Enterprising Investor Forum

We’re back with one of our ‘Interesting Charts’ posts! Has anyone looked at Oil performance against the S&P500 lately?

As usual, we have used the iPath Crude Oil ETF( OIL) as a proxy- for those of you that are not familiar with it:

• The investment is linked to the performance of the Goldman Sachs Crude Oil Return Index and reflects the returns that are potentially available through an unleveraged investment in the futures contacts comprising the index plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts. The index is derived from the West Texas Intermediate (WTI) crude oil futures contract traded on the New York Mercantile Exchange. The fund is nondiversified.

Here is the first chart that shows the 1 year performance:

No surprise here but it is still interesting too see how OIL moved to +60% and then dropped like a rock to -60%… talk about wealth creationg and destruction!

However, the 2 year performance shows a very different picture, with both Oil and the S&P ending up together:

Remember that time horizons are of critical importance when constructing your investment strategy and projecting expected returns… a lot of things can happen in the short term but if you are a long-term investor, you should try and tune out all the noise.

After a short period of strength in the midst of the whole de-leveraging story, the US Dollar has resumed weakness as most high profile investors have predicted for quite some time (i.e. Buffet, Rogers, Soros, etc..).

The actual graph is quite scary and what is surprising most of us is the speed at which this is happening – hereafter the latest 1 month EUR.USD chart :

It is currently on the way to breaking the 200 day moving average of 1,4712 and most commentators believe it will shortly return to the levels we saw this summer: 1,60 range.

What does this mean for the markets? Well, this is quite alarming as it would probably lead to a grid-lock situation and probably bring the 650 level back into play for the S&P – or at least, sub 700 area.

As our regular readers know, we are value investors and not market timers or commodity or forex specialists but the current climate feels very fragile and we would advise caution before entering the market. We would tend to adopt a wait and see strategy or place BUY LIMIT orders at the 52-Week-Low level until we have a better view of the current economic climate, issues & scandals.

Is it possible that it’s all about OIL? Most people tend to agree that Oil is too high and that at the 150 level we incurred demand destruction but when will the markets stop this Oil vs. Financials trade?

Most probably, what is happening is also that with so much uncertainty, this trade is the safest bet! What does this mean for Value investors? Well, it means that we are experiencing a very volatile market that gives us the opportunity to buy 6-10% dips in great companies that are already trading at highly discounted prices.

Remember that you most important task is to filter out the noise and focus on fundamentals, don’t get caught up in the market game!

Today we would like to discuss recent market events and what the possible outlook could be. Look at this 5 day chart where we use ETFs to show overall sector performance. We have used the XLF for financials, OIL is self explanatory and VNQ for real estate.

Despite the fact that OIL is sharply down and that both financials and housing are recovering, this does not mean that it’s time to jump back in. We feel that this is a bear rally and that investors should be careful… don’t be fooled by a 15% jump… a 30% drop could be around the corner. There are still too many unresolved issues with Freddie and Fanny and until we have concrete news from Washington, there is still sharp downside potential.

No doubt that this rally will probably go on into next week but again, we feel investors should not rush to get back in. As usual, study companies you are interested in and decide at what price you would be comfortable opening or adding to a position. It is extremely important to remain focused on this initial analysis and not to get carried away by what Mr. Market does.

Some readers have written to us asking if they should take out the limit orders and just buy now before things move too high… but this is not how we like to invest. Forget about the crowd, stick with your play. As Emerson said “The great man is he who in the midst of the crowds keeps with perfect sweetness the independence of solitude.”