A Timber-Backed ETF for an Historic Commodity

Up until 100 years ago our ancestors needed timber almost as much as water to survive.  Keeping warm, building shelter, constructing tools, all called for timber.  It was necessary for survival and life itself.  Indeed, plant material was (and still is) the basis of all life.

You can invest in timber by buying wooded acreage.  Periodically (like every 10-15 years) a timber company will pay to harvest your trees.  A much simpler and more efficient way though, would be to buy CUT, Claymore Securities' timber ETF  According to Claymore, CUT seeks investment results that track the Beacon Global Timber Index (see here for index information).

CUT invests at least 90% of its money in worldwide holdings of timber and wood product companies.  As of September 28, 2009, no company constituted over 5% of holdings, so your are well diversified.  Included are some well know companies such as Meadwestvaco (MWV), Rayonier (RYN) and Weyerhouser (WY).  A little under 1/2 of all holdings are in US (27%) or Japanese (19%) companies.

In the 1800's indiscriminate lumbering of pine (White Pine image at left) reduced much of America's, especially Michigan's, virgin pine to a wasteland of stumps and dry brush. This in turn sparked rampaging wildfires, both in the cities (Chicago fire of 1871) and cut over lands, the effects of which can still be seen.

Today, timber is harvested for packaging, paper, building materials, heating and furniture construction.  Home construction and furniture making are cyclical industries while packaging is highly dependent on the economy.  Many of CUT's holdings are packaging companies.

Is CUT a good buy?  You can make an argument either way.  On one hand timber is a real, not paper (I know, I know ... bad choice of words), asset which will always be in demand.  If nothing else you can always burn it for heat.  Indeed wood heat is becoming preferred in rural areas as a replacement for expensive propane.

On the other hand, packaging demand, dependent on recession spooked consumer spending, is in a slump.  Since CUT has almost tripled off its 52 week lows one must question the near term prospects, especially in a deflationary environment.  CUT, going forward, will undoubtedly mirror the health of the worldwide economy.

You can find more about CUT at this page on Claymore's website.

Disclosure: No Holdings in any of the above.

A Cold Wind Blowing

It has been a cool summer in the west central Michigan.   I can count on one hand the number of days this fast departing summer had temperatures reaching the low 80's.  Now, in the last days of August, temperatures drop into the 30s overnight.  Cold fall winds are blowing in early off Lake Michigan and the long gray winter suddenly doesn't seem far off.

Like the weather, the Michigan economy is gloomy.  Folks sell firewood, apples and yard sale trinkets to get a small amount of cash.  How much of that gets reported to Uncle Sam?  Wouldn't help anyway. 

Toys from more prosperous times line roads.  Boats, travel trailers and other paraphernalia can be had for a song.  Not many cars, I guess the clunkers program got most of them.  Deteriorating roads make for rough driving. Walk into a store: You will find solicitous clerks but few customers.

With an unemployment rate over 15%, real estate values continuing to drop, and a cold winter approaching things seem bleak.  One hopes the red, orange and gold leaves of October will help.

Oil as an Investment in Deflationary Times

We all know that in an inflationary environment oil and other real assets are good places to put your money.  It is easy to find asset classes which keep pace with inflation.  Gold, oil, real estate, stocks, collectibles, maybe even your car and your boat.  Your choices seem endless.
But what about in today’s deflationary environment?  Investments that do well in a deflationary environment are much more difficult to find.  Here are some possible  candidates with my comments in italics.

1. Cash - No upside, but safe, liquid and purchasing power increases with time.  Example:  If you had sold a Florida house 3 years ago for cash, put the cash in a savings account you can now buy two houses with the money.
2. Quality long term government and corporate bonds - This was a great place to be the last 1/2 of 2008, but the trend runs its course as interest rates approach zero.   Even worse, with trillion dollar deficits and quantitative easing you know this game will end someday.
3. Currency plays such as the US Dollar (UUP) or Japanese Yen (FXY) - These currencies do well when the fear factor is strong and markets tank.
4. Inverse ETFs such as SDS, SH, DOG, and DXD - Great for short term trading, but if you are not a day trader stay away, especially the double inverses.  SA has numerous articles on why.

I propose a 5^_th item,  Investments in companies rich in oil and other natural resources.  Consider Oil Rich Stocks such as OXY, PBR, and EOG.  For diversification, but with a higher natural gas component, consider XLE.
Remember “inflation is always and everywhere a monetary phenomenon”.  Prices are determined by supply/demand, not just inflation/deflation.  Worldwide, the supply of “easy” oil is falling quickly, even as demand stagnates.  The large middle eastern fields are in decline.  It is telling that when oil was over $100/barrel Saudi Arabia and the rest of the middle east was unable to up production much.  Therefore, oil prices could continue to rise, even in recession.
Economies such as China, India and Indonesia are again strengthening, if not booming.  Tens of millions of first time customers are looking to buy autos, this has to be bullish for oil.
I would stay away, for now, from the natural gas etf UNG.  There is an oversupply of this relatively inelastic commodity thanks to technological advances in production.  Eventually, natural gas will start replacing oil as it becomes relatively cheaper, but the process will take time.  How many natural gas powered vehicles have you seen on the road lately?
Of course the current rally is not only in natural resources, it is also in world markets.  It is best not to buck a trend.  However, nothing goes up forever.  The test will come when market indices decline, then we will see to what extent oil follows.  For this reason, I would stay at least 50% in cash.  You may find better entry points later.
With dark under-currents of impending doom and crash rumors swirling just below the surface (See numerous SA articles) I would keep a close eye on the rear view mirror.  At least with natural resource positions you have something which, short of Armageddon (and we will all be dead then anyway), will always be in demand for the foreseeable future.
Disclosures: Long SH, OXY and FXY

Peak Oil Investing

Think back to July of 2008 oil was over $140/barrel and a lot of talk on “Peak Oil” (the point in time when the maximum rate of global petroleum extraction is reached) was floating around.  By late December a hard hitting recession (depression?) and a strengthening dollar drove prices under $35/barrel.  Suddenly there was very little peak oil talk.  Today oil is around $60/barrel -  and dropping.  It is time to again visit peak oil thinking.
Several factors influence oil’s price.  The fundamentals, of course, are supply and demand.  Wars and rumors of wars, especially in the oil rich Middle East, can drive prices sharply higher in just minutes.  Quantitative easing, technological advances, Middle East stability, market manipulation, “herd mentality”, all influence oil prices.  So, any discussion on peak oil must also consider non-fundamentals.
Oil fields, once put into production, go into decline as the easiest to recover oil is drawn off first.  In fields all over the world, the “easy stuff” is now largely gone.   Even the massive Saudi Arabian fields are in decline.  This is true of course for all resources.   Consider copper:  In early settlement days large copper ingots were found simply lying on the ground in parts of Michigan as gold nuggets were found in parts of California.

Arizona Copper Mine

No one finds gold or copper lying around for the taking any more.  We need to dig massive, miles wide, holes in the ground thousands of feet deep.  South Africa goes deeper and deeper to tap their prolific gold fields, yet production is in decline.  Yes, I know this article is about oil, not gold or copper.   The principle is the same though, we must exert greater and greater effort to extract natural resources.
New discoveries can drastically affect prices.  In 1901, in southeastern Texas, after drilling down over a little over 1000 feet, the Spindletop oil well suddenly exploded up, oil gushing 150 feet into the air.  Spindletop, originally expected to produce 50 barrels a day, initially produced an unheard for the time 100,000 barrels a day, more oil than anyone knew what to do with.  By 1902 the price of oil had declined to an all time low of 3 cents a barrel.  Previously most US oil had come from the less prolific Pennsylvania fields.  Read about Spindletop here.  Now, with over one billion cars worldwide predicted by 2010, we know exactly what to do with with oil and gasoline.
We still occasionally find huge oil fields.  However, they are miles deep, under the ocean, rock and salt or locked in tight shale formations.   Read Kurt Wulff’s SA article about the large Petrobras finds off Brazil here.  In the US it has recently been estimated North Dakota’s Bakken shale may contain up to 500 billion barrels, yet only 3-4 billion is recoverable at today’s prices (see here).  Conclusion?   Another “Spindletop” effect is extremely unlikely.

Apache Corporation, A Solid Investment?

No, oil and gas exploration company Apache Inc. (APA), is not directly tied to ancestral Native American lands in the American southwest - though I guess all US lands are ancestral Native American lands.  Nor, as far as I can determine, is the Apache tribe involved in management in any way.   Instead, the name was picked by using the first letters of the last names of Truman Anderson, Raymond Plank and Charles Arnao, the three founders of the company in 1954.  Helen Johnson, an early employee, was awarded a $25 United States savings bond for suggesting the “che” be added, thus the “Apache” name.  Raymond Plank has just retired this year after 54 years of service.
Apache Corporation has grown rapidly in the 54 years since its founding and is now a $26 billion (market cap) international oil and gas exploration, production and development company.  The company reached the $100 million earnings mark in 1996 and $1 billion mark in 2003.  Starting in 1999 Apache has had a steady string of acquisitions.  The acquisitions are continuing.  In April of this year agreement was reached with Marathon (MRO) to acquire 9 Permian Basin oil and gas fields.  This company seems to do acquisitions quite well.
Apache is active in seven regions around the world: the Gulf Coast (onshore and offshore), USA Central, Canada, Egypt, Australia, the North Sea and Australia.  On the the companies’ web site there is a map showing the seven regions they operate in (see it here).  By clicking on the captions on the map you get a summary and details of what the company is doing in that particular region.
Competitors include Exxon Mobil (XOM), BP plc (BP), and Anadarko Petroleum (APC) among others.
Apache, as of December 31 2008, had estimated proved reserves of 1,081 million barrels of crude oil, condensate and natural gas liquids along with 7.9 trillion cubic feet of natural gas.    Reserves are located in mid-continent USA (25%), Canada (22%), Gulf of Mexico area (14%), Egypt (14%), Australia (12%), North Sea (8%) and Argentina (5%).  Apache claims they replaced 122% of production in 2008.
Apache had a $5.25/share loss first quarter of 2009.  In the Earnings Transcript release Tom Banks, President of Corporate Planning and Investor Relations, said “Loss was the result of the continuing deterioration in north American gas prices at the end of 2008 which recorded 1.98 billion non-cash after tax reduction in the carrying value of oil and gas properties”   Also, revenue growth is down 48% year over year due to lower oil and gas prices (Yahoo Finance).  In general, however, Apache is regarded as a conservatively run company and should weather the current downturn better than some of its competitors.  Total cash is $1.38 billion and total debt $4.91 billion (Yahoo Finance).
I like to read annual reports.  The annual report always puts a positive spin on things, of course, but it does give you a feel as to where company enthusiasms lie.  The reports are usually available on the company website under “Investor” sections.  Unfortunately, the Apache website said the 2008 annual report was not yet available and when I clicked on the links to the 2007, 2006 and 2005 reports I got a “page not found” message.  Having done some web design I know it is very simple to create pdf links, so not sure what is going on here.
Apache seems to be a good, solid company in which to invest.  Oil and gas reserves are tangible assets that will hold value, it not appreciate, in today’s climate of currency devaluations.  Unlike gold, oil and gas have actual uses (think your car).  Oil, currently near $60 a barrel and natural gas still only marginally higher than 52 week lows, may drop if the current market upswing is just a bear market rally as many, including myself, think.  On the other hand, if you think that all “real” assets are on a tear due to currency debasements now may be the time to invest in apparently solid companies such as Apache selling for a little over 1/2 its 52 week high.
Disclosure: Long APA

How You Can Lose with Annuities and Whole Life Policies

“Look, Bruce!”, my 85 year old mother-in-law exclaimed, waving a letter over her head.  “My annuity is now up to $85,000.  I just can’t withdraw my money for 6 months.  I don’t need it now anyway, though”. That got my attention.  Why couldn’t she withdraw?   Turns out, Standard Life of Indiana, her annuity company had  sent her a second letter.  That letter informed all policy holders Standard Life was now under an “Order of Rehabilitation” with the state of Indiana.  The letter went on to assure policy holders that all annuity contract terms would be honored except “partial and full surrenders clauses”. This is kind of like a bank holiday for an insurance company.
For more information policy holders were referred to the website: www.standardlifeofIndiana.com.  On the website the first question in the FAQ section is “What happened to Standard Life Insurance Company?” — a good, if not particularly encouraging starting point.  Other questions address issues such as financial condition and safety.  The answers were reassuring but vague and short on specifics.
The court filed “Order of Rehabilitation” document is more direct.  Basically, Indiana state Insurance Commissioner Jim Atterholt and his appointees now have control of Standard Life of Indiana.  All power formerly vested to the directors, officers and managers now resides with the State Commissioner.  For those who would like to see the court filed document go here. The rehab action is essential so as to prevent a run on the company while the state figures out just what the assets are worth.  A minimum of six months is needed and that time period may be extended.
Standard Life of Indiana may have been a good company at one time.  However, It was acquired in the 1990’s by Capital Assurance Corporation, a private company.  Obviously, they made  investment mistakes and were caught in last years slump.  I don’t know what the outcome will be for Standard Life’s 40,000 policy holders such as my mother-in-law.  It is probably safe to say that after the bad investments are written down and the legal and other state fees are assessed policy holders will take a significant haircut.
Now, I do not know a lot about annuities and the Standard Life of Indiana action is not new (the court document was filed December 18, 2008).  I do know that funds invested in fixed annuities and whole life policies go into the companies’ balance sheet and will take a hit along with the balance sheet.
The purpose of this article is to alert fixed annuity and whole life policy holders: You cannot assume you 100% safe.  The products are only as good as the company and its investments.   Annuities and life insurance is often sold to financially unsophisticated and/or elderly people.  Even with state regulation, the potential for abuse in these non-transparent investments is present
I would be careful with all fixed annuity and whole life products, especially those held by AIG affiliates (AIG), and large annuity providers such as Genworth (GNW), Hartford (HIG) and Allstate (ALL).
It is not easy to find the financial standing of many annuity and whole life holders.  Some, such as Standard Life of Indiana, are privately held.  Others are large company subsidiaries (with different names) or international firms such as Allianze or Aviva.  Many large banks with shaky balance sheets hold annuity money.  The rating firms gradings have been over optimistic in the past.  Those sophisticated in financial analysis may be able to track this stuff down but the vast majority of annuity and whole life policy holders are clueless.
Disclosure: No positions in any of the above mentioned companies

Families showering together may offend some sensibilities.   However, the April, 2009 issue of National Geographic Magazine has a photo (legs only, sorry) of a family doing just that.  Not only do they shower together, they do it standing in flat plastic containers to catch the soapy run off.  The run off is then used to water the garden.  This is one of many measures promoted by the state of South Australia to conserve water in the drought stricken area.  Water is so precious every last drop is reused as often as possible.
Often called Blue Gold, water is the ultimate commodity.   Why?  Simple, without it, for ourselves and our crops, we die.  Life cannot exist without water.  Yet, we often take clean water for granted.  We waste it and dump toxins in it.  In an increasingly crowded world that has to change.
Watts Water (WTS) a $780 million cap company has been around since 1874 and supplies water control systems in North America, Europe and China.  The company has been in China since 1994 but saw Chinese revenue decrease in 2008 due to currency, tax, wage and transportation issues.
The company website is www.wattsind.com The site provides access to SEC filings, annual reports from 2001, dividend and stock data, press releases, webcasts and other company information.
WTS manufactures valves and related products which insure water quality, conservation and control.  Recent focus has been on valves which prevent water back-flow.  Back-flow controls prevent dirty water from contaminating clean supplies.
Smartmoney magazine discusses how Watts Water may benefit from the US $789 billion stimulus plan.  See the article here.  Competitors include Flowserve Corp (FLS) and  some private firms.
Watts had negative publicity last month as it cut jobs but increased executive compensation (see article here).  Also, there are some litigation issues which have dragged on for several years (see the 2008 annual report).
Watts has a PE of 13.7, price/sales ratio of  .53 and a well covered 2.1% dividend.   There have been 22 years of consecutive dividend payments.  Recent market rallies show WTS participating strongly.
China is suffering from major water quality problems while President Obama’s stimulus programs will benefit water infrastructure products in the US.  In a world increasingly needing clean water WTS seems to have a bright future.
This seems to be a solid, long established company.  Recent problems in China, litigation and perhaps ill timed layoffs and executive compensation issues may warrant some caution, however.
Disclosure: Long WTS