Who Has the Edge For the Balance of 2010?  What to Do Now?

It was just about a year ago that the markets hit bottom. It was a market bottom born of the sub-prime mortgage catastrophe, fed by the banking crisis, and beaten to submission by the recession. Since then the rise has been nothing less than spectacular with the Dow Jones Average surging back 68% from the lowest point. This upward spike occurred despite the fact that unemployment is still hovering around 10%, the economy is still in a weakened state, and the international financial crisis is far from over (just look at Portugal, Italy, Greece and Spain). Further, there is great concern about the growing national debt, and future deficits seem to be impossible to avoid in consideration of the aging population’s impact on Social Security and Medicare, and the potential new spending required for a National Health Care Program. Finally, while the residential mortgage market appears to be improving, and the economy seems to be responding, albeit slowly, to the stimulus package, and technically we are out of the recession, we still are suffering under a general malaise which seems to pervade every aspect of American life. What will happen with our trade imbalance with China? Is the falling value of the dollar a significant problem? Will commercial real estate suffer the same problems that residential property did? How will terrorism, the wars in Iraq and Afghanistan, concern over nuclear weapons development in Iran, instability in North Korea, weakness in the European markets, volatility in the energy markets, emergence of high tech in India, and other significant world developments, impact the US economy? Will our “log-jammed” congress be able to get together to pass legislation that will begin to solve some of our problems, or will we fall further into the mire of extreme political polarity with the primary concern of lawmakers raising money for re-election and supporting their party.

The FED gave us a hint today by holding the FED funds rate unchanged and commenting that rates would remain at “exceptionally low levels for an extended period of time.” This indicates that they believe that, while we are coming out of the economic/financial crisis that brought us into recession, it is happening slowly and the recovery is very fragile. They want to do everything possible to encourage expansion and avoid a double dip recession, and it seems that they are the only arm of the government that has any power to make a difference. Whether they are successful or not only time will tell.

This past year, it was obvious that the markets believed that the stimulus package and the FED managing interest rates would be successful in bringing the US out of the doldrums. The various problems listed above are most likely already discounted by the market, and unless we face some unforeseen crisis, it would be reasonable to speculate that the markets will continue to respond favorably as the economy continues to improve, housing continues to improve, and eventually unemployment begins to go down.

Here’s the rub. Historically the markets have proven to be unpredictable and random, and at times, even the very best analysts have proven to be wrong despite the most logical rationale behind their forecasts. Therefore, as investors, we need to make our decisions following the old cliché, “hope for the best prepare for the worst.”

How should investor’s proceed for the balance of the year given the uncertainty of the economy and market conditions? Historically, equities with a history of paying consistent and growing dividends generally do better during uncertain times. Traditional safe havens such as bonds which did very well, as interest rates dropped, will eventually be negatively impacted when the FED turns and begins to raise rates. While, based on the current FED position it is obvious that this will not happen in the short term future, the market looks ahead six months to a year, and sometime in the not too distant future we will see this begin to happen. This point of view is even more critical when looking at Mortgage Real Estate Investment Trusts. Historically, regardless of the type of MERIT, they have all dropped substantially when the FED begins raising rates. While some hedge interest rates, and some only invest in government backed mortgages, it doesn’t seem to make a difference, the market simply hasn’t liked this category in a rising interest rate market.

Meanwhile, certain quality utilities which were significantly more stable during the downturn, will more than likely do better during the recovery, although rising interest rates may be expected to negatively impact their price appreciation to a certain extent. Business development companies that kept their powder dry during the recession may excel during the recovery as they have a broad range of companies to choose from to add to their expanding business investment portfolios. However, at the top of my list for investing during these uncertain times are Master Limited Partnerships focusing on oil and natural gas, especially those that have paid consistent and increasing distributions. To focus in even tighter I am especially enthusiastic about MLPs that operate pipelines for oil and natural gas distribution. These pipeline MLPs are paid like an automobile toll road, the more oil or NG that passes through, the more money they earn. Additionally, while volatility in the price of oil or natural gas theoretically should not impact their profit margin (unless they are also involved in exploration and drilling) the pipeline MLPs tend to fluctuate to a certain degree along with oil and NG prices. With Oil prices at approximately 55% of where they were at their recent highs and NG at about a third of recent highs it is a fair bet that we will see further increases in the near future. If you believe that fossil fuel prices are going up, and NG usage is increasing then these government sanctioned pipeline “monopolies should do very well for the foreseeable future.

MLPs are tax favored entities established by the Federal Government in an effort to enable the everyday investor to participate in the oil and gas infrastructure that previously was only available to the very rich (there are also MLPs in other raw materials). MLPs pay no corporate federal tax, which leaves the tax burden on the unit holder to pay at their regular tax rate. However, due to the structure of most of these oil and natural gas MLPs, and the depreciation that they incur, generally most of the tax is delayed until such time as they are sold. It is well worth the effort, and not really difficult to learn the tax related intricacies of MLPs, and evaluate how they might fit into your diversified portfolio.

Perhaps now, more than any time in the past, with the price of oil rising and the use of replacement alternative fuels still in the future, quality MLPs with consistent and growing quarterly distributions are the bright spot in a market with a somewhat cloudy horizon. Information on MLPs is readily available on the internet through any search engine. Always remember, nobody cares more about your money than you do.So be sure to do your own due diligence as there are a wide variety of MLPs, with varying levels of quality and distribution rates, and not all may be suitable to your investment criteria or tolerance for risk.

Copyright 2010 Boyd Investment holdings LLC. All rights reserved worldwide.

Bob Boyd invites you to visit the High Yield Equity Stock Report for further articles and a regularly updated high yield dividend stock list: http://www.highyieldreport.blogspot.com This site is dedicated to assisting investors with their due diligence in the highly volatile and often misunderstood category of high yield dividend investing as part of a diversified investment program.

Article Source: http://EzineArticles.com/?expert=Robert_W_Boyd