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Stocks

The Gilded Age of Wall Street Remains Intact

By , Associate Editor, Money Morning - • Print | Email

For decades, Wall Street offered the allure of big league paydays and behind-the-scenes power.

But since the 2008 financial crisis there's been a growing sense – or even hope – that The Street's stride had been broken. After all, demand for a financial system overhaul, regulatory reform, and a crackdown on Wall Street pay must take some toll.

Not hardly. Wall Street hasn't changed its ways and it never will.

Take it from a man who has spent decades on The Street, seeing everything firsthand.

Money Morning Capital Wave Strategist and retired hedge-fund manager Shah Gilani says that in the short-term, firms will have to deal with new rules and slimmer paychecks, but ultimately, they will still find a way to prosper.

"The bloom is off the rose and Wall Street is showing its thornier side, but the Street is still paved with gold," said Gilani. "On any relative basis, unless you're a rock star, star athlete or Hollywood heavy, there's no place like Wall Street to make your fortune. That's not going to change any time soon."

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M&A Heating Up in the MLP Sector

By , Global Energy Strategist, Oil & Energy Investor • @KentMoors_OEI - • Print | Email

The announcement Saturday by Kinder Morgan Energy Partners LP (NYSE: KMP) that it would acquire El Paso Corp. (NYSE: EP) is shaking up the pipeline picture.

The $38 billion deal involves cash, stock, and warrants (with KMP also absorbing about $17 billion in EP debt).

It will create the largest pipeline holding in the United States, the fourth-largest company in the country, and by far the largest midstream service company.

It is this last factor that will have the biggest impact – for two reasons.

First, the merger puts renewed focus on other similar actions among midst reams. These are the companies that connect producing fields (upstream) with refineries, distribution, and retail sales (downstream). Midstream services include gathering, initial processing, feeder pipelines, transport (certainly by larger intrastate and interstate pipelines, but also by tanker and barge), terminals, and storage.

Storage is especially important in this era of surplus production in natural gas, and excess crude oil volume sitting in Cushing, OK (where the daily West Texas Intermediate (WTI) benchmark price is determined for NYMEX trade).

You see, m idstream companies that control storage (which usually includes a large percentage of available pipeline capacity, as well as underground stockpiling sites) generate revenue whether product is moving or staying put.

However, another element in this transaction may be even more important and, in the process, may telegraph where we should expect to see the sector move with further mergers and acquisitions (M&A) action.

What M&A Means for the MLP Sector

This newly announced merger brings together two Master Limited Partnerships (MLPs).

MLPs are designed to move all profits to the partners, avoiding corporate taxes altogether. They act the same way an "S" corporation does for individual taxpayers. When an MLP decides to spin off an equity issue, the portion of profits reflected by the stock must be passed through to the shareowners.

That means an MLP equity issue provides genuine potential for both price appreciation and a dividend well above market averages.

Among the El Paso assets included in the merger is El Paso Pipeline Partners LP (NYSE: EPB), which primarily controls interstate regulated pipelines (and provides a nice complement to KMP assets).

All told, the new $94 billion giant will control more than 80,000 miles of pipeline.
Typically, the initial announcement results in the acquiring company's share price declining and the acquired company's share price moving up.

That's why traders' reactions to this mega-announcement were most unusual. In this case, both were up strongly early this week.

The KMP-EP announcement will be followed by others as the sector continues to consolidate.

That will only create more opportunities for the individual investor.

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These Four Dividend Stock ETFs Can Add Pop to Your Portfolio

By , Associate Editor, Money Morning • @DavidGZeiler - • Print | Email

Investors who like dividend-paying stocks should love exchange-traded funds (ETFs) that focus on dividend stocks – they provide the same benefits but with diluted risks.

With the stock markets gyrating and traditionally "safe haven" investments like U.S. Treasuries offering historically low yields, dividend stocks offer the lure of a reliable income stream.

"Dividends provide you with an income far better than you can get in bonds and with considerable protection against a down market," said Martin Hutchinson, Money Morning's Global Investing Strategist.

Yet dividend stock ETFs also provide some measure of protection from a financial crisis at an individual company.

"Dividend ETFs mitigate the risk a company might commit the ultimate sin: suspend or cut a dividend," Matt Krantz writes for USA Today. "By owning one ETF, which owns shares of hundreds of dividend-paying stocks, if just one company halts its dividend, the impact to the investor will be relatively small."

ETFs own stocks like mutual funds, but are traded on the markets in "units" just like stocks. The units can be created (requiring the fund to buy more shares of the underlying stocks) or destroyed (requiring the fund to sell shares) to accommodate investor demand.

The Power of Dividends

Many investors underestimate the power of dividends. Hutchinson pointed to a study by Yale economist Robert Shiller that showed that dividends accounted for 67% of the average real return on common stocks from 1889 to 1998.

"While stock prices have been plunging, dividend payments are rising," Hutchinson said. "Through Aug. 31, 243 companies in the Standard and Poor's 500 Index increased or initiated a dividend payment. In fact, dividend payments are expected to end 2011 up 18% from 2010."

Companies that manage ETF funds have created an increasing number of dividend stock ETFs to serve investors hungry for ways to add more dividend income to their portfolios.

The Four Best Dividend Stock ETFs

Standard & Poor's Capital IQ Equity Research recently analyzed 1,100 ETFs to see which of the funds that focused on dividends had the best yields and excelled in several other criteria, including performance, risk, credit rating and volatility (based on its standard deviation).

That narrowed the list to 13 funds, of which most were general funds. Four of those ETFs, however, are specifically focused on dividend stocks.

They are:

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Kinder Morgan Energy Partners (NYSE: KMP) Buys Out El Paso Corp. (NYSE: EP)

By , Money Morning - • Print | Email

On June 6, I identified El Paso Corp. (NYSE: EP) as a "Buy." The stock at the time was trading at $20.40 share.

Well, on Sunday (Oct. 16), Kinder Morgan Energy Partners LP (NYSE: KMP) said it would buy El Paso for $26.87 a share. That's a 32% premium to the price the stock was trading at at the time of my recommendation. EP stock yesterday (Monday) rose more than 24% to close at $24.45.

The Standard & Poor's 500 Index has slumped nearly 8% since June 6, so readers who followed my advice would have enjoyed a nice rate of return over the last four months, compared to the overall market.

The case that I made for El Paso back in June was a simple one: The company's assets were valued at less than the equivalent assets held by its peers. El Paso at the time was in the process of breaking itself into two parts, so it could unlock some of the trapped value.

Kinder Morgan recognized that, as well, and acted.

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Green Mountain Coffee Roasters (NASDAQ: GMCR) May Be Red Hot but It's Not a 'Buy'

By , Money Morning - • Print | Email

Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) is one of the hotter stocks in the market right now. In fact, the stock is up 178% since the start of the year.

But if you know what's good for you, you'll steer clear. Green Mountain has shot up so high, so quickly that it has become a victim of its own success.

Let me explain.

Green Mountain started with a single café that roasted beans and sold coffee over the counter to customers in a small town in Vermont. Today, that same company is generating $2.3 billion of revenue.

To put that in perspective, Green Mountain has delivered double-digit net sales growth for the last 27 consecutive quarters. And, since the acquisition of Keurig, it has seen net sales growth of more than 39% for 12 consecutive quarters.

But while compounded growth is the key to long-term success, it also can become a drag on near-term profits.

Often a company feels it must continue to grow simply for growth's sake. And if that's the route Green Mountain takes, then it will find itself in the exact same place Starbucks Corp. (Nasdaq: SBUX) did a couple of years ago.

Indeed, Green Mountain has put so much emphasis on growth that high expectations could negatively impact the company's execution.

And in the economic reality of today, a company that has fixated on hitting lofty growth objectives could be setting itself up for a serious market disappointment.

So Green Mountain Coffee Roasters is "hold" – at least until global growth starts to rebound (**).

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Cybersecurity Stocks: The 100% Gain That's Yours For the Taking

By , Executive Editor, Money Morning - • Print | Email

If you read the Money Morning special report Five Ways to Profit from Cybersecurity Stocks back on Sept. 26 – and followed our recommendations – you've fared pretty well. But if you were also a Private Briefing charter subscriber, and invested in the one cybersecurity stock that we held back for that premium service … […]

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Seven Prospective Corporate Bankruptcies

By , Associate Editor, Money Morning • @DavidGZeiler - • Print | Email

Ten companies with at least $100 million in assets filed for Chapter 11 bankruptcy last month – the most since April when 17 such companies filed. So far in October five more big companies have filed, including Friendly Ice Cream Corp. and Open Range Communications Inc.

They join a list this year that includes Borders Group Inc. (PINK: BGPIQ), paper manufacturer NewPage Corp., skin-cream maker Graceway Pharmaceuticals and the notorious solar panel manufacturer Solyndra Inc.

In fact, 2011 has been the worst year for corporate bankruptcies since 2009, when the financial crisis touched off by the Lehman Brothers' collapse caused a record number of filings.

"It's getting busier for everyone I know," Jay Goffman, co-head of the Global Restructuring Group at law firm Skadden Arps, Slate, Meagher & Flom, told Reuters. "I think 2012 will be a busy year and 2013 and 2014 will be extraordinarily busy years in restructuring."

With many companies already struggling and experts warning that the U.S. economy is headed for another recession, odds are that the pace of corporate bankruptcies will accelerate.

Of course, when a publicly traded company goes bankrupt, the stock becomes essentially worthless, with bondholders and other creditors splitting up whatever is left of the company.

That's what happened to shareholders of General Motors Co. (NYSE: GM) when it declared bankruptcy in 2009. The old stock lost all value, while the reborn GM held an initial public offering (IPO) for a new stock trading with the former symbol.

While the mess angered those left holding old GM stock, that's one of the risks of buying equities. You don't want to be an investor who holds on to a dying company too long, or worse, buys a company expecting a turnaround that instead turns south.

So as an investor it behooves you know which companies are endangered. And while there may still be time for these companies to change course, right now they're on the road to bankruptcy.

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Deutsche Bank AG (NYSE: DB) Will Be Crushed Under the Weight of Europe's Debt

By , Money Morning - • Print | Email

Frankfurt-based Deutsche Bank AG (NYSE: DB) is about to be critically wounded by the European banking crisis.

Don't get me wrong – it will survive the spiraling financial mess. Germany will defend it because it's the bellwether of big banking in Europe. It's their version of "too big to fail."

But as the continent's largest bank, it won't be able to escape unscathed from the capital crunch about to take over the European banking system.

So it's time to sell Deutsche Bank AG (**), before the region's financial system falls apart.

Europe's Coming Capital Crunch

Many European banks don't have enough money to survive a Greek default. They hold huge amounts of their home sovereign's debt, as well as debt of their troubled Eurozone neighbors. Any write-down of those holdings will slam their balance sheets.

These banks were already overleveraged when the financial crisis started in 2007, and they have relied on outside sources like the United States to maintain core capital ratios.

In the 2008 crash, the European banks turned to the U.S. Federal Reserve for trillions of dollars of liquidity injections. They also used sources like U.S. money market funds for short-term loans – commercial paper that matures in less than 270 days – to cover capital loaned out at longer maturities. In May 2011, U.S. money market funds had an average 40% of holdings in European commercial bank paper.

But then U.S. banks, afraid of the unfolding European sovereign debt drama, let these short-term loans mature. This brought the capital back home and took an estimated $350 billion in liquidity out of the European banking system.

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How the Legacy of Steve Jobs Could Haunt Apple

By , Associate Editor, Money Morning • @DavidGZeiler - • Print | Email

Now that its iconic founder is truly gone, Apple Inc. (Nasdaq: AAPL) must figure out how to remain true to the legacy of Steve Jobs without getting hamstrung by it.

It's not as easy as you might think.

The challenge starts with finding a successor CEO who can carry on the legacy of a founder like Steve Jobs without being intimidated by it.

"Much like Disney, Apple's founder was the brand. He was their Mickey Mouse, he was their Betty Crocker," corporate governance expert Nell Minow of GovernanceMetrics International told Reuters. "They have to replace him in five different ways."

That Jobs himself groomed former Chief Operating Officer Tim Cook to follow him as chief executive reduces Apple's risk, but doesn't erase it.

Companies such as The Walt Disney Co. (NYSE: DIS) and Wal-Mart Stores Inc. (NYSE: WMT) have learned that staying faithful to the ideals of a legendary founder can be fraught with pitfalls. Rigid adherence to old ideas can lead to stagnation, but straying too far from them can undermine what made the company such a huge success.

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