Many people are still skeptical about the market hitting new highs, and concerned not only that it won’t go higher, but also that it will actually drop.
Let me share with you a couple points about why it is different now than in 2007. I have said before that corporate profits are at all-time highs. Part of this is due to low interest rates. In October 2007 the 10-year treasury was at 4.25 percent; it is now half that at 2 percent.
Consumers were spending more on their mortgages, much more, during the housing market bubble. The 30-year-fixed rate was 6.6 percent — the rate is now nearly a full three percentage points less than that. This allows consumers to refinance or buy more of a home for less money, which allows them to spend more on other consumer goods.
Lastly, over the past four years, more than $171 billion net have come out of stock mutual funds, while bond funds saw a $1 trillion dollar increase. Compare that to the period of 2003 to 2007, and you will see $585 billion went into stock mutual funds, while bond funds saw only a $177 billion increase. What if the net outflows for stock funds flatten or increase over the next three years, similar to the four years prior to 2007? Don’t you think the market will increase? I do.
Scott, in San Diego, says a buddy of his asked him for his thoughts on MV Oil Trust (NYSE: MVO). As you can tell, Scott thought he would get my thoughts on this company as well. Scott, I can see what attracted your buddy to this; it’s that juicy 10 percent dividend. This is not your normal stock, and it is hard to follow or see the value of this trust.
MVO appears to be what is known as a royalty trust, which is different than an MLP (Master Limited Partnership), and, again, this is not a company you are buying shares of. Royalty trusts also work differently in that they generally don’t hold land or much in the way of assets.
Second, these trusts generally have a finite life either measured in years or volume. They can also terminate on the death of certain named individuals.
Lastly, they do not own the properties that they are producing; they simply collect the royalties and distribute them.
I did notice that this trust has paid a quarterly dividend since February 2007 to the most recent 68 cents dividend on Jan. 18, 2013. The highest dividend was July 14, 2011, when the trust paid $1.03 that quarter. The lowest dividend was paid April 13, 2009, in the amount of 41.9 cents.
While the fundamentals on this trust do show up on Reuters, this is where it is so important to know what one is investing in. Had I received this on my radio show I probably would have not known it was a trust and would say the fundamentals look good. I would have warned that no analysts follow the company, which would worry me, and I would have cautioned the listener to look deeper in this company that is really a trust.
Lastly, understand how these are taxed, You may be in for a big tax bite down the road, like one could have on an MLP to where part of the dividend is a return of capital and you may end up paying taxes on the entire value when you sell that MLP. This is when it is good to have a good tax adviser to consult ahead of time to keep you out of hot water with the IRS.
I can’t stress enough to investors to know and understand what you are investing in. It took me some time to find information on this trust and what it is. With that said, I still would not invest in this trust because there are things that don’t make sense to me or that I don’t understand. If one doesn’t understand something and still invests because of that 10 percent plus yield, then be prepared for some unpleasant experiences in your investment lifetime.
Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.
Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on 760 KFMB AM. Information is provided by Reuters.
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