THE UNSUSTAINABLE RALLY-NOW WHAT? COMMODITIES FOR INCOME INVESTORS

1. Introduction

What does the past week’s market activity tell the high dividend income investor who is considering taking new long positions to get some return on cash that’s lying fallow? What follows is nothing fancy, people. Just a simple follow up and update to last week’s post Notes on a Scandal: High Dividend Investor's Survival Guide to This Unsustainable Rally, and some practical tips on what to do now.

Caveat: I’m not a prophet. The following conclusions are just based on the evidence I present below that this is not the time for new long positions. I’m still innocently (naively?) assuming we have a free, open and transparent market operating. However, given the degree of market manipulation we’ve seen (see Notes on a Scandal: High Dividend Investor's Survival Guide to This Unsustainable Rally) and mentioned in recent posts, one could argue otherwise and try to bet on a continuing rally aided and abetted, legally or not, by team Washington & Wall Street.

2. What The Charts Suggest

A. Chart 1

Overall market broke its long term downtrend at the end of March, and the rally has stalled out in early May.

B. Chart 2

For the past 6 months the market has traded in a range between 680 and 940.

C. Chart 3

Since the rally stalled in early May, volume on down days is greater than that on up days, and there have been about 3 times more down days than up days. This suggests lack of conviction by market participants.

3. Conclusions

A. Be Cautious Taking New Long Positions

From a very simple technical perspective, the current rally has stalled. From a fundamental perspective, as noted in Notes on a Scandal: High Dividend Investor's Survival Guide to This Unsustainable Rally, the rally is mostly unjustifiable, and arguably the result of outright manipulation by Washington and Wall Street. Perhaps this is for the greater good. It has allowed at least some of the major banks a rising market into which they can sell stock and raise needed capital from willing investors, not just captive taxpayers. For example, both Goldman Sacks and Bank of America have done so thus far.

B. What This means for Dividend Income Investors

Yes, it hurts to sit with cash producing no income. Because both fundamental and technical evidence suggests it’s more likely that stock prices in the coming months will fall, recent advice still holds. Take only partial positions using cash that will not be needed within the foreseeable future. Consider taking at least partial profits or losses if you foresee needing to raise cash in the coming months from your stock portfolio. Consider hedging techniques discussed in prior articles.

For example, for short term hedges consider: UltraShort S & P 500 Proshares (SDS), UltraShort Financials ProShares (SKF), UltraShort QQQ ProShares (QID), UltraShort Real Estate ProShares (SRS), UltraShort Russell2000 ProShares (TWM).

For those who can, consider owning Canadian or Australian dollars, or assets based in these currencies. Why? To alter the famous line about plastics from the film, The Graduate, “commodities, Benjamin, commodities.”

C. The Real Meaning of What Jim Rogers Has Been Saying

This past week renowned investor Jim Rodgers was widely reported to predict a coming crisis in the currency markets as governments worldwide attempt to bolster their economies by expanding the supply of their currencies, thus ultimately eroding their purchasing power once the world economic situation improves and demand for goods rises.

Even for those well versed in currency trading, that advice is not easy to put into practical use. If all currencies are inflating, and currencies always trade relative to one another, so how does one know which currency to prefer over another?

One could consider which currency is being most burdened with debt and thus likely expansion of supply, as suggested by the following IMF (International Monetary Fund) chart provided by Kathy Lien in Will the U.S. Be Next to Receive a Credit Warning?

That might work if you want to trade currencies AND the rest of the market follows the same chart. Maybe it will work, maybe it won’t. Successful trading is not just about being right about the asset, but being right about what the rest of the market will think about it, and when.

Here’s simpler idea. While choosing the right currency pair may be unclear from Rogers’ remarks, what IS clear is this: commodity prices should be in a long term uptrend, if for no other reason than their being priced in eroding currency, typically US dollars. So invest in instruments that will rise with commodity prices.

THAT is the obvious implication from Rogers (who has made a few bucks in commodities).

Thus consider, strongly, one or more of the following investing options:

· Commodities themselves via ETFs, CFDs, futures, etc. A very creative and worthwhile suggestion from a comment I received on an article, one which I recently followed – consider a investing in a hybrid car, better home insulation, or other energy saving devices. Yes, cars are depreciating assets, but if you have to commute long distances anyway, the savings could well be worthwhile. FYI I went for a Toyota (TOY) Prius. It handles very well, has sufficient acceleration when needed, and cut my gas bill by more than half. My only complaint is the very primitive sound system, especially considering this is not a cheap car. It’s not strictly an income investment, but a penny saved IS a penny earned. No, it’s better. There is no tax on the penny saved (yet), at least until you invest it.

· Convert at least some US dollars to Canadian or Australian dollars (which rise relative to other currencies as commodity prices rise)

· Income instruments based on commodities that should rise with them. Many of the stocks I’ve been recommending fit that description, especially WHEN stock prices pull back. These include:

· Big Oils: BP, plc (BP), CNOOC Ltd. (CEO), Enid SpA (E), Total Fina Elf (TOT)

· Canadian Energy Trusts: ARC Energy Trust (OTC: AETUF, TSX: AET-UN), Claymore/SWM Canadian Energy Income Fund (ENY), Enerplus Resources Fund (ERF), Peyto Energy Trust (OTC: PEYUF, TSX: PEY.UN), Provident Energy Trust (PVX, TSX: PVE.UN), Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN)

· Coal MLPs: Alliance Resource Partners (ARLP), Northern Resource Partners (NRP), Penn Virginia Resources Partners (PVR)

· Canadian Real Estate Trusts: While real estate is not a commodity, it is a hard asset that is inflation resistant. A worthy group of stocks to keep in mind when prices pull in include the Canadian Real Estate Trusts: Canadian Apartment Properties REIT (OTC: CDPYF, TSX: CAR.UN), Northern Property REIT (OTC: NPRUF, TSX: NPR.UN), RIOCAN REIT: (OTC: RIOCF, TSX: REI.UN

The Gabelli Global Gold, Natural Resources & Income Trust (GGN): a way to play gold and get income

However, again, be cautious about new stock purchases until we see a pullback. Why? Here’s a lesson worth repeating.

D. Even Great Stocks Usually Follow The Market

Remember, no matter how good their results, few stocks avoid selloffs when markets decline. So be cautious buying income stocks based in commodities or commodity based currencies at this time.

For example, look at a chart of Atlantic Power Corporation (OTC: ATPWF.PK, TSX: ATP.UN) compared to the S&P 500 (in red).

Note that ATPWF’s price movement followed that of the S&P 500 index. Despite producing stellar results during this period, including raising dividends while cutting debt and openly declaring the dividend secure for years to come; its price fluctuated in the same directions as the index.

Ironically, ATPWF’s price was actually more volatile (due to its low daily trading volume), despite its far healthier and more stable revenue stream than almost all companies in the index.

The lesson: you generally do not take long positions when the evidence suggests prices will drop. thus even though the recovery of energy prices and stocks seems inevitable, it’s not yet the time to buy. By all means place orders starting near the March lows, though.

4. Conclusion, Disclosure & More Info

Again, the Caveat: I’m not a prophet. The following conclusions are just based on the evidence I present below. I’m still innocently (naively?) assuming we have a free, open and transparent market operating. However, given the degree of market manipulation, (see Notes on a Scandal: High Dividend Investor's Survival Guide to This Unsustainable Rally) mentioned in recent posts, one could argue otherwise and try to bet on a continuing rally aided and abetted, legally or not, by team Washington & Wall Street.

Disclosure: I have positions in most of the above mentioned investments.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit http://highdividendstocksguide.blogspot.com