Goldman came out with a note yesterday encouraging clients to dump their oil holdings and lo and behold, oil is down 4% – correlation, not necessarily causation, I know, but still. Remember the good ol’ days when oil was at $10? Anyway, let’s put yesterday’s move in context (this is the weekly chart through Monday, click to enlarge):
Still quite a bit higher than the roughly $85 we saw at the beginning of the year, not to mention the beginning of 2009. Simultaneously, we have witnessed the energy sector pretty much single-handedly pull the equity markets up, with a 14+% return vs. the S&P 500’s 6% total return.
I actually don’t have much exposure to oil per se, but I’m definitely overweight energy. So why am I NOT selling my Market Vectors-Nuclear Energy ETF (NLR) and Market Vectors Coal ETF (KOL) and the First Trust ISE-Revere Natural Gas Index Fund (FCG) like I did iShares' Silver Trust (SLV) Monday and rotating into utilities or healthcare? For one, when you get in at a good price, you can withstand a lot of market volatility. Secondly, the fundamental reasons why I took a position in energy (political instability, risk of rising protectionism, risk of inflation, increased capital investments, solid balance sheet fundamentals, yield, etc.) are all still in place. It’s that simple.
Some might say that a global slowdown will pressure oil, and they are absolutely right. However, I anticipated a slowdown already BEFORE I took a position and it STILL made financial sense. So either, the expected slowdown will come and I’ll generate solid yields with upside optionality in case of inflationary pressures, or a slowdown will not come and I’ll generate solid returns based on analysts mispricing the top line growth potential. In the meantime, I maintain a hedge against an increase in political turmoil, protectionism (that’s why I concentrated on locally available energy) and inflation. So while Goldman can make predictions about where oil is heading in the next day, week, month or year, I prefer to invest with a longer horizon and by looking at the total investment potential and risk as compared to other alternatives.