commodities, portfolio, diversification, oil, gold, hedge, china, india, alternative
Copyright 2006 Rafael Velez
Although it may sound frightening and risky to many investors, if handled correctly, commodities could be the missing piece of an investor’s portfolio. What exactly are commodities? Commodities are any mass goods traded on an exchange or in a cash market including: cocoa, coffee, eggs, lumber, orange juice, soybeans and sugar just to name a few. Industrial metals are also included with copper, aluminum, zinc, nickel, silver, and lead ranking among the most popular industrial metals holdings. Finally, the most widely followed commodities include oil, natural gas and gold.
The diversification benefits equal or surpass those of other asset classes like fixed income and real estate. The primary reason for this is their correlation, or lack thereof, to the stock market as represented by the S&P 500 (Correlation describes how similar the price movement is between two investments). Commodities have historically exhibited absolutely no correlation to the stock market or any of the bond market indices. In fact, they have a negative correlation. This non-similar pattern of performance allows an investor to minimize volatility and protect capital in down markets. Overall, these factors help to decrease overall risk in a portfolio of investments. In short, commodities have historically been a good compliment to a traditional stock, bond and real estate portfolio.
When commodities are utilized as a stand-alone investment, commodities are relatively volatile, exhibiting wild price swings. At times, they are also illiquid, prohibiting the investor from exiting a position that is dropping rapidly. Another factor to be aware of when investing in commodities is the unusual income taxation. Most notably, investors are taxed each year on their share of the profits, if there are profits, regardless of whether the investment has been sold. This is a significant disadvantage compared to investments in stocks, because one does not pay income taxes until the stock is actually sold. Finally, fees to implement a commodities strategy are significantly higher than for those of traditional mutual funds, for example. For these reasons, it is best to only consider 5-20% of one’s portfolio for this strategy.
At a time when stocks and bonds are predicted by most academics and investment gurus such as Warren Buffet, Bill Gross of PIMCO, and Jeremy Grantham of Grantham, Mayer, and Van Otterloo, to produce 5.0% returns or less over the next decade due to historically high market valuations. On a historical basis, commodities are inexpensively priced and substantial upside potential is possible. U.S. inflation is historically low right now but with the effects of massive fiscal, monetary policy and already robust consumer spending, raw goods prices will inevitably increase. When they do, commodity indices will follow. As inflation gradually rises in 2006 and beyond, industrial metals prices will rise as investors begin to direct large amounts of money into these hard asset commodities. The high correlation between commodities and inflation provide an important hedge against considerable losses in traditional financial instruments such as stocks and bonds.
In his recent book “Hot Commodities”, author and renowned investor Jim Rogers summed it up this way:
The 1980’s and 1990’s saw a bear market in commodities. Prices had fallen to levels (adjusted for inflation) not seen since the Great Depression.
For 130 years, stocks and commodities have alternated leadership in regular cycles averaging 18 years.
The long bear market in commodities has created a sharp reduction in capacity – and thus large supply-and-demand imbalances.
As economies in Asia continue to grow, there will be a strong worldwide demand for all commodities.
Historically, the prices of commodities show a negative correlation to the prices moves of stocks, bonds and other financial instruments.
Commodity prices can rise even when the economy is stuck in reverse and their returns outpace inflation.
The U.S. Federal Reserve and other banks in the world have been pursuing a policy of debasing their paper currencies.
The U.S. Federal Reserve’s policy of monetary stimulus and rapid credit expansion will continue to push up the prices of hard assets such as precious metals and other commodities.
History shows that war and political chaos only push commodities prices higher.
Commodities also provide a tactical play on the current weakness in the U.S. Dollar. As other currencies such as the Euro and Yen appreciate versus the dollar, foreign buyers can buy less goods with the same amount of currency. This artificially increases demand, and subsequently drives up the prices of commodities. Currently, effects of this phenomenon can be seen best in the gold and silver markets as prices have risen dramatically over the past year.
Commodities provide a play on globalization by their ability to aid in the improvement of the global economy. This is due to the fact that prices for industrial materials will increase as demand for industrial goods increase. As countries such as China and other emerging market economies develop, they will require more raw materials. This is especially true for industrial metals. China continues to develop at a rapid pace and consequently, their demand for raw materials continues to rise. In fact, China’s iron ore demand has increased from 5% of the world’s supply to almost 50% over the past twelve years.
Commodities have proven to be excellent investments over the last few years. There are a number of types of investment vehicles to take advantage of this great diversification play. Many of our client portfolios have benefited from this recent performance. With only small allocations to hard assets, most client portfolios have delivered returns that were twice the performance of traditional stock and bond portfolios.
Many experts agree that U.S. stocks and bonds will, in all likelihood, generate significantly lower returns over the next decade. Commodities on the other hand may have the potential for the highest returns since the 1970s due to a worldwide economic expansion especially from emerging market countries.
Showing posts with label alternative. Show all posts
Showing posts with label alternative. Show all posts
Tuesday, February 8, 2011
Thursday, March 18, 2010
Alternative Energy Investments
The following is an excerpt from the book Black Gold
by George Orwel
Published by Wiley; June 2006;$27.95US/$35.99CAN; 0-471-79268-3
Copyright © 2006 George Orwel
The oil market is not the only one looking up. Alternative fuel stocks are also attracting many investors. Because oil and gas are expensive, Americans are looking for cheaper nonfossil fuel and that demand is boosting the alternative fuel stocks as well. This is especially good for anyone who cares for the environment -- the greens. If you consider yourself an environmentalist or a preservationist, this is perfect for you, for you are now able to support efforts to preserve the environment while at the same time profiting from those efforts. It's a win-win situation. Consider this: Pacific Ethanol Inc., a small ethanol-producing company started in 2003 by Bill Jones, the former secretary of state for the state of California, has trebled its stock price on NASDAQ to about $30 a share within a year of going public in March of 2005. Like many other similar renewable fuel start-ups, millions of dollars in private equity money are being thrown at Pacific Ethanol like the world is coming to an end. Billionaire Bill Gates, the chairman of Microsoft, is one of those investing in renewable fuel stocks. Gates' investment company, Cascade Investment, has agreed to pump $84 million in Pacific Ethanol.
The U.S. government has recognized alternative fuel as the fuel for the future and has included a number of tax incentives in the Energy Policy Act of 2005, the energy law signed in the summer of 2005, to spur growth in the alternative fuel sector. If you haven't already, you should give alternative stocks a try as it will make you feel morally stronger. It's been nearly three decades since efforts to promote alternative fuel floundered after the 1973 oil crisis, but it's making a comeback. Still, alternative fuel remains a small industry, with small cap companies dominating. Since 2005, 15 of the 36 companies in the WilderHill Clean Energy index have made huge profits. That includes hydroelectric power and wind energy, solar energy, and fuel cells.
Some of the most successful companies in the renewable fuel sector are huge conglomerates, like General Electric and Germany's Siemens, and also big oil companies, like BP, that are hedging their bets. Investing in these companies offers a chance to own a clean energy stock. Here's some information about GE worth knowing: It made close to $2 billion in sales from production of wind-powered turbines in 2005, treble what it made from that business unit in 2002. However, that's only 1 percent of GE's revenues.
There's a lot of hope that alternative fuel technologies developed by some of the smaller companies will become commercially viable and help support the sector. As a result, stocks for these companies are expected to soar. WilderHill Clean Energy Index gained 26 percent in the past 12 months alone, compared with 50 percent for oil. That's not bad, considering this is not an established sector in the United States.
Moreover, since continued oil supply is uncertain, a lot more consumers are going to turn to coal, which is abundantly available in the United States, China, and India. Coal used to be frowned upon because of its dirt, but technology has improved enough to make it just as clean as other fuels. Shrewd investors could buy shares in U.S. coal producers, including the two biggest, Peabody Energy Corp. and Arch Coal Inc., both based in St. Louis, Missouri. Coal companies have profited from the current oil boom.
Investing in coal doesn't mean that Big Oil isn't safe anymore. It only means that you are on much firmer ground when you have a diversified portfolio. If you look at both types of stocks, the difference isn't large. Exxon Mobil, for instance, returned 36 percent to its shareholders in market appreciation and dividends in 2005 and BP returned 21 percent. Peabody Energy stockholders, meanwhile, did far better in the same time period. They more than doubled their money, and Peabody shares have risen more than three and a half times since the company's initial public offering in 2001. Arch Coal stock returned 65 percent in 2005 as well.
Coal producers have benefited from increased demand from power plants and steelmakers in the United States, China, and India. Massey Energy Co. of Richmond, Virginia, for instance, said its average selling price for coal used in steel-making jumped 38 percent in 2005. Consol Energy, Inc. of Pittsburgh, the third largest U.S. producer, plans a $500 million mine expansion to keep up with orders.
Soaring prices for natural gas have given coal demand another lift. Many electric power plants have switched from gas to coal, which costs about half as much. In the spring of 2006, Duke Energy Corp. closed on a deal purchasing Cinergy Corp. for about $9 billion, in large part because of Cinergy's coal-fired plants.
Back to oil, we've also seen that the market has been good to minnows as well. In fact, some smaller oil companies also have outperformed the giants. For instance, Apache Corp. of Houston produced a 12-month total return of 51 percent for its stockholders, helped by increased first-quarter selling prices of 51 percent for crude oil and 11 percent for natural gas. Apache recently bought property from Shell, BP, and Exxon Mobil and its profit rose tremendously in 2005. Oil transport companies have not been left behind. Overseas Shipholding Group of New York made an acquisition in 2005 that made it the world's second-largest oil tanker company. The bigger fleet, combined with higher tanker rates, boosted the company's 2005 earnings by about 40 percent. The world's biggest owner of oil tankers, Teekay Shipping Corp. of Vancouver, Canada, capitalized on high energy prices in yet another way. In the fall of 2005, Teekay raised $132 million through the public sale of a 20 percent interest in Teekay LNG Partners LP, whose ships carry liquefied natural gas and crude oil.
Is it too late to buy energy stocks, large or small? BlackRock, Inc., which manages $391 billion, doesn't seem to think so. It reported to the SEC in late summer of 2005 that after $870 million in purchases, it owned stakes in Peabody, Arch, Consol, and Massey ranging from 3.3 to 8.8 percent. The money manager also has a 4.7 percent stake in Newfield Exploration Co., an oil-and-gas company that returned 49 percent to its shareholders in 2005.
The bottom line is this: The world needs a lot of energy, but supply is getting tighter; an "überspike" in oil prices is in the making and the potential rewards for the savvy energy investor are huge.
Copyright © 2006 George Orwel
George Orwel is an Oil Analyst and Senior Writer for both the Oil Daily and Petroleum Intelligence Weekly. Previously, he covered the oil market for six years as a staff reporter for Dow Jones Newswires. Orwel has appeared on key media outlets, including CNN, BBC, and NPR, and contributed articles to the Los Angeles Times and the Christian Science Monitor, as well as other publications. He lives in Brooklyn, New York.
by George Orwel
Published by Wiley; June 2006;$27.95US/$35.99CAN; 0-471-79268-3
Copyright © 2006 George Orwel
The oil market is not the only one looking up. Alternative fuel stocks are also attracting many investors. Because oil and gas are expensive, Americans are looking for cheaper nonfossil fuel and that demand is boosting the alternative fuel stocks as well. This is especially good for anyone who cares for the environment -- the greens. If you consider yourself an environmentalist or a preservationist, this is perfect for you, for you are now able to support efforts to preserve the environment while at the same time profiting from those efforts. It's a win-win situation. Consider this: Pacific Ethanol Inc., a small ethanol-producing company started in 2003 by Bill Jones, the former secretary of state for the state of California, has trebled its stock price on NASDAQ to about $30 a share within a year of going public in March of 2005. Like many other similar renewable fuel start-ups, millions of dollars in private equity money are being thrown at Pacific Ethanol like the world is coming to an end. Billionaire Bill Gates, the chairman of Microsoft, is one of those investing in renewable fuel stocks. Gates' investment company, Cascade Investment, has agreed to pump $84 million in Pacific Ethanol.
The U.S. government has recognized alternative fuel as the fuel for the future and has included a number of tax incentives in the Energy Policy Act of 2005, the energy law signed in the summer of 2005, to spur growth in the alternative fuel sector. If you haven't already, you should give alternative stocks a try as it will make you feel morally stronger. It's been nearly three decades since efforts to promote alternative fuel floundered after the 1973 oil crisis, but it's making a comeback. Still, alternative fuel remains a small industry, with small cap companies dominating. Since 2005, 15 of the 36 companies in the WilderHill Clean Energy index have made huge profits. That includes hydroelectric power and wind energy, solar energy, and fuel cells.
Some of the most successful companies in the renewable fuel sector are huge conglomerates, like General Electric and Germany's Siemens, and also big oil companies, like BP, that are hedging their bets. Investing in these companies offers a chance to own a clean energy stock. Here's some information about GE worth knowing: It made close to $2 billion in sales from production of wind-powered turbines in 2005, treble what it made from that business unit in 2002. However, that's only 1 percent of GE's revenues.
There's a lot of hope that alternative fuel technologies developed by some of the smaller companies will become commercially viable and help support the sector. As a result, stocks for these companies are expected to soar. WilderHill Clean Energy Index gained 26 percent in the past 12 months alone, compared with 50 percent for oil. That's not bad, considering this is not an established sector in the United States.
Moreover, since continued oil supply is uncertain, a lot more consumers are going to turn to coal, which is abundantly available in the United States, China, and India. Coal used to be frowned upon because of its dirt, but technology has improved enough to make it just as clean as other fuels. Shrewd investors could buy shares in U.S. coal producers, including the two biggest, Peabody Energy Corp. and Arch Coal Inc., both based in St. Louis, Missouri. Coal companies have profited from the current oil boom.
Investing in coal doesn't mean that Big Oil isn't safe anymore. It only means that you are on much firmer ground when you have a diversified portfolio. If you look at both types of stocks, the difference isn't large. Exxon Mobil, for instance, returned 36 percent to its shareholders in market appreciation and dividends in 2005 and BP returned 21 percent. Peabody Energy stockholders, meanwhile, did far better in the same time period. They more than doubled their money, and Peabody shares have risen more than three and a half times since the company's initial public offering in 2001. Arch Coal stock returned 65 percent in 2005 as well.
Coal producers have benefited from increased demand from power plants and steelmakers in the United States, China, and India. Massey Energy Co. of Richmond, Virginia, for instance, said its average selling price for coal used in steel-making jumped 38 percent in 2005. Consol Energy, Inc. of Pittsburgh, the third largest U.S. producer, plans a $500 million mine expansion to keep up with orders.
Soaring prices for natural gas have given coal demand another lift. Many electric power plants have switched from gas to coal, which costs about half as much. In the spring of 2006, Duke Energy Corp. closed on a deal purchasing Cinergy Corp. for about $9 billion, in large part because of Cinergy's coal-fired plants.
Back to oil, we've also seen that the market has been good to minnows as well. In fact, some smaller oil companies also have outperformed the giants. For instance, Apache Corp. of Houston produced a 12-month total return of 51 percent for its stockholders, helped by increased first-quarter selling prices of 51 percent for crude oil and 11 percent for natural gas. Apache recently bought property from Shell, BP, and Exxon Mobil and its profit rose tremendously in 2005. Oil transport companies have not been left behind. Overseas Shipholding Group of New York made an acquisition in 2005 that made it the world's second-largest oil tanker company. The bigger fleet, combined with higher tanker rates, boosted the company's 2005 earnings by about 40 percent. The world's biggest owner of oil tankers, Teekay Shipping Corp. of Vancouver, Canada, capitalized on high energy prices in yet another way. In the fall of 2005, Teekay raised $132 million through the public sale of a 20 percent interest in Teekay LNG Partners LP, whose ships carry liquefied natural gas and crude oil.
Is it too late to buy energy stocks, large or small? BlackRock, Inc., which manages $391 billion, doesn't seem to think so. It reported to the SEC in late summer of 2005 that after $870 million in purchases, it owned stakes in Peabody, Arch, Consol, and Massey ranging from 3.3 to 8.8 percent. The money manager also has a 4.7 percent stake in Newfield Exploration Co., an oil-and-gas company that returned 49 percent to its shareholders in 2005.
The bottom line is this: The world needs a lot of energy, but supply is getting tighter; an "überspike" in oil prices is in the making and the potential rewards for the savvy energy investor are huge.
Copyright © 2006 George Orwel
George Orwel is an Oil Analyst and Senior Writer for both the Oil Daily and Petroleum Intelligence Weekly. Previously, he covered the oil market for six years as a staff reporter for Dow Jones Newswires. Orwel has appeared on key media outlets, including CNN, BBC, and NPR, and contributed articles to the Los Angeles Times and the Christian Science Monitor, as well as other publications. He lives in Brooklyn, New York.
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