Knowledge is Power: Small-Cap Stocks, Investment Horror, Oil Economics Edition

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Inside US Capitol, Washington DC

This Chart Shows Crude Oil Is A Very Volatile Commodity

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Crude oil jumped 6.3% yesterday to $45.94 a barrel for December delivery on the New York Merc. In the past few weeks oil prices have been volatile. In general, oil is the most volatile commodity in the world. Prices of oil can vary from one day to the next for any number of reasons. A single guy can set a small fire to a pipeline in Nigeria and oil prices can move up or down apparently for this reason.

The following chart shows the gut-wrenching volatility of oil prices from one year to the next:

Click to enlarge

Oil Volataility Chart

Source: US Funds

So the key takeaway is that one should not make their long-term investment decisions based on the movement of oil prices.

Quick Post: A Note On Latin American Airlines

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Airlines generally tend to perform well when the economy where they are based at is in expansion mode. This has been the case with Latin American airlines. Latin American carriers have performed poorly recently due to the adverse economic conditions in countries like Brazil, Chile, Colombia, etc.

Panama-based Copa Holdings SA (CPA) which operates Copa Airlines is down over 50% year-to-date and so is Chile’s LATAM Airlines Group S.A. (LFL). In the past five years CPA has declined by about 4%. From a high of over $160 in 2014, the stock price closed at $49.99 today. This shows the dramatic decline airline investors can expect. Until mid-2014, Copa was a hot stock among the airline stocks. LATAM is down an astonishing 82% in the past five years. As the airline focuses mainly on Brazil and Chile, the economic suffering of those countries has impacted the airline’s earnings. LATAM was formed a few years after LAN Chile merged with TAM of Brazil.

The relatively new ADR of Avianca Holdings S.A. (AVH) has plunged by nearly 67% year-to-date. Avianca, based in Colombia, also had great potential when it was listed.Mexico-based Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (VLRS) is reaping the benefits of the strong US economy. The airline is a major operator of low-cost flights between many US and Mexican cities. With rising traffic by Mexicans and tourists alike, the airline is performing well in recent months. The stock is has nearly doubled so far this year.

Brazilian carrier Gol Linhas Aereas Inteligentes’ (GOL) ADR is down by 85% year-to-date.

In summary, investing in airline stocks is not a great idea. Most US airline stocks were awful for investors for many years. Only recently they have gained some traction upwards. Similarly in Latin America, economic turbulence has hit airlines pretty hard. So from an investment point of view, it is better to stay away from Latin American airlines for now.

Disclosure; No Positions

European Utilities Are Still Struggling To Grow

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Most European utilities have under-performed the market in the past few years. Though boring utilities are considered to be safe and stable growers, in this case they have let down investors due to many reasons. For instance, the many crises that flared up in the past few years in Europe have taken a toll on this sector.

The STOXX® Europe 600 Utilities Index is a proxy for the sector. The chart below shows the five-year return gross return (in Euros) of this index:

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Euro Utils Chart-1

 

In five years the index has returned 34%.

The long-term return is shown in the following chart:

Euro Utils Chart-2

Since 2001, the index has returned 109% but is still off the peak reached just before the Global Financial Crisis.

Source: STOXX

A few points about European utilities:

  • In France the sector is under pressure from the state that blocked price increases. The state is a major holder in companies such as EDF (ECIFY).
  • In Spain and other “PIIGS” countries lackluster economic growth is not helping utility companies.
  • British power and gas companies are relatively doing well due to pricing power and a robust market competition.
  • German utilities are in a deep morass. For many years now utility stock such as EON(EONGY) and RWE AG(RWEOY) have been declining and reached multi-year lows recently. State policy change that favors renewable energy over nuclear and other traditional energy sources is the main factor for the crash in stock prices.

Disclosure: Long EONGY and RWEOY

A Note On U.S. Military Spending Compared To Other Countries

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The US ranks ahead of all the other countries in the world in military spending. The following chart shows the top 20 countries based on their military expenditures in 2014:

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20_largest_defense_expenditure_countries

Source: CHARTS: U.S. Army size and defense expenditures relative to other nations, The Brookings Institution

The US. is not only the largest spender in the world but its total military spending is many times over the spending of other countries.

The chart below shows how the Federal Discretionary Spending amounts for 2015 is allocated:

Discretionary_spending_pie,_2015

Source: Federal Spending: Where Does the Money Go, National Priorities Project

Military accounts for more than half (or 54%) of the $1.11 Trillion spending.All other categories receive a portion of the remaining funds. For example, Transportation is one of the categories that receives a tiny portion of the overall discretionary spending of over $1.0 Trillion. It can be argued that this is one of the reasons why US infrastructure is such a dilapidated condition.

However despite such high spending the US Army branch of the military is still small relative to other countries as shown in the chart below:

top_10_active_duty_armies_country

Obviously a country having more active soldiers does not mean that country is superior militarily. Countries such as China and India have huge populations and labor charges are low. Hence they can afford to keep million man armies. North Korea is an exception.

Source: CHARTS: U.S. Army size and defense expenditures relative to other nations, The Brookings Institution