2011 is one for the history books. It was not a great year for many investors. The S&P 500 was down in seven out of 12 months, but rose more than 10% in October, recouping much of the loss. Stocks finished the year flat, with the S&P 500 off 0.003%.
In other words, stocks went sideways. Of course, it didn't feel sideways. From the early May peak to the early October bottom, the market dropped 22%. That's a big drop. After big drops like that, stocks usually go up. And they did. The S&P 500 rose more than 10% in October. If you didn't pounce in early October, you missed most of the move. But many of the world's best businesses are still selling at very cheap prices. Readers of The 12% Letter recognize these businesses as World Dominating Dividend Growers (WDDG) – each is the No. 1 company in its industry and pays out higher dividends every year like clockwork.
For example, one of the stalwarts of our WDDG list is such a ubiquitous household brand name... I'm virtually certain every reader has consumed one of its products at one time or another. Right now, it's trading at a dirt-cheap price-to-earnings ratio. Businesses this great aren't supposed to get this cheap. I recently updated my analysis of the stock and moved it to a "buy" rating. The market is making a huge mistake here, and I urge investors to take advantage of the situation before it corrects itself (which it's already starting to do). To get access to our list of World Dominating Dividend Growers, including the latest addition to it, click here.
The WDDGs did well in 2011. While the S&P 500 went sideways, the Dow Jones Industrials Average was up 6%. The Dow 30 contains several WDDG stocks. Also, almost all WDDGs pay dividends that rise every single year. The stream of rising dividends from these stocks represents the most predictable, safe profit trend individual investors will ever find in the stock market.
And again in 2011, as in previous tough years, scared investors did what they usually do when they're afraid to hold stocks: They bought U.S. dollars. The Wall Street Journal reported U.S. Treasurys had their best year since 2008, when some Treasury yields went negative. It was also the first time the 10-year yield was less than 2% since 1977, according to the Journal.
In 2011, I (Dan Ferris) wrote seven newsletter issues (more than 30,000 words) about the oil and gas boom occurring in the United States right now. I also spelled out how the boom is creating an "American Industrial Renaissance" by reducing energy and feedstock costs for dozens of global manufacturing businesses... and providing them with the most powerful of all incentives – lower costs and higher profit margins – to come to the United States. "Buy American" is becoming more than a jingoistic, protectionist political appeal. It's actually a solid investment thesis, at least when it comes to energy.
On the first trading day of the New Year, the big oil and gas companies of the world seem to be telling me the U.S. energy boom has long, long legs under it...
Late Monday, French oil giant Total announced it would buy a chunk of Chesapeake Energy's Ohio shale gas project for $2.32 billion. Under terms of the deal, Total will own a 25% interest in a 619,000-acre area of the Utica shale in eastern Ohio. Total paid $610 million to Chesapeake and $290 million to EnerVest, an oil-and-gas property management firm and the other partner in the deal. Total will pay Chesapeake another $1.42 billion for drilling and well completion by the end of 2014.
"This is consistent with our strategy to develop positions in unconventional plays with large potential and, in this case, with value predominantly linked to (the) oil price," said Total Exploration and Production President Yves-Louis Darricarrere.
This type of deal – where Chesapeake sells a portion of a shale property for cash and development expenses – is common... Total paid $2.25 billion to Chesapeake in 2010 for a stake in its Barnett shale property in Texas.
One of the companies in the Total deal, EnerVest, has produced a return of more than 200% since its 2006 IPO... and increased its oil and gas reserves more than 250% during that same period. The company's management is one of the biggest institutional oil and gas investors in the world. It operates more than 18,000 oil and gas wells in 12 U.S. states. It has 3.6 million acres of land under lease and proved reserves of more than 2.5 trillion cubic feet of natural gas.
This is one of the biggest energy investors in the country. And its managers are great energy investors. Its partnerships have earned returns as high as 37% annually through up and down energy cycles over the past 19 years. But normally, individuals like us can't invest in the company. EnerVest only takes big financial institutions as clients.
However, in the September issue of The 12% Letter, we showed subscribers a way we can invest with EnerVest. To access The 12% Letter – and discover our most recent research – click here.
And today, Chinese oil giant Sinopec announced it would pay U.S. energy firm Devon $900 million in cash and up to $1.2 billion in future development costs in exchange for a one-third interest in five shale operations (including Utica and other deposits in Louisiana, Oklahoma, Michigan, Colorado, and Wyoming). Devon said it expects to drill 125 wells in the five locations by the end of this year.
Big Oil spending billions of dollars for shale gas properties isn't a new phenomenon... Chesapeake sold shale assets in Arkansas last year to BHP Billiton for $4.75 billion. Last June, private-equity firm Kohlberg Kravis Roberts sold assets in the Eagle Ford to Marathon Oil for $3.5 billion. Progress Energy Resources sold a shale property in British Columbia to Malaysia-based Petronas for around $1.1 billion the same month. And in March, Sasol bought a 50% stake in shale assets owned by Talisman Energy.
And in the largest natural gas purchase by a major oil company, ExxonMobil bought XTO Energy outright for $41 billion last year. In fact, shale gas is one of Exxon's biggest focuses at present (and not just on U.S. soil). Last November, in an interview with the Wall Street Journal, ExxonMobil Senior Vice President Mark Albers said, "We do believe there is potential for unconventional oil development from shale resources globally… We are pursuing that not only in a number of the countries where we have unconventional gas potential but also here in the U.S."
ExxonMobil, the world's largest publicly traded oil company, officially announced it was changing its drilling focus to oil shale in the U.S. and abroad (including Poland, Germany, Argentina, and China) last October.
The world's largest hedge fund, the $125 billion Bridgewater Associates, granted a rare interview to the Wall Street Journal, discussing its outlook for the year. Ray Dalio founded Bridgewater in 1976 as a macro-economic hedge fund. And since 2000, the company's flagship Pure Alpha fund has been up every year. It's only had three negative years since 1991.
Robert Prince, Bridgewater's co-chief investment officer, told the Journal the firm he believes we'll see at least a decade of slow growth and high unemployment in the world's developed economies as they deleverage their massive debts. He calls those economies, particularly the U.S. and Europe, "zombies."
"What you have is a picture of broken economic systems that are operating on life support," Prince said. "We're in a secular deleveraging that will probably take 15-20 years to work through, and we're just four years in."
Bridgewater is positioned for higher gold prices, strength in Asian currencies, and lower yields for high-quality government bonds (i.e. Treasurys, though we'd question their definition of "high quality"). To demonstrate the current U.S. debt situation, Prince notes the leverage in the U.S. economy, as measured by comparing household income to net worth, is still higher than it was in 2008. In other words, after leveraging up for 60 years, then "solving" the problem by creating even more debt, it's going to take some time to shake out.
Prince believes the Federal Reserve will continue purchasing government bonds in spurts, as opposed to another massive quantitative easing. Dalio, in an interview last year with Charlie Rose, said of the Federal Reserve's ability to goose markets, "There are no more tools in the tool kit." While we agree that point will eventually come, we think it's years out.
Levering up and buying Treasurys is one of Prince's favorite investments. He gives the example of Japanese government bonds... If you leveraged three-to-one and bought Japanese bonds yielding 2.5% in the mid-1990s, you would have earned a compound average annual return of 12% a year for 15 years.
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New 52-week highs (as of 1/2/12): None (market was closed).
In today's mailbag… more support for Porter's "Corruption of America" piece. If you haven't read it… we urge you to click here and find out what the subscribers are talking about. And if you have, let us know what you think at feedback@stansberryresearch.com.
"I've been a subscriber for almost a year now and I have had the satisfaction of seeing my portfolio grow more in that time than in the last 10 years, I find your advice very useful and helpful in making me a much better investor than I have ever been. Keep up the good work and I will spread your name far and wide." – Paid-up subscriber Dean Beaudre
"Your description of the history of Detroit was, as the saying goes, spot on. I am 90 years of age, and have lived in and around Detroit since I wore diapers. Worked for the former Detroit Times circulation department for 21 years. After its demise, worked for the Detroit Free Press for little over a year, In 1961, I had had enough of Detroit and left to find employment elsewhere. Best move I've ever made.
"My years at the Times were spent working in substations where youngsters would get their newspapers for delivery. In 1950, I moved from what was a nice neighborhood to a suburb. It was sad to work neighborhoods uprooted by the building of the Freeways and govt. projects like the Jeffries (now gone) since it became unmanageable.
"One of the things I remember the youngsters talking about was the ADC, known then as the 'absent daddy club.' Your description was so accurate as to cause and effect. Getting out of was similar to exercising a stop loss on a stock. Keep telling it like it is. We need your kind of reasoning and advice." – Paid-up subscriber CW
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
January 3, 2012
2011: Stocks flat, Treasurys up... Our favorite WDDG stock right now... Dow 30 up 6% last year... France's Total buys shale assets... 37% a year in energy stocks?!... China's Sinopec buys shale assets, too... Shale boom gone global... Biggest hedge fund: Buy Treasurys with leverage...