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Turtle Rock Light, Philadelphia, Pennsylvania
This lighthouse was built on the Schuykil River in 1887. The lighthouse was constructed for $2663 and it stands at 30 feet tall. The lighthouse is operated by the Sedgeley Club, a social club located at #15 Boathouse Row.
Kansas City Water Intake Light, Kansas City, Kansas
This lighthouse stands at 40 feet tall. The “light” serves as a pump station on the Missouri River.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
Tariffs
Over the weekend we learned that President Trump’s promise to place tariffs on U.S. trade partners was not a threat. Trump placed 25% tariffs (with exclusions) on goods from Canada and Mexico and 10% tariffs on Chinese goods. Canadian energy resources got hit with a lower tariff at 10%.
Many investors believed his tariff threats were part of a negotiation tactic and did not believe they would be enacted. This move by Trump led to an all-out nationalist trade war across North America. Mexico and Canada depend heavily on the U.S. and this 25% tariff could be crippling to their economies. JP Morgan stated that both countries would enter a recession if these tariffs lasted for some time.
Before we analyze what has happened since, let’s review what a tariff is as there has been a lot of white noise on social media regarding tariffs. A tariff is a tax. They are used as a protectionist measure in international trade. The cost of a tariff is eventually paid by the domestic consumer. Tariffs impact demand and prices and can eventually lead consumers to choose an alternate product made in their country. Although Canadians and Mexicans will not initially pay for these tariffs, they will eventually suffer due to weaker demand from their largest trade partner, the U.S. U.S. consumers in the short term will see higher prices, but in the long-term tariffs can make domestic industries stronger and decrease a country’s reliance on trade partners.
We learned late last week that Trump would not enact these tariffs if Canada and Mexico committed more to border security and focused on seizing illegal drugs on their borders. The border has been a huge issue in the U.S. for years and Trump is taking a new path to solve that problem. We learned this information in a nomination hearing for Trump’s Secretary of Commerce. However, some of his other staff members rebuked the statement and said tariffs would still move forward. As Canadians, this worried us over the weekend.
The one thing we did not see from Canadian leaders is a new plan on how we can increase security along our border. The latest plan from the government was released over a month ago before Christmas. Unless we missed it, it did not seem like the Canadian government wanted to make this commitment to the U.S. We hope border security improves across the world for global safety. Nonetheless, Canada responded to these tariffs with their tariffs on the U.S. at the federal level, and various policy announcements at the provincial level. Some of these retaliatory tariffs include a 25% tariff on $155 billion worth of U.S. goods. The Province of Ontario breaking a massive contract with Starlink, and numerous Provinces banning U.S. alcohol sales.
We blinked over the weekend, and we were in a full-fledged trade war with our closest ally.
On Monday morning, Trump reportedly had a short call with Trudeau regarding trade. Nothing came from the conversation. Trump went online and took a shot at Canadian regulators which prevent U.S. banks from entering Canada despite Canadian banks operating (and expanding) across the U.S.
Shortly after that call, Trump had a great conversation with the Mexican President where she promised to deploy 10,000 members of the Mexican National Guard to the southern border of the U.S. to avoid the trafficking of drugs to the U.S. and high-powered weapons to Mexico. The agreement led to Trump removing the tariffs levied against Mexico for another month. A huge win for the Mexican economy and population. This conversation between Trump and President Claudia Sheinbaum was reported on by numerous outlets and confirmed by President Trump on social media. Trump said there will be negotiations between U.S. and Mexican officials over the next month regarding trade, tariffs, and border security.
A few hours later Trump and Trudeau announced a deal that would pause tariffs for a month. The deal included Canada making numerous commitments to securing their border and investment in the war on drugs. Trudeau also announced a Fentanyl Czar that will focus on fentanyl distribution in Canada and along the border. Despite the Canadian Public Safety Minister stating only 1% of U.S. fentanyl is from Canada, our country may have a problem. During the fourth quarter of last year, Canadian authorities made 4 large busts across the country. Those busts alone accounted for 6% of drugs seized by the U.S. in 2023 and account for over $1 billion in street value. Drugs are manufactured across Canada, and many have used the great white north to set up shop. Canada’s proximity to the U.S. and laxed laundering regulations in the Canadian economy are major reasons the drug trade has exponentially grown in Canada. So, despite what government stats say, our country does contribute to the drug problem. We are glad our government is now cracking down on this illicit practice and making our border more secure. We will say that it was not and will not be fun to be at the peril of a U.S. President that is impulsive and unpredictable.
Wall Street is even changing its tune on the impact of tariffs. Jamie Dimon went on CNBC and said, “National security trumps a little bit more of inflation.” He also said for those complaining “Get over it”. It seems most Americans are behind Trump regarding this policy move as it will eventually strengthen the U.S. economy and national security.
So, we get a one-month tariff pause, what happens if they are enacted on the first of March?
We all know that Canadians will be the ones hurt in a trade war as we depend greatly on American goods. For those who say, “but oil and energy”, prices will move higher with tariffs in the short term, however, the U.S. can increase production to fill a Canadian void. The other issue with this argument is where the pipelines in North America are located.
There is no way of moving energy to the east from the west in Canada without sending it through the U.S. This complicates the energy industry greatly. Canada has boxed itself into a corner with overregulation and the canceling of numerous energy projects including Energy East (illustrated in the graphic above). A nation with massive reserves cannot move the resources across its own country, completely unacceptable.
If Canada had continued to grow its energy sector, we would have more leverage in negotiations with the U.S. Canada needs to re-embrace its energy sector and deploy all the resources possible to support it.
We will note that U.S. refiners are set up for and heavily dependent on Canadian heavy oil. Canada is also dependent on these refiners. The only other country that produces a similar product and has large oil reserves is Venezuela. We doubt the U.S. wants to depend on Venezuela after Trump’s promises to halt Venezuelan energy imports.
*Heavy oil is asphaltic and contains asphaltenes and resins. It is “heavy” (dense and viscous) due to the high ratio of aromatics and naphthenes to linear alkanes and high levels of NSOs (nitrogen, sulfur, oxygen and heavy metals).*
So, after reading all this? Who has the leverage in oil? In the short term, it’s a lose-lose in the energy industry. Canada cannot cut off the U.S. as the U.S. would cut off Ontario and the U.S. needs Canadian heavy oil and Canada needs the U.S. refiners. We are not sure how this will unfold (as of this writing on Monday morning) but hope for the best. However, expect higher prices at least at the pump (if tariffs continue to be enacted).
If tariffs are long-lasting, we hope the Canadian government does not send out stimulus cheques (which has been reported). We hope they cut regulation, approve energy infrastructure and mining projects, cut taxes, and attempt to stimulate the domestic economy which has been stagnant for almost 10 years (GDP per capita).
Other energy reports
As investors in the global energy industry, it is important to stay up to date with updated forecasts and reports. This week we read a few news pieces on oil that caught our eye. These are all topics that do not regard tariffs (do not worry).
The Wall Street Journal reported that Trump’s inner circle is now realizing shale drillers will not ramp production up. A huge part of Trump’s 2024 election platform was expanding energy production domestically and lower oil prices, he coined his policy “drill baby drill”. For now, it seems U.S. producers are more worried about their shareholders than Trump’s pressure. We thought this would most likely be the case as the oil market is very fragile and U.S. producers do not want to flood the market at a time when many believe OPEC+ could do the same. Oil companies also have become more disciplined in recent years and have somewhat learned from their past that their industry is a boom-bust cycle that can be mitigated through strategic decisions and effective risk management.
This is bullish news for oil prices and U.S. oil producers.
The next piece of news that we wanted to share is regarding a model forecast. According to Vitol, the world’s largest independent energy trader oil demand will remain at current levels for at least another 15 years. The energy trader trades 7% of the world’s oil supply every day. They expect oil demand to increase and peak in the mid to late 2030s.
This is one of the most bullish models released in recent years in regard to oil demand. The model suggests that the transition will be much slower than anticipated. This forecast by Vitol is the first time they have published this data set publicly. Vitol’s forecast is much higher than recent forecasts published by European firms. Vitol’s model comes weeks after the election of Trump who has promised to increase fossil fuel production.
Vitol has been one of the most bullish commodity traders regarding the long-term strength of oil demand. This strategy has made Vitol one of the most profitable companies in the world on a per-employee basis. Vitol’s net profits totaled $15 billion and $13 billion in 2022 and 2023. Vitol employs 1,700 people and is owned by approximately 450 senior partners.
Gold hits new highs
The spot price of gold hit a new high this week as worries about tariffs, the economy, and geopolitics spook investors. Gold bulls are more than likely relishing the Trump uncertainty. This is the reason that we did not size down our physical gold and gold mining positions. We have been in the trade for some time now and have seen strong returns. Inflation and volatility have driven the price of gold above $2,800/oz, just this year the price of gold is up 9% and up 34% in the last year.
Retail investors and foreign Central Banks are fueling this price action as they search for safety and stability. Recent inflation worries have also fueled the charge as many believe tariffs could cause prices to rally across the world. The Central Banks of India, China, Turkey, and Poland were big buyers of gold last year according to the World Gold Council. This follows a decade-long trend of Central Banks selling U.S. Treasuries in favor of other assets including gold. Despite this run-up, many investors including institutions are underweighted in gold despite the attractive setup. According to Topdown Charts and LSEG, investor allocation remains historically low:
The recent surge in gold comes at an unusual time as the U.S. Dollar has rallied. Normally a surging dollar is bearish for gold, but not this time. Numerous analysts point to the dollar’s strength being short-lived and to the fact that investors are searching for safety in these extremely uncertain times. In high-risk environments, gold and even silver become very appealing to all types of investors, especially for those who choose physical exposure as their counterparty risk is eliminated.
We expect this trend to continue as uncertainty across the world remains. Trade talks are being conducted between the U.S., Canada, and Mexico over the next month and things are reportedly heating up between the U.S. and China in regard to tariffs and trade. We will say, do not expect these huge moves like we have seen over the last 5 weeks to be a regular occurrence.
On a final note, for gold and silver, miners continue to be highly attractive despite their strong performance. Many trade at attractive multiples and are returning strong distributions to shareholders. For example, the VanEck Gold Miners ETF is trading at 12x 2025 earnings estimates, below its 5-year average of 15x. As mining is a speculative industry, we recommend that you hold quality and do in-depth due diligence before entering a position ….. or speak to us.
Disclaimer: MacNicol & Associates Asset Management holds physical gold, silver, and platinum securities and gold, and silver mining company shares across numerous client accounts.
Big tech flop
Alphabet shares sunk 8% on Wednesday after the company released earnings at market close on Tuesday. Alphabet beat earning estimates and only slightly missed revenue projections. However, there were a few data points that have investors a little worried. Alphabet’s earnings-per-share jumped 31% year-over-year and beat estimates by 1.4% for the quarter. Revenue was also up year-over-year but missed street estimates by 0.24%.
The data points that disappointed investors were Alphabet’s cloud business, and its capital expenditures related to artificial intelligence forecast for 2025. Alphabet’s cloud revenue and earnings were great year over year but not by as much as investors had forecasted. Cloud division revenue increased at a slower rate than the growth rate of the three previous quarters.
The second data piece that spooked investors was the company’s CEO stating that Alphabet will spend $75 billion on AI capex this year. The number is 33% higher than Wall Street had forecasted and well above its 2024 number ($53 billion). This capex spending includes data centers and servers. Alphabet followed Microsoft which dropped last week after their earnings where Microsoft indicated they will spend $80 billion on capex, and they also missed cloud growth estimates.
On the legal front, Alphabet still faces pressure from the US Department of Justice as well as Chinese authorities. Just this week, China launched an antitrust investigation into Alphabet and raided their Beijing offices. This move has been interpreted by many as leverage in tariff negotiations against the U.S.
Regardless of how you feel, we think Wednesday’s pullback is an overreaction. Alphabet trades at the most attractive multiple amongst the Magnificent 7. We also think Alphabet will continue to grow and have numerous strong operating segments that will continue to deliver strong returns to shareholders. However, it is interesting to see these massive technology companies pivot from companies with low capex to capital-intensive companies.
Trump launches something new
The world has been bracing for President Trump’s second term for a few months. Not even a month in and he is shaking things up, non-traditional cabinet choices, tariffs against allies and enemies, mass deportations, and now a new sovereign wealth fund.
That’s right. Trump announced the U.S. is starting a sovereign wealth fund. Many nations worldwide have sovereign wealth funds including countries across the Middle East, China, Norway, and Turkey. Before you ask what, a sovereign wealth fund is, we will explain. A sovereign wealth fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals, or other financial instruments. These funds are typically funded by revenues from commodity exports or foreign exchange reserves held by the central bank. SWFs are primarily created to achieve long-term returns, diversify assets, stabilize the economy, or save for future generations.
Trump’s Crypto Czar, David Sacks, hinted that Bitcoin and digital assets may even be bought by the fund.
There are no details on the fund so we will report back when there is news. Our first question regarding the fund would be, who will lead this fund? Many joked online that Former Speaker and current Congresswoman Nancy Pelosi should lead the fund due to her stellar results in her investment portfolio. Pelosi’s portfolio is tracked by many databases online through mandatory Congress disclosures. We know this will never happen but will say, it would be hilarious to see the ultimate insider put her skills to use for the American people.
MacNicol & Associates Asset Management
February 7, 2025
