Investing during the Financial Crisis

The sky is falling! The sky is falling!! The sky is falling!!!

And indeed it is. As of today, the DOW has fallen 9 days straight. Most Americans' retirement accounts have been decimated by The Plunge. The typical events that cause a turnaround is nowhere in sight. The public has lost confidence in out elected officials to act responsibly. Nobody trusts President Bush when he says the markets will be OK. The Senate sat on the bailout plan for days until they got their $140B of earmarks. How brazen is that during an election year when both candidates denounce earmarks? A partisan Congress blames the other party for corporate greed, earmarks and All Things Bad, while providing no concrete proposals to prevent further abuses. The investment community has lost confidence in the Fed to make a difference. The bailout plan approved by Congress is skewed towards helping out the Guilty and the Greedy. AIG actually had the chutzpah to spend $400,00 of taxpayer money on a jaunt the day after the bailout was approved.

So what is an Investor to do?

Of course the safest thing to do now is to lock in your losses by bailing out of the market and parking your money in an FDIC insured bank account. But if parking your cash with no growth, and no yield is not your cup of poison, read on.

First of all, do NOT jump into other investments that are traditional considered The Safe Investments.

Annuities

Stay away from annuities. They are insurance policies that tie up your capital until the day you die. The insurance company takes your capital and invests it to generate return for issuing the insurance. Traditionally, that had been the safest way to park your money. Even though the rate of return is low, the perceived safety of insurance has been ingrained in our cerebral cortex since birth. Well, if there is anything the past 3 weeks have taught us, it is that insurance companies are not necessarily all that safe. Unless you have a level of crystal ball gazing that borders on the supernatural, you cannot tell which insurance company is going to be financially sound enough to pay out the annuties for the years you will be alive. And the use of Moody's credit ratings is of no use either -- Lehman was given an A rating right up to the moment they filed for bankruptcy.

So an annuity is a one sided transaction -- you give up control of your capital, while having no possibilty of pulling it out when thunderclouds loom in the horizon.


Canadian Energy Trusts

Not ALL sectors are affected by the financial crisis.

The best income play on crude oil prices is still to invest in select Canadian energy royalty trusts. Unlike U.S. energy royalty trusts, which stop paying once the trust runs out of oil….

Canadian energy trusts can acquire and add more reserves to replenish depleted supplies – and as a result, pay off perpetually.

Traditionally, these Canadian energy trusts have been exempt from corporate tax.

In November 2006, Canada announced its intent to tax these trusts starting 2011 – causing a 30% - 50% drop in the stock prices of those Trusts.

The good news is -- some of the trusts have accumulated enough tax pools that they will not have to pay corporate taxes even beyond 2011. So the stock price correction increased the yield for investors who bought after the November scare.

The recent financial crisis have caused a further drop in the stock prices of these Trusts. But let's look at the issue with eyes of cold steel. These Trusts generate Cash Flows independent of the US financial markets, and their dividends have not been impacted. So given the irrational panic selling over the past weeks, their stock prices have fallen to a level where the dividend yield is above 25%!!! No, that is not a misprint. How crazy is that? Some of these trusts have paid out twice as much in dividends over the years than their stock is worth today. And they continue to pay these Paul Bunyan sized dividends.

Regardless of how much more their stock prices fall, that dividend is as safe if not more safe than anything else in the market today. So unless you need to pull out all your cash over the next few years, these Trusts can give you an incredible amount of income.

Most of the better Trusts have hedged a portion of their production, and their income are not significantly impacted unless crude oil and natural gas falls significantly below todays levels respectively. In addition, the capital requirements of these Trusts are self funding in the short term. In the long term, these trusts need to borrow to grow. Canadian Banks do not have the liquidity problems of US Banks. They are better regulated. Besides, the Canadian Government is less leveraged than the US government, and is in a better position to do any kind of bailout, should it be necessary.

Bigger is better for these Trusts, as they have the flexibility to weather fluctuations in crude oil and natural gas prices. I like Penn West Energy Trust (PWE) . They are the biggest Energy Trust in North America with 10 years of reserve life. Their payout ratio only 52% making their dividend among the most sustainable in the group. Their income is hedged -- 40% of their production is hedged for $60/ barrel oil. Unless oil drops below $65 - $70, their dividend is safe. Even if it drops below that, a modest reduction in their dividend still represents extraordinary size yields.

The market is driven by Fear and Greed. At this point, Fear dominates. While we don't know where the market bottom is at, history proves there is always a bottom and an eventual recovery. By then the average investor's mindset will be consumed with "should have", and "could have". The more chaotic the environment, the more clear our thinking must be to survive and thrive. The better managed Canadian Energy Trusts like Penn West Energy Trust (PWE) and Paramount Energy Trust (PMGYF) are places to invest and grow while the storm rages around us.