Invest in Oil and Stocks, Not in Fads

I had set out to write a more lengthy article, but I'm tired and I'm sure you're tired so I'll stick with bullet points.

OIL: Over-priced relative to current economic conditions, but, supported by a weak US Dollar, Middle East tension, and increasing demand in Asia. Bottom line: I don't see higher oil prices unless the US Dollar weakens further or there's a crisis. Downside probably around $40, upside $80 in the absence of significant economic recovery in the US. However, I believe oil is indeed a new currency.

GOLD: In the lime light. Half the TV commercials want you to sell your gold, the other half are selling gold to you. Conservative talk radio seems to be entirely sponsored by sellers of gold bullion, which, they point out every 2 seconds, has tripled in value this decade, while stocks have lost half their value. The contrarian in me says its time to short gold and go long stocks. I'm wondering if GS and JPM aren't doing exactly that, as some have asserted.

STOCKS: The consensus is that we were all suckers for buying stocks 10 years ago, and 5 years ago, and 2 years ago. The contrarian in me thinks this is a good time to buy stocks.

US Dollar: It seems undebateable that other currencies will continue to appreciate relative to the USD if the USA continues on its current course of fiscal insanity and economic stagnation; better find alternative stores of wealth than the USD, see below.

US Interest Rates: No where to go but up.

US Taxes: Going up.

US Economy: Stagnant if not outright continuing to contract (don't believe the government on this).

Real Estate: Current prices and tax incentives favor owning rather than renting in my opinion. Buying cheap property in popular locations seems like a good bet over a 5-10 year time horizen.

Global Warming: Maybe yes, but I doubt it.

US Energy Policy: Crazy. No nuclear, less coal. Less oil. Less natural gas. More solar panels? More electric cars? More windmills? Cap and Trade? WTF? I believe the Obama Administration wants high oil and gas prices to drive their anti-fossil fuel agenda. I also believe the oil companies are in the crosshairs of the government; I've noticed the smallest spread between NYMEX unleaded gasoline and pump prices that I can ever recall. The oil companies are afraid to raise prices, or, have been told not to.

Coins and Precious Metal Prices: If I have started accumulating gold, silver, and platinum coins, you know prices have peaked for a while. I am a perfect contrarian indicator.

Best Wealth Preservation Strategy: Live in some politically neutral, economically sound country like Canada, Australia, or Switzerland. Diversify your holdings between stocks, bonds, various commodities, real estate, and hold various currencies. Some people say "gold (or silver) IS money." That's true. But sometimes food is money. Or land is money. Or energy is money. Sometimes money is money.

Don't depend on fads for investment themes. By the time something is popular you've missed most of the "move up" in price. Hold more of what is cheap but important and less of what is expensive and bubbly. If you have to rationalize why something is so expensive, it's probably too expensive and not a good investment.

Bad Case Scenario #1, Stagflation: US Economy finds a "new normal" at low or no growth rates, real estate continues down and stays down, stocks continue down and stay down, the US Dollar weakens and interest rates rise making stuff more expensive in spite of the fact that more people have less money. This kind of stagflation can be hedged with growth stocks, high yielding bonds, and certain commodities. Real estate used to be a hedge against stagflation, but, maybe not this time around.

Bad Case Scenario #2, Deflation and Depression: This scenario scares me. High unemployment. Low demand. Falling prices. Falling asset prices across the board: stocks, real estate, commodities, everything. Money becomes scarce and interest rates remain low. The only defense is to hold cash or Governement Bonds. The Depression scenario seemed to stike late last year and early this year. Not entirely off the table in my opinion.

Beanie Babies: Market continues weak. No comeback in sight. Do you know about ten years ago certain Beanie Babies and Beanie Baby Trading Cards were selling for the cost of an ounce of gold? Sometimes more? Back in the day, a hot Beanie Baby would easily fetch $300. Today? If you could sell it at all, maybe $25 dollars.

The bottom line: Figure out what you want your life to be like now, and in the future. Figure out how much that will cost. Save as much as you can and invest wisely. If you're already rich, enjoy it, diversity your holdings a bit, and keep a low profile. If you want to become rich, it's going to become even harder. Learn to live with less. I drive an old car. It still looks fine and runs great. I can buy an ounce of gold or 400 shares of MSFT each month with the money that would have gone for a new car payment. And I am cutting back to 4 days a week. You can't tax what I don't earn.

Comments

[ArtfulDodger:]

Dr. O:

This is a very good, common sense run down across the board of scenarios that we might encounter.

Overall, excellent advice. Thank you a lot!

Have a good summer and enjoy your long weekends.

I'm about to take off for the summer, myself.

Jun 22 06:32 AM

[Shale Gas:]

What is your opinion on natural gas?

Jun 22 08:34 AM

[Dr. O:]

Natural gas? An excellent contrarian investment. Short term, and this is already in the price, mostly, high supply and modest demand. I was cruising around Italy in the mid 1980s in my girlfriends Beamer that was outfitted to use some form of natural gas. Why that hasn't caught on in the States is beyond me.

Jun 22 08:42 AM

[Old Trader:]

"I was cruising around Italy in the mid 1980s in my girlfriends Beamer that was outfitted to use some form of natural gas. Why that hasn't caught on in the States is beyond me. "

At least a few regular contributors to SA and a number (relatively small) of commenters wonder the same thing, as do I. It truly seems like a "no- brainer". Regarding your forecast of a price range of $40-$80, about 2 months ago, I wrote a short piece focusing on oil prices, and where they might be headed, and suggested a range of $50-$80, and the $30 spread I used earned me the suggestion that I was "clueless" by a couple of commenters...hopefully, if they read your piece, they'll be "nicer", LOL.
On Jun 22 08:42 AM Dr. O wrote:

> Natural gas? An excellent contrarian investment. Short term, and
> this is already in the price, mostly, high supply and modest demand.
> I was cruising around Italy in the mid 1980s in my girlfriends Beamer
> that was outfitted to use some form of natural gas. Why that hasn't
> caught on in the States is beyond me.

Jun 22 09:17 AM

[john s. gordon:]

more wisdom in this article than i've seen in a loooong time.
> jack

Jun 22 09:24 AM

[ECONOMICS 101:]

Thank you Dr. O, this is great advice and outlook.

Michael Goodman of Toronto also agrees but with a soundbite of caution to "wait and see" what the IMF, G20 and BRIC does.

By Johnathan Vrozos

johnathanvrozos.ca
johnathanvrozos.com

Jun 22 09:25 AM

[Mad Hedge F...:]

Crude is your friend. First of all, let’s get some facts straight. No one was buying oil at $72 because they plan to burn it, use it to drive more miles, make asphalt or plastics, or rub it all over their bodies. They are buying Texas tea because they hate the dollar and there is no other surrogate reserve currency. Some of the biggest buyers of crude now are the oil producers, desperate for any appreciating asset they can park their revenues in size. This is why you can now walk across the Caribbean and not get your feet wet, jumping from one storage tanker to the next. The world is choking on surplus crude. Does anyone see anything wrong with this picture? Even perma bull Boone Pickens has a target of only $75. I hope he remembers to sell this time (sorry for the cheap shot Boone). The problem is that when you have so many hedge funds, financial players, and non consumers bunching up in a trade, the turns can be particularly vicious. All it would take is a little more evidence of a double dip economy, or even just an innocently strong dollar. Watch those green shoots with a magnifying glass.

Jun 22 10:06 AM

[bluesmoke:]

Very good article. Thanks.

Jun 22 10:40 AM

[Jimbo:]

A very enlightening survey of the current scene. Keep up the insightful work !!

Jun 22 11:08 AM

[Dr. O:]

Thank you so much for the kind words!

Jun 22 11:18 AM

[thearizona5:]

Rofl, every commercial wants you to sell your gold at half it's value while the other commercials want to sell you gold at twice it's value. Call me when both sides aren't trying to rip off the public.

Jun 22 11:38 AM

[jerrydd:]

Only buy oil reserves companies as they will go up vs others without reserves that will not.

And they will only be good for about 10 yrs as after that oil price will be constrained by eff, RE which is profitable at $4/gal.

As for most stocks they are gambles, not investments. All the short sellers, speculators, M+A, hedge funds take all the value and leave you they shell.

Real estate won't come back in most markets for yrs.

The recession will last much longer, probably 5 yrs at least to untangle this mess.

We have been in stagflation in buying power for 6 yrs until recently but that will come back as prices go up but wages don't.

Invest in your own RE equipment as the price is upfront and almost all increasing profit after that as energy prices skyrocket. If you own it, sell the power you'll make much more money than buying RE company shares. Great retirement income if done right.

Jun 22 11:47 AM

[ERCaptain:]

Your article resonates with me on nearly all points.

And I would say that on your final point --
"I can buy an ounce of gold or 400 shares of MSFT each month...."
I think you should -- see

Thanks for a great level-headed article.

Jun 22 12:01 PM

[JeffDB:]

I could be wrong, or course, but your "Bad Case Scenario #2, Deflation and Depression" doesn't seem very likely to me given this administrations lack of qualms in ramping up the money supply and directly intervening into the private sector.

I'm thinking of Prudent Investor's article, Monetary Madness in a Single Chart: Hyperinflation's Just Around the Corner seekingalpha.com/artic...

A horrible stagflation or "inflationary depression" seems more likely to me than deflation. ;)

Jun 22 12:58 PM

[David Ristau:]

I just see oil falling...

They are going to plummet for a bit of time, probably hit $50 per barrel again. The oil market rose up in response to a general market rally with a lot more gusto. As the market rescinds back from yearly highs, the oil market will reverse with the same gusto. Just look at today, oil is below $70 again. One thing is that there is a squeeze coming on gas because of increasing backstock supplies along with lower wholesale prices versus overpriced gas.

Fundamentals will win out. In the long run, sure oil is an issue. For the rest of the summer, I don't see it causing much threat as it rescinds, helping to allow for us to calmly recover.

David Ristau

President, The Oxen Group
theoxengroup.com

Jun 22 01:48 PM

[mcl_mixer:]

"I can buy an ounce of gold or 400 shares of MSFT each month with the money that would have gone for a new car payment."

400 or 40?

Jun 22 02:06 PM

[Chancer:]

Dr. O:

Thank you.

I have always followed the thrify frugal strategy, so did not take much adjusting to the extreme negatives of this economy.

I had to buy an HDTV (I do not think converter boxes are reliable). I do not have cable tv. I do not have dsl; have dial up at $5.50/mth. I do not have a cell phone plan; for emergency only, I have prepaid phone card at $25/quarter. We own 4 cars for 2 people that we drive less than 5,000 miles per year: years are 1992, 1995, 1996, and 2000. With multi-car discounts, insurance is less per car and maintenance is low considering we spread it around, and always have an extra if one breaks down. We always rented out extra rooms in our house to help pay the mortgage. We work to control our utility expenses and manage to keep water and electricity low, although we have a pool. I spend most of my shopping dollars at Costco and 99 cent store. I usually buy sales items at grocery stores and use coupons. I use credit cards for rerwards and switch cards when they reduce rewards (although all may soon be history). I am not a big consumer who has to own something new or buys latest fads. I am usually last one to buy new tech.

For the new Obama economic world, I agree you have to be low profile. Limit your taxable income as much as you can. If you are are not filthy rich, you should look as poor as possible to all governments; Federal, state, city, and county. They are coming after a bigger share of what you got.

I do believe the liberal dems have a VAT in our future. It may start at 5-10%; but when they realize that public does not object and this will give them near unlimited funding, it will be surprising how fast they will raise it to 30-50% before you know it. Think about paying $60K for a car that now costs $40K.

The VAT will probably start with manufactured goods, and then be expanded to services, and all sales/purchase transactions as the politicians "need" more money, as they always do. Will they some day make you pay a VAT when you sell your home? 30% on a $400,000 house will be $120,000 for the politicians to spend on their wildest dreams. For the buyer, lenders will finance $520,000 over 30-40, maybe even 50 years. Welcome to the new economic reality of Obama.

Jun 22 02:57 PM

[AndrewBaker:]

The dollar is going down, so find another store of value: I agree. Oil, gold commodities; Norwegian, Australian currencies; natural gas and agricultural commodities for medium term holds, I suggest. Short financials for sure (FAZ for me). Long term, look at cloud computing companies and alternative energy. Re-reading this, I'm happy with my portfolio right now. Oh, yeah; and spend as much as you can on tax-deductibles: they can't get what you don't have!

Jun 22 03:27 PM

[Dubious Bro...:]

Good financial advice. The next step is to be at least educated if not involved with politics at the local, state and national level. We all need to insist on well qualified candidates at all levels to flush out the insane and corrupt that are bankrupting our cities, states and country. It won't matter how much we have or don't have if we don't pay attention to who is minding the store.

Jun 22 05:21 PM

[Dr. O:]

If "volume points the way" then I offer two simplistic interpretations of today's relatively high volume sell off:

1. After weeks of very low volume sideways action the market succumbed to a "one off" bout of high volume profit taking, and will soon stabilize, being locked in a tight trading range.

2. After weeks of very low volume sideways action profits are being taken, shorts are being initiated, and the high volume suggests the market is going to retest the March lows.

3. Be mindful of the tight correlation between US dollar strength, commodity weakness, US stock weakness, and foreign stock weakness. High beta up is high beta down. FCX down 6 today. That's quite an air pocket and suggests the market is poorly bid and vulnerable to a quick and deep downturn.

Jun 22 11:10 PM