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The Commodity Investor Q&A

With Matt Badiali, editor, S&A Resource Report
Wednesday, March 5, 2008

Q: What is your view on continued ownership of large Canadian Energy Trusts? – C.H.
 
A: On October 31, 2006, I personally bought shares in a small Canadian royalty trust. On November 1, the Canadian Finance Minister told investors the royalty trust system was over. I lost half my investment in less than 24 hours, and I wasn't alone.
 
But I became an even bigger fan of the Canadian energy trusts.
 
The royalty trust structure allows natural resource producers to pass their earnings on to shareholders in the form of dividends... thus paying no corporate tax at all.
 
However, the Canadian government felt it was missing out on billions in tax revenues (and a host of conventional businesses were applying for royalty-trust status) and squashed the program.
 
As of 2011, royalty trusts will be taxed just like everybody else. But I still love 'em...
 
That's because they are great aggregators of production assets. In English, that means these companies bought long-lived oil and natural gas wells. These are better than a busted slot machine for producing cash.
 
Thanks to that deadline hanging over our heads, royalty trusts now pay double-digit dividends. I'm not worried about the deadline, because I think these companies will be bought up or taken private long before 2011.
 
So the short answer is, hang on to those trusts. And I'm looking into adding some to the S&A Oil Report portfolio.
 
Q: How much money do I need to get started in natural resource investing? – J.S.
 
A: Today's commodity investors have an incredible "toolbox" available to help them invest with a small amount of money.
 
For instance, a number of ETFs allow you to take a position in the price of crude oil (OIL, USO, UCR). Each of these is priced below $100. These "direct bet" ETFs are also available for gold, silver, natural gas, grains, livestock, and base metals.
 
You also have shares in natural resource companies. Some of my favorites are Big Oil producers like Petrobras and Chevron.
 
Among the biggest miners, you'll find BHP Billiton, Rio Tinto, Anglo American, Teck Cominco, Barrick Gold, and Newmont Mining. You can own 10 shares of Newmont for about $535.
 
Also... the variety of ETFs out there that hold commodity producers is mind-boggling. I recommend using ETFConnect to go through a fund's holdings.
 
Make sure the fund isn't heavily weighted toward just two or three stocks... and make sure the fees the fund company charges aren't more than 1% (some are even less than 0.5%). If you find the right one, you'll have a diversified way to own a lot of great companies with an investment of less than $1,000.
 
And allow me a shameless plug for the S&A Oil Report. It's called the "Oil Report," but we'll take a position in almost any commodity.
 
Right now is a fantastic chance to own a little-known type of commodity stock called a "royalty company." Put simply, these stocks are cheap, and they give you the right to participate in hundreds of promising resource projects with a small amount of capital.
 
Good investing,
 
Matt Badiali




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Market Notes
Credit Crisis!... Citigroup, Freddie Mac, Morgan Stanley, UBS, Fannie Mae, Lehman Brothers, Legg Mason, and American Express hit new lows.
 
CurrencyShares Japanese Yen hits all-time high.
 
Internet behemoth Google falls to 52-week low.
 
Big Pharma takes a hit... Novartis, Sanofi-Aventis, and AstraZeneca fall to lows.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%