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Masters of Myopia
Dear American Capitalist Reader,
As you have undoubtedly heard, the weather here in New York has been downright balmy. I, for one, am not complaining. I live on the top of a ridge and am the proud owner a driveway with a 20-degree incline in some spots. However, the warm weather in the Northeast - the largest oil-consuming region in the world - has done a real number on the oil sector.
What is perhaps the most interesting about oil's slide from over $61/bbl. last weekend to under $57/bbl. this morning is that it is incredibly short sighted. Yes, the weather is warm, and fuel oil stocks are higher than expected for January as a result. But as is their custom, oil traders seem to be focused on the last four weeks instead of the last four years, in which the Northeast saw winters that were colder and snowier than average; last year we received well over 40 inches in my front yard. And guess what? I have it on good authority that is going to snow again at some point. In fact, a quick note to the environmentalists out there - the recent warm stretch DOES NOT mean irreversible global warming is here, the world is ending, etc. It means we're in a warm stretch. It happens. Get over it.
Wall Street, though, has priced oil stocks as if Old Man Winter has just retired and move to Palm Beach. How shortsighted can you get? Always masters of myopia, the traders downtown have driven the shares of the entire energy complex down hard, although in many cases oil's recent move impacts them relatively little. Consider the action in the oil-service sector - the Oil Service HOLDrs ETF (OIH), the best proxy for the sector, is down from $150 before Christmas to $130 yesterday. That's a drop of nearly 15%, most of it over the last three days, and all out of proportion to the drop in oil. Plus, let me let you in on a relatively little-known secret; most oil-service contracts, like those for drilling rigs and seismic exploration surveys, are not cancelable due to a drop in the oil price. So while Wall Street is merrily selling these firms with abandon, their earnings visibility for 2007 and 2008 is actually excellent. With every major oil company in the world exploring, producing and refining as much oil as they possibly can whether the price is at $61 or $57 per barrel, most of these firms have a decidedly rosy couple of years ahead of them regardless of where oil goes.
We follow energy very closely in Trend Investor, since it is has such incredible implications across the global economy. As a result, we have a good idea of how much impact a short-term drop in the price of oil will have on the stocks in the sector. The bottom line? The decline in oil-service shares over the past couple of days is out of line with the impact oil's correction will have on the sector. Plus, weaker oil right now is a GOOD thing, since it actually supports the economy while we maneuver toward a low-inflation, low-growth soft landing, and will support oil demand heading into the spring. For investors, the drop in oil stocks in general, and oil-service ones in particular, means one thing; a buying opportunity.
Sincerely,
Steven Lord, Editor, Trend Investor
