BrotherMaynard

Best Investments for Rising Oil

btw, i never understood why oil (or other commodities for that matter) were such a great idea when it came to the falling dollar? Why not just bet against the falling dollar in...the forex market? At least in the forex market you don't have to deal with non-currency related issues like OPEC or EIA demand statistics, or driving habits of americans, or how many cars chinese consumers bought? just a sloppy way to hedge in my opinion.

seriously, though, how many 10-k's has anyone read where currency risk was hedged away by buying commodities?

Best Investments for Rising Oil

RE: Nelsanity

"Oil being priced in dollars is not comparable to your house (assuming you live in the US). When Saudi Arabia sells a barrel of oil in dollars what are their costs in?"

Look...the currency markets are seperate from the commodities markets, fundamentally speaking.

There is no fundamental reason for the commodity/currency trade other than speculators think it is a better store of value than the dollar (or whatever currency happens to tickle everyone's fancy).

The dollar movement has nothing to do with fundamental supply and/or demand for the commodity, any more than it does any other asset on the planet.

The dollar can go all over the place, but commodity prices are ultimately a function of supply/demand, not currencies, despite their obvious correlations. Somebody must buy or sell the actual commodity to set the prices...the prices just aren't "adjusted" by a market maker.

Again, the dollar/commodity trade Its merely a speculative store of value. It is not an axiomatic price-setting mechanism like supply and demand, and therefore buying/selling commodities becuase of currency movements is more noise than signal. And if it goes on long enough, you start to get large dislocations.

Best Investments for Rising Oil

Not a very good -- these sort of platitudinous assumptions offered up by the author are similar to the idea that trees grow to the sky and its amazingly easy to see how this sort of careless temperatment got us into the housing mess.

"Almost every investor is aware that oil supply is getting harder to find, while oil demand from growing economies is rising."

Well, if you are a contrarian, this is a red alarm. "Almost every investor..." is like saying "everybody knows land is finite and population is growing, so housing prices are going up forever." In addition, the author didn't really offer any evidence/data to support his statements, much less for anybody to refute, but I guess just assuming he is right is good enough? That's how you lose money, in my opinion.

"Furthermore, underinvestment in oil industry infrastructure leaves open the door for an energy shock if a global economic recovery"

Again, this guy is bringing nothing to the table...no statistics, just a headline that you can read on most any newspaper or blog...in other words, every capital market on the planet has priced this in. Nobody should risk capital (short or long) based on these platitudes alone.

"Barrels are priced in dollars, so as the value of dollars fall, the price per barrel will rise."

I understand this correlation is undeniable. But the causation is flat out erroneous. Look for this correlation at any time during the 90's...it didn't exist, and for good reason. Pricing oil higher because the dollar fell is double counting. The currency markets, prima fascia, are responsible for repricing all things on a relative basis. For instance...my house is priced in dollars, so ceterus paribus, my house is worth more because of the dollar fell? You never hear Shiller or CR talk about the dollar being a tailwind for houses. It's fundamentally no different for oil and investors are asking to get burned by assuming this is a sound fundamental reason for risking capital.

"Remember that the next time some part-timer tries to sound wise by pointing out that the leveraged ETFs are calculated on a daily basis -- as if you didn't know that by now, and as if it means they can't work for periods beyond a single day."

This author could've offered some valuable insight, but instead decided to drop ad hominems. So i will attempt to add some insight to leveraged ETFs...Going long a leveraged fund is being effectively short volatility. As volatility falls, you should do OK. But as volatility rises, your returns will indeed erode. So for example, when the VIX hit 90, people lost money hand over fist, no matter which side of the leveraged bet they were are on. In the world where VIX is 20-30, they should probably do OK. But again, doing the leveraged thing is taking on unecessary risk because it adds the fate of the VIX into your total return.

The Relationship between Oil, Drillers and Refiners

Excellent stuff...and just to add, i did something similar to this. If you look at the correlation between oil and these stocks during the 90's (i used the XOI for drillers...i did not do this w/refiners, though)...there's almost none! That leads me to believe the second derivative of correlation seems to be positively correlated w/oil as well (that my sound circular, but its not). In other words, stock picking ability is less beneficial now, as investors do not discriminate between biz models.