Im switching to another host

Well I have decided to switch from wordpress to blogger. Here’s my new website :

http://investing-advice.blogspot.com/

Stay tuned to Profits from financial markets!

The coming economic slowdown

Recently, Warren Buffett said that the US was already in a recession, and I totally agree with him.

Buffett said that the United States is already in a recession and added: “Perhaps not in the sense that economists would define it” with two consecutive quarters of negative growth.

“But the people are already feeling the effects,” said Buffett,”It will be deeper and last longer than many think.”

There are 3 main reasons behind this recession :

• Demand pull inflation due to rising oil and food prices (The main thrust behind the recession)

When people spend more money on food and oil, they will have to spend less on other consumerable goods.

Take a look at the consumer confidence survey :

• Cost push inflation affecting the transport, courier and airline industry due to rising oil prices

Many stocks in these industries are already trading near their 52 week lows while they continue to absorb the high costs of oil.

American Airlines (AMR) is at $6.32. Its 52 week low is $6.00 while its 52 week high is $29.32.

Delta Air Lines (DAL) is at $5.50. Its 52 week low is $5.37 while its 52 week high is $21.80.

Federal Express (FDX) is at $86.83. Its 52 week low is $80.00 while its 52 week high is $119.10.

• Aftermath of the sub-prime crisis and the ensuing credit crunch

Although many analysts believe that the credit crunch is easing, they are still taking write downs and I believe that it will continue for some time

It seems that an economic slowdown during the 2nd half of 2008 seems increasing likely.

The Truth About Oil Prices

Read this if you are unsure where oil prices are going next.

After the recent surge in crude oil prices, experts and analysts alike seem to have different opinions about where oil prices are headed next.

On one side, there are those who claim that speculators have drove oil prices too high and have caused a bubble which will burst sooner or later

Others simply point to demand and supply imbalances as a reason for the spike, and they think that oil is going to go even higher (Goldman Sachs’ Arjun Murti think its going to $200 in the next 6-24 months)

With of these “Experts” are correct?

Actually, both are correct to a certain extent, depending on the time frame you are looking at.

Here is my prediction :

In the short run : Oil will continue to surge higher and higher, until it reaches a peak, where it will fall back to around $100.

In the long run : Oil will resume its climb to $200 and then to $300

1) Currently, oil is trading at $132. Greedy speculators will continue to fuel this spike until it peaks at $150 to $200 (The prices that T.Boone Pickens and Arjun Murti gave for oil) , where people will start taking profits.

2) Once it peaks, everyone will be trying to get out of their oil positions, and oil prices will drop as fast as it as risen, consistent with the bubble theory.

However, I wont call it a bubble bursting because there will be a strong resistance at the $100 level, since there is a real demand for oil. (i.e. If oil falls to $99, traders who really need oil will snap it up at that price)

Oil will continue to try penetrating below the $100 level, but it will ultimately fail

3) Once the mania has subsided, demand and supply imbalances will return to the market and continue oil’s spike

For your information : I do have stocks in Oil ETFs (DBO), and I am waiting for oil to reach its peak before exiting my position and then snapping up cheap oil at around $100

A promising blue chip – Citigroup

For the past few weeks, Citigroup (C) shares has been nose diving and it seems that the time to buy its shares at a bargain is coming soon.

Take a look at Citi’s 10 year price history :

Its hit its 52 week low of 17.99 in March this year, and the stock, currently trading at 21.12 seems a bargain when you consider that its 52 week high is 55.53

In addition, when you look at Citi’s SEC fillings, the bullishness of insiders also makes it an even more compelling case.

LIVERIS ANDREW N, of director of Citigroup (and also CEO and Chairman of The Dow Chemical Company), purchased 1,200 shares at $23.47 on 05/13/08

FORESE JAMES A, an officer, sold 100,000 shares at $25.79 on 04/24/08

MEDINA MORA MANUEL, an officer, bought 185,000 shares at $27.01 on 01/24/08

“Wait! What about the write downs due to the subprime crisis, and Citigroup’s decision to shed $400 billion assets?” , you may wonder.

The fact that Citigroup is the world’s largest bank ensures that there is a low chance that the Fed will allow Citi to go bust on its own (Or else the US economy will suffer badly)

Also, Citigroup’s total assets is worth trillions, so $400 billion isnt an amount that can stop it from being the biggest bank.

Being one of the Dow 30 Components that make up the Dow Jones Industrial Average further enhances this “invincibility” aura that Citigroup seems to carry.

Of course, after Bear Stearn’s fall, anything is possible, but chances of Citigroup shares hitting $2.00 are extremely low, while there is a huge upside potential given that banks are now slowly recovering from the write downs

Nevertheless, I will still be waiting for Citigroup shares to fall further, perhaps to $15.00 before I consider investing, as a recession might be coming. It wont be long before Citigroup shares reach a bottom and that will be the best time to buy an undervauled stock.

A few ways you can profit from the current surge in oil prices

Here are some ways small investors can profit from the volatility in crude oil prices without having to store a few barrels of oil in the backyard (Not an exclusive list) :

If you think oil prices are going up (Which I do) :

1) Buy stocks of companies that engage in oil exploration and drilling such as Exxon Mobil (e.g. XOM, BP, SNP, PBR, STO)

2) Buy Exchange Traded Funds that are directly proportional to oil prices (e.g. USO, OIL, DBO, UCR)

3) Short sell (Borrow to sell) the stocks of those in the airline, transport or courier industry (e.g. UPS, FDX, UAUA)

If you think oil prices are going down :

1) Invest in alternative energy, such as the Guinness Atkinson Alternative Energy Fund or First Solar (FSLR)

2) Buy the UltraShort Oil & Gas ProShares

If you think oil prices are either going up or down by a huge magnitude:

Buy a straddle (A put and a call option at the same price) for a oil ETF

Investing in oil

There seems to be no limit to how high oil prices can go.

On Thursday, crude oil reached $135 briefly, before settling around $131. Oil has increased dramatically over the few months, and Goldman Sachs analyst Arjun Murti recently advised that crude oil could reach $200 within 6 to 24 months.

According to The Economic Times,

Murti, 38, now a managing director at Goldman Sachs, first came to the fore as far back as 2003-2004 when he predicted that oil prices would breach $80 a barrel when it was still in the 30s. He was sneered at. He was mocked again when he predicted in 2005 that it would double from $50 to $100 before the end of the decade.

Is the rise in oil prices due to fundamental economic reasons, or is it simply a bubble caused by speculators?

Before investing in crude oil, lets review both sides of the argument

Increased volume of oil contracts traded on the NYMEX

There is more and more speculative activity, especially from pension funds and other large institutions.

I just visited www.nymex.com, and it says on its website that the Total Exchange Volume (Not just volume for crude oil) is 1,830,281 for 05/23/2008*

According to Bloomberg,

Electronic volume for Nymex’s crude oil, natural gas, gasoline and other energy products rose 30 percent to 772,567 a day last month

Take a look at the volume for Light, Sweet Crude Oil, taken from NYMEX :

Year	Daily Average	Annual Volume
2008 (April)	536,837	44,557,489
2007	482,246	121,525,967
2006	283,080	71,053,203
2005	237,651	59,650,468
2004	212,382	52,883,220
2003	181,748	45,436,931
2002	182,718	45,679,468
2001	149,028	37,530,568
2000	148,123	36,882,692

In 2006, the daily average volume is 283,080. In 2008, its 536,837, almost a twofold increase.

Surely, the world’s population could not have doubled in 2 years!

What we can clearly tell from this is that more people are trading crude futures, and we can also infer that speculative activity is increasing, which supports the bubble theory. ( An excuse that OPEC uses for not increasing oil supplies)

Nevertheless, the main reason for the increase in oil prices is not due to speculators, but there are other fundamental reasons.

1. Weakening US Dollar
2. Higher drilling costs and national policies that restrict foreign investments
3. Growing demand for oil from rapidly developing countries
4. Supply disruptions (Attacks on oil pipelines in Nigeria)

5. Possible sanctions on oil-exporting Venezuela

As a result, crude oil inventories are down by 5.4 million barrels from last week, according to the EIA.

As long as these supply disruptions are not dealt with, and the US dollar continues to depreciate (It will continue to depreciate in the long run), oil will continue to rally, no matter what speculators do

CONCLUSION

Jeff Rubin, Chief Economist and Chief Strategist at CIBC World Markets sums it up well :

“Even at $133, demand hasn’t been reined in, and without a real raise in supply we think it’s ultimately going to go over $200 a barrel.”

Before investing in crude oil, do remember that short term corrections are possible (perhaps even down to $80), but in the long run, oil prices will shoot up