Wednesday, April 16, 2014

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:


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

U.S. 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."


 "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:
"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:

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

China's Needs For LNG:

OECD vs Non-OECD Oil Demand:

Warren Buffet Piling on Exxon/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]
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.

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