Monday, December 21, 2015

Maybe I should have taken his bet!

Several weeks ago, during a heated discussion on oil prices a good friend told me:  "You believe that oil prices are going down, put your money where you mouth is"

The bet was for oil to hit $30 before it would hit $50.  That bet -- was a sucker bet.  The marginal market is unknowable.  That's simply the truth is that one serious global event and oil prices can jump back to $80.  What is more interesting is where will oil be in 24 or 48 months.  Will it remain as cheap as today.

There are a number of factors at play:

  • Producers the world over have gotten use to the $80/100 bbl economic windfall; enabling them to buy off their citizen -- from Caracas to  Ryad the plan has been "buy off the natives"
  • US producers of expensive shall gas and oil have used "expensive" debt to fund their development.  Sunk costs are sunk!  Right now they are pumping as much as they can so that they can meet interest payments.  But soon even variable costs will not be covered.
  • Nearly 50% of all high yield debt is issued by E&P companies...
  • There are no massive growth pushes out there.  America just raised interest rates.  Although several economies have gone "negative" the overall impact is not working out as planned as banks are actually raising interest rates on consumer loans
  • 2016 is election year in America -- there will be no further tightening by the Feds (there may even be a reversal
  • America, as a net energy exporter, doesn't benefit from lower energy prices

So there we have it; oil (the sweetest kind) briefly dipped below $34 -- now around $35.  The trend tells me that oil prices are not done falling, at least until some fundamentals start changing.  The producers need to cash to keep the population happy, and users are in the same boat they've been for the past 12 months -- lower oil prices have not stimulated demand.

I shoulda taken that bet!

On a side note, yesterday I "fell" on a copper -- as value investing, video on you tube.  This video was from a guy who bought some pre 1983 pennies which with 95% copper content were worth twice as much as their face value.  That's when copper was trading around $4,000 a ton.  Today coper is around $2,000 a ton -- so our friend, who bought is pennies at a slight premium to their face value -- plus stored them for nearly 3 years is siting on an investment worth exactly what he paid for.  

Turns out it was a good store of value -- he didn't make a fortune, but on the other hand he didn't lose anything (aside from holding costs and inflation).  However, had he invested in the stock market his worth (assuming no tax impact) would have risen by nearly 50%.  Soooo maybe not the greatest strategy EVER!

Wednesday, December 16, 2015

Canada's shameful history -- but what are the lessons?

So Canada's Truth and Reconciliation Commission has finally closed its books and the Canadian government has decided to apply all 72 recommendations.  Fine as it stands, the Residential Schools were traumatic.

The issue today is where does Canada go from here?  What is to be done about the Aboriginal problem, because its an C$ 8 billion per annum cost.  What are the solutions?

First, some hard truths, if you are an Amerindian in Canada you have two choices; live a coddled and largely pointless life on a "reservation" pay no taxes and receive benefits.  Education, despite being expensive, is widely seen as completely useless.  Children leave school with little useful knowledge or socially (outside the reservation) useful skills.  If you are smart -- you get out as fast as you can. My experience, at McGil University years ago, where I met a single AmerIndian was telling, smarter than most, engaged and had little time for his tribe.  He was out in the world -- a loss to his tribe a tremendous gain to Canada's society.  BTW those Amerindians who live in reservations near large centres are not the topic of conversation here -- they're doing just fine!  

The second issue, and this is a difficult one is that the Supreme court has for 30 years accepted "oral history"  the problem -- well the stories don't match, conflicts on which land belongs to which tribe -- in Northern Quebec alone, there are 60 distinct tribal groups -- that have a separate world view and very distinct nationhood.  Each with its own history -- and vision of its land rights.

Third if they are a sovereign nations -- where do we come off telling them how to manage things (well or poorly is irrelevant) granted the golden rule applies here too (he who has the gold rules!), but it remains that many problems arise from the tribes own decision process -- flawed or otherwise.

The fundamental problem is integrating a hunter/gatherer "stone age" society  -- a great part of the Amerindian heritage are hunting and fishing seasons -- when EVERYONE leaves for these activities it is how they define their society.  

Call centres, manufacturing or assembly require employees to be present -- every day and every week.  These 21st century activities cannot accommodated the labor force disappearing for weeks.     Moreover, most tribal land is in remote locations (by choice or otherwise) with generally poor communication channels.  There are no obvious solutions here -- Like Romeo and Juliette its is simply a tragedy the Amerindian's expectations and the 21st century's needs simply do not meet. 

Programs to extricate their brightest will only sentence their brothers and sister to a worse life.  It s a tragedy that within the Canadian constitution their "rights" have been inshrined in such a way that their hunter/gatherers ways are protected -- allowing them to retain their way of life -- but at the same time condemning them to their way of life.  

It seems that the solution is:  Shovel money -- a tragedy!

Tuesday, December 8, 2015


Oil are now lower than at any time since 2009!  That's going to cause serious trouble in America's oil patch (not that things are going to be that great for Saudi or Venezuela for that matter.  The shift from a few to many (lower oil prices benefit many while high prices benefit the few, is a massive transfer of wealth.

The Saudi royals have been "buying off" their country men with the windfall of expensive energy.  Now they have to liquidate their holdings...that could hurt stock prices.  In america, nearly 50% of all junk bonds (High Yield bonds) are issued by oil & gas companies drilling expensive shall gas and oil.  So far they've been buying time with massive increase in flows, but that cannot keep up.

Interesting times

How can a nation so well armed be so afraid?

Every day another nut-job professes his desire to "kill" Syrian refugee "in Paris" as if that's where they were... The most amazing thing, of course, is that America has seen these kind of commentaries before, many many times in the past -- at the turn of the century it was the Irish and before them the Jews.  Although historically America has welcomed the poor --that have served it so well, today the behavior of most Americans remains appalling.  Obama is proposing bringing 10,000 refugees to America, that compares to nearly 25,000 before Christmas in Canada, and tens of thousands in Europe.  Recent polls show that 72% of Republicans believe that the values of Islam are at odds with American values, for the Democrats the number is 48%.  There are many similarity between the Christian and Islamic faiths; neither are totally comfortable with secular governments, but Christians made (mostly) their peace with the separation of Church and State.  As for the place of women honestly both faiths position women in a subservient role; at odds with the feminist movement that achieve so much over the past 40 years.

The reality that is America -- gun crazed but also deadly afraid of anything and everything is an outcome that seems odd when it continually professes its machismo strength "We're #1".  Political polarization and the poor prospects of middle class are the root cause of these positions.  A blue collar worker looking at his wages for the past 20 years has seen no real incrase (median wages are still falling in America and have since the 1980s), and yet everything is more expensive, there is no feeling of security and the media's feeding frenzy on anything that could be remotely considered terrorism is simply fanning the flames of distrust.

If America was as generous as Canada it would have taken nearly 250,000 refugees -- instead it may well accept less than half of what Canada is taking in the last few days of 2015!  Moreover, the difficulties in arriving on American shores makes it the least interesting place to consider.  

Yet American remains deadly afraid -- mind you not of guns that kills!  They like those but those pesky terrorist well that's something else.  I don't really understand why a crazed gunman is better than some extremist.  The dead and maimed remain dead and maimed; is it any better to be told that your 13 year old son/daughter was killed by some crazy bottom dweller or some radical terrorist? In my book neither are attractive scenario.

But America is not alone in this; yesterday it was the "Premier tour" of the regional elections in France, and the far right National Front did very well across the country and in some place almost got 50% of the ballots -- are seeing a golden opportunity to finally take power an enact some rather aggressive anti-immigration legislation.  

So there we are; America and Europe are bombing the shit out of the Middle East, this causes refugees afraid of dying from "our bombs" and our reaction is -- stay home enjoy the free landscaping!



Wednesday, December 2, 2015

Clown #1 lead widens !

Now that's a great headline.  This morning the latest poll, just 12 weeks ahead of the first primary races in New Hampshire and Iowa (its getting serious now) show that The Donald(TM) is now leading the field with 35% support of primary voters -- in Iowa Carson is still #2, but with the bad press -- he ran as an "honest guy" who turns out has lied about his entire life... is really toast.

Things are unchanged in the Dems field, HC is still well ahead of Sanders.  

The Donald continues "outrageous statements" is a non-stop spin machine.  He now suggest that the US and its friends should "Kill the families of terrorists".  Now I don't condone terrorism in any way shape or form, but history has shown that "Freedom fighter" and "Terrorists" can easily be confused -- depending on your side of the argument.  If you are a surviving member of a Yemeni wedding party that was bombed "in error" by a predator drone -- you may feel that America has an unpaid debt, even a blood debt!  

Trump is employing the Kayser Soze solution:  you not only kill your enemy but you also kill the family of your enemy and their friends and even people who lent them money (watch the clip). Anyway, blind and total revenge.  Don't think its a good idea, but its red meat to the base... 

Months ago a Andrew Sullivan made a joke -- inauguration day for Trump. It could happen!

Tuesday, December 1, 2015

Are markets primed for a 25% drop -- e.g. the big correction?

So despite all the BS news over the past few months, if you had bought the S&P500 or the DJ industrial you would have assumed that 2015 was a very quiet year for investors -- the S&P started at 2020 and today is trading around 2100, a 3.9% increase and if you add your dividend (a whole 1.9%) you are looking at total revenues of 5.8% -- before tax not too shabby and certainly better than what a bank deposit will give you.  In a nut shell 2015 has been a good year for investors, at least better than for depositors.

So what about 2016?  One of my very favorite commentators is Bob Janjuah -- an old colleague with tons of street smarts.  He's the voice of reason and a very good macro commentator.  He was long the whole year and told his clients to stay the course -- if not increase position when the market soften. He's now gone full bear told his investors to liquidate their positions in September on the often heard rumor that the feds were going to raise rate -- their last chance before the 2016 presidential election. Its now December 1, and nothing has happened so far.  The state of play is as follows:
  • America, as an energy exporter, doesn't like lower oil prices
  • America has a weak recovery (although better than what the Bush years produced
  • Europe could have a better 2016 than the market thinks
  • Japan will have more QE -- because the economy is back in recession
  • China is facing difficult decisions -- and is finding that the usual levers of control don't work too well anymore -- China is the big unknown.
Overall, what we are seeing is growth but tepid growth, if the Feds decide to raise rates...then recession will follow, because the US recoveries are getting weaker and weaker -- Europe and the emerging economies could not sustain much tightening and China is being China.  His view is that real earnings are stagnating -- at best!  Steady earnings are a poison to earnings multiples that are justifying the current very high p/e numbers.  The death of growth will directly impact p/e ratios and therefore Bob's call for a 25% market correction.

Finally, and this is one if my favorite factoids:  The economy always grows better when the White House is occupied by a democrat -- and that's been true for the past 50 years.  Budget deficits are always smaller, and the the tax base shrinks.  When the GOP takes control -- the goody train goes full blast for the rich folks and everything else gets screwed (the deficit, wages, the economy).  Cannot think of a better reason not to vote for the GOP (wait there are 17 good reasons not to vote GOP -- starting with Trump...)