Stock Market Investment Ideas

Down with Corporate Welfare! Big Oil Tax Loopholes Should Be Closed

IN THIS ISSUE: Dividend-Paying Stocks and Riding Rough Seas by Roger S. Conrad
China Ascendant Despite Slowdown by Yiannis G. Mostrous
Down with Corporate Welfare! Big Oil Tax Loopholes Should Be Closed by Jim Fink
Investing Daily's Stocks to Watch
RSS Feed

“I’ve got to have it!”

It’s the rallying cry of billions of people. 3.9 billion people will upgrade from cell phone to smartphone and enjoy instant access to the Internet.

Here’s how you profit.

Down with Corporate Welfare! Big Oil Tax Loopholes Should Be Closed
by Jim Fink

Earlier this week I took issue with President Obama’s March 1st speech on American energy policy because in it Barry erroneously asserted that U.S. energy independence requires costly government subsidies to develop uneconomic renewable energy technologies. In reality, unconventional horizontal drilling using hydraulic fracturing) (“fracking”) has revolutionized both natural gas and crude oil production and promises to make the western hemisphere (for sure) and the U.S. (plausibly) energy independent by 2030.

The Real Energy Agenda of Liberals is Environmental, Not Energy Independence

Obama and the Democrats love to trot out “energy independence” when trying to convince the American public to spend money on renewable technologies because independence from foreign oil is a goal that virtually every American believes is important to our national security.  But what Obama and the Democrats don’t like to publicize is their real reason for supporting renewable energy: it’s “green” and protects the environment.  Personally, I consider myself an environmentalist to a limited degree and am willing to shell out a slightly higher portion of my heard-earned income to support clean water and air.

Subsidizing failing renewable energy companies, however, like Solyndra (solar panels) and Ener1 (electric batteries), is just throwing public money down a bottomless pit of wasteful despair. And shelving TransCanada’s (NYSE: TRP) Keystone XL oil pipeline – and forfeiting 118,000 American jobs (page 4) in the process – simply because small sections of the pipeline were positioned above the deeply-embedded Ogallala water aquifer in the Great Plains. The aquifer is so well-protected, in fact, that expert hydro-geologists – and Obama’s own State Department – concluded that the pipeline posed “minimal risk” to the environment.

Obama’s extremism on the environment at the expense of jobs has disappointed a substantial portion of the public. A December 2011 poll found that 78% of Americans believed the XL pipeline would create “a significant amount of jobs” and two-thirds support the project and disagree with the President’s political decision to kill it. Is it any wonder that 50% of all Americans consider Obama’s
presidency a “failure?”

Tax Subsidies for Big Oil Companies are Wrong Too

Before you pass me off as nothing more than a Republican political hack, let me add that there was one part of President Obama’s energy speech that I completely agree with: the end of corporate welfare for big oil companies. Obama put it this way:

Right now, $4 billion of your tax dollars — $4 billion — subsidizes the oil industry every year. Now, these companies are making record profits right now — tens of billions of dollars a year.  Does anyone really think that Congress should give them another $4 billion this year?

It’s outrageous.  It’s inexcusable.  And I am asking Congress — eliminate this oil industry giveaway right away.  I want them to vote on this in the next few weeks.  Let’s put every single member of Congress on record:  You can stand with the oil companies, You can keep subsidizing a fossil fuel that’s been getting taxpayer dollars for a century, or you can stand up for the American people.

Many of these tax breaks (i.e., corporate welfare subsidies) started during the Warren Harding administration – more than 90 years ago – at a time when oil production was in its infancy and it was in the national interest to encourage development of a largely unexplored natural resource. There is absolutely no need for such tax breaks today, especially for the top-five largest oil companies known as “Big Oil.” Just look at the collective $137 billion in profits these five companies “made” (I refuse to use the word “earned”
because they simply benefited from higher oil prices) in 2011:


2011 Profits

ExxonMobil (NYSE: XOM)

$41 billion

Royal Dutch Shell (NYSE: RDS-A)

$31 billion

Chevron (NYSE: CVX)

$27 billion


$26 billion

ConocoPhillips (NYSE: COP)

$12 billion

Big oil’s tax breaks consist of a three-way combination of deductions: 

(1) domestic manufacturing tax deduction,

(2) deduction for taxes (royalties?) paid to foreign governments,


(3) deduction for intangible drilling and development costs

Thanks to these deductions, ExxonMobil’s effective tax rate over the past three years has been only 17.6% — three percentage points below the effective tax rate paid by the average American. Common decency tells you that’s just not right.

In May 2011, Senate bill 940 entitled the Close Big Oil Tax Loopholes Act was introduced and ConocoPhillips CEO Jim Mulva had the audacity in a press release to accuse Senate proponents of the bill that would require big oil companies to pay taxes like the rest of us as “un-American.”  What a disgrace. Requiring that oil companies pay their fair share of taxes would not result in any of the parade of horribles Mulva outlined in the press release:

  • cost jobs
  • raise consumer prices
  • shrink government revenue
  • hamper the ability to remain competitive and reinvest in energy technologies and resources in the United States and internationally.

The only thing eliminating tax subsidies would do is reduce the U.S. budget deficit, as well as put a halt to the exorbitant compensation packages paid to oil executives. Back in 2005, Mulva testified before the U.S. Congress that ConocoPhillips did not need tax incentives to drill for oil when oil was trading for $55 per barrel. Yet in 2011 with oil trading at $100 per barrel, Mulva said before Congress that such incentives were needed!

Granted, some of these tax subsidies are available to companies in many different industries, so to withdraw them only from big oil companies could arguably be a violation of the U.S. Constitution’s Fifth Amendment due process clause. But federal regulations often provide a helping hand to companies in fledgling industries, so I don’t think this equal protection argument holds water.

In any event, Senate Bill 940 never became law because a vote to invoke cloture, which would have stopped a Republican filibuster, failed to garner the necessary 60 votes. The vote was 52-48 in favor of cloture. Interestingly, those Senators voting against cloture (mostly Republicans) received five times as much campaign contribution
from the oil industry as did the Senators voting in favor (mostly Democrats). Coincidence? I think not. It’s sad that our political leaders can no longer be trusted to do the right thing, having been completely corrupted by corporate campaign contributions.

Democrats and Republicans are Both Guilty of Corporate Welfare

A pox on both political parties! Democrats are wrong to subsidize unprofitable renewable energy for job-killing environmental reasons and Republicans are wrong to subsidize immensely profitable big oil companies for, well, no reason at all other than oil companies have paid them off with campaign contributions. In these difficult economic times, let’s take back our heard-earned dollars from the Washington power elite and stop all of this corporate welfare now!

This “Cloud” Will Rain Gold on Australia

Cloud services are the future of business computing. An Australian telecommunications company is leading the way: they just completed an ambitious cloud service for their proprietary broadband network. Even Microsoft, Google, and Amazon haven’t built a cloud like this.

This company pays a 9% dividend, and they have mobile, phone, and other Internet services to fatten their bottom line.

Learn more.

Dividend-Paying Stocks and Riding Rough Seas
by Roger S. Conrad

This week I’ve been aboard the Westerdam on the Money Answers Investment Cruise. One of my objectives has been to talk to as many fellow travelers as possible–a large number of them are Utility Forecaster readers–to hear their concerns and answer their questions.

Here are some of the highlights. Note that our own Investing Daily Wealth Summit will be held in Palm Beach, Florida, May 4-5, 2012, at the Four Seasons Hotel. Visit for details.

Question: Today’s ultra-loose monetary policy by Ben Bernanke and the Federal Reserve has to add up to rapid inflation sometime.

Won’t this pummel all dividend-paying stocks, and what can we do to protect ourselves?

Answer: The problem with trying to devise an investment strategy from 30,000 feet is there’s always a lot happening on the ground that may or may not fit pat theories concocted from the heights.

Last year there was almost a unanimous consensus that a downgrade of US government debt would set off a massive spike in interest rates. What happened when Standard & Poor’s did cut, though, was exactly the opposite: The mother of all rallies for Treasuries and plunging interest rates. In fact, US Treasury bond yields are still a stone’s throw from their lowest levels in history.

This is why I’m always a lot more comfortable managing my investment strategy from the ground, that is based on the prospects of the stocks I own.

But, to look at the question another way, we really are in no-man’s-land as far as monetary policy goes, and I’m not sure how far the old rules apply.

We’ve just lived through the worst deflationary event since 1929–the crash in the US housing market–and the impact is still playing out across the economy. That’s what the Fed has been fighting, by doing in most cases exactly the opposite of what the central bank did in the 1930s. And the results have undeniably been different: In the 1930s, for example, it took until 1935 for commodity prices to recover. This time around the upside action started in early 2009, just a few months after the crash itself.

Maybe this does bring on real inflation in the long term, as the Austrian economists forecast. The price of some goods and services has indeed continued to rise, and we’re hearing once again that the US government is hiding the real inflation by cooking the books. Equally, though, the inflation scenario is still missing a key element: any kind of upward push on wages such as drove up prices in the 1970s. As long as that’s the case, price increases are arguably more contractionary than inflationary, as they take money out of consumers’ pockets.

I guess what I’m saying is that these broad-ranging economic discussions can consume ink by the barrel. But when it comes to making informed investment choices, they’re really not that useful. I’ve always believed very strongly that income investors need to buy and hold to get the benefits of dividends and dividend growth, which means living with and being prepared for both credit risk and inflation risk.

Sooner or later we’re going to see more inflation. It’s almost certainly going to come when almost no one expects it, rather than when so many do. But the way to prepare for it is to diversify and balance your dividend-paying stocks, not run for the hills.

One way to accomplish this is to always make sure the dividend-paying stocks you own have a growth angle. Growth keeps you ahead of inflation, and it’s also the best possible assurance that the dividends you’re receiving are safe.

Another way is to own stocks that pay dividends in a currency that’s tied to commodity prices, such as Canadian and Australian dollars. If we do get real inflation going forward, it’s going to have to be fueled by rising commodity prices. That will increase the value of these currencies against the US dollar, with the result that dividends and stock prices will keep pace.

This would offset possible losses in other dividend-paying stocks. But in the meantime, you can still stick with high-quality, growing companies from a range of sectors that will build your wealth and income streams up over time.

That’s the secret to superior returns.

Question: What do you see for oil prices and, by extension, the world economy if Israel attacks Iran’s nuclear facilities?

Answer: If there’s anything where the information is less clear than on the economy, it’s geopolitics. This, in my view, makes it foolhardy to base your investment strategy on a question like this one.

I don’t think it takes rocket science to figure out some of the likely consequences of this kind of Middle East war. For one thing, oil prices would likely spike up, which, if sustained over several months, would have a contractionary impact on the global economy.

We’d also probably see a selloff in global stock markets, as investors absorbed the uncertainty for future political and economic stability.

Based on what’s happened in recent market panics, we’d probably see a flight back to safety. And US Treasury securities are still the only market large enough to accommodate such a push. That would bring rates down once again in the US. I also think it’s reasonable to assume gold and oil stocks would benefit.

If you’re really worried about this kind of event, make sure you own some energy stocks. But based on what’s happened in these situations in the past, the market reaction would be violent and short-lived, i.e. more of a trading opportunity than a reason to change your investment strategy.

And keep in mind that this is a situation where watching the news isn’t going to inform you. The players in this game keep their cards close to the vest.

Question: High-yield bond funds don’t score very highly under mutual fund ratings systems. Is there any reason to own them?

Answer: High-yield bond funds are the most volatile part of that market, and performance data for most rating systems is going to include 2008. That was a year when high-yield bonds were slaughtered, along with almost everything else this side of US Treasuries.

From my perspective the appeal of high-yield bond funds is two-fold. First, yields are much higher than for higher-quality bonds. Second, they actually benefit when economic growth is picking up, as investors rightly perceive less risk to principle and interest.

Whether they actually benefit from inflation depends on how fast market conditions are changing. But they have been shown to keep pace, even if higher-quality types of bonds are falling fast. That’s means added diversification that actually reduces overall portfolio risk.

If I’m pushed on the point, I definitely prefer to hold dividend-paying stocks to any kind of bond. That’s because stocks, unlike bonds, can increase dividends over time. And individual high-yield bonds can also default, which makes wise selection just as important as it is with individual stocks.

But held in a fund, they provide yet another measure of diversification and balance for income investors, and that’s ultimately the key to earning superior returns safely.

Question: What happens to pipeline master limited partnerships (MLP) if there’s a spike in inflation?

Answer: In general, pipeline contracts actually do have automatic rate-adjustment clauses that are tied to inflation. They would theoretically keep pace over time, though there would be at least some lag in the near term that could affect profitability, particularly if inflation really spiked up.

MLPs are very capital intensive and use a lot of debt to finance projects. A rapid increase in inflation would erode the real cost of the debt they have on the books versus the earning power of their assets, which would be bullish. But it would also surely increase the interest rate they’d have to pay on new debt to finance new projects.

They could still lock in margins at that higher cost, if they’re able to get contracts providing enough revenue. But MLPs would no longer be in the sweet spot where capital is cheap and there’s a wealth of new projects to take advantage of.

Inflation in general does depress stock market returns, as we saw during the 1970s. One little-known fact is that dividend-paying stocks did hold their own in the latter part of that decade, as the cash they paid out offset lower share/unit prices. And to the extent they can grow, these stocks will keep up with inflation. But all else equal, they would perform better if there is little or no inflation.

Question: What if President Obama wins re-election? Won’t taxes go up across the board and dividend stocks crash? Shouldn’t we be lightening up?

Answer: Letting your politics guide your investment decisions is always bad business. There’s just too much room for emotion to enter in. Just ask all the people who stayed out of the market in early 2009 because they were afraid of new regulations. They missed one of the most explosive three-year bull markets in history.

This is an election year. The president and the Democrats are trying to rally their core voters, and so are the Republicans. One time-honored way to do that is to hurl invective and issue dire warnings about what will happen if the other side wins.

After the election, however, everyone in Washington–as well as in the states–is going to have to come together and reach a compromise on some critical issues and everything to do with taxes, spending and regulations is going to be on the table. My own view is that taxes are going up, and very likely some of those higher levies will be on investments, particularly for anyone in the higher tax brackets.

The president is campaigning on eliminating the Bush-era tax cuts for income of over $250,000 for couples but basically keeping them in place for earnings below that level. His principal challengers are campaigning on reducing taxes even further, including eliminating levies on capital gains and dividends entirely. What will almost surely happen is something in between.

How will this affect the market for dividend-paying stocks? It depends on the details. But it’s worth noting that dividend-paying stocks, including utilities, didn’t rally immediately after the Bush tax cuts passed Congress. Rather, their strong performance over the past decade came together as their underlying businesses returned to health and supported dividend growth.

In the near term perception is everything in the stock market. And I wouldn’t rule out a selloff of some sort depending on what does get passed by Congress and signed by the White House.

If you’re really worried about this, however, I wouldn’t turn everything upside down. Instead, just make sure you own some dividend-paying stocks that wouldn’t be affected by a change in dividend tax rates–any Canadian and Australian stocks, or in fact any European stocks. They’re primarily owned by people who don’t pay US taxes and therefore won’t be investing based on any changes here. You can also pick up some master limited partnerships, which are taxed entirely differently.

In a worst-case these investments would gain value to offset losses elsewhere. But the main point is a higher tax rate for some doesn’t change the fact that anyone living off their investments needs income.

Dividend-paying stocks are still the only alternative that pays a living wage and keeps up with inflation. That won’t change no matter how they’re taxed. And that will limit downside from any change in taxation.

Question: What impact would a collapse of Europe have on the US economy and stocks?

Answer: As we’ve seen several times since this stock market rally began in early 2009, anytime Europe’s news gets worse, investors flock to the one safe-haven market that can hold them: US Treasuries. My prediction is the same will happen again when we get the next batch of bad news from the Continent.

Europe has problems. The austerity measures taken in Greece and elsewhere continue to slow these countries’ economies, which is worsening the budget situation. I wouldn’t be surprised if several countries actually ditch the euro, though there still seems to be political will to keep things together.

One thing I don’t think will happen, however, is for Europe’s woes to trigger a credit crunch here along the lines of what happened in 2008. The main reason is US corporations have used the low interest rates of recent years to eliminate near-term debt maturities. If conditions tighten, they can simply take a step back and wait for conditions to loosen again before selling any bonds. In fact, we’ve seen that happen several times the past couple years.

Credit conditions, like everything else, are subject to the law of supply and demand. And if companies don’t have to borrow, the institutions that buy them will have no choice but to pay up, which will keep rates low. That’s a far cry from the situation in 2008, when so many were caught out by the tough conditions and were forced to borrow at loan-shark rates. And it’s why Europe’s woes are likely to stay on its shores, at least when it comes to affecting the underlying health of companies.

Wealth Without Wall Street

Ignore the volatility of Wall Street. This Canadian Royalty Income Trust offers stable, reliable, boring dividends. Just $10,000 invested 3 years ago and you’d have $4,400 in EXTRA CASH today.

Details here.

China Ascendant Despite Slowdown
by Yiannis G. Mostrous

In early November, we warned investors to prepare themselves for the possibility of slower growth from China. At the time, China’s latest Five-Year Plan from 2011 to 2015 targeted annual gross domestic product (GDP) growth of 7 percent, a moderate decline from the heady growth of the past five years.

Because the Chinese government is not shy about telegraphing its intentions in advance, it’s rather perplexing that the market was surprised by Premier Wen Jiabao’s announcement on Monday that China had lowered its GDP growth target for 2012 to 7.5 percent.

Though the usual China skeptics reveled in this news, the new GDP target does not change anything with regard to China’s long-term growth story. The precise rate of China’s GDP growth from one year to the next doesn’t matter too much as long as its economy remains on a trend toward long-term sustainable growth. And for China, that is still the case.

Of course, just because the Chinese government has set a lower target for GDP growth this year doesn’t mean that it will do everything in its power to stop growth from surpassing this target.

Although this is the first time in the past eight years that the growth target has been set below 8 percent, history shows that a higher growth rate will be welcomed as long as it dovetails with the government’s efforts to spur domestic growth.

As such, we reiterate our prediction that the Chinese economy will grow at 8 percent this year, once again exceeding the government’s official target.

The main reason for this assessment is that the Chinese economy has entered 2012 with strong momentum, and only a substantial shock to the global economy could derail this momentum.

Secondly, this announcement also seems to be a message to China’s local governments that excessive risk-taking in the name of growth will not be tolerated. Over the past year, China has undergone a number of changes in leadership at the local government level, so Beijing is simply reminding these new leaders to respect their authority.

Indeed, a number of these new local government officials have been eager to demonstrate growth and have announced local GDP growth targets close to 10 percent this year. That is not only undesirable for long-term sustainability, but also unattainable given the uncertainties plaguing the global economy.

Finally, a lower GDP target suggests that although the government will support continued growth, it will not pursue that growth with an extensive stimulus package while the Chinese economy remains on a relatively solid footing.

Instead, selective and gradual easing will take place in a manner to avoid an overheated economy while not choking off growth. This mirrors the government’s recent effort to cool its real estate sector.

Although the market may be roiled by such efforts in the short term, we remain long-term investors in China.

Ride the High Seas of Financial Independence with a 10.7% Yield

Maritime transport is the backbone of global trade for basic commodities and finished goods – don’t let this cash cow pass you by! Just $10k invested could easily return $1,000 a year – and the tax advantages for this security are astounding. MLPs are uniquely able to withstand economic turmoil while posting stunning returns! In a tough market, set your sights on investment strength.

Read more here!

Recent Articles from Investing Daily
U.S. Energy Independence and $247 Oil by 2030
by Jim Fink

An ETF Broadcasts PIMCO’s Latest Move
by Benjamin Shepherd

My Evening With Chuck Akre: Part 1
by Jim Fink

Learn more about the Investing Daily editorial team:

Roger Conrad

David Dittman

Benjamin Shepherd

Elliott Gue

Jim Fink

Yiannis Mostrous

Investing Daily Premium Services
Big Yield HuntingTrophy-sized yields every month

Global ETF ProfitsAuthoritative guidance from the ETF pros

Utility ForecasterYour guide to safe, stable high-income for life

Australian EdgeThe Best Total Return Story on the Planet

The Energy StrategistMinting the next round of energy millionaires

Options for IncomeConservative options for aggressive income

Cocktail StocksHelping you pay for the party called “life”

Personal FinanceYour one-stop, proven investment source

Wall StreetWinning stock guidance from the pros

Canadian EdgeBest wealth-builder on the planet

Global Investment StrategistHigh-growth and hard-assets profits

MLP ProfitsMarket-beating yields from MLPs

You are receiving this email at as part of your subscription to Investing Daily’s Stocks To Watch, published by Investing Daily. To ensure delivery directly to your inbox, please add to your address book today.

For more commentary and analysis from Investing Daily’s investment experts, visit Or visit us on:

Twitter Facebook RSS Feed



Preferences | About Us | Contact Us | Privacy Policy

Copyright 2012 Investing Daily. All rights reserved.
Investing Daily, a division of Capitol Information Group, Inc.
7600A Leesburg Pike
West Building, Suite 300
Falls Church, VA 22043-2004

Sorry, comments are closed for this post.