“The U.S. Treasuries market could now be described as a Ponzi market” according to Hyman Minsky of asset manager Guggenheim Partners. Now is a good time to look at stocks with key resource assets.
Charles Ponzi
Ponzi schemes are named after Charles Ponzi and all follow a similar path. Money from new investors is used to help pay off old investors. While the schemes can work for a little while, they eventually fall under their own weight. Minsky compares U.S. Treasuries to a Ponzi scheme because “the only reason investors would buy Treasuries today is that they expect the Federal Reserve will buy them at higher prices in the future.”
If Minsky’s assessment is correct, assets of all types will feel the heat of an unraveling market. If the U.S. government’s ability to pay comes into question, then investors should strongly consider owning companies with real assets backing up their businesses. And, a focus on income-paying companies will help ease any near-term pain from volatile markets.
Oil and natural gas
Royal Dutch Shell plc (ADR) (NYSE:RDS.A)’s shares have been held back by difficulties in the company’s drilling efforts in Alaska and its big bet on U.S. natural gas. The drilling issue is industry wide, as companies have increasingly been forced into more dangerous environments to find resources. Weak U.S. natural gas prices, meanwhile, make the company’s large bet here look like a poor choice. That said, both Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) expect gas to be a big business in the future, which could turn this negative into a positive over time.
Commodity prices make the top and bottom lines at Royal Dutch Shell plc (ADR) (NYSE:RDS.A) quite variable. However, it has a long history of regular, though not annual, dividend increases. Oil and natural gas will remain in demand no matter what happens to U.S. Treasuries.
A dirty fuel
Coal is unloved because it is considered dirty and because natural gas prices are near historic lows, which makes switching to gas economic. In fact, the coal industry has been hammered pretty hard over the last year or two. With that as a backdrop, it might be surprising to see that Alliance Resource Partners, L.P. (NASDAQ:ARLP) has been posting record results and expects to keep doing so. It has been increasing its dividend on a quarterly basis, too.
Alliance Resource Partners, L.P. (NASDAQ:ARLP) has been able to do this by continuing to invest in its business. Although coal prices are low, volume increases have more than offset price drops. Moreover, the company is focused on particularly low cost coal basins, so its coal can compete with natural gas despite the low price for that commodity. Market share gains remain the focus.
This limited partnership yields around 6.4% and has a long history of regular dividend increases. Although coal is unloved, it will remain an important fuel source in the United States for years to come. Alliance Resource Partners, L.P. (NASDAQ:ARLP) has prospered even in a horrible coal market, imagine what it will do if coal pricing improves.
Golden touch
The company primarily mines gold, but also has silver, zinc, and copper operations. It’s core assets are in Canada and have very low operating costs. Newer properties, however, have higher costs because they reside in hostile environments. Mine disasters are another recent negative.
So, costs are more likely to head higher over the near-term than lower. That’s a big negative, but if gold prices stabilize, the company will have plenty of time to get its house in order and start growing its relatively low-cost production again.
Gold prices are the lynch pin here, but if U.S. Treasuries tank, gold will likely become a very desirable commodity to own. In the meantime, investors can pocket a 3.2% dividend yield backed by a dividend that’s grown notably over the last few years.
Out of the ground
If the U.S. Treasury market falls apart like a Ponzi scheme, investors are going to be looking for safe havens. Gold has traditionally been the asset of choice here, which makes Agnico Eagle Mines Ltd (USA) (NYSE:AEM) an interesting option. However, natural gas, oil, and coal are all backed by the world’s massive and growing energy appetite. Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and Alliance Resource Partners, L.P. (NASDAQ:ARLP) are both high yielding options with good underlying businesses.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners, L.P..
The article These Stocks Are Better Than Treasuries originally appeared on Fool.com is written by Reuben Brewer.
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