U.S. Oil and Natural Gas Production Rising

Posted by on

Crude oil and natural gas production in the U.S. has strongly rebounded in the past few years according to an article by Thomas Helbling in the latest edition of IMF’s Finance & Development magazine. As a result, natural gas prices are at a 20-year low. But gasoline prices have not followed natural gas prices and have actually reached closer to the $4.00/gallon mark in recent weeks. Today however the average national price is at $3.659 per the gasbuddy.com website.

Click to enlarge

US-Oil-Gas-Production-2001-2012

The IMF article notes that high crude oil prices and new technology have allowed produced producers to cheaply extract these resources from unconventional geological formations. The process of “fracking” in which fluids are injected under high pressure into rock formations such as shale rock to release trapped fuels has revolutionized oil and gas production at prices that are profitable to producers.

From the article:

Production of crude oil from unconventional sources increased about fivefold in the United States between 2008 and 2012, reaching close to 1 million barrels a day by the end of 2012. On average, shale oil—or light tight oil as it is often called—was about 16 percent of total U.S. production in 2012 and accounted for almost three-fourths of the 1.3 million barrel rise in overall daily oil production in the United States over this period.

So far, much of the increase in oil production has reflected field development in the Bakken Shale, which spans the western states of North Dakota and Montana—although in 2012, production in the Eagle Ford Shale in the state of Texas also started expanding rapidly. Eagle Ford area production is expected to continue to expand, and new field development and extraction should start in other known shale rock formations. Expanding development to other formations is necessary if production is to increase further.

At this point, the ultimate oil extraction potential from shale rock and tight sand formations in the United States is uncertain.

The author also notes that employment in the oil and gas extraction and mining sectors has almost doubled over the past decade. Last year some 570,000 workers were employed in these two sectors.  While employment levels in many other industries have declined in the past decade it is refreshing to hear that the energy and mining industries are creating jobs.

To be sure, the U.S. is still a net importer of oil. However U.S. EIA projects imports to shrink to from 8.3 million barrels per day to 6 million barrels per day at the start of 2014.

Back in January Bloomberg BusinessWeek published an article titled “Falling U.S. Oil Imports Will Reshape the World Crude Market“. From that piece:

If you had told an oil analyst seven years ago that by 2014 the U.S. would import only 6 million barrels of crude oil per day, or roughly a third of what the country uses, he would have been incredulous. Imports back then accounted for roughly two-thirds of U.S. oil consumption, according to the federal Energy Information Administration, and had been rising for 30 years. With all its major fields discovered and production dropping, America seemed destined to import more and more oil, especially from Canada, Mexico, Venezuela, Saudi Arabia, and West Africa.

US-Oil-imports

Then came hydraulic fracturing—the technique of blasting water into shale to extract oil and gas—and the energy picture in the U.S. changed dramatically in a few short years. Now the International Energy Agency predicts that by 2020, U.S. oil production will exceed Saudi Arabia’s. This is altering decades of established trading patterns.

Related ETFs:

United States Natural Gas Fund (UNG)
United States Oil Fund (USO)

Disclosure: No Positions

A Look at Two Large Food and Consumer Staples Retailers

Posted by on

Walmart(WMT) and Costco(COST) are two of the large retailers that sell food and other consumer staples. In addition, they also sell consumer discretionary items. Both these companies offer membership-based wholesale bulk shopping stores for food and other items. Costcco operates these stores under the Costco brand while Walmart runs it under the Sam’s Club brand.

1.Costco Wholesale Corporation (COST)

Costco operates membership warehouses in the US, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Australia, and through majority owned subsidiaries in Taiwan and Korea. A typical store operates on a seven-day, 69-hour week schedule and is about 143,000 square feet in size. Each store carries thousands of products with many offered in bulk quantities. These stores are popular with consumers as they offer products at some of the cheapest prices anywhere.

Last year the company has about $103.0 billion in sales. In the most recent quarter Costco had revenues of $24.87 billion and made a profit of $547 million. At $101.75/shr the current dividend yield is 1.08%.

2.Walmart Stores Inc (WMT)

Walmart is the largest retailer in the world and is also the world’s largest employer. The company operates in all 50 states in the U.S., Puerto Rico and 26 other countries. Its Sam’s club unit accounted for about 12% of it net sales in 2012.

Walmart’s revenue in 2012 was about four times that of Costco’s at $469.0 billion. At the current price of $72.50 the dividend yield is 2.59%.

Here is a chart showing the long-term performance of the two companies and the S&P 500:

Click to enlarge

WMT-Cost-SP500

 

Source: Yahoo Finance

Note: Dividend yields noted are as of Mar 15, 2013

Disclosure: No Positions

A Comparison of U.S. Health Care To Other Developed Countries

Posted by on

America is the only nation in history which miraculously has gone directly from barbarism to decadence without the usual interval of civilization.

– Georges Clemenceau, French journalist, physician and statesman

The U.S. health care system is actually a hodge-podge of many entities, some of which may have conflicting interests, meshed together to operate under the umbrella of a nicely sounding term called the “health care system”.  Unlike other developed countries health care is not a human right but a privilege in this country.On the other hand more important things like very cheap fast food, guns including semi-automatic guns, cheap credit, owning a home, drinking large sized-soda and thousands more to list here are considered as rights available to all citizens regardless .

The health care system is run as a business for profit. However unlike other industries the health care industry is very expensive, non-transparent and no such thing as competition exists. All the players in the food-chain of this system have a vested interested in maintaining the status-quo. Hence any real change is unlikely to occur unless the link between money and politics is broken and real free-market competition is allowed to exist. The goal of a patient and the goal of the system are in direct conflict with each other. The patient wants the best care possible for the lowest price while the system wants to make the profits possible. As a results atrocious gouging of patients at every step in the health care system occurs on a daily basis across the land all considered perfectly legal by the state. Hospital systems that operate as non-profits to evade taxes are allowed to charge as much as possible from even the poor or the uninsured. So it is not surprising to see that medical debt is the number one cause for bankruptcy filings in the country.

A 36-page expose of the US healthcare industry by Steven Brill was recently published by the Time magazine under the interesting title Bitter Pill: Why Medical Bills Are Killing Us (Subscription required for access to article). From the article:

1. Routine Care, Unforgettable Bills
When Sean Recchi, a 42-year-old from Lancaster, Ohio, was told last March that he had non-Hodgkin’s lymphoma, his wife Stephanie knew she had to get him to MD Anderson Cancer Center in Houston. Stephanie’s father had been treated there 10 years earlier, and she and her family credited the doctors and nurses at MD Anderson with extending his life by at least eight years.

Because Stephanie and her husband had recently started their own small technology business, they were unable to buy comprehensive health insurance. For $469 a month, or about 20% of their income, they had been able to get only a policy that covered just $2,000 per day of any hospital costs. “We don’t take that kind of discount insurance,” said the woman at MD Anderson when Stephanie called to make an appointment for Sean.

Stephanie was then told by a billing clerk that the estimated cost of Sean’s visit — just to be examined for six days so a treatment plan could be devised — would be $48,900, due in advance. Stephanie got her mother to write her a check. “You do anything you can in a situation like that,” she says. The Recchis flew to Houston, leaving Stephanie’s mother to care for their two teenage children.

About a week later, Stephanie had to ask her mother for $35,000 more so Sean could begin the treatment the doctors had decided was urgent. His condition had worsened rapidly since he had arrived in Houston. He was “sweating and shaking with chills and pains,” Stephanie recalls. “He had a large mass in his chest that was … growing. He was panicked.”

Nonetheless, Sean was held for about 90 minutes in a reception area, she says, because the hospital could not confirm that the check had cleared. Sean was allowed to see the doctor only after he advanced MD Anderson $7,500 from his credit card. The hospital says there was nothing unusual about how Sean was kept waiting. According to MD Anderson communications manager Julie Penne, “Asking for advance payment for services is a common, if unfortunate, situation that confronts hospitals all over the United States.”

From another article in Bloomberg:

By the time Astra Augustus left Virtua Memorial Hospital in New Jersey after the last of four surgeries, she’d run up about $255,000 in bills.

At first, Augustus said, she thought she was lucky. Virtua gave her a charity discount, to $30,530. Then she got statements from the doctors who treated her in the hospital, adding $18,000. “I didn’t know who to pay first,” Augustus said.

Virtua sued last month after she fell behind in her $400-a- month installment plan. While the nonprofit hospital had been generous, she said, the debt is still overwhelming for someone with a monthly income of $2,200.

Hospitals’ fast-rising sticker prices are adding to the financial burdens of the 49 million Americans without insurance, more than 20 million of whom won’t be covered under PresidentBarack Obama’s Affordable Care Act.

Now lets take a look at how the U.S. healthcare system compares with other developed countries. From OECD’s health data site:

1. Comparing US Health Expenditure to other OECD countries

Click to enlarge

US-Total-Health-Expenditure-Per-Capita-1

US-Total-Health-Expenditure-to_GDP-2

2.A sample comparison of hospital inpatient price levels

US-Inpatient-Hospital-Costs-3

3. US Obesity rates compared to other OECD countries:

US-Obesity-Rates-4

 

Source: U.S. health care system from an international perspective,  OECD Health Data 2012

Related:

From Why an MRI costs $1,080 in America and $280 in France  in The Washington Post, Mar 15, 2013:

“In my view, health is a business in the United States in quite a different way than it is elsewhere,” says Tom Sackville, who served in Margaret Thatcher’s government and now directs the IFHP. “It’s very much something people make money out of. There isn’t too much embarrassment about that compared to Europe and elsewhere.”

The result is that, unlike in other countries, sellers of health-care services in America have considerable power to set prices, and so they set them quite high. Two of the five most profitable industries in the United States — the pharmaceuticals industry and the medical device industry — sell health care. With margins of almost 20 percent, they beat out even the financial sector for sheer profitability.

The Top 10 Safest Banks in North America 2013

Posted by on

The Global Finance magazine publishes their top bank rankings each year for various categories. The lists for this year were published last month. In this post lets take a quick look at the top banks in North America.

From the report in the magazine:

The banks were selected through a comparison of the long-term credit ratings and total assets of the largest banks. Ratings from Moody’s, Standard & Poor’s and Fitch were used.

The Top 10 Safest Banks in North America for 2013:

S.No.BankTickerDividend Yield as of Mar 15, 2013
1TD BankTD3.81%
2Royal Bank of CanadaRY4.10%
3Bank of Nova ScotiaBNS3.79%
4Caisse centrale DesjardinsN/AN/A
5Bank of MontrealBMO4.64%
6CIBCCM4.57%
7BNY MellonBK1.82%
8CoBank,ACBN/AN/A
9U.S. BancorpUSB2.28%
10Northern TrustNTRS2.18%

 

Source: The Top 10 Safest Banks in North America 2013, Global Finance

All the five major Canadian banks are considered to be the safest banks in North American by their independent analysis. In addition Quebec-based Desjardins Group’s Caisse centrale Desjardins also appears in this list.

Among the U.S. banks, none of the four super-banks made it to the list. BNY Mellon(BK), Northern Trust Corp(NTRS) and U.S. Bancorp(USB) are three good picks to ride the rebound in the banking sector. CoBank, ACB is an agricultural credit bank and is part of the US Farm Credit System. Based in outside of Denver, Colorado it serves farmers, ranchers and other rural customers. It operates as a cooperative bank and is not publicly-traded.

Note: Dividend yields noted are as of Mar 15, 2013

Disclosure: Long BMO, BNS, CM, RY, TD and USB

Is Stock Picking A Losing Game ?

Posted by on

Many retail investors are coming to the realization that stock picking is a losing game. The folks that lost all or most of their investments during the dot-com bubble of the 190s jumped back into the market thinking it was safe only to take a hit again by the great global financial crisis of 2008-09. At the lows of those dark days some investors sold out their holdings and decided to never again invest in equities. Who could blame them since their trust in the market was shattered not once but twice within a decade and they were shocked to see the bankers and others that created the crisis escaped scot-free. They were disgusted with the regulators such as the SEC who were supposed to monitor the workings of the market but slept at the wheel like a drunk driver and even when they took any action they were more of a slap in the wrist or even worse. Hence the idea that market is a rigged game where only the wealthy could play and multiply their wealth started to take hold.9

In general,  if retail investors wanted to invest in the stock market should they pick individual stocks or just go with passive funds?

The answer to the above question is it depends on the type of retail investor.For most retail investors individual stock selections will not work due to the time and effort involved in doing research, monitoring their positions, following up with all the earnings reports and so forth. For these people passive funds are the best option.

In  my opinion, people who are financially-literate and willing to do hard work and have time to follow the markets can go about building a portfolio made up of their own stock selections and other assets. Even for these folks winning in the equity markets is not a sure thing since any company can blow up regardless of how much time one spends reading all the publicly-available information. The collapse of bank stocks during the financial crisis is an example of this. However diversification is one strategy that can help to reduce volatility and survive a man-made disasters such as a dot-com or a credit crisis.

From a post titled “Keep Investing Simple” by Barry Ritholtz of chief executive of FusionIQ:

1 Go passive. Here is a dirty little secret: Stock-picking is wildly overrated. Sure, it makes for great cocktail party chatter, and what is more fun than delving into a company’s new products? But the truth is that individual stocks are riskier than broad indices. Managing those positions through the ups and downs is complicated and time-consuming, and most investors lack the skills and discipline to do it well.

Consider this: The world’s greatest stock-pickers got creamed in 2008. And the world’s worst stock-pickers made a killing in 2009.

Your solution is index ETFs, vastly preferable to picking individual stocks. Lower cost, reduced turnover, fewer taxes — and much less risk.

Here is  Roger Nusbaum, Portfolio Manager of  Your Source Financial on this topic from his recent article aptly titled Not All Stock Picking is Wildly Complex:

I wanted to continue on with a concept I brought up recently about stock picking despite the ruckus it raised. In trying to demystify stock picking a little I said that there are some stocks that can serve as reasonable proxies for decades. They may not “beat” the market but they can be great holds and don’t require a degree in forensic accounting to understand and follow.

While researching on the importance of diversification I came across a fascinating article published in 2009 by  William J. Bernstein in Money magazine. From Are stocks a loser’s bet?:

In fact, I wouldn’t be surprised if, after seeing the market go straight up for the better part of two decades, you’re now starting to wonder whether stocks are prone to lose money over time.

Well, guess what? Most stocks do lose money over time.

It’s a little-known and depressing fact, but the majority of individual securities tend to post negative returns over the long run.

In fact, researchers at the investment management firm Dimensional Fund Advisors found that from 1980 to 2008, the top-performing 25% of stocks were responsible for all the gains in the broad market, as represented by the University of Chicago’s CRSP total equity market database (see the chart at right).

As for the bottom 75% of stocks in the U.S. market, they collectively generated annual losses of around 2% over the past 29 years. (emphasis added)

chart_missing_the_mark

 

Source:  Are stocks a loser’s bet?, CNN Money

Hence retail investors unable to spend the time and effort needed are better off owning diversified low-cost funds such as ETFs. For investors willing to devote time and continue to learn about equities through market ups and downs stock picking is the best option. Diversification and long-term holding of high quality dividend-paying companies for example can help them attain their goal.

Ten stocks to consider are listed below with their current dividend yields for investors looking to build a portfolio on their own:

1.Company: General Mills Inc (GIS)
Current Dividend Yield: 2.85%
Sector: Food Products

2.Company: The Coca-Cola Co (KO)
Current Dividend Yield: 2.88%
Sector: Beverages

3.Company: Union Pacific Corp (UNP)
Current Dividend Yield: 1.95%
Sector: Railroads

4.Company: Southern Co (SO)
Current Dividend Yield: 4.31%
Sector: Electric Utilities

5.Company: AT&T Inc (T)
Current Dividend Yield: 4.94%
Sector: Telecom

6.Company: Kimberly-Clark Corp (KMB)
Current Dividend Yield: 3.47%
Sector: Household Products

7.Company: Marathon Oil Corp (MRO)
Current Dividend Yield: 1.94%
Sector: Oil, Gas & Consumable Fuels

8.Company: T. Rowe Price Group Inc (TROW)
Current Dividend Yield: 2.01%
Sector: Investment Management

9.Company: Procter & Gamble Co (PG)
Current Dividend Yield: 2.94%
Sector: Household Products

10.Company: Caterpillar Inc (CAT)
Current Dividend Yield: 2.34%
Sector: Machinery

Note: Dividend yields noted are as of Mar 15, 2013

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • Vanguard Dividend Appreciation ETF (VIG)
  • SPDR S&P Dividend ETF (SDY)
  • iShares Dow Jones U.S. Select Dividend ETF (DVY)
  • PowerShares Dividend Achievers ETF (PFM)
  • iShares Russell Midcap Index Fund (IWR)
  • iShares S&P MidCap 400 Index Fund (IJH)
  • iShares Russell Midcap Growth Index Fund (IWP)
  • Powershares Dynamic Mid Cap Growth Portfolio Fund (PWJ)

Disclosure: Long GIS