End of Quarter Thoughts – Q3 2015

The middle two quarters of the year were rough for me. Not only did I get into energy after it had declined 30-50% which was just in time to see it drop another 30-50%, but my hedges for what has happened August and September, expired in June. Arrrghhh. Being right isn’t always good enough, sometimes, timing does matter. Luckily, most of my energy investments are stock, so the calendar is on my side.

I am still heavy cash, but less so after the purchases listed in the past month. If you are still sitting 25-50% cash, you should be thinking about a scaling in approach. Don’t delude yourself into thinking that you can catch absolute bottoms. You can’t. Nobody can. Not with any regularity anyway. You’ll catch some bottoms, others you will miss. That’s life. 

Focus on the intermediate term, 2 to 10 years. Think about what is likely to happen. Hint: it’s not the end of the world – that happened in 2008.

Here are the main things I think about:

  1. Demographics – China, Japan and Europe are getting older. None of those nations can fix their problem. They aren’t having babies and immigration is a slow road if there isn’t a culture of integrating immigrants within a generation. In the United States, demographics, though not as favorable as 30 years ago, are favorable. Not only is there a huge millennial generation entering prime baby-making household formation years, but in America, adding immigrants is much easier. Despite our issues with the fraction of Hispanics who cause a problem, the reality is that vast majority of them are hard working good people who I’d have a cerveza with.
  2. Global debt – there’s only three cures: depression, war and inflation. Governments and central banks won’t allow depression. We’ll get some war, see today’s headlines (doesn’t matter what day). Inflation is the default setting of governments and central banks even if inflation turns into stagflation for awhile. Prepare for inflation, it’s coming, probably as soon as energy prices rise.
  3. Fossil Fuel Energy – Despite the devastation in fossil fuels the past year, only coal is on its way to a grave in the next couple decades. Massive consolidation in the industry is going to change the supply/demand landscape. How fast is the question most people have. The answer is faster than most people think. Consider that the oil and gas surpluses would last under 2 months each if there was a disruption of just 5% of either fuel. Then consider that capex spending is slated to be 60% lower in 2016 than 2014 and has already turned over. Throw in annual well depletion of 2% to 3% and you can see the glut is not terribly much to overcome. We have already seen a host of bankruptcies in the oil and gas space, there will be several more over the winter. Soon enough Saudi Arabia will cut production if for no other reason than they are running at capacity and can’t do it for long before people and equipment wear out.
  4. Alternative Energy – While you or your neighbor or favorite news source might not believe in global warming, most governments of the world do and that’s what counts. The transition away from coal to natural gas is approaching full force. Meanwhile, virtually all of the increase in demand for energy is being supplied by alternatives, mainly solar and wind. Solar has growth rates of 25-35% depending on the year and has no tipping point in sight as it still accounts for under 2% of global energy. When it cracks 20% and we have euphoria in asset prices, then we should start to think about what’s next. For now, what’s next is solar. 
  5. Healthcare – Globally with aging populations, pharmaceuticals and biotech are on top for big growth. The problem is the huge margins in biotech. Governments won’t stand for that as Hillary Clinton’s text heard around Valeant has proved. Cody Willard and I talked about coming margin contraction months ago. Traditional dividend paying pharma over biotech. Wait and see, big pharma is finally going to start buying up biotech and it won’t be at peak prices. 
  6. Technology – The internet of things is coming, but who will win? I defer to smarter tech analysts than I, but I do know that processing speed and security are big deals, so that’s where I’m looking. Folks here already know two of my favorites, one small and one big. 
  7. Agriculture & Water – I should give these their own categories but they seem related at some level to me. I like both food and water. I’m guessing you do to. Global warming has an impact here. Fertilizer that maintains moisture is important. Water infrastructure is important. There’s a lot to be done and few companies to do it. Get these whenever they’re cheap. 
  8. State of the World – Despite headlines written to get a rise and a peak from people, and folks who sell fear, the world is slowly getting better. Take a look around. People today are living better than 4 years ago, 8 years ago, 12 years ago, keep going. Is there a step back for every two or three forward? Sure. Do we always get back on our feet? Yep. Expect good, but lumpy in delivery. That’s the way it is.

Where should you be investing now. Even more than a few months ago in energy. Hold your nose and do it. Buy solar on dips too. If this correction continues, add some pharma if it sees financial crisis prices. If we get the 50% biotech correction, then add some of that back too. Add some tech, but stick with companies that churn out cash and have revolutionary products – not something that’s in the lead in a huge group of competitors for the moment. Banks are too hard for me, so, unless we do get another end of the world, I’ll be out of those for years.

If you are a subscriber, you know my “very short list” and you ought to be looking there.

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