Oil & Gasoline Prices Will Head Higher

| September 10, 2008 | 0 Comments

A few weeks ago I wrote about a huge success we had.  At the beginning of the year I wrote about the Airlines.  I knew they’d face some big problems from rising oil.  Boy was I right.  We even recommended puts on United Airlines in our Elite Options Trader service. Those puts yielded in less than 5 weeks, at peak value, returns of more than 260%.

Not bad.

But sometimes I’m wrong (kind of).

Back in June I wrote an article titled Oil Over $142 – Is Your Portfolio Prepared?  I focused on the rising cost of oil and gave my opinion on its future direction.  I wasn’t alone in my opinion.  I called for higher oil and higher gas prices.  I realize now I may have been a bit aggressive.

In the short term oil prices actually headed lower not higher.

I was a bit early on this trade.  Oil has since traded down almost 30% from the high.  We may not hit $200 oil in the next few weeks.  But it doesn’t mean my thinking was entirely wrong . . . my thinking was mis-timed more than anything.

Oil’s still a major commodity.  Its price is being driven by global supply and demand.  I still believe we’re going to see demand climb higher.  The increasing demand will come from China, India, or even Africa. (See, not so much wrong as really early!)

Now I’m not alone in making mistakes.

Some mistakes can be much bigger than others.  This weekend, I cracked open my latest Forbes magazine.  It was within those pages that I found something really interesting.  See, I may have been temporarily wrong about oil prices.  At least I didn’t suggest you lose all your money in an investment.

A horrible suggestion.

One of the popular Forbes writers penned an article titled The Experts Are Wrong.  In it he talked about Freddie and Fannie and tried to address some important issues.  He tossed around phrases like “too big to fail” and “moral hazard.”  He asked who should be responsible for the future of our biggest financial institutions.

I guess he was going for some deep, thoughtful insight.  I was about to turn the page when I read something really interesting.

It was his suggestions of where to put your money.  Back in June this very editor suggested purchasing Fannie and Freddie Preferred Stocks. Since that suggestion, these preferred stocks had fallen 20% and 46% in price.  Not a good start.

Did he suggest exiting the trade to conserve capital?

Nope.  He actually suggested just the opposite.  He stated that he still liked them!  He went on to suggest holding them “for a recovery”. Unfortunately I’m sure some of his readers went out and bought more of the preferred shares.

That was the worst possible suggestion.

When the Federal government put Fannie Mae and Freddie Mac into conservatorship they took control of the company.  Their first action was to eliminate the dividends being paid to the common and preferred shareholders alike.

Now, here’s an interesting observation . . .

Preferred stock, like that of Freddie and Fannie, is typically looked at like a debt instrument.  The company issuing the preferred is obligated to pay the dividend.  Normally it’s a nice yield, and because it takes precedence over common shares it’s regarded as somewhat safe.

But if that dividend goes away, the preferred stock becomes more like the common stock.  And its value plummets.  If a company hits rough economic times or enters bankruptcy, the equity will be considered worthless.

And that’s exactly what happened to the preferred stock of Fannie and Freddie.  Unfortunately for the Forbes editor and all of the holders of Fannie and Freddie stock, even the best of us can be wrong at times.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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