Money and Investing Thoughts

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.

My favorite quote so far today:

The analyst who projected $200 oil should have lopped off a zero.

Commodities Collapse: Fast, Big and Still Going – WSJ.com.

The WSJ article linked above (sub. required) show how wrong the analysts were on the commodities bubble then gives some new predictions on how far down (much farther, of course) the prices will fall. Then they compare the commodities bubble to the dot com bubble to get parallels on price losses.

If I remember correctly many of the dot com bubble stocks never had any real revenues or profits and were just over sold ideas. Commodities are a real part of the world wide economy and have significant supply constraints. I believe price recoveries in many commodities will come pretty soon. Just my opinion.

Mexico Hedges All Oil Exports in ’09 at $70 – WSJ.com.

The above article from last week at the WSJ.com (subscription required) detailed how Mexico has purchased puts against its entire 2009 oil production to guarantee an minimum of $70 per barrel. They purchased puts at a cost of $1.5 billion to cover 330 million barrels of oil. My math puts (pun intended) the cost of the protection against lower than $70 oil at approximately $4.50 per barrel of oil.

When a major player in any market takes a large position against a price move in one direction, I am tempted to believe the next move will be in the opposite. Witness the locking in of corn prices by VeraSun Energy at the grain’s peak and the subsequent bankruptcy when prices fell precipitously. Fear can drive people to irrational and ill timed decisions. I quote from the WSJ article:

But the steep fall in the price of oil from last year’s highs alarmed Mexican officials.

Buying puts does allow the Mexicans to profit if oil prices rise significantly. They would just let the put expire worthless and have a loss of their initial purchase. If you are a believer that large institutions are very good at making the absolute wrong decision at the wrong time, this action would predict that oil prices will trade in a range of $70 to $75 for most of 2009.

If one starts digging into the interrelated Atlas energy companies, you first get a headache, then you decide there may be some good profit opportunities. So far I have listened to 2 earning calls from the energy company and the pipeline folks. Atlas America (ATLS: 24.94 0.00 0.00%), which hold general partner interests and a significant portion of the LP units will report on Friday.

First up was Atlas Energy LLC (ATN: 0.00 N/A N/A) ATN is the natural gas exploration and production part of the equation. Atlas Energy currently is developing shale properties in Michigan, Tennessee, Indiana and the monstrous Marcellus Shale in Pennsylvania. From the 3rd quarter of 2007 revenues were up 19%, earnings up 21% and distributable cash flow up 17%. The company has had 6 straight quarters of record results since going public at the end of 2006. A dividend of 61¢ was declared giving the stock a current yield of 11%. Distribution coverage for the quarter 1.4 times in distributable cash. ATN sets itself apart from their peers in two ways. First, they generate funds for drilling expansion and additional revenue by selling individual tax-advantaged investor programs. They are not dependent on borrowing to fund drilling expansion. Second, they take a strong, active hedging stance to lock in profits for their natural gas production. Current hedges will ensure growing profits through at least the end of 2009. It is hard to believe the shares of ATN traded as low as $13.37 a month ago, pushing the yield to over 18%.

The conference call for Atlas Pipeline Partners (APL: 36.94 0.00 0.00%) and affiliated Atlas Pipeline Holdings (AHD: 0.00 N/A N/A) took a significantly longer than average 1.5 hours. It opened with CEO and Chairman Ed Cohen expressing his “anguish” at the valuation the stock market is putting on his company in comparison to the excellent performance he sees in their results. He came back to the topic several times during the call and I definitely got the message they want the market to value the company higher. Market concerns seem to be with APLs high debt load in the face of a possible slowdown in cash flow due to much lower natural gas prices. Atlas Pipeline currently generates about 82% of EBITDA from the processing of natural gas into other fuels under the collective name of NGLs (natural gas liquids). When asked about the affect of natural gas and oil prices on their margins the answer was that processing margins are affected by:

…NG liquid prices, natural gas prices, oil prices, the covariance between these prices and the influence of the company’s hedges on these prices.

I would find it hard for a stock analyst to get a handle on that well enough to predict the future for APL. The balance of EBITDA come from the fixed fees for the transportation and compression of natural gas.

The market has definitely priced in a distribution cut from the current 96¢ which provide a yield of 20% at the current stock price. If the distribution was cut to 80¢ (my guess as the minimum for 2009 based on comments in the conference call) the stock would still be yielding 16%. If the stock was priced at a more reasonable 12% yield on the hypothetical 80¢ distribution the stock would be 30% higher than it is now at around $26. The stock is way undervalued.

To reignite the stock price APL management is looking at several options to get the market to see more value in the stock. One idea proposed in the conference call was the combination of APL and AHD into a single entity. This would retain more distributable cash into a single stock and reduce the murkiness of the relationship. Currently whenever APL increases the distribution amount it is required to send the same amount of cash to AHD. A single company would be able to increase distributions at a much faster rate. APL is also actively researching selling off some of their pipeline and processing assets and use the cash to pay down debt. One problem some stock analysts have with the company is the amount of debt on the books.

I think both of these Atlas siblings are well managed and actively hedged energy companies that are currently very undervalued. This is from a combination of a general weakness in the stock market, falling natural gas prices, and the inability of the market players to separate the conservative players from the agressive. Atlas Pipline Partners (APL: 36.94 0.00 0.00%) is a component of this site’s Income Portfolio and Atlas Energy (ATN: 0.00 N/A N/A) is in the Opportunities Portfolio.

“I am so buried right now with the lower prices compared to what I paid,” he said. “But if I can get what I think is a reasonable amount, I’m going to sell out.”

Investors flee to stock market’s sidelines, no return in sight – MarketWatch.

I am always happy to see articles like the one above from MarketWatch. I remember similar sentiments in 1987 and 2002.

Here are a couple of more quotes from the article from professor Terrence Odean:

“There was a sharp drop for a couple of days in 1987, but this is very different,”

“It’s not unreasonable for people to want lower exposure and risk in this environment,” said Odean.

It is a source of continuing amazement how investors love stocks when they are high and cannot bring themselves to hold them when prices are at their lows. It appears that this happens to investors at all levels. The emotional pain of seeing one’s investments lose value is just more than many can handle.

And finally when the investor quoted at the beginning of this article was asked if he would come back into the stock market:

“There’d have to be a dating period. I’d wait and see what happened three or four years down the road.”

Sounds like timing for the next market peak!