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(B)(N) The Dow Utilities & Coal

November 17, 2013

Drama. While the market hot spots are engaged with Tesla and the Social Media and the recurring miscue on Wall Street, we’ve been thinking about the “new fundamentals” in the industrials, transports and utilities that power all of this. For example, the thirty companies of the Dow Jones Industrials employ 7 million people and the lights have to come on every day.

Lake Michigan is also quite dark, for example.

Lake Michigan is also quite dark, for example.

Moreover, we know that “volatility” is not risk and that this new way of thinking about our investments has yielded +36% in the Dow Industrials, +132% in the Dow Transports and +20% in the Dow Utilities. Plus dividends of $130 billion so far this year.

And “Big Oil” is also up +40% this year and has paid dividends of another $30 billion ($47 billion if we include Chevron and Exxon Mobil which are also in the Dow Industrials). Maybe the “new normal” is +20% in good markets or bad.

That’s hard to imagine if the goal is +4% or +8% but we think that as long as there’s an economy somewhere, some companies will do better than others and “some” quickly becomes “many” in the absence of guaranteed returns that exceed the rate of inflation and which are underwritten only by governments.

Crowd Goes Wild

The Crowd Goes Wild! But Fails To Score! The “New Normal” is +20% or we’re just bystanders.

In contrast, if we’re managing for volatility and co-volatility on stock prices or their returns and forget that an investment is just and only the “purchase of risk”, there’s only one game in town. And there’s no manager or co-manager who can make a difference.

Investing in the utilities (and coal, please see below) has not been as instantly gratifying as ear-buds and teleprompters this year but we’re angling for the long term, the bigger game that might decide how dark we are.

Exhibit 1: (B)(N) The Dow Jones Utilities – Fundamentals

The Dow Jones Utilities - Fundamentals - November 2013

The Dow Jones Utilities – Fundamentals – November 2013

Are the utilities “overvalued” at 39× earnings [P/E]? We don’t know because there’s no compelling logic in that number for these companies which all do the same thing – produce electricity for the common grid – but the combined dividend yield (4.0%) and market price yield (2.5%) is currently 6.5% and most of these plants are “coal fired” so nothing else is likely to slip into the ocean.

Moreover, they have maintained their dividend yield out of their own pockets, possibly by borrowing more, because the dividends of $13.8 billion exceed the earnings of $8.9 billion by more than 50%. And only ten of the fifteen are currently eligible for the Perpetual Bond™.

Please Click on the links The Dow Jones Utilities – Prices & Portfolio and Portfolio & Cash Flow Summary for more details on what’s hot and what’s not according to the “risk averse” investors who might actually buy these stocks from us at higher prices.

Nevertheless, our estimate of the downside in the stock prices is as much as minus (13%) if there’s a general flight of investors from utilities to government bonds or from electricity to electrons and that’s just the something that we can be prepared for by using our usual stop/loss prices or bought puts to protect the prices that we have.

Exhibit 2: (B)(N) The Dow Jones Utilities – Prices & Portfolio – November 2013

The Dow Jones Utilities - Prices & Portfolio - November 2013

The Dow Jones Utilities – Prices & Portfolio – November 2013

(Please Click on the Chart to make it larger and again if required.)

Powered By Coal

Powered By Coal

The US Energy Information Administration (EIA) has recently noted that just four companies provide more than 50% of the coal that is used to fire these plants (and there are over 500 companies for the balance) and that American electricity is still 40% produced from thermal coal of which 90% is produced and used in the US.

They also produced losses of $1.9 billion on gross revenues of about $20 billion which are up 50% since 2009. Please see Exhibit 3 and 4 below.

Exhibit 3: US Coal – Fundamentals – November 2013

US Coal - Fundamentals - November 2013

US Coal – Fundamentals – November 2013

Exhibit 4: (B)(N) US Coal – Prices & Portfolio – November 2013

US Coal - Prices & Portfolio  - November 2013

US Coal – Prices & Portfolio – November 2013

Presently only one of these four companies is eligible for inclusion in the Perpetual Bond™, Alpha Natural Resources Incorporated, and then only if it can maintain enough investor interest to keep its stock price above the “price of risk” which is currently $7.25.

The “Risk Price Chart” is typical for the companies in this industry during the last several years. Please see Exhibit 5 below.

Exhibit 5: (B)(N) ANR Alpha Natural Resources Incorporated – Risk Price Chart

(B)(N) ANR Alpha Natural Resources Incorporated

(B)(N) ANR Alpha Natural Resources Incorporated

Alpha Natural Resources Incorporated is a supplier and exporter of metallurgical coal for use in the steel-making process and a major supplier of thermal coal to electric utilities and manufacturing industries across the country.

(Please Click on the Chart to make it larger if required.)

From the Company: Alpha Natural Resources Incorporated  together with its subsidiaries, engages in extracting, processing, and marketing steam and metallurgical coal in Virginia, West Virginia, Kentucky, Pennsylvania, and Wyoming. As of December 31, 2012, it operated 107 mines and 26 coal preparation facilities in Northern and Central Appalachia, and the Powder River Basin with approximately 4.6 billion tons of proven and probable coal reserves. The company also constructs roads; repairs and resells equipment and parts used in surface mining; supports preparation plant operations; manufactures patented particulate scrubbers and filters for underground diesel engine applications; rebuilds underground mining equipment; and provides degassing services. In addition, it owns and operates third-party end-user coal handling facilities; purchases and sells third party coal; sells non-strategic assets, such as timber, gas, and oil rights; leases and sells non-strategic surface properties and reserves; and provides coal and environmental analysis services. The company serves electric utilities, steel and coke producers, industrial customers, and energy traders and brokers. Alpha Natural Resources, Inc. was founded in 2002, has 12,500 employees and is based in Bristol, Virginia.

For more information and additional references to the theory, please see our recent Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100.

And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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