Chart: U.S. Oil Production To Imports, 1973 To 2013

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Crude oil prices plunged by 46% in 2014. Yesterday oil futures for February delivery closed at $53.37 a barrel on the NYMEX. Gasoline prices have followed crude oil and have declined dramatically in the past few months and is now selling for less than $2.0 a gallon.

The chart below compares U.S. oil production to imports from 2973 to 2013:

Click to enlarge

US Oil Production to Imports Chart

Source: Changing Markets Economic Opportunities from Lifting the U.S. Ban on Crude Oil Exports by Charles Ebinger and Heather L. Greenley, September 2014,  The Brookings Institution

From 1980s tru 2006, U.S. production of oil declined steadily.However from 2008 production has consistently increased even as imports of crude oil and related products fell after peaking in 2005.

U.S. oil producers increased production as oil prices continued to stay high in the past few years. Since prices are down by about half it remains to been if many of these producers reduce or shut down their operations.It is highly likely that some of the smaller producers may go bankrupt unlike the major integrate firms like ExxonMobil(XOM), Chevron(CVX), etc.

Oil production in the U.S. rose by nearly 2.5 million barrels per day from 2008 to 2013 from shale and convention sources. From an article today in Bloomberg:

Crude Production

Crude production accelerated to 9.14 million barrels a day through Dec. 12, the fastest rate in weekly data that started in January 1983, EIA data show. It was 9.12 million last week.

“The real story is the shale revolution and the fact that Saudi Arabia, the 500-pound gorilla, refuses to be the one to make the cut to support prices,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “Everyone is fighting for market share here.”

OPEC, which pumps about 40 percent of the world’s oil, produced 30.24 million barrels a day in December, according to a Bloomberg survey, down from 30.36 million in November. The group decided to maintain its output quota at 30 million barrels a day at a Nov. 27 meeting in Vienna.

“In the near term, and by that I mean 30 to 60 days, crude will be under a lot of pressure,” Dan Heckman, Kansas City, Missouri-based national investment consultant at U.S. Bank Wealth Management, said by phone. His firm oversees about $120 billion. “It will take time to work off this inventory glut.”

Source: Oil Caps Biggest Yearly Slump Since 2008 Amid Supply Glut,  Jan 1, 2015, Bloomberg

From an investment perspective it is wise to stay away from small oil companies and nibble at major players as stock prices have declined strongly in recent months.

Related ETF:

  • United States Oil ETF (USO)

Disclosure: No Positions

The British Stock Market Performs Best Under Conservative Prime Ministers

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The UK General election will take place in May next year. The contest will be mainly between the Conservatives and Labour. Though the radical U.K. Independence Party (UKIP) is growing in popularity among the general public it is highly unlikely to gain any significant number of votes.Ultimately either the Conservative or Labour party will win the elections as has been the tradition in the island country.

Equity markets in the developed world generally tend to have political preference. In the UK, stocks perform better when the conservative party is in power according to historical data. This is hardly surprising since the Labour (or “Labor” in U.S. English) policies have historically been anti-business. For example, Labour’s Ed Miliband has proposed levies on banks and price freezes by utilities. Clearly his plans will negatively impact firms operating in the financial and utility industries.

The table below shows the returns of the FTSE All-Share Index under the last nine Prime Ministers:

Prime Minister and PartyFTSE All-Share Index Return
Margaret Thatcher, Conservative (1979-90) 271%
John Major, Conservative (1990-97)107%
James Callaghan, Labour (1976-79) 67%
David Cameron, Conservative (2010-2014)38%
Edward Heath, Conservative (1970-74)22%
Tony Blair, Labour (1997-2007)20%
Harold Wilson, Labour (1964-1970)9%
Harold Wilson, Labour (1974-76)9%
Gordon Brown, Labour (2007-2010)-19%

Data Source: Thomson Datastream, AJ Bell Research

Source: World Investment Outlook 2015, AJ Bell

Of the top five best runs in the FTSE All-Share Index, four have come under the Conservative Prime Ministers. During the ‘Iron Lady’ Margaret Thatcher’s administration, the index soared by 271% as the economy took off when she privatized most of the state-owned industries that were plagued by inefficiencies and labour strikes.Under the current prime minister David Cameron, the index has had an excellent 38% return.

The all  four worst runs came during labour rule including most recently when Gordon Brown ran the country.

From an investment point of view, it is a good idea to keep an eye on the upcoming election and be ready to take advantage of  potential investments or adjust investments as needed.

Related ETF:

  • iShares MSCI United Kingdom Index (EWU)

Disclosure: No Positions

Knowledge is Power: Bull Market, China, Buybacks Edition

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Why This Bull Market Is…Bull (Canadian Investment Review)

Falling oil price highlights end of commodities supercycle (Deutsche Bank Research)

Energy Bargain Hunters Plow Record Amounts Into ETFs (Bloomberg)

5 investments to stay away from in 2015 and beyond (Financial Post)

China tops the charts (MoneyWeek)

Australia’s economy (OECD)

Oil and Emerging Markets: A Double-Edged Sword (Mark Mobius, Franklin Templeton)

Stock Buybacks: They are big, they are back and they scare some people! (Aswath Damodaran)

A subjective comparison of Germany and the United States (Alex Boldt)

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Manhattan, New York

S&P 500 Index Returns By Decade Since 1940

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Dividends account for a significant portion of the total returns of the S&P 500 over long periods. The table below shows the contribution of dividends to the total returns of the S&P 500 over the decades since 1940:

Click to enlarge

SP500 Returns by Decade

Source: A Brave New World, Dec 2014, The Absolute Return Letter, Absolute Return Partners

It is surprising to note that during the 1940s and 70s dividends accounted for 75-80% of the total returns. These two decades were also characterized by slow economic growth. So it can be argued that during periods of slower GDP growth dividends play a much more important role in total returns.

During the 90s many U.S. firms slashed their dividend payouts as investors preferred share price growth than dividends. Also the bull market of that decade made dividends almost “meaningless” as stock prices were soaring on a consistent basis.Up until the 1970s, dividends contributed at least 45% to the total returns in each of the decade shown.

It would be interesting to see how much dividends end up contributing to total returns at the end of this decade.

Related ETFs:

  • iShares Dow Jones Select Dividend ETF (DVY)
  • SPDR S&P Dividend ETF (SDY)
  • Vanguard Dividend Appreciation ETF (VIG)
  • Vanguard High Dividend Yield ETF (VYM)

Disclosure: No Positions

Do Reverse Stock Splits Work?

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Reverse stock splits rarely work. When a company is in serious trouble a silly reverse stock split will not change its fortune. Fundamental changes including new management, growth and other things have to occur in order for a reverse stock split to be successful. In most cases this does not happen. Rather the same incompetent managers would be in control of the company hoping the reverse stock split would save the company, their jobs, stock options, etc.

National Bank of Greece S.A(NBG) is one such company. I have written about the bank’s reverse splits before here and here.Despite two reverse stock splits, NBG is trading at just $1.81 today. Another example is Puerto Rico-based Doral Financial Corporation (DRL). Doral got into a financial mess even before the global financial crisis. In August, 2007, as the stock price continued to decline the company initiated a 1 for 20 reverse stock split. The stock failed to stabilize and grow. So the bank implemented a second reverse split in the ratio of 1:20 again in July, 2013. Today a share of Doral goes for about $3.94. More recently the FBI visited its office in PR in connection with the fraud investigation.

The chart below shows the performance of NBG and Doral in the past five years:

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NBG vs DRL-5 Years

Source: Google Finance

Doral is down over 93% and NBG is off by an astonishing 96%.

The key point to remember is that reverse splits will not automatically cure a company’s ills. Hence investors have to be very cautious and take actions when a company initiates a reverse stock split.

Disclosure: No Positions

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Sears Tower, Chicago