Monday, July 3, 2017

Market Timing no Good

We have on this blog, on and off, discussed market timing. In fact we tend a little bit towards building cash when approaching market peaks to be ready for buying opportunities in the following down turn. Some months ago, I did a spreadsheet simulation showing that apart from unreal perfect market timing, building low and high cash positions did not add much to your portfolio performance and that panic selling during the downturn is the worst thing an investor can do.

Here is a link to an Globe and Mail article on market timing that confirms the above. In fact it claims that being always fully invested in the bond and stock market with a 40%-60% distribution gives you the best performance. Have a look.

Friday, June 23, 2017

Buying good assets at a good price – aim for 6% plus inflation returns – tax efficiently

What is investing?  At its core, investing is allocating money to things that make money in terms of appreciation or income or… both. A liability is something that costs money. A person is a liability in terms of living expenses but it can be an asset in terms of its ability to earn money or create value. Typically a car is a liability unless it is required for earning money then there is a trade-off.
Children in developing countries, after the initial costs of bringing them up, provide the parents with care and even income once the kids are adults. Overall they are a financial benefit. Children are assets.  In the West, children often are expensive to bring up and apart from the joy the often bring in a parents life, the money they earn typically remains in the child’s pockets. As such, in the West, children are a financial liability (everything is relative). Best form of birth control!
But investing is about allocating money to assets and hopefully increase the investor’s net worth and financial means to a level that makes him/her independent of employment. In this blog we call this latter stage: Financial Adulthood. If you love your career nothing stops you to pursue it until the end of times (financially) and if you have a nasty boss or client, you can tell him to take a hike.  In my consulting business, being financially adult, I have the option to price my services based on the ‘pain factor’ a client may pose. This is a subtle way of telling a client who poses too much of a pain factor, to take a hike. To some degree we have the option to set the terms of our ‘employment’ and I can tell you that that is quite a luxury in the current state of the oil patch. We love to work and provide good quality services for our clients and we do so taking their best interests into account. But we won’t work under abusive circumstances and we don’t get taken for a ride by ‘nickel and dimers’. This makes life very pleasant. Today I took time off, writing this blog on my condo’s terrace in a nice shaded area with nothing but green around me. Oh, that reminds me: I badly need another cappuccino. 😊
So what is a good investment?
For me, it is an asset that every month throws of a bit of cash flow and that appreciates over time. If the average annual return of my portfolio is between the 5 to 7% plus inflation then I am happy. Using the rule of 72 and estimating average inflation of 2%, it should take 72/(6+2%) = 72/8=9 years to double my net worth.  So If at age of 40 I own $ 1 million dollars then at 49 years I own $ 2 million and at 58 I own $ 4 million and by age 67 I own $ 8 million plus my Canada Pension. Not bad.  Of course, this also requires that you don’t pay a lot of taxes.
Hmmm….  So how does one minimize taxes?  Not by applying illegal tax avoidance tricks or putting your money in shady overseas tax havens. Buy a ‘good asset’ and never sell it!  The result is no capital gains taxes over your life time.  Fill up your TSFA to the max. You may say TSFA that’s only a measly $5500 per year.  No that is wrong thinking.  Since inception of the TSFA, with ok returns, that TSFA is now reaching $70,000 to $80,000 in value.  If you’re 25 years old and you make nominal 8% returns, at age 67 you have accumulated tax free $1.7 million. Ooops!  Yes, Oooooooops!
An RRSP is a lot riskier. This depends on the tax rate at which you make a contribution and the tax rate at which you withdraw from your RRSP.  So if your investment income at time of RRSP withdrawal places you in the top tax bracket you likely lose.  Especially considering that you don’t get dividend tax credits and that you cannot recoup your capital losses. From my point of view, RRSPs are evil instruments of the government to suck even more money out of the unsuspecting investor.  No wonder, Justin Trudeau stopped Steven Harper’s increased TSFA contribution. He wants people to stay dependent on the government and force them to work longer as wage slaves.  Really, the liberals are not the friend of the savers and of the middle class. (Ooops was that a bit of ideology on my side?)
A good business throws off cash flow and appreciates year in and year out. You make a product or provide services at a return on equity rate of 8% per year. Now a lot of public companies don’t make those returns without a bit of financial engineering. Neither does real estate. Since real estate is one of the simplest business models let’s use that as an example.  Real Estate typically appreciates just a tiny bit better than inflation. Say at 3% per year. It also provides cashflow – my target is a cap rate of 3%.  That means, its net annual cashflow should be 3% of the property's market value. Say, a building is worth $100,000 than after all costs, it should net you 3% or $3,000 cash every year. There are some tax advantages that you can use to make this 3% virtually tax free. BTW cap rate is kind of similar to EBITDA for corporate financials. 
In our example net rental income is typically tax free for around 20 years. Of course your appreciation is also tax free as long as you don’t sell. So you’re making 6% tax free returns annually.  Now, how can you increase (financially engineer) your return to say 8%?  Simple, use leverage and take out a small mortgage. The interest on the mortgage if used for investment purposes is tax deductible.  If you are in the top tax bracket that means the government pays half your interest.  Isn’t that nice!  So we’re making (3 + 3% =) 6% or $6,000 per annum on a $100,000 investment.  To make 8% we need to make that $6,000 on how much equity? Right $6,000/8% = $75,000.  How do we get our property for $75,000 instead of $100,000?   By taking out a $25,000 mortgage say for 5 years at 2.4% or 1.2% after tax interest. 1.2% interest on 25,000 reduces our net cash flow by $275 per year that is virtually zero costs especially if you take into account that the $25,000 in terms of purchasing power decreases every year at the rate of inflation by another 2%. So really, you get that $25,000 basically for free. That is the world of negative interest rates today.
Of course leverage has its dangers. Never over-leverage because if you get trapped into too much debt in a falling market, your financial life may come quickly to an end (Think Peter Pocklington, Campeau, Olympia & York, etc.). 
Look no further than the stock market where senior management pumps often up their debt to increase the company's net income to the max until the day things turn sour. But management, by then, has driven up the stock value to the max, cashed in their options like bandits and then run while shareholders are holding the empty bag. Of course, those shareholders demanded maximized net income as well and didn’t care how management achieved this. Well investors in over-leveraged oil and gas companies have found out how debilitating too high debt can be. Their shares are our now worthless and all the senior management departed. To ad insult to injury, with golden handshakes to top off their cash haul.  Yes, expertise is soooo hard to find!
Good business are like good real estate. But often real estate cycles and stock market cycles are a bit out of sync. So are precious metals and other commodity cycles. When one market does do well, another may be in the doldrums or worse. This, of course, provides buying opportunities for investors with strong stomachs and cash-on-hand. This is also why a good investor has a ‘diversified’ portfolio – something that doesn’t makes you ‘seasick’ of the roller-coaster markets and that is good when you have to buy with knots in your stomach at the bottom of an asset market.

This is what investing is all about. Not gambling or speculating. But buying good assets at the lowest possible price and keeping them as long as you can. The example, par excellence, in this game is Warren Buffett and last week’s investment in Home Capital. 
So next time, first ask yourself if what you buy is an asset or a liability; is it helping your portfolio to achieve the desired returns (6% plus inflation) and can you buy it for a truly good price (say at the bottom of a bear market)?

Saturday, June 17, 2017

Responsible share ownership and drill cuttings in oil and gas wells

In the current economic climate, oil and gas operators do everything to cut costs – sometimes to absurd levels. The horizontal well multi-stage fracking revolution has many think that geology is not that important anymore and that statistically drilling will do the job.  So now, a number of operators are drilling wells with no cuttings sample collection and no geological supervision. After all, the reasoning goes, you really don’t need to know your reservoir you just apply a mega-frack and out come the hydrocarbons. This is especially true for the Montney play on the Alberta/BC border.

Statistical drilling works only where it works. What I mean is that if you do have a development play, yes you can drill it out like a factory spacing horizontal wells out every 200 or 400m and drilling them over as long a distance as production remains economic. In the Montney that means that the ‘lateral leg’ may be 2000 to 3000m long. Operators think as long as you meet the ‘type curve’ with your production you’re doing fine. Type curve is the average production forecast of a well in a certain formation and you can drill when the economics of a well that produces like the type curve are satisfactory, i.e. meet corporate profitability criteria.

In the stock market, everything is based on financial ratios and although these ratios differ by industry sector, investors don’t think typically much farther. So many corporate management teams don’t think much farther either (as they are often compensated in shares and options) and since many don’t even understand the technical aspects of their own oil and gas assets except in the broadest terms nearly every decision is based on those corporate ratios. How much production does an asset have and what do we pay per barrel of oil Montney production? It is often not much based on a true technical evaluation of an area’s geological potential. Thus, who cares about collecting data we have a ‘gas or oil’ manufacturing operation!  In other words, other than financial engineering and reducing operation costs management does not have to use its brains and technical staff is encouraged to think less and less in terms of how to properly manage the asset not only for the future but also for understanding the variable production behavior that exists from well to well within an oil and gas asset because ‘as long as we meet type curve’ we’re doing fine and if we don’t produce enough we just make more frequent and bigger fracks.

Apart from what this kind of thinking does to the oil and gas industry's social license this is not how we should manage these valuable assets. We optimize our short term recoveries at maximum profits but at the expense of our overall recoveries and profits from the asset. Today, the target within the asset is often only one small interval in a huge geological column of rock and we don’t even have the data to determine what that target’s real potential is.

Some companies tell their owners (shareholders) oh, in the Montney we have multiple zones of production. We can drill at one location horizontals that access pay at several depth intervals. Yet, they don’t know whether that is true for their asset without a proper evaluation and they have no idea what the final recovery from each zone is.  Yes, they estimate the ultimate recovery from a well after they have some production history (e.g. a year); this is called EUR.  But really, the EUR is determined by many factors including the reservoir properties but also to a significant degree by the drilling, completion and production practices applied to the play. Ironically, the horizontal multistage fracking technology is an obvious example of that. 

Your EUR is mostly a function of, economics, technology and reservoir quality. What we are doing today is focusing on our immediate technology and economics while completely ignoring the third factor: reservoir quality. Most companies have a general concept of their reservoir which is often based on extrapolation of concepts from adjacent operators. “Our land lies on trend” or “We are producing from high TOC rock”. The latter is often just assumed because someone published a technical paper 200km away from their holdings; sometimes a paper half a continent away.

My company Eucalyptus Consulting, has recently performed a regional Montney study in Alberta and we found that there are a wide range of play and reservoir types within the Montney. Most are what is euphemistically called ‘Conventional’ oil and gas plays and have little to do with production from source rock which is often considered ‘Unconventional’.

With a better reservoir description, we can often explain why one horizontal produces better than an adjacent one. We can determine where in the reservoir the wellbore was placed and with that we can design the appropriate size and type of a ‘fracking program’.  Reducing frack size and preventing formation damage by the selection of appropriate frack fluids may result in major cost savings but industry has really given up on this and is just interested in larger and ironically, in cheaper fracks using ‘economy of scale’.

With a better reservoir description, we can plan for extending the life of a well and even consider enhanced recovery schemes. This may not appear economic now and, I guess, with the world expecting a switch from fossil fuels to renewable endless energy any moment now, who would care about such future recoveries. This was meant to be sarcastic. Because it is ironic that we are treating our hydrocarbon assets with so little thought in this so-called time of sustainability and environmental concern.

If the economic life of a 4 to 10 million dollar well is not much more than 4 to 7 years than we must have a truly endless supply of oil and gas. After that we shut-in the well and hope to have to pay for its abandonment far into the future when according to our economic standards that money is worthless. I wonder whether the people living in that far-away future would think the same when they end-up paying for these abandonments and when the original owners of the play are long gone?  

With extending the life of a well, companies have another lease on life. That is often overlooked in favor of immediate cash flow – something demanded by the stock market but is that about running a good business or about being ‘robber barons’ or flight-by-night operators.

Reality is that stock market investors want investments that provide fast returns and many of the institutions that manage your legacy funds invest on that basis in our industries. We need fast growth and high returns; once the growths flatten we dump the suckers and move to our next 'investment'. This attitude seems in particular to exist in commodities and ironically in high tech. When the ownership has this attitude how can we expect that our assets are managed other than as ‘Pump and Dump’ schemes. But that is what we’re seeing, loud and clear, in today’s oil and gas industry. Isn’t it ironic that in this era where we all standing on our high environmental horses and point to anyone except ourselves that our investment attitudes promote exactly what our mouths claim we abhor?  Well, fellow investors and fellow oil & gas workers, you will reap what you sow. There is a difference between making a quick buck and owning a good business. If we really want to do what we preach then start with responsible ownership. And you thought this was about collecting cuttings!
This posting is not to blame the oil and gas industry. It is to point out your role and your attitudes when investing and the consequences thereof regarding how your assets are managed. What I describe here about my industry of which I am generally very proud, happens in many other sectors as well.
Ultimately, you the consumer demands the products delivered at the cheapest possible costs and your investment habits have a direct impact how that is done. No wonder industries act the way they do when you dump your holdings at the first quarterly report miss. What I am asking you to do is to better look at what you own and how you manage your assets. I think this may be a topic for multiple postings where I will explore a more responsible way and a better way of investing. I hope you join me in this exploration and develop a better more sustainable investment strategy not by sitting on a high horse but by becoming more aware about what we are doing and how that goes down the chain all the way to the workers in our assets.  Your ideas/input are very welcome.
I am proud of my industry and all the good it is doing to our society and I am grateful for investor funding that enables our industry to find that energy. I also think that oil and gas will be part of our resource mix longer than most of us believe.  Look no further than coal - it is still an important commodity a century after oil and gas became mainstream.   
Oil and gas is and will remain, together with many other resources and other industries key to Canada's well being. We may find ever cleaner and efficient technologies. Even coal can be used in a cleaner way. Think of new scrubbing technologies; generation of hydrogen from coal. 
It is wrong to blame or point to one sector in our economy and use it as scapegoat for our social problems, real or imagined. We should all take responsibility for our lifestyle and investment habits. Maybe a greater awareness about our own attitudes may show the way to a more sustainable life.

Saturday, May 27, 2017


Newspapers make money by printing scary stories.  You read a lot about investing advisors who are extremely bullish or bearish and much less about the ‘steady-as-she-goes’ advisors unless there is a quirky angle.  War here; death there; next years’ mega crash in stocks or gold, corruption, rape, that is the stuff that sells newspapers but does it really make you rich?
Possibly but not likely. Many of the investment expert’s will tell you that ‘Buy&Hold’ is passé and that it won’t make you rich. Well, think again! How do these guys make money?  Right by selling you stocks or by scaring you into buying their services. If they were really so successful then why are they trying to use your money when they should be already filthy-stinking rich?  Not all these ‘gurus’ are no good, some may actually be excellent asset managers.  But real investing is not exciting; the best investments are boring; thousands of books have been written about this.  Investing is about buying money generating assets and if you think that Canada’s banks or companies like Disney or GE are unprofitable and not making money over the next 25 years than please, please… give those shares to me. A house, ownership in a business, investing in debt, those are all assets that overtime make you a lot of money.  The simplest way and one of the safest is buying a government bond that pays you a certain interest rate over time.  Say you buy a $10,000 bond that pays 7% interest annually for 25 years. That is 25 times $700 over 25 years or $17,000 plus your $10,000 back after 25 years. Oh, you nearly tripled your money!  So what if you reinvested the interest that you collected at 7% as well?  Then you invest at a compound interest rate of 7% and your original $10,000 would give you $54,275 after 25 years
 So if you saved for 5 years $10,000 every year following your 25th birthday and then did nothing but invested at 7% compounded you’d have $312,117.49 at age 60. Early retirement? Now there are things like taxes but you can take care of that with TSFAs and RRSPs.  So, there is a perfect retirement plan for you young bucks!  So why is this so darn difficult?  It isn’t, but you do need a bit of self discipline and set your priorities. For example: at 25 you tell your self: “my first $50,000 is for retirement; the second is for a BMW. The rest of my life’s earnings are for living and bringing up a family.” Done!  If that is what you want.  You don’t have to read this darn blog ever again. Oh… Freedom.
You don’t need to be right about each bull and bear market. As pointed out in earlier (or better in many earlier) postings: Don’t panic during a bear market and sell; just hold on and your ‘losses’ will be recouped over the next few years. If you use your cash to buy more during that down turn you will earn a bit more but not a lot more. Yes, from time to time you may win a investment lottery ticket. What if you invested $10,000 in the 1960s with Warren Buffett? Today it would be worth roughly $100 million! Now there is a lottery win for you!  We all come across such an opportunity from time t time. The art is to recognize it and grab the opportunity. Most of us won’t out of fear - often just when risk is lowest.
So, here I want to help you in becoming a contrarian investor and hit from time to time a home run.  Have a core portfolio with stocks of companies that pay every year increasing dividends and that are going to be around for the next 100 or so years.  I am talking Canadian Banks, Walt Disney, GE, Microsoft, AT&T and many others.  Put $10,000 in each of them and 25 to 30 years later you’ll be a millionaire. Then play the investment lottery: try investing opposite to the news headlines.  Now you can make investment home-runs!  So if the newspapers love Facebook, just run away. If the newspaper says “This is the big bull market’, start accumulating cash.  If the media say that we are in a financial crisis and that stocks will never recover, you know it is time to add stocks to your core portfolio.   If the media says: “Oil prices will fall or stay in a trading range for the next 10 years”, you know it is time to buy good balance sheet oil and gas companies.  Now, these companies, if not Shell or Exxon Mobil like, should never be part of your core portfolio.  After making a good profit – say 100% sell part and let the rest run until the next peak then use trailing stops to get out.

Well if this works and you become wealthy or better if you become very wealthy, remember in your will this little obscure investment blog that provided you this deep investment truth… no I should say ‘THIS SECRET THAT WALL STREET DOESN’T WANT YOU TO KNOW!”  How is that for a marketing title?

Monday, May 22, 2017

Brexit – Should you still invest in the European Union?

Euro skeptics are mostly far-right (or left) extremists. They are often the same as the ant-emigration crowd. The losers today of automation and globalization.  So this period from 2008 until 2017 has been a time where a lot of pain came to the surface. The public answer was the election of people such as Trump where the population demands a breather from never ending global chance. The world faced a lot of headwinds, including the ever-deeper intrusion from governments and big business into our personal finances and even into our living room.  Many feel powerless against the current elites who incessantly crave for evermore bureaucracy, the power to impose their lifestyle on others and years of empty promises of more jobs at the expense of those in society who saved their money.  Few persons in this world are truly rich. To have meaningful affluence a household should have a net worth of at least 10 million – i.e. the Decamillionaires. That is less than half of the ‘one percent’ and I think I am exaggerating even that. With 70 to 80% of Americans unable to handle a $1000 emergency expense without going even deeper into debt, who is truly rich?
We only read about the super rich: Bill Gates, Warren Buffett, etcetera in the news papers and yes they influence the world due to their economic leadership not because of their voting power. So really who are paying taxes and on who are imposed every increasing numbers of new rules and laws?  Tax hikes on the superrich won’t do anything except driving them away into tax havens. The real taxes are paid by the middle and the lower portion of the ‘upper classes’.  Why do you think that many of the so-called 1% are considering themselves ‘middle class’?  People feel (and are) lied to by the political class who portray everything in black and white soundbites amplified by a media that is out of touch with their readership and form increasingly part of the ‘elites’. Don’t forget many of the bureaucrats, politicians, lobbyists and media members never worked in the real economy that is providing the funds for our welfare state but even more for all sycophants at the public trough. It is for real reasons that so many people are moving to libertarian ideas – because they want to lead their own life.  It is not for nothing that the Alberta’s NDP stronghold is Edmonton!  Bet that Ottawa votes overwhelmingly Liberal?
When teachers and other civil servants are millionaires because of their defined benefit pension plans as soon as they retire – often a lot earlier than most in the private sector do -, one must wonder who is serving who? Europe is a bit ahead in this because they practiced the ideas of a cradle to grave welfare state much earlier than here in North America. But over the last decade the bill has been presented and by now Europe is moving back to the solid right. Their financial dire straits are the direct result of their state socialist philosophies of the previous decades. Political correctness – green energy everything proves to be costly and eating into the wealth of Europe’s population.  With a 19 trillion U.S. dollar economy, it is larger than the U.S. and NAFTA. It is the real juggernaut in the world.  It is the U.S. own fault that they spend most on defense – but they also benefitted from that by being the worlds most powerful military nation and having the world’s largest defense industry contributing to its economy. Europe after two world wars is not so keen on world dominance as the U.S. is but now Trump demands they spend more on the military and guess who will sell them all those new weapons? 
Many libertarians feel that they have no business being the world police.  Many libertarians feel the government should stay not only out of their life but also out of the life of citizens in other countries. Strangely enough Obama was more into that than Trump. Don’t tell me that there is logic in politics!  So, the British voted for Brexit at a low point in the evolution of the EU. After a difficult period, leave it to the Brits to run for the exit!  Just like Quebec in Canada – they will end up being the big losers (history may proof different). There are lots of similarities between Quebec and Great Britain as it was called in the past. But the clearest lesson is that the process of separation seldom leads to more affluence and just contemplating going such a route is economically very expensive. Just consider what has happened to Montreal over the decades. London may not be far behind.
If Trump truly exits NAFTA then there is a big price to pay in our North American economy. Trump the negotiator may think that ‘he who is willing to let go is in the stronger bargaining position’ just like Quebec thought this for years but remember the state Canada was in during the 1990s – the height of Quebec separatism - and consider what would have happened to Canada if Quebec had succeeded!  Trudeau Senior and now Junior are the true leaders of divisiveness in Canada because they are so Quebec centric that they have no idea how to consider the interests of the West. It seems right now ‘deja-vu all over again’. How come that under Harper Canada was united more then ever and as soon as one of the Trudeaus come in, the West feels like talking separatism again?  But as said, separatism is not the solution but the indication of sickness or problematic times.
Western Europe knows full well how much unification has contributed to their peace and affluence.  How great life without borders is and how convenient a single currency is. But there are also problems. Big problems!  Just like in Canada, Europe is very diverse. In fact, it is even more diverse than Canada ever will be. How to take the interests of such diversity properly into account?  Obviously creating a big bureaucracy (like Brussels) and drowning the population into exhaustive regulations doesn’t work.  The election system is quite good in Europe – a system customized for each member state by history.
Canada is struggling with elective problems. How to take care of an uneven population? – where the majority in the East has elected the federal government before election booths have closed on the West Coast.  How to take care of regional conflicts of interest and ensure that the city population doesn’t crush the rest of a province?  Are Vancouverites with their urban experience really qualified to impose their views on a resource economy in the interior of BC?  Yes, a vote in rural Alberta weighs heavier than that of a citizen in Calgary or Edmonton but if that wasn’t the case people would be driven off the land by urban ideologies that often do not reflect economic realities.
Yes, in many ways Europe is the true leader of the world not the U.S. as many self-deluded North Americans seem to think. Now that Europe starts to recover this may become much clearer over time. Do you want to know the impact of an aging population? Look at Japan and Europe!  Do you want to know what the economy might evolve into when the world population stabilizes – the front leader is Europe. Even though the Euro monetary system has significant issues to work out, especially how to deal with their diverse economic conditions and lifestyles, they are now slowly turning the corner. Brexit was the low point; Dutch and French elections mark a potential turning point. Brexit will be a great learning experience for European unification and the bill may be paid by the British. The British people are very charismatic – who cannot empathize with the Welsh, the Scots and the Irish such a charming and colorful lot of rogues? But it is likely they have most to lose from Brexit. I sincerely hope that we don’t have to say: “You were a great nation and it was nice knowing you.”
From an investment point of view, Europe leads the real world.  Asia is the up-and-coming kid but they have a very turbulent way ahead. If you think Europe has problems just think about where China, India and there ‘spheres of influence are going – South China Sea a powder keg. Not to mention the Middle East. Yes, North America is a powerhouse and we should invest in our own economy but things can go and will go wrong here as well. Emerging markets are obvious candidates for economic growth but they have considerable risk and it is highly questionable that investing in their stock market will be beneficial. I think Europe is a lot more promising than many believe.  Russia is troublesome and Putin is a wildcard. What would happen in case of assassination or if the man becomes too audacious and triggers a war? Will Russia turn in another North Korea or will it become a respected member of the global community?
Western Europe deserves a much larger part of our investment portfolio than many of us have. Think of it this way, with the reductions of freedom over the last decade here in North America and with Scandinavian countries often depicted as the new ideal states (Seen any uplifting Scandinavian movies lately? – I don’t believe they exist) Europe may enter a new era of prosperity and an era of lots of introspection and social leadership

Tuesday, May 9, 2017

My new GOOC portfolio – Get Out Of Canada

Canadians have always had a self-destructive streak. They want to be the nice guys of the world.  Oil and gas are not nice but are reality. That is where Alberta and the rest of Canada always seem to clash and Pierre Elliot Trudeau is the poster boy of this attitude.  Another liberal to the West, seems to have taken over Trudeau’s baton with blocking Alberta’s landlocked oil and gas – although she favors exporting gas on her side of the border.
In Alberta, we have an NDP premier – a lapse of Albertans’ common sense. But to be honest, after 40 years in power, conservatives deserved a big kick in the behind. But how are we Albertan investors to protect ourselves from the current downward spiral.  I love life in Alberta – it is one of the best places in the world and Canada is one of the best countries in the world. Although due to Canada’s large areal extent and uneven population distribution it tends to tear itself apart politically.
I am tired of the nearly always under-performing Canadian stock market and maybe this is the time to admit that focusing on Canadian investments is a poor form of diversification. Ah… I am sure you’ve figured out where this is going.  Yes, with Canada’s adverse business climate it is time to get out.   Wynne, Notley, Clark and Trudeau – it is virtually impossible to get a more anti-business political stage i.e. the Alliance of Pretty People (APP).
I am economically dependent on Alberta with real estate and owning a business tight to the oil and gas industry. Thus it may be best to have a stock portfolio with heavy international emphasis. So that is U.S., Europe and emerging markets. There are some Canadian large caps with heavy international interests such as the 5 banks, Power Corp, the large insurance companies such as Manulife and asset manager Brookfield.  One must place a small bet on recovering oil and gas say 5 to 10% of the stock portfolio and another 5 to 10% on gold and silver. So that leaves about 50% of the stock portfolio for international markets.  I would say, 30% of that could be invested in the U.S. with world class companies such as Johnson&Johnson, Microsoft, Apple, Bank of America, Brystol Myers Squib… and so on. Finally, with the recovery in Europe on its way, put 15% in Europe and the remaining 5% in Emerging Markets – the latter best through ETFs.  Voila, our new strategy ‘GOOC (get out of Canada)’ portfolio phase I.
If Canada is so self-destructive that over the last 6 months so many international major oil companies ran for the exit, why shouldn’t we do the same to protect our retirement.  Next phase… avoid Canada’s disease of self-entitlement and self-righteousness.

Sunday, April 23, 2017

Thriving in an uncertain world

We are now 4 months into 2017 and my fears for an imminent stock market crash has diminished.  Many investors realize that the Trump plans may take a bit longer to realize than the first months of the Donald’s presidency. To be honest, I still don’t know what to make of this ‘shock and awe’ president, he seems to be a master at keeping everyone off balance with his flamboyant tweets and with his often more sedated staff that he uses to execute his real plans. Like any trader, he is not showing his hand.

So now, investor enthusiasm has cooled and the markets are a lot less euphoric than just a few months ago. The U.S. economy and that of Europe and even the economies of some emerging markets are looking better and better. Yet there are many turbulence causing clouds on the horizon; not the least being the French elections. But here is what many of us forget: Do you really think that today’s worries are so much worse than say those during the cold war when as a child I was living in a country that could be reached from Russia’s nuclear arsenals in under 7 minutes by jet?  Yes I am talking about Western Europe in the ‘Happy Days’ of the Fonz. We’re looking at those days as if they were ‘good old days’ with ever appreciating stock markets.  Well, dig out your rusty memories and you realize that those days with the Vietnam War and Cambodia were far from that ‘Happy’. Violent crime rates weren’t that low either. Oh then there was China’s Mao and Cuba’s Che.

So, stop whimpering over today’s excessive uncertainty. Life is uncertain and in fact, we are living in one of the most peaceful periods in history.  It is just that if someone dies in Paris in the morning, you read it in the Globe that afternoon! What are the problems we have today? ISIS?   Syria?  Compared to Vietnam or the 2nd World War that is small potatoes. More people die in traffic than by the hands of ISIS. I will say it again on this blog: “We never had it so good!”. 

Today we’re struggling with low oil prices.  Yes I underestimated how fast the oil-shale drillers got U.S. production back up. I compared it with Canada’s unconventional and conventional oil. Well the Permian is booming right now and in Canada that is far from the case. Though we have turned the corner as well.  Because heavy oil construction cannot be turned off right on the spot, Canadian ‘oil sands’ production has actually increased, in spite of the devastating fires in Fort McMurry last year.  And because of falling operating costs (yes, not only Americans can produce now cheaper), many of those projects are still moderately economic. The weak players have often gone bankrupt or similar.  Look at PennWest which went from 160,000 barrels per day to barely 20,000. You call that survival?

But we have many companies, most of which were tiny and unknown just a few years ago that are rising out of the ashes. Lots of people are still without work – waiting for ‘the turn around’.  So, in hind sight, what was this oil price war really about?  I’d say it was about Free(er) market versus State owned Oil (and Gas).  OPEC is the embodiment of state-owned oil. The government owners can control how much their country produces.  They boast the ‘cheapest’ production costs but reality is that they use their oil dollars to run and control their population and fight their wars. OPEC cannot exist without spending ‘petro dollars’ to control their populations and to support their wars (think Iran vs Saudi or think of the civil unrest in Venezuela). So their cost of production is not the $5 or $10 dollars per barrel that they claim. Their real breakeven is $50 or $60 per barrel. Probably they start restoring their severely diminished sovereign funds around $70 per barrel.

So now they rile against the North American oil industry for taking more and more of their market share. But we represent the ‘Free Market’ and our governments don’t control our output other than imposing more and more cumbersome regulations and carbon taxes.  Regulations that make those governments popular in the East where most of our population lives but with little understanding of how much oil and gas contributes to this country’s wealth - along with numerous other natural resources. It is the profitability of our operations that determine how much we produce. The latter is set by the economic climate, the skills of the oil industry workers and the pace of innovation. North American oil output is not set by government (to some degree) but by the market and economics and no government owned oil company driven by politics can compete with that.

The disastrous results of the ‘Green Revolution’ in Ontario show the same. Governments are poor investors and the high prices of their energy driven by ideology rather than economics has driven the Liberals to the bottom of the polls now that Ontarians feel the bite in their purse. I like the idea of renewal energy, but it has to be economic and its real costs in dead birds, landscapes cluttered with windmills and the uncertain energy supply should not be hidden behind ideology. Lately, that same Liberal government plans to mislead its population by expanding rent controls.  The short term thinking population needs a scapegoat for exploding housing prices. So blame the evil (often mom&pop) landlords who cannot fight back. Reality is, as pointed out by most economic hand books, rent control restricts investment in revenue generating properties (reduces available rental units) and leads to less property maintenance (i.e. creates slums). 

But getting back to topic: the oil-price wars. That OPEC countries try telling North America to reduce oil and gas output to control energy prices. As explained this is just ridiculous and it shows OPEC’s lack of understanding as to how the ‘free market’ works. Two worlds: government owned versus privately owned oil are slugging it out.  It is clear, who will win in the end – the free market.  Saudi is putting part of Aramco up for sale to get cash.  As long as that government controls the company and even refuses to disclose its real oil and gas reserves, I wouldn’t touch that deal with a 200-foot pole.  Oops, did I make a stock recommendation?   No! I didn’t I am just pointing out that Saudi-Aramco is un-investable but I have no idea how its stock will perform.

I have moved away from the stock market into a private real estate venture. Building a personal residence in a semi-depressed real estate market. Short term, it is high risk because my real estate portfolio goes to overweight.  But real estate is a long term gain and I will rebalance within a year (I hope). This works well in my overall view that the stock market is nearing a crash. But there may also big stock market gains ahead because we have not reached the euphoria stage yet. Alas, this is an uncertain world and we can only pray that, as often happens with patience, that matters will work out.  In the meantime, at my age, I am clearly still in the thick of things and going out on a limb (within reason). Isn’t that what live is all about – going after a worthwhile challenge?  In my mid-sixties and building my own dream residence certainly is worth it for me. Who says the Golden Years are a dream-like state of vacations, golf clubs and dying of boredom?