Real Wealth #004 12/27/2005
The Impact of Oil Prices on Your Investments
Tuesday, December 27, 2005
The last week of 2005 figures to a rather uneventful one, at least as far as the markets are concerned.
So I'd like to use today's edition of the Real Wealth e-letter as a quick "refresher course" on the importance of oil prices on the market.
I'll have more to say about where oil prices are headed — and how you can profit — in the days ahead. But in the meantime, I'd like to present a passage from my book, The Global War For Oil: A Survival Guide to the Coming Energy Shock...
Since our economy is so vulnerable to an oil shock, most investments get hammered when oil prices rise.
History shows that high inflation cripples the stock market. From 1966 to 1982, a period of high inflation, there were six bear markets (with declines of 20 percent or more). From 1982 to 1999, a period of low inflation, there were only two bear markets, which caused little net change for the years in which they occurred.
And oil, all by itself, can cause massive inflation. As we've seen, its price affects the prices of almost everything else.
As a result, for the last thirty years, the price of oil has been the single most important factor for the economy and the stock market. When oil prices are stable or decline, stocks do well. When oil prices rise, stocks do poorly. Very poorly.
Investment analyst Stephen Leeb has discovered a very specific correlation between oil prices and stock prices. He describes it like this:
"For investors, it's what we dub your 'desert island, one phone call' indicator. If you can know only one thing about the world, make it the direction of oil prices over the preceding year, and you'll do better in the stock market than almost anyone else following any other indicator, from interest rates to corporate profits. This has been true for the last three decades, and it will remain true throughout the early part of this century — until we kick our oil habit and develop and switch to viable energy alternatives."
(from "The Oil Factor: Protect Yourself — and Profit — from the Coming Energy Crisis")
According to Leeb, if you had sold stocks (starting in 1973) every time oil went up by 80 percent or more in a year's period (putting the money into T-bills), and bought them back when prices rose by less than 20 percent in a year, you'd have avoided the following:
You'd have been out of the market less than four years out of the 30, but you'd be up 70 times your original investment, compared to only 35 times with a buy-and-hold strategy. That's doubling your returns, just from this one simple indicator. A starting investment of only $20,000, following this strategy, would have meant an eye-opening $700,000 extra in gains.
The price of oil is a crucial, although usually unrecognized, influence on your investments. That's why it's vital that you know about — and prepare for — the coming oil shock. "Conventional" investments are going to get ugly very soon, and "non-conventional" investments will flourish. I expect to see $100 oil and $1,000 gold before it's all over.
The sad part is that not one person in a thousand will prepare properly. Most analysts today poo-poo the idea that oil is about to get very expensive. We have enough cheap oil to last us for decades: 40 or 50 years' worth, or so they claim.
Are they right? We'll talk more about this in upcoming issues of Gold and Energy Advisor's Real Wealth e-letter.
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