I hope both of you are enjoying the easter holidays. Times are changing rapidly. My children will hide the eggs tomorrow morning for us, their parents. 

David and Eoin, I really enjoy listening to your audios, especially the Friday long-term audios. I often listen to them twice or I listen to the previous long-term outlook audio. I always get deeply inspired while listening. I hope you do not mind, but this email will be pretty long. Before I forget; I would like to thank you  both for your reaction on my previous questions regarding wti and options on Dutch shares and Porsche. 

I have two stories to tell you, not about easter of course, but about you both and the market. Here is the first story. 

Imagine us, your subscribers, as car drivers and you, David and Eoin, as our navigators, leading us along the beautiful English countryside enjoying the ride.  You have your pace notes to tell us when to take a turn, slow down or to accelerate. Quite recently, about mid 2014, things got off track. Suddenly the turbo charged engine began increasing revs resulting in an increase in speed and causing curves look a lot sharper.  Additionally; hedge funds, HFT, bankers, media, etc. wanted to benefit at our expence. Navigators and drivers were forced  to pay close attention avoiding slipping off the road and damaging their cars. Fortunately our navigators are smart men, nowadays using i-pads for their pace notes, smartphones for keeping up and drones to scout the roads in front of us looking for obstacles. Of course it is the accelerating speed of technological innovation causing major changes in our investment decisions. 

While being our navigators, you regularly try calling the government bond car, warning them they are driving dangerously close to the White Cliffs of Dover. Alas, as this car does not think it needs safety advice, the phone is left unanswered. Apparently the bond car got bored with the repeated message and think it is safe, protected by a fence constructed by our own Mario Draghi. For how long this protection will last nobody can tell, but when it disappears it could mean a total loss when falling down of the White Cliffs of Dover. 

My advice would  be to stop warning them. Maybe they will listen then. 

On another note, in the Netherlands some pension funds are still buying governments bonds. You might ask why? Because they are forced by politics, because buying shares is considered dangerous. I think this is ridiculous. 

For my second story I would like to take you to sea.  

Let us take any major oil company and call it the Titanic. Everyone knows about the tragic sinking of this beautiful ocean liner. Imagine her sailing year after year on her voyage and entering the year 2014. She is still on course, crew and passengers feeling great and doing fine. Unfortunately she is unaware of the fact that she is on a course  hitting an iceberg. The Titanic spots the iceberg too late and, like any other big vessel, is unable to stop or change course. The collision is inevitable. At first, nothing seems to be  wrong with our Titanic. There is hardly any damage and she is still floating. What a relief. People are going back to sleep, not feeling worried at all. She is even taking in new passengers who do not seem to be worried about the slight damage. I wonder why would anyone want to take that chance? Do we not all know that the ability of icebergs to cause damage is huge, as about 80 pct is below the waterline and thus invisible. 

On a side note: Our banks, now known as “people robbers” as contradictive to bank robbers, have a goal to establish. This goal being to enrich themselves and their higher employees at all costs. These banks refused to pay interest to hard working people who had saved some money. Those people were thus forced to look for alternatives and where do you think that led them? Yes, of course to the relative safety of the oil companies, like for instance RD Shell with a low p/e value and a high dividend yield. (yes David you too). And so, they were welcomed aboard the sinking ship. It all still looked fine, briefly touching 116.  

Now our Titanic is down at 55 and getting in serious troubles. Passengers are craving positive news from the experts on the damage they are dealing with while their lives are at risk. At this point in the story, a realistic damage report has to be written. The trouble is, that it is difficult to predict the future price of oil. What we know for sure is that many jobs are at risk, billion dollar rigs  can become worthless and  governments  will have reduced tax receipts. But why tell the passengers? Imagine all those valuable reserves being worthless for maybe decades to come, your balance sheet ruined. It would be a complete nightmare. So the experts assure the passengers that the ship will rise again, but know themselves that it is just a matter of time before the Titanic will go down. So the music keeps on playing and she will keep paying dividends as long as she can. She was beautiful, well build, admired by many. She felt strong, so very strong, close to arrogance. Will the iceberg make her a relic of the past?  

Let us take a closer look at the iceberg, the cause of the damage to the Titanic. In our story it does not consist of ice but of new technologies. Technologies used to build new vessels which are more efficient than the old Titanic. All kinds of exciting new materials are used to make them much lighter and stronger than steel. Far more efficient engines, the use of solar power to support the electricity needs, batteries to store the overproduction for future needs and use of  the latest technology producing constant data on their performance, helping the crew to be able to adjust whenever necessary to avoid problems. As with all kinds of new technologies some were tried and quickly abandoned. Remember the windmills on the new vessels? Fortunately these ugly windmills were soon dismantled after being proven far less efficient than graphene based solar panels. Fortunately too, those solar panels nowadays have all kinds of shapes and forms and you really have to look close to spot them. Remember how horrible they used to look on your roof?  The future looks bright and exciting like it did when the Titanic was built and our captains seem better prepared to guide their passengers safely across the ocean.  They should be able to spot icebergs in time but beware; the speed of vessels has increased and the results of accidents can be more severe. For now, set up for the future, we can set sail. Let us hope we did not built ourselves new Titanics and that history will not repeat itself.  

This time the accelerating rate of technological innovation called hydraulic fracking is causing a massive shift in the oil sector  and the implosion of Opec. Apparently,  fracking companies have been able to cut their cost with 10-30 pct  just in 2015. Accomplishing, this within three months time is astonishing. Despite the reduction of the numbers of rigs by half, the US production is still at record levels. If oil prices would rise rigs could quickly be put back in use and US production could explode. If fracking would be applied in other parts of the world the drama for oil majors could be even more severe. David you mentioned the Iranian deal and you are right, with the possibility of Iranian oil back on the market in lets say six month, there will be even more oversupply. With production  breakeven prices in the Middle East, being  usd 10-20 a barrel, someone is going out of business or at least sustain heavy losses. Where are high production costs combined with high risks the greatest? The answer, of course, is in deep sea production with a breakeven of production costs of usd 90 per barrel moless 10%.  BP has felt and still feels the consequences of the Deepwater Horizon disaster.  

I am sorry that I believe the Titanic is going to sink. Can you blame the Titanic? No not really. The data forecast of the EIA from 2008 expected crude at usd 130 in 2016 and usd 165 in 2021. Plus, after investment decisions, it takes many years to start production. 

The only thing I know I do not want, is to be on board the Titanic. There are more than enough excellent investment opportunities in what you call the beauty contest. Some autonomies could even be renamed “The Untouchables”. Others who looked fine till quite recently are looking like the Titanic to me. We need you to spot them. 

I hope you liked my story telling, I enjoyed writing it. You are both spending so much time every day in writing your daily commentary and always provide it at a high standard. I appreciate it very much. 

My "Titanic list "also contains mining companies like BHP, Rio Tinto, coal producing companies like Peobody Energy Corp and any rig owning company.  

In the near future I expect  other companies, which for the moment are still regarded as a sound investment, to be added to this list.  

To conclude, to be discussed and to commented on if possible: 

The supply of all commodities, including soft commodities, has and will increase faster than the increase in demand.  Technological innovations will bring new investment opportunities. Positive deflation and economic growth, for the years to come, can result into higher profits for companies.  Crucial decisions about  when, where and / or in which companies to invest will have to be made. We had better be sharp as knifes if we want to prosper. 

Ps David, I am following your lead on India, China and Japan. Also the DAX companies are amongst my favourites. 

David Fuller's view

Thank you for a lengthy but also interesting and creative email which certainly held my interest.  I think many subscribers will also appreciate your efforts.

On market navigation, we can only guess as to what the future holds, but we gain perspective over the decades, having observed most of what markets can do. 

Yes, I do think bond markets are dangerous over the longer term, and suspect yields will be considerably higher when we next enter a period of synchronised GDP growth.  At most, that is no further than a few years away, in my opinion, and it could also occur considerably more quickly, given low interest rates, liquidity provided by central banks, technological innovation and cheaper oil prices.  I just hope that subscribers in bond markets will be quick to take profits when total returns begin to erode.  The people who will be most vulnerable, I fear, will be those who are trusting financial advisors to get them out of bonds in time.  As always, some will but too many will not make that call successfully. 

Re your second story, are major oil companies versions of the Titanic?  Yes, possibly in eventual outcome but probably over a very lengthy period.  I see little chance that the world will stop using crude oil and natural gas anytime soon.  However, we are already less dependent on it and nothing is likely to stop the solar-led renewables development.  Companies that are primarily oil suppliers are the most vulnerable over time.  The big, diversified oil companies such as Royal Dutch Shell (est p/e 16.74 & yield 5.36%), which produce fuels, chemicals, lubricants, and operate gasoline filing stations worldwide are likely to be around for a lot longer.  Moreover, I believe RDS intends to produce more natural gas than oil, and this trend is likely to increase.  Nevertheless, the days of yielding over 5% are limited. 

I think the same could also be said for leading miners, although some may benefit from takeovers in depressed conditions.  Historically, they have been highly cyclical so the acid test will be whether or not they experience another strong catch-up move as the global economy strengthens.