20 Aug 2004 Future’s As Clear As Oil
Oil futures are now above $49.00 per barrel nearing the record highs (inflation-adjusted) reached during the oil embargo of the 1970’s. Iraq’s shipments have dropped about 1 million barrels a day from 1.8 million in April. Oil prices have set records every day save one since July 30. World oil traders are concerned that the reduced supply fromIraq,Russia, andVenezuelacannot be offset by other OPEC countries which are producing at full capacity. Saudi Arabiais the only country with capacity to offer and their oil minister said yesterday that they were prepared to pump as much as they could.
The market rallied on news that Iraqi police peacefully took control of the Imam Ali Mosque in Najaf from militia men loyal to Shiite Muslim cleric al-Sadr. Over 500 fighters inside the mosque surrendered and may be freed under an amnesty agreement. But so far the price of oil has not significantly reversed its advance.
Oil is likely the chief culprit in keeping a lid on the growth of the economy down, although the political rhetoric is replete with additional blame. The Conference Board ‘s index of leading indicators fell by 0.3% to a level of 116, the second consecutive decline, and it said the weakness in the past two months was widespread. The biggest negative factors were declining vendor performance; a widening gap between Treasury bond yields and the Federal Reserve’s interest rates and a diminished real money supply — which both make it harder for businesses to borrow money; increasing weekly claims for unemployment insurance, and declining orders for business equipment from manufacturers.
While we are uncertain what happens to oil prices and economies from here, we are clear that a balanced, diversified, and dynamic portfolio approach is indicated. Our primary aim is to avoid, where possible, richly-valued assets that have huge downside risks during unexpected events. There are a few exceptions in our portfolios including stocks like Procter & Gamble. The stock is cheap relative to its past five years, but still trades at a P/E higher than that of the market.
Our portfolios are well balanced for the increased cyclicality of theU.S.economy. If the economy continues to grow, our positions in basic materials, banking, energy, growth oriented real estate, technology, and retail (the latter two are very attractively priced) will do exceptionally well. If oil remains high, and/or taxes are increased, and/or terrorists attack causing a recessionary or deflationary cycle, our counter-cyclicals should do quite well. They include the yield investments like specific real estate investments, utilities, consumer non-durables, (cereals, beverages, and the like), and healthcare. Finally, we are diversified abroad in countries that are growing in their own right, not fully dependant upon a strong U.S. economy.
Maybe one day our economy will be freed from the internal struggles of a few countries that control a fuel source that outdates man, but we seem no closer to that goal than we were during the turmoil of the mid-70’s. More than a few fuel alternatives and opportunities look appealing at or above $50 per barrel oil. Sure would be nice to put OPEC in the history books.