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Dow Chemical’s Magical 17.8% Return |
Double Your money in 7,000 years!
“Why would you choose returns that will double
your money every 7,000 years?” IDE’s Steve McDonald asks. He isn’t
kidding. Some money market funds are paying 0.01% yields. That would
double your money in, yes, 7,200 years...
“Your broker may tell you that without risk
you won’t get returns,” says Steve, Editor of
The Bond Trader.
“It doesn’t have to be that way. Investment
grade corporate bonds give you both decent returns and downside
protection.
Don’t Be Misled by a Bond’s Yield
Steve wants you to know that you can get a
much higher interest rate than what you see listed on the bond itself.
Steve buys bonds at a discount to par
($1,000). He collects the coupon (the interest rate) and sells the bond
as it approaches par or goes to a premium (over $1,000).
Take a look at how this strategy played out
with the last bond recommendation Steve made through The Bond Trader...
Who Says Dow Chemical Is Boring?
Through The Bond Trader, he
bought a Dow Chemical bond last February for the discounted price of
$955 (instead of $1,000). Its interest rate was 6.125%. And its maturity
date was December 1, 2011.
“When you add the capital gain of $45 (at
maturity) to the stated rate of 6.125%,” Steve explains, “your average
annual return amounts to 8.05%.”
“Now here’s where the magic comes in. The bond
ran up in price to $1,040. We sold it a few days ago at that price for a
17.74% return!”
Let’s do the math...
“We held the bond for nine months while
earning 6.125% or $42.12 per bond. Plus, we got a capital gain of $85
($1,040 minus our cost of $955). That comes to $127.12 per bond for
every $955 invested in the span of nine months.
“Remember, we only held the bond nine months,
not the full maturity of 37 months.
“Dividing your total return, $127.12, by your
cost, $955, and then by how long you held it, nine months, and then
multiplying it by one year (or 12 months), here’s how the numbers
look...
“$127.12 / $955 / 9 months x 12 months =
17.74%
“We expected to make about 8% per year but
actually made more than twice that.”
Steve points out that this is not as unusual
as you might think. His Bond Trader also sold a Hartford
Finance bond in November. When he bought that one, he expected to make
11.3% on it – but he actually made an annualized return of 25.66%!
In the past year, Steve’s Bond Trader
has sold 26 bonds before their maturity date, and all but two have
returned more than what they were expected to earn when first purchased.
What if the bonds had not appreciated? Steve
tells me he would have been content to hold these bonds, collect his
interest, and realize a small capital gain at maturity.
“The returns have been great and the downside
protection is the maturity date,” Steve says. “It’s the best of both
worlds.”
Energy Starving for Cash
The recession is killing the energy sector.
One company after another has been reporting profits dropping by
30-50%.
Meanwhile, inventories are up and demand is
still scraping bottom.
Demand is so bad that Saudi Arabia – the
world’s biggest oil supplier – has shut down one-third of its total
capacity. I asked IDE’s Andrew Gordon, who has several energy holdings
in his portfolios, when he thought the sector was going to recover.
He explained that you really have to divide
the sector into two parts. The traditional half is made up of oil and
gas producers. The non-traditional half is made up of alternative energy
producers using wind, solar, and thermal sources.
“Both have seen big declines in profits,” he
told me, “but not across the board. Some energy shares are going up
while others are going down. Same thing with prices. They’re all over
the place. Oil is going up while gas and solar are dropping."
“So where do we want to be now?” I asked
Andrew.
What’s really interesting is that oil is
gearing up to really take off.”
“Why” I asked.
“The culprit,” Andrew said, “is
underinvestment.”
Oil Preparing for Big Rebound
The International Energy Agency (IEA) based in
Paris says that “the financial crisis has cast a shadow over whether all
the energy investment needed to meet growing energy needs can be
mobilized.”
IDE’s Rusty McDougal (who edits the
Resource Windfall Speculator) loves to hear stuff like that. He
says that underinvestment is an investor’s best friend...
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It lays the groundwork for future flat or
decreasing output.
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Like day follows night, shortages follow.
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Prices then go up.
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Producers begin raking in the revenue.
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Their stocks surge.
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And you can make a lot of money by investing
early.
Investors today are more focused on today’s
falling demand than tomorrow’s shortages. As shortages develop, Rusty
says, future oil prices will surge...
“Next year, it’ll go over $100 per barrel. We
may never see oil priced under $100 again,” he says. To make the most
money, he advises you to invest now.
An Energy Sector Only the Government Can Love
The IEA says that investment in renewable
energy has been particularly hard hit, falling by about one-fifth in
2009 compared to a year earlier. But if the government hadn’t kicked in
with grants and low-interest loans, it would have been much worse.
Renewable energy investments would have fallen 30% this year.
Another underinvestment opportunity?
Andrew Gordon says not this time...
“The renewable energy market isn’t a normal
market. It’s built on government subsidies and financial incentives.
Without government subsidies there would be no alternative energy.
“It costs too much to produce and it’s
expensive to buy. Even with all the money from the government, renewable
energy is the energy of last resort. Its contribution to the future
energy pie is an outgrowth of government policy, not the free market.”
That makes the future of renewable energy
unpredictable, says Andrew – unlike the future of the oil industry.
Invest Safely,
Bob Irish
Investment Director
Investor's Daily Edge
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