CTMPR

When the BP Oil Spill first came to light there was a sharp sell off in the entire oil sector including crude oil itself. I had a hard time understanding this reaction because obviously this was going to cause a slow down in drilling activity in the gulf. Any slow down in drilling activity in my mind would be bullish for crude oil prices and land based drillers. Nevertheless, the entire sector was walloped for about a month and the price of cash crude fell from $85 to $66.

Opportunity #1 – Buy a Crude Oil ETF on the panic because tighter restrictions on oil production will reduce the future supply of oil. It only took 2 months for the price of cash crude to get back into the $80s.

Another way to play crude directly that was even more dynamic was to purchase BPT – BP’s Prudhoe Bay Trust. This was not only hit by the drop in oil prices but because of it’s association with BP. However, since BPT is a Royalty Trust that operates as a completely separate entity there was little reason to discount it. As oil prices recovered BPT shares have soared almost 50% while paying out strong monthly dividends.

Opportunity #2 – Buy land based oil drillers and producers as demand for their services and production will increase to compensate for the lack of gulf drilling. Stocks of oil producers working in the Bakken formation (Western ND & Eastern MT) for example have soared since June. NOG, BEXP and KOG are all examples of companies aggressively drilling wells in ND.

This chart shows how NOG (Black Bars) and BEXP (Blue Line) have outperformed the XOI Oil and Gas Index (Brown Line).

Opportunity #3 is not quite as explosive as the other two but represents a low risk play. You can see by the chart below that OIH was actually out performing XLE for the first 4 months of 2010. During the “Spill Scare” the Oil Stock ETF – OIH fell harder than the XLE because there are more oil drillers in that ETF. If you were a holder of XLE you could’ve traded your shares for OIH. You could’ve bought OIH outright considering how big of a discount it was trading at or you could’ve went long OIH and short XLE against it (Lowest Risk).

Using any of these techniques would’ve been profitable as the spread normalized within 6 months and now there is no longer a discount.

The most important thing you can do as an investor is keep a cool head while those around you are in a state of panic. Each event that shocks the stock market normally leads to opportunity on the other side.

One topic that’s fun to think about is Early Retirement. The thought of retiring while you are still young enough to enjoy life is very appealing, but is it realistic in today’s uncertain world?

The first thing to consider is what you mean by retirement? Do you mean plunking down in a recliner or beach chair and doing absolutely nothing? Or do you mean being able to give up the 9-5 grind and do something more appealing with your time? Do you own a business that you can monetize or turn over your daily tasks to other employees?

The only thing you need in order to be able to retire early is a stream of residual income. There are several ways to establish a residual income, here are a few of the most common:

The traditional idea of retirement planning involves opening an individual retirement account or utilizing a pension plan or 401k at work. Once you get past the age of 59 1/2 you can begin drawing funds from these accounts without any penalties. Then when you reach age 62 you can take early retirement as far as social security is concerned. If you take it early however, the results will be a reduced monthly payout so there is a cost associated with it.

Investment Income

As people move into retirement they tend to change their investment style to include more stocks that pay regular dividends as well as bonds that pay regular interest. This allows people to take the income portion of the money out of the account without diminishing their capital. Today with incredibly low interest rates this has been a challenging way to generate significant monthly income. People seeking higher monthly payouts have been forced into lower quality bonds investments such as a Junk Bond ETF or other things such as Master Limited Partnerships or REITs that produce monthly income.

Real Estate Ownership

Real Estate investing was all the rage a few years ago but has now fallen out of favor along with housing prices. Now (after the crash) real estate investing probably makes much more sense because the key is being able to rent out the property for more than your mortgage payment. Now many people can’t qualify for a mortgage but would still like to live in a house, so there is good rental demand. In the early 2000’s people were banking on huge capital gains from owning real estate, but the key is the monthly cash flow.

Turning A Hobby Into An Income Stream

If you have a hobby that has value there is a very good chance that you can organize things in a way that would make it possible. I enjoy writing for example, so I’m building a residual income based on my writing and web site development skills. 2 months ago I decided to make a change and only build informational web sites for myself instead of building sites for clients.

Other people like to restore furniture or cars or fix up homes, all of which can provide a nice source of income.

Monetizing A Business

Small business owners have several different ways to monetize their business and turn it into an early retirement.

These include:

Selling out to a larger business or business partners
Selling out to your employees (ESOP)
Maintaining ownership and turning over responsibilities to key people.

The key for a business owner is to determine whether or not they have key people who they can trust to run a business or whether they should simply try to cash out.

To me, the key idea of retirement is freedom. There are many ways to achieve freedom, start by writing down the assets you currently have and how they can lead to a stream of residual income.

Whenever you are making investment decisions (especially those that affect your retirement plan) you need to be aware of two cycles that dramatically affect the markets.

1. Where we are in the business cycle (expansion or recession)
2. Where we are in the Stock / Commodity cycle.

Right now we are in the expansion phase of the business cycle, even though it’s not a very strong one. The key to the expansion has been the incredibly easy monetary policy and the endless liquidity provided by the federal reserve. So this cycle is positive for the stock market.

The Stock / Commodity Cycle however is still in favor of commodities for another decade. How does this cycle work? The chart below shows how the dow has performed over the past century, you can see that it tends to go up for about 18-20 years and then turns choppy for about the same length of time. During those choppy years is when the commodity booms have taken place, the last one being 1964-1982.

Cycles in Stocks and Commodities

If you look at the last boom which encompassed the 1970’s you will see that the stock market action over those years looks remarkably similar to what we are experiencing right now. The stock market traded in a broad range and didn’t go anywhere for about 20 years. That’s easily what could happen this time as well, we have sharp sell offs and sharp rallies but really don’t go anywhere until the latter part of this next decade. That will also coincide with the rise of the baby boomers kids who will provide the next wave of heavy consumer spending as they begin to raise families.

The current cycle began in 2000 when the stock market peaked, commodities took off in late 2002 so expect the next major break out in the stock market to occur between 2018 and 2020. There can be new highs made in these next few years but it shouldn’t be anything significant. The real winners during this time period will most likely continue to be:

Gold Miners
Silver Miners
Energy Stocks
Ag Related Stocks

Basically anyone who is involved in producing or mining commodities should do pretty well. Those that use commodities and sell finished goods to consumers will be the laggards during this time frame. A perfect example of this right now are Jean Manufacturers as cotton prices have doubled in the past couple years.