by Steve McDonald, Bond Strategist, The Oxford Club
Monday, November 5, 2012
In focus this week: coal is really hot, a Ferrari in your portfolio and the SITFA
Virtually the whole world depends on coal for both metal production and electricity, and it’s finally turning the corner on the horrible beating it has been taking because of the huge glut of natural gas in the U.S.
Both Westmoreland Coal and Peabody Energy got very big thumbs up this week from analysts, a key indication that coal is coming back into favor.
Barron’s reported a “Buy” on the Westmoreland Coal’s 10.75% bond of 2018 and moved the stock to an “Outperform” rating. WLB had a 19% margin in the previous 12 months on sales of $507 million with a declining cost per ton of coal from $25 to $17 per ton.
Barron’s also reported that they expect WLB’s debt to fall from to $240 million from the current $400 and also expect WLB to have an easy time with any refinancing.
2013 earnings are expected to increase from the current loss of $0.31 to a positive $1.13. That’s a big jump in one year.
Peabody Energy’s CEO stated in a recent interview that in September alone their market share of electricity generation has increased from 30% to 39%. In one month!
Arch Coal, Alpha Natural Resources and Peabody have all seen 20% increases in prices just the last month.
For the past few years coal has been as badly beaten up as anything I have ever seen, but this recent shift is a very solid indication that coal is back and hotter than ever.
Watch this one!
Next up, rare cars beat the market
Alternative investments are getting a lot more attention these days. Since investors started fleeing the volatility of the stock market everything from wine to musical instruments have been gaining in popularity.
Morningstar reported that classic cars have returned an average of 13% a year since 1980. Large stocks returned 11%, including dividends during the same period.
But you can’t cruise around in a stock!
Don’t get your driving gloves on just yet. All of these alternative investments can be somewhat difficult to liquidate. You do have to wait for someone to come along to buy that Mercedes Gullwing. Collectors are not hanging on every corner and there is no centralized exchange, except maybe for eBay.
I have actually bought two old VW convertibles on eBay, a ‘74 and a ‘79, which I have restored. It worked out very well.
Greg Davies, head of behavioral research at Barclays, says you should commit to this type of investing only if you really enjoy the cars. But some of the numbers are pretty compelling.
The Journal is reporting that vintage Ferraris have run up 28% this year, and Porsches are up 15%.
Be forewarned. This market can be very volatile. In the early 1990s the HAGI Index, Historic Automobile Group Index, dropped 50% and the Ferrari market dipped a crushing 70%.
The Family Classic Cars Fund, of San Juan Capistrano, California, is currently raising $120 million to buy classic cars. For a $10,000 minimum investment you can get in on what looks like a hot market. The fund charges 2% and takes 20% of the profits. That’s pretty steep, but you’re in for $10,000.
When even the bond king, Bill Gross is advising clients to own hard assets, vintage cars may be one to consider.
Besides beating the stock market, you look really cool driving them, and you just can’t park them anywhere. A parking lot ding on a $100,000 car is a whole other issue than one on a Toyota.
And finally the SITFA
It’s a quickie this week.
6000 on the S&P, no this is not a prediction, but according to the Fed that’s what it should be right now.
The Fed reported to Congress in the 1990s that the earnings yield on the S&P 500 should be equal to the yield on the 10-year Treasury.
That means, based on the current 1.7% yield on the 10 year the S&P should have a price earnings multiple of 60, it is actually 13.7.
If you carry this projection to stock prices, according to the Fed’s model, the S&P 500 Index today should be at 6000, not 1400?
Really? Who is running the ship over there? I wouldn’t run out and buy S&P Index calls just yet.
It’s a good thing no one pays any attention to the Fed anymore.