January 22, 2015 Comments

Thursday was a good day to own stocks. To own, that is, your share of the largest and most profitable companies in the marketplace.

The S&P 500 was up 1.5% and Toronto was up 1.4%

Some of the notable gainers on our list were CNR, up 3.9% , Stantec up 2.2%, Canadian Tire up 2.6%, FirstService up 3.3%, Wells Fargo up 3.2%, the Bombardier series 4 pref shares up 5.8% and the B shares up 4.9%, Riocan up 3.3%, Bank of America up 4.4%, eBay up 7.0%, the oils sands ETF CLO up 3.2%, and Agrium up 5.6%.

The only significant loser on our list was American Express down 3.8%.

Capital spending in the oil and gas “space” in Canada is of course being trimmed back by billions.

Yesterday I saw an interview where the head of the Canadian Petroleum Producers Associated said that the capital spending was being cut from $69 billion to $46 billion. And this is heavily concentrated in Western Canada, and particularly Alberta.

One interesting aspect of this is just how HUGE these numbers are and still remain even after the cut. To be meaningful one has to put numbers into context.

Here are some numbers that help to show just how large $6 and $69 billion is.

Alberta’s total budget revenues in 2014 were $44 billion. Canada’s Federal budget total in 2014 was $279 billion. Canada’s total exports run at $480 billion annual of which energy is $113 billion (or WAS in 2013 before the recent price drop).

Berkshire Hathaway, which is number 4 on the Fortune 500 list and which owns a giant rail road and giant utilities has capital spending that runs at $12 billion annually.

Canada’s GDP in total was recently running at $1651 billion. At $69 billion the country was plowing over 4% of its entire GDP into capital spending just in the energy sector.

Looking at these other numbers for context, I would suggest that it shows that $69 billion in capital spending by the energy sector may well have been unsustainable. The $46 billion that is now predicted for 2015 remains gargantuan and outsized compared to the Canadian economy. It’s scary really because what will the capital spending be when some of the current mega projects are over and we return to more sustainable levels? And what would it be if they REALLY started to cut to the bone?

I would hope that Alberta’s economy, and the other provinces benefiting from that $69 billion in cap ex, has not been overly reliant on what appears to have been an unsustainable burst (although it has lasted for some years) of capital spending.

If it’s a problem when “only” $46 billion gets plowed into capital spending for the energy industry, and when we understand that that amount is still gargantuan, then something does not seem quite right and maybe the problem runs deeper than $50 oil.

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