I noticed the following was the headline on the Drudge Report, who is amazingly good at fueling public sentiment on various issues on his simple, yet amazingly addictive page of links:
Although a single headline does not make markets move, it is something to be cautious about. The price of gasoline has not reached the mania level that it did back in 2008; however, it may reach that again in 2011.
I noticed while reading the latest financial pornography, mainly the five or so Canadian-related websites that attempt to sell advertising that they are having a “top four” stock contest. While these are purely for fun and have no bearing on reality unless if people invest real money in their convictions, I do notice that oil-related companies are starting to become about as prevalent as investing than gold-related companies.
Although in the long run I believe that the easy oil is gone, oil is still a cyclical market and is still bound by the economic constraints of how the marketplace works – with high capital costs, there are times where each individual company would see it rational to produce product above marginal cost but below fully burdened costs, leading to a situation where you have the underlying commodity trading below the fully burdened cost.
You see this happening today in the North American natural gas marketplace.
The contrarian pick would be to long natural gas and short oil, but this seems too obvious and too soon. One of the most dangerous aspects of investing is knowing when to exit the party, and an early departure to the party at this point will likely lead to plenty of gains being abandoned in the name of safety. When everybody runs for the exits, it will not be pretty.
However, if you’ve survived with your capital, you will be sitting pretty to pick up the capital-hungry entities that will be left standing and will receive a good risk/reward ratio for your patience.
