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.

Wall Street Reform.....Not Really.

Before anyone gets all warm and fuzzy feelings about "Wall Street Reform", please read what the bill contains. To sum it up in a sentence, the bill attempts to increase the regulation of Wall Street. As with every bill that comes out, it fails to address the real cause(s) of the problem it is attempting to fix. Basically, it is a dog and pony show of BS. The main causes of the problems we are facing today is that Wall Street firms are allowed to contribute money to political campaigns, which obviously creates a conflict of interest. Also, Bill Clinton engineered the repealing of the Glass-Steagal Act of 1933, which allowed depository banks to own financial institutions. These two factors have allowed things to get out of hand. Now, the politicians are trying to take advantage of the volatile situation by putting the squeeze on Wall Street in order to cash in by extending Washington's reach, which is never the answer. The reason why this will not work is because the guys on Wall Street are far and away much smarter than the guys in
Washington.

Until the structure and not the regulation of Wall Street changes, things will not get any better. Since that will not happen any time soon, the best you can do is pay down your debts and build up your savings. Keep a healthy amount of money in reserve to take advantage of the dips in the market. Track your holdings and not the broader market, even though the swings in the broader market will affect your individual holdings in the short-term, they shouldn't affect them to the same degree in the long-term. If you own solid companies or mutual funds that have solid management, you should profit in the long-term (15+ years).

Finally, stop listening to the media. The media reports on events that have already occurred, which does not help investors. Currently, they are talking about the market "heading for a correction" after the DOW has come down 10%. I've been calling for the correction for last couple of months. The market is still about 10% overvalued at this point, but it might be a good idea to look at the energy sector (especially oil) as it has gotten beaten up a bit and it could be a good idea to start buying into the dip. If the DOW dips below 10K, we could see a big move through 9500. I'm still holding that the DOW should be around 8800 to be fairly priced, but as we know, the market is never fairly priced. Good luck and keep researching your holdings and tune out the press.

Has The Market Peaked?

If you are asking yourself if the market has peaked, then you are a very insightful individual. The run up on the market (as I have stated previously) has no logic. Not to imply the market is logical, but you have to take a step back and wonder what the basis is for the extended run up. Obviously, a vast majority of the investors out there sell when stocks tank and buy when stocks are on the rise. I know, you've heard that all before, but the fact of the matter is when the market peaks, it is typically about 20%-30% overvalued at that point. It is relatively safe to begin buying (mutual funds) after the market has pulled back 10%; only if you are using dollar cost averaging. If you plan to shift a bunch of cash at once after a 10% pull back, you may or may not lose money, but you will most likely hinder your future gains. If you are 25, you can pull that off, but if you are 45, it is best to get back in slowly. This way you may sacrifice potential gains in order to mitigate potential losses. You should always look at it this way.....if you put a chunk of money into a stock and it loses 50%, you need to double it from that point in order to break even, so hasty bets and not for the meek. If you have play money that you can afford to lose, by all means, go for it!

As I wrote last time, triple digits movements in the DOW are a rare. As per usual, when I state something like that, the opposite starts to happen. The scary thing about the market is that when we hear good news about a large company, folks start buying. It seems they buy without rational or long sightedness. They buy as if they are day traders looking to capitalize with a huge bet on a stock hoping to sell at the next 1/8 point increase. Granted, the market drivers are the investment firms and hedge funds, which makes me think at this point, they are trying to walk their holdings up and invite the individual suckers to jump in at too high a price and then the biggies will jump ship and leave the individuals with overvalued stock that has no where to go but down (sorry for the run-on sentence). Just remember, if you are able to obtain as little as $5M-$10M dollars, you can manipulate a stock and make a killing the same as the hedge funds do. Also, if you are looking at a stock and you like to see what the analysts think of it; stop doing that. There is a conflict of interest there that cannot be igonored. Finally, please lobby your congressman to impose the Steagall/Glass Act of 1933. This whole process started when the Clinton administration repealed that law. That one caused a snowball effect that we are now getting hit with today. Think about what happened to ING, Bear, Merril.

What To Do Now.

So, I hope everyone has enjoyed the run up that market has had over the past several months. What we are seeing right now is a decrease in the volatility of the market. Triple-digit swings for the DOW are rare nowadays. With no hint of a rate hike by the FED in the very near future, most investors seem to be in a holding pattern until the receive news that will entice them to make a move. So, what is one to do when faced with a stable market?

When faced with this situation, you can do a couple of things. First, take a look at what industries have been beat up. The one that comes to mind instantly is Natural Gas. Prices are currently at record lows and companies such has Terra Nitrogen (TNH) have seen investors run for the hills because of this fact (and the fact they disolved their fat dividend). Good news in the last few days has helped the price of natural gas creep up as the actual supply reserve turned out to be less than expected. If you are looking to make quick cash, then investing in natural gas is not for you. Natural gas is definitely a long term investment.

The second thing you can do is look at the major factor that helped the market stop the free fall and unltimately helped the run up.....super low interest rates. The FED has kept the interest rate have been near zero for the past couple of years. Now that the market has appeared to be at or near the top, inflation now is a very real threat. You won't see hyper inflation as we've seen in Brazil, but if nothing is done, we could be looking a lot like 1983 realtively soon. So, in order to stem the rise of inflation, the FED needs to increase the interest rate. This will mitigate inflation and will strengthen the dollar.

When the interest rates increase (since they can't go any lower), you'll see bonds taking a beating and you'll see foreign companies who import a significant amount of US goods get hurt on the exchange rate. If you are currently invested in any bond funds or have individual bonds that you do not plan on holding until maturity, then you need to get out now while prices are good. Once the rate is increased by the Fed, the bond prices will start going down. You should reduce your exposure to foreign (Global, international, etc.) mutual funds and move that money into a money market or stable fund for now. US companies who import foreign goods should do well when the dollar starts to increase in strength, as the US dollar will go further in other countries and will reduce expenses for the US companies.

Another investment vehicle that could help you when inflation starts to come up are TIPS. These go up in value as inflation increases, which creates a hedge against inflation. These will be very valuable if the FED doesn't react in a timely fashion to abate the increase in the CPI.

On a personal note, I've reduced my exposure to the market by having 60% on the sidelines. Once the market makes a correction later on this year, which I figure to see a drop of 15%-20% overall, I'll start moving back into stocks and bonds. We'll see what happens.....