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An oil pump jack pumps oil in a field near Calgary, Alberta in this file photo.

TODD KOROL/Globe and Mail Update

This isn't unprecedented but the oil sector has become the poster child for modern markets, complete with new technologies, fear of obsolescence and excess speculation.

Bloomberg noted recently that U.S. oil stocks have de-coupled from the commodity price -- stock values aren't rising with West Texas Intermediate crude -- to the greatest extent in the history of the data.

One school of thought argues that the development of alternative energy and electric vehicles has created enough doubt about the future of oil demand that stocks in the industry will trade at a discount from now on (the bottleneck-rich domestic oil industry has it's own, separate issues of course). This idea of a green discount was supported from an unlikely source, a member of the board of directors at Chevron,

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"If oil energy consumption is declining and #renewableenergy consumption is on the #rise, what does that mean for the future of the oil industry?" Dambisa Moyo, an economist and author who joined the oil company's board in 2016, wrote on Twitter.

Ms. Moyo deleted the tweet but I'm not sure it was relevant for the short term anyway. Even if it's now an emerging markets phenomenon, global crude demand growth remains robust and worldwide electric vehicle sales are still a rounding error as a percentage of the total.

Rampant, aggressive speculation on the crude price is a better explanation for ex-Canadian oil sector underperformance in my opinion. Portfolio managers are less likely to buy energy stocks when hedge funds and the lesser-know Commodity Trading Advisors (CTAs) -- algorithmically-driven, trend-following speculative funds -- are pushing the commodity price around with aggressive futures positions, making corporate profits and stock prices in the sector harder to predict.

Goldman Sachs analysts directly blamed CTAs for the weakness in oil prices in a recent report,

"The decline of managed money positioning during the sell-off was concentrated in [oil-related] products, in which CTAs tend to over-index…  Unlike other 'traditional' speculators, trend-following funds are not [acting] on informed views of future supply and demand. As such, as they become an increasingly large driver of managed money positioning and volatility, commodity prices are increasingly at risk of becoming temporarily dislocated from fundamentals."

The Financial Times had trouble even uncovering who the new speculative, non-fundamentally driven traders in oil markets are,

"Who trades oil is changing, however. Investors who bother little with details such as inventories and pipeline flows are replacing dwindling ranks of specialist commodities hedge funds… The identities of oil investors are murky. Futures markets, anonymous by design, have become more so because of electronic trading."

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The recurrent theme here is, I think, financialization -- a process where borrowing money and buying and selling assets takes precedence over real world economic activity. Global economic growth is broadening now, but we've been through a decade where outside of exceptions like China, asset price growth has been strong while Main Street has struggled. Small wonder that wealth is more concentrated in markets than households, constantly lurching around in search of new opportunities.  At this point, buying and selling houses and oil futures contracts dominates the business pages instead of corporate investment in new production capacity.

In oil markets, fundamentals will at some point re-assert themselves, probably soon rather than later when the hot money loses interest. In the mid-term, companies like Tesla Inc. will either collapse under the weight of their enormous debt loads or realize the promise embedded in their stock value by selling enough cars to make a dent in the market. Until then, the next moves in markets, subject to the whim of speculators, might be tough for investors to figure out.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you, you can sign up for Globe Investor and all Globe newsletters here.


Stocks to ponder

Restaurant Brands International Inc. (QSR-T). Restaurant Brands International Inc.'s stock has lost its sizzle, even though the home of the Whopper and the double-double just doubled its dividend. For investors, this could be a good time to place an order. Since Restaurant Brands (QSR) was formed in 2014 following the merger of Tim Hortons and Burger King, its formerly bite-sized yield attracted little interest from income-oriented investors. But that changed on Feb. 12 when the company – which also owns Popeyes Louisiana Kitchen – hiked its payout by 114 per cent to US$1.80 annually, which equates to a yield of about 3 per cent. Let's take a closer look at the company to see why, for long-term investors, Restaurant Brands could hit the spot. John Heinzl explains.

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Boardwalk Real Estate Investment Trust (BEI.UN-T). Boardwalk Real Estate Investment Trust, which slashed its monthly payout just three months ago, believes it is now making a comeback. Many investors are on board with its new-found optimism, but it's hard to see much upside in this turnaround story. The REIT's challenges are clear: Boardwalk owns and manages residential rental properties primarily in oil-sensitive Western Canada, where occupancy levels have fallen sharply. Cash flow has dwindled in recent years, and the unit price is down more than 35 per cent since 2014. But when Boardwalk released its fourth-quarter financial results earlier this week, its management referred to 2017 as a "transitional year," implying conditions are set to improve. Management also gave upbeat guidance for the year ahead: Cash flow, they believe, is set to rise as much as 11 per cent from last year. David Berman reports.

Lucara Diamond Corp. (LUC-T). Value hunters like to talk about whether a stock is cheap or pricey on the basis of its earnings and cash flow. But sometimes you have to go well beyond the financial statements to assess an investment. A case in point is Lucara Diamond Corp. It seems to be a value hunter's dream – a high-performing company with a spotless balance sheet selling for a below-market multiple. But is the Vancouver-based miner really as cheap as it appears to be on paper? Ian McGugan examines the stock.

The Rundown

Why even a heck of a good earnings season has failed to ignite a rally in the TSX

Corporate Canada is knocking it out of the park this earnings season, though you wouldn't know it by looking at the average stock chart. Fourth-quarter reporting season has just passed its halfway point, with total profits posted by Canada's largest public companies on track for close to a 20-per-cent increase over last year. Even though that's a big improvement from what was forecast just a couple of months ago, Canadian equities have failed to register much in the way of enthusiasm for the unexpected prosperity. Tim Shufelt reports.

Why I'm feeling really bullish about the energy sector right now

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The S&P 500 energy sector is down 8.2 per cent year to date compared to the 0.1 per cent gain for the overall index. The story is no different over the last 12 months as the sector continues to lag the performance of the index (minus 7.6 per cent compared with a 11.8 per cent gain for the market). In fact if one were to go back to the beginning of the decline in oil prices back in mid-2014, the energy sector has declined 32.7 per cent versus a 35.7 per cent gain for the S&P 500 — a whopping 68.4 per cent underperformance. David Rosenberg takes a look at the fundamentals and likes what he sees.

The market's gone mad. Here's how to protect yourself

When my sister tried to open an investment account at a major Canadian bank in early January, she was told she would face at least a two-week wait. "Everyone is opening accounts to trade pot stocks," her branch manager said. It's not just my sister's bank: Whenever I log on to my own investment account at another big Canadian financial institution, I see a message warning me that response times will be slow because of "unprecedented demand" from clients for investment services of all types. I can't remember so much excitement among investors since the late 1990s. Back then, newly minted dot-com shares with no record of sales or earnings were soaring to the moon and beyond. North American speculators were convinced that only chumps settled for anything less than doubling their money. Ian McGugan reports.

What an investor at a $4.5-billion asset manager is buying, selling and thinking about markets right now

Like many investors, Robert Taylor wasn't surprised at the recent market correction and believes it was necessary to maintain its long-term health. Still, he doesn't recommend investors rush back in. "You don't fall from a 10-storey building and then get up and you're fine the next day; it definitely takes some time." Mr. Taylor, senior vice-president and portfolio manager at Calgary-based Canoe Financial, which has $4.5-billion in assets under management, expects more volatility ahead. Brenda Bouw talked with Mr. Taylor.

Horizons revamps ETF amid worries about volatility-based funds

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Concerns are growing around leveraged volatility-investment products as one of Canada's largest exchange-traded-fund providers announced a halt in trading for a second time this year. On Tuesday, Horizons ETFs Management (Canada) Inc. announced a temporary suspension of new subscriptions for units of BetaPro S&P 500 VIX Short-Term Futures Daily Inverse ETF (HVI), saying it plans to rejig the fund's investment objective. Clare O'Hara and Christina Pellegrini report.

Top Links

All today's news is bad for the Canadian economy

Measures to curb housing prices will be 'too successful'

How rising bond yields threaten equity portfolios
 

Others

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The week's most oversold and overbought stocks on the TSX

Friday's Insider Report: Companies insiders are buying and selling

Thursday's Insider Report: Companies insiders are buying and selling

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Bond market déjà vu? Here's what will show if rout has legs

Demand for guns isn't going away, Wall Street analyst predicts

How to save enough to retire after hitting the Big 5-0

Passive becomes the new active as indexing rules everything

What 37 economists and analysts are predicting for crude oil prices this year

Number Crunchers

A small-cap strategy focused on earnings growth, free cash flow

Ten U.S. health-care stocks for a late-cycle bull market

Ask Globe Investor

Question: I have a U.S.-dollar trading account where I have traded stocks for many years and occasionally added funds in U.S. dollars. I know that I have to convert the buy and sell amounts into Canadian funds to establish my capital gains/losses using the exchange rate on the settlement dates. My question is: what happens when I eventually close my account and convert it all back to Canadian dollars? Do I have to establish if there was a currency gain/loss from the day I opened the account in U.S. dollars to the day I convert all the funds into Canadian dollars?

Answer: No. If you have been buying and selling U.S. stocks and reporting the capital gains and losses along the way in Canadian dollars, then you do not need to go back to the beginning and report currency changes a second time when you close your account. When you eventually sell your current U.S. holdings, you would do what you have always done: report the capital gains or losses based on the purchase and sale prices of those securities in Canadian dollars. Technically, you are also supposed to report any currency-related capital gains or losses on U.S. cash when it is converted back to Canadian dollars, but for currency transactions the Canada Revenue Agency only requires you to report the amount of your net gain or loss for the year that is more than $200. "If the net amount is $200 or less, there is no capital gain or loss and you do not have to report it on your income tax and benefit return," the CRA says. (For more on this topic, read my two-part columns here. Part 1 and Part 2.

--John Heinzl

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.


What's up in the days ahead

The U.S. corporate world is in love with share buybacks, thanks in part to Donald Trump's tax cuts. Tim Shufelt this weekend looks at the Canadian side of the story. Plus, a look at the progress (or lack thereof) of online brokerages omitting A class funds from their platform when a cheaper equivalent fund is also widely available.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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