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A View From Here February 2015

February 1, 2015 • Print This Article

A View From Here

It's like Déjà-vu, all over again - Yogi Berra

Another Lesson Learned...This time from the Oil Patch

A good part of my day is spent speaking with investment professionals from analysts to portfolio managers covering all aspects of the markets. Lately, a lot of our conversations revolve around oil's stunning collapse that blindsided so many investors. Oil had been trading well over $100/bbl. in the past couple of years, continuing a 5-fold increase which began in 2002. As the price increased, it became a foregone conclusion that economic growth in emerging countries would increase demand resulting in prices well above traditional levels for the foreseeable future. But as a testament to human ingenuity; both technological and financial: if you need oil...we'll find it, and create some attractive investment products as well. Demand and outlook brought out technologies that made it more economical to extract and higher prices led to significant profits. Oil producers and by extension, investors purchased companies using debt based on a generally accepted forecast of continued strength. Canadian oil companies were paying dividends and distributions attracting investors.

And the beat went on for well over a decade - until the unforeseen happened...Oil went lower - a lot lower. In fact, it appears that at current prices, some companies might actually be redundant. The shellacking of oil companies from 'yesterdays' forgone conclusion' could be just the beginning. Many blame a political agenda that squeezes out the weakened economies that are seen as some version of the 'axis of evil'. But I see something totally different...when things are going well, almost too well - something comes and changes the game.

Cruise Control Investing

Back about 10 years ago, all was well with Canadian income trusts...perhaps too well. These were corporations that changed their structure to payout their pre-tax income in the form of distributions that were initially set up to pay out monthly income that annualized at approximately 10%. With rates shrinking, they were seen as an excellent way to attract investors who could now receive monthly income more than 3x that they could receive from the lowest risk government bond. It seemed all well and good and more and more product was produced to meet the demand of the yield hungry investors. As this occurs, usually the quality of the investments is sacrificed. On Halloween 2007, the Canadian Government had enough and thus began the great unwinding of what seemed to be a great investment idea of the time - on the surface. They simply, set their sights on the open road and hit the cruise control button to collect their unusually high returns and financial advisory was more than happy to provide the product.

Déjà Vu all over again

To me, what has occurred with oil is very similar. Many companies purchased more expensive production over the past 10 years using debt, and distributed income by way of trusts or dividends that was often 5x what could be achieved in the safest of assets...Government Bonds. It seems to me that it's only when things are going just a little too well that I think of these lyrics from one of my favorite Joni Mitchell songs:

"Everything comes and goes Pleasure moves on too early And trouble leaves too slow Just when you're thinking You've finally got it made Bad news comes knocking At your garden gate."

I believe that theme based investing can be very dangerous, especially at what could be the late innings of the game (15 years?), and the China-India-Resource game just got another shot across the bow. Oil related investments might seem like a bargain right now, but that is because nobody knows where the underlying commodity will settle in. Suffice to say - many companies and investors are paying the price for elevated oil price expectations. This might take years and a few stunning collapses before it makes sense to take advantage of the opportunity. One never knows. But at this point, we are thankful that our exposure is minimal.

January continued a string of good performance for our holdings.

Thanks for taking a look,

And,

All Good Things,

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des épargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

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