Investing in Oil, Food, Alternative Energy, Gold or Water? Yes, All of the Above
November 6th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
Over a roughly 24 hour period, I received four emails from readers with questions about investing in oil. (Has there been some specific event in the media that has touched off a lot of interest? Just curious. I don’t have a TV so I don’t know what people are being fed on that thing.)
The tactical calculus on oil is extremely difficult. Forget any fundamental analysis of the thing, because the people providing the numbers simply lie about their reserves. Peakers will tell you that the companies and countries involved are lying about how little oil they have, but only an idiot would believe that they don’t lie the other way as well. That’s just the nature of the business.
So, if fundamentals are just slightly better than worthless, what about the technical side?
From a long perspective, the oil charts look more terrifying than gold!
Some people have no problem with buying high and hoping to squeeze more out of a chart that has gone vertical. Not me, brother. I never played the game that way (unless I was going in heavy for a few minutes or hours on momentum, in which case I didn’t even get up to use the toilet until the trade was closed). I liked oil back in the low $50s, and told you guys all about it. But now, the oil chart has gone vertical and oscillators are pegged in extreme overbought territory on the weekly interval.
I don’t chase moves like this. I just don’t do it. My trading philosophy has always been:
“Buy low, sell high,” or “Short high, cover low.”
“Nobody ever went broke by taking profit.”
“Pigs get slaughtered.”
“When the money honies are paying a lot of attention to it, with the oscillators pegged in extremes, consider exiting the trade, hedging or even reversing the position.”
Could oil just keep right on going? Absolutely. But high oscillator band long entries, especially on the weekly charts, aren’t my cup of tea. I know. It hurts to watch a thing continue to go vertical when discipline tells you, “Don’t do it.” If you’re thinking about chasing a move on something like that, get your husband or wife to duct tape your hands to your desk so you can’t click the buy button on your broker’s web site. Here’s an idea for a product: a firewall that prevents you from buying anything in your portfolio or watch list when the weekly stochastics are over 80.
Considering long on oil, after looking at those charts I immediately thought: Not only no, hell no, and maybe even consider throwing some money away on some deep out of the money January put options.
But some people can’t help it. If you feel as though you want to be in on this, I wouldn’t allocate much on the options, futures or any ETF that tracks oil directly, unless you really know something. That is to say: Event risk is always a factor on oil, but I don’t know anything about the timing of such things, and, chances are, neither do you.
As usual, diversification, diversification, diversification.
I’d look at using a basket of energy ETFs AND I would strongly consider hedging with out of the money put options on oil directly until the weekly oscillators unwind a bit.
There are dozens of energy ETFs out there. And I don’t like having to mention funds that hold so many earth murdering corporations, but if we’re talking about making money on oil, I’ve got to put a clothes pin on my nose and try to force the bile back down.
Look at the energy spiders and vipers: XLE and VDE.
The expenses on these funds are very low. That’s good, considering that the companies involved are responsible for enslaving us all and killing the planet.
Rather than hedging with put options on those ETFs, I’d consider put options on the oil itself. Options are such a crap shoot, I’d only consider them for hedging at extremes. Like on oil and gold right now. Look at some out of the money January strikes on oil puts to go along with your long term energy holdings. You could, of course, just wait for those spiders and vipers to dip and keep your powder dry, in FXF Swiss Franc Trust, for example. If the dollar mounts some unthinkable rally, you can switch out of FXF in an instant (see criticism of doing this with ETFs vs. Forex).
In summary, on oil: The chart has gone vertical. Danger. Warning. Caution. If you must play, use ETFs to spread the risk around, and strongly consider hedging your long positions with put options near term. Consider waiting for the ETFs to unwind a bit. In the meantime, avoid exposure to the dollar with something like FXF.
Consider some alternative energy ETFs as well. Higher fees, but definitely worth a look, in my opinion. Seeking Alpha lists several of them, along with many other conventional energy ETFs:
Claymore/LGA Green ETF (GRN)
First Trust NASDAQ Clean Edge ETF (QCLN)
Market Vectors Environmental Services ETF (EVX)
PowerShares Cleantech Portfolio (PZD)
PowerShares Global Clean Energy Portfolio (PBD)
PowerShares WilderHill Clean Energy Portfolio (PBW)
PowerShares WilderHill Progressive Energy Portfolio (PUW)
Van Eck Global Alternative Energy ETF (GEX)
Since any post on oil is really a post on commodities in general, keep in mind that any portfolio that doesn’t have exposure to the apocalyptic rises in food prices seems boneheaded to me. I don’t see the food price increases as speculative bubbles. When you look at the underlying causes (top soil depletion, drought, costs of fertilizers, energy, doomed agricultural practices, etc) you realize that these rallies could have a long way to go. The problem is: How to play? I’m not saying to become a commodities trader, but take a look at parking some treasure–long term—in the the PowerShares DB Agriculture Fund.
Last but not least, when thinking in terms of scarcity: Think about water.
Water should be the primary strategic consideration at the front of all of our minds, yet it’s just assumed, even by many Cryptogon readers. People ask me lots of questions about investing, but they never ask about investing in water.
Here are some water related ETFs to check out:
PowerShares Water Resources Portfolio (PHO)
First Trust ISE Water Index (FIW)
PowerShares Global Water Portfolio (PIO)
Claymore S&P Global Water ETF (CGW)
With so many ETF options, there’s absolutely no reason to keep too many eggs in too few baskets.
Hard assets, especially food and water (and also a way to grow food in winter), definitely. But I also recommend BULLETS (and guns), whether you live out in the country or in town or city. You never know. If you have guns, buy bullets for them now–but this is mostly for US folks, should Hillary become President, she WILL outlaw either one or the other, and possibly both. All she would need to do is sign an executive order…She and Bill almost did that after Okie City, but a majority Repub congress stopped her (well, something did.) The Dems who will control congress will just let her do it. Best to be prepared for the worst (Hillary or Guilianai Presidency, while hopinf for the best–Ron Paul)