Trump Budget Poses Big Challenge to Republicans

“Dead on arrival”: The three words from Capitol Hill that greet almost every presidential budget. Even when dealing with a president of their own party, lawmakers are loath to relinquish the purse strings. They have the final say on all federal spending and financial priorities.

President Trump’s first full budget, unveiled this week, was received the same. Democrats tore into the document, as expected. But even key Republicans in both chambers welcomed the president’s input like a hiring manager accepts unsolicited resumes.

Continue reading “Trump Budget Poses Big Challenge to Republicans”

Big Picture Trends for the Energy Industry and How Investors Can Profit

I recently teamed up with my colleague Jeff Kosnett to discuss developments in the energy sector, and how they translate into opportunities for investors. Below is a summary of our discussion. At the end of this article is a link to a recording of the conversation, which is free to Kiplinger Alerts subscribers.

Where are oil prices headed?

Markets have been volatile over the last few decades, which is a scary prospect for investors.

Why has the market been so volatile? The one-word answer is shale.

Crude oil recovered from shale has only recently become economically viable. Refinements in drilling technology – predominantly fracking and horizontal drilling – have opened a lot of formations for oil recovery.

In less than a decade, shale output has almost doubled the amount of crude oil produced in the U.S., which has had a dramatic effect on world oil markets.

Kiplinger thinks $50 per barrel will be the new normal for oil prices.

Many shale resources become economic at about $50 per barrel, which provides a stabilizing factor in oil prices. Prices will remain volatile, but on average they will hover around $50 per barrel for the foreseeable future.

How can investors profit in this environment?

Generally speaking it’s not a good idea to invest in mutual funds or oil stocks based on short-term price predictions. Some investors have made unfortunate bets on companies investing in new acreage or undertaking expensive capital projects just as oil prices collapsed. The safe thing to do is to look for iron-clad financial strength and great diversity.

Exxon Mobile (XOM) is a very reliable long-term investment that will faithfully pay a dividend, and they’ll raise it every year. No one project is going to sink them because it’s such a large company. Other large oil companies have run into problems because of a lack of diversity.

If you want to put money in the oil industry directly, buy an index fund like SPDR Energy Select Sector (XLE). The world spends a tremendous amount on oil every day, so you’ll always get a dividend.

As a general rule, the best policy with oil investing is don’t stick your neck out.

Pipelines and Oil Transportation

Millions of miles of pipelines cross the U.S. The companies that own and operate them don’t get paid based on the price of the commodity they transport, but on throughput.

So what’s going on with oil production?

The shale revolution has brought production up dramatically, almost to the high levels of the early 1970s. The outlook is even better because U.S. production will continue to grow. Production companies are drilling new, more efficient wells. The industry is much leaner and meaner, and production is on the increase. The U.S. will surpass its 10 million barrel per day peak later this year or next year. This is good news for the pipeline industry since there will be more demand for their services.

How can investors profit from increasing domestic production?

Most oil industry infrastructure – including pipelines, storage facilities and refineries – is owned by Master Limited Partnerships, which are publicly traded ventures that trade just like stocks. The larger oil companies spun off this infrastructure into partnerships to free up their own capital for exploration. Some MLPs are specialized on pipelines, or storage tanks, or retail stations. The biggest, Enterprise Products Partners (EPD), owns just about everything. For steady, reliable, no drama income, the larger partnerships are your best bet.

Another option that has often been recommended in the Kiplinger 25 is Magellan Midstream Partners (MMP), which controls a large amount of the distribution of gasoline, diesel and other finished products in the central U.S.

Despite fluctuations in price, these kinds of partnerships are going to have steady income in the coming years.

Investors who are not comfortable picking specific companies may prefer to invest in a mutual fund. A complicating factor with mutual funds that specialize in MLPs is that tax law prohibits these funds from placing more than 25% of their assets in partnerships and still qualify to be a tax-exempt pass-through mutual fund, so the fund has to pay 30% or more in taxes, which reduces your dividend.

A better option is Miller/Howard High Income Equity Fund (HIE), which has capped its MLP investment at 25%, with the rest of the fund invested in real estate investment trusts, utilities and other income-paying securities. This is a way to get about five or six very good MLPs without running afoul of the tax laws.

Having said that, it’s still best to pick the individual stocks if you can do that.

How do refineries fit in?

Oil must be refined before it’s used, so refineries are a key segment of the oil industry.

The demand picture for refined fuel is fairly steady over time. Demand took a hit during the Great Recession and hasn’t picked up that much since, despite a recovering economy. That flat trend is mostly due to increased efficiency, e.g., cars getting more and more miles to the gallon.

But that’s not the whole story with the demand for oil. The picture for overseas demand is much brighter, which has led to a sharp increase in U.S. exports.

Markets overseas – especially in emerging markets – are growing faster than the U.S., and there’s a growing worldwide middle class that needs gasoline and diesel.

The U.S. refining industry is very efficient, with excess capacity, so it’s well situated to take advantage of this growing foreign demand.

Other countries, including especially Latin American countries that produce a lot of oil, don’t always have the refining capacity to match their production, so U.S. refineries will continue to grow as they take up that slack.

Kiplinger forecasts continued growth in worldwide demand, which bodes well for U.S. refineries.

What investing opportunities exist in oil refineries?

U.S. refineries benefit from access to cheaper domestic supplies, which helps them make a better margin on the finished product.

A few options to consider for investors.

  • Valero (VLO)
  • Alon USA (ALJ)
  • Tesoro (TSO)

These firms are often structured so investors can choose a stock (e.g., VLO) or a partnership (e.g., VLP). The distinction will affect the tax treatment of your dividends.

Investing in refineries is much less volatile than other parts of the energy industry. Over the long term these investments have been very stable, and even as new technologies come along, the world is going to continue to require refined petroleum products for a very long time.

What’s the forecast for electricity?

Demand doesn’t look all that encouraging on the electricity side. Consumption has been flat for a long time, aside from seasonal variations.

While the economy is growing, energy efficiency keeps increasing as well, which keeps demand in check.

That doesn’t mean this isn’t a good area for energy investors. Electricity rates are another story and have increased gradually over time.

The electric industry is heavily regulated at the state and federal level. The regulatory bargain goes like this: As long as utilities are delivering reliable power, they are generally allowed to pass along the cost of infrastructure investments through increased rates.

While demand is very stable, prices do gradually rise, and there is continual investment in new capital, which creates investment opportunities.

Investment opportunities in electric utilities

The first thing to know about these investments is that they aren’t bonds in disguise. These are real businesses that grow and make a profit. They don’t necessarily see share prices go up or down with interest rates or inflation. Wall Street is only now catching up with the opportunities in this sector.

While there are plenty of good options in this space, here are three recommendations.

  • American Electric Power (AEP)
  • Xcel Energy (XEL)
  • NextEra Energy (NEE)

These firms take advantage of the regulatory system and pay decent dividends. They have benefited from inexpensive natural gas and the ability to invest in solar and wind. They’ve also increased their efficiency from consolidation through mergers and acquisitions. Total returns have been very reliable for a long time.

Investors can pick and choose any of these companies, or they can choose some mutual funds and index funds that specialize in the regulated utility industry.

Preferred shares can yield 6-7% while common stocks typically yield 3-4%.

In a few situations there have been some dividend cuts, but generally speaking these companies have tried to increase their dividends. Common stock dividends are taxed at an advantageous rate, so on an after-tax basis, these investments are comparable to a municipal bond.

What’s Next with Wind and Solar?

While renewable energy is a very small percentage of our total energy picture, it’s growing rapidly.

Don’t get distracted by the solar panels on your neighbor’s roof. The utility industry has been the biggest installer of new solar capacity. Solar panels are increasingly efficient and are coming down in cost.

There’s also a lot of growth in wind energy.

In some months, wind generates as much power as hydroelectric dams. Also, government policy is encouraging renewable power with federal and state tax credits. In addition, some states mandate that utilities acquire a percentage of their power from renewable sources.

With both a push and a pull – from better economics and government subsidies – there’s been an increase in investments in renewable power.

Investing options

Any time there’s a new growth industry, Wall Street isn’t far behind in constructing some sort of investment vehicle to send some of that cash back to shareholders.

About five years ago, some of the independent power producers that used to be in the oil and gas business decided to get into renewables. While utilities continue to invest in power generation, and some invest in renewable facilities, a lot of the growth has been from independent power producers – either the true independents, or spin offs from the utility companies. These spin-offs are called Yield Cos. They finance the creation of commercially viable, large-scale renewable power and supply it to the rest of the supply chain. Prices move around a lot, but this is an opportunity to take a shot at larger yields – up to 8 percent.

Options to consider include the following.

  • Atlantica Yield (ABY)
  • NRG Energy (NRG)
  • Brookfield Renewable Partners (BEP)

Webinar-On-Demand Series

This special presentation was one of the four annual webinars included in your Kiplinger Alerts subscription. If you would like to listen to the entire presentation, here’s a link.

 

U.S.-Iranian Tensions Cloud Victory for Moderates in Tehran

Mixed reactions greeted President Hassan Rouhani’s landslide reelection victory in Iran over the weekend. Rouhani, a political moderate (at least by Iranian standards) who negotiated a landmark nuclear deal with the United States and other world powers during his first term, was the favorite candidate of both young Iranians hoping for change and international investors looking for stability.

He is expected keep Tehran on the path to more transparency and engagement with the world. Even though the president is largely subordinate to the supreme leader in Iran’s unique political system – meaning the government’s aggressive foreign policy and repressive domestic one are unlikely to change anytime soon – he still wields some influence over the direction the country takes. Continue reading “U.S.-Iranian Tensions Cloud Victory for Moderates in Tehran”

What Does the Expanded Laptop Ban Mean for Business Travel?

Chances are good the government will expand the ban on bringing electronic gadgets into the cabin on trans-Atlantic flights.

Although a decision is still being mulled by the Homeland Security Department, most aviation experts expect DHS to act sooner rather than later. The anticipated expansion would extend to all U.S.-bound flights originating from some European cities. It started in March and only covers foreign carrier flights beginning in 10 Mid-Eastern and African airports. Passengers boarding in those cities much check devices bigger than a smartphone, including laptops, tablets, e-readers, cameras, portable DVD players, electronic games, printers and scanners. Continue reading “What Does the Expanded Laptop Ban Mean for Business Travel?”

What Does Special Counsel Mean for Trump’s Political Fortunes?

Washington today feels like London during the blitz: Every day brings a new bombshell about President Donald Trump’s apparent efforts to derail an FBI investigation into his campaign’s alleged Russian ties.

The latest: A special counsel. The Justice Department Wednesday appointed former FBI Director Robert Mueller to oversee the bureau’s probe following Trump’s decision to fire Director James Comey earlier this month. Continue reading “What Does Special Counsel Mean for Trump’s Political Fortunes?”

Brace for More Destructive Cyberattacks

The latest global cyberattack is a harbinger of worse cyber strikes to come. The May 12 attack crippled businesses and governments around the globe, disrupting operations at English hospitals, FedEx, Telefonica and thousands of other organizations. Hackers infiltrated Microsoft Windows computers and held files hostage until a ransom was paid. Their way in? A security flaw buried in machines that lacked the most recent software version. The attack reportedly infected more than 200,000 computers in 150 countries before it was halted.

Cybercriminals are poised to probe other weak spots in the coming months. Criminals and hostile nations have identified security vulnerabilities from data breaches and leaks at U.S. intelligence agencies, including the National Security Agency and CIA. Intelligence agencies stockpile flawed code for their own digital intel efforts, and often don’t share the potential security problems with technology vendors. Security experts warn that this practice is dangerous. If hackers get their hands on the flawed code, they can hijack the info for their own cyber strikes. Continue reading “Brace for More Destructive Cyberattacks”

How Retailers Can Cope With Fierce Online Competition

The retail industry as we know it is facing an upheaval of its traditional business practices. As online shopping and consumer tech grow in popularity and usability, traditional retail is rapidly losing business to e-commerce giants and “deep value” retailers that keep costs down.

The result? Big-name retailers closing stores and getting stuck with more square footage than they know what to do with. It’s adversely affected the economy too, forcing some chains to file for bankruptcy and lay off thousands of employees. Payless ShoeSource, hhgregg and American Apparel, to name a few, are no more, while Macy’s, JCPenney, and Kmart are shuttering stores.

So, what’s a retailer to do? Continue reading “How Retailers Can Cope With Fierce Online Competition”

How an Emerging Type of Biometrics Will Thwart Financial Crooks

The way you swipe and press your smartphone will soon add an extra layer of security. Tech companies are building artificial intelligence software that siphons up data on the unique way you fiddle with your sensor-packed smartphone. The systems are fine-tuned enough to detect how you might favor an old wrist injury, stumble over a certain word while typing or press on the screen while using a certain app. The personal profiles that are churned out are highly accurate for identifying the correct user. The underlying technology stems from a Department of Defense research project. Continue reading “How an Emerging Type of Biometrics Will Thwart Financial Crooks”

Surprise Comey Firing Roils Capitol Hill

President Trump blindsided Washington once again this week, this time with his shock firing of FBI Director James Comey. On Capitol Hill, the move infuriated Democrats and frustrated Republicans, who are growing weary of being left in the dark by a White House often disconnected from, and sometimes disdainful of, the legislative branch.

The Comey sideshow is poised to further slow a Congress already gridlocked by partisan rancor. And as it faces a full plate of major agenda items—such as a health-care overhaul, tax reform, appropriations bills and a looming debt ceiling—Republicans can ill afford another distraction.
Continue reading “Surprise Comey Firing Roils Capitol Hill”