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Two Safe Ways to Profit From the "Alibaba Shockwave Effect"

In the mid-1990s, I was fortunate to meet and start working with an Upstate New York money manager named Anthony M. Gallea.

The relationship began when I attended and wrote stories about some of the investment seminars he periodically held for prospective and existing clients. He then became a “source” for some of the investment stories I periodically wrote for Gannett Newspapers. And we ultimately collaborated on a pretty successful book about “Contrarian Investing” that was published by Prentice Hall.


Along the way, Tony shared some pretty important snippets of investing wisdom…

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    How to Profit from High Crude Oil Prices

    Despite a recent price pullback, my "oil constriction" approach for how to profit from high crude oil prices has not gone away.

    In fact, it is right on track.

    But we need to remember that the constriction in oil availability will not hit all oil sector shares the same way.

    There are four overriding elements in what is coming.

    1) Crude Oil and Gas Prices on the Rise

    The markets have witnessed a rise in both crude oil and gasoline prices - West Texas Intermediate (WTI) prices are up 37% since Oct. 4, while RBOB (the gasoline futures contract traded on NYMEX) is up 29% since Nov. 25.

    The constriction, however, is not simply reflected in the price.

    We have a very different dynamic underway than the one experienced in 2008. Three years ago, it was a speculatively driven rise in oil prices that came crashing down when an outside crisis hit (the subprime mortgage mess and the corresponding credit freeze).

    This time around, the constriction results from the rapid decline in prices from the third quarter of 2008 through a sluggish leveling-off through the fourth quarter in 2009. This period produced a significant cutback in new drilling.

    Consider this: The top 15 oil producers in the world have replaced barely 70% of the extractable reserves they extracted over the past three years.

    With conventional production, therefore, the constriction is already in place.

    However, we have moved quickly into accelerating unconventional oil production.

    That is element number two.

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  • high oil prices

  • High Oil Prices: Even $200 Oil Won't Cause a Recession Last Friday's weak unemployment numbers, with only 120,000 jobs created, brought renewed wails that high oil prices were causing a recession.

    Having heard this refrain so many times, I thought I'd dig a little deeper.

    After all, a peak of $145 per barrel in the West Texas Intermediate oil price pretty well coincided with the onset of the 2008 recession.

    The question is whether or not high oil prices are always correlated with an inevitable downturn.

    For instance, when you look closer, oil was not to blame in 2008. Other factors were much more serious culprits, including the housing crisis (by then in market collapse) and the banking crisis that followed.

    Between them they are the hallmarks of financial crisis that brought on the nasty recession.

    To find out why, we need to do a little arithmetic.

    High Oil Prices and the Economy

    The U.S. Bureau of Labor Statistics breaks down personal consumption expenditures (PCEs) on energy versus other items on a month-by-month basis.

    The PCE on energy goods (which include natural gas and electricity) rose from 5.05% of total PCE in 2004 to 5.88% in 2007 and 6.31% in 2008. When oil prices peaked in July 2008 PCE hit a maximum monthly level of 7.01%.

    Thus taking the increase from 2007 to the highest month in 2008, energy PCE rose by 1.13 % of total PCE, or about $115 billion on an annualized basis.

    That sounds like a lot of money, but it's well under 1% of GDP.

    For example, it's less than the estimated $152 billion cost of former President Bush's ineffective 2008 tax rebate stimulus.

    Indeed, it is one-seventh the size of President Obama's stimulus the following year, which didn't have much visible effect. Thus the high oil prices of 2008 might have made the difference between marginal growth and marginal decline, which according to the "butterfly effect" of chaos theory could have caused other larger changes.

    However, high oil prices were certainly not sufficient to push an otherwise healthy economy into recession.

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