Fracking and Dividends from Emerging Markets
by Steve McDonald, Investment U Contributing Editor
Sunday, December 18th, 2011
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In focus this week: medical devices, fracking hits a snag, dividends from the emerging markets and the SITFA.
Medical device stocks may actually be one of the bargains created by the crazy market volatility we’ve been surviving for the past year or so.
Anyone who has any understanding of demographic trends has to know that the Baby Boomers moving into their golden years will be a huge market for medical technology companies, device makers in particular.
It’s almost unavoidable. The demand for knees, artificial discs, diabetes devices… the list goes on and on… the demand will be just too great.
The recent sell-offs in Medtronic (NYSE: MDT), Stryker (NYSE: SYK) and Boston Scientific (NYSE: BSX) may look like a technical nightmare waiting to happen, but it may actually be one of the best buying opportunities of the fourth quarter.
A recent Barron’s article looked at the technical patterns of all three device makers and concluded they’ve settled into a trading pattern and appear to have avoided a complete collapse following their recent sell-off.
What’s more apparent to me is that as the Boomers age, they’ll have to have what all three of these companies sell.
MDT develops treatments for everything from cardiac problems to diabetes.
Stryker makes reconstructive medical and surgical devices
Boston Scientific makes devices that provide alternatives to surgery.
Being one of the Boomers who’s closing in on 60, I know I’ll eventually be a customer of all three. I already have an artificial disc in my neck and will probably need one in my lower back. My left knee isn’t getting any better, either.
Medical technologies and devices will be one of the long-term solid moneymakers. Take a look at them.
Fracking Hits a Snag
Fracking was in the news this past week. The (Wall Street) Journal reported that the EPA has for the first time stated that fracking is responsible for the contamination of drinking water in a town in Oklahoma.
This is big news!
Fracking uses water and chemicals under pressure to force gas from under ground shale deposits. Until this finding by the EPA, it was believed to be safe and didn’t pose a threat to aquifers or wells. So safe in fact that it has been exempt from the clean water act.
Since 2000, according to the Economist, gas production has soared 12 times and most of it’s due to fracking in shale areas. As you might expect, this production explosion has also been responsible for the very low gas prices we’ve been enjoying here at home.
The gas industry says the Oklahoma situation is an exception because it was drilled at 1,200 feet instead of the much deeper wells in Pennsylvania and Ohio. These average about 5,000 feet and are well below water sources.
But, if this problem is found in the deeper wells, the industry could be in for really big shake up. If the gas drillers have to comply with all the current clean water standards, we might have to say good bye to cheap gas.
In the last year, environmental groups have been pounding the table about this exact risk to water sources that the EPA has confirmed in Oklahoma. If these environmental groups get hold of solid data that confirms their claims of contamination in Pennsylvania and Ohio, look out above. Gas prices would take off.
The good news in all of this is that there are companies that have the technology to allow fracking without any chemicals. To date very few drillers are using the process, even though one filtering company, Ecosphere Technologies (OTC: ESPH.PK), says it’s actually cheaper than the current process of using trucked in chemically treated water.
Watch the news for this one. It could develop into a big run-up in gas prices.
Dividends From the Emerging Markets
Most investors are in the emerging markets for big capital gains, but there are dividends there, as well.
MarketWatch ran an article about two relatively new ETFs that track two emerging market indices, the Dow Jones Emerging Markets Select Dividend Index and the S&P Emerging Markets Dividend Opportunity Index.
Although each ETF tracks 100 companies, only 30 overlap and they go after different types of dividend players at two different risk levels.
The Dow ETF focuses on companies with about half the market cap of the S&P Index: two million versus one, and with greater exposure to Africa.
The S&P Index has a greater exposure to Latin America.
The Dow’s ETF yield is at 7.34% and the S&P around 7.17%.
The S&P ETF requires positive earnings growth for three years to be included in its universe. The Dow only required one year of profitability. So the Dow with a smaller capital requirement and lesser profitability requirement looks to shaping up as a smaller-cap style.
As you might expect the annualized five-year return for the Dow ETF is around 15% and 9% for the more conservative S&P fund.
The downward trend of the emerging markets this year may be a “Buy” signal for these two funds, especially if you agree with the consensus opinion that the emerging markets will be seeing significant growth in the decade ahead.
Emerging market dividend ETFs look like a good long-term bet, just be aware of the added risk. These are still coming out of emerging countries.
Finally, the SITFA.
This one will kill you.
Pablo Escobar, the former cocaine king of Columbia. A man who’s personally responsible for the murders of thousands of people including judges, politicians, police… almost anyone who opposed his cocaine business. He killed everybody, and he’s now a tourist attraction in his native Columbia.
His own brother, who was the accountant for the drug empire, said he learned to stay very calm around Pablo because getting upset around him got you killed sooner.
People are now paying $40 to visit his home, the house where he was gunned down, and his grave.
There has to be something more worthwhile to do with your time than this.
I wonder if the tour includes the graves of his innocent victims, or a list of all the destroyed lives his drugs were responsible for.
Quite a slap in the face.
Steve McDonald
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Re fracking:
At epa.gov/hydraulicfracturing you can review extensive details of the chemicals used in the process. These chemicals constitute no more than 0.5% of the mixture of water and proppant (quartz sand or ceramic spheres)and are not toxic. They include polyacrylamides or other antisurfactants commonly used in household cleaners; biocides that prevent microbiological corrosion within the casing; and scaling inhibitors e.g. calcium carbonite or barium sulfate which are also used in common household cleansers and de-icing agents.
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