Oil & Gasoline Prices Will Head Higher
The Dynamic Wealth Report
September 10, 2008
Was I Really Wrong?
A few weeks ago I wrote about a huge success we had. At the beginning of
the year I wrote about the Airlines. I knew they’d face some big
problems from rising oil. Boy was I right. We even recommended
puts on United Airlines in our Elite Options Trader service. Those puts
yielded in less than 5 weeks, at peak value, returns of more than 260%.
Not bad.
But sometimes I’m wrong (kind of).
Back in June I wrote an article titled
Oil Over $142 - Is Your
Portfolio Prepared? I focused on the rising cost of oil and gave my
opinion on its future direction. I wasn’t alone in my opinion. I called
for higher oil and higher gas prices. I realize now I may have been a
bit aggressive.
In the short term oil prices actually headed lower not higher.
I was a bit early on this trade. Oil has since traded down almost 30%
from the high. We may not hit $200 oil in the next few weeks. But it
doesn’t mean my thinking was entirely wrong . . . my thinking was
mis-timed more than anything.
Oil’s still a major commodity. Its price is being driven by global
supply and demand. I still believe we’re going to see demand climb
higher. The increasing demand will come from China, India, or even
Africa. (See, not so much wrong as really early!)
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Now I’m not alone in making mistakes.
Some mistakes can be much bigger than others. This weekend, I cracked
open my latest Forbes magazine. It was within those pages that I found
something really interesting. See, I may have been temporarily wrong
about oil prices. At least I didn’t suggest you lose all your money in
an investment.
A horrible suggestion.
One of the popular Forbes writers penned an article titled The Experts
Are Wrong. In it he talked about Freddie and Fannie and tried to
address some important issues. He tossed around phrases like “too big to
fail” and “moral hazard.” He asked who should be responsible for the
future of our biggest financial institutions.
I guess he was going for some deep, thoughtful insight.
I was about to turn the page when I read something really interesting.
It was his suggestions of where to put your money. Back in June this
very editor suggested purchasing Fannie and Freddie Preferred Stocks.
Since that suggestion, these preferred stocks had fallen 20% and 46% in
price. Not a good start.
Did he suggest exiting the trade to conserve capital?
Nope. He actually suggested just the opposite. He stated that he still
liked them! He went on to suggest holding them “for a recovery”.
Unfortunately I’m sure some of his readers went out and bought more of
the preferred shares.
That was the worst possible suggestion.
When the Federal government put Fannie Mae and Freddie Mac into
conservatorship they took control of the company. Their first action was
to eliminate the dividends being paid to the common and preferred
shareholders alike.
Now, here’s an interesting observation . . .
Preferred stock, like that of Freddie and Fannie, is typically looked at
like a debt instrument. The company issuing the preferred is obligated
to pay the dividend. Normally it’s a nice yield, and because it takes
precedence over common shares it’s regarded as somewhat safe.
But if that dividend goes away, the preferred stock becomes more like
the common stock. And its value plummets. If a company hits rough
economic times or enters bankruptcy, the equity will be considered
worthless.
And that’s exactly what happened to the preferred stock of Fannie and
Freddie. Unfortunately for the Forbes editor and all of the holders
of Fannie and Freddie stock, even the best of us can be wrong at times.
• Wheat ($7.43 per bushel)
Wheat prices have fallen to lows not seen since mid-2007. The prospect
of a strengthening US Dollar has lead to falling expectations of demand.
As the Dollar strengthens, wheat becomes more expensive for the rest of
the world. The higher price ends up reducing demand as consumers seek
out cheaper alternatives.
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