Wednesday, 9 January 2013

Everything is relative . . .

Copper down 0.3 per cent to $3.66 a pound, but Brent crude added 68 cents to $112.08 a barrel . . . everything is relative.

I've been an oil bull for over a year now and it really hasn't paid off perfectly. My rationale for liking the black stuff was that the continue debasement of the USD by the Fed would see oil, especially at the long end of the curve assume a "money-like" status similar, yet more useful than gold. As someone who's first economic memories was of the oil-shock and the lines of cars at US and European petrol stations in the early 70's I can remember the effect the dual forces of inflation and supply restriction had on the world. Of course now is different in that supply while tight is not really restricted and inflation remains for the moment dormant. Things have changed a lot on the demand side with the US Energy Information Administration predicting that net imports of liquid fuels, including crude oil and petroleum products, would fall to about 6m barrels per day in 2014, their lowest level since 1987 and only about half their peak levels of more than 12m during 2004-07. Thats an amazing fact when you consider where oil is. Therefore if we assume normal monetary policy can we also assume oil would be much lower? I think so, thus the difference in my mind is what we might call the hard money value of the commodity.

Let's think about oil as though we're still in a pre-money bartering economy; you can run a truck for how long on a bbl of diesel? In that time how many deliveries can you make? Therefore there is a store of value in the fuel. You can always burn it and realise a yield. That of course is not to say you won't lose some  money, but there's always value there. I know there's a lot of problems with this logic, mainly because it relies on demand to make the oil economically useful, but if you're a cyclical bull energy, such as oil may act as an inflationary hedge as well as an economic conduit. Take it one step further . . . traders will often price gold in various currencies in order to reveal hidden value. You can do the same thing with oil. Ask yourself questions like: How many ounces of gold does it take to buy a bbl of Brent? Look at it over the ages and at times similar to now. Draw your own conclusions. Is oil cheap or expensive?

Readers of this blog know how I feel about Japan and the long term effects of their Zero Interest Rate Policy (ZIRP). Well this morning we had the unseemly unravelling of the Ping An Insurance share sale by HSBC.

The Thai group that seemed to have the financing locked up to do the deal turns out to suddenly not be a suitable borrower for China Development Bank (CDB). Let's leave aside the possible nationalistic reasons that the state-owned bank may have had to pass on the deal and consider that Ping An itself may not be a great opportunity without extremely lenient credit conditions for CP Group, the acquirer. The RoE of around 15% looks good compared to many of the banking and insurance plays available around the world, but a debt to equity ratio of over 250% and a dividend stuck below 1% might not be the best use of available debt. Also you want to assume that China is still under insured because the 5 year earnings growth at 14.5% is a little underwhelming for an emerging market. Yes China is still an emerging market. Other than that HSBC now will be forced to mark the block to market and do so at each reporting period. Perhaps volatility will return to the share price and holders of HSBC might be able to resume an over-writing strategy to supplement their yield?

HSBC used to be special until we found out that their compliance procedures were not as air tight as investors once assume. What happens if a companyApple is no longer special? It's not a bank, so a compliance "blow-up" is only likely if we find out that Foxconn has been taking liberties with the workforce. But what we can assume is that a lot of the "special-ness" in Apple equates to sector leading margins. Well it will make you shudder to know the company is working of a commoditized version of the iPhone. A $300 iPhone may sound like good news to the cash strapped consumer, but to me it looks like another step to cannabalizing Apples own product lines. Much like the iPad mini, a iPhone mini has very few virtues that would help Apple re-capture a higher trading multiple. If you liked the Japanese consumer electronics groups who perennially show up at investor meeting hoping to hit net margins of 5% then you'll love Apple as well. The trouble is you are not going to pay 14 - 20x EPS for it. Stay under weight here.

I'm recovering after yesterdays short but exhausting ride in the Sydney heat. The weather has cooled overnight to a cloudy 22 degrees, but my legs still feel a little wobbly.

Lance Armstrong is going to come out of hiding to talk to Oprah Winfrey. There's a lot of theories going around about why he would do this. I tend to believe the guy is pretty smart and that he sees this as the best of what must be some horrible options. Americans and indeed a lot of us love a redemption story. If he can pull this off he wouldn't be the first guy to take himself to the edge of oblivion and return bigger, better and stronger. Who knows . . . I know I'll be watching.


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