stalled. From a fundamental perspective, as noted in Notes on a Scandal: High Dividend Investor's Survival Guide to This Unsustainable Rally, the rally is mostly unjustifiable, and arguably the result of outright manipulation by Washington and Wall Street. Perhaps this is for the greater good.  It has allowed at least some of the major banks a rising market into which they can sell stock and raise needed capital from willing investors, not just captive taxpayers. For example, both Goldman Sacks and Bank of America have done so thus far.

     

    B.  What This means for Dividend Income Investors

     

    Yes, it hurts to sit with cash producing no income. Because both fundamental and technical evidence suggests it’s more likely that stock prices in the coming months will fall, recent advice still holds. Take only partial positions using cash that will not be needed within the foreseeable future.  Consider taking at least partial profits or losses if you foresee needing to raise cash in the coming months from your stock portfolio. Consider hedging techniques discussed in prior articles.

     

    For example, for short term hedges consider: UltraShort S & P 500 Proshares (NYSEARCA:SDS), UltraShort Financials ProShares (NYSEARCA:SKF), UltraShort QQQ ProShares (NYSEARCA:QID), UltraShort Real Estate ProShares (NYSEARCA:SRS), UltraShort Russell2000 ProShares (NYSEARCA:TWM).

     

     For those who can, consider owning Canadian or Australian dollars, or assets based in these currencies. Why? To alter the famous line about plastics from the film, The Graduate, “commodities, Benjamin, commodities.”

     

    C. The Real Meaning of What Jim Rogers Has Been Saying

     

    This past week renowned investor Jim Rodgers was widely reported to predict a coming crisis in the currency markets as governments worldwide attempt to bolster their economies by expanding the supply of their currencies, thus ultimately eroding their purchasing power once the world economic situation improves and demand for goods rises.

     

    Even for those well versed in currency trading, that advice is not easy to put into practical use. If all currencies are inflating, and currencies always trade relative to one another, so how does one know which currency to prefer over another?

     

    One could consider which currency is being most burdened with debt and thus likely expansion of supply, as suggested by the following IMF (International Monetary Fund) chart provided by Kathy Lien in Will the U.S. Be Next to Receive a Credit Warning?

     

    See http://highdividendsto... for image

     

     

     

     

    That might work if you want to trade currencies AND the rest of the market follows the same chart. Maybe it will work, maybe it won’t. Successful trading is not just about being right about the asset, but being right about what the rest of the market will think about it, and when.

     

    Here’s simpler idea. While choosing the right currency pair may be unclear from Rogers’ remarks, what IS clear is this: commodity prices should be in a long term uptrend, if for no other reason than their being priced in eroding currency, typically US dollars. So invest in instruments that will rise with commodity prices.

     

    THAT is the obvious implication from Rogers (who has made a few bucks in commodities).

     

     

    Thus consider, strongly, one or more of the following investing options:

     

    ·   &... Commodities themselves via ETFs, CFDs, futures, etc. A  very creative and worthwhile suggestion from a comment I received on an article,  one which  I recently followed – consider a investing in a hybrid car, better home insulation, or other energy saving devices. Yes, cars are depreciating assets, but if you have to commute long distances anyway, the savings could well be worthwhile. FYI I went for a Toyota (TOY) Prius. It handles very well, has sufficient acceleration when needed, and cut my gas bill by more than half. My only complaint is the very primitive sound system, especially considering this is not a cheap car. It’s not strictly an income investment, but a penny saved IS a penny earned. No, it’s better. There is no tax on the penny saved (yet), at least until you invest it.

     

    ·   &... Convert at least some US dollars to Canadian or Australian dollars (which rise relative to other currencies as commodity prices rise)

     

    ·   &... Income instruments based on commodities that should rise with them. Many of the stocks I’ve been recommending fit that description, especially WHEN stock prices pull back. These include:

     

    ·   &... Big Oils: BP, plc (NYSE:BP), CNOOC Ltd. (NYSE:CEO), Enid SpA (NYSE:E), Total Fina Elf (NYSE:TOT)

    ·   &... Canadian Energy Trusts: ARC Energy Trust (OTC: AETUF, TSX: AET-UN), Claymore/SWM Canadian Energy Income Fund (NYSEARCA:ENY), Enerplus Resources Fund (NYSE:ERF), Peyto Energy Trust (OTC: PEYUF, TSX: PEY.UN), Provident Energy Trust (PVX, TSX: PVE.UN), Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN)

    ·   &... Coal MLPs: Alliance Resource Partners (NASDAQ:ARLP), Northern Resource Partners (NYSE:NRP), Penn Virginia Resources Partners (NYSE:PVR)

     

     The Gabelli Global Gold, Natural Resources & Income Trust (NYSEMKT:GGN): a way to play gold and get income

    ·   &... Canadian Real Estate Trusts: While real estate is not a commodity, it is a hard asset that is inflation resistant. A worthy group of stocks to keep in mind when prices pull in include the Canadian Real Estate Trusts: Canadian Apartment Properties REIT (OTC: CDPYF, TSX: CAR.UN), Northern Property REIT (OTC: NPRUF, TSX: NPR.UN), RIOCAN REIT: (OTC: RIOCF, TSX: REI.UN

      

     

    However, again, be cautious about new stock purchases until we see a pullback. Why? Here’s a lesson worth repeating.

    D. Even Great Stocks Usually Follow The Market

     

    Remember, no matter how good their results, few stocks avoid selloffs when markets decline. So be cautious buying income stocks based in commodities or commodity based currencies at this time.

     

    For example, look at a chart of Atlantic Power Corporation (OTC: ATPWF.PK, TSX: ATP.UN) compared to the S&P 500 (in red).

     

    See http://highdividendsto... for image

     

     

     

     

    Note that ATPWF’s price movement followed that of the S&P 500 index. Despite producing stellar results during this period, including raising dividends while cutting debt and openly declaring the dividend secure for years to come; its price fluctuated in the same directions as the index.

     

    Ironically, ATPWF’s price was actually more volatile (due to its low daily trading volume), despite its far healthier and more stable revenue stream than almost all companies in the index.

     

    The lesson: you generally do not take long positions when the evidence suggests prices will drop.  thus even though the recovery of energy prices and stocks seems inevitable, it’s not yet the time to buy. By all means place orders starting near the March lows, though.

     

     

     

     

     

    4. Conclusion, Disclosure & More Info

    Again, the Caveat: I’m not a prophet. The following conclusions are just based on the evidence I present below.  I’m still innocently (naively?) assuming we have a free, open and transparent market operating. However, given the degree of market manipulation, (see Notes on a Scandal: High Dividend Investor's Survival Guide to This Unsustainable Rally) mentioned in recent posts, one could argue otherwise and try to bet on a continuing rally aided and abetted, legally or not, by team Washington & Wall Street. 

     

     

    Disclosure: I have positions in most of the above mentioned investments.

     

    Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit http://highdividendsto...

     

     

     

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Comments (7)
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  • das555
    , contributor
    Comments (173) | Send Message
     
    Cliff,
    If you believe that the rally is unsustainable and that stock prices will therefore fall and thus provide a better acquisition point, are you selling some of your holdings into this rally in order to profit now with a view to again acquire these stocks when they pull back?
    28 May 2009, 12:14 PM Reply Like
  • optionsgirl
    , contributor
    Comments (5045) | Send Message
     
    If this is armegeddon, why aren't you short?
    28 May 2009, 12:24 PM Reply Like
  • anarchist
    , contributor
    Comments (1221) | Send Message
     
    If you follow Cliff's articles you will see that he has hedges (short positions) in place such as SKF, QID etc, so he is short. As Cliff says, he has no crystal ball and to go completely short is about as mindless as going completely long at this point. Of course Cliff also is picking up the dividends from his long positions yet not suffering if there IS a significant pullback.

     

    On May 28 12:24 PM optionsgirl wrote:

     

    > If this is armegeddon, why aren't you short?
    28 May 2009, 12:31 PM Reply Like
  • anarchist
    , contributor
    Comments (1221) | Send Message
     
    I can't speak for Cliff but I can tell you that I think it is prudent to take profits on half of each of your positions now and buy enough QID to hedge your remaining longs. That should keep you in the game so you are still receiving dividends, completely protected on the downside and with cash to re-enter the market after a significant pullback. Of course if you read this article and don't agree, still think this market is the "energizer bunny" then your best bet is "hold em". I agree with Cliff's article (instablog), I think that near term there as it will only take one of several events hanging out there like the credit card debt crises, another round of dismal employment or housing data, a geopolitical event or another bank scandal to tip this market into a large correction.

     

    On May 28 12:14 PM das555 wrote:

     

    > Cliff,
    > If you believe that the rally is unsustainable and that stock prices
    > will therefore fall and thus provide a better acquisition point,
    > are you selling some of your holdings into this rally in order to
    > profit now with a view to again acquire these stocks when they pull
    > back?
    28 May 2009, 12:48 PM Reply Like
  • optionsgirl
    , contributor
    Comments (5045) | Send Message
     
    Those 2x inverse etf's are not the same as going short. They are a proximity to it, only. "Mindlessly" going short is something I will leave to you.

     

    On May 28 12:31 PM anarchist wrote:

     

    > If you follow Cliff's articles you will see that he has hedges (short
    > positions) in place such as SKF, QID etc, so he is short. As Cliff
    > says, he has no crystal ball and to go completely short is about
    > as mindless as going completely long at this point. Of course Cliff
    > also is picking up the dividends from his long positions yet not
    > suffering if there IS a significant pullback.
    28 May 2009, 12:53 PM Reply Like
  • SeekingTruth
    , contributor
    Comments (1166) | Send Message
     
    The collusion between Wall Street and Washington , always there to a degree, is becoming more broadly and openly conspiratorial. It may be free, open, and transparent to some , but I fail to grasp and enjoy that vantage point with them.
    While somtimes well meaning (generally), this collusion cannot be a good thing in the overall theme of free market investing.

     

    Cliff , appreciate your strong efforts to summarize conditions and events, and help us select the appropriate sectors and companies with the appropriate caveats and warnings.
    Your articles are a pleasure to read and are information rich - what more could we ask?

     

    As another non prophet, I believe that extreme caution is in order , partly because of an artificially induced strong rally for the reasons mentioned, among others.

     

    One does not have to be a prophet to assess these things, and take heed when warranted. As such , you are doing a great job and always improving , a rare and valuable attribute.
    28 May 2009, 12:54 PM Reply Like
  • Delojozafado
    , contributor
    Comments (537) | Send Message
     
    What the charts suggest is that Cliff was a bit early with the exception of a batting of an eyelash in July the markets have done extraordinarily well. The investments in Canada have proved the most rewarding. Now as the trusts convert one by one we see these fabulous buyng portunities on mis-understood distribution cuts. ADN:CA/ACAZF, ATLIF and MCQPF have all moved sharply higher after tanking as against their distribution adjustments. These companies are fabulous investments in the twinkling of an eyewhen the yield as against the new distribution level and LLC structure of the company are realized. The +7.% distribution is "not sustainable" and the market quickly adjusts the prices of the now shares exchanged for units to reflect a nearer to market level interest rates of 5-7%. If you were lucky enough to get in on the above named as they went though their distribution announcements back in Dec-Jan then you could have the 7-10% increase by now in your yields just on the basis of the currency leverage. MCQPF now yielding near 9% as against the cost basis of below $6 a few months ago. Also when these convert to a LLC and are held in aUSA IRA the tax treaty with Canada provides for the stopping of the 15% Cad with holding that you are subject to in non-sheltered accounts and in trusts held in IRAs. Most have not caught on to this yet and it may very well be adjusted by Mr Flaherty in the furture. It took me three months of argueing with my broker to get the with holding stopped on my shares of ATLIF. Now we have to go to war on the ACAZF. Brokerages don't like changing things because the computer does and is responsible for all things. The individual service agents are deathly afraid to make adjustments when they are totally ignorant of what is going on. So the $3 billion telecom BLIAF is holding a meeting in May to vote on their conversion. Keep an eye on that one for a sell off to below $24 or maybe lower when they announce an adjustment to the dividend for the new LLC corporate structure.

     

    Mean while the BDF infusions in the mining sector created fabulous opportunities for whale following in the PAL, KGILF and MEAOF. C$50MM, C$32MM and C$7 MM respectively. All briefly gave way to a discount to the subsequent share issue prices. PAL @US$2.87/C$3.15 briefly slid to below US$2.50. Now a juggernaut stock witha double in hand and heading for $6.25 by many analysts targets. Palladium is up a staggering 82% against it's most recent high after just crossing $300 last Sept and then pulling back to $293 on a technical consolidation. PAL still has not poured their first bars from the mine they put some of that BDF into to get it restarted after shutting it in for price weakness. The first Bars of PD should pour sometime in May and that will give another spike. Meanwhile gold production continues strong. Kirkland lake will use their money to more than double production in the next year. Kirkland shares should be near $12 before year end. Metanor already has 95% of their infrastructure in place and is currently pouring gold bullion from their ore processing. their drilling results nearby indicate some richer stopes of ore than what they are now mining and they expect to put the cash infusion into more mining of these areas. The BDF of KGILF @C$7.25 sent the shares to blow $6. That is where there was some very significant insider buying. Recently Kirkland shares reached just ovr $8 before the current pull back in the precious yellow. Metanor went off near 45 cents and now he shares are back to 60cents the area they were trading in before the BDF announcement. With every thing in place to extract, transport and mill their ore and ramp up their production MEAOF has a likely $1.12- $1.25 outcome in the next year. Add to all this you have the DD of the forensic accountants of these syndicates who invest this money checking for intrinsic valuation and out looks for profitability. Good call by the way by Cliff on the GGN! The two REITs Northern and RIO also have been stellar.

     

    One other note : These BDFs in mining can usually be sniffed out on the Kitco homepage where the breaking mining news posts each morning. Be cautious of the non-producers like Explor Resources and Great Basin Gold/GBG. Gold has advanced 15% a year for 5 years all those stocks have done is advance the expenses of having stuffed shirts, the gigantic compensation packages, and expense accounts they run up each year for flying people all over the globe to investigate mining prospects they would then hope to explore and develop using more borrowed money from somebody else. Look for current production and viable plans to increase the same.
    17 Apr 2010, 06:38 PM Reply Like
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