QE Bubble Burst

Government debts from around the world are being monetized by the central banks of the world. But under no scenario would there be a burst of bubble just because the central banks can always take on more debt on their balance sheets.

The Bank Of Japan version of QE is way bigger in proportion to Japan's GDP. Again, this would not lead to a crash since money supply can be created to support the debt. This would lead to weaker currency as USDJPY increased quite a bit since BoJ QE started.

http://blogs.wsj.com/moneybeat/2014/11/05/should-the-ecb-follow-the-bojs-shock-and-awe/

Porky U.S. Federal Tax Credits

Section 114. Extension of Indian employment tax credit. The provision extends through 2016 the Indian employment tax credit. The Indian employment credit provides a credit on the first $20,000 of qualified wages paid to each qualified employee who works on an Indian reservation.

Section 124. Extension and modification of accelerated depreciation for business property on an Indian reservation. The provision extends accelerated depreciation for qualified Indian reservation to property placed in service during 2015 or 2016. The provision also modifies the deduction to permit taxpayers to elect out of the accelerated depreciation rules.

Section 156. Extension and modification of production credit for Indian coal facilities placed in service before 2009. The provision extends through 2016 the $2 per ton production tax credit for coal produced on land owned by an Indian tribe, if the facility was placed in service before 2009. A coal facility is allowed only nine years of credit. The provision modifies the credit by removing the placed-in-service-date limitation, removing the nine-year limitation, and allowing the credit to be claimed against the AMT.

Indian here is defined by Native American, not people from the nation of India. 

Section 121. Extension of classification of certain race horses as 3-year property. The provision extends the 3-year recovery period for race horses to property placed in service during 2015 or 2016.

Section 123. Extension of 7-year recovery period for motorsports entertainment complexes. The provision extends the 7-year recovery period for motorsport entertainment complexes to property placed in service during 2015 or 2016.

Section 130. Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. The provision extends through 2016 the eligibility of domestic gross receipts from Puerto Rico for the domestic production deduction.

Section 140. Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands. The provision extends the $13.25 per proof gallon excise tax cover-over amount paid to the treasuries of Puerto Rico and the U.S. Virgin Islands to rum imported into the United States during 2015 or 2016. Absent the extension, the cover-over amount would be $10.50 per proof gallon.

Section 141. Extension of American Samoa economic development credit. The provision extends through 2016 the existing credit for taxpayers currently operating in American Samoa.

Hmmm.....

Source: http://waysandmeans.house.gov/wp-content/uploads/2015/12/WM-extenders-2015-2016-summary-12-7-2015-FINAL.pdf

How Much Is Valeant Pharmaceuticals Worth? $VRX

Let's forget all the controversies surrounding Valeant for the moment. Let's just do a quick back -pocket calculation using some what conservative assumptions.

1. Assuming every business Valeant acquired is worth the same market price today - meaning the asset or earning power at these companies did not depreciate or appreciate

2. Then all we had to do is to do a quick sum of all parts addition and take out the debt to calculate the value to equity holders

Bausch and Lomb	8700
Biovail and Valeant	6000
Sanitas and iNova	1000
Medicis	2600
Ora	450
Dermik	425
Pharmswiss	500
Brazilian (Probiotica)	100
Natur	163
Eyetech	22
Solta	250
Precision Derm	475
Pedinol	35
Ora Pharam	312
Obagi	344
Nestle	-1400
Brodalumab	445
Synergetics	192
Amoun	800
Sprout	1000
Dendreon	495
Salix	15600
Total	38508
Debt	-37461
Market Value	1047

*in millions

*They sold rights to their cosmetic business to Nestle for $1.4 billions

*Debt is only accounted for the long term portion. The short term portion was taken out assuming their short term assets can be liquidated at a discount to cover it.

Well, according to this, their business is pretty much worth way less compare to it's current market cap. But they are generating $2 billions a year in cash flow, The question then become, how long can they generate $2 billions of cash per year? Their credit default swap spread is indicating that they are currently shut out from the credit market so their operating cash flow is their only life line.

At the current market cap of $32 billions dollar, they are roughly trading at 15x to 16x operating cash flows.  It is quite rich compare to generic drug maker Teva - which is only trading at 10x operating cash flow.

So Valeant is worth somewhere between $1 billion to $20 billions - $1 billion if the cash flow isn't sustainable - or $20 billions is fair given that it is able to proof leverage and binge buying is a business model that is working.

Interesting to see where this going to end up.

1st Quarter Update

1. There hasn't been any chance for me to reallocate to stock in my 401k. The last recent min-sell off did provide some opportunity. Allocated 20% to S&P 500 index in my 401k. Leaving 80% cash.

2. Portfolio is muddling through. All the out performance this year was short lived as Suncor sold off due to the election in Alberta, Canada. The new premier wanted to tax oil companies more. The good news is WTI is pricing fairly at $60 a barrel. The Canadian Sand Oil is usually priced at 30% discount to WTI. That mean they are selling at roughly $42 at the current environment. The cash operating cost per barrel is $33. So Suncor will still produce enough cash flow to cover CAPEX or dividends.


3. Government bonds sold off worldwide for no particular reason or trigger aside from the fact German Bund traded with negative yield for a few days. Not sure where the money will be allocated to if they are shifting money out of govies and stocks. Corporate bonds perhaps? The spreads are already tight enough.

4. Sold LULU this quarter and added small amount of FNMA and FMCC. These two mortgage giants trade like an option. It has a relative high risk-reward ratio. It can pay 5 to 1 if the government decides to re-capitalize them with private capital. That's a big IF.

5. Oil bounced back was unexpected as inventory continue to build. This is mainly due to the weakness in US Dollar rather then change in the fundamental. Oil is priced in dollar.

6. India/Africa remain an interesting investing opportunity as their GDP can grow tremendously with some proper structural reform. The last place on earth that can provide cheap labor and stable political environment (tbd).

In an other news, my job search which started couple weeks ago has not gone too well. It looks like the market died down quite a bit after the initial beginning of the year shuffle. I only managed to score 1 interview so far. Not sure where to go from where. I suppose it's time to get creative as the usual channels are running dry.

Investment Outlook for 2015

There quite a bit more headwind coming into 2015 that makes me cautious:

- Massive QE and undertaking by Eurozone and Japan, which is an experiment never been done before

-Potential tightnening of U.S. monetary policy

-Lower oil prices which can cause high yield energy companies and oil producing countries to go bankrupt, which might have contagion effect (who's holding these risk?)

-China's bubble economy (shadow loans, over investment in real estate)

-Web 2.0 companies evaluation . We are again seeing companies trading at 70 P/E with little or no earnings

- Greece defaulting for the 100x. At this point they should default and leave the Euro. Take the high road and reform the economy like Iceland did post-2009

Tailwind for the economy:

+Lower oil prices mean consumers will benefit via perceived wealth affect. Consumers spending will likely ticked up

+Lower oil prices also is a deflationary force, which would keep the Fed from tightening monetary policy by raising Fed Fund Rate.

+Full employment. Although many would argue most recent hires are working for minimum wage or part time jobs, the employment picture is relative better than same time last year and 5 years ago.

+Technology and innovations continue driving human productivity. Our lives has gotten so much more efficient through the use of technology which has enable us to do more per hour. The downside is the shift in the economy. Manual workers are becoming history - how can these guys retool themselves for the new economy?

What am I doing with my portfolio?

For my 401k:

-Max contribution for the first year

-Allocating to 50% U.S. Treasury fund and 50% S&P 500 Index fund

-Only buy S&P 500 Index when VIX is above 17

-Contribution bi-weekly automatically. Assigned 50% cash and 50% U.S. Treasury fund. Re-balance to the planned 50/50 allocation when VIX is above 17 - looking for opportunistic buy 

For my personal and IRA portfolio which is currently heavily invested in energy stocks:

-Will look to buy quality names as oil prices continue to drop

-Expecting $30-40 crude oil prices by spring

-Favorite name: EOG

-Current holdings: SU, IMG.L, LULU, CHK

-This portfolio has under-performed the market 2 years in a roll. Maximizing 401k would leave me less money to contribute to the alpha and IRA portfolio.

-

Black Gold

A somewhat unexpected sell off in oil price is nevertheless a welcoming news.

Most of the oil and gas exploration companies are selling at discount due to the sell off in crude oil. The stagnant crude oil prices won't last as production shut in already happening and companies are cutting capital expenditure.

Exclusive: New U.S. oil and gas well November permits tumble nearly 40 percent

http://www.reuters.com/article/2014/12/02/us-usa-oil-permits-idUSKCN0JG2C120141202
Continental Resources Announces Revised 2015 Capital Budget And Guidance

http://seekingalpha.com/pr/12061185-continental-resources-announces-revised-2015-capital-budget-and-guidance

Energy firms slash spending on drilling as crude’s decline accelerates

http://seekingalpha.com/news/2173365-energy-firms-slash-spending-on-drilling-as-crude-s-decline-accelerates

Since gas is price inelastic, the dropping prices won't cause any uptick in demand in the short run. So to close the gap between the excess supply and demand - Supply would have to be reduce. And most of U.S. shale oil productions are not profitable at the current WTI price of $55 a barrel. Prices probably won't recover until the excess inventory work itself out in summer driving season and the supply reduced in 2015. This will leave a good 6 months of lower energy and stock price. An excellent "buyers" market I must say since production won't recover until WTI reaches back to $80 a barrel. 

So I will be paying close attention to inventory numbers from EIA week by week.

http://www.eia.gov/petroleum/weekly/

I don't buy the slow demand from Europe/Asia theory. World Oil Consumption, a factor of demand is still trending up

http://www.eia.gov/forecasts/steo/report/global_oil.cfm

Also since oil is priced in US Dollar. The strength of the dollar is most definitely contributing to the sell off. 

http://www.bloomberg.com/quote/DXY:CUR

The problem from lower oil prices is the fact that wealth is now being transferred from net oil producing countries to net oil consumption countries. Hence, the Russian economy is getting hit particularly hard (as a net oil exporter). We should pay close attention to the possible contagion effects from these oil producing countries possibly defaulting in 2015 (ei: Venezuela/Russia). This will cause more geographic instability in these regions of the world (bad for supply but also bad for GDP growth).

http://graphics.wsj.com/lists/opec-meeting

OPEC is usually the swing producer - meaning they are willing to cut production to support prices. But it seems to be no longer the case this time around. Perhaps there alternative political motive behind the action. Or do they simply do it because they can?

Saudi Arabia says won't cut oil output

http://www.reuters.com/article/2014/12/21/us-oil-prices-saudi-idUSKBN0JZ05W20141221

No worries, you can always depend on America on the demand side of the equation:

SUVs hot in best November auto sales since 2001

http://www.usatoday.com/story/money/cars/2014/12/02/automakers--monthly-sales-november-ford-gm-chrysler-toyota-honda-nissan/19760173/

So no doubt in my mind that oil price will rebound, it just the matter of time since shale oil is unprofitable to produce and drill below $70-80 a barrel. There is very little chance oil stay at the current level given the steady rise in consumption. The overstock of oil is relatively short term (1-2 year).

How long does a typical oil down cycle last:

http://seekingalpha.com/article/2757505-how-long-does-a-typical-oil-downcycle-last

About that GDP "revision"

http://www.americanthinker.com/blog/2014/12/obama_administration_tweaked_the_gdp_data_.html

Interesting.

AT&T - Dividend Champ with Hidden Value

With Netflix signing two deals recent - one with Comcast and the other with Verizon, I can't help but think this is going to be the future of internet. The information highway now can charge tolls two ways! The basic business of any telecommunication provider is a subscription based business with consumer paying a fee every month. The challenge is that the landline market is quite saturated, and the high-growth wireless business is getting very competitive. 

So there is almost zero chance for any cable/telecoms to get out of low single digit growth rate.

The Netflix deals changed everything.

Now service providers such as Netflix is paying to get on the internet express lane. This can be first of many. 

Service providers and app developers now might need to pay to get speedier connections to the consumers. And the longer AT&T hold out on dealing with Netflix - the more Netflix is going to fork up to ensure AT&T broadband customers are getting the best experience. I can be wrong but that type of deal just made any companies providing internet connections a lot more lucrative. 

And let's not forget the same can happen with apps and wireless data plan:

Fred Wilson on Net Neutrality

This can only mean extra revenue for internet service providers. They are essentially double dipping on both end. The ISPs can do this because they have leverage - leverage created by years of consolidation and limited competition. Look what happened to the telecom industry in the past decade. We have so limited choices here in the U.S. because of mergers and acquisitions. We have four major wireless providers to choose from and if Sprint - Tmobile deal get approved - that will limit it to only three! As for at-home internet connection, most people only have two choices - their local telecom or their local cable company. 

Unfortunately, limited competition works against the consumers. The scale is now tipped into the hands of a few who can bring you on-line. Advertisers and app developers will fight for the screen time on people smartphone - and who's standing between them and the consumers?

Hence, I believe AT&T or any telcos and cable company that has substantial customer base stand to benefit from this trend.

AT&T just happens to offer a juicier 5%+ dividends. Couple that with the low rates banks are offering to park your cash. It's a no brainer.

Investment Outlook 2014

We are well into the 2nd quarter of 2014 and I am just publishing my outlook for the year. Better late than never right?

I am bullish on the U.S. Economy:
+ Employment is steady and improving
+ Households debts are winding down
+ Housing prices recovered (individual wealth+)
+ Corporate balance sheets are well cushioned
+ Low interest rate
+ Entrepreneurial fostering environment (ability to foster innovations such as Tesla/Facebook/Twitter...etc)

Not so bullish case against the U.S. Economy:
- QE winding down - the low rates environment might soon be gone
- Corporations are hoarding cash and not spending on capital expenditure
- Despite positive GDP growth and tax receipts, there is still a outsize Federal budget deficit ($400 billions+)
- Slower earning growth

Even I am bullish on the U.S. economy, I feel like most assets are fairly priced. Buying bonds here would be silly if economy continue to growth, which will lead to inflation. Inflation = rates hike. Rates hike = depress bond prices.

The stock market is fairly priced at a P/E of 16-17. But, it is a better hedge against inflation as long as 10 year treasury rate is under 5%.

Real Estate is also fairly priced depending on the location. Again, this is an asset that is rate sensitive. However, you can use quite the leverage when investing in rental properties. I personally do not like the illiquid aspect of real estate, neither do I have much to put down for down payment in my area (NYC).

Gold - I can't value gold. This thing does not have intrinsic value. It does not produce cash flows. Your guess is as good as mine.

Commodities - I like oil in general just because it will take a massive build out of infrastructure (which takes time) to replace the current energy needs. And it has become tougher to find and drill oil the conventional way. The mega oil companies replacement reserve rate is barely 100% (they can barely replace the current outgoing production). The only bright side on the supply side is fracking and horizontal drilling in couple of good oil patches within the U.S. But those wells deplete on a much faster rate than convention well. Oil is very finite and widely demanded. It is also extremely sensitive to political risk around the world. I'm very bullish on oil.

In a not so quick conclusion, the stock market, even fairly value, make a decent case for investment. If the economy does well and inflation picks up, corporations can pass through pricing down the supply chain. If the economy does not do well, which will encourage the Federal Reserve to continue their current accommodating programs - which is also good for stock. It's almost a win-win here.


Disclosure: I'm long SU, CHK, DB, INTC

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North America - World's Energy Powerhouse

I'm going to keep this post short and concise. North America is on the way to become a NET supplier of energy source to the world even being the biggest consumer(s).

Let's start off with a map of today's energy picture:

http://www.nytimes.com/interactive/2007/11/06/business/20071107_WINNERSLOSERS_GRAPHIC.html

Continue onto the increase in production in Canada, U.S. and Mexico:

U.S. Shale Gas:

http://www.api.org/policy-and-issues/policy-items/exploration/facts_about_shale_gas

"In its April 2009 report, "Modern Shale Gas Development in the United States: A Primer," the US Department of Energy stated that at the US natural gas production rates for 2007 of about 19.3 Tcf, the current recoverable resource estimate provides enough natural gas to supply the US for the next 90 years. Separate estimates of the shale gas resource extend this supply to 116 years. Production of shale gas is expected to increase from a 2007 US total of 1.4 Tcf to 4.8 Tcf in 2020. The DOE report states that shale gas production potential of 3 to 4 Tcf per year may be sustainable for decades. The INGAA report stated that to achieve the forecast results, industry must have land access for drilling, a reasonable permitting process and adequate prices and demand for natural gas."

http://en.wikipedia.org/wiki/Bakken_formation

 "In November 2013, the US Energy Information Administration projected that Bakken production in North Dakota and Montana would exceed one million barrels per day in December 2013.^[12] As a result of the Bakken, North Dakota as of 2013 is the second oil-producing state in the US, behind only Texas.^[13]

Bakken production has also increased in Canada, although to a lesser degree than in the US, since the 2004 discovery of the Viewfield Oil Field in Saskatchewan. The same techniques of horizontal drilling and multi-stage massive hydraulic fracturing are used. In December 2012, 2,357 Bakken wells in Saskatchewan produced a record high of 71,000 barrels of oil per day.^[14] The Bakken Formation also produces in Manitoba, but the yield is small, averaging less than 2,000 barrels per day in 2012.^[15]"

Canada's Oil Sands:

http://en.wikipedia.org/wiki/Oil_sands

"Most of the oil sands of Canada are located in three major deposits in northern Alberta. These are the Athabasca-Wabiskaw oil sands of north northeastern Alberta, the Cold Lake deposits of east northeastern Alberta, and the Peace River deposits of northwestern Alberta. Between them, they cover over 140,000 square kilometres (54,000 sq mi)—an area larger than England—and hold proven reserves of 1.75 trillion barrels (280×10⁹ m³) of bitumen in place. About 10% of this, or 173 billion barrels (27.5×10⁹ m³), is estimated by the government of Alberta to be recoverable at current prices, using current technology, which amounts to 97% of Canadian oil reserves and 75% of total North American petroleum reserves."

Mexico Opening For Oil Investment Due to Troubles with Under-investment in state own PEMEX:

http://www.bloomberg.com/news/2013-12-03/mexico-parties-said-to-agree-to-sovereign-fund-with-energy-bill.html

Thoughts from the Russians, the World Largest Energy Producer (ex-OPEC):

http://oilandenergyinvestor.com/2013/12/this-spells-big-trouble-for-the-russians/

China's Needs For LNG:

http://finance.yahoo.com/news/cnooc-limited-examine-lng-development-233000282.html

OECD vs Non-OECD Oil Demand:

http://www.eia.gov/finance/markets/demand-oecd.cfm

http://www.eia.gov/finance/markets/demand-nonoecd.cfm

Warren Buffet Piling on Exxon/Suncor:

http://seekingalpha.com/article/1842202-tracking-warren-buffetts-berkshire-hathaway-portfolio-q3-2013-update

http://en.wikipedia.org/wiki/Suncor

Suncor is the world's largest producer of bitumen, and owns and operates an oil sands upgrading plant near Fort McMurray, Alberta, Canada. Originally developed by Great Canadian Oil Sands, a majority-owned subsidiary of Sun Oil, it is now wholly owned by the independent Suncor. It was the first commercial development on the Athabasca oil sands, although small, earlier projects like that at Bitumount also played a role in development. The company also produces conventional oil, heavy crude oil, and natural gas.^[10]

http://en.wikipedia.org/wiki/Imperial_Oil

Imperial Oil Ltd. (French: L'Impériale) (TSX: IMO, NYSE MKT: IMO) is a Canadian Petroleum company.^[2] It is Canada's second-biggest integrated oil company.^[3] Exxon Mobil Corp. had a 69.6 percent ownership stake in the company as of December 31, 2012.^[2] It is a significant producer of crude oil and natural gas, Canada’s major petroleum refiner, a key petrochemical producer and a national marketer with coast-to-coast supply and retail networks.^[2] Its retail operations include Esso-brand service stations and On the Run/Marché Express and Tiger Express-brand convenience stores.^[2][5] It is also known for its holdings in theAlberta Oil Sands.^[3] Imperial owns 25 percent of Syncrude, which is one of the world’s largest oil sands operations.^[2]

Bottom Line: North America will become an energy production powerhouse. Companies with large energy reserve and operational efficiency to get oil/gas out of the ground will benefit the most from this shift. Will be back with more details.