Last January I publicly shared an eight-page report on the risks I was seeing from deflation in 2015 and 2016. I am no expert on the subject (or economics for that matter) but tried to put together an overview that made sense to the average investor – myself included. It is still relevant for those interested:
https://stockhouse.com/getattachment/opinion/ticker-trax/newsletter/2015/01/20/deflation-risk-review/ttraxjan2015deflation.pdf
Those concerns a year ago helped me avoid portfolio destruction in 2015 and will drive investment (and newsletter) decisions I make in 2016. This past year I focused on cash rich microcap stocks and healthy balance sheets (meaning I avoided excessive debt), and we looked at very few junior exploration companies as the pressure on commodities was expected to be extreme.
I have those same concerns for 2016 but significant money could still be made from these depressed microcap stocks (the TSXV is trading at historic lows). My strategy will remain the same as 2015 but we will likely follow more techs. Other industries I look at when we can see a flow of capital (interest in certain sectors perking up).
These are all relatively short term speculations - maybe a few months or a few quarters – as the concept of “long term investing” in microcap stocks rarely works. Some companies we will follow for more than a year but it is dependent upon a LOT of factors.
This past week I put together a report for paid Ticker Trax subscribers on our game-plan for 2016 and within it, I highlighted the reasons we would be avoiding oil companies – at least for the first half of 2016. Below is an excerpt from the report:
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From my list of 150 big money managers and strategists (compiled over the past decade), I track several oil specialists who nailed their 2015 forecasts. From what I can see, the first six months of 2016 could get ugly. After the summer, oil could stabilize and clean up closer to $50, but investors may want to plan for the worst in this first half.
Negative Oil price pressure is going to come from:
1) aggressive production in the United States where 538 rigs continue to drill and storage levels are hitting capacity across several states (Oklahoma in particular).
2) OPEC nations who refuse to give up International market share and big production from the Middle East where the cost to produce a barrel is still below $12 – they have a LOT of room to try and force American shale producers into bankruptcy.
3) Iran who will start with half a million barrels per day production soon and will ramp up to 1.5 million barrels within six months. They have been shut down by sanctions for so long that they don’t care how low the price goes – they are going to sell and produce regardless.
4) Saudi Arabia will refuse to lose market share to Iran regardless of price.
5) Non OPEC countries like Russia and Mexico need the cash and will also push ahead with large oil production. OPEC knows this and (again) refuses to lose market share to these countries. Russia average cost is $17 per barrel while Mexico is $29…. Canada is $41 and USA $36.
This all boils down to a “market share war” between OPEC and Non OPEC producing nations. Throughout 2016 (the first six months in particular) we are going to see huge price volatility – which big traders love. John Kilduff who last summer said oil would hit $35 by year end, says oil could trade below $20 in 2016. This is backed by several I follow who say $20 to $30 oil in 2016 cannot be ruled out.
"There is a lot of downward pressure on this market," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, which oversees about $126 billion. "We don’t see any relief until the second half of next year. There’s just too much supply across the energy food chain."
Again Capital founding partner John Kilduff said U.S. crude oil could fall as low as $18 per barrel in 2016.
"I think it's going to have to get that painful for the global industry to finally respond and that includes Saudi Arabia, OPEC and Russia," he told CNBC's "Closing Bell" on Thursday. "The market is going to have to bring them to their knees because they're not going down on their knees willingly or voluntarily."
Shorter term technical support for WTI crude oil is the 2008 Low near $32.50 (currently $37):
“Saudi Arabia, the world’s biggest crude exporter, will probably use a price of about $29 a barrel in its 2016 budget, according to estimates from Riyadh-based Jadwa Investment. Kuwait will use $30 a barrel, Alrai newspaper reported last week.”
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https://www.twitter.com/microcap_com or www.facebook.com/microcap
LinkedIn: www.linkedin.com/in/dannydeadlock
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Disclosure (shares always purchased in the open market):
N/A
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