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2006-06-05 :: Iran, Oil, and Your Investments

Oil is back above $73 based upon Iran’s statements that they would halt
oil shipments if economic sanctions are imposed upon them for their
nuclear activities.  European markets have been down based upon this
threat and it looks like US markets are set to open down as well.

Energy is still the dominant investment theme in our portfolios and will
continue that way for the foreseeable future.  Sure, you can buy
Kellogs, General Mills, Pepsi or BUD to hedge against a recessionary
economy and maybe pick up a basis point or two in your diversified
portfolio, but the people that are doing this are selling energy and
metals to move into these stocks.  Bad move.

When you are investing funds for clients, it is my opinion (and
BankChampaign’s practice) to take a longer view of the world and invest
accordingly.  Sure, you can buy breakfast cereal stocks,  soda pop
stocks, or beer stocks as insurance against something that might
happen.  But why sell the stocks of companies that have just about the
only sources of consistently growing earnings in the markets today?  It
just doesn’t make sense.

IF we were to see a worldwide recession that included China and India,
THEN we would see a deserved drop in the prices of these commodity
stocks.  However, I find it unlikely that this would happen.  We may see a slow down to a lower growth scenario, but we would likely continue to see actual earnings beating estimates.  As I’ve written previously, estimated earnings for energy companies are based upon $45 to $50 oil, and for metals companies $1.50 copper (as an example for the metals).  As long as the prices for these commodities comes in above the estimates, and as long as there aren’t any badly timed hedging strategies in place, earnings will beat estimates and share prices will go up.

This link is the recently release Nesbitt Burns forecast for commodity prices.  Nesbitt Burns, in my opinion, is the best source for this information, so I am glad to see this timely release:
Just copy and paste the link into your browser and it will take you to their forecast for energy prices for 2006/2007.  Please note that they see an average price of crude oil of $70, well above where earnings estimates are based.

This link:     will give you similar numbers for the metals, forecasting copper at $2.75 on average.

After a period of extended volatility that shakes my favorite holdings, I like to review my investment thesis.  I am still convinced that the long-term fundamentals are in place and this recent correction is a buying opportunity in the areas where we invest.  Let’s hope that this coming week is a return to a more normalized investment environment where the fundamentals rule instead of the gyrations of the hedge funds and their computerized trading.

More later.