The markets were down for the week through Thursday, Feb. 24, 2011, with the Standard & Poor’s 500 Index closing down 2.75%; The Dow Jones Industrial Average down 2.60%, and the NASDAQ composite down 3.39%.
As oil prices go up, the markets will generally go down. It is no surprise that the markets have hit a rough patch this week. For investors who are in for the long haul, the dip in prices can present a buying opportunity. We do not see why investors should wait to see how the news plays out. On Thursday, there was speculation that Libyan leader, Col. Moammar Gadhafi, had been shot. He was confirmed alive, as he gave a speech on Friday, Feb. 25th. We do not see that this should immediately factor into your investment decisions.
Generally, any extremists, Muslim, Israeli, or Christian Capitalists, want to sell their oil. We feel the recent bump in oil prices is temporary and speculative, as there is no disparity in supply and demand. Libya’s oil exports mainly supply Asia and Europe. The United States receives only 5% of Libya’s oil production. Furthermore, Libya accounts for less than 2% of the world’s total oil production. If Libya were to stop their production, Saudi Arabia has more than four million barrels of spare capacity and has pledged to tap it if necessary.
Even with conflict in the Middle East, we adhere to buying high quality investments and abide by our Ten Year Rule. We feel investors need high quality fixed investments that mature in the next 10 years to cover liquidity needs, and that the remaining funds should be invested in high quality equities or mutual funds that invest in equities.
We stress high quality investments because marginal companies are usually hurt the most by speculation in the market place. For example, small oil companies may feel the pressure, but larger oil and energy companies are more diversified in both production and sales. Additionally, if interest rates increase, it penalizes the lower quality companies, as they will face difficulty obtaining credit.
Will the increase in gas prices push a recovering economy back into recession? At this point we are not concerned. Generally, when the market has a $10 increase in the price of a barrel of oil, it reduces the growth of the gross domestic product by 0.5%. We believe the increase would have to continue for years before it affects the world economy.
There will always be economic and political turmoil somewhere. U.S. investors have experienced a difficult decade, but we still believe the best place to put your money is in ownership. When you buy shares of a company, you are investing in ownership of the company, which can increase in value while fixed income investments cannot. Interest rates will move up and down, but we will not see -5% interest. Rates will have to increase. Likewise, commodities will fluctuate in price, but generally do not increase more than the rate of inflation. This is where we feel stocks have the edge. Companies can continue to grow, and in the end, we believe strong companies will survive.