Saturday, May 7, 2011

As Predicted, the Oil Price Reverses

by Andrew Butte

Identifying bubbles is not (very) hard, what’s hard is predicting at what price and when they will pop. Two weeks ago I wrote an article titled “FAO Food Index Predicting a Reversal in Crude Oil Prices”. I’d say a 15% decline in Brent from $127 to $110 qualifies as a “reversal”. Outside of noticing that food prices slightly lead oil prices, the logic behind that argument was:

1: The Libya thing was a Red Herring used by the speculators to instill a bit of panic into the market; there never was a short-fall of oil compared to demand (short-term) and there still isn’t.

2: The Saudi’s might have a sulk about what they perceived as misinformed and impolite comments from various corners of the US Administration about the human rights of minorities and all that baloney. But ultimately, they know that the alternative to sucking up to America (making sure oil does not get too expensive for America’s taste), is not an option, and they know America knows that and America knows they know America knows that. Perhaps it wasn’t a coincidence that oil prices tanked soon after Osama bin Laden was in the news (hopefully for the last time), and as that subject hit the headlines, memories were jogged that 14 out of the 19 terrorists in 9/11 were Saudi’s?

3: The correct price of oil right now valued according to what the world can afford to pay (without suffering unduly), is about $90 (Brent). So at $127 oil was a 40% bubble, bubbles do have a habit of popping once they get to 40% over the “fundamental”.

Where Next?

Well, according to the theory, if oil was 40% too high, and if no one is taking the spectre of peak oil too seriously (in which case the “fundamental” value is the replacement cost (i.e. what it will cost to find and produce more oil)), then at some point in the not-too distant future the price of oil “ought” to explore $90/1.4 = $64 (Brent). Whether it does or not, will be a good test of how much the “Peak Oil” idea is gaining traction.

Tuesday, May 3, 2011

Osama Bin Laden's Death - How will it Affect Markets?

By Jon Elder.

This is a special edition post for Free Money Wisdom. I typically post every other day, but Osama Bin Laden has been killed by the US military. This is great news and provides this country with closure after nine long years of battle in the Middle East. Osama Bin Laden has been killed near Isalamabad, Pakistan. It looks like justice has prevailed, took long enough! However, I do want to note that this is no time to gloat over his death. Although he was a murderer, killing hundreds of innocent Americans, it is not Biblical to rejoice for your enemy's death : 'Proverbs 24:17 Do not gloat when your enemies fall; when they stumble, do not let your heart rejoice.'

This is a personal finance blog, so let's dive into the repercussions of Osama's death. The news is pretty clear. Stocks will be in the green tomorrow. This is great for most investors. However, if you bought into the gold and silver rush, this might be the pullback that I've been waiting for. Already, there is early trading going on and it does not look good for the commodities markets.

The news of Osama Bin Laden's death is positive news for the equities markets. It's been a nine year battle over in Afghanistan and Iraq. And now that Osama Bin Laden is dead, this brings much needed closure to this great country we call the United States. This 'close' equals positive gains in stocks tomorrow.

Osama Bin Laden's death equates to a lower national security risk. If it's actually safer in the world, who knows, but the markets will be having a nice rebound in the morning. Most likely, bonds markets and treasuries will have some sort of a pullback.

Three commodities to watch in the morning include oil, gold and silver. These three have been going on a steady incline, but I predict that these will fall dramatically tomorrow. It will be a great buying opportunity for anyone wanting to get into commodities. I know that I've been waiting for a silver pull back for some time now. I'm excited to see what happens.

There are other markets like defense companies such as Raytheon and Boeing. These should be watched closely, as they could swing in either direction by dramatic amounts, just hard to say at this point.

Basically, this will be a short term gain for the equity markets while the commodities markets will take a massive blow.

I'm afraid that Osama Bin Laden's death will cause uprising in the coming months and even more terrorist attacks. I'm praying hard that's not the case. Either way, God is sovereign and everything is happeneing according to his divine plan. Invest wisely!

So what do you think? What is your investment strategy for tomorrow? Comment below.