two sides of the coin

One of the reasons why stocks change hands a million times over everyday is because no matter how great or dire the economic/corporate earnings outlook is, there is always two sides to the story. Optimists and pessimists will always disagree, and each side can usually make a compelling case to either leverage yourself to the hilt and buy stocks with all your resources, or to sell everything stash most of your cash underneath your mattress and use the rest to build a bomb shelter. I think most would agree that it feels like we are on a very bad footing right now economically, but yet stocks are still finding bids, and the sun continues to rise every morning. Here are some reasons to be optimistic or pessimistic about the near-mid term economic/corporate earnings outlook:

Pessimists

• Consumers and businesses are buckling down for a number of reasons which include economic uncertainty, rising unemployment, recessions, falling home prices, and trouble obtaining credit.
• The U.S. government is building a massive debt load, and recent actions that they've taken shake the very foundations of capitalism and promise more risk aversion, and government regulation, of industries and markets in the future.
• The former 'BIG 3' automakers are in trouble, putting millions of more jobs at risk.
• The growth within emerging markets like China and India is slowing and recent terrorist acts add to the fear and uncertainty in these markets.
• Deflation is now taking over from inflation as a worry because the price of goods are declining quickly.

Optimists

• Fuel and other commodities are much more affordable than they were just months ago. This allows consumers and businesses to cut costs and leave room for consumption and investment.
• The S&P 500 index has fallen over 40% since the start of 2008. Shares of many companies can be bought for significantly less now versus in 2007. Severe declines in forward earnings have been priced into many stocks making them less risky investments.
• Interest rates around the world are coming down making credit and mortgages cheaper for many.
• Emerging markets like China and India are still growing at very high rates and demographic, and lifestyle trends indicate that they will require the rest of the world's goods and services in a big way for years to come.
• In a Darwinian type of way, plenty of the inefficiencies, mismanagement, redundancy, greed, and waste is being washed from the system. Most of the issues which have been dealt with and are being dealt with right now will come out the other side cleaner, leaner, and more stable. (ie Big 3, Financial sector, credit markets, consumer debt)

Feel free to comment on which camp you are in and why.

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is oil dropping to $60/barrel?

Looking at the shares Canadian integrated oil and gas firm Petro Canada (PCA) you would assume that oil is on the way down to where it was in the days where you could pay 20 bucks to fill up your car.

If we can forget about $60 oil and $0.60/L gas, then Petro Canada shares are looking cheaper than the samples at Costco. The stock is now trading at a Price to Earnings (P/E) ratio of a staggering 5.8x trailing earnings. This comes after a 77% profit gain and a 54% dividend raise in the most recent quarter. Is this type of earnings momentum sustainable? Likely not, as oil has touched $145 recently before dropping to the current $115 range; but it is difficult to see the current share price as reflecting anything other than sector rotation due to the current sentiment (right or wrong). Traders seem to be betting that oil is sinking down to at least $90/barrel the way the oil sector is trading, however Petro Canada traders must be betting on a much lower price for oil for a long time. Either that or some very negative, company specific results.

It is hard to imagine that there would be much downside on this stock while it trades at these levels. In order for this price to truly reflect the company's mid term future I would imagine that their production would have to decline in tandem with oil declining in a big way. With this stock you get exposure to conventional oil, oil sands, refining, marketing, and natural gas.

View the PCZ WikiChart on Wikinvest

Ford's delayed reaction

“We view the move to smaller, more fuel-efficient vehicles as permanent, and we are responding to customer demand,” Ford CEO Alan Mulally said in the statement. “For the long term, we are moving fast to introduce more small cars, crossovers and fuel-efficient powertrains — including more hybrids — and we will adjust our manufacturing facilities to match our updated product lineup.”

Ford Motor Company (F) is cutting production and delaying the release of its latest F150 pick up truck, because of the declining market for trucks and SUVs. This statement by Ford CEO Alan Mulally comes a few weeks after GM echoed similar thoughts when they announced the closing of their pick up truck plant in Oshawa, Ontario. The trouble is that Ford's whole problem stems from delaying in the first place. These two companies are about as prescient as birds flying into closed windows. Quick, name 2 smaller fuel efficient vehicles that are made by Ford?

It is easy to see why these two companies have struggled the way they have in the recent past when their lack of foresight comes out so clearly in statements like Mulally's above. I'm no economist or fortune teller but I'd like to think that if you would have asked me 3 years ago which type of vehicles would trend higher in popularity I would not have pointed to the F150 and Sliverado. On the other hand, Toyota (TM) has been putting out small fuel efficient cars for ages. Even Toyota's larger vehicles are far superior in fuel efficiency than their U.S. headquartered competition. Ford and GM have been failing for years to provide the vehicles that people want to drive. Add this problem to their array of other issues such as health care costs and a U.S. slowdown, and it's easy to see why these companies are in trouble. I hope they don't pull their ad from below this post...

Gasoline is currently selling for about $1.30/L in my area.

gas prices knocking on the door of change...?

Are higher gasoline prices starting to mean something more than filler for the 11 o'clock news?

Maybe so...

• Ford cuts North American Gas Guzzler production, the company said it is cutting production of pick up trucks and SUV's.

"Consumers have been shifting to smaller, more fuel-efficient cars in the last few months at a pace that has stunned the industry. January-April sales of subcompact cars in the U.S. shot up 33 per cent from a year earlier, including 29 per cent for the Ford Focus compact sedan, while overall American vehicle sales slid eight per cent."

• Hyundai shelves plans to build pick up trucks in the U.S.
• I'm getting less strange looks for driving a Toyota Yaris around
• A new employee just started with our company and he drives a Smart Car
• Several stories about less travelling on the U.S. Memorial Day weekend

What tangible affects of high gasoline prices have you seen?

hedge yourself™ - gasoline costs

Life is full of personal expenses that are hard to avoid. Whether they're necessities and essential services that we can't go without like gasoline, hot water, food, and banking, or discretionary like clothes, restaurant fare, or alcohol. I'd like to introduce a post series (hedge yourself™) about negating, or at least buffering the affects that these personal expenses can have on our finances. The way I propose that an individual eliminates the affect of these expenses is to hedge themselves against the expense by purchasing instruments (stocks and/or income trusts), that will provide income and perhaps capital gains that will at least buffer, one's expenses in this area. More interestingly the way one will hedge these costs will be to profit from the very source of the expense. This makes a lot of sense because if one is choosing to expend money in this area, odds are many other people are doing the same. Wouldn't it be nice to make a trip to the pump, grill, bank, mall, or liquor store a net neutral financial choice? "If you can't beat em, join em!"

The elephant in the room lately when it comes to personal expenses has to be gasoline costs. Sometime within the past two years in Canada gasoline was selling for about $0.85/Liter. This price seems very attractive as I write it, because today in Brantford, Ontario gas is flowing into vehicles for about $1.20/Liter. Let's assume Joe drives the average car, a 2009 Toyota Corolla, with a fuel tank capacity of about 50L. 2 years ago Joe was paying $42.50 to fill up, while today he is paying $60. That is a difference of $17.50 per tank.

Assuming Joe fills up his Corolla once per week, he is spending an extra $17.50 today, versus what he was paying 2 years ago.

Joe is not happy about this extra $17.50, and he would like to mitigate it's affect on his budget. This is an extra $910 per year, assuming he fills up once per week. His options are limited: drive less (he has to get to work), comply with that chain email and boycott certain gas stations (this will surely get the price down...?). There is one more option that Joe may want to consider, a hedge. Joe should open a discount brokerage account if he doesn't already have one, and perform one of the following.

• Buy 114 units of Canadian Oil Sands Trust (COS.UN). This is an income trust that pays you cash monthly when you invest your money in their business. COS.UN extracts oil from the tar sands in Northern Alberta and benefits greatly from high oil prices.

COST TO JOE = ~$5,472 for 114 units of COS.UN including a trading fee.

WHAT THIS WILL ACCOMPLISH = This investment will provide Joe with $456 per year and eliminate approximately half of the impact that high gasoline prices have on his budget. Also if Joe is willing to hold COS.UN for the long term, his investment should appreciate, and his cash from the investment should increase with high energy prices allowing his hedge to be more effective or at least keep pace with his expenditures for years.

At the end of the day this allows Joe to pay about $1.02/liter for gas when in reality it actually sells for $1.20/liter.

*taxes on Joe's investment are not included, I am not a financial advisor

gas prices & me = still friends

I am absolutely fed up with gasoline prices! I just filled up my 2007 Toyota Yaris and it cost me a whopping $43! Obviously I'm joking…gas prices are still not bothering me.

With the summer driving season approaching it will be interesting to see how high pump prices go. I always find it fascinating to read articles about truck and SUV sales vs. higher gasoline prices and whether or not the prices are affecting consumer behaviour. I am in the camp that believes that it will take significant appreciation in the price of petrol for North Americans to change behaviour by driving less, or opt for more fuel efficient vehicles. The migration to more fuel efficient vehicles may have already begun in earnest, however I do not believe the trend has gained any momentum as of yet.

What will it take for North Americans to adapt? I'm not sure. One thing that is interesting is how the Canadian dollar plays into the price of fuel in Canada. If the Canadian dollar was back even close to the levels it sat at years ago we would be in for significant pain at pumps compared with where we are at now. The reason for this is that our fuel marketers buy gasoline in U.S. dollars. So the price I paid today, which was about $1.10 / liter would have actually cost me closer to $1.35 if the Canadian dollar was back at $0.80 U.S. In that case my thirsty Yaris would have taken almost $53 worth of the smelly stuff….

Now if Petro Canada's (PCA) stock price would only perk up....

gasoline prices are great...aren't they?

Listening to people complain about gasoline prices can get a little irritating. Especially since many people who complain about this are the same people who drive SUVs and pick up trucks, and do not have the necessity to do so. I can see if you own a business where you require one, but if you are getting yourself to work and back each day in a V8 4 wheel drive GMC Sierra you may as well have your pay cheque transferred directly to Petro Canada. Maybe try living in Europe, we have had it good for a long while.


I partially know this from experience as I used to drive a 97 Ford Ranger, which is a smaller truck, and would often walk away from the pumps frustrated after having paid $70 or $80 to fill it up. Recently I found out that this was nothing when I rented a full size pick up truck for the day to transport my demolished deck. I filled the rental back up at the end of an exhausting day; I had only used slightly more than 1/4 tank, and I rung up the pump to $54. This truck would have cost about $150 to fill up at that day's price, which was about one month ago today. Compare that to my 2006 Toyota Matrix which runs me about $40 for a full tank.

Wow.......that would not go over well with me, but I may be a little frugal, but I would not enjoy paying over $8,000 / annually on gasoline just for the pleasure of driving one of these things around with nothing in the box.


Personally higher gas prices don't really bother me. We drive 2 Toyotas that get 32 mpg (avg.) and 36 mpg (avg.), and our monthly gas bill is about $220. Also, we are both well compensated for our out of town kilometers for work. Gas mileage was one of the reasons we got rid of our older vehicles, as well as one of the reasons we selected the Matrix and Yaris.


I also own shares of Petro Canada (PCA), so I am slightly hedged against rising gas prices. I feel a lot better paying my gas bill to Petro Canada when I know that they are growing the value of my investment over time, as the rest of the world scorns them as thieves and villains.