Sunday, November 11, 2012

2013 What will it bring?

To be honest, I have no idea! We may extrapolate some trends from the recent past but nobody, except some very talented fortune tellers, will be able to accurately tell us what lies in store for 2013. I do read newspapers and other sources of information about the economy here at home and in the international arena. A lot of it is hype to get you addicted to a particular newspaper or news-channel or investment letter. So if you want an accurate forecast of the future then don’t look for it in the media. Their forecasts are frequently ‘updated’, contradictory and often with a complete case of amnesia as to earlier ‘forecasts.

But really, other than recognizing some major trends, we’re only interested in owning profitable dividend paying businesses. We’re not traders who change their positions as often as the weather or mutual fund managers who claim to be ‘buy & hold’ and in reality churn over the entire portfolio each year… at the client's expense.
We invest for cash flow and if we get some capital appreciation any time during the next year or five that would be great. So let’s first look at what happened last year, how that affects our investments and what we may conclude about next year’s strategy to reach our goal, our Belize, our financial adulthood.
Talking about our Belize don't aim for too specific a future.  We’re living too long to know whether we will be married to the same person until death does make us depart; we don't even know how our situation is 30 years from now. We’re living too long to know how our children will work out 40 or 50 years from now.  I left my parent’s house when I was 18; I have lived longer in Canada than in the country of my birth. What we hope to achieve today is likely something we don’t care about 15 years from now. That is life. So, rather than worrying about what we may wish to do when we ‘retire’ or when we’re too old to play professional soccer, let’s just aim to have the financial means that allows us to do what we want without depending on a particular employer, career or pension plan.  Let’s aim to become financially grown up!
We invest for cash flow that makes us, hopefully in the not too distant future, financial adults. Capital appreciation is great, but it is unreliable. We need income to support our financially independent life style. So we want dividends, interest, rental income, income from pensions, from royalties or from a part- or full-time career. We want cash flow from multiple income streams so that when the stock market fails, we may get interest from bonds or from MICs or GICs. If both stocks and bonds fail, we may luck out on rental income or earn money from a career that we still like to do.
My son is a smart cookie, so he really doesn’t listen to his old man. But I listen to him… sometimes. Sometimes I listen with a smile because of his youthful enthusiasm and his believe in an unlimited future. One of his favorite themes is that ‘after 2015 our health sciences will be so far advanced that live expectancy is each year increased by one more year.’ That means if you are alive in 2015 your life expectancy maybe 90 years. In 2016 it would be 91; the year thereafter it would become 92. In fact, barring an unfortunate event such as a head-on collision with a big truck, we are in theory immortal - according to my son. Yeah, right…  I foresee never ending stiff muscles and endless marathons using a walker! J
How do you plan for such an immortal future?  How would you envision an immortal life of doing nothing but watching the Simpsons?  “Aaaaaahhhhhh!”   Yes you can say THAT again! “Aaaaaahhhhhh!”
We have to become more pragmatic in our life goals and in our relations with the people around us. My current definition or life goal is no-longer to own $3 million at age 55; a wife with whom to travel the world until we drop; to golf with buddies 24-7 and to see my grandchildren grow-up into a bunch of annoying teenagers whose names I may barely remember and  walls plastered with their photos. No, that might truly become a nightmare for this type ‘A’ personality or into whatever round hole my square peg is supposed to fit.
I need a broader more flexible life goal and investment goal. Here it is: For as long as possible and with human dignity, I want to pursue those things in my life that I consider worthwhile at whatever stage in my life and I want to have personal relations and the financial means to achieve those things.
Oh! My vacuuming robot just beeped, telling me to put it into another part of my house so it may clean that too! Excuse me for the interruption. I don’t have Microsoft Surface Pro yet and my old robot is not smart enough to interface with this latest tablet (which won’t be on the market until Feb 2013). I hear the churning noise of my bread-maker creating multi-seed whole-wheat bread with orange peels. I should get the sweet baking smells entering my nose within the hour!  Oops, the beep I hear signals that my dishwasher is finished – talk about living in the future...  where my car can park itself!  Oh… we’re there already.

Today life is supposed to be misery; living in a ‘gloom and doom’ economy; even worse we’re supposed to live in a depression with the world coming to an end!  That is if you believe the media and hysterical vote hungry politicians. However, in my view, life was never better and with each coming year the world is becoming a more beautiful place. Ah, how sweet life really is!
So it was just announced that the United States of America is close to being energy self-sufficient. The North American continent has enough natural gas and oil to last us yet another lifetime.  We would like to export some to other parts of the world where energy and other natural resources are scarcer – for a profit of course. But many people on our continent oppose this, using reactionary excuses such as ‘global warming’ and ‘protecting the environment’.  It is good to work for a cleaner world – but it is not good to oppose each project categorically as seems to be the case with so many of todays’ action groups.
With the explosion of new energy supplies and the restrictions placed on exporting them, we may undermine our own economy; support dictatorships elsewhere in the world; promote poor environmental stewardship on other continents, including dependency on nuclear energy.  Just think of the irony - environmental groups opposing oil transport through relatively safe pipelines have forced oil companies to transport it via rail. Wow, that is just an accident waiting to happen!
Protestors forget that affordable energy will allow us to reduce our current account deficit because we do not longer have to import hydrocarbons. Governments will collect royalties and ‘land sale’ proceeds in addition to income taxes. Our manufacturing sectors, supplied from local resources including cheap energy, will be able to put our well-educated population at work enabling it to compete with Asian cheap but less educated and less productive labor.  Less government debt; more jobs and thus more affluence in a clean(er) world that is what lies within our North American reach.
In the meantime, the Asian ‘middle class’ will be close to reaching a critical mass that increases demand for products manufactured by its own industries. We're talking economic development that is less dependant on export demand and that continues to grow based on local demand.

The Europeans will solve the issues of their debt crisis – the shock waves emanating from the old world will decrease over time, as they did in in this year as compared to 2011. After all, Europe has a much lower debt load than North America – their issue is how to spread the labor force, government accountability and social safety nets more evenly across the European continent with the financial and organisational backing that instils confidence with the investment markets.
The Middle East is a mess. No other word for it. This part of the world is going to evolve at quite a revolutionary pace. It experiences what Christian societies of the ‘West’ learned in the first half of the 20th century. The Middle East is learning that religions and government should not restrict the potential of its people but rather empower its people to live to their full potential. As long as the Middle Eastern dictatorships and clergy prescribe what its population is allowed to do and what not, these areas will remain powder kegs. Rather than being accountable for their own failures many in those countries tend to blame more successful societies around them thus they become the spawning ground of terrorism and poverty.
Africa is only very gradually improving, but it also suffers from dictatorships, corruption and a poorly educated population with attitudes and religions that just like in the Middle East are self-defeating. Unless the social and political infrastructure of this continent allows its population to grow and develop Africa will remain an economic backwater filled with violence and disease.
Central banks all over the world stimulate their respective economies to the max by driving interest rates to unsustainable lows. They do this by ‘printing’ an endless new supply of money. Sooner or later this will not only encourage economic growth but it also restarts the inflationary cycle driving asset values up and the purchase power of money down. Governments may hope to use inflation to reduce the real value of their debts and thus lowering debt as a proportion of GDP. But who will pay for that?  Tax payers that save; holders of government debt, i.e. investors like you and me! 
I think that today the risk of holding government debt is way too high considering the interest that is received and the potential of principal devaluation. Maybe some European bond funds are better because they are cheap and earn higher interest rates.  Another source of interest income that may be worth a closer look is Mortgage Investment Corporations (MICs) that invest mostly in Alberta – aim for returns in the 5 to 7% range.
I think that it is risky to invest in plain oil companies. There is a real chance that oil supply in North America becomes so plentiful that prices collapse and local oil companies could lose significant value. I am more optimistic on a recovery of natural gas producers – after all they have already survived a similar price collapse and gas prices have stabilized or may even move up.
Some investment letters suggest that it may be safer to invest in oilfield infrastructure and service providers rather than producers.  So consider pipelines, LNG facilities and even CPR or CNRail.  Service companies like CalFrac have lost a lot of stock market value while their profits and revenue are stable or even grow.  Also consider the large integrated multinational oil companies such as Exxon and Shell.  They pay dividends and are highly diversified. A speculative call on natural gas would be Encana; also consider investing a bit in highly diversified CNRL. Apart from a large heavy oil mine and lots of SAGD production, CNRL has extensive natural gas holdings in both Alberta and NE BC. Finally it has a small but profitable international arm based in Aberdeen with operations in West Africa and the North Sea.
The main beneficiaries of the new energy revolution will be manufacturing, transportation and of course governments. Since Canada’s stock markets are heavily resource oriented, I recommend instead to invest in large U.S. companies such as Microsoft, JNJ, Cisco, Walgreen, Proctor & Gamble and Anglo-Dutch Unilever.  The easiest way to participate is to buy U.S. ETFs in the Dow and S&P500.  Finally for the most adventuresome amongst us do buy ETFs in Northern Europe and Asia.
All these investments provide dividends as well as appreciation. They also allow you to enjoy an expanding North American economy (in spite of Obama and the Republican dominated house). Investing in a recovering Europe and Asia should ad diversification at low prices.
Don’t forget real estate. Especially Alberta real estate which can provide you cash and appreciation at very reasonable prices – but avoid new trendy inner city condo complexes. The story here is that prices seem reasonable with two bedroom apartments in the $200 - $350K range – that is until you consider the square footage of those units which is considerably less than those of more mature apartments.  
Rental properties have currently low vacancies and with mortgages becoming increasingly difficult to obtain and with positive net in-migration and unemployment rates that most of the world dreams of, Alberta vacancy rates will likely stay low and landlords are free to demand higher rents and thus better cash flow.
So there you have my 2013 game plan. Oh, and by year-end I will post a rebalanced low P/E-moderate dividend portfolio. Thus: no forecast for 2013 but a strategy based on the trends as I perceive them today combined with an investment philosophy that focusses first on cash flow and second on capital appreciation.

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