I was fifty-feet above the deck, swinging back and forth like a metronome on a bungee cord, when Dad asked me about oil stocks.
You see, about a week ago my parents — who are in their mid-seventies — were sailing in fair conditions when the loop adjoining their jib sail to their jib halyard snapped.
The jib (the big sail on the front of the boat) came fluttering down while the bitter end of the halyard was stuck at the top of the mast.
This meant, of course, that on a perfectly fine Saturday morning when an intelligent person might be eating pancakes and drinking coffee on the patio, yours truly was dangling like a howler monkey in a bosun's chair, pondering terminal velocity and whether or not a shroud could take off a limb.
Now, I’m not saying that my father is senile, but in recent years he has been known to have his senior moments.
Sometimes he forgets things or scares pedestrians.
These incidents are not serious — unless you are betting your life on a man’s rope-handling skills...
So, as I twisted around, bounced off the crosstrees and looked down at a seagull, I pondered oil stocks.
Oil Falls Hard
Oil stocks have fallen more than any other market segment this year.
According to Bloomberg:
The MSCI World Energy Index (MXWO) has declined 9.6 percent this year, more than any other group. The divergence reflects the transformation of an industry where growing consumption of energy has been met with even bigger gains in supply. U.S. crude inventories are the highest since 1990 and natural gas prices have lost 38 percent in 12 months amid a glut spurred by hydraulic fracturing.
When to Sell
I’ve been trading oil for about 15 years now. I love the oil trade because it has a long cycle. You buy when it’s going up and sell when it’s dropping.
It takes a lot of time and money to get those rigs and deals in place... once they are, they stay for a couple of years.
I sold all of my oil plays three months ago for two basic reasons: a global economic slowdown and increased oil inventory.
Europe is in real trouble. The BRIC countries are slowing fast with big currency hits.
On top of this, the Saudis are pumping at a high rate while the U.S. government is estimating shale formations such as the Bakken in North Dakota will more than double oil output in the next two decades.
If you look at the one-year chart, you can see that oil rallied from September to February based on the idea that the U.S. had turned the corner on the economy.
Once the bulls turned to bears, the price of oil dropped fast.
That said, we are approaching a support line at $75 for WTI. There is a very good chance we’ll get a dead cat bounce.
One reason might be an active hurricane season. There have been some evacuations from rigs in the Gulf of Mexico due to tropical storm Debby. Gulf hurricanes pushed up the oil price in 2005 — the year of Katrina.
But what my father wanted to know when I landed back on deck was whether oil companies like ExxonMobil (XOM) were now a buy as a value play.
Of course not, I told him.
The problem is oil companies that had expected to grow earnings 2.2% in 2012 are now expecting earnings to fall 5.8% this year.
Never buy into a contracting market; you buy when the investors have given up and the growth comes back.
When the underlying market expands and no one is paying attention is the time to buy the stock at a discount.
Most newsletters will only tell you when to buy a stock, but with today’s ever volatile market, it’s just as important to know when to sell.
This is far from a comprehensive list, but it works:
Christian DeHaemer’s 10 Reasons to Sell
- Even if you are up a lot, selling half of a 100% winner gets your principle back — and lets you ride the market for free. No one went broke taking profits...
- A company or industry goes from growth to contraction — or misses earnings. Always sell a miss!
- A major management leader quits/gets fired. Smart leaders always flee before the implosion (see: GE’s Jack Welch or Enron’s Kenneth Lay).
- A company gets bought out. There is no need to wait for the merger to go through for that extra 5%. There's a risk that the deal won’t happen and the stock will drop.
- The company cuts its dividend.
- The company has a new business plan.
- The stock chart breaks below the long-term support line.
- The stock chart goes parabolic (this is what happened to the oil stocks three months ago).
- A major lawsuit.
- You hit your stop-loss.
Avoid the big oil companies unless you are trading the short-term bounce.
Buy companies that save consumers money or benefit from lower oil prices — companies like airlines, utilities, and miners.
Keep your feet on the ground,
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.