- Almost every article that you read in the Press these days paints an economic picture that is so bleak that it is downright frightening.
- I do not buy into this philosophy.
- Significant downturns, one of which we are now in, present opportunities.
- One of the sectors that I am very positive about is energy. I am also eyeing the real estate sector.
I don't know how it happened
It all took place so quick
But all I can do is hand it to you
And your latest trick
- Dire Straits, Your Latest Trick
It's bad. It's badder. It's worse than badder. Almost every article that you read in the Press these days paints an economic picture that is so bleak that it is downright frightening. You feel as if you should own nothing and build an underground shelter to protect yourself and your family.
I am sorry. I do not buy into this philosophy. I have read all of this kind of stuff in 1987 and 2008/2009 and the cries of forthcoming disaster are mostly the touts, the pimps, if you will, of people and institutions that will benefit from our current position.
I also point out that significant downturns, one of which we are now in, present opportunities. Let the amateurs and the faint of heart go into panic mode. Let them sell everything and run for the bleachers. Their loss can be our gain and my investment timeline is longer than one millisecond, thank you. These people and these articles are just so far away from me.
Here I am again in this mean old town
And you're so far away from me
And where are you when the sun goes down
You're so far away from me
- Dire Straits, You're So Far Away From Me
One of the sectors that I am very positive about is Energy. The price of oil and natural gas, already significantly off its lows, has further to rise in my estimation. We have had a demand problem, as coronavirus has upset the applecart, with many industries closed or close to closed. I am well aware of the problem. Yet, as I so often say, problems create opportunities and the demand for Energy will return.
There are investment grade bonds that I like here paying very nice yields. There are some high yield names that I also find quite attractive. Also, the closed-end funds with energy portfolios have generally not caught up with the recent rise in WTI and some of the yields here, for monthly paying funds, are well into the low double digits.
Look, the ten year Treasury closed Friday at 0.612%. The Fed is in buying Treasuries, investment grade bonds and even high yield bonds. There is now a kind of floor here built by the Fed's support. Moreover, double digit returns will eventually compress in against Treasuries and I do not see yields going significantly higher any day, or month, or even year soon. We are chained into a low yield environment if, for no other reason, that the government of the United States cannot afford to pay higher rates on all of the money it has borrowed, and is borrowing, and so the Fed will make sure that interest rates remain at very low levels.
Consequently, in the Energy sector, you have all kinds of positives going for you. Sure, they will be bankruptcies and reorganizations. However, the product, itself, is not going anywhere. Yes, Saudi Arabia and Russia may continue to chip away at each other but eventually they will reach some accord because their economies require a solution, if nothing else. Both countries virtually have no economies except for energy and so the politicians will be forced into some agreement before revolt or revolution occurs in their countries. There is just not any other choice.
I am also eyeing the Real Estate sector as another good opportunity. Here, again, there will be bankruptcies and reorganizations, but the Real Estate properties will remain. The product, itself, like oil and natural gas, is not going anywhere. It is just a question of its valuation and cost. Several years ago, many pieces of Real Estate were very highly valued, and the cash flows made no sense. Now, cash flows are down and so the valuations make all kinds of sense especially if they can be purchased from banks and other debt holders that are in trouble. Our coronavirus pandemic has opened the doors here, and I invite you to examine entering.
I have often pointed out the pitfalls in the hotel industry. They are certainly present as no one ones to congregate but even here, there are opportunities that abound, if you have a little patience, as this will change over time. There will be conventions and meetings and events again and if you can buy at some of the almost historic low valuations that exist today then Alpha, in my view, is likely to be achieved.
Office properties are another area I like because people will be going back to work. Social distancing, of some kind, will likely remain in place and if you think this through it would mean that many companies will need more space, and not less space. You have to look out just a little further than your nose.
My point today is that yes, we are in "Dire Straits." This, however, in any known language, does not translate into "the end of life as we know it." We are just in a tough position. Having said that, tough positions always create opportunities and there are several stand-out opportunities that can now be utilized, in my opinion. It is Dream, Think, Plan and then Execute.
Just listen to the music and begin to dance.
You get a shiver in the dark
It's a raining in the park but meantime
South of the river you stop and you hold everything
A band is blowing Dixie, double four time
You feel alright when you hear the music ring
- Dire Straits, Sultans of Swing
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
This article was written by