Saturday, August 22, 2009 EST

Investors looking for ways for the highest investment returns tend to look beyond the stock market towards the futures market. Trading in futures long and short can involve more risk then trading in the stock market. This can happen if an investor is long a particular investment such as Oil Futures. If an Oil contract goes “limit down” the investor can be caught on the wrong side of the market with no way out.

There are other ways investors can take part of the benefits of the futures market without trading futures contracts or options on futures. Let's review a few areas first starting with the least commonly known investment vehicles.

1. Royalty Trusts (RT)
generate income from the production of natural resources such as oil and gas. When an investor buys a RT they are paid dividends on the sale of the natural resource. When production increases so do the dividends paid to investors.  The yields on RTs can be 8% or more a year. In additional to providing income RTs have capital appreciation by share price growth.  Some examples of Royalty Trusts are Permain Basin (PBT) for oil and gas or San Juan Basin (SJT) for natural gas,  

2. Master Limited Partnerships (MLP)
unlike Royalty Trusts an investor is paid dividends on the business such as a pipeline. There is another advantage of trading in MLPs and investor can purchase a closed end fund that holds a group of MLP which in theory should reduce risk. This is discussed in the next section.

The following MLPs are highly held in many closed end funds: Energy Transfer Products (ETP), Kinder Morgan (KMR), Magellan Midstream (MGG).  

3. Closed end funds (CEF)
provide the opportunity for an investor to buy under the market if the CEF is trading to a discount to the Net Asset Value (NAV).   There are closed end funds that invest in MLPs and an investor may chose this route to limit risk by purchasing a group of MLPs. A few of these are First Trust Energy and Growth (FEN), Claymore MLP (FMO), Gabelli Gold and Natural Resources (68% Gold) (GGN).  

4. Exchange Traded Notes (ETN)
"look and feel" like an ETF but there are a few major differences. An ETN is an unsecured debt security that is used to track an underlying index. The caution for investors is that unlike an ETF, if the issue of an ETN goes bankrupt and investor may loose all the investment or wait in line in bankruptcy court to get pennies on the dollar.   iPath has one of the largest selection of ETN that track Oil (OIL), Natural Gas (GAZ), Livestock (COW), and every other sector of the futures market.   

5. Many Exchange Traded Funds (ETF)
for the energy sector are commonly known. There are commodity ETFs that hold futures contracts such as US Oil (USO), US Natural Gas (UNG).  PowerShares Products Crude Oil (OLO), Commodity Tracking (DBC) Energy (DBE). There are other products that track oil companies such as PowerShares Oil Exploration (PXE).     In summary an investor can add commodities to their portfolio by using the investment vehicles noted in this article. Commodities provide a level of diversification and separation from the major stock market indexes.

Sunday, August 9, 2009 EST

There is a lot of talk regarding the rally and if it will continue and this talk has been going on for months.  Many more advisor's are bullish since the economy has come off some of the worst levels.  There are some signs of weakness but these are slight to moderate.

The NYSE has not broken out of a prior high and did not confirm the break out seen in the NASDAQ and Value Line Arithmetic Index. The NASDAQ trend appears to be slowing and has broken the up-trend which should keep investors on their toes.

Typically when the Advance Decline Line (ADLine) starts to move sideways a trend change may be on the way. The markets closed up this past Friday and the ADLine moved lower showing a lack of support for the upward movement.

The downward tick in the ADLine was slight and may indicate a slowing in the trend. The earnings season was fairly good the past couple of weeks, but it was comparing to a very poor previous year. Regardless the market is now entering a quiet period and it may mean sideways movement or a pull back. With the power of the bulls in the market it seems unlikely there will be a deep pullback unless there is some surprising bad news. The may come in the form of commercial defaults on mortgages but that remains to be seen.