Monday, October 29, 2012

Natural Gas Pricing

Today I was asked why the gas price posted in the blog header was $0.40 more than the one listed at TD.  Gas prices differ for many reasons. It may be the type of natural gas, e.g. Alberta natural gas or the location of the gas distribution hub that determines price. For Alberta the main hub is AECO’s ‘C’ hub in Suffield. Today’s price there was $3.19 per BBTU. That is to say that the ‘Spot Price’ at AECO ‘C’ of the shortest term contract available (i.e. gas delivered in November) is $3.19 per BBTU.
Commodities traded in New York on the NYMEX have their own prices. Gas is also expressed in BBTUs but it is deliverable at the Henry Hub in Louisiana. There Natural Gas Contracts for November (Spot Price) is $3.47. However, the data supplier for this blog apparently has already switched to December Prices since we’re nearing the end of the Month (that is my guess). The NYMEX price for December contracts was today: $3.81 per BBTU.
By the way, AECO prices are in Canadian Dollars; those on NYMEX are in U.S. Dollars. One thousand cubic feet of gas (Mcf) -> 1.027 million BTU = 1.083 billion J = 301 kWh

Saturday, October 27, 2012

Low P/E and Moderate Dividend Portfolio – Update Oct 2012


Well the summer months were kind of depressing and although we have recovered a bit, the TSX has barely appreciated by 2.89% since January. Our portfolio, after a blistering start has petered out as well, its annual appreciation is negative 0.42%.
However, if you add to that a 4.64% dividend yield (as estimated in January), the portfolio’s return is comparable to that of the TSX. So we’re performing similar to the TSX but outperform GICs and money market funds by a wide margin.
Now we’re waiting for the year-end rally and the total received dividends.
Click the table for a closer look

Sunday, October 21, 2012

The pot calls the kettle black

Debt is something us mere mortal souls are supposed to repay, if not….  But did you know that governments never repay their debts? Instead they inflate it away. I am not just blaming the Europeans, nor the U.S.A., although if you hear Americans talk about Europe you would never guess that they are deeper in hog than Europe (in terms of Debt/GDP U.S. is 103% while Europe is 87%).

You may hear Canada’s federal government bragging that their debt to DGP is only around 35%. That is not bad, but when you realize that a lot of this debt is shoved on to the provinces, you may think differently. The ones that really should be peed off are Albertans because their provincial debt is virtual nil. So who are the big provincial debtors? You got it: Ontario and Quebec and to a lesser extend BC. The latter with close to 47 Billion loonies in debt. No wonder BCers love nature so much!  That is a lot prettier than their wallets!
We are also talking so much about China’s growth and the end of the U.S. and Europe as economic super powers. The Euro area plus the United Kingdom has a GDP of over 15 trillion in U.S. dollars. This, in spite of the large drop in exchange rate between the EURO and U.S. dollar recently, otherwise the European economy would have been closer to 19 trillion! The U.S. economy is somewhat smaller; it is barely touching 15 trillion. China? It has now exceeded the size of Japan’s economy and counts just over 7 trillion.  With Europe and the U.S. economies counting close to $32 billion is China with a GDP of $7billion really that influential?
While the Euro-area combined with the United Kingdom is close to 400 million people and the U.S. counts just over 300 million, China counts 1.3 billion or 1,300 million people. Thus who is more productive a Chinese, a European or an American? It is the Canadian and Australian! They produce $50,000 and $60,000 per capita compared to $48,000 and $39,000 for Americans and Europeans while the Chinese barely earn a paltry $5,430 per capita.
So let’s go back to government debt: in the 1990s, Canada was deep in ‘doodoo’. In 1997, the Federal debt reached 92% of GDP not counting municipal and provincial debt. No wonder we feared that under Mulroney we might become a third world country! We fought the national deficits under leadership of politicians such as Ralph Klein and Paul Martin. But they did have some help from falling interest rates and rising commodity prices. In 1997, debt of the Federal Government peaked at $563 Billion. Now, being the world’s wunderkind of financial prudence would you care to estimate our federal debt?
Oops it is $599 billion! We really didn’t repay a lot and then with the financial crisis we required stimulus. Remember how hard the Liberals and NDP were shouting at Stephen Harper’s minority government to do something? Well Stephen did ‘reluctantly’ spend.  In the U.S. debt nearly doubled to $14 trillion over those years. So how does a government pay off its debt? It doesn’t! Just like on your Line-of-credit, governments pay only interest on the moneys borrowed and then hope that the country’s economy grows so much through inflation and real productivity that the debt kind of ‘goes-away’. The graph below tells it all: 


Canada's Debt Statistics
Really, we just print money and earn more by building an ever more efficient, i.e. more productive, economy. As long as our economy grows so will our GDP and so will our debt ‘disappear’.


What is the real solution for Europe and the U.S.? It is not repaying debt as many Gurus would like make you believe. Much of the U.S. debt came from the Iraqi and Afghanistan wars; also the bailouts of the financial and automobile industry resulted in a lot of debt. But now both are recovering and car makers and bankers start to repay some of the bail-out money and no additional expenditures are required. Government spending is likely to decline or at least stabilize. Some austerity may be required and many U.S. government levels have reduced staff. There are probably excesses in the system such as grossly overpaid firemen in forever-bankrupt California but overall we don’t want to overdo austerity.
It may be politically popular in Germany and the Netherlands to demand severe austerity in Greece and Spain but that only reduces growth further. What really is required is lower interest rates and renewed growth. The same in the U.S.; it’s economy is now gradually picking up and will likely grow at an even faster pace in the coming years. This, plus a generous supply of affordable energy and a recovering housing market will probably carry the day. In a few years, you’re likely to see politicians claiming how they saved the nation’s economy rather than its hardworking citizens. Of course, if those same politician’s don’t resolve their ‘fiscal cliff’, which is nothing more than political chicanery, then they could delay the U.S.’s recovery significantly and add to that country’s already high debt load.
None of us are angels – even the gurus and talking heads who have their personal agendas. A lot of government number comparisons between countries are like comparing apples and oranges. For example here is a comparison between Canada’s government debt and that of the U.S. From my estimate, Canada’s graph includes provincial debt while that of the U.S. appears only to include federal debt. I have no clue as what is included in the European chart. But with data like this, who needs an enemy! Also, included is a table from Statistic’s Canada that may shed some  light on the Canada's real situation.  Talking about pots calling kettles black.




Click on images to magnify
 

Saturday, October 20, 2012

Growth

Growth is not just the result of population increases. It is not just because the population is young and starts families all at once while building houses at record pace and blowing demand for fridges out of the water.  If that was true then why is China’s slowing growth a reflection of ‘falling demand’ from the demographically youngest economy in the West - the U.S. or from the aging European economy?

There are many other factors that feed growth. One factor is global trade; another is the need for poor populations to catch up to the prosperity level of the West. You may think why was there not more growth in earlier years in those emerging economies? The answer lies in the political and social infrastructure of those economies. Many emerging economies were, and several still are, dictatorships, epicenters of repressive religious extremism and bastions of corruption and extreme egocentric behavior – these are recipes for stagnation and underdevelopment – here the few are prospering at the expense of many. Once such a society turns the corner, especially when achieved in an evolutionary fashion rather than a revolutionary, prosperity will start to come in reach of even the poorest.
With enough critical economic mass, countries like China will be able to grow for some time based on the consumer demand of its own population, but in the end, the global community of people will become an interdependent economic union. When China or any other emerging economy grows we all will grow and visa- versa. When the West prospers once again then so will the rest of world.
Another powerful source of growth is invention and innovation. This in my book is just a matter of statistics and the availability of fertile grounds to seed and grow them. With an increasing world population we will have more smart people and more geniuses. Besides, most inventions and innovations do not require a genius but rather people that work hard and trying to do things better and more efficient. We are a world of continuous improvement and thus we continuously lower costs of our material needs resulting in ever more prosperity.
Greed to some level is good because it motivates us, but excessive greed will return us into a society were few benefit at the expense of the many. We need a happy medium – when we lose this balance we end up in catastrophe as the 2008-2009 financial crisis taught us.
But just because we hit a bump or are on a rough stretch in the road, that does not mean that we have reached the end of growth; the end of making money. We’re living in a ‘clean-up time’ and we’re working hard to smooth out the road again.
The European Crisis is on the road of resolution – its economic shocks are becoming less and less severe. The end result is a stronger and more fiscally integrated Europe that will soon be back on track to more prosperity The U.S. ‘fiscal cliff’ will melt in the heat of the new energy revolution. North America, in spite, of its shortcomings and its addiction to debt will resolve its issues on the back of a recovering housing market  combined with an abundance of reasonably priced gas and oil supplies for the next century or so. Don’t forget that thanks to illegal and legal immigration in this boiling pot of entrepreneurship the U.S. has one of the youngest demographics and thus one of the steadiest long term housing demands of the Western world.
Global growth and prosperity will once again pick up and with the cheap credit policies of central banks all over the world our stock markets and industries will soon once again explode to the upside – until the next crisis. Crises are typically painful and we think that they never will end. Newspapers and other media will declare years and decades of doom and gloom ahead, while missing the developments hidden below the surface that clear the excesses and lay the basis for renewed growth. This is the time to invest in real estate and in our stock markets. Those that hide their money under matrasses or lend it out at rock bottom rates under the false perception of the reliability of the creditors will suffer and miss out on the next period of asset appreciation that is just around the corner.
Nobody can predict exactly when strong growth will return or which company will do best or go under. But in my books growth and prosperity will return soon. Our world has gone through a major crisis; however painful it was we seem to have laid the foundation for a new period of strong growth and prosperity that lies in the not too distant future. Newspapers and media live of your fears. Economists call themselves not for nothing practitioners of the dismal sciences. So throw off those blinders of fear and profit from the opportunities ahead.