Monday, 12 January 2015

New beginnings and old stories . . . .

During 2010, I was trying hard to get a new hedge fund off the ground which was set up to invest in commodities linked listed instruments. It wasn't a radical idea, but we felt that a lot of investment vehicles were either too single commodity orientated or too much like existing CTA's. While we were bullish, especially on oil markets, we used always to have a slide in our presentation about possible threats to our view. One of those threats was USD strength. You see we saw oil like Paulson sees gold, as a hedge against currency debasement. The lower the USD went, the more pronounced the spike in oil. Mind you, we always noted that the Keystone pipeline, natural gas, and fracking in making predictions on price targets within the petroleum complex.

The USD is the key. Consider that countries like Saudi Arabia are almost exclusively reliant on USD's to support their economy. Their local currency is almost an economic mirage. All the Saudi's, Iranians, Nigerians, et al. care about is how many dollars they receive for a barrel of black sludge. They may as well carry around little vials of oil to exchange for their groceries. If the USD goes down it usually means fewer oil barrels per dollar. If it goes up it means the opposite. In an economic sense, you may even be better off looking at the "Big Mac Index" to get a true sense of  what that means.

Right now oil is dropping faster than the dollar is rising. That differential is because the capacity takes time to slow down or shut off completely. Something has to give. This blog has long held the view that USD was the way to play the recovery in the world's economy, and this will continue. As such oil will bottom when capacity cuts start to come into force. The Saudi Ambassador to the USA said only last week that they had no plans to implement such cuts.

Why does that matter when the Russians and the Americans produce similar amounts of petroleum? Well, mainly because the Saudis have the advantage in the lowest cost and lightest crude. That means they have the flexibility to control the supply. It comes down to them looking at how many USD's of income against a "trade-weighted index". Obviously if oil falls too quickly the Saudis will have a deficit until USD buying power catches up. That's why we're still some ways off from an equilibrium being reached. In the meantime, look for further USD strength and slowing of the rate at which oil is falling. You'll know we're at the bottom when you start to see the Saudis cutting production.

I get perverse pleasure in watching the failures of newspaper stock pickers. One of the few reasons I buy the Sunday newspaper published by underperforming media group Fairfax is to watch the performance of their stock-pickers. Last year the dart board and astrologer seemed to be forever in their top ten, which gives you idea of what type of market we were seeing. This year I'm following a "dirty dozen" assembled by News Corps flagship paper The Australian (The Weekend Australian January 3-4, 2015, page 25). The twelve "pickers" have come up with 100 stocks, so there's some overlap. As usual I get a chuckle at those participants throwing in the odd "penny dreadful" in the hope of a big percentage return. Then there's the "dogs of the Dow" type picks, where they pick "bluish chips" that are bombed out in the hope of a bounce back. Don't get me wrong, there's a place for everything, but without weights and cap parameters the average punter would be best to treat this as entertainment.

Sample from the excel I'm building to track the stock pickers in The Australian. If you want a copy contact me at IBCyclist Consulting.
So far the combined portfolios are predictably flat for the year, perhaps slightly positive. There's a few end of 2014 marks I need to investigate before publishing. The best performer looks to be Angus Geddes (Fat Prophets, +3%). Geddes looks to have picked the bounce in gold via his Newcrest (NCM.AX) pick. In addition, it gets the secondary benefit of receiving USD's against an Aussie Dollar share listing, so the more the US dollar and gold goes up, the more AUD earnings the company has.

At first I thought the worst performer was Peter Wright (Bizzell Capital Markets), but because he's chosen some speculative plays my data looks corrupt and needs modification. Thus my earlier comment about 2014 marks. One of the stocks Mr. Wright has chosen is Laneway Resources (LNY.AX), a gold play whose market cap is less than AUD 10m. In his synopsis, he said the company "boats a gold resource of more than 400k ounces". That sounds attractive, but as I have no idea of the cost to produce those ounces it's hard to make a judgement. If you're like me, you'll go straight to the company website and the associated announcements made to the ASX. As I always say: Investors need to stop research and think before buying or selling. I'll be following this "competition" all year and providing some analysis of the mathematics of the performance we see at various intervals.

Finally on to cycling. In 2014, I didn't quite reach the same mileage as I had in 2013. Strava, the sports tracking website, produces a nifty video summary of all your activities for 2014. It's very cool and another reason I prefer using Strava over other similar websites.

Funnily enough I think Strava failed to upload one ride. Garmin has me at 8817km for the year. For the record, here's my Garmin numbers:

For the record, I cycled nearly twice as many kilometres that I drove my car. Which I think is a good thing, right?