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J.C.
HOOD INVESTMENT COUNSEL INC. |
Hello Everyone:
Oils: I always enjoy being invited on BNN and in this instance it was on Dec. 30th, so there was an opportunity for this year’s prognostications. Of course, when I was initially invited, oils had not stumbled into the apocalypse with oil analysts chiming ‘bring out your dead!’ Certainly, Alberta will feel the pain of $40-50 oil with layoffs, less cap-ex and projects shutting down, and investors will share in grim asset write downs and chopped dividends resulting in lower share prices.
From a broader perspective however, circumstances are not quite as mean for the rest of the country as best evidenced by smiling faces at the gas pump. Let’s see; oil prices are at 5 year lows; the U.S. is awash in oil and far less dependent on finicky/malevolent suppliers; business/transportation companies are relishing the energy savings; interest rates, while marshalling to rise, are unlikely to rise quickly and consumers have an extra $25/week in cash to spend. What s not to like? I read yesterday that even Jeff Rubin, oil super bull and former CIBC economist, who 5 years ago called for $225/bbl oil had thrown in the towel!
Dr. Jack Mintz, a tax specialist/economist and Chair at the School of Public Policy in Alberta, describes this shattering of oil prices as really just a return to normal pricing. Through the early 2000s, growth in China and emerging markets pushed the price to $145 but declined quickly after the recession to about $87 in 2014. Further, with slowing demand, countries such as Libya and Iraq are resuming production, thereby increasing supply. Nonetheless, Mintz estimates that in 2015, oil will be in the $65 range. He actually welcomes this change because it will force oil producers to ‘improve efficiencies and cut costs.’ He estimates with lower energy costs, Canadian goods and services will ‘pick up a quarter of the negative effect of oil prices on Canada’s GDP.’ Interestingly, the sale of Canadian-built cars has reached record levels not seen since 2001 despite the best efforts of Unifor (formerly CAW) and feckless auto management to destroy the industry in Oshawa as they did in Detroit. Combined with a lower $CDN much of this ‘oil shock’ could be mitigated. Even Conrad Black was effusive about declining oil prices: ‘This has been a $750billion tax cut for Western Europe, the Americans, Japan and Australia.’
There is, of course, another intriguing thread to this price shock that I described in last month’s newsletter; that this is less about economics than geopolitics. This crisis was precipitated because the Saudis would not cut back production, therefore allowing the price to collapse. This however fits rather neatly with their desire to crush the Shiite Iranians who need oil at $130/bbl to service their debt and for the Americans to shove that little KGB thug’s, Putin, nose into it and undermine his belligerence. In other words, this crisis could end as quickly, well not quite, as it began.
U.S. Markets. As you know, I always watch Sam Stovall of S&P Portfolios whenever he appears on BNN or CNBC. Sam brings a statistical/historical narrative to market forecasts. While Sam is quite concerned about a temporary pullback, even more so as markets climb to higher highs, he nonetheless sees the S&P500, currently 2019 to reach 2250 by year end. He expects enhanced performance from the tech and health care sectors . We should not lose sight of the fact that the U.S. recovery is real!
Your Portfolios: For portfolios that still have further room for U.S. assets, we will be adding some healthcare and tech ETFs including FHH/FXH from First Trust and tech XLK from Vanguard. We sold our positions in VGK in most accounts with a small profit but I was very concerned about the EURO and VGK is not hedged against its decline. I still like Europe as an asset class, but I want a hedged position. In non-registered accounts, I sold the CDN energy XEG not just because of lower oil prices but because of an embedded taxable gain that I wanted to avoid by selling before year end. The XEG were replaced with a similar ZEO but left in registered accounts.
Thank you for your business and a very Happy Healthy and Prosperous New Year!
John
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