Saturday, February 27, 2016

The Bull market in Gold started mid 2013

What planet do you live on, a bull market in Gold? Don’t you know that we are in a commodities bear market? Maybe we’re near the bottom but a bull market that started in June 2013?
Yes, dear reader, the gold bear market started in late 2011 when gold peaked and it bottomed in mid-2013!  I am not talking about gold mining companies but about the bullion. This is one of the best examples showing that asset valuation is in the eye of the beholder and that, as pointed out in previous posts, you should not compare your total portfolio performance with that of the TSX or the Dow. That is comparing apples with oranges.
So I will state it a bit more specific: Gold is in a bull market since mid-2013 for Canadian investors like you and me and recently this bull market has accelerated. It bottomed around Cdn $ 1250 and today it is, sit tight, at Cdn $ 1703. Oops that is a nearly 36% gain in 3 years and the party is going to get hotter! So should you take profits? Probably not, because the precious metal has barely started its upwards momentum. Remember you let your winners run and sell your losers (when triggered by a 25% or so price loss from its high).
So I live in the Canadian universe and we should always look from our perspective, in this case in Canadian dollar terms. That also means that when investing in the TSX over the last 3 to 5 years you feel like a moron but if you’d bought U.S. stocks you may think you’re a genius. Probably even last year your holdings of S&P500 ETFs in Canadian dollar terms still made money.  Over the long term, currency effects seem to even out. But short term, say 3 to 5 years, you may be able to take advantage of broad currency swings. Not by trading them but by trying to divine their general trend.

Right now, I think the U.S. dollar is peaking and, thus when possible, hedge your U.S. investments for a decline in U.S. dollar valuation. The U.S. economy is doing reasonably well with GDP growth around 2.5 to 3.5% and low unemployment but I don’t think they will raise their central bank interest rates (Fed Funds rate) a lot. Compared to the rest of the world, the U.S. economy is peaking and so, in my view, is the U.S. dollar. Probably the rest of world will gradually catch up and thus their currencies will catch up.
Also, interest rates are turning the corner with governments starting to lose their fears of incurring budget deficits. Instead many governments will probably increase their debt over the coming decade to 'stimulate' their economies and with that, interest rates and inflation will rise. This combined with the millennium generation starting to have families spells the end of low interest. Also, don’t forget the enormous losses corporate bond investors will incur because of debt funded, nearly wasteful, over-investment in growth. In particular debt related to oil and other commodities are likely to collapse - due to past low interest rates and the deluded expectation of 'never ending' high Chinese growth rates. In the future, investors will think twice to chase higher yield without scrutiny - they will become more risk averse and demand higher interest rates.

During the last couple of years Chinese growth has slowed and today it is paying the price and trying to convert to a more service oriented market depending less on exports. In the meantime, all kinds of resource producing companies ranging from potash to gold, copper and oil have created enormous overcapacity that will have to be worked off. That is why Canada’s mining industry has suffered so horribly over recent years, not because of low gold prices which, in terms of Canadian dollars bottomed and gradually improved since 2013 but because of over-expansion regardless of price. A similar process is going on with oil right now.You may think that the Canadian oil industry is currently suffering, but because of their currency (costs in U.S. dollars rather than Canadian dollars) many local U.S. oil and gas producers are suffering worse.

 So, if you had the stomach to buy gold over the last five years, you bought probably low. The same for silver. That is also why companies like gold streamer Franco Nevada never crashed over the last 4 years or so but now it is really taking off. Silver Wheaton, in spite of its tax dispute with Revenue Canada, is probably not far behind. So if you’re wondering whether you missed the boat, I would suggest that there is still plenty of time left for this bull market to run, especially for rightsized medium to large gold miners. So, here we thought the world is coming to an end and then there is, yet again, opportunity. Enjoy the ride.
Sourced from YCharts,com. Click in image for more detail.

Sunday, February 21, 2016

Climate Change – mankind’s hubris

You have heard me often complain on activists and overzealous environmentalists who attempt to save the planet from climate change or global warming. It is not that I don’t care about the environment or that I am in the pocket of BIG Oil. But I think our focus on CO2 is misdirected
As far as I am concerned there is no BIG OIL that controls how we think, BIG OIL that suppresses more energy efficient, or  fossil fuel independent methods of propulsion. Yes, there are the ‘Seven Sisters’ or what they have evolved into. But really, the majority of oil producing countries have a national oil industry controlled by their national governments (whether they are dictatorships or democratically elected). In the West, in particular in North America, anyone can start an oil company and there are literally hundreds of these companies if not thousands. Last time I looked Calgary counted around 400 hundred companies ranging in size from a few barrels to close to half a million of barrels per day (that is barrels equivalent – i.e. including their natural gas production). So to think that there are six of seven humongous companies that huddle together to control 92 million barrels of oil and gas per day, as well as discoveries in propulsion technology is kind of simplistic.
I have to disclose, I love hiking or being in the mountains and I also love to travel the world to visit beautiful spots. My passion is geology (not meteorology), I love to study how our earth was formed – especially sediments rather than fire breathing volcanoes although they are awesome as well. I also work as a geologist and that means I work in the oil industry. Other geologists work in the mining industry and a few work for government in a research or regulatory capacity. Does that mean that I am evil? That I am corrupt? If you walk through Calgary these days, you see many geologists walking around without work; not because they spoke up against climate change or on the other side defended climate change concepts. They were laid off for pure economic reasons – the fall in oil prices and elsewhere the fall of other commodity prices. Those geologists are not in love with oil companies nor are they controlled by the sinister BIG OIL syndicate.
Many petroleum geologists and reservoir engineers work with reservoir simulation to try to forecasts reservoir performance. To do that geologists create as detailed a reservoir rock description as they can and reservoir engineers try using fluid mechanical principals to describe the fluid flow (oil, gas and water) through that reservoir. First they try to recreate past production that may go back since the reservoir was discovered; sometimes decades ago. Trying to calibrate the model's calculated production with actual past production is called ‘history matching’ and requires often that the reservoir engineer tweaks many parameters and assumptions. Once the history is matched the same parameters and assumptions are extrapolated into the future sometimes 5 to 25 years forward. In spite of having simulated numerous reservoirs all over the world for many years, simulations provide often only rough forecasts. Even worse, the forecasts are very dependent on the quality of the data entered and yet worse on the parameter adjustments by the reservoir engineer.  These adjustments (euphemistically called ‘tweaking’) can vary greatly from engineer to engineer even when there is an abundance of data. The ‘solution’ is not unique!  The same data set with different geologist/engineer teams can throw off completely different conclusions.  Simulations, like so many other technical evaluations in the oil and gas industry can only indicate what next operational step makes most sense. 
If a matter as ‘simple’ as a tiny oil reservoir is so difficult to forecast, how can we expect to state with any accuracy that with the current CO2 atmospheric content something as complex as earth’ climate is going to be 1.5 degrees Celsius warmer in 50 years?  Even if we understand to some degree many mechanisms that play a role in creating a climate there are numerous others we don’t understand at all – we probably don’t even know of their existence. How come we still cannot forecast with any degree of accuracy stock market performance for the next year or month, why do we believe we can forecast climate when many of its aspects we are only beginning to understand?
Geologists in the 1970s were afraid for a new ice age; Patrick Moore, founder and former executive of Green Peace left that organization because of his disgust for the organization’s change from science driven to politically driven. In a recent speech, Patrick – a scientist with a PhD in ecology – claims that on a geological time scale basis current CO2 content is far too low! CO2 is not a toxic gas but a basic constituent of life on earth. According to Patrick, if CO2 remains at the current LOW levels (as measured over geologic time not just a few decades) life on earth will be destroyed within 2 million years or so.  So who is right, the climate modelers or Patrick?  Who is right geology/engineer team1 or team2?
What is climate change or global warming really about?  It is about change!  Because climate always changes and climate is related to sea-level changes and the amount of sea that covers the earth (or better the availability of land suitable for human occupancy). If sea level rises a meter (it did rise many tens of meters since the last ice age – no kidding) what would happen to densely populated areas positioned near sea-level? They would likely flood! Countries like the Netherlands, Pakistan, Egypt’s Nile delta with Cairo, New Orleans.  What about land suitable for agriculture? You see, concepts like global warming and climate change are speaking to our fears. Homo Sapiens is a conservative creature that is afraid of change and is afraid of having to adapt to new conditions. What are the ramifications of sea-level rising in the Indus Valley? Past flooding of the Indus has already destroyed entire civilizations (e.g. the Harappan Civilization) and now we may have to deal with more sea-level changes.  Rather than adapting to nature man is arrogant and thinks it can control climate with CO2 being the boogey man. Everyone springs on the band wagon! The religion of global warming or climate change has been born and currently florishes. And we mankind think that we can stop it if only we control our CO2 emissions! Dogma and a need for easy answers are the basis of our hate for CO2. We should rather focus on living in a sustainable world that continuously changes.
Geologists have mapped out the times of sea-level change and climate going back billions of years – I am not kidding. It shows the general relationship between climate (with cold and warm periods) versus sea-level. It is not precise – no geologist would claim so. We think in millions of years not decades. The occurrence of ice caps on this planet is not common. It not only depends on earth’s temperature but also on oceanic currents and related to that on the configuration of continents. The Burgess Shale Geoscience foundation has published a book titled “Climate Change and Landscape in the Canadian Rocky Mountains”. It is an easy read for most people. The figure below is scanned from this book and it shows the relation between earth’s temperature (or climate) and sea-level.  Mind you, geologists know that our atmosphere has also evolved over time (eras) strongly influenced by plant life that added oxygen to our atmosphere. Patrick Moore in his speech http://www.thegwpf.org/patrick-moore-should-we-celebrate-carbon-dioxide/ tells more about the role of CO2 and O2 and how it relates to the evolution of the atmosphere.
Yes, we should be concerned to keep our backyard, the planet earth, clean and sustainable but to think that we can control this planet and its evolution is just plain human hubris. Certainly when done in terms of climate hysteria. If Patrick Moore is right (I really don’t know) maybe, we’ll thank today’s China for its CO2 emissions that saved life from extinction 2 million years in the future. Now would that not be ironic!


Click fpr details - figure from Climate and Landscape published by 'The Burgess Shale Geoscience Foundation'

Saturday, February 20, 2016

Dead at 83 or 200?

Yes, I did that dreaded thing, the annual checkup of my biological engine. My mechanic, a highly qualified medical doctor spouted scary statistics and bullied me in taking even more pills. The Pharma industry must love this guy. My drug bill went up from $20 per month to nearly double that. Aah, that’s why we have insurance. My dentist noticed two ‘flaking’ crowns to be replaced – oops another $1600. Yes, I love my medical insurance… really? Maybe more about that in future posts. Back to the pill-monger.
So he says that I have an 18% chance not to make the next decade but if I take the pills he recommends then I have only a 10% chance to be dead. Wow, that doesn’t sound good. I went home quite depressed.  Then common sense hit me. First off all, there are millions of baby boomers at the tender age of 63 (that’s mine) and all those peers get those increased medical doses from their respective life-mechanics.  Wow! Invest in pharma! That was my first thought.  Next I thought about car leases! Yes, you are supposed to follow the maintenance recommendations of your car mechanics including car engine flushes every three months and God may know what else. No wonder garages recommend that rather than 6-month oil changes. After all, the profit margins on selling new cars are near all-time lows.  Garages make their mula from car maintenance and the sale of ‘pre-owned vehicles’. Back to my life expectancy.
So, if I and my other 63-year-old mates are expected to be dead (on average) by 83 that means that at least 50% of us are dead in 20 years.  So based on that I must be dead by 75 with a probability of close to 20 to 25%. I went on-line and there are life expectancy calculators.  I lead a pretty healthy life watching my sugars, biking to work in summer; swimming or skiing twice a week in winter. Modest use of alcohol and eating a lot of organic stuff. So what does the stupid on-line calculator tell me? Yep, I have a 19% chance of being dead in a decade no matter that my fortune teller told me that I won’t expire before reaching the ripe age 93!  The calculator came courtesy of the Mao clinic although I have no idea what China’s communist leadership has to do with health. I would nearly think that their attention leads to a much lower life expectancy!
Next, I wondered what are these numbers based on?  Are they based on the male life expectancy in Europe or the entire world?  Or are they based on overweight Texans? J  Are they based on the average Canadian jog addict? Next thing is that we are looking at a glass that may either be half full or half empty depending on one’s perception of life. One nearly suspects that medical doctors have also a degree in the dismal sciences! So, I probably have an 80 to 90% chance of making it to the next decade and at least a 60% chance of making it past 90. My Dad is past 90 thus I probably also have some longevity genes in me. That improves my odds!  So by how much are those stupid pills really increasing my life expectancy if any? And for that I’ll be paying $40 per month for the rest of my life while I could have an Economist subscription for what, $10(?) per month until perpetuity?  This doesn’t even take into account that we’re technically immortal since progress in medical science apparently increases our life expectancy by yet another year, every year!  Hmmm…
I think our physicians are kind of like our health coach and many are sincere in their mission to keep us alive longer. But using these shaky life expectancy statistics to scare us into yet another addicting drug is not the way to go. Here these people lose a lot of credibility. Neither adding to the credibility is their believe in average body conditions.  I may be a bit over my ideal weight (I think 10 to 15 pounds) due to my sedentary office career but not compared to age peers (yes, I am a bit conceded). However, in appearance I am not overweight. Yet based on my length and weight I was classified to be on the edge of obese. Yes, a person of light build who was always skinny, say a marathon runner of my length, may be considered obese at my weight.  Me, though, a competitive swimmer still active and broad shouldered and of quite different build than the runner is not obese.  That generalization of ‘being obese’ would make nearly every one of my age obese – no wonder all the dire warnings of the WHO.  We all have to meet the average standards of weight, sugar level; cholesterol etc. even when controversial amongst physicians themselves. Please, medical profession, in this age of computers and fine dress shirts customized based on cell phone measurements (did you watch Shark Tank lately?) could you be a bit more specific rather than scaring the crap out of us grey masses?

Diversification and bargain hunting

Last week we talked a bit about what to do in a bear market. Also, remember that I have been concerned the last couple of years about the length of this bull market and recommended building cash. People like Warren Buffett seem always to have plenty of cash and employ some of it when they see truly good investment opportunities. If there are, in their opinion, no good buys, they prefer to sit on their hands. Warren calls it “Benign neglect, bothering on sloth”. Really, “it pays to be informed” but that doesn’t mean that you must act every week or month.
You may say that having lots of cash on hand makes you an underperformer to the markets.  But this is comparing apples and oranges. For example, my portfolio is nearly 50% real estate – most in Calgary – so how does my portfolio performance compare to a market index and should I compare with the TSX or with the S&P500.  You see how ridiculous it is to compare your performance with one specific asset class in one particular region or continent? So you underperform the TSX because in 2014 it went up say 11% and you held 20% cash and thus even if your portfolio was 80% TSX stocks your portfolio would have underperformed. Assuming you earned nothing on cash – your performance would have been ‘only’ 11x0.8 + 0.2x0= 8.8%    Last year the TSX was down, what 9%?  So then, with 20% cash your performance would have been 0.8x (-9) = -7.2% Hè! Your portfolio outperformed the TSX in 2015 by 1.8%!  See how ridiculous it is to compare your portfolio performance with that of the TSX?  After all, your portfolio is a lot more diversified than just the stocks of the TSX.
So, my stock holdings are diversified over Canada, the U.S., some in Europe and a tiny bit in Asia. Then I own Calgary real estate which was flat last year and may decline this year.  Because of Calgary’s dependency on oil, I lowered my investments in oil stocks over the last number of years and last year I sold off nearly all – some at large losses. But in my quest to balance my portfolio I also cashed in on some large gains (e.g. from Brookfield) to neutralize my capital gains taxes (BTW I own Brookfield and related investments for over 20 years). I also started to diversify into gold in recent years and that is paying off as well right now. Although it still is far less than 5% of my stock portfolio, let be 10% of my overall portfolio as some gold bugs advise. Not that I do everything perfect but my overall portfolio was virtually unchanged in 2015. Definitely not booming but then I am still learning after more than 30 years investing. In fact, I am still learning every day as a geologist after doing that for nearly 45 years!  Yes, it is currently not a lot of fun working in Calgary’s oil patch but it is definitely interesting.
I digress. First of all, you may hear portfolio managers of BNN stating: “I am always fully invested in the market because that is what my clients hire me for”. To some degree this is true – because the statement comes from a manager of a fund that invests in North American stocks and his job is to outperform the S&P or TSX!  Fund managers who are investing in resources, may take a completely different take and may say that she is 70% in cash today because this sector is very cyclical and if she doesn’t take profits at the top of the resource cycle all gains will be wiped out! So when you listen to their advice better know where they are coming from when trying to emulate their advice.  I follow a lot of investment newsletters and one of the most difficult things to deal with are the conflicting views of these letters.  One letter is for day traders and another is for retirees – two entirely different worlds and their ideas are based on these different worlds. You the individual investor will have to describe your own world which may be an amalgam of all those different views you read about. So, what for you may be a good performance may compare to others as quite mediocre but that is like comparing apples and oranges.  So track your own performance and look at your portfolio’s different components and try to continuously improve without getting an inferiority complex when you hear the ‘performance’ of the gurus who probably only mention the returns of the best fund they manage. ‘See behind the curtain’ is a favorite saying by Don Campbell, one of Canada’s most popular real estate experts. That is here a very appropriate statement.
So, what about the diversification of my current stock and bond portfolio – it is said that a diversified portfolio should have no more invested than 5% in one single stock. So does that mean that one only holds 20 stocks?  Far from it, using my own portfolio and how it has evolved over the years, my top 10 holds range from 3 to 10% with 10% being cash and the next runner up (7%) in money market funds.  The remaining holdings range from 3 to 7% and I have been reducing the ones above 5% lately adding to cash.  Cash is also coming from dividends that I typically do not reinvest automatically but accumulate for new or increased investment positions. The runner up 10 holdings (the top 11 to 20 ranked holdings) range in size from 1.8 to 3% (average is 2.3%). These are holdings that mostly have proven their performance and to whom I may add when their prices are right until they become part of the top 10. Then I have another 10 stocks (holdings ranked 21 to 30 which comprise between 0.8 and 1.8%, averaging 1.2% of the total stock and bond portfolio.  These are a combination of misfired investments and up-and-coming (i.e. recent) investments.  The misfired investments have not yet triggered their stop loss sale or I decided to hold on any way (not always wise). The most important of these top 21 to 30 holdings are the new investments.  So when I think a stock is good I do try not to buy everything at once – scaled buying is the official term – but I still want to make sure that there is enough that the position has an impact on overall portfolio performance.  
For example, right now I think we’re at the bottom of various commodity cycles and there is also a general stock market correction going on.  So, I feel it may be the time to buy energy stocks. Last December I bought a bit of Crescent Point (200 shares) and was planning to buy more later on – a tiny balloon in the oil storm. Within a month the stock lost 8% of its value and I felt that I had very little tolerance for even losing 8%.  I sold before it triggered the 25% stop loss.  This week, I became more and more convinced that we have reached the bottom of the oil cycle, CNRL has quite a solid balance sheet and I talked with oil patch workers in Calgary about ‘how business is going’ – not insider information but just general impressions including my own.  Calgary lies in shambles, there is blood in the street in terms of layoffs and a fair number of companies are bankrupt or in the ‘zombie stage’.  Their cash flow is barely enough to service their debt and pay for their G&A.  There is no money for repairing broken down wells; many pools produce at negative ‘net back’ (well revenue minus royalties minus operating costs and transportation). So there is no new drilling and pools get shut in. Talking about Deadman walking!  The only reason many of these companies are still functioning is because somebody has to manage the creditor’s oil and gas properties and those creditors don’t have the expertise. So what’s the use of calling the loans? Yes this is the time of blood in the streets – can things get worse?  Yes but… by how much?  The chance of upside is much better. So its time to nibble at the stocks of the best companies. I bought a bit of CNRL and probably will buy more during refinery maintenance season when we’ll likely get some more price scares and opportunity to buy cheaper. I have put a maximum limit on my total oil and gas holdings at 5% (for now) and I’ll be filling those positions over the next few months. I expect those stocks to have the potential to double or even triple over the coming 3 to 5 years.  So 5% could grow to 15% just through appreciation (assuming the rest of the portfolio does nothing).  I consider that meaningful.  

This is what I call an appropriate approach for my diversified portfolio.  The TSX index has typically 25-30% energy stocks – so being an oil industry worker, 15% of portfolio value seems to me an acceptable proportion. We’ll see when we get there. In the meantime, I wish you good bargain hunting.

Please, Note. This blog does not make specific stock recommendations. This post just tells how I try to manage my stuff.

Monday, February 15, 2016

Investing in Bull and Bear markets

In 2010, I posted a brilliant essay on the future of natural gas backed up by research from Chesapeake Energy.  Chesapeake’s stock has fallen from a $60 plus in early 2008 to $3.50 lately. These guys were considered geniuses – what do people call those same guys today I wonder? 
Investors gather assets that throw off cash flow that allows them to pursuit the lifestyle they want and make their dreams reality. But life is so uncertain and we always seem to believe fairytales or research that just a few years later appear to have missed the boat completely. In fact, the only forecast that seems to be accurate are the most recent forecasts – until next week! Does that mean we’re all should become traders?  NO! Heaven forbid!
This blog has always believed in buying assets for a good price; in having cash for ‘bad times’ so that we are not forced to sell at depressed prices. Some leverage may be good – but define your safety margins.  We should be happy that we’re not like those poor sods that manage public corporations! Those guys are not there to run businesses but to drive stock prices higher and higher while trying to cash in their stock options.  If their companies don’t earn enough during booms using maximum leverage and when their companies have too much cash, the next group of vulture investors in waiting will jump on their backs and kick them out of their jobs. During the following downturn those same vultures will accuse the companies that they have too much debt… yeah duuh… and kick the old managers out anyway together with all the near bankrupted shareholders.  We call this laughable game ‘optimizing shareholder value’ rather than running a good business.
We hear all those pundits talking about diversifying amongst asset classes but rarely do they mean diversifying into real estate or gold or collectibles. No all they do is selling you stocks, preferably those IPO’d by their own brokerage firms. Please, do not fall for this noise!  Today China is bad; tomorrow it is the country that owns the 21st century! Invest in Emerging markets you stupid… oops, get out of emerging markets. Invest in BRICS… no in FANG… No run! The world is coming to an end.
Let’s look at investing and diversification in a more down to earth way. Don’t look at countries – today’s hero is tomorrow’s credit crisis!  Look at ASSETS that throw off cash… preferably in the form of rent, dividend, interest or if all else fails, capital gains. Really, where does this cash ultimately come from?  EARNINGS or better FREE CASH FLOW!  In the end, rental income is the profit from your rental property. Dividends are from earnings; ultimately even capital gains stem from earnings growth - either real or engineered from stock buybacks. There are also capital gains from speculation – those are the earnings that smelt like snow in the sun – the casino earnings you may say.
So if we talk diversifying is that stocks versus bonds?  Diversification amongst countries?  I have come to the conclusion that all that is poppycock. We should not see us as investors in countries but rather investors in cash flow producing assets all over the world. Now, accounting standards vary all over our globe; thus stick to investing in assets with reliable accounting. Yes, it is not always that advisable to invest in China or in India – too much sh..t is hidden from the investor’s view. If you think property rights are scary in North America or Western Europe, what about a nice dacha in Siberia?  Technology maybe where the future of endless growth is, but what about today’s earnings?
Basically, when we talk about assets that throw of cash flow, we do not care about 60/40 stocks versus fixed income. We only care about income producing assets such as:
1.       Real Estate
2.       Bonds
3.       Oil and gas stocks
4.       U.S. blue chips (Microsoft; GE; Hersey)
5.       REITS
6.       Banks
7.       Gold miners
8.       Pharmaceuticals
9.       Etc.
Gold is kind of unique in that it does not throws off cash. Instead, it is the ultimate currency hedge.  It also seems to go up with market volatility (safe haven); deflation (holding gold is better than negative interest rates) and significant inflation. See gold as your preserver of purchasing power.  Use it as an alternative to cash.  There is a big difference between cash and companies that print money or between gold and companies that produce money. So don’t mix up owning gold with owning gold miners nor for that matter with companies that finance gold and other resource production.
We diversify our assets classes and realize that real estate in Vancouver is different than real estate in Calgary. There is a difference in active and passive investing. So you can own passive real estate in REITS or rental pools (unless you sit on their board), Self-managed real estate such as a small apartment that you rent out. We diversify by investing in Canadian Banks; or U.S. Banks; or European Banks. Another asset class may Canadian Oil and Gas or International Oil & Gas. Pharmacy; Consumer Staples. Don’t worry about whether you’re dealing with stocks vs bonds – look at your overall portfolio and see in what industries you’re active and yes distinguish between active and passive management. 
With active management you are in control. You do the work! You determine the degree of leverage you may want to use it in the form of a student loan when investing in a career or line of credit when investing in a rental apartment unit. Because you are in control of the asset you can afford to own it at a larger proportion of your net worth than when dealing with passive investments.  And then there is the grey area, your stock savings plan or options in the company that you may be employed. All asset classes have different characteristics.
Suppose you invest in a bank – it’s performance often reflects the economy – the Canadian economy or in case of TD, the North American economy. In case of the Bank of Nova Scotia it may be better aligned with the Canadian economy AND with that of South America.  Wells Fargo is more aligned with the U.S. economy while others such as City Bank or Goldman Sachs are reflective of the U.S. economy with a heavy weighting on the rest of the world. But all are stable companies, heavily regulated and when in trouble they’re often bailed out by their respective governments.  Their leverage is typically quite high considering that they use money that is lend to them by depositors or by preferred shareholders or by investors in corporate debt etc. They live of the margin between their cost of capital and the yield of their investments: corporate loans; mortgages, or the government debt they often invest in. They also make money of the accounting and insurance services they provide their clients.  When investing in banks you often do so on a buy and hold basis and with a large proportion of the profits coming from dividends and dividend growth.  Bank dividends often reflect the highest quality of dividends available amongst publicly traded companies.
On the other side of the spectrum are oil and gas companies and other resource producers.  Quite different! These companies make money by producing fossil fuels (resources) from their assets at a price higher than their operating costs and finding costs. Today, many of them cannot expand their production, although they can still extract money from their existing wells at a price that is higher than their operating costs. But those existing wells decline in production rate over time; between 20 to 80% percent per year. So really, virtual no oil company can make money these days. For oil companies to prosper they need cash flow from their operations (oil price minus cost of operations) from which they pay their staff and offices (G&A with should be between 17-25% of EBITDA) and their interest (typically 2-10% of EBITDA for the best companies).  So if 35% of EBITDA goes to interest and G&A, the remainder can be used for capital expenditures (land; drilling acquisitions) and income taxes as well dividends and stock buy backs. Right now, many oil companies have G&A plus interest nearly exceeding their EBITDA and that is why they cannot drill without incurring even more debt and who is crazy enough to lent them money right now? 
A lot depends on the price of oil. The intrinsic value of that oil is probably around $50 U.S. This represents the price at which companies can cover their all-in-costs plus profit margins which typically averages 8-15% (not a fat pot when compared to high tech industry margins - sometimes 40% and higher). You may say that countries such as Saudi Arabia can beat that intrinsic value hands-down but that is not true.  You see, comparing a publicly traded company with a state owned (or better dictator owned) company is kind of tricky. Because many of those’ countries need their companies’ profits to control their populations. So if a country like Saudi Arabia is seeing its treasury decline and even considers selling part of Aramco of in an IPO they produce below the intrinsic value of oil as well.
So, really the current market value of oil is strictly based on the price war tactics of over production and it does not reflect the worldwide intrinsic value of oil. If the price war mongers Russia and the other OPEC countries would reduce their output by 1-2 million barrels per day (which would be by less than the famously quoted 5%) oil prices would shoot up to $80 per barrel or higher in no time. This is not a price war between Saudi Arabia and North American producers!  We’re just collateral damage!  Because the moment oil prices recover our production would go up and much of the treasure money lost by the price war mongers would never be recovered. No this price war is about market share in the rest of the world (Asia, Europe and part of South America). And the price war mongers are not only in a price war they are at physical war amongst themselves as well in Syria, Yemen and where ever else they can fight. The question is when do they give up their price war before going bankrupt?  The markets suspect they are close to maximum pain and that is why every time there is a rumor about production cuts the oil price shoots up by up to 10% in a single day.   We’re near a bottom in the North American market. It is time to accumulate some oil and gas upon oil price weakness over the coming months. Yes, everyone does know about buy low and sell high; but do we have the guts to apply that?  I don’t know but if you have the nerve to buy now and oil returns to its ‘intrinsic value’ you will do well over the coming years.
There is a lot of worry about oil and gas being on the way out.  Yes, this is the green dream (for now) but the key word is ‘dream’; we’re years away from low fossil fuel consumption but the masses believe Obama. In the meantime, people buy bigger cars again and as Jeff Rubin once aptly noticed when car efficiency and prices are down, oil and gas consumption increases. So don’t hold your breath about the disappearing oil and gas industry.  Look at coal! It is still with us despite all the consumer disdain and so called decades of decline!
World economy growth is very dependent on demographics! China’s population is greying rapidly thanks to the past ‘One-Child’ policy. North America’s population is young and the Millennium generation, comparable in size to the Baby boomers, is about to start families. Yes, it may have been delayed by the financial crisis which kind of resulted from the start of Baby boom retirement. The fallacy of demographics is the assumption that each generation follows the same habits as their parents. But Baby boomers behave different than Millenniums, which marry later (in their late twenties or early thirties) and which stayed home with Mon and Dad much longer than previous generations.  But just like Baby boomers they will retire later in life if ever.  And it is not only about generations; it is also about emigration and fugitives from war. In the short term these people may be a drag on the Western societies but over the longer term they will rejuvenate the population. So, where do these people go? To China or India? Hell no! They’re on their way to Europe and North America.  That is where the future lies and that is where innovation blossoms. I foresee that these years of muted economic growth will disappear soon and that investing will become very profitable of the next decade.  I don’t think emerging markets will disappear from investment portfolio’s but just like the Japan of the 1970, their days of explosive growth are over.  So buy today to reap the profits tomorrow! 

We had low growth years from 2008 until today – nearly a decade – growth will be back and probably soon. Nobody can time market turn arounds; first we need our portfolios to survive and for that we need cash flow – just like the oil companies and when too heavily indebted we won’t be able to invest and prosper of the coming decade (or two?). So aim for cash flow by reducing interest payments and increase dividend and rental income. Stabilize and protect your cash by keeping it in gold (or in the Canadian dollar because the U.S. dollar is not far from peaking barring stupidities by the current Liberal government).  That is my road map for investing in the current Bear market and the Bull to come: conserve or improve cash flow and buy on market weakness solid cash flow producing assets at dirt cheap prices.