BP and Foreign Oil

In light of the last two months of coverage of the BP oil spill, I have decided to bring into the spotlight some misconceptions about BP and foreign oil. I have heard several comments on TV and read several comments in the paper about the BP disaster. Mainly, the comments revolve around how we should tap our own oil in order to break free from our dependence on foreign oil. It is true that we need to break free from our dependence on foreign oil, but many of us believe that tapping our oil is the answer. First, our oil is being tapped as we all saw with BP drilling in the Gulf of Mexico. Second, corporations are in business to maximize revenues. US oil is being harvested and sold to highest bidder. Much of our oil is being sold abroad. The corporations have a duty to the shareholders to increase the value of their shares, so selling American oil to Americans is not always in the best interest of shareholders.

The way to get off of foreign dependency on oil is to get off oil and find an alternative fuel. If that is not accomplished, then we will continue to depend on foreign countries (as well as foreign and domestic) companies to provide it. I'm not a fan of government control, but the only way to utilize American oil is to create a government owned company that drills and harvests the oil.

As far as BP goes, the amount of money it is going to cost to clean up the spill varies greatly depending on a number of factors. Regardless, the financial hit the company will take and the subsequent destruction of their share price makes BP an attractive take over target. The company does have a large cash hoard, but a huge amount of that is tied up to settle lawsuits filed by residents affected by the spill. If you have BP stock, hold it. If you do not, then refrain from buying until more reliable information about the cost to fix this mess. However, even if BP can come out of this still intact, the damage to the company's reputation may be too much to overcome.

Adjusting To The New Market Rhythm!

Since the market has appeared to stablize (somewhat), how can we capitalize on that? Well, if your only investment vehicle deals with mutual funds, bond funds, etc., the best thing you can do in the short term is to put your contributions into a stable value fund and wait for the housing market to take another turn for the worst, interest rates to increase and the market (as a whole) to react accordingly (meaning to drop). Once this happens, you can gradually redistribute the contributions from the stable value fund to other funds offered by your deferred compensation plan. Basically, it is a manual rebalancing of your proceeds. However, it is also a form of market timing, which is carries more risk. In order to mitigate the risk and keep you from reallocating too soon or too late, you should set some rules. An example of rule setting is saying I want to have about 30% large cap, 30% bonds, 30% stable value and 10% international (a.k.a global, foreign). If you set rules, you more closely fit the rebalancing type of strategy rather than market timer. Depending on the vendor servicing your deferred compenstation, you can set it up to periodically rebalance automatically. This will completely eliminate the need to do it manually and you will avoid trying to time the market. Just a reminder, when the interest rates are hiked up, the bond fund prices will go down and will offer up a buying opportunity.

If you have an brokerage account or an IRA that allows you to invest in individual stocks, then you can still buy stocks at a bargain price, even if you think the market is overvalued. Natural gas and oil stocks are pretty beat up currently and once the economy recovers, they should start to recoup the losses they have sustained over the past six months. Again, if you are looking to trade, rather than invest, this is not going to help you make a quick buck. These are plays for the long term. After more than a year since my last trade, I have picked up Petrohawk (HK), Transocean (RIG) and Duke Energy (DUK). Oil prices are low and should increase. Petrohawk is a small cap company that has solid financials and a lot of room to grow. Transocean has been beated to death lately because of the BP oil spill. Transocean is the vendor hired to perform the deep sea drilling. This company is fantastic and I believe their stock price is overly depressed. I am not certain when it will have an upswing, but as long as I think it is low, I will continue to buy in at realtively small amounts. Duke Energy has been around for about a hundred years. They are a utility stock that has its hands in natural gas and electricity. It supplies energy globally, which should help its stock price increase as the global economy recovers, not just the US economy. Duke also has an attractive dividend yield about close to six percent, which is mainly due to the low stock price. Lastly, Duke just announced a dividend increase, which always is good news for the future outlook by management.

Even though I think the overall market is overvalued, I have found enough good buys to keep me 85% invested in stocks with 15% of my portfolio in cash (that will increase as I keep adding cash). I typically like to keep anywhere from 25% during bull markets and 40% during bear markets. That is my personal preference as I think you can make money in any market, if you search hard enough.

Please keep in mind that the stocks I have recently purchased are not indicators that you should also purchase. Everyone has a different financial situation, investment horizon and goals. These stocks or any individual stock may not fall in line with your goals and risk tolerance. If you are up to trying something risky, make sure you do your research first and only invest as much money as you can easily afford to lose.