NEW YORK (TheStreet) -- We're down to the wire on two major events that will massively affect the markets -- the mid-term elections and the expected second round of quantitative easing (called QE2), scheduled to begin the day after the election results are in.
But what will be the results of these two blockbusters and where should you be positioning yourself in the energy sector to take advantage?
Everyone is expecting to see two results by the end of next week. First, the Democrats will lose their majority in the House of Representatives. And second, the
will institute a second program of quantitative easing to add stimulative effect to a very sluggish recovery.
The Best Oil Stocks Post-Election
QE2 will take the form of a swap of U.S. treasury debt by the Federal reserve, in essence selling short term-debt while increasing its purchase of longer-term notes. This will have the affect of shortening the average maturity rate of treasuries, a tool used frequently by the Fed to adjust the practical short-term interest rate, without actually "printing money" -- a misstatement often used to explain this round of easing.
For us as investors, however, the results are largely the same. They lower the cost of capital and further pressure treasuries and other short-term cash equivalents higher.
In a note by Goldman Sachs' chief economist Jan Hatzius, the investment banking firm is expecting as much as a $2 trillion round of bond purchases, which Hatzius estimates will be equivalent to 1.5% decrease in interest rates, a massive easing considering how short rates are already on the bond curve.
On the political side, the Republican juggernaut with its talk of decreased spending and stricter, European-style budgets -- whether political posturing or a real policy plan -- will result in a locked Congress.
A Democratically controlled White House and Senate will slow Washington progress to a crawl, and nothing much will change in the next two years, as we all will wait for the next presidential cycle.
That political stalemate will amplify the importance of the continuing Obama stimulus and QE2, for better or worse.
All of this leads to an already well-worn story in the capital markets -- a short-term yield picture that begs investors to buy stocks, and particularly quality U.S. stocks that are delivering reliable and decent dividends.
In energy issues particularly, that's where we've needed to put our investment capital as the midterms approach and where we need to put our money now, in big U.S. dividend-paying companies like
and in smaller dividend producing independents like Marathon and
Another important subsector we are forced to look at in energy are the master limited partnerships (MLPs). These are the toll road and storage companies of energy, charging fees for transport and storage, untethered from the commodity price.
The problem with these stocks is how strongly they have run already this year. As I said, the theme of decreasing treasury yields have set off a feeding frenzy for stock yields and the MLP's, with their 5 ½ to over 8 % distributions have been a huge beneficiary.
Even with their more than 30% sector run this year, they are difficult to ignore. Of this group, I tend to like the larger MLP's, even if their yields are slightly below the maximum available. In this sector, I like
Energy Transfer Partners
Both the midterm elections and QE2 promise that stocks will remain very attractive compared to low yielding treasuries, particularly in energy. With inevitably increasing crude prices, maximize your gains and minimize your risks by staying with these two high-yielding integrated and MLP stock sectors.
At the time of publication, Dicker held positions in Conoco-Phillips, Exxon, Transmontaigne and Energy Transfer Partners.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.