Saturday, December 15, 2012

MLPs: The Place to Be in 2013

Stocks are drifting higher in that wonderful, irrepressible holiday spirit we see almost every December. The Dow gained 78 points on Tuesday, for instance, and probably would have gained even more (the index was up 136 points in the morning) but for some Grinch-like remarks by Senate Majority Leader Harry Reid concerning fiscal cliff negotiations.
Absent a sudden, unexpected breakdown in the negotiations, sheer momentum buying — the dog chasing the car — will likely take the market up a few more notches through the end of the month. The benchmark S&P 500 should reach 1,440 at least, with 1,470 a target in January if Congress and President Obama can seal a bargain, however limited in scope.
I’m quite content to ride this wave as far as it will carry us. However, I can’t escape the sneaking suspicion that Mr. Market will deal investors a jolt or two in 2013.
Luckily for investors, there are a few hiding places left.

Risks in 2013

Corporate profit margins have peaked for the current business cycle, which means earnings growth will be much more difficult to come by in the New Year. Analysts’ year-ahead estimates for many companies — and for the market as a whole — are probably too high.
And it wouldn’t take a meteorite from outer space to shatter the fragile optimism that has built up on Wall Street. A simple downshift in earnings expectations could quickly lop off 10% to 15% from the S&P, and an outright recession — triggered, perhaps, by a poorly structured fiscal compromise — would hurt even more.
Given these risks, I suggest you stick with the policy we’ve followed all year: buying stocks and mutual funds on pronounced weakness and peeling off a portion of your holdings as the market rises. We were active buyers in May and early June, and again in November. If prices continue to tick higher this month and into January, you can assume I’ll have some sell signals for you.
Meanwhile, we’re still buying, but much more cautiously and selectively. One group worth trolling in is the master limited partnerships.

MLPs Are the Place to Be

Chances are Congress will leave the tax status of MLPs untouched. According to the congressional Joint Committee on Taxation, the current tax treatment of MLPs only costs the Treasury approximately $1 billion in lost revenue over five years — a mere speck compared with the government’s annual $1 trillion budget deficit.
Moreover, with all the hoopla about the coming era of American energy independence, will Congress really want to squash this industry, which is building out our energy infrastructure and creating good, high-paying jobs?
If you don’t need current cash income, one way to get exposure to MLPs is though Kinder Morgan Management (NYSE:KMR). Based on the implied value of the stock distribution, KMR is yielding 6.8%. In a recent article on pipeline MLPs, I highlighed KMR and Enbridge Energy Management (NYSE:EEQ) as ways to play MLPs in an IRA account, but I expect EEQ’s distributions to grow more slowly than KMR’s in the next year or two.
KMR follows the performance of the underlying pipeline MLP Kinder Morgan Energy Partners LP (NYSE:KMP), but it can be held in an IRA and pays quarterly distributions in stock — shares of KMP — rather than cash.
The stock distributions are totally tax-free until you sell. When you sell, any profit is treated as a capital gain (a tax-favored long-term gain if you hold the units more than a year).

Thirteen Insights from Paul Tudor Jones

Paul Tudor Jones is not only a successful hedge fund manager and philanthropist, but also very original and clear thinker. Here are some of his best market-related insights:

1. Markets have consistently experienced “100-year events” every five years. While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it.

2. I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over.

3. When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. Why work when Mr. Market can do it for you?

4. These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates an illusion that there is an explanation for everything and that the primary tast is simply to find that explanation. As a result, technical analysis is at the bottom of the study list for many of the younger generation, particularly since the skill often requires them to close their eyes and trust price action. The pain of gain is just too overwhelming to bear.

5. There is no training — classroom or otherwise — that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. There’s typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief, volatile reign. The only way to learn how to trade during that last, exquisite third of a move is to do it, or, more precisely, live it.

6. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.

7. That cotton trade was almost the deal breaker for me. It was at that point that I said, ‘Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain?’

8. If I have positions going against me, I get right out; if they are going for me, I keep them… Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in.

9. Losers average down losers

10. The concept of paying one-hundred-and-something times earnings for any company for me is just anathema. Having said that, at the end of the day, your job is to buy what goes up and to sell what goes down so really who gives a damn about PE’s?

11. The normal progression of most traders that I’ve seen is that the older they get something happens. Sometimes they get more successful and therefore they take less risk. That’s something that as a company we literally sit and work with. That’s certainly something that I’ve had to come to grips with in particular over the past 12 to 18 months. You have to actively manage against your natural tendency to become more conservative. You do that because all of a sudden you become successful and don’t want to lose what you have and/or in my case you get married and have children and naturally, consciously or subconsciously, you become more conservative.

12. I look for opportunities with tremendously skewed reward-risk opportunities. Don’t ever let them get into your pocket – that means there’s no reason to leverage substantially. There’s no reason to take substantial amounts of financial risk ever, because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities.

13. I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.

Largest Capital In The World Now Entering Gold & Silver Space!

Today Rick Rule told King World News that the most massive and most intelligent pools of capital on the planet are now looking to crowd into the gold and silver space.  This is huge news for a sector that has been in a state of consolidation for over a year, and strongly supports the thesis that 2013 will be a banner year for gold and silver.

Rule had this to say about this extraordinary development:  “The things that support the thesis, particularly with regards to the gold equities, has been the approaches Sprott (Asset Management) has gotten from the very largest sovereign wealth funds in the world, and the very largest suppliers of private capital in the world.”  (more)

Dr. Paul Craig Roberts: America is Going to Crash Big Time – Dr. Paul Craig Roberts thinks there is “an impending collapse of the exchange value,” and the U.S. dollar could unexpectedly plunge in buying power. Dr. Roberts contends, “All of a sudden, people walk into Walmart, as usual, and they think they’ve walked into Neiman Marcus.” Dr. Roberts says there are no quick fixes to the bulging debt because “there’s no way to close this deficit when corporations are moving the tax base off-shore.” Join Greg Hunter as he goes One-on-One with Dr. Paul Craig Roberts.

Next Round Of QE Could Be Bad For US Dollar

The Dollar responded to the FOMC news exactly as one would expect, by moving lower.  Additional quantitative easing of $45B per month on top of the existing $40B was enough to immediately drive down the Dollar.  Although the reality is that the Cycle was already well positioned to accept this news as the path of least resistance is now comfortably to the downside.  No matter how much of the news was priced into the markets, the confirmation of $1T per year of easing, well into 2015, is not a bullish policy for the Dollar.
The Dollar has entered Week 13 and has struggled to make what would be any surprising final attempts at the Investor Cycle highs.  At this point with a potential 3rd Daily Cycle in a failed state, I expect nothing but pressure on the Dollar going forward.  It’s not going to be all downhill though; the Dollar stands on a slight crest overlooking what are the depths of the eventual Investor Cycle Low, still some 4-8 weeks away.

If you look closely at the above Dollar chart you will see that we have clearly entered the 2nd half of the Investor Cycle and the trend has moved to the downside.  Once the Dec 5th low of 79.57 is taken out the declines should accelerate.  But expect the Dollar to fight up to that point; in this macro environment all other major central banks are not exactly comfortable with a collapsing dollar and they too will resist this.

Make Up to 50% on a Relatively Undiscovered Trade... Until Now

An aging population is often cited as a reason to bet on health care stocks and other sectors that benefit from older consumers. Overlooked in this argument is the fact that equipment ages as well, and today we have a stock that could benefit from the fact that cars have gotten older than ever.

The National Automobile Dealers Association reported that at the end of 2011, there were a total of 249 million vehicles operating on the nation's roads. The average age of these vehicles was at a record high with the average car being in use for more than 11 years and light trucks having an average age of 10.4 years. Given these facts, the news that auto sales were up 15% in November as the economy struggled is less surprising. Many consumers are finding themselves in a position where they absolutely need to replace an aging vehicle.

Traders can take advantage of this trend in a number of ways. Automobile manufacturers could be bought if traders believe an economic recovery will push consumers into the new car market. Auto supply stores might be an option for traders who think that cash-strapped consumers will continue to delay purchases and do all they can to keep old cars running. Another trading possibility is to buy auto dealers, the retailers who stand to benefit from the purchase and service of a new or used car.

Sonic Automotive (NYSE: SAH) is a dealer with brand and geographic diversification that should help protect earnings from the potential impact of isolated problems in the industry. SAH offers 30 different brands of cars and trucks at 119 dealerships in 15 states.

The company's earnings have been relatively flat for the past five years, but that looks like it is about to change. After earning $1.39 per share last year, analysts expect earnings per share (EPS) to reach $1.67 this year, and then deliver average growth of about 20% a year. Based on this year's expected earnings, SAH could be worth about $33 a share with a price-to-earnings (P/E) ratio of 20, a value that would be reasonable based on the EPS growth rate. Many analysts believe that the P/E ratio should be about equal to growth rate of EPS.

That fundamental value would put SAH back near its all-time highs. In the 2008-2009 bear market, the stock sold off sharply, losing about 98% of its value. A rapid price recovery has been followed by an extended period of base building.

SAH Chart

Now, SAH is showing renewed signs of growth and has gained nearly 40% in the past six months, making it one of the strongest stocks in the market right now. Recent price action seems to be completing a cup-and-handle pattern that offers a price target of more than $23 for SAH.

SAH Chart

In the short term, SAH could deliver a gain of more than 17%. To manage risk on the trade, set a stop-loss at $18.40, which is just below the recent lows in the stock.

Call options offer another way to benefit from potential gains in SAH. May 2013 $20 call options are trading at about $1.80 and would be profitable if SAH rises above $21.80. At the target price of $23, the options should be worth at least $3 and offer a potential gain of more than 65%. May options are used because the company is scheduled to report earnings at the end of February, and these are the only options available with an expiration date that is after the next earnings release.
Recommended Trade Setup:
Stock Trade Options Trade
Buy SAH at the market price Buy SAH May 20 Calls for $2 or less
Set stop-loss at $18.70 Do not use a stop-loss
Set price target at $23 Set price target at $3
Potential Profit: 17% Potential Profit: 50%

Italy Joins The Two-Trillion Debt Club

from Zero Hedge:
As Monti, Grilli, and Berlusconi jockey for the headlines, the nation of Italy will surely be celebrating. Since debt is apparently wealth, the Italian nation has just joined an exclusive club of ‘wealthy’ nations as its total national debt blows through EUR 2 Trillion. With the trend now growing beyond exponential, having gathered pace since the crisis began in 2008, we suspect it won’t be long before we see EUR 3 Trillion (of course entirely backstopped by FT’s man-of-the-year Mario Draghi). It appears that it’s not ‘greed-is-good’ but ‘debt-is-good’ that is the idiom of today’s sovereign financiers.
Read More @ Zero