Bernanke the almighty and What are oil stocks worth anyway?

Andrew at City of God has posted that the Watcher called into question Sue Richard’s calling the Silver Surfer all powerful:  “‘all-powerful? There is only one who deserves that name! And his only weapon… is love’ (Fantastic Four #72; Mar. 1968).”  Well for us investors, we worship at the feet of one and only one, his high and mightiness, Benjamin Bernanke, the chairman of the Federal Reserve Bank.  He is the one who determines what our assets are worth and he wields a weapon called “QE” and another called interest rates  with which he increases our power, our net worth, and we become mighty warriors of investing–but when he refrains from wielding them, suddenly we are all grovelling in the dirt like worms eating skubala (a.k.a., the margin call).

So I wrote to my good friend Mich at Beating the Index, who is fretting about running out of powder for his battle on the investment front:

Bernanke is the first cause of everything in the market today. He is exercising his omnipotent power as head of the Federal chair to influence risk appetite. Well, there will be either more monetization soon or watch hundreds of thousands of government workers in Washington not get their pay cheques and be sent home crying. My Schadenfreude would be so high at that point, it would almost be worth a 50% cut in my portfolio to see it. But it ain’t never gonna happen! Believe me, by August or September, the pols in Washington are going to lose nerve and there will be new debt ceiling (and QE3), based upon a compromise between the left-wing republicans and the democrats in the House.

Meanwhile, fear is palpable.  The companies  in which I am invested have increased their asset values through the development of oil fields but their share prices are way down because the lack of QE3 has diminished risk appetite.  People are rightly afraid to be caught with their margin pants down, like what happened to silver investors when the margin requirements were magically increased.

Devon Shire chides Petrobank (last $14.30)/Petrobakken (last $13.63) for not having a share buyback at these low prices, which puts their market capital at serious multiples below the Net Present Value.  Shire wants them to reward shareholders with a buyback of shares, but of course the management spent that cash on PBN shares starting at $21 and who knew that the price would plummet to these levels? These prices  are not only at multiples below NPV but well below book value (=shareholder’s equity).  I wrote to Mr. Shire the following response:

Net Present Value for other junior and intermediate companies is also currently at extremely high ratios to market value. Midway Energy is reporting NPV10 of 1.7 billion while its market capital is 274.9 million.

Some are angry with Petrobakken for continuing what they consider to be an ill-advised dividend program. Evidently, the buy back of shares is an equivalent use of cash as a dividend–I suppose that the real need is to spend money on developing their resources in order to deliver growth. The sad part is that PBN started the repurchase program at $21 while the price was so high vis-a-vis the current price.

At some point either you and I are going to be considered really stupid for thinking we had found value in the Canadian oil sector, or there is going to be a major correction drastically decreasing the NPV/market capital ratio.

Yet Mich warned me about taking the NPV10 that Midway had presented as a serious indicator of their value and I reproduce here our dialogue:

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The long and short of it: 2010 DIY summary

Our DIY investment portfolio has had a strong performance this year.  It is very difficult to determine actual performance because of contributions of new principle, but suffice it to say that our personal wealth experienced a 25% increase since January 1, 2010.  Considering that the TSX was up 14.4% this year, I shall now claim that I beat the index in 2010, and so far since becoming a DIY investor (Nov 2005) that has been the case: the TSX is up 15.8% over the last 5 years, while we are standing at 76% unrealized gain in our current positions (plus considerable dividends and realized gains over that same period). Our net worth has nearly doubled since June 2008 (before the meltdown) and our current rate of monthly increase is at 5.5 times what it was before I became a DIY investor in 2005.  I’ve discussed on these pages the strategies that I’ve employed (see category “investment tips”).  But to summarize below:

Long:  Gold, silver, oil & gas, sugar, loonie, Canada

Short: US dollar

Best moves:  Held Midway Energy (mel), up 48%; held New Gold (ngd), up 255%.  Added Crocotta Energy (CTA), up 53%. Used leverage in US margin account to buy Canadian high yield stocks (pwe, pgh, erf, pvx, avf.un) and traded favorably in and out of these positions.  Received approval to trade options and used them to great advantage–in particular, I greatly benefited from the sale of put options on Canadian oil and gas and gold mining companies (esp. the following–Canada exchange: cpg, dgc, gg, abx, pbn, pbg, day; US exchange: gg, abx, pwe, pgh, erf and ngd).  Increased non-margin credit facility by 230%: these consist of a loan from a relative (10%), two HELOCs (80%) and a unsecured line of credit (10%).  NB: Most of this credit facility is unused and left in reserve to cover put options–this allows me to safely sell more put options and not have to worry if there is a decline in excess margin credit in the portfolio.

Worst moves: Added more Perpetual Energy (pmt), new positions down 28% (overall position is down 35.6% not counting dividends); held Prospex (psx) which went to as high as $2.52, ended year at $1.31. Natural gas: bought Terra Energy (TT–up 0%), added more pmt, psx, Pace (pce).  Sold a covered call on Detour Gold and became more bullish afterward–this resulted in a $4.49 loss to buy back the call.  Failed to pay all taxes on income trust distributions in 2009 because an unintentional oversight by myself and by my accountant–I will seek a new accountant, and I’ve decided to include an income summary with all the paper work that I provide my accountant in the future: the CRA fined me 20% (over $1000–it was nearly $3700 total notice of reassessment) because of a similar oversight in my 2008 return.  The worst part of this whole episode is the fear of being on the radar of the taxman for the next few years.

Is this a recommendation to become a DIY investor?  I don’t know but it is an apologetic, since most financial writers in the official media say that retail investors do poorly and that they can’t beat the index.  After five years of experience and after not merely surviving but thriving in a period that included one of the worst bear markets in history (September, 2008-March, 2009), I have a growing confidence that I can consistently beat the index and make better money at this than at a day job.  While I won’t give a blanket recommendation to everyone to become an DIY investor, Adam Hamilton does recommend that everyone become a trader (see Monty Pelerin).