Why Our Oil Companies Won't Drill. Those who oppose new drilling in so-called environmentally sensitive areas often call our attention to the fact that oil companies already have 60+ million acres of leases that they could be exploiting to increase our supply of domestic oil reserves. Why are they spending their capital on buying back their stock instead of exploration and production? Why aren't companies willing to invest more money in order to find more oil to sell at $120+ per barrel? We all know that the cost of locating and producing crude oil has increased dramatically; but surely at these prices it's worth it. Or is it? I recently read an article in The Economist about the potential for oil production in Iraq. Currently they are producing 2.4 million barrels per day with the potential for producing up to 6 million. Their proven reserves are 115 barrels, third largest in the world behind Saudi Arabia and Iran and these are only the proven reserves. They have hundreds of promising geological structures where no wells have been sunk. Only 2300 wells have been drilled in the entire country compared to over a million in Texas alone. The most important feature is the cost of additional production from existing fields. The state owned Iraq National Oil Company estimates that the new production will cost from $1-3 per barrel. Some time ago I called your attention to what happened in the early 80's when the oil producing countries flooded the market with oil and dropped the price by 80% leaving oil companies with a huge inventory of producing wells that could not compete at existing prices. No one worried about their sub-standard profits at that time. I was bombarded with comments calling my attention to the fact that it is different this time. Of course, its different this time because its different every time. Would you be enthusiastic about exploring for oil that costs $15-20 a barrel to produce when you know your competitor can put you out of business with their $1-3 per barrel oil? But our government can solve the problem. How about a windfall profits tax? That should get us a lot more new oil. Right?????????????
I Bet You Wonder Why I Defend These Greedy Oil Companies? Surely I can't defend the fact that Rex Tillerson, CEO of Exxon Mobil makes $11.3 million a year in salary, bonus, and "other" compensation. That's almost 1/4 of what they pay Judge Judy ($45 mil). Maybe some of these observations can explain why Exxon Mobil earned $40+ billion last year only to lose twice that much when the value of their stock dropped from $485 billion to $400 billion.
Economy Better Than We Thought? Our Gross domestic product grew by 3.3% this past quarter. This is much better than anyone anticipated. Perhaps the main reason was an increase in exports by 13% and a decrease in exports of 7.6%. The stock market rebounded some 200+ points. I guess I can't get too excited; however, I have stopped raising cash and am ready to start buying selected conservative issues a little bit at a time.
Fourteen Days At The Hospice. Nothing like 14 days at the hospice to let you know how precious life is. The medical personnel all say they wouldn't work anywhere else. They feel honored to be chosen to help patients and their families at such an important time. They are truly special people.
Thursday, August 28, 2008
Monday, August 18, 2008
THE TIME VALUE OF MONEY
How To Make Any Financial Decision. The key is a thorough knowledge of the time value of money. In six plus years of post high school education no one ever taught me that concept. I was in my late 30's when I was introduced to the concept and I immediately felt that I had the "key to the vault." With a $75 calculator and a thorough knowledge of this concept, you can make any financial decision from the right mortgage to finance a property, to whether to lease or buy a car, or which investment is appropriate for your circumstance. Further, there are assumptions you make which are different for everyone, allowing you to customize an answer for any client's situation. I won't go into detail but suffice it to say that 30 years after I learned about this concept, I decided it was not nearly as empowering as I thought. In order to modify the statement to make it more important, you simply have to turn the words around. It's not the time value of money that counts, it's the money value of time. That insight occurred to me this year when I turned 70. It became even more important this week end as I visited the hospice where my brother-in-law is ready to call his earthly journey to an end. It's sad to realize the time we've wasted worrying about things that don't matter in the least. Time isn't money, time is your life. Don't waste a minute of it.
A Word About Those Evil Oil Companies. Most of us have trouble holding down our anger every time we fill our gas tank lately. Even Bill O'Reilly accuses the oil companies of gouging consumers by holding prices at unfair levels. Surely a company like Exxon with a value of some 400 billion can force prices to levels that won't cripple our economy. Guess what. America doesn't have any big oil companies. Exxon with all it's billions is dwarfed by the really big oil companies, all of which are owned by foreign governments or government sponsored monopolies. In reality, Exxon is only the 14th largest in the world. Exxon buys 90% of its oil from the really big oil companies who, by the way, control 94% of the world's oil. Surprised? I was.
What About Those Windfall Profits? Oil companies are earning a lot of money, and the owners are getting rich. Sure, Exxon earned 43 billion this past 12 months bet those owners are rolling in dough. Don't believe it. The market value of a company is easily determined by multiplying the number of shares outstanding by the current share price. Since the first of the year, Exxon's value has decreased from $485 billion to $400 billion. That's 17.58%. They aren't the only one. Marathon Oil, a smaller $62 billion company has dropped to less than 45 billion, a 28% drop. Conoco-Phillips and Chevron-Texaco show similar trends. Of the four companies I researched, the total loss in market value since the first of the year, was $128.13billion, runs into real money sooner or later. Despite their huge earnings, they must have problems of which the public is unaware.
I Am Not A Huge Fan Of These Companies. Their executives obscene amounts of money but so do Rush Limbaugh, Al Gore, Bill Clinton, Shawn Hannity, and Carmelo Anthony. It is impossible for most of us to comprehend how anyone can be worth that much money. Some oil company executives are guilty of fraudulently taking money from their constituents but so are some politicians, communication company executives, and investment bankers. When our economy has problems, there is a rush to find out who is at fault. After all, it can't be us. It has to be someone else. In this case, there blame for enough people to go around, not the least of which is the "man in the mirror."
A Word About Those Evil Oil Companies. Most of us have trouble holding down our anger every time we fill our gas tank lately. Even Bill O'Reilly accuses the oil companies of gouging consumers by holding prices at unfair levels. Surely a company like Exxon with a value of some 400 billion can force prices to levels that won't cripple our economy. Guess what. America doesn't have any big oil companies. Exxon with all it's billions is dwarfed by the really big oil companies, all of which are owned by foreign governments or government sponsored monopolies. In reality, Exxon is only the 14th largest in the world. Exxon buys 90% of its oil from the really big oil companies who, by the way, control 94% of the world's oil. Surprised? I was.
What About Those Windfall Profits? Oil companies are earning a lot of money, and the owners are getting rich. Sure, Exxon earned 43 billion this past 12 months bet those owners are rolling in dough. Don't believe it. The market value of a company is easily determined by multiplying the number of shares outstanding by the current share price. Since the first of the year, Exxon's value has decreased from $485 billion to $400 billion. That's 17.58%. They aren't the only one. Marathon Oil, a smaller $62 billion company has dropped to less than 45 billion, a 28% drop. Conoco-Phillips and Chevron-Texaco show similar trends. Of the four companies I researched, the total loss in market value since the first of the year, was $128.13billion, runs into real money sooner or later. Despite their huge earnings, they must have problems of which the public is unaware.
I Am Not A Huge Fan Of These Companies. Their executives obscene amounts of money but so do Rush Limbaugh, Al Gore, Bill Clinton, Shawn Hannity, and Carmelo Anthony. It is impossible for most of us to comprehend how anyone can be worth that much money. Some oil company executives are guilty of fraudulently taking money from their constituents but so are some politicians, communication company executives, and investment bankers. When our economy has problems, there is a rush to find out who is at fault. After all, it can't be us. It has to be someone else. In this case, there blame for enough people to go around, not the least of which is the "man in the mirror."
Thursday, August 14, 2008
LOOKING FOR A PORT IN THE STORM.
Protecting Portfolios From Volatility. Dividend paying stocks are historically less volatile than those that don't pay dividends. My strategy is to emphasize these stocks for a number of reasons. Unfortunately, the recent market has not worked that way. Mainly, this is due to the crisis in the financial and real estate markets. I have also said that the best strategy has been to "stay the course, " collect dividends and wait for these stocks to recover. For the most part, that strategy works; however, I know how difficult it is to tolerate large reductions in the market price of our portfolios. I have occasionally raised cash in portfolios via carefully selected sales of stocks and retention, rather than reinvestment, of dividends. That reduces volatility; however, the yield on cash is less than two per cent, a guaranteed way to lose in the current inflation environment. I continue to search for ways to get better returns with less volatility. While there is no sure-fire strategy, there are a few that I think have merit in getting somewhat higher yields without at less risk. Here are some of them.
Health Care Stocks. I recently bought Pfizer at 17.78 per share. This is a major drug company which has dropped from the 50's over the past 5 years. They have some problems in that patent protection on many of their major drugs is expiring during the next few years; however, the aging population should provide a growing market for many of their products. The dividend of 7.19% is not a barn burner but it should more than justify the risk. I will continue to seek out similar health care investments.
Preferred Stocks. These are becoming more popular as investors seek stable yields. You can find yields in the 8-10% range. While there is limited upside, you have much less worry about dividend cuts since the preferred dividend has to be paid before any dividend can be paid to common share holders. Preferred shares on real estate investment trusts appear to be particularly attractive since they are bought primarily for dividends and companies strive to maintain high dividends to keep from losing investors. An example is First Industrial Reality, a REIT that has industrial properties world wide. At present they pay a dividend of 11.68%. I wouldn't buy the common stock because of the potential for a dividend cut; however, the preferred has a yield of 9.54% and the potential for a dividend cut is greatly reduced.
Combination of Preferred and Health Care. Someone recently called to my attention is a REIT called Biomed Realty Trust. It is a company that buys properties for lease to companies in the life science industry. They currently pay a 5% dividend on their common stock. While that isn't bad, you can buy the preferred stock at a yield of 9.54% and there is little danger of a dividend cut. There are a number of similar opportunities out there which offer higher dividends combined with lower volatility. You won't double your money but you can sleep better with some of these in your portfolio.
I Have To Brag A Little. On July 13, I told you that oil prices had to come down. At that time, oil was selling for more than $140 per barrel and many were saying the next stop was $200. Today, the price is $115. There are a number of reasons this has happened to include a world-wide reduction in demand, a renewed pressure in congress to open up more areas for exploration and production, and an a heightened awareness among Americans of the magnitude of the problem and the consequences of continuing like we are. The debate rages as to how to deal with this problem. Suggested solutions run from putting more air into our tires, to batteries, to wind energy. These solutions fall into three main categories: Conservation, finding more fossil fuels, and finding alternative (mostly renewable) sources. My recommendation: All of the above. One last comment: Before you finally decide whether the fault lies with OPEC, China, India, President Bush, futures market speculators, or those evil oil companies, go down and look in the mirror. We build bigger houses than we can possibly use, buy huge cars with little regard for the energy they consume, and we borrow on our houses to buy consumer goods we really don't need (forcing the value of our dollar lower).
I will Be In Colorado For Longer Than I Had Planned. Should be here for the next two months. I am looking forward to meeting with many clients and friends during that time.
Health Care Stocks. I recently bought Pfizer at 17.78 per share. This is a major drug company which has dropped from the 50's over the past 5 years. They have some problems in that patent protection on many of their major drugs is expiring during the next few years; however, the aging population should provide a growing market for many of their products. The dividend of 7.19% is not a barn burner but it should more than justify the risk. I will continue to seek out similar health care investments.
Preferred Stocks. These are becoming more popular as investors seek stable yields. You can find yields in the 8-10% range. While there is limited upside, you have much less worry about dividend cuts since the preferred dividend has to be paid before any dividend can be paid to common share holders. Preferred shares on real estate investment trusts appear to be particularly attractive since they are bought primarily for dividends and companies strive to maintain high dividends to keep from losing investors. An example is First Industrial Reality, a REIT that has industrial properties world wide. At present they pay a dividend of 11.68%. I wouldn't buy the common stock because of the potential for a dividend cut; however, the preferred has a yield of 9.54% and the potential for a dividend cut is greatly reduced.
Combination of Preferred and Health Care. Someone recently called to my attention is a REIT called Biomed Realty Trust. It is a company that buys properties for lease to companies in the life science industry. They currently pay a 5% dividend on their common stock. While that isn't bad, you can buy the preferred stock at a yield of 9.54% and there is little danger of a dividend cut. There are a number of similar opportunities out there which offer higher dividends combined with lower volatility. You won't double your money but you can sleep better with some of these in your portfolio.
I Have To Brag A Little. On July 13, I told you that oil prices had to come down. At that time, oil was selling for more than $140 per barrel and many were saying the next stop was $200. Today, the price is $115. There are a number of reasons this has happened to include a world-wide reduction in demand, a renewed pressure in congress to open up more areas for exploration and production, and an a heightened awareness among Americans of the magnitude of the problem and the consequences of continuing like we are. The debate rages as to how to deal with this problem. Suggested solutions run from putting more air into our tires, to batteries, to wind energy. These solutions fall into three main categories: Conservation, finding more fossil fuels, and finding alternative (mostly renewable) sources. My recommendation: All of the above. One last comment: Before you finally decide whether the fault lies with OPEC, China, India, President Bush, futures market speculators, or those evil oil companies, go down and look in the mirror. We build bigger houses than we can possibly use, buy huge cars with little regard for the energy they consume, and we borrow on our houses to buy consumer goods we really don't need (forcing the value of our dollar lower).
I will Be In Colorado For Longer Than I Had Planned. Should be here for the next two months. I am looking forward to meeting with many clients and friends during that time.
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