Does gold’s move this past week suggest that the rest of the world has lost faith?

Summary

Fundamental Outlook for Japanese Yen: Bullish

Given the multi-month recovery in energy prices (aided by the ongoing long term weakness in the US dollar in which energy is priced), one sees a lot written on how to play energy’s recovery.

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.

The first quarter was not a pleasant one for the energy trust sector, as plummeting commodity prices left many of them worrying about their balance sheets a lot more than their operations. But Canaccord Adams analyst Kyle Preston offered up at least one piece of good news: all the companies in his coverage universe survived, and are positioning themselves for a better second half. Plus, their earnings were largely in line with his expectations (which were pretty low).

Mr. Preston noted that cash flows in the group fell 37% year-over-year, with production down an average of 7%. On the positive side, there was a slight decline in operating costs, and debt-to-cash-flow ratios remained reasonable.

Here I'll briefly review the stocks that help you avoid the Seven Deadly Sins of Income Investors.

Yes, inflation is on the way. Perhaps, as Nouriel Roubini argues, it will take some time as the deflationary pressures of a still worsening economy and failing banking system work themselves out, so we may even see some deflation first. However, the Fed can't print the equivalent of the U.S. GDP's worth of new dollar bills (about $13 trillion) and not have serious inflation (unless we get government imposed price and wage controls?) at some point. I won’t even begin to discuss what happens if the demand for U.S. Treasuries dries up.

• Steady high yields, most of the recommendations’ dividends are very safe, some less so (but with more upside potential). Thus you are well paid while you wait for the market to recover (versus negative real returns in cash).
• Earnings and yields can keep pace with USD inflation, thus providing at least some protection for your principal and income.
• Currency diversification and thus reduction of risk from declines in the USD relative to other currencies.

• Strong businesses that continue to maintain or grow their revenues, incomes and cash flows even in this environment.
• Owning or controlling vital hard assets or commodities that hold or increase value in times of inflation AND/OR dominant position in a market niche with steady and growing demand that allows these firms to raise prices when needed to keep pace with inflation.
• Earnings and distributions in a non-USD currency, ideally one that is tied to hard assets and commodities.
• High dividend yields about 7% or higher: Regardless of price movements, you continue to get steady junk bond like yields with far greater safety and better price appreciation potential (as long as they meet the above criteria).

• Yields that are high enough to leave you something after real inflation and taxes
• Protection of the value of your principal and income

Then you can profit only if the market rises. That’s a risky bet these days.

1. MARKET STATUS

Before ever considering investing in stocks, we must always first look at the overall market, since almost all stocks follow the major indices.

1. MARKET STATUS

See Part 7A.

1. MARKET STATUS

Before ever considering investing in stocks, we must always first look at the overall market, since almost all stocks follow the major indices. See Part 6A, Market Update: Warning: Do Not Feed (Yourself to) the Bears for full details. In short, we remain in a confirmed downtrend.

Treasury Secretary Geithner’s plan has revived the rally, but we’ve seen lots of short lived news driven rallies recently. Still, the idea of incentives to private investors to takeover questionable debts is a step in the right direction, since the government should not be in the financial services business any more than absolutely needed.

<<< Read part 1

<<< Read part 2

MARKET STATUS

Before continuing to examine the case for the U.S. Dollar and how high yield stock investors can hedge it while getting high yields, we first must look at the overall market, since almost all stocks follow the major indices.

High-yield stocks are a form of cash. Thus inflation eats away at both yield and principle. As governments inflate their money supply to ease credit, most oberservers believe inflation is inevitable.

Before ever considering investing in stocks, we must always first look at the overall market, since almost all stocks follow the major indices.

Canaccord Adams equity strategist Nick Majendie introduced changes to his list of "ten stocks to own," this week, replacing four names and keeping six from the previous update back in late October.

The mainstays are Barrick Gold Corp. (ABX), Bank of Nova Scotia (BNS), Manulife Financial Corp. (MFC), Potash Corp. of Saskatchewan Inc. (POT), Suncor Energy Inc. (SU) and Teck Cominco Ltd. (TCK). These stocks are joined by Brookfield Asset Management Inc. (BAM), Finning International Inc. (FINGF.PK), Telus Corp. (TU), and Vermilion Energy Trust (VETMF.PK).

Oil and gas analysts popped out mixed messages on the trusts they cover this week – a buy to one warranted caution from another.

On the sunny side, Jeremy Kaliel, an analyst at Scotia Capital, expects the oil and gas trusts he covers to spit out a total return of 41%. Their holdings in the western Canadian sedimentary basin give them the chance to discover “the next big resource” – buckets of hydrocarbons hiding below the earth’s surface.

The market sucks, but oil and gas royalty trusts, along with their junior counterparts, have a weapon in their arsenal others may lack: cash.

Mark Bridges, an analyst at CIBC World Markets, wrote in a note to clients on Tuesday:

We believe that the current market sell-off has presented a rare opportunity for producers to create value through share buybacks. Why spend capital to add reserves at $20.00 per barrel of oil equivalent when a producer can simply use this capital to buy its own stock back at $10.00/boe?

The way Grant Hofer sees it, even when you lose you win.

Mr. Hofer, the UBS Securities guy crunching data on royalty trusts in Calgary, thinks now is the time to take a good look at the group.  The trusts he covers are down 8% over the past month (but still up 34% this year), and Mr. Hofer thinks “the sector appears to us to be very well positioned and offers exceptional value today.”

We've all heard that  royalty trusts are going to be pained when they are taxed like regular corporations in 2011, and Alberta’s proposed royalty changes really suck.  However, this week, Canaccord Adams, long a noisy critic of anyone’s plans to tinker with trusts, released a report on the evolution of royalty trusts.  It picked eight oil and gas trusts it believes “have the right assets and right people to successfully transition” into intermediate or senior explorers and producers.

Top three, in no particular order: Baytex Energy Trust (BTE), Daylight Resources Trust , and NAL Oil & Gas Trust (NOIGF.PK).