Generalized market thoughts

Here are a few more general thoughts on the markets:

1. As long as American oil producers are able to pump progressively higher amounts of crude oil, Canadian producers will always be at a relative disadvantage to the USA unless if they develop a proper export facility that goes outside the USA. This is a very well known fact, and one of the reasons why even if the federal government changes this October, it will still be quite some time before Canadian oil producers reach the glory days like they did a decade ago. The completion of the expansion of Enbridge Line 3 (late 2020) will alleviate this somewhat but ultimately, Canada will receive full price for its crude oil if they can export elsewhere. Good luck!

2. The dynamics for natural gas are a little different. While domestic production exceeds domestic consumption, there is the promise of BC’s LNG project near Kitimat, which is expected to be active in 2025. What will be interesting is if any court challenges will stall the project out like the Trans-Mountain pipeline. In general, natural gas producers (and there are a handful of them to look at) look more promising from a valuation perspective than do crude oil counterparts. They have both been hammered as AECO pricing has been terrible – again, there is just no way to get rid of the product when the USA’s own production has been expanding like no tomorrow.

3. The acronym TINA – There is no alternative – is what explains a lot of what I see in equity pricing. If you are a pension fund manager, and your expected rate of return is 7%, you can invest in some BBB-rated bonds and get a 4% return. You need to pile onto the equity in order to make up the the other 3% for the remaining part of the portfolio. When equity prices fall, in order to generate the extra needed return, you rebalance and purchase more equity. With central banks very loose with money supply, there remains ample firepower to throw into equities – and it doesn’t matter what equities, as long as they are as liquid as possible.

I have no idea when this blows up, but I suspect when it does, it will be very, very quick – similar in scope to December 2018, or the crash of the inverse volatility ETFs which happened in February 2018.

There will be pockets of safety here and there, but everybody remembers what happened in 2008 – mostly everything got sold down, no matter how attractive the assets were.