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Showing posts from October, 2014

Impact of lower oil prices -- its not all good, right?

First off, understanding the impact of dropping oil prices is complex, because the law of unintended consequences applies.  There is no doubt that falling oil prices is good for business and good for consumers.  Because it increases, directly, income (and profits), so the impact at first blush is positive.  At the end of the day, the impact of oil price drops is good in terms of inflation expectations (down) and to growth to the economy.

The fall in oil prices is caused by a change in the supply demand equation (either figure can shift):

First, the supply picture has changed enormously over the past decade.  In 2004, fractioning margin (refining process) carried negative price.  Oil company could not pass on the cost (necessary) of refining the oil they produced.  The impact was under-investment that has translated into compressed supply (at the very least limited search for new oil reserves).  The massive boost in price from $35/bbl to $100/bbl had the obvious impact on supply -- it r…

Energy costs, CAD level and inflation expectations

Oil prices are crashing, from a peak of $105 per bbl its down to $83, a massive 20% drop in the price of energy in the last 4/5 months.  First, the world is awash with oil (granted not cheap oil) but oil nevertheless is plentiful.  From the Montana Bakken fields to Libya production has outpaced faltering demand for oil.  For the American producers, the headache is that production costs are high. According to some analysts, fracking production costs are in the upper 80s  which means that light and sweet crude at $83 is a massive problem for the producers of this "synthetic" oil.

Even up here in Canada, oil at $83/bbl is a problem, because some of the more recent oil sand projects have exploitation costs that are near that level (older projects are apparently producing at around $40/50 per bbl).  I've said it here, and I said it often, Canada is a bit of an oil play.  Canada accounts for nearly 20% of America's oil consumption.  An addiction that many Americans would l…

doubting Europe's creditworthiness!

La grande correction?  I don't know.  Generally, you only know that a big move is afoot once its all over.  Dragi could once again put forward the "plunge protection team" at work and prove that everything is fine, by buying every bond in sight.

But the reality of core/non-core Europe is serious.  First off, Germany is exporting to the rest of Europe, and still works on the premise that its client's inability to pay their bills is not its problem (right).  France is starting to behave like a non-core (that may be temporary) yields are rising fast in France:



But that's northing compare to Greece that saw a 200 bps yield rise in the past week.  (Hurray to all the French and German banks that sold off their Greek exposure to ECB over the past 36 months).   Don't know how many Macro funds went bust this week -- my guess is that its going to take a few weeks/months before the blood bath there emerges fully, but these leveraged hedge funds are simply not equipped …

Markets are topping -- Should I care?

Well, personally I have had the opinion that the markets were near their peak about 4 years ago! Got that wrong!  However, now the consensus is that the markets are near their peak (there's always a consensus that support your views/opinions).

How did we get to such high levels -- today earnings as a percentage of GDP are at a historical high (12% of GDP).  Companies are sitting on mountains of cash (granted most of that cash is offshore and will not be repatriated for tax reasons.  Companies continue to do well, and yet all earnings are directed to either dividends or stock buybacks.  Paying dividend is rational (some would disagree) and in many low growth sector essential.  But stock buybacks are another story: either funded by free cash -- or via more debt (debt is always cheaper than equity -- and has been incredibly cheap recently).  The CEO's decision to buyback his company's share are driven by a number of factors:


Increase earnings per share (smaller number sharing…