Winter is a season of recovery and preparation. Paul Theroux
When the the bi-annual meeting of OPEC came this past week, rumors swirled for weeks about the possibility of a production cut. Specifically, the prime players in the drama, which it seems like is happening at every meeting, are the Saudis, and Iran. Plainly, the Saudis wanted a cut, Iran did not because they argued their production levels should be restored to pre-sanction levels. Underneath the surface of the meeting, however, are urgent concerns for the decision makers of the majority of these countries. Specifically, these nations are dependent on oil revenues to subsidize their citizens, and with oil prices in the dumps for going on over two years, all have been running huge budget deficits. Many have large reserves, like the Saudis, but some don’t, and so countries like Venezuela, Nigeria, Qatar, Kuwait, United Arab Emirates, and the rest of the wonderful group are feeling more than a little pressure from current conditions. So, beyond the veil of happy rhetoric was the vital importance to get an agreement to raise the price, meaning now. Low and behold, when a 1.2 million barrel per day cut was announced, the price jumped 8%. For the week, oil prices were up 10%, and the stock prices of the whole sector jumped in a big way. History has proven these agreements fall apart because of the inherent unreliability of these countries to honor their production quotas. Most analysts believe with the current cut, the existing glut has another six months left to work off. Oil is always important to monitor and plays a ‘huge’ role in the global economy. Given what transpired this week, it will not change any time soon.
Elsewhere in the capital markets, the November jobs report came in at a light 178 thousand number, so it will be interesting to see what the Federal Reserve says about future interest rate moves after their next meeting. From a credibility standpoint, it is pretty much assumed they raise 25 basis points and then stop for a pause to see what happens. Of course, their actions will depend on what transpires at the outset of the next congress and the new administration. If fiscal stimulus gets passed in the various forms being thrown around, the tightening cycle may be just beginning. We will know soon enough.
In the meantime, Mr. Trump is entertaining the press and public by taking a victory lap and proceeding with picking his cabinet. The choice for Treasury Secretary, Mr. Mnuchin helped Bill Ackman to the tune of nearly half a billion bucks. Mr. Mnuchin has proclaimed a different policy with respect to the large GSE’s, Fannie Mae and Freddie Mac. He has said he wants to take them out of the hands of the government and reduce the public’s risk. The situation highlights one of the issues investors have to grapple with when owning stocks. In many cases, the largest gains of a position will only come five or ten years after buying the stock. Ackman has been involved with these for a few years now, but you have to have plenty of patience if you are an owner of stocks.
One of the interesting areas of the market is arbitrage. A unique situation involving Under Armour Inc (NYSE:UA) and the various classes of its stock has made it a target for the arb participants. The specifics involve the different voting classes of each of the Under Armour group and the discrepancy in market value. Usually, the strategy is to short the overvalued entity, and go long the undervalued one. The classes of the stocks should have similar market values, but those with voting rights should have a premium to something without the votes. They don’t always trade this way in the market, which is why there are opportunities. I know, you will send me a check in a few weeks, right?
Super investor Mario Gabelli is in the news for creating his own new ETF’s. One is based on the Liberty family of stocks, the other is broader based. He did this as a way to be more tax efficient because an ETF redeems shares of individual companies without selling the entire ETF to the public (uses a broker for the individual holding). It is a way to defer taxes, especially when a company you own gets bought. In this case, Mr. Gabelli has clients who owned Precision Cast Parts at 8 bucks a share. It was acquired by Berkshire for well over 200, thus the concern about a large capital gain. Nice problem to have, eh? Tomorrow, Italy votes on their voting referendum proposed by the Prime Minister. If the vote goes no, expect there to be plenty of action in Europe, especially with their largest banks. Finally, last week I mentioned some items to think about in preparing for 2017. I forgot to mention the various insurance coverages to check on. Typically, health, care, life, and an umbrella policy are the areas to cover and be comfortable with. As the heading quote mentioned, winter is coming and it is time to get ready.
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.