Monday, December 29, 2014

Looking into 2015 – BTW expect my opinion to change as early as tomorrow


So this is the time of the year when we’re trying to see what the next 12 months may have in store. The key word being MAY! Let's start with today’s situation and then extrapolate from there.
Right now the U.S. economy is growing at a good clip. In fact an estimate for inflation adjusted economic growth for the 3rd quarter of 2014 was an incredible 5%. What do these guys think? This is not China!  The economic growth is created by a super low interest rate environment, increased consumer confidence, more jobs and cheap commodities including lately cheap energy. 
Really, what more do you want as a manufacturer or service provider.  These things put an economy like the U.S. on steroids and Europe is not that far behind. When the U.S. and Europe do well, guess what, the Chinese will see their exports take off again. All these guys love cheap energy.  No wonder the S&P 500 is up a whopping 23% for the year.  ETFs anyone?  You bet!
Canada and Australia are classic commodity supplying economies and with commodity prices in the K.O. corner of the economic rink, these resource based economies are not so hot right now.  Yet, the TSX60 (Canada’s 60 largest publicly traded companies) returned an impressive 12.4%.  Many of these 60 companies are not resource companies but insurance companies, banks, hi-tech, and real estate companies. On top of that, resource companies in the TSX60 are large enough that they are somewhat diversified either in hydrocarbon style (gas, bitumen, conventional light oil, tight sand-light oil; unconventional gas SAGD oil, etc.) or they are diversified through an upstream and downstream portfolio. 

It are especially the mid and small sized resource companies that have been hardest hit. Also, royalty income and land sale proceeds as well as corporate and income taxes for provincial and national governments are likely to suffer.  Maybe this time Canadians will learn how much they benefit from the resources industry that so many of them seem to hate.

Apart from the U.S. and, to some degree, Canada not many economies in this world are doing very well. Countries like Russia, Venezuela and Argentina are in deep ‘doodoo’. So are Middle Eastern countries with their never ending infighting. They blame the Jews, the West, the large multinationals, the infidels, anyone but themselves for their misery.  Now, finally, after none seem left who can be blamed, they’re fighting themselves over religious or tribal  differences.
It is the North American energy revolution that has finally lifted the veil of the causes for Middle Eastern fighting. Good, maybe they can finally stop blaming the stereotypical white male for this evil in the world. Plenty left to blame the stereotype for anyway.
As far as commodities is concerned, the fall in pricing is blamed on oversupply.  Personally, I think that a rising U.S. dollar, the currency in which many commodities are being priced, is at least in part to blame.  With western economies finally on the mend and with exporting economies probably soon to follow, I think that demand for raw materials and energy will pick up pretty soon. Also, the current energy prices are excessively cheap – in several cases below the cost of production.  Part may be due to speculative forecasts made by companies such as Goldman Sachs who seem to confuse their own interest with those of their clients. How can you trade for your own accounts while  providing advice to your clients against whom you often trade?

So, for 2015 I foresee continuous improvement in economic growth with slightly higher interest rates in the latter part of that year. 2016 is probably when we’ll see more tightening in the U.S. to more normal levels. With Europe and Asia improving, the U.S. dollar may stop its upwards trajectory while other currencies strengthen a bit. With falling supplies and increased demand, energy prices are likely to improve say up to $75 dollars per barrel of oil and close to $4.00 per mcf for gas (in North America). That may not sound like a lot, but that is close to a 50% increase for oil from current levels and an 25% increase for the gas price. Hmmm…. How would oil and gas companies benefit from such a turn-around? 
Pipeline companies are not as much affected by oil prices, yet their share prices have dropped significantly as well while the shortage of transportation capacity remains an environmental, economic and safety issue.  As such, right now, you can buy pipelines cheaply, especially on further weakness. They are likely the first to benefit from stabilizing and improved oil and gas prices. Other commodities such as copper, silver, zinc, etcetera  will likely benefit as well from the improving world economy.
Yes, there is a lot of rosiness for investors to look forward to as we leave the depressed state of the Great Recession farther and farther behind.  But with that, so will our memories fade of the dangers of the stock market and investors may throw their caution out of the window and grow outright euphoric right before the next market crash which is sure to come – not IF but WHEN?
I have become more and more a proponent of international investing.  First the U.S. which likely will have yet another good stock market year – 10 to 15% appreciation?  But if so, brace yourself for more volatility and a crash in 2016 or 17. This is becoming a very long bull run.  Canada and Europe will do well too and the Chinese stock market is likely to extend the gains of this year into next – another 30%?

But if this scenario becomes reality, do not be afraid to take money of the table. Use a stop loss to sell under performers and sell highflyers with prices that exceed their normal valuations by a wide margin.  You will have to balance the need to let profits run with risk management because the higher the market flies, the riskier it becomes.  

My allocations for 2015 for new investments are Canada 30%; U.S. 30%; Europa 30% and 10% in emerging economies such as China, India and Brasil. Also build your cash holdings so that you have around 15% cash near the end of 2015. Ohh, by the way – this forecast may change starting tomorrow

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