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August 16, 2019 | Oil and Credit Strains Leading Banks and TSX Lower

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

Rising precious metals stocks this summer have, so far, managed to hold the Canadian stock market (TSX) above the 16,000 level where it has languished, flat since 2017.  Material stocks, however, make up just 10% of the index overall.

Energy stocks, the second-largest sector weight at 19%, have been losing since oil prices hit a secular peak in 2008, and are down another 24% in the last three and a half months.

Oil companies are suffering from both a cyclical fall in demand as the world economy heads into its next contraction, as well as a secular ‘evolve or die’ phase where they must reinvent themselves into renewable energy and storage conglomerates.  See Power to the People–How Renewables and Batteries are Reshaping the Utility Industry.  This is not an easy transition and will take a lot of money.

At the same time, lawsuits for increasing environmental and health damage will be a drag on oil sector cash flow, profits and shareholders for years to come.  This CNBC report reviews some of the recent price impacts.

Something interesting has been happening in the oil patch: Crude oil has fallen the last few months both here and around the world. But the American oil stocks have fallen a lot more, and now there is real concern about where the industry may be headed. Here is a direct video link.

In the process, countries, states and provinces which came into this secular downturn heavily dependent on fossil fuels are behind the curve and will struggle with their current low tax, high spending policies.  For example, see Behind Alaska’s Big Fight Over Oil Money:

Instead of paying taxes to fund state government, Alaskans have since the early 1980s been able to rely upon taxes and royalties from North Slope oil and gas production to pay for both (1) state government and (2) a sort of universal basic income for residents, with “dividend” checks averaging an inflation-adjusted $1,718 a year since 1982. Alaska levies no statewide property, sales, or personal income taxes, has the lowest state and local tax burden of any state, spends more per resident than any other state government and has over the past four decades relied on oil and gas for 83% of the unrestricted state general fund revenue with which most state operations are funded. But since 2015, the oil revenue hasn’t been nearly enough to pay the bills.

To try and make ends meet, an increase in consumption taxes is inevitable as incomes fall. Tough times in Alberta are reflected in the steadily rising mortgage defaults over the past ten months, see Mortgage Arrears in Alberta hit the highest rate since 2013.

All of this is setting up for a triple whammy for Canadian banks who are levered on rising defaults in the highly indebted oil patch, realty markets and households as well as tumbling capital markets.

Make no mistake:  as the energy and realty sectors stumble, so do the banks.  Down over 4% this month, Canadian financial shares are finally repricing for the compounding strains at hand.  Since financials are the largest weight in the TSX (34% of its market cap), the broad market will have to follow suit.  It’s just math.

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August 16th, 2019

Posted In: Juggling Dynamite

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