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Bad news Alberta - stagnant oil prices are potentially here for a long time; multiple forces in play suggest this. Stability and low prices offer relief for consumers and businesses, but oil-dependent parties and organizations will need to adapt to the new reality.
An unofficial meeting between OPEC members on Wednesday September 28, 2016 showed some promise that a supply reduction was on the table, however the cut drops oil production to 32.5 to 33 million barrels per day, from the estimated 33.25 million currently being drilled. Although it is just a hair cut, it triggered a 6 per cent rise in the two sessions following. Prices are now back hovering near $50 a barrel again. That sounds great, right?
Well, these knee-jerk reactions allow non-OPEC members to re-enter the market even momentarily and elevate supply, a concern that plagues the industry. This has and will continue to counter any major bullish move in oil prices for years as long as OPEC maintains its strategy of capturing market share.
Take for example the promising run-up in oil prices in June and July of 2016 which created a pivotal situation. US oil rigs were moving conversely to crude prices. CNBC reported that when oil had reached $50 that spring, US oil rig counts were at their lowest. However, as they started going on line, persuaded and incentivized by higher prices, crude fell again back to $40 due to larger supply.
Unlike most consumer goods, oil and commodities are typically traded through futures and forward contracts. Producers secure prices months or years in advance. So, when oil surged for just one week, dozens of rigs were able to lock in $50-plus oil revenue.
According to the U.S. Energy Information Administration (EIA), in 2015, an estimated 93.88 million barrels of oil are consumed per day and supply amounts to 95.72 million. Even with the reduction by OPEC producers of at most 750,000 barrels per day, there is still more oil being supplied than consumed and nearly an additional 3 billion barrels of oil sitting in inventory as of year-end 2015; this represents 32 days of oil coverage (if all producers closed operations).
OPEC maintains its stance. It wants to capture global market share however it appears its strategy has changed with ministers in Saudi Arabia having been swapped. They are more inclined to support prices at current levels than to allow it to drop back below $30 - a price that still is profitable for OPEC members. We must acknowledge that prices around $70, what many consider the most efficient oil price in America, would be a level that introduces significant competition. The United States is number 2 in oil production and OPEC, to remain consistent with its strategy, must ensure prices do not reach that level for years to come.
Oil is also traded in US dollars and therefore, strength in the currency will reduce the price of oil in relation. Since the US Federal Reserve is looking to increase borrowing rates, which in turn increases the value of American currency, this does not bode well for oil prices. All things being equal, gains in the greenback as a result of interest rate hikes, increases in American investments, or economic growth reduces the price of oil in American dollars.
The current environment and conditions do not favour a sustained bullish move for oil and sweeping changes and renewed sentiment of oil ministers and OPEC will continue to keep prices at bay for many more years. Regardless of the tactics of the speculators that exist in the trading pit for energy derivatives, the reduced interest in oil trading only elevates the accurate pricing of supply and demand. And it appears that $45-50 US is where it will remain.
A significant number of investors fail to hedge their portfolios for two reasons: They are unaware of hedging strategies or they implement them poorly. Hedging is a very important strategy that can help increase returns in one's portfolio offering income and protection during market corrections. For example, if you had purchased Netflix on the day of its earnings release last week, you would have seen a 10 per cent hair cut on your share price. However, I made the same purchase and hedged fully and have made gains on the trade. Here's how.
Before I provide you with the trade details, readers must know that my strategy on Netflix is an income generating strategy and not of capital appreciation and therefore the strategy outlined ahead may not be suitable for all investors. My intentions on buying Netflix is to collect the premiums on covered calls while ignoring the daily and weekly oscillations in the stock price. This way of thinking mimics a home owner renting their property to a family as the value of the monthly rent trumps the value of the home. The value of a home could rise or fall, but the rental income is the primary focus on the investment. With that said, here's how I've made money on a losing trade.
Shares of Netflix were purchased for $99.39 a share. Immediately, a married put strategy was implemented selling the July 22 103 call for $3.30 a contract. We also purchased a July 22 95 put for $2.93. As you can see, the premiums received on the calls offset the cost of the put option. The paired trade automatically generated income of $37 a contract regardless of where the stock finished for the week. This represents 0.37 per cent income on investment. The set up above meant that I would be forced to sell my shares at $103 if the stock rose above on Friday. However, if the stock fell below $95, I would have the option to sell at $95. My max profit on the stock was $3.61 a share and my maximum loss was $4.39 a share.
With the shares having fallen to around $86 on the stock's earnings report, the put option was sold for $9.80 instead of selling the stock at $95 because I wanted to continue owning the shares and reduce commission costs. The call option was worthless and we collected the entire $2.93. With the shares below the Bollinger Bands, we knew a rise was imminent, and on Tuesday July 26, the shares rose back above $90. We sold the July 29 93 call for $0.65.
If you add up all the transactions, the net money collected through all options was $10.82 (sale of call and put options minus the cost of the put option) a share dropping our break-even to below $90. If we are forced to sell the shares at $93 before the end of the week, we will have actually made $4.43 a share even though we sold it for $6.39 below our purchase price, as we see in the table below.
| Asset Name | Cost Price | Sale Amount |
| Netflix stock | 99.39 | 93.00 |
| Jul 22 103 call | 0.00 | 3.30 |
| Jul 22 95 put | 2.93 | 9.80 |
| Jul 29 93 call | 0.00 | 0.65 |
| Total | 102.32 | 106.75 |
I have removed commission costs in the examples above, however, with commissions below $5, they're essentially negligible in this example. If you have comments or questions on hedging strategies, leave us a message or follow my Facebook trading page Moonlight Financial Education.
Disclaimer: I am currently long Netflix shares and short Netflix call options.
The Pokemon Go app is believed to be generating a million dollars US a day, which puts it on par with top mobile games, such as Candy Crush and Clash of Clans. It's probably too late to buy Nintendo's (JP:7974, US:NTDOY) stock, which trades on the pink sheets in the US and the main exchange in Tokyo, with its significant climb this month, but there are still opportunities to make profits on this craze.
The release of the game occurred in the the third quarter (or second half for European readers) of the calendar in the US and Australia first, which means most earnings reports due this season will not include revenue related to the game. In fact, the game has not yet released in Japan, strangely. With that said, there are at least three industries that may see a pop in Q3 earnings and here's your chance to take advantage.
Telecommunication
Telecom stocks are poised for an earnings surprise in October and probably the biggest beneficiary. Data and roaming revenue will undoubtedly be fractionally higher. Most national carriers refrain from offering unlimited data and summer typically brings new contracts. Customers and parents dishing out the bill may be asked to offer or bundle better data plans. Canadian dollar investors may want to look at Rogers Communications (CA:RCI.B, US:RCI), Telus (CA:T), and BCE (CA:BCE, US:BCE) on the Toronto Stock Exchange. An added benefit: these companies offer attractive dividend yields and have a history of raising dividends every four to six quarters. Even if you end up stuck with these trades, they may turn into great investments for one's portfolio. If you want to stick with American telecommunication companies, consider Dow components Verizon (US:VZ) and AT&T (US:T). Both companies also offer generous dividends.
Historically, telecommunications also outperform the broader market during times of low or negative economic growth as investors seek safety and yield. Sales of battery charging units and portable kits are also expected to rise which boosts profit for companies like Best Buy (US:BBY) and many other electronic companies.
Cellphone Manufacturers
The second industry that will be a beneficiary of this Pokemon craze would have to be phone companies. Software updates on older phones typically stop after a while. The Samsung S3, for example, is unable to play the game, although there are ways around that do allow tech savvy users to catch em all. However, for thr general population, this game may be the catalyst that pushes customers to upgrade their phones which may also offer better battery life and faster game play. Apple (US:AAPL), Google/Alphabet (US:GOOGL), and Samsung (KR:005930) should see some sales boost in the third quarter. These companies also offer phone charging units as sales for these products have seen a jump.
Utilities
Thirdly, one could argue utility stocks could see a boost in demand for power. Charging phones three times or more should provide a small revenue boost. This is also another industry that outperforms during periods of slow economic growth; any boost in power consumption could offer yield hunters some capital appreciation. Transalta (CA:TA) in Canada is a major player and there are nearly a dozen US companies worth over $10 billion in market cap. The top three American stocks in market cap as of 2016 are Duke Energy (US:DUK), NextEra Energy (US:NEE), and Southern Co. (US:SO). If you're looking for a boarder based play, the iShares US Utility Index (US:IDU) offers exposure to an abundance of energy stocks in America.
It must be noted that these companies have not yet released second quarter earnings and if guidance for the third quarter is provided which discusses increased revenue from Pokemon Go, the trade may yield smaller returns. The US stock market is currently at a record high and it is important to be aware that most analysts are bearish at this point. If you are looking for an inexpensive way to play these trades, call option spreads may be a more efficient alternative. Good luck and happy trading.
Disclaimer: At the time of this article, I did not own any stocks or derivatives on the companies mentioned. Household owns BCE.
For the first time in my life, I will be celebrating Canada Day outside of my beloved nation. Do not worry fellow Canadians, I am not abandoning us on our day of independence. I assure you, it was purely coincidental. My love for Canada runs deeper than hockey and maple syrup and beavers. It's about waking up every morning with the inhalation of freedom and safety that exists never having to live in war and oppression. I am proud that we have Syrian refugees plotted across Canada to be as far as possible from war, but with a silver lining, also as far as possible away from their home. I like knowing that I was provided with an education that has given me an advantage, skills, and knowledge to fulfill my dreams. I have faith that our healthcare system, which is essentially free and imperfect, will give me doctors and nurses that will do the best they can to fix me. I like that my government actually cares, even if many disagree, because they are formed of Canadians whose intentions are to grow and move this country forward on many social issues, including LGBT rights, minority rights, and environmental protection. I proudly call Canada home.
For the first time in my life, I will be celebrating Independence Day in the United States of America. USA, our biggest ally. I'm sorry, as Canadian as an apology may be, for never attending your birthday until now. I hope you put on a wonderful show for me and my boys. But there are some things that upset me about your country and it's deeper than football and apple pie and bald eagles. I don't like waking up here knowing that there could be a mall in lock-down a few blocks away. I don't like your inability to realize that Syrian refugees are people looking to be plotted across your country in shelter as far as possible from war. I don't like knowing that your country, the richest nation in the world, cannot provide its children with top-notch education and as a result, it has put your people without an advantage over cheap labour, with a lack of skills, and with a lack of knowledge to pursue their own dreams. I do not have faith that if I am injured while on vacation that your healthcare has my interest at heart because I am in a position where it will cost me an arm and a leg to fix my arm and my leg. I don't like that your government has no energy to focus on social issues, including LGBT rights, minority rights, and environmental protection, because you spend most of the debates arguing about gun control. I proudly call Canada home.
To put this into perspective, in Canada, we're currently arguing about the carbon tax issue and why Parliament is wasting time and resources debating over a gender neutral national anthem which was the dying wish of a Member of Parliament. But in America, you continue to have a decade-long argument about gun control which is brought up every time there is a mass shooting, which is literally everyday. Yet, you continue to make little strides in protecting your own citizens. It makes my nation's squabbles and political debates seem so petty. And all Canadians should feel so grateful that our nation is peaceful enough that our debates at all levels of governments are so "meaningless."
Nobody I know talks about going to America to be a doctor or a movie star anymore. Nobody wants to deal with a country that makes people contemplate if they should go to a hospital or save a few thousand dollars. In Canada, I drive to work knowing that the school behind my house won't go into lock-down and the only guns at the gym are the biceps on those buff guys.
And to my American friends that are against gun control, it works. It has worked in your country and it works everywhere else. Ask us, Japan, Australia, Sweden, Norway, England, France, Italy, Hong Kong, China, Germany, Switzerland, Iceland, Cyprus, Finland, and Czech Republic, just to name a few. Because here's the thing, by the end of today, whatever day you have chosen to read this, there probably has been more mass shootings in America than the combined amount of mass shootings in all of the nations I listed above.
I come to visit America because your nation has great cities and monuments, but these are all symbols from your rich past. Those skyscrapers, those cities, those statues were all made decades ago. When I walked into America, I didn't get that same 20th century feel that once existed in the streets. People's eyes do no light up with fire and passion and wanderlust. They walk with sorrow because they have no job and they cannot afford to cure their ailments and their child has just died in a school shooting. This is what has happened to America and it's a complete shame.
Canada, you have continued to rise in my heart and I am grateful for everyone and everything that makes our country so wonderful and the envy of so many. It is not a perfect country and it never will be through the eyes of thirty some odd million, but it's my home. Happy Canada Day, and yes, to our neighbours, with a "u", Happy Independence Day. I truly hope as our biggest friend that you can be the country that once was because it will make the world a whole lot better.
Photo from CNBC.
Central banks around the world have been unable to advance economic growth and raise inflation in the last five years despite declining interest rates and added stimulus to their national economies. Their egos fail to recognize that their monetary policies and actions have a smaller impact on real-world economics. Individuals still cannot get loans because poor economic conditions disallow many to qualify. And housing inflation skyrockets as speculators re-enter the market. This has created an environment not unlike 2008 that could lead to another stock market crash in the very near future.
Continued pessimism with regards to the economy is justified by falling corporate earnings and low GDP growth. The US market has now had four consecutive quarters of falling earnings - termed an earnings recession. Just this month, we have seen three behemoth technology stocks that rule the world, Apple, Microsoft, and Google disappoint followed by significant reductions to their market capitalization. Yet, the stock market maintains its current valuations propelled by low interest rates.
Low interest rates has been the culprit for the extension of the bull market. With no other assets to invest in that can yield significant returns, investors are forced to turn to the equity markets where dividend yields are relatively higher than bonds. During a time of significant pessimism, this can be dangerous when smart money pulls the trigger and starts selling the moment the Fed raises rates as it will have to do if inflation starts to rise. This rate hike is predicted for June 2016 unless conditions worsen, a truly lose-lose situations for main street.
In December, the market fell 8 per cent when the US Federal Reserve moved to raise rates a quarter basis points. It was the first rate hike in a decade. It was concluded that the stock market was in a fragile state for a rate hike because of its significant correction, but four months later, the stock market is right back where it was. With little options, as discussed, the flow of money continues to drive the market higher while the Fed remains hesitant on its second move.
The second component of this rally may be corporations buying back stock. Large names like Apple, Starbucks, etc. are borrowing billions of dollars, instead of using their cash deposits, to buy back stock. An interest payment on a bond would be less than the dividend payment owed to investors because yields on the safer bonds are often lower than equities. This creates a situation that may be arbitrage and allows corporations to boost earnings per share without having to increase revenue and net income.
The conditions created by low interest rates will only cause another fallout. A housing bubble is being created by the few speculators that have access to low-cost money. The UK posted in December 2015 that housing inflation was at 7 per cent, exceeding both inflation and wage inflation. Housing now costs 10 times the earnings of first-time buyers versus 2.5 in the 1990's. As of March 2016, the Canadian housing index is up 7 per cent year-over-year as well, also exceeding the consumer price index average of 1.5-2.0 per cent.
Sweden, one nation with negative interest rates, recently posted a significant growth in its GDP. It is heavily debated whether it is a direct result of negative interest rates, but the main concern now is the significant amount of consumer debt that has been created. Housing has risen 11 per cent as more people take on mortgages fueled by low interest rates and this may be an unhealthy as it creates a bubble.
Central banks do not get it. They have pumped trillions of dollars in international economies over the last half-decade and lowered interest rates to record lows, some nations at negative interest rates, with very little to show. This is because the average individual has not prospered through some trickle down economics. Jobs are still as scarce as ever and housing prices are beyond the affordability of most people. Stability in the market is uncertain and GDP growth in first world nations will not reach 2 per cent for another decade. The law of big numbers, an idea that as a company or entity gets bigger its rate of growth slows down, has now hit world economies. Japan went through a decade of tepid growth and our world is near its peak, but it is still a shining example of innovation and the envy of many.
Perhaps we have entered a new economic environment that does not prosper as it once did, but maintains small growth equal to inflation. All I know is this. Economics and business analysts are concerned. Central banks continue to believe their stimuli will work. They will continue to delay and prolong an interest rate hike and it will allow the stock market to soar, but when they realize it has failed and its decisions are less effective, it will pull the carpet from under investors in the stock market and the average person will see another crash. It is only a matter of time.
Read:Bank of America believes not investing equal to investing in 2016
