2016 Prognostications

by: Inzkeeper


Investing is an optimistic activity for those with margin in their lives.

The media is full of doom and negativity.

What should our response be?

Investing is an inherently optimistic enterprise. Generally one invests planning, expecting, and hoping for gains, regardless of your strategy or whether you are long or short. Investing means you have the physical and mental margin in your life and not only expect a future but are able to plan for it. People who are barely managing to survive - whether trying to manage food and shelter paycheck to paycheck, or have experienced some disaster - have no time or energy to consider investing. One only needs to think of refugees, or those many who lost their homes due to the tornado in Texas to understand how easily priorities can shift. Investment portfolios for retirement are not being considered at times like this. Self-directed investment is the activity of those who have some measure of leisure in their lives, or for those who value it enough to find and carve out the time and energy required out of their full, most likely stable, lives.

2015 was a challenging year on many fronts. If I was sure this year would be a disaster for my portfolio, I would be selling all my holdings. I am not. As my year end articles show, I have been buying somewhat aggressively over the last couple of months and I have also been optimistically writing put options as well. Considering they have all expired worthless (to date that is, I make no guarantees about tomorrow) my optimism has not been foolish.

The media has been seriously negative about the 2015 year, which really was painful for many investors, but the varying prognostications of the coming year seem to be even more negative for next year. I want to look at two of these news items which come from my 'back yard'.

The biggest news in my neck of the woods (Alberta, Canada) this year has been the Crash in Oil and Gas prices this year. "Lower for Longer" is the current catch phrase. Goldman Sachs says that $20 oil is likely for 2016. I do not need to go into the gory details of companies that have lost 80% of their value, as we are all quite aware. At these oil prices no dividends are safe and nearly all companies will eventually be bankrupt. Though oil prices may yet reach new lows, I doubt they will be stay there for the very long term. As the prices rise the industry will pick up the pieces as they have time and time again.

Very few people I know have not been touched, in some way, by the lower oil prices. We know people who have been laid-off, businesses that are comparatively slow, portfolios of friends have been badly damaged, and income of retirees that have been dramatically affected by the oil and gas stocks. This is not just arm's length. My son was laid off (but found employment that he is very happy with within a couple months), and my husband is now left solo in his department.

I have no idea what the price of oil will do, but I do know that now is the time to identify the companies that will survive, do the homework, and be ready to buy when there are strong signs of a bottom. I have already purchased nearly all the shares I wish to hold in the pipelines. Enbridge (NYSE:ENB) is now my second largest holding. Inter Pipeline TSX:IPL (OTCPK:IPPLF) was doubled, and I would like to double my new holding in Pembina Pipeline TSX:PPL (NYSE:PBA) sometime. I have also purchased, but would like more shares yet in the retail arm via Parkland Fuel TSX:PKI (OTCPK:PKIUF). I already have a full holding in Alimentation Couche-Tard TSX:ATD.B or (OTCPK:ANCUF) and their gas stations and convenience stores.

I have been writing put options on Altagas TSX:ALA (OTCPK:ATGFF) that keep expiring. On December 23rd, I finally purchased double the shares I sold as in September shares outright. I would not mind doubling that holding again and am now on my fourth ALA put option contract.

I have not touched the service and production companies yet as I still expect there may be more pain in store for them this year, and well, one cannot manage everything at once.

I have also purchased unrelated companies that have been punished because of locale or by an arm's length relationship to oil and gas, such as Boardwalk Properties TSX:BEI.UN (OTCPK:BOWFF) and have looked at others but not purchased.

Somewhat related to this here is the expectation of a Canadian Property Crash. This has been prognosticated repeatedly for several years actually and is hardly new news. In oil patch areas like Fort McMurray, Alberta this is and has happened. Many of the articles talk about how overvalued property in Toronto and Vancouver are. Reporters worry that rising interest rates will topple the "bubble" market. Just Google "Canada Housing Bubble" and you can be entertained for hours.

I confess that the possibility of an oil crash and resultant housing downturn was a small factor in our decision to sell our house and move to a condo almost a year ago, but it was many other factors (health, empty nest) that prompted the move into the unit we originally purchased as a rental property. It was part of moving to a position of financial security and I was tired of the upkeep on an older home. Without the children around, and with the hopes I had of my husband enjoying household projects and maintenance with me vanishing as his health concerns grew, it made sense to get out before we might not have been able to. What a great decision - but not because we sidestepped any weakness in the housing markets.

Aside from directly oil-related markets and condos in very specific markets, I do not see that Canadian housing prices are in a bubble or that the 'house of cards is about to collapse', despite the endless discussion. The US has raised interest rates, but the same action is not at all expected from the Bank of Canada. I would not expect a rate rise until the oil and gas situation improves. Even then, I would expect small, incremental increases which will not cause the Canadian housing market to collapse.

Today, for the first time, I looked up our credit report on Equifax and I found this interesting graph.

It looks to me like most Canadians have their financial houses in order. Listening in on the Canadian Bank's annual report conference calls, I thought the comments were positive on the state of personal mortgages. Royal Bank (NYSE:RY) stated that many homeowners are prepaying their mortgages and that they are witnessing a deleveraging. Statistics Canada states that more than 40% of home owners are mortgage free and that a significantly larger percentage of renters are overextended than homeowners. Scotiabank (NYSE:BNS) reports that 58% of mortgages are insured, meaning that the rest have put over 20% down on their mortgages. These organizations are not screaming doom and gloom the way the media is. The short interest on the Canadian banks from the American side seems to be growing, but actually, I feel sorry for anyone currently shorting the banks. If condo prices drop in our area, I will be buying at least one unit in our complex as a rental.

In conclusion, doom and gloom makes news, not investments. There is definitely instability in the markets and increased volatility, but I do not think it is time to flee to the hills. If you do, then what are you doing in the markets?

I expected very little from 2015 - no return at all or just dividends only, after the generous returns from the previous two years. My expectations for 2016 are more of the same. It would not surprise me if it was a down year, but my expectation is that it will end up flat. I do not think it is all doom and gloom. I think there are substantial headwinds for the markets ahead this year and global instability will continue.

But there are also opportunities. It may take longer than just one year for the opportunities to start paying off though, especially in oil and gas. In this coming year, I think those who follow an index strategy may be disappointed, as the volatility in specific names continues, but investors who diligently select and follow their investment partner companies carefully, will likely do better. It would not surprise me if some "market darlings" underperform. Those who can see the opportunities, and are bold enough to take advantage of them, as well as sidestep a downdraft in overvalued companies, will do comparatively well. I hope I am one of those investors. Time will tell.

I hope that despite the doom and gloom in the news, we have a Happy 2016.

Disclosure: I am/we are long RY, BNS, ANCUF, BOWFF, ENB, IPPLF, PBA, PKIUF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.