Sunday, November 25, 2012

Steady as she goes!

With our 2013 macro scenario in place, what are we going to do with our 2013 portfolio? Since the Great Recession in 2008 -2009, we have bought our stocks for dividend income in mostly large and great companies such as Microsoft, Power Corporation, the Canadian Banks and oil and gas service companies such as CalFrac and TransCanada Pipelines. In addition we have our Low P/E and Moderate Dividend Portfolio that we will have to re-balance in the coming month (last trading days before Christmas). Gold and silver are represented through investments in Silver Wheaton and the S&P/TSX Materials ETF (XMA). We own ETFs in the Canadian Stock Markets (XIUs and CDZ), in Canadian Bonds (XBB) and in the U.S. we own ETFs based on the Dow and S&P indexes. Finally we have an ETF for Europe in place that hopefully will take advantage of the coming recovery over there.

This year we significantly reduced our oil producer holdings and we have started to nibble at gas producing companies such as Peyto and we kept our Encana holdings steady.
We also have our Alberta real estate portfolio where we took advantage of the 2008 correction and added properties over the following years.
Now, we only have to tweak our holdings, ad natural gas investments when that market segment improves. We also will add to our various other holdings while the global markets recover using cash flow from our various paper securities. But mostly, we’re ready to harvest. This is one of the toughest things to do – i.e. keeping our fingers off the buy and sell triggers. But that is what the 2013-2015 period is going to be about. This will be the ‘boring investment’ era where we sit back, collect and reinvest dividends and from time to time we may buy a new stock or property if new cash comes in and in an extreme case we may have to dispose of a under-performing investment.
While the markets recover and appreciate over the coming years, we may sell and buy options to enhance our dividend income and we may start to use stop loss orders to protect our profits from major corrections and bear markets. Don’t worry about investing in Asia – our commodity stocks and our U.S. blue chip holdings will help us there. You may not even realize it, but many U.S. large caps earn a lot of their income from Asia and other overseas markets and commodities are driven to a large extend by emerging economies such as Chine and India. Thus you get to benefit from any Chinese growth resurgence while you have the transparency of North American stock markets (well everything is relativeJ).
Barring a major collapse of Alberta’s energy sector, Alberta rental properties will do fine and with added leverage your ROI will reflect this. Now it is time to focus on your real life apart from finances. Maybe plan or revisit your life vision, i.e. your personal Belize. See whether you are on your way to achieve it or whether your plans have to be adjusted by a career change or an unexpected curve ball lobbed into your life. Maybe more specific planning for your upcoming financial adulthood is required.
We’re departing from a buying opportunity of a lifetime and are traveling through the waters of a prolonged recovery. As the captain of your voyage to the port of your personal Belize, you should now be ready to say: “Steady as she goes! “




Friday, November 23, 2012

What's wrong with the natural gas price chart in the Blog Header

The natural gas and oil price data in this blog's header are delivered automatically from I am uncertain what contracts or markets are quoted. Below is the NYMEX chart for the last year that shows what is going on with natural gas prices and why a significant number of analysts now feel that we're heading this winter for $4.00+ prices.

My personal view is that gas prices have bottomed and likely will, overtime, recover to the $6.00 - $8.00 range. This may take several years, but we have likely turned the corner. Current statistics suggest that it costs around $6.00 for many companies to produce gas on a break-even basis. The current gas glut has forced many producers to sell their gas for much less. This gas 'on sale' situation will only last until supply and demand are back in balance. I do not foresee prices to rise much above $6.00 because then economics will justify renewed drilling. We have drilling prospects for the next hundred year according to many reserves studies. Thus gas prices will fall as soon production causes the market to become over supplied.

This scenario will provide North America extensive gas supplies at reasonable prices for many years which will benefit manufacturing, power generation and transportation. It will help keep energy imports to a minimum thus reducing our trade balances and foreign debts.  From an energy perspective we will experience for the next decades a Goldie Locks market - not too cold and not too hot but just right.

Something similar is going on in the oil markets but it tends to trail the natural gas markets probably by 3 to 5 years.

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.

Sunday, November 4, 2012

Some rough numbers

I came across an interesting statistic: the government of the U.S. plans to spend 3.8 trillion dollars in 2013 or… $12,000 per person. So a single person who earns $30,000 per year and who spends it all does basically have the lifestyle of someone earning $42,000.  Since 47% of U.S. citizens according to Mitt Romney don’t pay taxes that is $42,000 AFTER (income) tax dollars.
Here are some additional numbers: the 46.5% are 76 million people of whom 723,000 reported income between $75 and $100K; 381,000 earning between $100K and $200K; another 103,000 persons reported income between $200K and a million buckaroos and 7000 people earned above a million. Add this up and we learn that 1.2 million U.S. citizen earn more than $75,000 and pay no taxes out of the 76 million. He… is that the infamous 1%? J
Of the 76 million, 38% make less than the personal tax deduction of $9,350 (per tax payer). I would say, definitely poor. Seniors get extra tax deductions. I will not break this down further. One last number, the medium wage income in the U.S. was $26,364 in 2011.

Thus, a median dual income family with 2 children would make $26,364 x 2 plus 4 x $12,000 in government spending totaling $100,728 per year while paying no taxes. This is what it really would cost to live in the land of the ‘American Dream’.  I bet, in Canada things are not overly different.
In Canada, tax freedom day is around the middle of June. Thus half of our income goes to the tax man. Of course although collectively we pay 50% of our income, close to 40% (or is it 47%?) doesn’t pay income taxes and on average we’re paying 15% of what we’re spending on consumption taxes (which are flat taxes). That would mean that approximately 60% of Canadian workers pay all of Canada's income taxes, their tax freedom day is not In June but probably closer to August. Would you like to be ‘rich’ and work 8 months per year for the government? Is this a progressive tax system or are we already living in a socialist society?