Y H & C Investments BLog
The blog is a personal commentary by Yale Bock on the specific events which may have occurred in the investment or political world. Specific stocks are mentioned, and many readers find this a good way to gain another perspective on the investment world.
The Color of Oil
One of the great things about investing is the dynamic nature of the markets, which simply means the environment is always changing. Over the last few months, I have repeatedly written about my thinking with respect to how the equity market would perform. Also, we noted the price of crude would stay pretty much stagnant. Within this context, the other 'interesting' part of markets is you will constantly be humbled and surprised at the way things might turn out. Now, admittedly, the last week was difficult for nearly every equity owner, and especially if you were exposed to any portion of the oil complex.
It is no joy for myself to watch the market value of assets which I have selected for clients go down in price, especially if they trade at nowhere near levels which represent their intrinsic value. In that light, the pain was broad and deep in the oil complex. Nothing was spared, the largest integrated oil companies, big shell producers with great prospects in the best areas, or small independent producers with acreage in excellent locations as well. If you are a highly leveraged small indy, in some cases stock losses have been in the 80-90% range. Over the last three decades, if you owned oil stocks, the color of oil was black, and in your portfolio the end result was usually green. Could it be there has been a dynamic event which changes the appearance of oil so it now looks brown, with an unusually pungent odor which resembles feces? In this potentially new paradigm, long term equity owners of oil related stocks would have to get used to a new color in their portfolios, which would be red.
One of the slogans used for the holiday season is gift giving. In the financial markets, historically December is a time when all kinds of things happen which can affect the market price of assets. It is during this month when tax loss selling, hedge fund closings, fund liquidations, redemption, margin calls, investment bank risk managers closing losing positions, and of course, commodity funds selling underwater holdings. Clearly, there are a lot of reasons why institutions might liquidate which have nothing to do with the merit of an equity investment.
As support of this thesis, in the last few years the market has given some 'gifts' to perceptive buyers which are not hard to forget. Two years ago, Hewlett-Packard, the largest computer company in the world, was priced to go out of business with a market price of $13.28 on December 28, 2012. It currently sits at $38.01. Best Buy was also lumped into this pile, trading at $11.51 on December 28, 2012. Today, the big box retailer sells for $36.85. At the time, investors believed tablets sales would doom future PC prospects. Looks like they were wrong. Fortunately, over the years we have benefited from the gift giving season, and not those exchanged at Hanukkah and Christmas. Could it be this year the market is showing its generous side in the form of the oil complex?
The fundamental reasons for owning the oil complex have not changed one iota in the last few months. According to the long term outlooks of most large integrated oil companies (BP, Exxon, Chevron, Shell), the demand for energy will grow significantly through 2030. Oil currently accounts for nearly 75-95% of all transportation related inputs, depending on the kind of entity used. The largest growth in demand for these resources will come from Asia, specifically China and India. On a percentage basis, both countries are well below mature countries in terms of the percentage of population which owns and drives automobiles. China recently claimed the number one spot in the world for yearly car sales. The largest integrated oil companies have fields which possess thirty to fifty years worth of oil, and they take five and 10 years to fully construct and develop ways to produce the black stuff. Commodity prices are historically volatile, although to watch an asset lose 50% of its value in six months like oil is certainly 'interesting.' Still, the next time you want to drive somewhere and have no gas in the car, think about what the alternative could be. Electric cars? Maybe 30 years from now, maybe, and it is a big maybe, a big, big, big maybe. Good luck with that Elan. In the meantime, if you are long term investor and have more than a 1-2 year time horizon, if oil is not interesting now, when might it be? It can certainly go down into 2015 and you have to be prepared for that possibility. Still, I would imagine the color of oil is still black, and yes, green.
Elsewhere in the market this week, Verizon and AT&T warned about higher subscriber growth because of competition from T-mobile. McDonald's reported its worst same store sales number in 11 years, down 4.6%. In Macau, the anti-corruption crackdown has continued to hurt casinos overseas with revenues down nearly 20% in both November and October. Some analysts view this as a completely different environment for the gaming operators and potentially a massive shift in the way the market may function from a long term perspective. You have to wonder if that might be another gift by a truly hospitable market.
On two opposite sides of the spectrum in retail, Costco reported a very good number and raised its estimates for 2015. Conn's got drilled after reporting weaker numbers as it seems the promise to pay is always easier than actually forking out the cashola.
Conoco-Phillips reported its capital expenditures for 2015 will be twenty percent lower than they originally forecast. Rosneft announced a huge deal with India to supply oil and gas for the next ten years after discovering oil with Exxon in the first well they drilled in the Arctic Ocean in late September. Naturally, Warren Buffett is seeking to profit from the decline in energy complex prices. Berkshire Hathaway announced yesterday the purchase of a logistics and distribution entity which services the oil and specialty chemical industries. Maybe an early gift for Berkshire shareholders as well.
Turning to fantasy land, after waiting an entire year to do absolutely nothing, our hard working politicians passed a $1.1 trillion dollar budget which most of the members did not have the time to read. Along those lines, I find it interesting Vladimir Putin is being pummeled in the press for the Russian excursion in the Crimea and now Ukraine, which along with falling oil prices have crushed the value of the ruble, up to nearly 60 rubles per dollar. Yet glad Vlad tries to make lemonade from lemons by signing the two most important countries in the globe to long term oil supply deals while our hard working decision maker wants nothing to do with oil or energy policy (can you say Keystone pipeline). Must be a few television interviews are more important.