PREDICTING THE PRICE OF OIL.

What Factors Influence The Price Of Oil. Bill O'Reilly thinks it's "those greedy oil company executives." He also figures speculators drive prices up and he thinks we should control those markets. If you are waiting for me to give you a definitive answer, you might as well stop reading now. Oil prices are set daily via a complex set of factors including relative valuations of currencies, the futures markets, money flows into hedge funds, geological factors, expectations for conflicts in the middle east, inventory numbers, consumer spending patterns, and dozens of other things I no-doubt missed. Many of the so-called experts use the simple technique of estimating that the current trend will continue. This is probably the reason that you hear talks of $25 per barrel oil. While price maximums and minimums are usually higher than I anticipate, I can not envision oil at prices much lower than the current levels. In fact, I would go so far as to call the current price in the high 30's is as unsustainable on the low end as 147 was on the high end.

Why Prices Will Rise. 1. At these prices, many conservation efforts are not economically viable. For example, one of the more efficient hybrids could be expected to recover the extra cost in three years at $4.00 per gallon gasoline. With the current prices, it would take around 8 years. There was a waiting list for a new Prius last spring and dealers were selling them for a premium over the sticker price. Now dealers have lots full of them. 2. Drilling plans to exploit new deep reservoirs are on hold. As I mentioned countless times before, low-cost producers can undercut the price of new, more difficult to access, production. We need $65+ prices for this production to be profitable. 3. Alternative energy sources are way too expensive to compete. While we love to talk about a wide variety of alternative sources as a solution to this problem, they are even more economically out of line with petroleum than before. Some venture capital firms are still willing to fund new alternative energy technology projects but these are becoming more scarce in the current environment. Even the old windmill man, T Boone Pickens has put his wind/natural gas projects on hold.

How Do We Protect Ourselves Against Future Price Increases. There are a number of ways and I'll tell you about two that I am currently using. 1. US Oil (USO) This is a fund that is constructed to follow the price of west Texas intermediate crude. It is an exchange traded fund that uses futures contracts and other instruments to accomplish its objective. It is a pure oil play and has nothing to do with the performance of any company. I bought it at $29.80 per share. As usual, I hedged my bet by selling an option to buy me out at $30 per share between now and the mid January expiration date. I received $2.24 per share for these options making my net buy in price at $27.56 per share. If the price goes up by a modest $.20 per share, I make almost 9% return for a two week investment. If not, I sell another call for the next month. As with PLD, I pledge to tell you what happens to this investment at the conclusion. Another way to profit from an increase in oil shares is to purchase an oil company with ample reserves. I bought Marathon Oil at $28.69 last October. That was before the recent major drop in oil prices. The stock is currently selling at 26.61. This may not sound like a great deal; however, I have collected $5.85 in option premiums lowering my break even price to $22.84. There are numerous other oil companies that may be worth buying at current prices. The currently high option premiums provide a decent means of downside protection and higher returns in the current market. As usual, I hasten to add that these examples are for illustrative purposes only. Do not consider them as recommended strategies for your own portfolio.

My Last Post Of 2008. A new year starts day after tomorrow. I have no particular plans to change my money management strategies for next year. I do anticipate a much better market and will begin the long process of rebuilding my own and my client's portfolios. Many of you will be getting statements that show some pretty hefty losses. We harvested these losses in taxable accounts only in order to provide deductions for current and future years. Our strategy was to replace these depreciated shares with similar companies at depressed prices. Also, we can wait 30 days and replace these same shares with new shares of the same company. Here's hoping that next year brings more prosperity to us all.

"ALWAYS A BULL MARKET SOMEWHERE."

I stole The Above Title From Jim Cramer. Although I am not a huge fan of Cramer, I occasionally watch him in hopes of gaining some fresh insights into the markets. I must admit, I have a difficult time finding the bull market in this environment. I always thought "bail out" was two words; however, it is used so often these past few months that it is, more often than not, written as one word. Banks, insurance companies, car companies, and investment bankers are looking for a helping hand from the government. The latest plea has come from real estate developers who will almost always produce more developed real estate than the markets need if they are given the money to do so. Home builders, are also crying the blues and trying to get the government to provide mortgage money to allow buyers to buy more real estate than they can afford. I am confused. I thought easy money was what caused the problem in the first place. The funny part of all this is that the government has no money. Their main source of funds has been the taxpayers, who are also tapped out, and the Asians who are always willing to loan money so that we will keep buying their stuff. The problem is that the consumers are trying to become more discriminating in their spending habits and the Asian economies are feeling the pinch all around.



Here is An Idea. This advertisement appeared in The Economist: "Our lives are full of things. Disposable distractions, stuff you buy but do not cherish, own yet never love. Thrown away in weeks rather than passed down for generations." I read that with considerable interest because I am amazed at the amount of stuff we own that is virtually worthless. The second paragraph was also interesting: "Perhaps things will be different now. Wiser choices made with greater care. After all, if the fewer things you own always excite you, would you miss the things that never could." What a thought provoking series of statements until you look at the bottom of the ad that says "A diamond is forever." I guess I'm not excited much by diamonds either. In my real estate activity, I am often called upon to be among the first to enter a house where the occupants died only a short time before. I am always amazed at the mountain of stuff that has no value to those who remain. I don't intend to throw all my stuff away, but I am determined to devote less time, energy, and money to acquiring stuff that those who survive me will consider worthy only of giving to the homeless or depositing into a landfill.



Enough Philosophy. I'm sure that most of you read this to get some idea of where opportunities may lie in this marketplace. On November 7th, I wrote of my purchase of Pro Logis (PLD), an industrial real estate firm owning industrial properties worldwide. My purchase price was $9.85 a share and I sold an option which allows the purchaser of the option to buy the stock from me, on or before December 19, at $10 per share. Since I received $1.75 per share for the option, my net out-of-pocket price for the stock was $8.1 ($9.75 purchase price less $1.75 received for the option.) Since I didn't want to convey the impression that I was only going to tell you about my winners, I promised to let you know what happened with this investment, win or lose. What happened almost right away was that the stock dropped to $2.50 a share. Not a great result for an investment professional risking his own funds. Fortunately, things turned around and the stock price rose to $9.00 at the time the option expired. I could have sold at that point for a profit of 11% in a month but, still holding a belief that PLD has a bright future somewhere down the line. I sold another call option to allow the option purchaser to buy the stock in January at a purchase price of $10.00 I received $1.20 for that option. At this point I am out $6.90 for the stock (9.75 less my original 1.75 option premium less my recent $1.30 premium). If the stock reaches $10 in January, I make a profit of 32% in two months. If not, I can sell the stock or write another call and receive another premium. This illustrates the potential of writing covered calls. There are some pitfalls but but this is a lower risk option strategy that offers an additional strategy for increasing gains from your portfolio.

Holidays are Coming. Christmas and New Year are rapidly approaching. These holidays have had religious significance in my family for hundreds of years. Here's wishing those of you who feel likewise a very Merry Christmas. For those of you who feel differently, I intend no disrespect. As always, your friendship has meant much more to me than all the "stuff" have managed to accumulate over the past 70 years.

SOME RANDOM THOUGHTS.

What A Deal. I filled my truck for $21 bucks today. Granted, it wasn't empty, but it would have cost me $52 just a few weeks ago. Perhaps its worth the recession and huge drop in the stock market just to keep all that money from going to countries who hate us. Russia and Venezuela are already feeling the pinch. Couldn't happen to a nicer bunch of folks. Perhaps these reduced prices will help end the recession. I am an optimist. I believe it will but not right away.

Some Bad News On Energy. Just what I told you a month or so. Its hard for us to develop new energy at prices that are competitive with fossil fuels when low cost producers in the middle east can undercut your price when they get good and ready. The technology isn't quite there for renewable energy resources and you don't have to be too old to remember what happened in the 70's. Just to refresh your memory, the Department of Energy poured $174 million into Solar One, a plant created to make steam from solar energy. It opened in 1982 and was shut down in 1999 because it wasn't commercially viable. Then there was the giant coal gasification project in Beulah in 1985. It still operates but is not expected to recover its cost (much less a return on investment) until 2010. Billions have been poured into projects to develop fuel from shale and we still don't have a viable process to compete with middle eastern oil. Much of the recent increases in crude oil prices were due to speculation about "peak oil" which says that current production has peaked and will begin to decline. Tell that to the Saudis who claim that, within 20 years they will increase their proven reserves from the current 260 billion barrels to 450 billion. In case you think its just in the middle east, just about all US oil companies are replacing their reserves faster than they are depleting them.

I Don't Want to Sound Too Pessimistic. Alternative fuels can replace fossil fuels but I also don't want to make it sound too easy. We cannot depend on companies or the government to continue pouring money into alternative energy as long as we can buy it cheaper than we can replace it. I don't look for many of the current projects to bear fruit until we burn up a larger proportion of cheap imported oil.

The Government Will Save Us. They're now talking about pouring billions into the auto industry. Although I hate to see those companies fail, I wonder if we are capable of preventing it. There is talk that the loan will allow Detroit to "retool" so that they can make more hybrids and other efficient cars. If the current drop in oil prices holds, hybrids will be the last thing our consumers want to buy. The government wants to put more money into the hands of consumers with the hope that they will spend more money. That just prolongs the agony. Consumers spend more than they can afford already and they've done it with borrowed money that they can't pay back. While I agree that putting more money into the hands of consumers is not a bad idea from a fairness point of view, I don't believe it will help if the consumers do what they should do which is save, invest, and pay down debt.