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Sold Entire NRP Position

In the spirit of tax loss selling and raising yet more cash for what I anticipate will be a nasty climate, I sold my entire position in NRP for $15.18. The cost basis of much of this position (before some profitable swing trading and distributions) was about $20, making the realized loss on the trade (24%).

That is alleviated partially by distributions (about 8% on the position collected over the year I owned NRP) and some profitable trading – the real net loss still stands a little north of 15%. As a percent of my book (from initial investment) the loss was roughly 1-2% of assets. This does not change my recent performance; year to date gains remain north of 15%, thanks to a very lucky batch of sell orders I made last week.

This was my worst performing investment and I’m happy to have scrubbed it off the books.

I do like NRP and the steps they’ve taken to diversify their operations. I think it pays off for them. But there are better places for my money right now…like my pocket.

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The Melt Up Is Upon Us

There is no limit to the benevolence of my portfolio today. HCLP spurred out the gate and is now closing in on $70, +5.4% in the first half of today’s trading.

CCJ and BAS are second runners up. Most everything else is green, with only new half position PSEC and NRP breaking the pattern at the moment.

No one wants to hold short into the Labor Day weekend. Bears have been conditioned over the past five years that long weekends deal death to misers.

My account is up +2.3% today. I’m tempted to take a few sales at lunch, just to prepare for September (the biggest dick of all the months).

The world is my tainted oyster (which is only an odd statement if you knew that I don’t like oysters). Now, as you were.

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Down Over 2% Today

Well, the hubris post did it, and pointing out that when I crossed 20% YTD gains timed the top with almost cruel exactness. Just as we all knew it would.

BAS is taking the session the hardest for me, down almost 7%. They started a correction after earnings, and it looks to be picking up speed. My guess is a retest of the 200 day, putting them just over $20 a share, at which time I will be a buyer.

MAA is second worst, down over 5% on a disappointing…Core FFO number? FFO is very important in the real estate market, because it prices out depreciation of construction (which so long as your structure is sound is irrelevant). But they also just doubled their operation by acquiring my old position CLP, and seem to be continuing the spirit of development and expansion. They have sound debt levels making the process easier, with plenty of room to add leverage. And a strong wind at their backs in the form of a rising rent environment. I’m holding here because a 4% dividend and steady growth make MAA a sound enough investment once this passes.

Following next is a roughly four way tie between BTU, NRP, HCLP, and ETP. There seems to be a theme today of energy names being punished a little worse than the indices. Then again, people have hated coal for years and half the energy sector has huge gains unrealized with ample volume to round about escape losses elsewhere, so maybe this makes perfect sense.

CCJ had a good earnings report, continuing to kick the uranium market doldrums by personally doing just fine. Their long term contracts persist in rewarding them with a price well above the dismal spot market, and sales volumes have increased. So the market has rewarded them by only selling off 1.5%.

(Actually, I need to be honest. I am concerned that CCJ has managed to perform this well in this environment. Particularly because despite the better sales and earnings, they continued to lose cash – the only thing that really matters – and in light of the recent revelations of overseas corporations acting to enable financial games with their taxes. I’m going to be sniffing around very closely here, because I will not become prey to some corporate Enron nonsense)

AEC and silver are my “best” positions, each down “only” less than 1%.

Okay, so the market is getting clubbed. What do we do about it?

Well, if you’re in my position – and if you’ve been following me, that is quite possible – up still over 15% for the year, then the answer is pretty clear. You do nothing.

I can afford to do nothing here, to see if this hard drop doesn’t stabilize quickly and lead us higher through August. We should hit a bottom pretty quick. I don’t yet see a good catalyst for a major drop, outside of the regular bank failings and global “World War” heckling that usually bogs us down. For the moment, that’s no excuse to panic.

China, Europe, and most the rest of the world haven’t exactly been doing awesome before now. This isn’t news.

So there’s no rush here. 13% YTD gains is my floor. When I hit that point, I go to cash fast, because my year will be at least +13%. 13% because I was stuck between 10% and 15%, so let’s take the black prime number in the middle (scientific, right?).

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Here’s What’s Not Working For Me Right Now

What is working for me is pretty obvious to anyone following. HCLP and BAS are setting my year, single handedly. Even factoring in my biggest misses so far, my gains stand back above 10% YTD.

But I’m not going to just steadily publish a slew of feel good pieces, brushing my ugly ducklings under the mat. So this post will focus on them, why they aren’t performing, and what I intend to do about it.

First up is NRP. NRP is a debt ridden resource MLP whose largest assets are comprised of metallurgical coal deposits. The partnership has been hammered since I bought in at $20, currently standing just below $14. Back in January, I cut a lot of this position for around $16, but recently added back above $15. The position stands at around 6% of assets and I have a big loss attached to it.

As for why NRP is down more than 40% this year, there are two big factors driving the outcome. The first is the obvious hatred of all things coal, based on falling global demand and unfriendly domestic politics. The second is that people generally mistrust this position specifically and are betting they’ll have to raise cash through dilutions. The company has a lot of debt coming due.

My opinion is that NRP has already suffered enough to justify the prices at $20, and my opinion hasn’t changed much at $14. I’m not knee jerk afraid of shareholder dilutions and like the steps NRP has taken to diversify their assets away from a pure coal play. I also think coal is set to rebound. In the meantime, even if they slash their distribution by 25%, that would leave it paying out 7% annually, which is far above market yield. However, I will not be adding more until I see market sentiment shift, preferring instead to add other coal related investments and keeping company specific risk low – building my coal thesis out of many smaller parts. BTU is my first secondary choice, and I’ll probably follow up with a third play next year if coal names are still depressed then.

My second ugly child is CCJ. This is kind of amusing, as I really haven’t lost money on CCJ this year. Cameco and related names rallied hard starting around February helping press my gains to 15% early on, and CCJ’s unceremonious relapse was one of the biggest contributors to those gains sliding back below 10% a month ago. CCJ stands at $19, 5-10% below my average cost per share.

CCJ’s problem is also bicausal. The market for uranium remains abysmal, and spot prices have plunged another 20% this year. That’s the pricing for when there are uranium trades at all. My smaller, half scaled position, UEC, made ZERO sales in the first quarter of this year. The market for uranium is near-totally dead. CCJ has largely fended off impact from this pricing issue through their long term supply agreements. However, that can only get you so far.

But CCJ has a second big problem, which is a very large (and growing) deferred (some may say dodged) tax liability to the Canadian government. The price tag is set to cross $1 billion shortly and will probably be almost three years worth of earnings when we’re set and done here. This is why CCJ’s stock is performing so much worse than its dumber, small peers this year.

And I am not at all concerned about CCJ. I’m electing to sit back and do nothing. The tax bill is a non issue. Without question, Canadian corporate governance is much harsher than the US, and there will be consequences for CCJ. They will be made to pay up, and someone will probably get punished. However, even given the magnitude of the bill, it’s hard to see how this changes the stock dynamics.

To put this into perspective, consider APC back when the oil well blew up. People freaked out at the billions of dollars they would owe in damages and bid the stock down an absurd amount. And then, it no longer mattered. The company made a full recovery in a hurry. As then, CCJ’s market prospects look bright on the horizon. They will be made to pay past owed taxes and that hit will sting, but it’s a one time issue and when you consider how stock multiples are priced into shares, the truth is CCJ’s larger problems (business) when worked through will more than totally swallow this blip on the radar. From the perspective of shareholders, at this point and at this price, CCJ’s only problem is the uranium market. The tax liability will be worked through and take care of itself shortly, if only the damn uranium market can recover.

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Bought Half Sized Position In ETP For $56.64

I found the terminal position I want, but it has nothing to do with coal. I bought a half sized position in ETP for $56.64.

Energy Transfer Partners, LP is a storage and distribution partnership that specializes in a diverse number of business lines, including (1) midstream, interstate and intrastate transportation and storage natural gas operations, (2) gathering, compression, treating, conditioning and processing of natural gas, and (3) purchasing and marketing natural gas and NGLs.

They’ve been making a flurry of acquisitions, their cash flows seem proper, and they seem cheap relative to peers. They also are paying me 6% in annual distributions to hang out. I like their market position and think the next 10 years will be big for them (same as BAS, same as HCLP).

This is right where I want to be. I’ll refocus energy on coal later – for the moment, I have half assembled positions in NRP and BTU.

Of course, at this stage in the game, it’s going to be hard to hit the kind of returns I got for BAS and HCLP. The market was just so negative about those positions and now since September of last year, it’s getting so expensive. But this is still a good buy here.

I admit it is getting a little harder to find positions to buy. Price to book of companies certainly looks heated, although that’s not the only measure. There are certainly some positions out there priced to fail, like EPD. And coal companies in general look terrible. It wasn’t just tech that got bid up last year.

But there are still lots of positions that are growing revenues and earnings just fast enough to keep that risk threshold around a 10 year horizon. It’s not the 5 year break even points you could have picked up in ’08, but what do you want?

Some of these positions are going to be stealth winner. I think coal names are artificially expensive, but really quite cheap. You have to consider how much of the “expensiveness” is being driven by low coal prices forcing write downs on entire proven reserves. So is the company selling the whole operation for that price level? That’s the big question isn’t it. If you get a coal price recovery, suddenly these operations are all trading <1X book with robust earnings growth.

95% invested.

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The Time To Accumulate Coal Positions Is Now

I entered into NRP some time ago, which was quickly an unmitigated disaster. The position is down 25% from my purchase price. I sold half the position, along with other partial positions, back in January when I raised cash.

Today, I added back some of that for $14.93.

I want to talk at brief about coal. The time to buy into US coal reserves is now, while euphoria over natural gas is highest and markets are most spooked about a Democrat directed EPA.

I am in no way minimalizing the importance of the shale revolution. Not by a longshot – if you look at my own holdings, BAS and HCLP represent a firm belief in the continued importance of those assets to the US energy equation.

What I am doing is highlighting the continued importance coal will have in US power generation and abroad.

Coal presently makes up just over 1/3 of US domestic generation. This is down from 1/2 earlier this decade, most prominently replaced by the surge in application with natural gas. Yet, markets price in equilibrium of choices, when operating correctly.

We have to presume that markets will find a price that fairly limits benefits between choosing natural gas versus coal versus nuclear versus…for equivalent production of energy. This would suggest that natural gas prices are set to rise (further enhancing the payoff for the producers). I would also expect that, as excess capacity gets utilized, the adaptation of coal plants to gas will subside.

This process may take a little longer to finish, and perhaps gas will even match coal in terms of energy mix before it is done. What I would not count on is coal rapidly or even ever completely being removed from global energy production.

Which brings us to the fears of EPA punitive measures against coal. So far, these are aimed at coal fired power plants. While this would, at least temporarily, hinder US energy production from coal here at home, what is to stop US coal producers from simply shipping overseas? And why is metallurgical coal acting so volatile when it is not a component of US power generation?

The signs, to my eyes, spell clear a story of market overreaction to pop culture and fantasy. Power generation shifts or slides, waxes or wanes. It does not turn on or off. Coal has been systematically shunned regardless of its exact nature (energy versus metallurgical) and the driving catalyst seems to be mostly political.

But politics change and politics in this country are about to.

I will give you a 6 month synopsis of what is about to happen. In November, the DNC is going to get creamed, delivering the Senate to the RNC. You can suspend your political predilections, as this is merely obvious to anyone not sucking their own exhaust. And the GOP has no problem with coal power generation. In fact, the Republicans think the argument against coal power generation is, quote, “stupid”.

This will change the short term plot dynamics that drive most superficial market players. Around middle of 2015 or early 2016, coal will be “the most obvious buy ever”, whereas today it is “fools nonsense.” Of course, when it is “the most obvious buy ever”, it will be at some considerable percentage above where you can take a position today.

This will accelerate especially if it should appear going into the next presidential election that a Republican is about to take the White House (that is still too far out for me to see, but it is certainly not out of the question). In such an event, the current shunning of coal will look especially stupid and myopic.

Regardless of the next presidential cycle though, the simple act of the GOP taking both chambers of Congress should noticeably shift the messaging surrounding out of favor coal plays. Executive overreach through agency bodies, no longer shielded by the Senate, will begin getting visibly and openly reprimanded; or even punished.

This shift, along with coals critical importance to the US economy and abroad, should render this a generous buying opportunity in hindsight.

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