Market Commentary

Weekly Market Comment

In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497”– Warren Buffett (note: the Dow has almost doubled since this quote).

The TSX Composite gained 0.7% while the S&P 500 rose 0.8%.

According to Raymond James strategist Jeff Saut, the inability to do a congressional deal on health-care reform didn’t derail the stock market because investors turned their attention to the prospect of tax cuts. He believes such cuts will be watered down due to budget issues and the obvious fact that the less radical the tax cut plan is, the more probable it will garner enough congressional support.

According to the Wall Street Journal, the U.S. is considering placing tariffs of 100% on Perrier mineral water, Vespa motor scooters and Roquefort cheese to fight against the EU’s ban on hormone-treated cattle. How aggressively they hit some EU products might be telling for what we can expect in the future, suggests the Journal. In the meantime, the Fed’s preferred inflation metric, personal consumption expenditures, hit 2.1% for the first time in almost 5 years. The Fed’s official goal for this metric is 2%, illustrating that the Fed has reason to keep hiking the key interest rate.

China’s internet firm Tencent has purchased a passive 5% ownership of Tesla. Of the $1.8 billion investment, only some goes to Tesla’s bank account because some of Tencent’s money went to buy stock in the open market. Regardless, it gives the ambitious electric car visionaries much needed capital and, on the surface, looks like a savvy political move to help ensure Tesla’s support in China. Or is it? China has always, and will always, favour Chinese companies over foreign companies.

For Tencent, the benefits are not as clear. Rich from its instant messaging app WeChat and incredible computer gaming success, the firm seems to be playing catch-up to their fellow Chinese behemoths Alibaba and Baidu who already made forays into electric and computer-assisted cars. But we will give Tencent this much: instead of wasting their massive cash flows the way the Saudis did in the ‘70s and ‘80s, they are investing, investing, investing. As Wayne Gretzky said, you miss 100% of the shots you don’t take.

We bought back some oil leveraged stocks, adding back some Concho that we sold higher and a new position in Marathon (up 5.7% so far). Both are Texas based. We stuck with US producers because we wanted to stay clear of oil sands exposure.

Cenovus, on the other hand, announced it is buying ConocoPhillips’ 50% non-operating interest in its Foster Creek Christina Lake oil sands partnership, plus a majority of Conoco’s western Canada Deep Basin gas assets. The market didn’t seem to like it, sending Cenovus shares down over 12% on the news.

With oil struggling to get much past $55 after the OPEC deal, heavy oil producers with high break-even and capital expenditure requirements are not the place to focus.

Musings Beyond the Markets

This week, the UK formalized the process of divorcing itself from the EU. England’s Prime Minister May is putting on a brave face as she tries to execute the will of the British people (or about half of them) but Business Insider explains why Germany will make the divorce as painful as it can. The motivation is to deter others from leaving and Merkel is extremely smart when it comes to shutting down her dissenters. The wild card for the EU? A Marie LePen victory in France, who is extremely anti-EU and protectionist. Her winning is not probable at this point but it’s definitely possible. For more on both of these subjects, see political risk analyst Ian Bremmer’s analysis on Bloomberg TV.

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