The US markets did well in 2012 despite fears that the European Union would collapse, the US economy would double dip, and the “fiscal cliff” would crash the economy. The US economy continues to muddle along in spite of an environment constrained by massive fiscal deficits in the US and Western Europe as well as the backlash from the massive build up in debt by consumers, homeowners, municipalities, states, and federal governments over the last 40 years. These debts will continue to create economic headwinds and market volatility as they have for the last few years.
Our investment thesis remains the same. In the current environment, investing in securities with attractive income growth profiles will lead to outperformance–compared to domestic equities and bonds. Further, income growth investing will improve retirement income and financial planning targets by avoiding negative dollar cost averaging. Negative dollar cost averaging is the arithmetic consequence of monthly securities liquidations to meet a fixed obligation, like living expenses, when one is forced to sell more shares at lower prices than at higher prices and achieves lower than average sales prices. This is the reverse or opposite of dollar cost averaging, when individuals invest a fixed sum on a monthly basis and achieve superior purchase prices by buying more shares when prices are down and fewer shares when prices are higher. Relative to other investment options, investing in income growth strategies will create additional cash flows in the future (retirement) and should outperform the majority of investment asset class options in the years ahead.
We recently concluded a performance analysis of Master Limited Partnership (MLP) investments I have made for clients over the last 12 years. The return, before management fee is 20.24% per annum. This return measures the size weighted return of just the MLPs in our portfolios since December 31, 2000 before fees. This return beats the capitalization weighted Alerian Index return over the same period by 3.53% per year. With the benefit of hindsight, we have not emphasized MLPs as much as we should have. On a going forward basis, with the US natural gas shale boom, MLPs will benefit from a dramatic increase in domestic natural gas, natural gas liquids, and oil development for at least the next decade. Consequently, MLPs should provide our clients with the investment returns, income, and the financial planning benefits they desire.
We have been positive on Genoil Inc. for years and Apple Inc. for the last 15 months. Genoil appears to finally be gaining traction, though it has yet to produce a meaningful contract for either its GHU (Genoil Hydroconversion Upgrader) or its Crystal Sea bilge cleaner. Recent developments suggest that this should finally change. Genoil should begin selling its Crystal Sea units and may also commercialize its GHU with the help of SBK Holdings—Genoil’s Middle East marketing partner. Both developments should lead to a significant recovery in Genoil’s stock price. Momentum began in October for its Crystal Sea business following its first order from the marine division of Saudi Aramco based on two years of successful field testing. Additionally, the partnership with SBK Holding, LLC, signals commercial development momentum for the GHU in the Middle East. The Crystal Sea business can turn the company cash flow positive and drive a stock valuation of over $1 in the next two years. A commercial GHU contract could drive a much higher stock price, and those prospects have been further enhanced by a GHU engineering analysis requested by Lukoil in December.
Apple Inc. has been under pressure in large part due the fear of price competition from Google and Samsung. Apple Inc. stock at $509 already reflects market share losses and a less certain future, in our opinion. At 6.6 times September 2014 earnings (ex-cash) and a 2.1% dividend yield, Apple remains an attractive investment. We remain positive on Apple’s prospects, but will feel better when they are able to introduce a new product line which may be later in 2013 or 2014. Apple Inc. will report earnings after the close on January 23rd.
With the S&P 500 near five and 13 year–all time–highs, we are not aggressively bullish at this point in time. However, since 2000, earnings on the index have doubled and the value proposition is far more appealing than it was at the turn of the millennium. Recent Federal Reserve commentary suggests that “quantitative easing” will begin to end in 2013, so the artificially low levels of interest rates designed to spur the economy could end this year. Interest rates should begin to rise from 1.9% on the ten year US Treasury to the 4-5% range as the global economy slowly improves over the next five years. Equity markets should experience continued earnings growth, however, how they will perform is unclear. Rising rates will be problematic for bond investors. Due to these macroeconomic and market factors, our emphasis on income growth strategies makes sense as a growing income stream will be a powerful driver for capital appreciation, inflation protection, and interest rate risk mitigation.
Please note below the historical perspective on interest rates and the S&P 500 market multiple on a 10 year rolling basis courtesy of Robert Shiller and his website www.irrationalexuberance.com.
We wish you and your family the best in 2013.
Sincerely,
Tyson Halsey, CFA
Managing Member
Income Growth Advisors, LLC
Disclaimer: Our MLP performance is unaudited, though we hope to have it audited later this year. I own Genoil Inc. stock and have received stock options for consulting for the company. These facts may impair my ability to be objective in analyzing the company. Genoil Inc. has a “going concern” auditor’s note.