Your Money - November 27th 2020

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I know I have said it before but “wow, what a week!”

With vaccines on the horizon, the back to normal trade resumed with a vengeance driving markets into a virtual feeding frenzy. Crude oil hit its best levels since March 6th ahead of next week’s OPEC conference. However, all is not rosy on the crude front. Saudi Arabia and Russia are calling all of the oil ministers for “a chat” regarding production quotas and the inherent cheating. I don’t want to sound negative but I would not put it past the two big players to initiate a second price war just to keep the cheaters in line. Longer term, with a vaccine in place, it is hard not to think that demand will bounce back permitting increased quotas to match output so that prices do not go too high. Remember, the two big players lost market share in a big way when oil prices rose above $65 permitting US shale production to soar.

Furthermore, as a closet bull, I can’t help but ponder the potential for a major supply squeeze out past 2025. Reinvestment in onshore shale and offshore conventional basins have dropped well below the level of decline in reservoirs. And while it is relatively easy to start up shale production (in the absence of government closures and increased regulation), the offshore production wells take years to go online (similar to say a large oil sands project) and once shelved, it will take a mountain of effort to revive. Kind of like Northern Gateway (which should have been proposed for Prince Rupert not Kitimat) or Energy East. Under the current political environment, they are DOA. So what happens when we add 2 billion people to the planet in the next 25 years? They have to eat, heat their homes and the last time I checked, realize that everything we do is made with a petrochemical base. Phones, glasses, clothes and the roads we drive on all require input from petroleum.  Why the rant? Well I just happened to notice the best performing sector on the TSX this week was energy and if you look at the top five S&P stocks, only Dollar Tree has no direct tie to energy. Then again have you seen all the goods in those stores….

Now for those of you not on the energy band wagon, Canadian banks inched higher this week ahead of next week’s earnings starting Tuesday. It will be very interesting to see if they follow their US counterparts who suddenly found that maybe they had set aside too much in their loan loss book and are looking to book them back into earnings in 2021. Cannabis stocks also had a good week, no doubt due to perceived expectations for the Democrats to decriminalize the green weed. Couple that with a regulatory process in Ontario that moves at glacier like speed and there is some reasons for optimism.  In speaking to one of my analysts though, and it may be that investors are looking at life through rose colored glasses or maybe a blue haze. Yes more US States are approving it for recreational use but the regulatory side may take much longer.

The worse performing sector was gold stocks after bullion broke through $1799 an ounce, sending the gold index down nearly 5%. However, with central banks and governments (ex US) dumping money into the system, I can’t help but think gold will move higher over time. It is also interesting to note that Bitcoin fell significantly this week as investors dumped alternative asset classes and gyrated into stocks. It’s keeping the VIX or volatility index up over 20 and longer term it’s not a good sign in my opinion. Still it’s hard to argue with success. Then again with Tesla having a market cap of $544 billion, its bigger than Toyota, Ford, GM, Volkswagon, Volvo, Fiat and Ferrari…combined. I am seeing a lot of that lately. Let’s hope there is not a rush to the exits at the same time.

Happy Trading.

Stay Safe.

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Steve Bokor

Steve Bokor

Portfolio Manager