Red means opportunities

I always get more excited when I look and see red in the market, because It makes me feel like I have an opportunity to get something. When its all green I’m more likely to just add to my watch list. I’d been meaning to diversify my GLD into more gold related plays, and had gotten into RGLD already, but today I got to buy into both SLW and SAND. I didn’t have any new money so it had to be a trade … Last night I decided it was time to dump CPNO (there are better quality MLP’s out there) and I also sold a fraction of my GLD this morning. I’ve been seeing GLD as similar to holding cash lately, because in a sense it’s like a currency with 0% interest but relatively low QE (from mining).

Another stock on my watch list which got hammered today is an agricultural MLP, ticker TNH, which sells fertilizer. On the 17th my Citibank preferreds (C-PG in yahoo) which have been called will pay off so I’m hoping it will tank more before then. MLP’s have been going down across the board lately because of the fiscal cliff issues. Essentially, they are tax advantaged companies (they pay no corporate income tax), but they are required to pay out a large portion of their earnings to shareholders. They typically pay high yields because of this (TNH pays 7.7%)

MLP’s (Master Limited Partnerships) do have a good reason for declining in value after the fiscal cliff. Their high payouts mean that most of the tax burden is on investors at individual income tax rates which are going to increase significantly. In addition, as a limited partnership (limited meaning liability is limited to the stock hitting zero), you will receive K-1 statements and will be taxable or a portion of corporate income which is difficult to calculate. To me, this is great! It can scare off the wealthy investors so the little fish like me can take advantage of the yield. I simply throw away the K-1’s as junk mail. I’ve always done my own taxes (why pay hundreds for someone else to fill out a simple form?), my net worth is hardly relevant, and my taxable income will be nowhere near six figures anytime soon, so whatever affect they have on taxes is largely irrelevant to me. On the other hand, if you’re a wealthy investor, you might have other considerations – which brings me to another topic: Municipal Bonds.

I am actually somewhat concerned over the state of the tax-exempt status of municipal bonds (note I wouldn’t personally invest in them anyway because a tax shield for me has little to block). Regardless, the tax-exempt status of municipal bonds has been out to question … I highly doubt they’ll get rid of it entirely, but both sides seem keen on reducing the tax shield you can get from them by different means (such as including it in a list of deductions which are capped at a certain percent of income). Unlike MLP’s, the yields on Munis are pitifully low, so if the tax shelter is chipped away while local government debt problems fester, holders of munis could be in for a rude awakening. In short, I really don’t think they pay enough to be worth the risk, even for those in the upper income brackets.

I’m going to cut the post here and call it a night. Sorry to not include graphs or links in this one… I’ve been keeping up on reading and could talk about things like:
1. French debt being highly artificially low because of central banks being limited in their options when purchasing euros, or
2. The effect of central bank buying of gold in the east, which is greatly supporting the price and is unlikely to stop as few good alternatives to dollars (meaning US treasuries) are available for a central banks to purchase, and QE-infinity has them looking to diversify.
It’s been really busy for me at work these last few weeks (in a good way), so I’ll take a breather and say goodnight.

-John Taylor

Advertisements

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
This entry was posted in Market Thoughts. Bookmark the permalink.

5 Responses to Red means opportunities

  1. jbock220 says:

    I’d like to hear more about your thoughts on the last paragraph, QE4 and what that all might mean for down the road. Also, when are you getting your brokers license?

    • johnonstocks says:

      I’ll try to get more about that in another post. I’ll dig up some of the stuff grant Williams had on it a week or two go – it was good.
      As for a brokers license, I have no plans to get one or to get into the finance profession at this time. I’m fascinated by it, but its a tough time to enter the industry and I need to get a serious career going – which means I need my Project Engineering Industrial/Automation job to lead to Project Management roles. This industry and Sachs Electric Co have a bright future, and I need a bright future too. I’m happy to have an outlet for my interests though – no one at work is the slightest bit interested in finance/economics/investing, few are interested in history, and those who like current events focus too much on politics which is always overblown and often irrelevant.

      • jbock220 says:

        HA, I am in total agreement on the politics thing.

        I think I’ve said this before, but It’s too bad you’re not going into finance, I’d bet you could have a nice little practice of your own if you wanted to (My wife worked for a guy who managed some old PV money and I don’t think he cared about it like you do).

        Thanks for posting.

  2. Geoff Taylor says:

    What is an MLP? Is that like a new kind of LLC that you can buy stock in?

    • johnonstocks says:

      MLP = “Master Limited Partnership.” As a partnership it pays no corporate tax- income is taxed by “partners” or shareholders directly. The bulk of income is paid in dividends, but some is reinvested to keep the business running and growing. Limited partners have no legal obligation if the company is sued or owes money – their holdings in the company can only go to zero (like a stock) but you can’t lose more than that. They are traded over the NYSE just like a normal stock (BWP is a popular one).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s