Energy Exporting, AAA Investment Portfolio and Muni Bonds

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club

Energy Exporting, AAA Investment Portfolio and Muni Bonds

by Steve McDonald, Investment U Contributing Editor

Sunday, November 27th, 2011

In focus this week; the US is officially an energy exporter, a AAA portfolio with lots of dividends, muni bonds are booming and the Slap in the Face Awards.

First, let me wish everyone a happy Thanksgiving. Let’s hope for a decent market between now and Christmas. Here we go.

Energy exporting

Very quietly in the last few weeks the US entered a new phase in energy. It actually is now an energy exporter and it is the first few steps in the US becoming a major exporter.

The gas revolution that I have been talking about in this segment for some time is actually happening and it is just the start.

Cheniere Energy partners has entered into an agreement to sell LNG, liquefied natural gas, to BP and Gas Natural Fenosa, who will resell it in Asia and Europe.

Following the news Gas Natural news the stock shot up 10% and LNG has doubled.

How big is this deal? According to the Journal demand from Asia alone is expected to grow by 68% in the next 10 years alone, and the price of gas here, below $4.00 is almost a third of what Europe and Asia are paying currently

A Journal article stated there are more than 12 projects underway in the US, Canada and Australia to liquefy and export LNG, and BP says this agreement with Cheniere is a major coup for them by getting the first strike in against their competitors.

Some of the names involved are Royal Dutch Shell, Apache, Encana and EOG Resources.

BP was at one time one of the largest importers of LNG to the US but is now looking to convert a Louisiana facility from an LNG import site to an export facility.

This is happening. This is not an estimate or a theory. Natural gas from the US will turn the energy market on its head.

If you are not in some type of NG play get there. By the way, Dave Fessler the OXF’s energy analyst was talking about Cheniere six months ago. I hope you were able to get some.

AAA investment portfolio

A Market Watch article this past week listed the eight companies in the world that still have a AAA rating from S&P. What was really surprising about the article though was that these companies have out performed the market for the past three years.

Best yet, they have some very nice dividends.

The list is on your screen now.

These eight companies have a market value of $869 billion and is a diverse mix by industry and geography, with a very nice 2.9% dividend.

Company Market cap P/E Dividend


Exxon Mobil $378 bln 9.3x 2.4%
Microsoft $225 bln 9.7x 3.0%
Johnson & Johnson $177 bln 13.1x 3.5%
Imperial Oil $35 bln 11.7x 1.0%
Automatic Data Processing $25 bln 18.8x 3.1%
MTR Corp. $19 bln 15.4x 2.8%
ST Engineering $7 bln 17.0x 2.4%
SMRT Corp. $2 bln 18.5x 4.6%

This little collection also has a beta of .6, which means it has only 60% of the broad market’s volatile. That is a very low beta and really good news for investors who have gotten sick of getting kicked around by this market.

The Market Watch article reported these little darlings have a combined $105 b in cash on their balance sheets. That should keep the jitteriest of us comfortable.

Buy quality and collect the dividend. Oh and this down market may even give us a buying opportunity, but I wouldn’t hold your breath.

Quality is never cheap.

Muni Bonds

There has been a lot of pressure on muni’s this year, especially in the last few weeks with the default of Harrisburg, PA and Jefferson County Alabama. Muni’s have been pushed down, and their yields way up, by both real and imagined defaults.

Concerns that lower tax revenues for municipalities could drive other small cities and towns to default on their obligations has created what BCA Insights says is a situation where muni yields are way too high statistically.

Translation, muni’s are screaming buys. The real default rate is actually below 2010. In fact year to date according to Barrons’ muni defaults have only totaled $2.2b this year compared to $4.4b in 2010 and $8.6b in 2009.

Moody’s was quoted as saying that defaults will remain muted and most state and local governments are getting their budgets under control.

Meredith Whitney’s prediction of massive muni defaults, which was the cause of all the turmoil this year in this market, was just wrong, but what a buying opportunity we have until the average guy figures it out.

Finally the SITFA

You probably guessed it; this week it goes to the citizens of the US directly from the super committee that was tasked with finding a solution for the spending issue in this country.

Is anybody really surprised that our lobbyist laden representatives couldn’t agree on anything? Well that’s not exactly true.

It seems the Democrats conceded on the idea of means testing for both Social Security and Medicare. I like that. Why should we be giving money to those with more than enough money to fund their own retirements and healthcare?

The cuts have to start somewhere and that seemed like a pretty logical one to me.

The big stumbling block according to CNBC was that the republicans would budge on keeping the Bush tax cuts in place.

Anyway, enjoy your Sunday, drive carefully if you’re headed home today, and we’ll see you next week.

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