USO ETF is down this year even as crude has surged

uso

Did you predict that oil prices would bounce in 2016? Nice call! Did you attempt to cash in by buying the biggest oil ETF? That’s where you went wrong. Oil prices have risen about 25 percent this year. But the USO ETF, which promises exposure to oil prices, has fallen more than 5 percent.

At the root of the USO’s trouble is the simple fact that oil set to be delivered in different months and trade at different prices. For instance, October oil trades at $44.59, November at $45.16, December at $45.79, January at $46.36, and oil to be delivered in December 2017 at $49.76. This array of prices forms the futures curve, and with each month’s oil trading at higher prices, the market is said to be in “contango.”

The way the USO endeavors to track oil is by continually holding the most relevant futures contract. The one tracking oil set to be delivered in the following month (until the contract is within two weeks of expiration). The problem comes when a contract’s expiration is near and the USO shifts to tracking the following month’s futures. At that point, the fund’s managers must sell its massive holding of the nearer-dated contract and buy about the same amount of the further-dated contract.

Since the further-dated contracts trade at higher prices, holders of the USO are selling low and buying high every single month. Meanwhile, oil producers are selling their oil in the futures market for higher prices giving oil prices a boost while the USO ETF takes a hit.

This explanation of the USO’s poor performance is likely cold comfort to those who have done so badly on a trade they may have thought was a home run. With a current market value of more than $3 billion, it may be a fair bet that many investors in this ETF had no idea that they would be so hurt by the structure of the futures market.

Retail investors who invested in the XLE (ETF) which contains the oil produces, drillers and refiners did quite well. Even the midstream master limited partnerships like Alerian MLP would have been a better choice. It is has a dividend yield of 11 percent.

Full disclosure I own some shares in Alerian in my retirement account.

 

Is Globalization or is Technology destroying more jobs?

trump

Could last Friday’s weak U.S. job numbers help make this man president of the United States?

Many Americans believe that China and Mexico are responsible for their job losses. There is no doubt that some industries like apparel & electronics require cheap labor costs and companies have moved production overseas. I also believe that the majority of illegal immigrants (Mexicans) are working at low paying jobs that Americans don’t want. (Even Canadian farmers hire temporary workers from Mexico during planting & harvest season).

Economists around the world believe that globalization has more benefits than detriments. Long term, higher wages in poor countries should theoretically increase spending and help spur global economic growth. Wages in China are going up causing a slowdown in their manufacturing boom. In fact, some illegal immigrants are moving back to Mexico because of higher wages.

Advances in technology has created a large number of new jobs but many of those jobs are unfilled. The major problem is employers find it difficult to find workers with the appropriate skill levels. The education system is really behind the curve in preparing young people to enter the job market. No real surprise that the participation rate is falling as the unemployed are giving up looking for work.

The automotive industry has been well-known for its intensive use of robotic arms for assembly, welding and painting of cars. Many other industries have adopted robotic arms into their manufacturing process. Advances in automation has eliminated an estimated 30% of all manufacturing jobs. Developments in 3D printing could allow consumers to make a variety of products beyond just toys, jewelry and novelty items.

robot2

Technology has destroyed a number jobs in many sectors. It is obvious that on-line shopping has really hurt brick & mortar retailers. Retailers have cut full-time staff and reduce costs by hiring more part-time seasonal personal. A large number of book, music and video stores have simply disappeared. Netflix and other low-cost streaming services has really hurt jobs in media, cable and the music industry. Facebook and Google have captured the majority of advertising  dollars which has reduced revenue and job opportunities in radio, television and print media.

Have you ever wondered why there are so many fake reality shows on cable? Production costs are so much cheaper than producing quality programing. Networks have less ad revenue to paid wages for real actors, writers and directors.  

Thanks to ATMs, internet banking, direct deposit and mobile banking apps, bank branches don’t have as many tellers or people waiting in line. The rise of Robo-Advisors will further reduce bank staff over time. I wouldn’t be shocked to find a decline in the number of bank branches in the near future.

Smartphones have reduced the need for buying cameras, voice recorders, camera film, photo albums, alarm clocks, GPS’s, video cameras, calculators, flashlights, landline phones, watches, calendars, note pads, newspapers, books and even credit cards. I wonder how many jobs have been lost because of the popularity of smartphones.

The oil and gas industry used to drill five wells in order to get one producing well. Today’s drilling technology enables 100% success rate in finding oil and gas. Plus fracking technology has allowed oil companies to maximize oil and gas extraction.

Will future improvements in artificial intelligence enable robots to replace human workers?

robot   robot1

What do you think, Globalization or Technology to blame for job losses.

 

Oil prices up despite lack of production freeze

oil-bucks

Crude oil prices are rallying despite the fact that storage tanks around the world are filled to the brim with unsold oil. The oil markets remain over supplied, between 1 and 2 million barrels of crude are being pumped out of the ground every day in excess of demand. You would think that the failure of the world’s largest oil exporters to reach an agreement in Doha on Sunday to freeze output to January levels, would cause a selloff in crude.

Cushioning the blow from the failure to reach a deal was a short strike by oil workers in Kuwait to protest cuts to benefits and wages. There has been a significant amount of disrupted oil that came off the market in the last month from Colombia, Iraq and Nigeria. Iran’s ability to increase production quickly is also being questioned. Plus U.S. oil production has fallen below 9 million barrels a day for the first time since Oct. 2014 which is attracting some fast money into oil market.

One of the biggest factors effecting the price of oil is a weaker U.S. dollar which has fallen around 5% over the past seven weeks. The Fed’s dovish comments on future rate hikes has helped increased the price of all commodities. Plus there is a rumor that Saudi Arabia and Russia have agreed to freeze production. (Saudi Arabia pumped 10.2 million barrels per day for a third straight month)

“While this recent rally has the potential to run further to the upside … we believe that it is not yet driven by a sustainable shift in fundamentals,” Goldman Sachs said in a note to clients. Goldman said it was “premature to embrace these green shoots”, maintaining its view that a sustainable balancing of the market, driven by declines in U.S. shale oil production, would take place in the third quarter of 2016.

Oil analysts and market watchers have noted that Saudi Arabia’s strategy has appeared to pay off, with data showing that shale oil producers are closing down rigs every week and oil output is dropping. Major oil companies trying to preserve their cash flows are still cutting their capital spending budgets ensuring that new oil production will be years away. Although Saudi’s strategy has damaged the government revenues, it has enabled the so-called cartel to retain its market share of just under 40 percent.

Could Saudi boost output?

I believe that relations between Saudi Arabia and Iran hit another low following the failure of the Doha talks, there are reports now that Saudi Arabia, Iran and non-OPEC producer Russia could all be ready to ramp up production, rather than restrict it.

Mohammed Bin Salman told Bloomberg that the kingdom could increase output by around 10 percent a day if it wanted to, saying “If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.”

Could Mohammed Bin Salman’s aim be to discourage oil companies from investing in new output in Iran? It sounds like a threat to me that Saudi Arabia may indeed decide to boost output to protect its market share and cause the supply/demand imbalance to continue.

There are a lot of moving parts in the oil market. The fast money traders are betting that the U.S production of crude oil will continue to decrease and the summer driving season will push up demand. Even without a production freeze, many believe that the supply / demand imbalance will correct itself sometime in 2016.  Just remember that markets are forward-looking!

Earnings releases in the oil patch next week.

  • Mon – Halliburton, Pioneer
  • Tues – BP
  • Wed – Total, Baker Hughes
  • Thurs – Conoco Phillips
  • Fri – Exxon, Chevron, Phillips 66

It is impossible to predict how bad investors will punish companies that don’t beat the lower earnings estimates. It could offer a good buying opportunity.

 

3 Key Market Drivers Turning Some Bears into Bulls

      bear2   bull-party

In January and early February there were three major negative forces affecting the market. One was the total collapse of oil prices down to $26 a barrel. The second was a very real threat of a big devaluation from China. The third was the Fed hiking interest rates four times in 2016!

Those three deflationary forces would be very negative for stock market returns around the world. Six weeks ago, investors believed that the world was coming to an end. Some market experts were even taking about an increased possibility of the U.S. economy falling into a recession.

Why some market bears are getting bullish?

  1. The turnaround in the price of oil has been dramatic, raising almost 50% in six short weeks. Fears of massive credit defaults in the oil patch has been greatly reduced. Therefore, worries of a banking crisis have decreased and prices of bank stocks have recovered along with some energy names.
  2. Currency speculators and U.S. hedge funds have been heavily shorting the Chinese Yuan believing that devaluation is just a matter of time. China’s battle with speculators is expected to be very prolonged. Chinese leaders have assured Washington that it would keep the yuan stable after the U.S. approved adding the yuan to the International Monetary Fund’s basket of reserve currencies.
  3. The Federal Reserve has decided to halve its outlook for interest hikes to two from four by the end of this year. The announced has weaken the value of the U.S. dollar which helps increase the price of commodities including cruel oil. It also weakens the value of the yuan since 60% of its value is pegged to the U.S. dollar.

The chart below illustrates the price movements of the bank and energy ETFs compared to the S&P 500 since Feb 11 when the price of WTI hit a low of $26.19!

feb11

I am not convinced that we are out of the woods yet

  • Iran is a big wild card in the oil market. Iran has already stated that they will not agree to a production freeze until they increase their production back to levels before sanctions were imposed. Iran wants to add two million barrels of cruel oil a day to an already over supplied market. Plus there is over 500 million barrels of oil still in storage.
  • The Chinese leaders are slowly realizing that they have little control on how their citizens spend their new-found wealth. Converting their economy from being export driven to domestic spending is going to take a long time.
  • Negative interest rates in both Europe and Japan have not been successful in boosting economic growth.
  • U.S. consumers are not spending their savings from lower energy costs. Economy growth after a typical recession is usually a lot higher than today.
  • A large part of the rapid rebound in stock prices could be due to short covering by hedge funds.

I am not an expert on charts but the two-year chart below of the S&P 500 appears to have lower highs and lower lows. Plus I don’t like the fact that the 50 day moving average is below the 200 day moving average.

2016-spy

I believe that the roller coaster ride isn’t over yet and there could be a better buying opportunity very soon. Long term, I still prefer stocks over bonds.

 

 

 

Relief Rally in Oil or an Uptrend?

crude oil

In the past month, WTI crude oil has rallied more than 25 percent, taking the commodity into positive territory for the year. The fundamentals haven’t changed, inventories are still full and the build-up may continue as refineries close down for maintenance. The rally started after Saudi Arabia, Qatar, Venezuela and Russia said in mid-February that they would leave supply at January’s levels if there was enough support from other producers.

Market sentiment has changed as more investors feel that the price of oil has made a bottom. John Watson, chairman and CEO of Chevron, shared his views on the energy market and oil prices in an exclusive interview with CNBC.

“We think we’ll be growing production into a rising market,” Watson said Tuesday. He added, “I think we’ve seen the bottom in oil prices.”

Oil buying was encouraged by talk that OPEC producers want a higher anchor price. Major news media reported that OPEC is privately talking about a new oil price equilibrium of $50 a barrel.

“While it may not be an official target price, you’ll hear them saying it. They’re trying to give the market an anchor,” said Gary Ross, the founder, executive chairman and chief oil soothsayer at New York-based consultancy PIRA.

The volatility in the oil market has been ideal for hedge funds and speculators to make some quick profits. It takes very little capital to buy oil contracts and the price movements have been spectacular. Market watchers believe that the majority of the price movement in oil has been due to short-covering.

Short positions in West Texas Intermediate crude by 15 per cent in the week ended March 1, according to U.S. Commodity Futures Trading Commission data. Speculators’ short positions in WTI fell by 25,639 contracts of futures and options combined to 150,718, the biggest decline since April 21, CFTC data show. Longs, or bets on rising prices, fell by 753. The exodus of bearish bets resulted in a 24,886-contract jump in the net-long position.

Traders seem to be pinning expectations for oil prices to one specific number now that crude has staged an impressive comeback this year. It’s going to take a close above $40 to reverse a long-term down trend according to many Wall Street technicians. The chart watchers believe that there is another wave of pain for the commodity. Most view this recent run up to be just another relief rally. They are looking for one more final washout, somewhere below $30, which would be a final capitulation.

Big bets by option traders

Options that allow their owners to buy crude oil for $40 or above have seen notably more buyers and sellers compared with all other strike prices. Calls that expire in May and June have higher levels of open interest at $40 than at any other level. On Monday, call contracts that expire in April saw the highest trading volume in the $40 strike

Millennials using a risky ETF to speculate on oil

According to online discount broker TD Ameritrade, Velocity Shares Daily 3x Long Crude ETF (uwti) was one of the top 10 stocks traded by millennials in 2015. What makes this ETF a risky product is the extreme volatility due to triple leverage. The leverage amount in UWTI gets reset each day which can make for some epic days when oil goes up.

However, it is a costly product because it suffers from roll over costs that come from tracking front-monthly oil futures. Although, UWTI was fifth on the list of stocks millennials were buying, it was fourth on the list of stocks that they were selling.

cautionThe Fed meeting next week could put the rally in oil on hold if their comments turn hawkish. Increasing U.S. interest rates will strengthen the value of the U.S. dollar which could cause the price of oil to fall. The meeting of OPEC and non-OPEC members to freeze production may not even happen.

Disclaimer: This content is provided for informational purposes only! It is not to be viewed as a recommendation or endorsement of any particular security.

 

Money managers betting on a rebound in crude oil, selling growth stocks.

Oil Produx v prices

U.S. oil production continues to defy forecasts because it hasn’t declined. Refiners are processing as much of the stuff as they can, the glut of oil, gasoline and diesel fuel keeps growing. The U.S. has now stockpiled 1.2 billion barrels of crude. The growing supply in Cushing, Oklahoma and elsewhere has analysts concerned that oil will start becoming difficult to store.

Another factor driving oil prices higher was speculation that OPEC members may strike a deal with Russia to cut production. Analysts reviewing the possibility of the deal are doubtful that such a meeting could take place but some argue that Russia’s options for tackling a deteriorating economy are running out.

The Russian economy, along with other less stable oil producing nations, are under major strain with economists predicting further contraction in 2016. It looks like Russia could be facing a second year in recession. The Kremlin is now in a difficult position where it has to choose between further spending cuts or drawing down its sovereign wealth funds.

U.S. ratings agency Fitch said the Russian government has asked ministries to identify 700 billion rubles ($9 billion) of cuts, which will help with the deficit but will also likely dent demand in an economy weakened by lower oil prices and rouble volatility.

Several analysts agree that Russia is trying to talk up the oil markets by hinting at the possibility of production cuts and its willingness to holding meetings. A OPEC deal is unlikely, given the fact that Iran is just now returning to market.

“Genscape reports that a first shipload of oil left Iran for South Korea as sanctions against Iran were lifted. The tanker, Serena, left Iran on Jan. 15 and docked at Fujairah before setting a course for South Korea on Jan. 20.

“The ship had been moored for a year, and Iran is estimated to have about 40 million to 50 million barrels of crude or condensates in storage on tankers”, according to Genscape

The oil bulls point to the fact that Warren Buffett has recently invested a billion dollars into the oil patch by adding 12.5 million shares to his Phillips 66 stake. Berkshire now has $5.9 billion invested in the company representing around 14 percent of the outstanding shares.

Now, market sentiment has changed dramatically giving oil producers a pass when reporting poor results but hammering growth stocks. Two out of four FANG stocks beat earnings estimates but only Facebook remains in positive territory in 2016. Growth stocks like Tesla, Salesforce and LinkedIn have been pounded. The chart below is the year to date price of the FANG stocks.

facebook

On the other hand, BP reported a 91% drop in profit, Exxon’s profits dropped by 58% and Chevron lost $588 million. Now, keep in mind the average price of crude oil was around $46 a barrel in the fourth quarter and it looks like average price for first quarter will be in the $32.00 range. Next quarter earnings could look even uglier. Despite all these negative factors, the year to date chart below illustrates that money is still flowing into these stocks.

bp

What do think, has oil hit a bottom? Should you follow Warren Buffett’s bullish bet on oil?

 

 

Should you buy the dips or sell into the rallies?

buy sell

The strategy of buying the dips has worked very well during bull markets. However, every business circle has an upward trend which is followed by a move downward. Technically speaking, a bull market will end when there is a 20% or greater drop from the high point of the major indexes.

On Wednesday, the MSCI All-Country World Index has fallen more than 20 percent from the market peak. So that means that roughly one-fifth of all stock market wealth in the entire world has been wiped out. The selloff in the U.S. markets may seem bad right now but the truth is that they still have a long way to go to catch up with the rest of the world.

Now the S&P 500 had a two-day rally at the end of this week based on a bounce back in the price of crude oil and comments from Mario Draghi that the ECB is preparing a fresh blast of stimulus to halt the slide in global equities. Plus Wall Street believes that the Fed will hold off any interest rate increases until much later in the year.

My trader’s instinct tells me that this is a dead cat bounce in the price of crude oil. I have seen a couple of sucker rallies in oil during 2015 and this looks like a classic short covering rally. Fundamentally, nothing has changed in the oversupply situation and slow world economic growth will not boost demand anytime soon.

So, why is the price of crude oil effecting stock prices?

Wall Street is secretly afraid of another 2008 financial crisis caused by debt that is tied to the price of oil. U.S. hedge funds have been shorting Canadian banks because of their loan exposure to Canadian oil producers. They expect big loan losses will reduce bank profits.

Now, the big U.S. banks are building up their reserves to deal with potential energy-sector losses. In the fourth quarter, Bank of America increased loan loss provisions by $264 million, Citigroup set aside another $250 million while J.P. Morgan Chase added $124 million to brace for potential trouble with energy loans.

Bank of America leads the list with $21.3 billion in energy loans. Citigroup is next at $20.5 billion. Wells Fargo is third at $17 billion. JP Morgan Chase is at $13.8 billion. Morgan Stanley is at $4.8 billion, PNC Bank has $2.6 billion and U.S. Bancorp is at $3.1 billion.

That is only the tip of the iceberg, European & Asian financial institutions also have loan exposure to oil-producing companies in other parts of the world. There are also added risks of debt default from oil-producing countries like Russia, Venezuela, Norway, Brazil and Mexico.

domino

The S&P 500 has begun 2016 with its worst performance ever. This has prompted Wall Street supporters to come out in full force and try to explain why the chaos in global currencies and equities will not be a repeat of 2008. However, these individuals that dominate financial institutions and their economists seldom predict a down-tick on Wall Street, so I don’t expect them to warn of a possible global recession or market mayhem until after the fact.

I believe that no one can time the market so selling everything and holding cash is a very bad strategy. A good strategy would be not putting any new money into this market, raising some cash by selling some poor performing stocks and getting more defensive. I am not a big fan of CNBC’s Mad Money host Jim Cramer but sometimes he goes come out with some outstanding comments.

“Every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer

The chart below illustrates the daily stock price of the S&P 500 from Jan 4, 2007 until Mar 31, 2009. The market seems fairly flat until Oct 2007 before it started a roller coaster ride downward.

2007-2009

This next chart of the S&P 500 is from Jan 4, 2015 until Jan 23, 2016. Again the market seems flat for a while before the start of a new, more volatile roller coaster ride.

2015-2016

My trader’s instinct tells me that the U.S. markets may bounce up but that the rally will be short-lived because the price of crude oil hasn’t made a bottom yet. I am not a big fan of technical price indicators but the S&P 500 has to break through the 2000 level for this correction to be over and a breakdown below the 1820 level will see more selling. A double bottom pattern that formed during the August 2015 correction is very bullish.

Unfortunately, the average investor closed their eyes, put their portfolio statements in a drawer unopened during the 2008 financial crisis and waited almost 4.5  years to break even. They missed one of the best stock buying opportunities of some really stupid bargains.

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” – Warren Buffett

What do think? Is it safe to buy now or are you going to sell into the rallies?

 

Investment Club Meeting: a tad bearish on Canada but bullish on foreign equities

club

We had a very lively discussion during our annual shareholders’ meeting. As promised in my last post, I asked the advisors in the group for their investment outlook. These advisors were very skeptical about the bullish sentiment that the Canadian market would out perform the U.S. in 2016. Over the past five weeks, they have been getting more bearish commentary regarding Canada. One advisor commented that it was getting more difficult to separate the 80% that is bull shit and the 20% that is real.

He gave out a Dec. handout with Bankers’ predictions for oil in the $50 to $58 range, the Canadian dollar around $0.73 and the TSX closing near the 14,500 to 15,000 level. “How can RBC predict the price of oil to double by the end of the year and our dollar rebound to only $0.73?”

Key bearish comments on Canada

  • Saudi Arabia is not likely to cut production in 2016 because they have introduced economic reforms to ride out lower for longer oil prices.
  • Tensions between Iran and Saudi Arabia have increased. The U.S. (Saudi’s biggest ally) has been negotiating with their biggest enemy (Iran). Low oil prices has become a weapon to hurt Iran’s ability to finance their aggressive military expansion plans in the region.
  • The lower Canadian dollar is not helping our economy recover from low oil prices. Our manufacturing industry has lost production to Mexican whose currency has been lower for longer than Canada.
  • Canadian consumers have less disposable income, the savings from lower gasoline prices isn’t enough to offset the cost of higher food prices.
  • The selloff in Canadian Reits points to an increase possibility of a recession in Canada. Despite the fact that interest rates were cut twice in 2015, investors fear lower rental revenue in the office and industrial space.

Since our meeting I am even more bearish

  • The end of Iran’s oil export ban is expected to occur this weekend and could add another million barrels a day of surplus supply. IPA has projected a reduction in U.S. shale production of only 750,000 barrels by the end of 2016.
  • The U.S. oil export ban has been lifted, two weeks ago U.S. oil companies have started to export cruel oil. I believe that this could delay U.S. production cuts.
  • Back in November, three U.S.  tankers carrying diesel fuel heading to Europe had to turn around because the storage tanks in Europe were full.
  • Liquid natural gas (LNG) prices in Asia and Europe have fallen more than 50% making the whole process for North America suppliers less lucrative. Canada’s LNG window of opportunity is closing as we are still in the planning stages and years away from construction.

Blackrock Chairman and CEO Larry Fink said Friday the stock market could fall another 10 percent and oil prices could test $25 per barrel. But by the second half of the year, Fink said, the stock market should be higher. “Over the course of the next six months, we think it’s going to feel a lot better.”

club1

Club member’s views

Members believe that the Bank of Canada will cut interest rates again in 2016 and falling crude oil prices will weaken the Canadian dollar to the $0.60 to $0.62 range. We decided to move 50% of our cash into U.S. dollars.

They agreed with my short-term bearish views and with my suggested to protect our long positions selling covered call options and buying some short ETFs. (SH & DOG)

They are bullish on Europe based on the positive effect that Q.E. had on U.S. stock prices and that it should have same effect on European stocks.

Keep some cash on hand to pick up some bargains!

Disclaimer: These just opinions and you should consult with a financial advisor!

 

Yearend 2015 Scorecard for Smart Money

score

There are only a few days left in 2015 before we ring in a new year. It is a good time to look back and evaluate this financial blog. I am not sure that increasing the number of followers, views, likes or comments is an accurate measurement of success?

The financial media is constantly pitching you investment ideas and so have I, with a disclaimer to do your own research or consult with a certified financial advisor. I feel that it’s an important exercise to look back at both the good and bad ideas.

hit

Here are some good hits:

Back in January, I suggested going long the U.S. dollar and to get out of Canada. I made money in both my retirement and personal investment accounts by simply transferring Canadian dollars into U.S. cash. I was confident that the downward trend would continue but I had no idea that the Canadian dollar would fall 19% during 2015.

Now, the TSX has underperformed the U.S. markets over the last few years so moving out of Canada was a good bet especially with the weakness in commodities. The TSX was down over 11% in mid-December but the Santa Claus rally has come to Canada a little early and reduced the losses to only 8% with three trading days left!

One of my very best suggestions was to avoid investing in the oil & gas sector. All the Wall Street analysts, media experts, hedge fund managers and even the Bank of Canada were wrong on predicting a bounce back in the price of oil. Both oil & gas ETFs in Canada (XEG) and the U.S (XLE) were down 25% this year. There were a number of sucker rallies that just fizzled out.

I also suggested some U.S. sectors that I liked for 2015. They were consumer discretionary (XLY), health care (XLV) and technology (XLK). It looks like all three sectors will end up being positive for the year. I also stated that I was avoiding the gold sector (GLD) which is down 10% because I didn’t understand the factors that cause the price to move.

big3

 

miss

Here are some bad pitches:

The worse suggest was investing in the transportation sector (XTN). Planes, trains and transport trucks should have benefited from the drop in oil prices. The overall sector is down 20% and I lost some money on my shares of  CN Rail and Fed Ex this year. I did manage to make some profitable trades in the airline stocks.

After a number of derailments, plus delays in new pipeline construction,  I suggested that rail car manufacturers could be a good investment. The three stocks mention in the blog post are all down year to date. (GBX,TRN,ARII) I apologize for not writing a follow-up post stating that I didn’t put any money into these stocks.

big4

I have highlighted some of the best and some of the worse suggestions over the last year to illustrate the importance of keeping score. Your investment account statements will be on line soon or in the mail if you are old school. Take some time to evaluate the performance of your financial batting average. If you have a financial advisor, book an appointment to evaluate their recommendations to ensure that you are still on track to meet your short and long term goals.

Getting a hit 35% of the time in baseball would get you a big signing bonus and a huge salary. Over time, that same average in picking investments for your portfolio could put you into the poor house.

In case you didn’t know, we do play baseball in Canada.

The Domino Effect of the Collapsing Price of Oil

domino

The collapse of the U.S. housing bubble sent the world spiraling into recession. Could the collapse of energy and the bursting of the commodity bubble be just as damaging? Very few Wall Street experts are willing to even use the term “bubble” with regards to the boom and bust in the price of oil, copper, iron ore and other materials.

As with housing, there was a fundamental reason for these prices to soar. China has been on a historic commodities binge as it doubled the size of its economy in recent years to become the second largest economy surpassed only by United States.

A feeding frenzy of financing, mining, fracking and deal making intensified the boom and now, the bust as China’s growth and appetite for such raw materials has slowed dramatically.  You can add Canada, Australia, Brazil, Japan and Russia to the domino picture below:

dom

 

The U.S. economy is among the least directly damaged by this unwind but that does not mean the country will escape unscathed. For starters, the slowdown in world trade has already damaged profits of big corporate multinationals and transportation providers. The transportation EFT (XTN) is down 20% compared to the S&P 500 which is almost flat for the year.

Cracks have been forming in the high yield bond market from the realization that the price of oil will not be recovering anytime soon. (junk bonds) The possibility of oil fracking companies defaulting on their loans has caused a stampede to the exits.  U.S. investors have been pulling money out of high yield mutual funds at the fastest pace in over a year.

Third Avenue Management said on Thursday it was shutting the doors of its $800m high-yield bond fund because it had run out of money to pay redeeming investors without having to dump bonds at fire-sale prices.

The chart below of two popular high yield ETFs illustrates the rapid decline in their price that started back in June 2015.

bonds

Many Wall Street traders and hedge fund managers have been betting on a recovery in the price of oil. The collapse in oil below $40.00 a barrel last week has caused them to panic and caused the market to selloff.

In my humble opinion, I expect more tax loss selling this week. Plus hedge fund managers will probably try to recover some of their losses by going short oil and adding more downward pressure to the price of oil stocks.

The next domino to fall could be investor’s confidence leading to equity mutual fund redemptions. This could force fund managers to sell some of their more liquid big cap names like Facebook, Amazon, Netflix and Google which have been big market winners’ during 2015. Some fund managers will also be selling some other winners to avoid sending out tax forms in 2016 to their shareholders with capital losses.

There are two important events that I will looking at closely this week. The first is the wording of the Fed statement regarding the pace of interest rate hikes expected for 2016. The second is the stock market reaction to the triple witching of options that expire on Friday. It can be a down day for U.S. stock markets!

Triple Witching Definition from Investopedia

An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December. 

I would strongly recommend avoiding putting any new money into the stock market. I would wait to see how this plays out this week.