firming oil prices: seasonal strength or something more?

September through mid-January is the period of greatest seasonal strength in oil prices.  Early in this period, refineries shift from making gasoline to supply drivers to manufacturing heating oil in advance of winter in the northern hemisphere.  There’s normally some friction in the supply chain as this takes place.  But the key reason for current oil price strength, I think, is the typical behavior of wholesalers, retailers and end users accumulating supplies of heating oil for winter use as autumn commences.

This period of strength usually ends in late January–after which there’s be no time to get newly-refined heating fuel to users before the weather warms.

What follows from February through April is the period of greatest seasonal weakness for oil.


What to make of current firmness in crude.  Is there any evidence that the proposed OPEC production limiting agreement is exerting upward pressure on the price?

My private hunch is that, yes, there is.  At the same time, I also think there will be little lasting (meaning over six months or a year) collective discipline to keep to promised quotas once they’re seen to be having an effect.  Budget deficits are too large and the third world us-against-them cohesiveness that enabled OPEC’s remarkable past cartel success is no longer present.


Still, I think that prices will be strong seasonally for a while in any event, so there’s no need to have a view on whether a production agreement will stick.  That time will come early in the new year.

At that point, for 2017 investment success, having a (correct) opinion about oil will be crucial, I think.  I’m hoping–and anticipating–that I’ll be able to make that decision on other grounds, i.e., the innate cheapness (or not) of shale-related exploration stocks, even without price increases.  In the meantime, I’m content to be on the sidelines.


3Q16 earnings for Intel (INTC): implications

Last night after the close, INTC reported 3Q16 earnings results.

The number were good.  INTC’s growth businesses grew; its legacy arms showed unusual pep.  The latter development had been flagged by INTC during the quarter when the company announced wholesale customers were increasing their chip inventories. Nevertheless, earnings per share of $.80 exceeded the average of 29 Wall Street analysts by $.07–and surpassed even the highest street estimate by a penny.

Despite this, the stock fell by about 3% as soon as the earnings release was made public.  Traders clipped another 2% off the share price on the earnings conference call.  During trading today, the stock initially fell almost another 2%, before rallying a bit to close just below its worst aftermarket level.

There was some bad news in the report.  It will cost INTC more than anticipated to rid itself of McAfee.  It also looks like chip customers are no longer so eager to build inventory.  Instead, thus far in the fourth quarter they seem to be subtracting some of the extra they added during 3Q.   The result of this is that INTC thinks 4Q–usually the strongest period of the year seasonally–will only be flat with the robust performance of 3Q16.


I find the selling to be unusually harsh (be aware:  I own INTC shares).  After all, if INTC had earned the $.73/share the market had expected, a forecast of $.76 wouldn’t look all that bad.  That outcome, which appears to be the company’s current guidance, would also be better than the analyst consensus had been predicting for 4Q last week.

I’m not trying to argue that the stock should have gone up on this report.  I just don’t see enough bad–or, better said, enough unforeseeably bad–news to warrant a selloff of this magnitude in a gently rising market.

I attribute the aftermarket selloff to some combination of computer trading and thin volumes.  What surprises me is that there were no significant buyers once regular trading–overseen, presumably, by senior human investors–began.

Because of this, I think that trading in INTC over the next days is well worth watching to see if/when buyers reenter the market.  We may be able to draw conclusions that reach wider than INTC itself.

“The Dying Business of Picking Stocks”

That’s the title of an interesting article in today’s Wall Street Journal on the accelerating replacement of active investing with indexing in portfolios of all stripes in the US.

One important factor in the lagging performance of most active investment groups is being left out, however.  It’s the one no active investment organization wants to talk about.

Beginning in the 1980s and increasing in momentum in the 1990s, active investment groups began to dismantle their in-house investment research departments.

Why do this?

In my view it’s because,

–research departments are expensive.  They’re hard to run well.  Evaluating securities analysts over short periods of time, like a year, is as much an art as a science.  Because of its pain-in-the-neck character, a less tha nstellar research effort is very easy to regard as an unneeded expense rather than a valuable asset

–most money management organizations are run by the chief marketing person, with the head portfolio manager being the Chief Investment Officer.  So the ultimate decision maker on firm-wide administrative matters is typically not an expert on what it takes to have sustainably good investment performance

–in the 1980s and 1990s brokerage firms built and maintained strong research departments, whose output they offered to money management clients in return for charging a higher commission rate for trades.  So reliable–although not proprietary–third party research was available to money managers without their having to pay for it from management fees.  This added to the view that good in-house research was unnecessary

–eliminating in-house research would mean salaries “saved” that could be used to boost compensation for the professionals who remained (including the CEO and CIO, of course).


Not every firm used all the reasons on this list, but many found some combination of them persuasive enough that they decided to substantially reduce, or eliminate their independent research entirely.

This, of course, made these firms radically dependent on brokerage research…

…which has proved a disaster when, in their dark days immediately after the stock market collapse of 2008-09, most brokerage houses laid off virtually all their experienced researchers and pared back their for-commission research efforts to the bone.

This left money managers who had eliminate their own research high and dry.  It also meant the affected firms were faced with the prospect of rebuilding their own in-house research.  Because this would involve a substantial expansion of the professional staff, the resulting expense would pressure income for–I think–at least a couple of years.


I haven’t followed this issue carefully.  My experience, though, is that this is the kind of decision CEOs really don’t want to make–to admit they were wrong, and badly enough that fixing their mistake will retard or eliminate future profit growth.  As a result, a kind of paralysis sets in and the process of fixing the error never begins.



Calpers: one pension, two sets of books

For some time, the Los Angeles Times has been running articles aleerting readers to the troubles that California’s famous Calpers retirement system is having.  In a nutshell, the assets Calpers has on hand to meet future municipal employee pension benefits fall far short of what it will likely need.

The New York Times chimed in last week with a story about the troubles that individual cities, worried about their future and seeking to extract themselves from Calpers, are experiencing.

There are two parts to the latter:

–the “official” Calpers books give a relatively rosy picture of the current situation for each municipality.  They do this essentially by assuming the pension plan will eventually grow itself out of the problem.  The issue here is that their actuarial assumptions have lnot been adjusted down enough to account for today’s low-inflation, near-zero interest rate world.  In a sense, that pie-in-the-sky attitude would be ok with cities that want to leave Calpers   …except that Calpers presents potential leavers with a far different–and much higher–bill to bring their accounts up to full funding so they can depart.

–The Stanford Institute for Economic Policy Research has developed a Pension Tracker website where Californians in many areas can quickly look up how deeply in the hole their cities are.

Irwindale, a small town in the San Gabriel Valley of Los Angeles County, has the dubious honor of being #1 on the Stanford list of most exposed to pension shortfalls.  Irwindale’s Calpers account is short by $134, 907 per household of having its municipal pension funded.  Irwindale has other woes–Huy Fong Srirscha, for example.  But with the Stanford pension info a mouse click away, who is likely to move to Irwindale?    …or to other cities high on the unfunded list?

Worse than that, I’d certainly be thinking of moving elsewhere.


California may be the most high profile instance of municipal pension underfunding, but it’s certainly not the only one.

“hard” Brexit, not “soft”

Ever since the Leavers overwhelmed the Remain faction in the UK’s Brexit vote, observers have been wondering how the UK is going to effect its break with the EU   …and how complete the breach with continental Europe will be.

The two main approaches were dubbed soft, meaning that negotiations would be held at a leisurely pace, the break would come eventually–but not soon–and that the UK would retain as many of the privileges of EU membership will shedding as many obligations as possible.

Article 50 of the Lisbon Treaty lays out the process for a country to withdraw from the EU.  It provides that a state that wishes to leave sets the process in motion by invoking Article 50. That starts a two-year clock running, at the end of which the separation occurs.  Since two years is a relatively short period in diplomatic time, especially to arrange complex future trade agreements, conventional wisdom has been that a country like the UK would begin negotiations first and only trigger Article 50 when the negotiating finish line was in sight. Taking this path would be the more economically sensible.  It would also be a clear sign that soft is the ultimate goal.

The alternative would be “hard,” meaning basically getting out of Dodge as fast as possible.  Why do so when collateral economic damage would result?    …because other political considerations, like halting immigration from the rest of the EU, have a higher priority.


Over the past week or so, Prime Minister Theresa May has been signalling that Brexit will not be put on the back burner, and that, in consequence, the UK government is opting for the “hard” road.  She will invoke Article 50 by next March, at the latest.  And she has packed her negotiating committee with the most anti-EU people she can find.

This decision has a number of consequences:

–Scotland, where two-thirds of voters cast their ballots to Remain in the EU, is reviving its own referendum to withdraw from the UK and enter the EU as a sovereign country itself

–putting itself under time pressure by effectively starting a two-and-a-half-year clock running, the UK has revealed its sense of urgency.  That may have lost it negotiating leverage

–half of the UK’s exports go to the rest of the EU.  Time constraints may see it leaving the EU in early 2019 without trading agreements with countries where its major customers reside–meaning export sales may fall off a cliff

–similarly, it becomes less likely that bankers based in London can retain their current unfettered access to clients in other EU countries.  This suggests that banks may begin to shift operations to the Continent

–sterling will continue to slide.  For portfolio investors like you and me, this has perhaps the most important near-term implications.  There’s no need now, nor in the near future, to change from favoring London-traded stocks whose assets and earnings are outside the UK.  Better still if the firms’ borrowings and SG&A expenses are in sterling.




the presidential election (iii)

This is, I hope, my last post ever about politics in the US.

In early 1991, I met a political analyst who worked for what was then Prudential Securities.  His main idea was that even then the two major political parties were finding it difficult to retain relevance for contemporary Americans.  Leaders who were fundamentally shaped in the early twentieth-century economic struggle between working people and big business–long since been decided (in favor of labor)–were finding it hard to move on.

As a result, he thought, Democrats had a social/cultural program that defined them but no economic one.  Republicans still had their small government and laissez-faire ideas, which had only narrow popular relevance.  The GOP was–mistakenly, in his opinion–trying to broaden its appeal beyond its small base by courting the religious right.  (My acquaintance remained silent about the subtly racist the “Southern strategy” embraced by Republicans since Nixon as another means of bulking up.)

That was twenty five years ago…

…but to my admittedly not so politically-oriented mind, it remains a good description of today’s state of play.

Maybe that’s the fundamental problem.  Hillary Clinton is a Democratic figure my grandfathers (both immigrants, both Democrats, both union members–a longshoreman and a NYC trolley car driver) would have loved.  The Republicans have so little cohesion that their standard has been hijacked by an outsider winning discontented party members with a ludicrous promise to reinvigorate industries that prospered in the US of the 1950s.

The popularity of Bernie Sanders and the lack of a viable alternative to Donald Trump illustrate how out of touch the leadership of both parties has become.

My guess is that we’re in the early stages of a fundamental rethink of the political status quo that has dominated the US for generations.



the presidential election (ii)

This is a continuation of yesterday’s post on why I think the upcoming presidential election is, unusually, important for investors and why I think electing Donald is a recipe for disaster.

partnering not a priority

The most successful entrepreneurs I’ve studied create an ecosystem in which suppliers, customers and co-investors all benefit together.  In contrast, all the discourse I’ve read/heard from Mr. Trump stresses how an endeavor has benefited him personally.  Yes, the project may not have gotten off the ground, investor/customers/suppliers may have lost money–but Trump collected licensing fees or a salary/bonus or otherwise received a large benefit. And that’s all that seems to matter to him.  The upcoming fraud trial about Trump University will likely shed more light on this issue.

A careful analysis of the inner workings of publicly traded Trump Hotels and Casino Resorts (DJT) would doubtless provide more fodder.  (I haven’t made the effort, but News Corp’s Market Watch wrote Donald Trump was a stock market disaster,” observing that DJT lost 90% of its value during a time when US stocks in general were doubling.  The New York Times penned “How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions,” which says he shifted personal debts to the public company, while extracting millions for himself from it as the enterprise failed.)

a knowledge shortfall?

If the debates are any indication, Donald’s communication comes solely in short semi-coherent bursts of buzzwords and bluster that give me no indication that he understands much about the issues he purports to be talking about.  (I was recently watching a PBS documentary about the two presidential candidates in which one of Trump’s creditors in a bankruptcy proceeding comments that, while a brilliant promoter, Trump doesn’t seem to understand anything about either economics or accounting.  I don’t see evidence for the other side of the argument.)

His economic ideas are mostly wacky, and the sell-by date of his factual information passed maybe twenty years ago.

If I understand him correctly, he thinks, among other things, that:

–Russia, which is highly reliant on commodity exports, whose economy has shrunk in US$ by a third over the past five years and which is a dictatorship controlled by a former secret policeman, is a good model to emulate

–Japan is still a formidable economic rival to the US

–China is an exporter of labor-intensive, low value-added goods, not a burgeoning capital goods, tech and biotech nation

–erecting tariffs that substantially raise the price of imported goods will make consumers better off.  Smoot-Hawley, anyone?

–cities like Pittsburgh, now a tech hub, would be better off giving up their futures and going back to blast furnace steelmaking.

Worse than this, Republicans who have chosen not to support Trump comment that although he’s poorly informed, he has no desire to learn.

professional help?

Pro-Trump people may argue that if elected, Donald will have expert advisers.  If all else fails, his looniest ideas would be neutralized by Congress.  I think this is incorrect.

unacceptable social views

Trump is anti-women, anti-Hispanic, anti-Muslim, anti-gay.  He has been embraced by the American Nazi Party and the Ku Klux Klan.  From his earliest emergence as a candidate, other Republicans have referred to Trump supporters as Vichy Republicans, an allusion to the French citizens who collaborated with Hitler during WWII.  They’ve also described backing Trump as a “McCarthy moment,” referring to the decision to support the witch hunt for supposed Communists by Senator Joseph McCarthy in the 1950s that tarnished the legacies of those who made it.

Who would be willing to work for a man like this?  We know the answer already.

Just as important, if he becomes the chief of the Executive branch of government, who is he going to put in charge of the Justice Department, or the State Department, or any of the other cabinet posts?  I think this is a very scary prospect.