Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.
The energy reality, the energy divide
There’s nothing like the topic of investing in Canadian energy producers to get a gusher of emotions and opinions. No stranger to this space, Eric Nutall of Ninepoint Partners offered up (what I think is) a wonderful piece on the global and Canadian energy reality.
These days, it’s a fortunate but tough spot—to be a money manager focusing on oil. Here’s the headline from that National Post article:
“Eric Nuttall: Should I be grappling with my own ‘existential threat’ as an energy fund manager with a focus on oil?”
The article frames the current energy reality for Canada and on a global scale. Including …
“The world prior to COVID-19 consumed 102 million barrels of oil every single day and is projected to be back to that level by the end of this year.
“Roughly 60% of oil is used for transportation, while the remaining 40% is used for things such as petrochemicals, lubricants, and agriculture for which there is no real alternative.”
The use of oil and the need for oil will continue to increase for many years. Like you, I wish that we could “get off oil,” but that is not about to happen any time soon. I encourage you to read Nuttall’s post to obtain a topline view of that energy reality.
I shared that Financial Post article on Twitter to put the energy idea on the table for Twitter #investorfriends and bloggers. And in a recent MoneySense column, I looked at the hesitancy of most Canadian equity fund managers. They are not enticed by the amount of free cash flow, nor the profits that Canadian oil producers are likely about to deliver. Let’s call that “energy hesitancy.” They are not increasing their weightings in the sector.
Do retail investors also feel that energy hesitancy?
The topic of global warming and the environmental impact of harvesting the massive amounts of energy in the Canadian oil sands leaves very few investors “in the middle ground.” We all appear to have strong opinions.
"We produce one of the most ethical units of energy in the world and increasingly one of the cleanest."
So oilsands is clean energy now?
— TheDividendGuy (@TheDividendGuy) April 28, 2021
Follow that thread on Twitter—you’ll see most of the comments put environmental concerns over any investment consideration. And that makes sense, of course; there are few things more important than the planet. But the reality is that our investment decisions won’t be what drives the shift to a greener economy.
On final count, it is obvious that the retail investor is not enticed as well. I get the same energy hesitancy when I chat with advisors.
Many yield-hungry Canadian investors will stick to their pipelines. (If you’ve been reading this column for a while, you’ll know I am still with the gang with respect to those big-paying pipelines.)
This is not advice (I simply put investment ideas on the table), but I think energy is an obvious and missed investment opportunity. And it’s very likely oil use will peak and start to fall over time. This is perhaps not a forever buy-and-hold.
But, near-term, I put it in the no-brainer camp; I hold iShares in the energy index ETF XEG in a couple of accounts. And I will invest in the future as well. We can prosper from that transition. Portfolio shift follows that green shift. Perhaps any traditional energy profits can feed green technology and clean energy investments.
For me, this is some modest portfolio shading, part of the explore in the “core and explore” portfolio approach.
I like those undeniable trends. Canadians can look to Evolve ETFs for groundbreaking themes such as automotive innovation.
You can check out the Harvest Green Energy ETF. Google will help you with many more ways to green up the portfolio. You can keep an eye on the burgeoning green bond industry as well.
These are vehicles that offer more of a direct investment in the solution.
FAANGM is where they keep all of the growth?
This is just an incredible chart. FAANGM is an acronym for stocks on the U.S. markets that have been the main growth drivers: Facebook, Apple, Amazon, Netflix, Google and Microsoft. The chart below shows that, over the last several years, the FAANGM stocks have delivered incredible growth by many metrics, while the rest of the S&P 500 (collectively) has been practically dormant.
— Lance Roberts (@LanceRoberts) April 28, 2021
Roberts suggests the (collective) rest of the S&P 500 has offered no growth. It’s quite the choice.
— Lance Roberts (@LanceRoberts) April 28, 2021
That chart fits into a theme that I covered on my site—that growth will be even more scarce in the future. At least, according to economist David Rosenberg.
That post looks at a few themes and ideas for growth. Of course, the U.S. market and those U.S. growth hotspots are very expensive. And they are expensive for good reasons, as they keep on delivering the goods.
Keep in mind, there are pockets of growth within the S&P 500 outside of big tech. And, collectively, they can deliver positive growth over time for the total index. I hold a U.S. portfolio of individual stocks and I see growth in the healthcare sector, financials and even among consumer discretionary stocks such as Lowe’s and Nike. Other sectors have the potential to pick up some slack as well.
But, make no mistake, that chart is nothing short of fascinating; it shows us a great deal about the recent past and perhaps the future of growth and profitability.
Warren Buffett is still sitting on that big fat wallet
Warren Buffett, often touted as the world’s greatest investor, is still sitting on a mountain of cash, estimated to be in the $140-billion range.
Buffett is the CEO of Berkshire Hathaway (BRK.A, BRK.B) a publicly-traded company that you can own. (Full disclosure: we own that stock in my wife’s spousal account.)
He is a value investor, and his not backing up the truck to buy stocks suggests he can’t find any value in today’s market. He was certainly very cautious in the early days of the pandemic and amid all of the attendant uncertainties, he did not make purchases, even during the pandemic market crash. There was not enough clarity for an investor who practises “safety first.”
Perhaps (as a guess) Buffett feels that a real and lasting market correction is to come. He is waiting to get his chance to be greedy. We can only speculate.
All said, I look at the original reason for why I bought Berkshire Hathaway. It covers a value focus for our total portfolio mix and it is now a wonderful hedge for any near-term stock market correction. The world’s greatest investor is sitting on a mountain of cash, waiting for that correction. And the Berkshire Hathaway stock has delivered near-market returns over the last several years.
If you’re looking for a hedge, Berkshire Hathaway might give you $140 billion good reasons.
Elon Musk’s compensation goes to the moon!
The original title I had in ind for this section included the words “ridiculous CEO compensation.” The always-controversial Elon Musk, CEO of electric vehicle maker Tesla, and of SpaceX, is often in the news, but this time it might be for the wrong reason.
While Musk will likely be very happy to accept any big payday, shareholders might be uh, shocked, when they see the compensation numbers.
Tesla’s report on Monday showed the company hit targets qualifying chief executive Elon Musk for two options payouts worth a combined $11 billion. Future compensation might eclipse that $11-billion figure.
The electric car maker beat Wall Street’s expectations for first-quarter revenue and profit, boosted by record deliveries. Quarterly revenue came in at $10.39 billion and adjusted earnings came in at $1.84 billion. That surpassed targets that triggered options granted to Musk in his 2018 pay package, allowing him to buy discounted Tesla shares.
That is a massive payout for the CEO of a company that just recently turned profitable. And I’m no math expert, but in this quarter I’m seeing $1.84 billion for shareholders and potentially $11 billion for the CEO. I’d consider myself a capitalist to a certain extent, but that shareholder math doesn’t appear to add up.
I would think there is the potential of a public relations backlash when this compensation story continues and gets more digital ink.
Musk receives no salary at Tesla.
You may notice a slight pay cut in 2021
Research for the 2020 tax season took me to the CPP enhancement plan and tax planning for the current year of 2021 and beyond. And I discovered that many Canadians may have noticed a slight decrease in pay (if your gross pay has remained constant).
Service Canada has increased the CPP contribution rate to 5.45%. That means you will pay 5.45% and your employer will pay 5.45% of your maximum pensionable earnings minus the basic annual exemption, up to certain limits. The total annual CPP contribution of employer and employee increased $537 to $6,333 in 2021 (up from $5,796 in 2020).
Keep in mind that the CPP increase is an additional cost for your employer, as well. Your take-home pay would only be affected by the amount that you contribute, and that is deducted from your gross pay. The personal maximum is $3,166.
If you are self-employed, remember that you pay twice, as both employee and employer.
Of course, this means more money is being contributed for your retirement and you will see that benefit upon retirement. It is another form of forced savings, and for most Canadians that is a positive event.
I checked in with Certified Financial Planner and MoneySense contributor Jason Heath for additional insights. He offered…
- Those earning over $61,600 in 2021 will see their employee CPP contributions going up by $268.45 per year, or just $22.37 per month.
- While this seems like a tax hike, the good news is it will provide a higher CPP pension in the future.
- For some employers, the increase may be coming at a tough time for their business—with revenues down or other expenses up.
- Additional increases are coming in 2022 and 2023 to increase the maximum contribution rate by 0.25% of the year’s maximum pensionable earnings, so employees and employers can expect increases in the next two years as well.
You can see the recent history of CPP contributions here.
As more increases are on the way, you can factor in additional pension payments to your total retirement plan. This is also a good reminder to do a personal budget and cash flow statement. Find the money to maximize your RRSP contribution to the extent possible. Your RRSP contributions will lower your total tax bite for the year.
If you have a group plan at work with matched contributions from your employer, take their money. Contribute the amount that delivers their matched contributions in full, if you can.
One of the first rules of personal finance is take all free monies.
To help map out your retirement plan you might check in with an advice-only planner.
Sell in May and go away?
Sell in May and go away is a popular stock market refrain—or, perhaps, myth. This chart came to my email inbox from S&P Global. Here’s what happened (with U.S. stocks) when you miss out on May:
As the chart says: Don’t miss out on May.
The post Making sense of the markets this week: May 3, 2021 appeared first on MoneySense.