Energizing Your Energy Holdings

On December 19th I sold all my SU (Suncor Energy Inc.) and reinvested the proceeds in USO (United States Oil), the crude oil ETF.  This is a 1.3% position. My overall investment in energy stays the same. I merely switched from a stock to the actual commodity. This is the only transaction I have made since my last report (12-10-08). This puts me a step closer to Jim Rogers' strategy of owning the actual commodity rather than the company that produces it.

[Note: The USO fund follows the spot price of West Texas Intermediate light, sweet crude delivered to an Oklahoma-based storage facility. The fund invests in oil futures contracts traded on the New York Mercantile Exchange or other U.S. and foreign exchanges. It is a commodity pool, not a mutual fund.] 

Interestingly, both SU and USO are down 73% from their 2008 highs. Rogers is adding to his oil, saying that its fundamentals are growing stronger by the day.

Two years ago he disclosed that he also owned SU (or one of the other tar-sands companies), but all of his stocks are hedged with equal dollar amounts of shorts on overpriced stocks, therefore he didn't suffer the 73% decline on his SU which I did.

[Note: Tar sands, called oil sands in Canada and extra heavy oil in Venezuela, are naturally occurring mixtures of sand or clay, water and bitumen.  Bitumen is referred to as 'asphalt' in American English.  It is a sticky, tar-like form of petroleum that is so thick and heavy that it must be heated or diluted before it will flow.  Today, most of the world's natural supply of bitumen is located in Canada.]

LESSON: During the remainder of this secular commodity bull market and simultaneous secular stock bear market, hold actual commodities long and unhedged, and hold stocks of companies that produce commodities, either hedged or very low allocation. My strategy has been the low allocation to stocks, but I plan to move closer to Rogers' strategy over time.

I could be wrong, but the 2-4 year prospect for oil looks excellent, and much better than the prospect for SU, which will need far higher oil prices before extracting oil from tar sands becomes profitable again. That's why I made the switch.

At the moment, my favorite physical commodities are gold, silver, oil, natural gas and agricultural products.  According to Rogers, the long term fundamentals on all these are strong, and have not been impaired by the current bear market.

If I did not have a significant position in natural gas producing properties, I would be buying the natural gas royalty trusts now.  My favorites: SJT (San Juan Basin Royalty), BPT (BP Prudhoe Bay Royalty Trust), PGH (Pengrowth Energy Trust), ERF (Enerplus Resources Fund) and PWE (Pennwest Energy Trust). Look at the charts and current distribution rates. You're buying at the bottom of the natural gas price trading range. The current pay-out rates are high but will come down if natural gas prices stay down or decline more. The reward/risk ratio looks good.

CAUTION: Both stocks and ETFs are high risk investments. For money which you cannot subject to higher risk, I suggest PRPFX Permanent Porfolio Fund.  As of the close Friday, December 19, PRPFX was down 10% year-to-date. This compares to a decline of about 40% for the major stock averages.

Best wishes..............................Jay