Some truths about oil in the USA.

 For many years I have followed and invested in the oil and gas industry and believe maybe not being an authority I do know some truths about the oil situation as it is now. 

1.  The US now has within it's borders enough oil to fuel all our needs now and for the foreseeable future. The finds in North Dakota and the Eagle Ford region of Texas brought forth via fracking and new technologies make it now possible to need not one drop of imported oil from the middle east or anywhere else. 

2. Ditto for gas, just lots more.  We are floating on a ocean of natural gas in this country. This is the reason most utilities are changing from coal to gas electricity generation.  Add in that many long haul trucking companies are looking to convert their fleet to natural gas as well.  Natural gas is cheap and going to stay cheap for a hundred years or more due to the huge abundance we currently have in the ground.  If you have something that can use natural gas such as stoves or heating consider changing over from whatever energy source you are using now because it will likely save you money. 

3. In fact we have so much oil and gas in the USA we will begin EXPORTING it next year.  You read that right we will export it next year to other countries who do not have the technology and expertise we have to get at what they might have underground.  Check out the prospects for Chimera Energy for the first company that will begin exporting. 

4.  I expect you are asking why are we exporting energy and not using it right here in the US instead of continuing to import from the middle east or Venezuela who frankly do not share our values and sometimes outright hate us.  The reason is quite simple Barack Obama, Democrats, and environmentalists do NOT want us to us our own oil resources.  They currently are directing tax money to failed firms investing in wind, bio,  and solar energy.  All these excepting maybe solar have no hope to give us the energy we need at a price we can afford.  Both wind and bio are not only expensive, but have environmental issues of their own.  Solar has finally reached a point where it is affordable, but the issue with solar is that it takes up so much land space we simply can not produce enough to make enough energy to be worthwhile.  Besides using farmland and clear cutting forests to solar farms is not a good idea. 

5.  We are currently paying about $1.00 more per gallon at the pump than necessary.  The reason is that Obama will not allow construction of a pipeline from Canada to our oil refineries on the Gulf coast to refine and compete on the world oil market.  The Keystone XL Pipeline would pipe oil from the also massive oil resources of western Canada is being blocked by the administration and would add tens of thousands of jobs to build the project are being lost.  That oil would drive down prices due to the glut of oil it would impose. 

6.  Like it or not the oil companies and environmentalists are in bed together.  Yes, you read that right big oil companies make huge contributions to The Sierra Club and other big environmental operations to help keep much of this new oil from coming to market.  Much of those contributions are via bogus organizations so you need to look hard to find them, some are right out front and oil companies say they are trying to buy influence which is not so. The environmental lobby in turn does their part to force government to impose restrictions on use and drilling for oil to suit their aims. Talk about strange bedfellows, but it goes to prove the old adage that if the people and firms invested in having a problem would go away the problem would go away too. 

7. Last point and most important how can one make money on this information.  First off note the cost of oil coming out of the ground is more expensive than it used to be since the technology needed is much more involved.  Canadian oil is even more expensive due to the labor and capital required to get it processed so even with the best of environments with a true free market oil at the pump is never goring to see sub par $2.00 again.  Arab oil is cheaper to pump, but add in the cost of transport and you bump that up a good bit.  Not to mention the constant worries of something blowing up in the middle east and the cost to insure again such happenings. However much of the North American market is switching to local sources of energy and despite being higher in price is all but a guaranteed delivery.   For the next couple of years the refiners such as HFC and marketers such as COP offer good value via a solid dividend and good upside in stock price.  Long beleaguered ERF has finally hit bottom and with it's large footprint in the Dakota range has got some good upside along with a nice current dividend.  For those swinging for the fences LUKOY is a good choice. DVN offers significant upside potential as well.  The Eagle Ford play in Texas has been a gusher of late but many of the slow rabbits have been caught there. 

A double for 2013 and a 50% for 2012.

AAMC... This one is the stock of the year from Doug Kass, who has called market movement well the last few years.  Doug's pick last year was ASPS, go take a look at the chart and you will get interested in this year's pick.  This one is a spin off from last year's stellar pick and we believe has a good chance to double as he suggests in his latest letter.  AAMC, or Altisource Asset Management, will manage many of the back office work for foreclosed homes in their portfolio.  This business is growing faster than any other business in the country currently.  ASPS was the first play in the pipe on the foreclosure business.  Now the homes are starting to come out of the other end of the foreclosure process as homes ready to be sold off by banks and the federal government. The states AAMC is operating in are those banks where judicial process is not mandated. If you do not grasp the difference between judicial and non-judicial states look it up as the prior approach is causing significant backlogs in the foreclosure process hindering economic activity in those states.  SBY, a stock we mentioned in our post just before this one, is buying up these homes, repairing and renting them out.  There is a private business American Home.com that is doing the same and could come public soon I like even more.  Frankly many home run stocks in the next few years are in the clearing the foreclosed homes business and AAMC looks to do well.  This stock got public notice yesterday from several websites and jumped $4 or so to $84.  We much prefer to get it at $80 and hope once the buzz is worn off it will drop back some. 

HFC.. Holly Frontier Corp. is one of Goldman Sachs conviction picks for 2013.  After some research of all their picks I like this one best.  It has a 6% plus yield and growth prospects.  The growth prospects come from the increasing oil being found in North Dakota Bakken area and being pumped down to the Gulf coast to be refined in HFC's refineries. The other area showing significant increases in oil production is West Texas and there the fracking technique is rapidly making that area the growth play in the oil and gas business in the US.  HFC's refineries here are right next door. HFC has shown smarts in their business in mergers, in keeping expenses in check, and frankly being in the right place at the right time.  This stock could show a 50% increase this year if Goldman is right and we agree.  They should add to their already impressive dividend and I would not be surprised to see HFC add some refineries this year from purchases.   Buying in the low $40's here is good.

              

Trading Portfolio for 2013

We have spent a good bit of the last two months away from our hedging activities to rest up, reassess the market going forward, and maybe get some of the old thrill back.  We believe that has been accomplished to some degree. We cleared out much of our portfolio with the expiration of options on Dec. 21 and begin to build into a new portfolio that is not too different than the one we formerly traded.  Trading requires knowing your securities.

 The reasons are simple run and gun hedge trading is basically dead in this new Obama world as no one can trust him.  This lack of trust means any stock or industry is subject to being ridiculed or regulated out of existence by Obama. Therefore the positions we will use going into 2013 will be certainly safer than in the past.  We will use much tighter hedging pricing to keep us less vulnerable to silly proclamations from this administration. What this will do is limit our profits a good bit going forward, but since as we mentioned before we are playing with house money if we do not play we have absolutely no chance of profits. 

Below we present our portfolio and most important pricing positions for trading in 2013.  

BCE...This Canadian communications company returns but our price for entry will not be $40 instead of $45. 

CTL...This legacy communication company returns with again pricing set lower at $38. 

T...The largest telecommunications company is added with pricing at $34

NNN...This triple net lease REIT is an old standby and is the longest running stock in our portfolio and is without any doubt the soundest one bar none. Pricing at $30.  We will double our hedging on this one as a reward. 

NCT..This REIT which was added late in the year has a nice upside and good options premiums.  Pricing at $7.50.  We will also trade this one in our long term portfolio. 

O...We will admit Realty Income surprised us with strength at $40 and we will keep it there. 

JNK...We will keep this one, but keep it close in time due to some worry regarding interest rate risk.  Pricing at $40. 

ARCC...This BDC is a solid performer and high yielder.  Pricing at $17. 

SO ...We believe SO has now moved down enough to make the price more interesting.  SO has also cut a good number of coal fired plants and replaced them with gas fired ones that are more acceptable to the EPA.  In the end this company operates a electric utility in the best regulatory states environment period.  Pricing at $42

BP...Dare we take a chance on this one?  We are going to try since it appears BP has set a good base at our entry price of $40. 

ERF..We have been rewarded and burned so much on this one we keep it with concern.  However ERF in our opinion has finally set a base and should be rewarding from here.   We are setting a base at around $13. However we carried this stock over in our portfolio from 2012 and are holding a lost in it currently.  

FTR...We continue to like FTR going forward, but will only use long term options in hedging here.  $4 or $4.50. 

Long term option candidates.

TCAP..Long term option if can get in at $22.50.

SBY..We are awaiting options trading here.  Note an earlier post on this new issue. Entry price $18.50.

LO...We will not be fooled again here with Obama and his FDA.   We will long term option it with an entry price of no more than $110. 

              

              

SBY and OAK...Opportunities for long term investors.

Rarely do opportunities come along like this one and with solid management as well.  SBY...Silver Bay Realty Trust  just started trading less than two weeks ago.  The IPO was at $18.50 and dropped a bit before firming up and now trading just above that price.  We really like this REIT and expect it to be a long term performer in basically an entirely new industry.  

Home foreclosures are continuing at a rapid pace and these homes once they go through the extensive foreclosure process come out the other end as excess housing inventory to be sold off by  banks or the US government.  The disposal prices are much much less than the former selling price and usually much less than what their value will be some years down the road.  Patience here is the key. 

SBY plans on buying up as many of these homes as they can and will fix them up if needed and rent them out.  The idea is to produce rental income that is payable to the shareholders and as the housing market improves sell them off for nice tidy capital gains. We personally think they can make this happen, but again one must wait until housing prices improve. Basically buying SBY you become a partner in renting single family housing with the opportunity to sell homes when the price is right. 

Remember much of home buying is location and the real estate the home sits on, not necessarily the actual home itself.  Here is a key to this stock doing well and that is using their funds to buy homes in future offer desirable selling of real estate that have rental opportunities now.  Management looks to have the experience and skills to do just that. 

There is risk if housing does not improve.   The company will initially own about 3000 homes which is being spun off from Two Harbors Investment.  There is also the worry of renting out all their homes, which currently are not fully rented.  The original value average of $121k is low as well. However on the plus side are annual rents giving a 10% gross return right now. There is some big money moving into these shares and we too believe some part of your portfolio needs to be here. 

We will wait until the stock has some time to trade and the price settles into a pattern to step in and buy shares or if options are offered take a position there. 

OAK...Oaktree Capital Group has been on our radar for some time since starting trading in Spring of 2012.  Oaktree specializes in  contrarian investing.  These opportunities range from distressed debt to distressed real estate worldwide.  We liked the company early on, but wanted to wait and see if they could execute in this economic environment.  They have done so and recently the stock price has responded with a move above $45.  They also have plenty of size at $81 billion in assets. 

Yes, we would love to buy this stock cheaper and will be patient and see if there is a move down with the uncertainty in Washington DC.  However one could buy OAK as a long term holding and do well five years out.  

Both SBY and OAK are long term buy and holds where investors will do well.  OAK pays a nice 4.8% dividend and we expect once SBY gets going they will pay a similar dividend.  We also expect nice capital gains from both here as well.  

OAK is a partnership and will spin off a K-1 at tax time. Consult your tax advisor before purchase and if possible it would do well inside a IRA.

               

Toyotathon..the rest of the story.

Every year at the Christmas and New Years holiday period I get hit with remembering back to the year 1979.  Most of you see the seemingly endless series of TOYOTATHON commercials on the tube I see the word STUPID.  It is bad enough to know how stupid we were at the time, but trust me being reminded year each is not pleasant. In the paragraphs below you will see the rest of the story about the event called Toyotathon. 

 

All this occurred very innocently in the little town in eastern North Carolina of Clinton. However let's set the table first and go back to 1975.  I began my personal working life as an advertising salesperson for the Jacksonville Daily News in Jacksonville NC under the direction of two experienced and knowledgeable supervisors. Now Jacksonville NC is a military town being the home of Camp Lejeune and is full of young Marines with money burning a hole in their pocket. Young Marines have two big desires women and a nice car to drive on days off.  The Daily News the primary media in the market covered the second desire well with lots of automotive advertising since the car dealers wanted these young Marines to come spend their automotive money with them.  If memory serves me there were at the time some over 20 new car dealers in the area and a large assorted group of used car dealers wanting at their share of  this burning a hole in the pocket money. Note that in those days new car dealers usually had one line, Toyota, Fiat, Datsun (you have to be old enough to remember that one) and on and on.  The competition between dealers was intense and the two people, the manager and myself, in the car advertising dept. at the newspaper were kept quite busy selling and handling advertising for these dealers. In fact the Jacksonville newspaper ran more automotive advertising than the Raleigh newspaper at the time. The two supervisors helped teach me the finer points of handling car dealers and part of that was learning how the business operated and automotive talk used at dealers. I was young but a quick study and began to handle as many as 10 or so of the smaller dealers, leaving the big boys to the supervisor. When the boss was out I handled his load as well. The four years of this non stop deep in the weeds learning helped make me pretty good at working with new car dealers and I frankly enjoyed the work and being on the inside action so to speak. I liked new car dealer work so much for years afterward it was not unusual for me to be found at a dealer on Saturdays my day off just to enjoy the atmosphere,  and learn some more.  There came a point I could go into a auto showroom, check the atmosphere,  and know if the auto dealer was successful.

 

Now all this acquired automotive education was taken to a new job when I moved to Clinton NC in July 1978 to begin working at The Sampson Independent.  More money and better opportunities awaited me. My account list there had about three new car dealers and I quickly immersed myself in their business and began to help them sell more vehicles. Since I knew the auto talk and liked it my sales bloomed.  My supervisor noticed my skills with auto dealers and decided to assign me one of her accounts Clinton Toyota. Clinton Toyota was a fairly new dealership that was trying to sell Toyotas in a market that did not see Toyotas other than a bucket of loose bolts. But nevertheless I was assigned and the owners of the dealership there actually called my supervisor and asked her why she had assigned someone else to the account. They had liked having the manager call on them and expressed concern of her no longer handling their business. The manager assured them to just give me a try and she believed they would be happy. Now the manager being a step ahead of the Toyota dealership owners had already figured this out and knew if anyone could help them sell Toyotas I was the one.  It also would help her make her sales goal in her newspaper advertising dept. as well.

 

So the relationship began in early 1979 with the two owners and their new dealership. The final piece to this soon to happen event now comes into play and that is one world renowned Jim Moran. JIm was an automotive marketing legend already when he was asked by Toyota to take over their sales and distribution in Southeast US markets. Jim had already retired, but automotive was in his blood and I supposed he figured it would be fun too. So Jim went about trying to add new dealers to the network and existing Toyota dealers to push sales of Toyotas. Frankly most dealers were just fine with 25 or so new cars monthly making a nice profit on each and selling to people who just wanted a cheap fuel efficient car.  Jim was having a difficult time making headway with getting dealers to push sales notably in the bigger metro areas like Raleigh. Jim looked at Raleigh and saw a large and rapidly growing young population that would be ideal for Toyota sales. However the Raleigh dealer was not interested in pushing Toyota sales hard enough in Jim's opinion . Jim could not understand this since he thought they had an ace in the pocket which was the recent Arab oil embargo which had pushed up gas at the pump prices and should make small fuel efficient vehicles a easy sale.

 

Jim also had another ace in his pocket in the form of the Clinton Toyota dealership owners who wanted to push Toyota sales and were willing to work hard in the attempt. Jim decided to use this dealership in Clinton to get some of his other dealers moving by asking Clinton Toyota to begin advertising in other markets where Toyota dealers already existed hoping this would get them moving on sales. Marketing money was made available to do so. As noted I was now the Clinton Toyota advertising rep and knew just how to make use of the marketing money.  In the winter of 1979 one of the owners Jeff who was the marketing person and I began working closely as a team to market new Toyotas across Eastern North Carolina.  We were moderately successful at doing so and sales picked up to around 50 or so vehicles per month. Jim Moran took notice and asked Jeff and Tommy to make a BIG push in April and May to sell Toyotas.  Jeff came up with the idea of a big sale stretching from April 15 thorough Memorial Day in May. He envisioned selling 500 vehicles during the period. Jeff was a dreamer. Most everyone else though he had lost his mind thinking the dealership could sell 500 in that period. Jeff and I got together one day in late March in his office to put together a marketing plan.  It was here we decided to called the big sale the Clinton 500 and name it officially a Toyotathon. I still do not remember who came up with the phrase first but it was either Jeff or myself, but what I do know it was here at this moment that it was coined. Anyway the sale began and for around six weeks we ran an ads on radio, tv, and newspapers each week in various media markets. By the end of Memorial Day weekend we had sold somewhere around 450 vehicles. 

 

Frankly I believe even Jeff was shocked we sold that many, after all 75 to 100 would have been a good run. I know everyone else had smiles on their faces. Jim Moran took note of this sale and obviously was pleased.  I also expect he pointed to the success in front of some of his larger metro dealers saying see you can do this and more if you just try.  Whatever was said or done what I do know is Jim thought so much of our Toyotathon he did a late 1979 Holiday sales blitz using the name. Sales went big time during that campaign as well and the name stuck. Jeff and I were like proud parents having someone use our creation. Never thinking or considering that if we had been smart we would have copyrighted the name and sold it to Southeast Toyota.  No telling how much money we would have made over the now 34 year existence of Toyotathon. That is why when I see the word I think STUPID.

 

Now through the years when I see Jeff we laugh about it now knowing what we should have done. Oh, the story you will see about Toyotathon officially is that some ad agency came up with the name, but all they did was use the name.  But I know where it really came from and unfortunately Jim Moran is no longer with us to affirm this recollection. Jim took it and thanked us and passed it on to the agency for the official Toyotathon which is nationwide now.   

Now you know the rest of the story.               

Wiped Out?

Hardly a day passes that we do not see that a hedge fund has closed.  Many of the long time hedge funds in the past year have taken significant losses and the resulting exit of investors.  The reasons are many but mostly they revolve around a market where placing hedge bets increasingly result in losses.  Since these losses are hedged the loss factor can sometimes be many times the bet made.  Hedging in it's simplest essence is stock insurance either on the bull or bear side.  Any insurance market where losses become unacceptable or more importantly where the writer of the insurance can no longer see some reasonable assumption that the majority of the hedges will end up making money the writer stops making insurance shop. 

This is exactly what has happened in the US stock markets as more funds are as I said exiting the market.  Without the insurance protection, but more importantly without the insurance protection with reasonable premiums investors are left totally naked.  Like it or not lack of hedging in the stock and bond markets mean a much more unstable investing market going forward. Imagine automobiles and homes where insurance companies will not write insurance or where the insurance cost is higher than most people can afford.  

Our fund has in the last year taken some losses as well, but even into the last quarter we were positive cash flow. Much of this is due to the structure of our fund in that we hedge only certain kinds of stocks and then only a dozen of those that make the cut. We have been selective and our structure has always made cash flow a priority with a built in planning where even when we might be sitting on losses we could cover interest and trading fees until the market improved.  The key was to make enough cash flow via premium gains to make money.  However there has to be some solid base of reliable stock pricing to make this plan work.  In the past year the constant unreliability of stock pricing has made placing hedges almost impossible.  Much of this is due to a political environment where one has no idea where Obama or some other politician makes doing business for this or that business much harder by some policy move.  In the past year be it oil, tobacco, telecom, real estate, business development, and finally utilities have been hit by some form of policy change that resulted in stock price hits that could not be hedged via the normal news cycle. 

The last one utilities is by far the most extreme in that for years those businesses operated as boring regulated dividend producing widow and orphan stocks.  No longer is that the case.  Southern Company the first company we ever blogged about was as boring as they come.  This past week they finally succumbed to the global warming/climate change policy and took a earnings hit.  We honestly believed that was impossible up to now since the regulatory environment they operated in was most positive. 

The past week following the re-election of Obama the full force of the unreliability of earnings and dividends has come forward in a large sell off in the stock market and the pending losses in our fund are now more than our accumulated cash flow over the past year.  We are hoping their will be some relief in the brutal sell off of the past week the next five days prior to the options expiration cycle ending next Friday that will at least bring us back to even for the year. Even if it does not we are now considering ending our hedge activity after many years of doing so since the Obama environment makes it too difficult to do planning with so many unknowns involving policy decisions. 

We have always played with house money and used other people's money to make insurance coverage decisions.  Therefore if we do indeed decide to exit the trading market we leave with no more assets or no less assets than we brought in, just the loss of cash flow.   Frankly in a political environment where common sense and logic are replaced with emotion and cronyism we just prefer not to play.  Over the next couple of months our blogging will be much less as we continue to survey the current trading environment.  We will take this time to unravel our positions and begin an orderly exit of the options market.  We suggest others consider removing assets from danger as well. 

               

Searching for that Helen Keller moment.

This post was put openly online today and I am reposting it here for purposes of my readers to see since many who read my posts DO get the point. 

Yes I have seen many of your posts from my liberal Facebook friends who supported Obama regarding some mean spirited posts on FB you said you noticed by some of your and maybe even my conservative FB friends.   First off I have checked back and did not see any of my posts I considered mean spirited, but maybe you took them that way.  If they came across that way I apologize now.  All my posts either in jests or just pointed on a subject were purposed in finding that "Helen Keller' moment with those of you who I believed did not grasp the seriousness of the election. 

By saying that Helen Keller moment I meant that moment in the life of Ms. Keller where after a long and tortuous effort by her teacher Anne Sullivan where she 'gets it' and begins to frantically want to learn all she can after the light goes off about her situation.  if you have seen the movie you know her teacher was at her wits end trying to communicate but as a teacher knew IF she connected the quest would be worthwhile. 

Not to be overly cocky here, but for most of you reading this post I understand the American free market system better than you do.  I talk regularly as I have for over three decades with small business owners and I connect with their concerns and hard work they put in to survive and sometimes hopefully thrive. Most small business people take great risk with saved capital to make a go of it. Most of you frankly do not since you only see most of this from the outside. I can tell it by hearing you talk or just seeing your posts. You might even think small business people are rich SOB's who either make too much or do not hire you because they want to keep the profits to themselves. Nothing could be further from the truth as the vast majority of small business support local charities, schools, and employ local people.  They also enjoy making life better for their communities as well and like to grow and hire more employees. It is just in their blood.  Something most people do not grasp to be honest. 

Over the past four years most of these small business people have suffered significantly due to the recession as have their employees.  They want things to be better economically and know that the regulatory environment and downright mistrust Obama has placed on them has done nothing more than make things worse economically. They also know Obamacare is the doom to many of these small businesses as they can not afford the costs and stay in business.  To that point Obama had to go to make things better.  Anything else the media tells you or you believe frankly is not true and my efforts on Facebook has been to try and make that point get home.  

Add in the simple fact that Obamacare long term ends your liberty of choice regarding your own health care decisions.  Like it of not that is simple fact.  Your vote for Obama meant that you were willing to throw away your liberty and continue the slow death of small business.   I frankly am sorry I could not connect as I have opined on my blog smalltowninvestor.com which most of you do not read that this election does not effect my personal well being much as I am old enough to literally run out the clock and live life before things really go bad.  In going bad means we can not go on as Obama and some believe forever spending like drunk sailors and not go broke.  Trust me on this one taxing the so called rich there is not enough money to tax to solve the problem.  So to that end I failed in helping most of you see the "Helen Keller" moment.  I am not mad at you I am sad for you for the pain and problems will be yours.  At this point there is no hope and to that I am very sorry.