Tuesday, February 10, 2009

The Slippery Slope of Media Oil Coverage

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Most investors have trouble making money in the market because they pay too much attention to the mass media. The financial press is mostly a gigantic PR outlet for Wall Street and whatever bill of goods it is trying to sell the public at the moment. Wall Streeters are of course usually doing just the opposite of the what the media is telling you to do with your investments. This is how they make their money. While Wall Street can mislead through the press, hiding its true intentions is difficult in the charts, which is why everyone should understand at least basic technical analysis.

I am looking closely at oil at the moment. If you relied on the press you wouldn't be paying any attention at all. I have read all sorts of arguments lately about why oil can't go up this year. These include such fantastic claims as a new political stability in Iraq, Iran and Nigeria (yeahh, that can happen), although they usually center around a claim that oil can't rally until the economy improves. This argument in turn relies on the basic economic principle that prices don't rise if demand is falling (certainly happening because of the crashing global economy) and supply stays the same. There is somewhat less than a zero chance that supply will stay the same however. When oil prices drop, production gets cut practically everywhere. OPEC's announced plans for another round of major cuts at its March meeting are just the tip of the iceberg. My sources in Texas tell me oil production is being shut down all over the state. I read the other day, that the tar sands in Alberta need oil to sell in the low 40's to break even. How long will production continue if oil falls and stays below that price? In fact, much of the oil that came online in the last few years is expensive oil that will no longer be produced if oil prices remain low. Given this set of circumstances, oil supply could easily fall below demand and the price of oil would then rise, not go down as all the 'pundits' claim.

The press is also giving a lot of coverage of the Stimulus Plan and whether or not it will be passed. Passage is presumed to be good for oil because the stimulus plan will revive the economy. It will certainly have some positive impact, since it is difficult for a government spending program not to (the TARP is one of those rare exceptions). The media is wasting a lot of ink on whether or not the Stimulus Plan will be passed. This is another absurdity. There is zero chance that it won't be. The vote of the typical member of the U.S. Congress is more available for sale than a crack-addicted street whore. Sure the price is more expensive and usually has to be paid in taxpayer funded giveaways, but no one in Washington cares about that.

Investors should keep in mind that by the time some change in the market is getting a lot of press coverage, it is usually well advanced. When the average person starts to be concerned, Wall Streeters have long ago taken their positions and are probably getting ready to close them out (the old 'buy on the rumor and sell on the news' saw that has been around the Street forever). Markets also don't go straight down or up forever either. Even if a long-term trend is well in place, significant reversals are likely along the way. You can make a lot of money in those reversals, but not if you pay attention to the mainstream media.

NEXT: It's Amateur Night at the U.S. Treasury

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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