*****Limerick of the Week
It’s been too long since I printed your comments and answered your questions in Daily Profit. After I finished cutting and pasting the most relevant, I came out with 5 pages of reader mail. I’m going to have to do another one next week.
Let’s get to it…
*****Oil prices have been a popular subject. K. Santana wrote: Here’s one for you… Everyone is suggesting buying oil now that the price is so incredibly low and it’s, of course, going to rise to ridiculous prices again. What’s the best way to buy oil? Would it be through distributors like XOM or BP or is there something more direct?
Oil prices fell below $34 yesterday. That’s just an amazing drop in a very short period of time. I noted the other day that it seems as though the price decline has been more severe than what the fall off in demand might have suggested. But it is what it is.
That said, it’s virtually a no-brainer that prices will rise again. So investing for a rise in oil prices is basically a matter of how much risk you want to take on.
The safest route would be an Exchange Traded Fund (ETF) that tracks the price of oil directly. The US Oil Fund ETF (NYSE:USO) follows the price of West Texas Intermediate crude. It’s dropped from $119 to $34.
Next would be the integrated oil producers like Exxon-Mobil (NYSE:XOM). Your risk here is not tied directly to oil prices. There won’t be as much upside as with the ETF, but the downside is also somewhat limited.
You could opt for oil services stocks or an ETF. But these will be tied to investment in oil production, and I think that’s probably more risk than anyone wants to take while prices are still falling.
Daily Profit has recommended a position in services company Graham Corp (AMEX:GHM), but this very much a short-term hold. For long-term, there’s still much risk for the company.
Finally, if you want to speculate, you might look at some of the exploration companies or oil sands companies. Oil sands companies aren’t profitable until oil trades north of $50 a barrel or so. Clearly, there’s a fair amount of risk here, because there’s no telling how long it will take for prices to rise that much. In the meantime, your investment would be tied to how much cash a particular company has on hand to fund operations. Again, it would probably be best to wait for prices to start rising before going after oil sands stocks.
Small exploration companies like Continental Resources (NYSE:CLR) are interesting too. Continental has fallen from $83 to $12 and currently trades around $18. That’s a big drop, but it doesn’t mean the stock is a great buy here. I like the company, but there is still risk for the company in terms of funding operations. Continental is not cash rich.
Currently, I think the best long-term play on oil prices is either the US Oil Fund ETF (NYSE:USO) or Exxon.
*****Wayne P. had a question about an oil services stock: What is your opinion on Cameron Valve & Measurement; they are highly connected to the Oil Drilling and Production markets. Their stock has been over $ 58.00 and as low as $16.00’s with the down turn. I have had their stock for years with great success, should it come back and when do you think this might happen.
Yahoo! Finance tells me Cameron Valve is a private company, so I have no way of checking out its valuations. Assuming that the company has enough cash squirreled away to get through, the stock will come back when oil prices support increased investment in production.
When will that be? I suspect investment is as much tied to the credit markets as crude prices right now. Neither look like they’ll improve in the near future. 6 months down the road, oil services stocks may start to look better.
*****Here’s a question about investing in Citigroup from M. Hanlon: I’ve been buying Citigroup Preferreds paying 15% & a call option by Citibank at $25.00 in 2018. Am I bravely getting paid to wait out this financial tsunami or am I an idiot?
First off, there is no way I’m calling anyone an idiot after my interest rate gaffe the other day. You are in good company.
As for Citigroup, it’s pretty much a consensus that Citi is too big to fail. The company should continue to get whatever assistance it needs. But will assistance mean interest is still paid?
Citigroup preferred stock was recently downgraded by Fitch to BBB and is on Rating Watch Negative. Payment on the preferred stock could be deferred, so there is a question as to whether you’ll continue to get paid.
As for the LEAPS (long dated call options), that’s a long time to have your money tied, but I also assume you’re paying next to nothing for these calls. I like the spirit of this speculation. I hope it works for you. I do think there’s some risk that dividend on the preferreds.
*****Barry M. wants to talk about TIPS: You indicated "might be a good time to revisit the I share Lehman Tips". Could you explain why you think this, is it because of China‘s apparent good financial situation? Not sure I understand this. Maybe you could broaden our knowledge on this investment.
I’ve discussed the iShares Lehman TIPS Bond (TIP) a couple times in Daily Profit. A TIPS is an inflation protected Treasury bond. The yield is determined by inflation rates. It’s designed to outperform inflation rates.
TIP is an ETF. It has sold off since inflation rates dropped and investors started to worry about deflation. The ETF has rallied off its lows recently. I assume that’s because the Treasury and the Fed have been pumping dollars in to the system at a breakneck pace. Expansion of the money supply tends to be inflationary (see: home prices, 2005).
Barry wants to know why I mentioned TIP in relation to China’s stimulus plans. It’s because China has the biggest foreign currency reserves in the world. If it chooses to start pumping some of that cash into the system to fund its economic stimulus plans, it leads to more dollars in circulation and potentially higher inflation.
*****Finally, I’m going to leave you with another limerick from our resident poet, John…
Is a banker the home-owner’s friend?
When he’s recklessly willing to lend?
They’re most willing to borrow
From our children’s tomorrow
While our credit has come to an end?
*****I have several more reader emails to respond to. Look for more next week. Have a great weekend.