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Market Expectations for 2016

The Wall Street Journal featured a helpful article “Happy New Year…Now What?,” (subscription required) that stated:

Collectively, Wall Street forecasts are similarly inconsistent. Since 2000, the S&P 500 has returned a 4% average annual gain, excluding dividends. By comparison, Wall Street strategists have predicted 10% yearly returns, according to Birinyi. And, on average, the consensus always has predicted annual gains, missing all five down years in that stretch.

So what’s my take? My take is that Wall Street strategist forecasts are essentially useless.

Going into 2015, I wrote that SPX options had a skew to the downside, implying that there was more downside risk. Using a similar process, let’s look at SPX options for 2016.

On Thursday, December 31, 2015, the SPX closed at 2093.94. Looking at the SPX December 2016 Options (those that expire on December 16, 2016) and using thinkorswim’s platform for options, I note the following:

  • About an 80 percent probability that SPX closes above 1725;
  • About an 80 percent probability that SPX closes below 2275; and thus
  • About a 60 percent probability that SPX closes between 1725 and 2275 at expiration.

I arrive at these values by finding the SPX value at expiration where the put delta is roughly -0.2 and the call delta is roughly 0.2. I am using option deltas as a rough proxy for the probabilities.

The lower level is about 82 percent of the current SPX value and higher level is about 108.6 percent. Again, we see a skew to the downside because that implies about an 18 percent downside risk compared to about a nine percent upside risk. There is an approximately equal risk that SPX closes below 1725 as there is that it closes above 2275.

Even if the risks were perfectly balanced, there should be a skew to the downside because of dividends. Dividends make puts more expensive. So let’s adjust the put value to incorporate the dividends. SPY dividends have been about 2.4 percent. 2094 times 2.4 percent yields 50.25. Thus, to arrive at the amount of skew while incorporating dividends, we get a higher level of 84.8 percent (equals (1725 plus 50) divided by 2094). Thus, the downside risk of about 15 percent is nearly twice as great as the upside risk of about nine percent.

When learning of various forecasts, remember to keep an open mind. As the opening quotation shows, Wall Street forecasters are traditionally an optimistic bunch. While option pricing models are certainly not crystal balls, they do provide a quick snapshot as to how market participants view the current market. With the passage of time, of course, that view will change. In short, I am not wildly optimistic in my outlook for 2016.


Happy New Year 2016!

This past year was a difficult year for Albertans. With oil and gas prices at extreme lows, many oil and gas companies are struggling. Even worse, many have had to layoff significant numbers of their staff.

Last month, I mentioned that I expected oil prices would not remain in the US$30 for more than two months. After the disastrous December OPEC meeting where they failed to even agree to disagree, oil prices remain under pressure. Every country appears to be producing near or at maximum capacity as there is no production ceiling. Consequently, I am no longer as confident that oil prices won’t remain in the US$30s for two months or longer.

With oil prices forecasted to be “lower for longer,” many companies will continue to struggle and some may even perish. Companies that are most at risk are those that exhibit some or all of the following conditions:

  • Relative to others, a high break-even cost of production;
  • High debt to equity ratio;
  • Share price has declined more than 65 percent during the past two years; and
  • Large percentage dividend cuts.

For those who own shares in such troubled companies, this is a challenging time. Do you sell shares now and absorb your loss? Or, do you hope that the situation changes so that you can recoup some of your losses? There is no easy answer. You will have to assess your personal financial situation and that of each company. And, then make your decision.

While 2015 has been a difficult year and the early start of 2016 appears to be challenging, too, some analysts are forecasting better commodity prices in the second half of the year. For Albertans, let’s hope our situation improves soon.

I wish everyone a happy, healthy, and successful 2016!


2015 Year End Oil Price Outlook

In late January 2015, I postulated that oil prices were near or at their bottom. I wasn’t alone, however, as even Abdalla El-Badri, the OPEC chief, thought we were near bottom, too.

Here we are coming into the close of 2015. The question remains: As oil prices hover around the $40 mark, are they near the bottom?

This past year has surprised most experts as oil prices have stayed lower, and for longer, than most expected. Looking forward to the next few months is equally challenging. Inventories remain at record high levels, Iran and Iraq will be producing more, and the geopolitical environment is challenging. While the rig count is down substantially, US production is off only modestly.

During this past year, many capital projects have been cutback or eliminated. While those capital reductions might not have an immediate impact, over time their effect will be felt. In fact, Saudi Arabia is now voicing concerns, as evidenced in a recent Financial Times article “Saudi counters ‘lower for longer’ oil mantra” (subscription required), that the industry might not be investing a sufficient amount for future growth.

A year on, as Opec ministers prepare to meet next week with oil languishing near $45 a barrel, senior Saudi officials have a different message. In recent weeks, in public forums and private briefings, they have emphasised the dangers of future supply shortages as the oil industry has slashed investment in new projects.

Prices fell further than they ever anticipated, they say, remarks that for many in the oil market imply the Opec kingpin wants the year-long oil rout to come to a close.

Saudi officials say they are not about to reverse the policy that saw them open the taps and prioritise their long-term exports over short-term financial gain. But behind closed doors they say they want prices to stabilise between $60 and $80 a barrel.

That level, they believe, would foster oil demand but not encourage too much supply growth from alternative sources — a goldilocks scenario. Market watchers say that by focusing on the future outlook the kingdom can slowly coax the price higher without abandoning its strategy.

Back in late January, I thought oil prices might touch the high $30s, but doubted that prices would stay there for an extended period of two months or longer. While I am still of that view, I had expected that prices would have shown more strength by now.

I will be watching for any developments arising from the December 4 OPEC meeting and generally watching the oil environment over the coming weeks and months. Current prices are unstainable, so it is a question of when, not if, prices rebound higher.


Wishing Trudeau Good Luck

Like most voting eligible Canadians, I voted in the recent federal election.

Unfortunately, I was not thrilled with my choices, neither in terms of federal parties nor in terms of local candidates. I agonized over my choices considering the parties’ different platforms, with each of their strengths and weaknesses. Ultimately, my decision was based upon my perception of the “lesser of the evils.”

Canadians provided Justin Trudeau and his fellow Liberals with a majority government. The general consensus is that Canadians wanted change. The conservatives ran a negative or divisive campaign, whereas the liberals ran an upbeat, positive, sunny campaign. Trudeau also performed well throughout, seemingly gathering momentum with each passing day. The long campaign certainly worked to his advantage.

I am pleased to see that Alberta elected a few Liberal seats, which should provide Alberta with at least one cabinet post. And, many of the constituencies ran a very close race. Perhaps this latest change signals an end to Alberta’s tendency to vote for just one party. Having some diversity is good, because that suggests Alberta will always have a voice in cabinet, regardless of which party wins.

Now that Trudeau has been elected as our Prime Minister, I wish him good luck in governing. I hope he is able to effect the positive changes that he imagined. And, where it makes sense to modify or amend his plans, I hope he is open to altering his course. Canadians have impossibly high expectations of our new government. After a few months, however, we will all have a better sense of the new direction. Although he faces many challenges, I am sure Trudeau is excited by his opportunities.


Shale Boom, Shale Bust: The Myth of Saudi America

Having read his earlier book, Oil’s Endless Bid: Taming the Unreliable Price of Oil to Secure Our Economy, in 2011, I highly recommend Dan Dicker’s latest book, Shale Boom, Shale Bust: The Myth of Saudi America.

Up until the latter part of 2014, the American shale oil boom seemed to promise that North America would become energy self-sufficient. However, just as we began to prepare to welcome 2015, OPEC began to increase its production thus lowering the price of crude oil, in order to regain its historical market share. This change posed a significant threat to the US shale oil industry. Dicker’s book walks us through the shale oil story.

The first chapter, “Saudi America,” provides the foundation for the shale oil story. It begins with US Energy Information Administration graphs depicting expected shale gas and oil production. Then, a broader picture is developed showing a cost curve for various sources of oil found across the globe. Because shale oil is more expensive to produce than conventional OPEC oil, the United States can never live up to the hype of Saudi America.

The next chapter, “Shale Oil Is a Ponzi Scheme,” begins with a discussion of shale oil decline rates. Shale oil production declines rapidly, with more than half of an entire well’s production occurring within the first two years. The first six months of a well are the most prolific. Thus, shale oil is much like a Ponzi scheme in that more wells need to be drilled simply to stay ahead of the massive declines in production.

The third chapter, “Shale Scalability and Results,” discusses the economics of oil shale. With its lower upfront costs and fast quick production profiles, shale oil drilling will be quick to react to changes in oil prices. When prices are sufficient, activity is brisk with economic shale oil production. When prices are low, the converse is true. Coming into 2015, some of the shale oil players were hedged. That hedge allowed them to continue throughout 2015 without the full burden of lower oil prices. As shale oil producers work their way through 2015 and much of their hedges, they will collide head-on with declining production and lower prices.

The next chapter, “The U.S. Export Ban on Oil,” provides a historical background about why oil exports were initially banned and why, in Dicker’s view, they should continue to remain banned. A key underpinning argument is that shale oil is a limited resource.

The fifth chapter, “The Collapse of 2014 Oil,” discusses the reasons why oil prices tanked. Dicker identifies the following five reasons, listed in no particular order of importance:

  1. The rising strength of the US dollar;
  2. The defensive market share posture of Saudi Arabia within OPEC;
  3. The increasing production of US shale oil and resultant global “oil glut”;
  4. The continuing malaise of China and European economies; and
  5. The demise of US investment banks’ commitment to oil marketing—the hiatus of the endless bid.

Each is described in further depth.

The sixth chapter is a continuation of the earlier chapter. Each of the five factors is explored and analyzed for its effect. I found the fifth reason along with the effects especially interesting because I had neglected to consider it prior to reading this book.

“Three Phases to Shale Bust” is the next chapter. The chapter begins by discussing how oil prices can move to extremes, both on the upside and downside. Next, “Phase 1: Living Through the Oil Price Crash,” covered the period starting from early 2015. “Phase II: The Capital Chase: Cutting Jobs, Raising,” discussed the industry’s reaction to low oil prices. Last, “Phase III: Consolidation of Asset Ownership,” which is close to where the industry is now as I write this review, outlined expected developments as many companies face the inevitable cash crunch.

The old saw is that the cure to low prices is low prices and the cure to high prices is high prices. With the cure of low prices forcing consolidation, the seeds for the next oil boom have been sown. “The Next Boom” discusses the onset of the recovery. This eighth chapter discusses the expected global oil demand that exceeds the existing base production. That then leads to capital expenditures to increase production to meet future demand. Dicker outlines some key assumptions that support his position.

After the eighth chapter, Dicker presents “Conclusions,” where he states the “…United States is not one step closer to finding a unified energy policy that works, and the U.S.—despite its tremendous success with shale—is going to end up without the energy independence from foreign oil it craves. In my opinion, Washington and particularly the President are to blame for this.” He then goes on to provide more detail and some ideas for policy considerations.

His final chapter, “Addendum: Boom Bust Investing,” covers three key topics for investors who want to capitalize on the changes in the shale industry. “Investing in Exploration and Production ‘Survivors’” is as the title suggests: Invest in those companies that will survive. In his book, Dicker mentions specific companies for consideration. Next, “Investing in Pipeline Companies” is covered. And last, “Investing in the Cash-Rich and Opportunistic” discusses investing in those companies that are to take advantage of this downturn.

Again, I highly recommend Dicker’s book. Through his years of experience of being an oil trader and investor, he will provide you with thought-provoking material.


Photoshop LAB Color

In an earlier post, I mentioned that I was working with Dan Margulis and several other beta-readers to complete Margulis’s book, Photoshop LAB Color: The Canyon Conundrum and Other Adventures in the Most Powerful Colorspace (2nd Edition). We completed our task and his book has been available on Amazon since late July.

Although the beta-reading process was demanding, I thoroughly enjoyed working with Margulis and the other beta-readers. It was demanding because we had to read each chapter carefully, perform the exercises, and provide comments that might be helpful to Margulis. He read our comments and decided whether to use our suggestions. After each chapter was complete, in a private forum Margulis singled out beta-readers who spotted something unusual and who had particularly helpful insights. For example, if we all spotted the same item, none would be singled out. However, if three or less of us found something, then he would mention our names. While we beta-readers worked hard, I know that Margulis worked much, much harder at creating the content, reviewing all of our comments, and then reworking his chapters.

In choosing his fourteen beta-readers, Margulis picked people who represent different segments of his audience. I represented the advanced amateur. Thus, I might have had to work somewhat harder than most because my skills and experience are not as strong. I had an advantage, however, in that I had to rely on what was written and not my own background and skills.

The reason I enjoyed the process so much is that I worked hard, learned a lot, and met some great people in a virtual setting. It’s fun to be part of a successful project where I can contribute and give back to the larger photography and Photoshop communities. And, of course, I am always happy to help my friend, Dan Margulis. I am grateful that he allowed me to be a part of his team.

I wrote a review of the book on Amazon, which I have included below. If you are a Photoshop person, I highly recommend Margulis’s book.

My Review on Amazon.com

Many years ago, I purchased Dan Margulis’s book “Photoshop LAB Color: The Canyon Conundrum and Other Adventures in the Most Powerful Colorspace.” At that time, I didn’t understand Photoshop’s channels and certainly didn’t understand LAB colorspace. Being relatively new to Photoshop, I was eager to dive in and learn. When I finished the book, I had an understanding of channels and LAB.

To many people, LAB seems like an esoteric and foreign colorspace. I found, however, that LAB made more intuitive sense than RGB. For example, I know that for the A and B channels, positive values are warm and negative values are cold. I like that the L channel is luminosity. To me, LAB readouts are logical and intuitive.

While I still do some of my work in RGB and occasionally in CMYK, my workflow makes extensive use of LAB. It’s in LAB where I boost or strengthen colors. Once you read the book, you’ll have a better understanding as to why more than one colorspace is used to complete an image.

Dan’s latest book is, of course, even better than his original book. Over time, Dan gained more knowledge through experience, and much of that knowledge has been passed along in his latest book.

In reading both books, I found that some of the supposedly easier chapters were more difficult than some of the supposedly more difficult chapters. Dan’s books require concentration to fully absorb the material. My process with the first book was to read the book cover to cover and then to reread it again. Then, I selectively reread portions where I needed further review. Having the good fortune of being chosen as a beta-reader for his latest book, I read each chapter as soon as it was released. Even with my prior background, I still had to work at fully understanding everything. Furthermore, I often read the chapters more than once.

While the prior paragraph might make the book seem overly difficult, that would be the wrong impression. Instead, you must be prepared to work to understand the material, especially if you are still on the steeper portion of the learning curve with respect to Photoshop. I am not a Photoshop guru. If I can learn the material, so can you.

Is LAB a cure-all or some magical colorspace that solves all issues? No, neither. Instead, LAB provides you with more arrows in your quiver. As you read through the book, you might find yourself occasionally thinking, “I might tackle this issue in another colorspace using a different approach.” That’s perfectly acceptable. Dan’s book is geared toward LAB. So he does everything in LAB to show you some different alternatives. You might find that you combine some of your techniques with his. There are, however, many methods or techniques within LAB that can’t be duplicated in other colorspaces. And, that makes LAB extremely powerful. Dan’s book provides you with additional resources that you might not have possessed.

Having said all that, let’s quickly review the chapters.

Chapter 1: The Canyon Conundrum

It’s a quick introduction to LAB. You will see LAB at work with some easier examples.

Chapter 2: LAB by the Numbers

Readers begin to understand how numbering systems work and how the channels work.

Chapter 3: Freedom and Responsibility

You learn about the power of LAB. One of challenges is not going overboard with LAB. The overall aesthetic you are trying to achieve will determine how much extra color you may decide to add.

Chapter 4: Too Much is Just Right

Throughout his book Dan teaches us that it is better to go too far, and then back off the intensity. He presents several methods for doing so. Another key learning is that it’s okay to go too far so long as critical elements of the photograph are kept in check. One challenge when working on images, however, is that we often become desensitized to our own creative work.

Chapter 5: Knowing Right From Wrong

Earlier I mentioned that I found LAB more intuitive because positive values in the A and B channels are warm. This chapter takes that whole discussion much further.

Chapter 6: Sharpening for The Impressionist

Dan provides a comprehensive discussion on sharpening, including why you might sometimes want to sharpen in LAB.

Chapter 7: Entering the Forest: Myths and Dangers

Some common misconceptions and myths are explored. As an example, is the best way to convert to a black and white image simply to use the L channel from LAB? While I won’t provide the discussion, the answer is, no.

Chapter 8: The Readers Sum It Up

Here the beta readers contribute some of their knowledge and experiences.
As we enter the second half of the book, the material generally is more advanced. As mentioned, sometimes you may find the more advanced material easier than the earlier material.

Chapter 9: The LAB Advantage In Selections and Masking

I found this chapter very powerful because it unleashes how to use LAB and its channels to create very effective masks.

Chapter 10: The Product Is Red But the Client Wants Green

For those that often change colors, say of garments, this might be the most important chapter for you. For others, it is more arrows in your quiver.

Chapter 11: The Imaginary Color, The Impossible Retouch

LAB allows us to create colors that are impossible, imaginary colors. We can sometimes create these colors to put color back into blown out and overly dark areas.

Chapter 12: The Best Retouching Space

For certain types of retouching, LAB has advantages over RGB and CMYK colorspaces. Dan provides some great examples of where LAB excels.

Chapter 13: The Music of Noise

Marco Olivotto, another beta-reader, largely wrote this chapter. It was one of the most popular chapters for our beta reading group. The topic, of course, is noise reduction.

Chapter 14: Command, Click, Control

I enjoyed this chapter because I learned how to easily create color differentiation amongst items that have a similar color.

Chapter 15: LAB and Video

Dan shows how LAB can be used in Photoshop to add more punch to your videos.

Chapter 16: The Universal Interchange Standard

Dan provides a discussion on colorspaces, color models, conversions, and calibrations.

Chapter 17: Blending With the A and B

A and B channels are used in creative ways for blending purposes. Even though A and B contain no detail, they can be used as blend sources to separate objects based on their color.

Chapter 18: Canyons, Concepts, and Changes

In many respects, this chapter is a review and discussion of the prior material readers have been exposed to.

The book contains a tremendous amount of information. For those of you who have read his first edition, you should know what to expect in terms of difficulty and rewards. For those who are new to LAB, this book will be extremely beneficial. At times, you will likely find it challenging, but your prize at the end of the process will be worth your effort. You will have a much better understanding of channels, LAB colorspace, and what LAB can do for you.

For my own personal work, when working with LAB, I am faster and more efficient. And, most importantly, I get much better results.


Peace Bridge Just Before Sunrise

Peace Bridge Just Before Sunrise

I arrived at Calgary’s Peace Bridge on Sunday, July 19, 2015 just before sunrise and shot this photograph. The cool morning tones with just a hint of pink sky in the background, along with almost even lighting, creates an interesting photograph.

For those who are not aware, the Peace Bridge is a pedestrian bridge that crosses the Bow River in Calgary, Alberta. Santiago Calatrava is the architect who designed the bridge. Because of its costs and delays, it was a controversial project. Despite its initial issues, I like its striking design.

Although I have been busy, I wanted to share with you this latest photograph.


Nat Christie Centre – Alberta Ballet

Nat Christie Centre -  Alberta Ballet

On Thursday, June 25, 2015 I took a photograph of the Nat Christie Centre, current home of the Alberta Ballet.

I have wanted to take a photograph of this historic building for some time. One of the challenges, however, is that it faces north, which at Calgary’s latitude of 51 degrees means that the sun rarely kisses the front of the building. June 25 is very near the summer equinox, when the sun is at its furthest northern point. I was able to capture this photograph during the late evening at very nearly 8 p.m. when the sun was low on the horizon, at about 15 degrees. I like how the sun casts warm shadows across the building.

I recently attended an Alberta ballet lighting presentation in the Nat Christie Centre. One interesting thing that struck me was that the dance studios are warmer than typical room temperatures. The reason for heated studios is to keep the dancers’ muscles warm, thereby reducing injuries.

The Nat Christie Center itself has an interesting history. Constructed in 1905, the building initially served as a parish hall for St. Mary’s Roman Catholic Church, including a 500-seat theater used for various purposes by the community. Later, in 1911, the Canadian Northern Railway bought the building and surrounding property. The facility continued to serve as a train station until 1971. Then, in 1979 the city of Calgary purchased the train station, and it was designated a provincial historical building. Five years later, with funding from the Nat Christie Foundation, Alberta Ballet became its latest and current resident. You can read a more complete description at the Collections Canada Alberta Arts Heritage website.


This past weekend, Rachel Notley, leader of the New Democratic Party, was sworn in as premier of Alberta.

Because the last few premiers have not been good, I had hoped that Jim Prentice would be our next elected premier, and that he would be able to make many improvements. Prior to the campaign, however, oil prices crashed and Albertans became grumpy, and, during the campaign, he made a few but critical political stumbles. That and because people were hungry for change, he was defeated.

So here we are with a left leaning leader. Now, many Albertans are overjoyed while many others are fearful. For those that are overjoyed that their left leaning voices will finally be heard and acted upon, you’re in for disappointment. While I expect your voices will be heard, the reality of low oil prices will not allow the NDP to enact many of its desired changes. And, for those that are fearful, relax. It won’t be as bad as you fear. The NDP will realize that many Albertans did not endorse their platform, but rather voted for change. So it will have to adapt to the needs and wants of Albertans while operating within Alberta’s political and economic constraints. That will not be easy.

Because of the economic realities, the next four years are likely to be challenging. It wouldn’t have mattered which party assumed power. Having a new party with a new leader isn’t such a bad idea, though. Notley can review prior government decisions and actions to make improvements where possible. That’s a good thing.

The Progressive Conservative Party can regroup and assess its errors. With this defeat, some of the arrogance and feelings of entitlement should be diminished. Moreover, it’s a good wake-up call to the corporate sector that not all Albertans share their viewpoints.

The next four years will prove interesting. I wish Premier Rachel Notley well as she launches into her new role. While her job won’t be easy, I am positive that it will be interesting.

For another viewpoint, Ian Austen of The New York Times wrote, “After a Political Reversal in Alberta, ‘Anything Seems Possible’.” Please note, a subscription to The New York Times might be required.


Keeping Busy

This is just a short post to say that I have been keeping busy, though I don’t have much to write about. As mentioned in my prior article, I am still helping my friend Dan Margulis with his book. We are getting close to the end of the project, so I am excited to see his finished product. And, I have been busy bashing away on a few personal projects.

With the summer fast approaching, I hope to get outside more and engage in more photography. Then, I will have some photographs to share with you.

So that’s it for now.