Money and Investing Thoughts

Goldman, once warning of $200 oil, sees $45 in 2009 | Business | Reuters.

It look like the analysts at Goldman Sachs have learned their lesson in hindsight in regards to their $200 oil prediction. Their new prediction is within a $1.00 of where oil is currently trading. To bad they didn’t pick the $45 number 8 months ago!

To protect themselves further they should issue a standard deviation along with the prediction. A nice fat SD and they can claim accurate foresight no matter which way oil goes from here.

The article actually has the prediction of oil falling to $30 before recovering to average $45 for all of 2009.

A little research shows that GS predicted $200 oil within 2 years in early May when is was about $125. Oil peaked at about $150 a little over 1 month later. Contrarians might see this new prediction as a sign of soon to be rising oil prices.

I get the RSS feed from IndexUniverse.com and a weird thing happened to an article I was interested in today. The article was about the fact that the the Rydex Inverse 2X S&P Select Sector Energy ETF (REC: 0.00 N/A N/A) went ex-distribution with an 86% distribution. The link stopped working as I went from page 1 to page 2 of the article. I used the search function on the Index Universe website for “REC” and only found an article referencing planned distributions on 12/19. It appears the article I was reading has been taken down. I took another look at the site and the article is back up. You can read it here.

Too bad. I have completed a little research on REC and it looks like shareholders of record yesterday got hosed. Rydex declared a short term capital gain distribution of $86.48 per share. REC shares closed on Wednesday $88.23 below the ending price on Tuesday. Pity the uninformed shareholders.

REC started trading on June 10, 2008 at an NAV of $75. In the last 6 months the shares have traded between (before going ex) $70 and $258. Yesterday’s price ($12.05) plus the distribution equals $98.53, so there are exactly zero shareholders out their who will receive the distribution and actually made 86% on their investment. I would really like to find the guy who bought at $200+ and still holds the shares, has lost 1/2 his investment and has to pay full income tax on 86% of what’s left.

ETF’s are supposed to be tax friendly investments, but it is obvious there are some issues with these double down/up types. Before the Index Universe article disappeared, there was a chart listing a couple of other Rydex ETF’s that distributed 50%+ gains. Traders in these things need to keep a careful eye on distribution dates.

Each week I recap the results of the WilderHill New Energy Global Innovation Index, symbol NEX, and published by New Energy Finance Ltd. The index consists of approximately 90 stocks from 22 countries. The NEX is the tracking index for the PowerShares Global Clean Energy Portfolio ETF (PBD: 9.70 0.00 0.00%). For reference, the NEX has a 52 week high of 461.56.

For the week the NEX gained 8.7%, trailing the NASDAQ up 12.4% and the S&P 500, which gained 11.5%. AMEX Oil was 5.6% in the positive.

Solar energy was the top sector, gaining 13.7%. The sector was paced by Yingli Solar which signed a contract to deliver 91 MW of PV solar modules to IBC Solar. Suntech jumped after reporting a year-over-year profit increase of 53%. Both of these Chinese companies trade on the NYSE.

Co-largest sector in the index, wind energy gained 8.6% as several turbine manufacturers signed contracts for new turbines.

Here are the winners and losers from the index for the week:

NEX top gainers since 02 Dec 08
Yingli Green Energy Holding YGE + 53.0%
American Superconductor AMSC + 46.4%
Plug Power PLUG + 40.4%
Itron ITRI + 30.8%
Suntech Power Holdings STP + 30.6%

NEX top losers since 02 Dec 08
Aventine Renewable Energy Holdings AVR - 44.2%
Conergy CGY – 16.4%
Takuma 6013 - 16.3%
Epistar 2448 – 12.9%
Babcock & Brown Wind Partners Group BBW - 11.8%

I was scanning through some data on Terra Industries (TRA: 0.00 N/A N/A) and an interesting fact caught my eye. TRA has a current market capitalization of $1.4 billion. TRA is the general partner and holds 75.1% of the common units of Terra Nitrogen Holdings LP (TNH: 200.00 0.00 0.00%). TNH has a market cap of $1.7 billion. As GP, Terra Industries currently receives about 40% of Terra Nitrogen’s net income plus their 75% share of the regular distributions.

TNH has been popular with investors due to their high quarterly distributions. The company is a limited partnership that pays out the majority of the earnings of a single nitrogen plant in Verdigris, OK. Earlier this year, I wrote an article on the changes in TNH’s income payout that were of increased benefit to the GP and decreased the cash available to the common unit holders. The market has paid little attention to my analysis as TRA stock has fallen by 65% from when the article was written and TNH is off only 35% and shareholders have picked up $10.63 in dividends.

Let us look at the value divergence between the two Terras. Terra Industry’s 75% stake of TNH is worth $1.27 billion at current values. If the GP (wholly owned by TRA) collects 40% of Terra Nitrogen’s income before any distributions are made, let us value the general partnership of TNH at say $430 million (40% times $1.7 billion with a 1/3 knocked off as a fudge factor). This gives Terra Industry’s holdings in Terra Nitrogen a total value of $1.7 billion, $300 million more than TRA’s entire market cap.

TNH revenues are consolidated into the TRA income sheet and for the 3rd quarter TNH generated 31% of Terra Nitrogen’s total revenues. So the market is giving 69% of Terra Industry’s business a value of negative $300 million. Oh, and did I mention, TRA is sitting on $680 million in cash, half of the current market cap.

I know the short term future of fertilizer companies is considered bleak by many, but this current valuation of TRA is ridiculous. A couple of points to consider: Currently, Terra’s cost of natural gas is $4 to $5 less than their international competitors in Europe and the Ukraine. Low natural gas prices (the main component of nitrogen production) will allow TRA to maintain excellent margins even at significantly lower fertilizer prices. U.S. farmers will still plant a minimum of 85 million acres of corn next year and world demand for grains will continue to grow as populations increase. The dollar strength argument against grain exports seems a little weak since corn prices have fallen by 60% from their springtime peak and the dollar has rallied only 25% to 30%.

I am not sure the market will give up on the beating up of fertilizer stocks soon. I just wanted to point out that the current belief as reflected in the share price of Terra Industries may be very misguided.

Note: TRA is a component of this site’s hypothetical Opportunities Portfolio.

Business Cycle Expansions and Contractions.

Most business watchers are familiar with the recent news that the National Bureau of Economic Research (NBER) recently declared that we are officially in a recession and it started a full year ago in December 2007. The report from the NBER linked above give the dates of the U.S. economic expansions and contractions going back to 1854.

I took a look at the recession since WWII, since the modern industrial economy has more in common with the post-war era than the more agricultural emphasis before the war. Since WWII there have been 10 recessions not counting this one. The average length was 10.4 months with the shortest coming in at 6 months and the longest at 16 (twice). At 12 months of age, the current contraction is of above average length and has the distinct possibility of becoming a new post war record.

I would like to comment a bit about the two 16 month recessions, since I remember each fairly well. The 1973 to 1975 recession was caused by oil prices skyrocketing when the Saudis (primarily) realized they could get a lot more money from the West if they put on a little pressure. That pressure was an oil embargo that resulted in gasoline shortages, rationing and lines at gas stations. I remember a family trip from Minnesota to California in the family’s Plymouth Fury III and we could only get 6 gallons of gas at many of the gas stations along the interstate. We saw America as a gas station every 60 miles!

The 1981-1982 recession was due to high interest rates when Paul Volker pushed short term rates into the high teen after President Jimmy Carter was unable to Whip Inflation Now with his buttons. The recovery started when President Reagan cut the top marginal income tax rate from 70% to 50% to 28%.

The early 70′s recession saw unemployment peak at 9% two months after the recession officially ended. The longer 80′s recession saw unemployment climb to 10.8% but did not reach this level until a full year after the recession ended. It appears unemployment data can tell us little about the future of the economy as a whole.

The stock market averages tell another story, however. The Dow Jones Industrial Average reached a low close of 577.60 on December 6, 1974, 11 months before the end of the in-progress recession. In 1982 the DJIA hit a low of 776.92 on August 12, 1982, signaling the impending end of the recession when the economy bottomed officially in November of that year.

So if recent history can be a guide, the unemployment rate is still months from peaking and has little effect on the resumption of economic growth. If the market did reach its current bear market bottom a couple of weeks ago, the end of the recession is 5 to 11 months away. As investors, we do not care about the official end of the recession, just whether the market is signalling it. That will be the start of a new bull market.