Trends I'm Watching

Investing in Water – Are Conditions Right?

Trend: Water usage continues even when the economy slows.

We've invested in the water ETF PHO several times in the past year, only to be disappointed when it hit our 10% stop loss and sold. Maybe the market sell off and the unique characteristics of water use will make investing in water profitable in these strange times.

Nick Hodge at Wealth Daily recommends a water company who is growing earnings.

Link: Investing in Water Companies.

Flowserve Corp. (NYSE: FLS), which actually reported earnings last night.

Here we have a stalwart water service company that develops, manufactures, and sells a variety of valves, pumps, and related equipment for the water and other industrial sectors.

Their release of third quarter earnings recently stunned the street.

Earnings per share came in at $2.04, much higher than the analyst-predicted $1.76, and 86% higher than earnings in the third quarter last year.

Flowserve traded as high as $145.00 earlier this year, but now trades in the $55.00 range.

And here's the kicker.

Flowserve currently trades at a price-to-earnings ratio of 8.55. That's the current share price divided by full year 2007 earnings.

Unlike other companies that have reported earnings in recent days, Flowserve actually stuck to its earnings forecast for 2008.

Most other companies have trimmed their outlooks in light of current economic conditions that are all but certain to reduce sales.

The company is still predicting that 2008 earnings will come in at the $7.50 mark.

That would give the company a forward price-to-earnings ratio of just 7.33, rendering it utterly oversold.

You see, consumers will tighten their belts to get through these tough times. Less going out to dinner. Less purchasing of discretionary items. Perhaps even driving less to curb fuel costs.

But they won't use less water.

And there are a lot of other companies out there that will benefit from this situation as Flowserve will.

Disclosure: We may own shares of Flowserve.

Oversold MLP's and Dividends

Trend: Oversold stocks with dividends may provide relative safety and income.

Mathew Emmert of Dividend Gambit recommends two master limited partnerships. Excerpts from Mathew's article on MarketWatch are below.

Do what the government doesn't... find safety - MarketWatch.

The stocks of these companies have been taking an absolute shellacking lately (even more than the overall market) for several reasons.

First, these companies have seen an immense amount of "forced selling" lately from troubled hedge funds that once considered these cash-generating beauties favorite investments, but now just see them as a source of much-needed cash.

Second, like real-estate investment trusts, or REITs, MLPs pay out most of their cashflow to shareholders, so while that's great for yield-hungry investors, it also means they tend to fund growth via debt issuance, and the frigid credit market has created fears that the lack of this source of funding will curb MLP expansion.

And third, as anyone who fills up their car is quite aware, commodity prices for things like oil and natural gas have been falling through the floor lately, and many investors don't know the important difference between which MLPs have exposure to commodity prices and which don't.

So, all of these things have combined to create a level of panic in the MLP space that can be exploited by those in the know. Two of the best firms I recently recommended to my Dividend Gambit subscribers during the brutal recent sell-off were Enterprise Products Partners (EPD) and Teppco Partners (TPP).

Both of these firms own extensive, highly profitable oil and natural gas pipeline assets and storage facilities. They have little or no direct exposure to commodity prices. They have good access to capital and strong free cash flow, which should keep them growing both their businesses and their cash payouts for some time. They've also just completed large projects that have recently become accretive to their earnings.

And finally, both firms share the same managing general partner, which is effectively headed by Dan Duncan, who is a gentleman that I consider to be one of the best and brightest in the MLP space.

Enterprise is a larger and more diverse company, which arguably adds some safety and reduces volatility, so it has a somewhat lower 9% yield at its current price (though it does have a higher rate of annual dividend growth). So, though Teppco would be my first choice among the two due to its slightly more attractive value, both firms make a great pair for any hunkered down portfolio looking for specific MLP exposure.

Jim Jubak's 10 trends for long-term gains

Predictions: Jim Jubak at MSN Money describes 10 global trends

Link: 10 trends for long-term gains - MSN Money.

10 long-term trends that will drive the global economy over the next decade and more.

1. Go where the growth is, and that means the developing economies of China, India and Brazil.
2. Global blue chips are emerging from the world's developing economies to challenge Coca-Cola, IBM and Wal-Mart on the global stage.
3. The world is getting wealthier and older at the same time. So who's going to manage all that retirement money?
4. After 20 years of low inflation, the world is headed for a decade of constantly rising prices.
5. The world is runing out of cheap oil.
6. Developing economies are demanding more iron, more copper, more nickel, more coal -- and that has set off a boom for mining companies and the companies that equip them.
7. We're looking at a decade of higher food prices driven by competition with biofuels and the fact that people in the developing world will eat more pigs, chickens and other sources of protein as their incomes rise.
8. Environmental problems have become so pressing that it's time to save the world and make a buck.
9. The technology sector doesn't look anything like it used to, but fortunately the same rules still apply to what I call "hidden tech" stocks.
10. It used to be that stocks and bonds from the United States got a premium in the financial markets just for showing up. Investors were willing to pay more because the U.S. markets were so stable. They're still among the world's best in that category, but now they've got company from Canada, Australia and, of all places, Brazil.

Withdrawal Pains from Easy Credit Coming

Trend: The good old days of easy credit are gone and consumers and businesses who depend on it will have tough adjustments to make.

Michael Panzner says

Americans will have little choice but to lose a dependence on borrowed money that has become an increasingly pervasive feature of everyday living during the past few decades

Link: Is the Era of Easy Credit Over for the Long Haul?

Experts say that even when the current credit crunch eases, the nation may finally have maxed out its reliance on borrowed cash. Today's crisis is a warning sign, they say, that consumers could be facing long-term adjustments in the way they finance their everyday lives.

A prolonged period of tighter credit is ahead, experts say.

U.S. consumers will find it much harder to get a credit card, and to carry large balances. Late fees will rise and lines of credit will be reined in. After years of buying homes with interest-only loans, or loans that allowed people to borrow more than the value of the home, substantial payments and downpayments will be required. Interest rates are also likely to rise.

Lenders, far more wary of risk, have tightened the standards they use to judge potential borrowers. Regulators will be looking over their shoulders.

The changes cap three decades in which U.S. consumers - along with businesses and government - have run up ever-increasing debt. Americans became accustomed to financing purchases large and small with plentiful credit cards, easily approved loans for cars and the latest conveniences, and by siphoning the equity in their homes. Lenders did far more than just make credit plentiful. They aggressively marketed it as a necessity, a way for the smart consumer to leverage themselves into a better lifestyle.

The financial meltdown has made clear the role an increasingly global economy played in facilitating U.S. consumers' borrowing, with banks packaging and selling debt to investors, providing cash to people who once would have been considered too risky to get a loan.

The expansion of credit has, in many ways, been a good thing. It has allowed many more people to buy homes. At a time when household incomes have stagnated, borrowing has made it possible for many people to afford purchases and cover short-term expenses they might otherwise have had to delay or abandon.

But all that borrowing came at a heavy cost.

- Americans are more reliant on debt then ever before.

The portion of disposable income that U.S. families devote to debt hit an all-time high in the second half of last year, topping 14 percent, figures from the Federal Reserve show. When other fixed obligations - like car lease payments and homeowner's insurance - are added in, about one of every five household dollars is now claimed by bills.

The credit card industry lobbied heavily in 2005 to tighten bankruptcy laws to make it more difficult for consumers to seek court protection and shed responsibility for paying off debt. But in a sign of just how much households have become dependent on borrowing, the average amount of credit card debt discharged in Chapter 7 bankruptcy filings has tripled - to $61,000 per person - from what it was before the law was passed.

- Americans, borrowing to cover ordinary living expenses, have all but abandoned saving.

The U.S. personal saving rate dropped to well below 1 percent in late 2007 and early this year, according to figures from the federal Bureau of Economic Analysis. The figure has edged up in the last few months, but the actual savings rate may still be near zero, given that many people are covering living costs by using credit cards or money saved earlier, according to the BEA. The lack of savings is a sharp contrast with the decades after World War II. Americans routinely saved more than 10 percent of their income in the early 1970s.

Best Performing ETFs for the Past Week (2008-10-10)

Trend: Rydex Inverse 2x S&P Select Sector Enrgy (REC) led the one week performance (+69%, +89% for 4 weeks, n/a for 13 weeks). UltraShort Telecommunications ProShares (TLL) and UltraShort Oil & Gas ProShares (DUG) were the second and third best performers, respectively.

The 20 ETFs with the best 1 week performance through 10/10/2008 tracked by Morningstar are highlighted below.

Source: MSN Money Exchange Traded Funds (ETFs) Performance Tracker

Name	Ticker	Category	Holdings	Morningstar	Last Price*	1-Wk	4-Wks	13-Wks	YTD	52-Wks	3-Yrs	5-Yrs
Rydex Inverse 2x S&P Select Sector Enrgy	REC	Specialty - Natural Resources	holdings		$219.93	69.18	88.76	166.08	N/A	N/A	N/A	N/A
UltraShort Telecommunications ProShares	TLL	Specialty - Communications	holdings		$146.74	65.88	115.72	111.48	N/A	N/A	N/A	N/A
UltraShort Oil & Gas ProShares	DUG	Specialty - Natural Resources	holdings		$74.40	64.75	82.69	160.12	118.24	103.77	N/A	N/A
UltraShort Russell MidCap Val ProShares	SJL	Income	holdings		$173.15	53.30	90.72	73.51	112.89	151.96	N/A	N/A
Rydex Inverse 2x S&P Select Sector Tech	RTW	Specialty - Technology	holdings		$170.32	52.99	79.29	88.54	N/A	N/A	N/A	N/A
UltraShort MSCI EAFE ProShares	EFU	Income	holdings		$203.00	52.79	73.51	115.32	176.20	N/A	N/A	N/A
UltraShort Utilities ProShares	SDP	Specialty - Utility	holdings		$122.76	51.33	80.26	134.33	144.58	131.08	N/A	N/A
Rydex Inverse 2x S&P Select Sector Fincl	RFN	Specialty - Financial	holdings		$99.89	50.96	42.65	-2.85	N/A	N/A	N/A	N/A
UltraShort MSCI Emerging Mrkts ProShares	EEV	Income	holdings		$172.62	48.42	58.75	120.36	146.81	N/A	N/A	N/A
UltraShort Health Care ProShares	RXD	Specialty - Health	holdings		$122.98	48.17	64.22	54.27	89.53	99.66	N/A	N/A
UltraShort Russell1000 Value ProShares	SJF	Growth	holdings		$164.16	48.14	69.71	60.78	117.30	155.71	N/A	N/A
UltraShort MSCI Japan Proshares	EWV	Income	holdings		$169.86	45.56	70.23	103.59	124.58	N/A	N/A	N/A
Rydex Inverse 2x S&P Select Sector Hlth	RHO	Specialty - Health	holdings		$108.85	43.87	58.49	48.16	N/A	N/A	N/A	N/A
UltraShort S&P500 ProShares	SDS	Growth	holdings		$110.88	43.79	67.48	68.54	117.78	146.16	N/A	N/A
UltraShort MidCap400 ProShares	MZZ	Growth	holdings		$111.00	43.04	83.16	86.28	104.53	132.89	N/A	N/A
Rydex Inverse 2x S&P 500	RSW	Growth	holdings		$176.00	43.04	72.73	74.54	127.78	N/A	N/A	N/A
UltraShort Russell MidCap Gr ProShares	SDK	Growth	holdings		$163.34	42.96	95.24	115.71	159.17	184.93	N/A	N/A
UltraShort Basic Materials ProShares	SMN	Specialty - Unaligned	holdings		$92.99	42.62	107.05	187.15	130.66	118.05	N/A	N/A
UltraShort Financials ProShares	SKF	Specialty - Financial	holdings		$158.00	42.37	35.80	-5.38	58.92	117.27	N/A	N/A
Rydex Inverse 2x S&P MidCap 400	RMS	Growth	holdings		$160.02	41.22	83.95	84.28	109.43	N/A	N/A	N/A

Disclosure: We may own any EFT above at any time.

Please verify the performance of any ETF before investing.

Crisis Investing Strategy

Trend: Forced selling by hedge funds and panic selling by individuals continue to drive stock prices lower.

Jeff Miller at the A Dash of Insight blog provides some clarity on investing in current financial crisis. Excerpts below.

Link: A Dash of Insight: How NOT to Think about Your Investments.

Dr. Brett Steenbarger writes as follows:

When markets become unusually volatile, they make unusually large moves. To the short-term trader or the active portfolio manager, such moves look like phenomenal opportunity. This creates a kind of dissonance when their results do not reflect such opportunity. This dissonance is often expressed as regret: the word "should" becomes a prominent part of traders' thinking.

Underneath this regret is what behavioral finance researchers call "hindsight bias": the exaggerated sense of predictability in retrospect.

After some typical wisdom, which deserves to be read completely, he concludes as follows:

Given the limits of what we know and what is ultimately unknowable, not all movement is opportunity. The key to trading success is finding the patience to capitalize on those things you do know and the wisdom to accept what is uncertain.

The most important step an investor can take is to understand what is happening.  Here is our analysis.

• Our system has created a climate where banks will not lend with each other.  Why not?  After Lehman was allowed to fail, no one knows which financial institutions will get government support.  Why lend to an institution that might not deliver?
• We are de-leveraging at Warp speed, since any write down at one institution ripples through the entire system as required by FAS 157 mark-to-market rules.
• The lenders to hedge funds, all becoming regular banks, now have more conservative business models.  Leading fund manager Ken Heebner  made this point tonight on Kudlow.  See the video here and here.  The hedge funds can no longer take a strategy that makes 5 or 6 percent a year and leverage it five times.  This means that hedge funds are selling -- forced selling -- the good with the bad.
• Individual investors are dumping their mutual funds, as they always do in times of stress.

Leaders Describe Hope, Not the Future

Trend: Government and corporate leaders tend to describe what they want to happen instead of what is happening — we shouldn't confuse their vision with the reality of investing.

John McCain said "the economy is strong" until the Paulson Plan was proposed. Many CEOs and CFOs have reassured investors about their companies right until the end.

Michael Panzner says that many leaders use their skills to create a reality that matches a powerfully optimistic inner vision.

Andrew Ross Sorkin, who writes the Dealbook column at NYTimes.com, describes recent examples. Excerpts below.

Link: Dealbook - What Goes Before a Fall? On Wall Street, Reassurance - NYTimes.com.

Jim, we have a great future as an independent company,” Robert K. Steel, Wachovia’s chief executive, told James Cramer on CNBC’s “Mad Money.” “We’re also focused on very exciting prospects when we get things right going forward. I didn’t have time today to talk about the good things going on at Wachovia.”

That interview wasn’t last month or last year — it took place, amazingly, two weeks ago. Wachovia’s shares closed at $10.71 that day. On Monday, Citigroup bought the company for $1 a share.

What was Mr. Steel thinking? Did he think he could “spin” his way to survival?

It is a conundrum that C.E.O.’s of troubled companies seem always to face. In an effort to bolster public confidence in their businesses, they give interviews and try to put on a happy face — right before their companies go off a cliff.

We’ve seen it over and over again, especially during this latest chapter being written about the financial industry, a world that is predicated on betting billions of dollars of paper on little else than the confidence that the guy on the other side of the bet will be in business tomorrow. A rumor that a company is in trouble can turn into a self-fulfilling prophesy unless it’s stamped out quickly, or at least that’s the thinking on Wall Street.

Just rewind the tape: Days before Bear Stearns was sold to JPMorgan Chase, as speculation swirled about Bear’s stability, Alan D. Schwartz, Bear’s chief executive, went on television to say: “We don’t see any pressure on our liquidity, let alone a liquidity crisis.”

That same month, Erin Callan, then Lehman Brothers’ chief financial officer, confidently told analysts that the firm had raised enough capital. “We took care of our full-year needs at that point,” Ms. Callan said in a conference call before exchanging high-fives with her colleagues; her performance moved Lehman’s shares higher even though the company reported miserable numbers.

Of course, after the fact, we point fingers. Were they lying? In hindsight, it always seems that way no matter how they rationalize away their comments.