Newsletter July 9, 2015
InvestorsFriend Newsletter July 9, 2015
How to Invest in Uncertain Times
Actually, this is a trick topic. People almost always consider the times that they are living through to be uncertain. They are partly right, after all the future is always uncertain. But people tend to forget that almost all past times felt uncertain as well.
We now tend to view the early 1980’s as a wonderful time for investors. Interest rates on saving were spectacularly higher than today. And we now know that it was a great time to invest in stocks. But back in the early 1980’s people were living through extremely high inflation and also high unemployment. I could go on, but rest assured that every year in the past had its share of uncertainty and fear about where markets were headed.
Luckily, successful investing does not require any ability to predict the impact of various uncertain macro economic events or geopolitical events or anything of the sort.
Successful investing instead, involves accepting that markets will always be uncertain and volatile. It involves being in a position to live through the inevitable periods of market declines. This can be achieved partly by learning to be confident that the broad market averages do grow over the long term and do recover from set backs. It can be achieved through proper diversification. It can be achieved by being in a position (both emotionally and financially) to invest additional money at times of market declines in order to take advantage of bargains.
Why Oil Prices Are Lower
The generally accepted reason for the large decline in oil prices in the past year is that OPEC has decided to fight for market share. This explanation simply makes no sense to me.
Why would any rational supplier or group of suppliers cause a price decline in the order of 50% in order to gain just a few percentage points in market share? That is, why would any rational supplier purposefully cause their revenues to decline in the order of 40%? The purported reason is to drive out U.S. shale oil producers. That would make sense if the U.S. shale oil producers could be driven out relatively permanently. But how would that happen unless the oil price is to be lower on a relatively permanent basis? And again, how would that benefit OPEC? How does a few percentage points gain in market share offset a 40 or 50% drop in prices?
Another reason that has been put forward for OPEC’s actions is that it it was done to harm and put political pressure on certain countries including Russia and Iran. This makes more sense to me.
OPEC, the Organization of Petroleum Producing Counties consists of twelve countries. Based on figures from April 2014, Saudi Arabia accounts for 32% of OPEC’s production. Other important members are Iraq at 11%, Iran at 10%, Kuwait and the United Arab Emerates each at 9% and Venuzuela at 8%. It was by agreeing to limit production to certain quota levels in each country that OPEC kept oil prices relatively high for years. The basic purpose of a commodity cartel is to artificially raise prices by having each member curtail supply.
My understanding is that the smaller OPEC members have cheated on their quotas for years. It was often left to Saudi Arabia to curtail production to keep the overall oil supply low enough to keep the price up.
Today, OPEC no longer has production quotas for each county. My conclusion from that is that the OPEC cartel has basically fallen apart. Saudi Arabia may have turned on the oil taps in order to show the other members of OPEC what happens when production quotas are not adhered to. In this is correct, then oil prices are low because the OPEC cartel was no longer adhering to quotas and Saudi Arabia decided stop controlling the price on its own in order to attempt to restore discipline within OPEC.
Unless OPEC can reinstate quotas and member discipline then oil prices are unlikely to rise.
It may be that OPEC (especially Saudi Arabia) gave up because, with increased U.S. production it was simply no longer feasible for OPEC to curtail sufficiently to maintain the former prices.
In any case I simply do not buy the notion that OPEC willingly allowed prices to drop in the order of 50% just to gain a few percentages points of market share while losing perhaps 40% of its oil revenues.
The Canadian Trade Deficit
Statistics Canada reports that Canada’s trade deficit has widened considerably in the past eight months. In dollar terms (as opposed to volume), Canada’s imports have increased while Canada’s exports have decreased.
It was fully to be expected that imports would increase in Canadian dollar terms given that the Canadian dollar has weakened substantially and given that most imports are priced in U.S. dollars. I would have expected import volumes to decline due to the higher prices of imported goods. But import volumes have also risen.
I would have expected export volumes to rise because the cost of Canadian goods is now lower in U.S. dollars. But export volumes have fallen. It may be that Canadian exporters have not yet benefited much from the lower Canadian dollar. This would be the case if the prices were contracted in Canadian dollars.
I would expect some reversal in the trade deficit in the coming months as exporters benefit from the lower Canadian dollar and as importers curtail volume due to the higher prices.
Investors can easily gain exposure to companies outside of Canada and the U.S. through various country- or region-specific Exchange Traded Funds (ETFs). This can provide diversification as well as exposure to higher growth areas.
I have recently updated my reference article that lists selected global exchange traded funds and which also provides some valuation data for each ETF. Unfortunately, there did not appear to be much in the way of obvious bargains.
Investing in Canada and the U.S.
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