Not far from where Elisabeth and I live here in Florida, across the Everglades and into the Gulf of Mexico, a major new storm is emerging — Rita.
Woefully, its path reminds me of Katrina’s.
Thankfully, its wind speed and destructive power do not. Instead of a Category 5 that can rip virtually any structure to shreds, Rita will hopefully not exceed a Category 3, which, despite the potential for widespread damage, is primarily a threat to weaker structures.
But the U.S. National Hurricane Center still expects Rita to grow into a major hurricane.
It will affect a wide geographic area in the Gulf of Mexico.
Unless we’re lucky, it will disrupt, damage or even destroy oil facilities that Katrina spared.
And it will do so very soon, making landfall this weekend.
Rita Now Seems Headed
for the Biggest Concentration
of Refineries in the Nation
At this juncture, Rita’s exact target is far from certain. But one projection shows it striking the Galveston-Houston area.
If so, it could lead to a worst-case scenario.
About 190 miles to the southwest of Galveston is Corpus Christi. Roughly 60 miles in the opposite direction is Port Arthur. And in this 250-mile zone of the Texas Coast is the largest single concentration of major refineries in the
United States
, including eight of the nation’s 20 largest.
Oil Companies
Pulling Out
Most oil companies operating in the Gulf are taking no chances. They see Rita coming. And they now know the perils of underestimating Mother Nature’s wrath.
So they’re evacuating.
Chevron has already pulled out staff needed to keep its oil and natural gas platforms running, including production facilities run by its newly acquired Unocal.
Royal Dutch Shell and BP are starting to do the same.
Apache, Marathon Oil, Kerr-McGee, and Murphy Oil are monitoring the storm and will probably decide on evacuation today.
Largest Oil-Price
Surge in History
Oil traders have also learned their lesson.
Last time, when Katrina was making a bee-line for the Louisiana Coast, many pooh-poohed the potential damage. Now, just three weeks later, they’re not about to make the same mistake again.
And last time, in the wake of Katrina’s devastation, oil traders saw how the
United States
and 26 other countries pounced on oil markets, releasing massive amounts of strategic reserves in a desperate attempt to push prices down.
Oil traders saw how disappointing that effort was — only a minimal, short-term oil-price correction.
And oil traders know that, with strategic oil reserves already being depleted, we’re unlikely to see similar government efforts a second time around.
So in New York yesterday, virtually all traders — commercial interests, large speculators and small speculators — jumped in to grab up any energy contracts they could lay their hands on. They bought natural gas. They bought heating oil and unleaded gasoline. And most of all, they bought crude oil.
Result …
October natural gas futures jumped $1.446 to $12.59 per million British thermal units, the highest in history.
Gasoline futures surged more than 22 cents; and heating oil, more than 20 cents.
But the explosion in crude oil prices made these seem tame by comparison — over $4 in one day, the largest-day single jump ever recorded.
OPEC
Helpless
Meanwhile, in Vienna, OPEC members are trying to figure out what to do about this, but they’re virtually helpless.
One option they’ve considered is to increase their output quotas by 500,000 barrels a day to 28.5 million. But it’s a joke. A half million barrels is pitifully inadequate. And most analysts figure that OPEC countries are already pumping that much oil anyhow.
Another possibility is that OPEC members would agree to make their remaining two million barrels of spare capacity available to world oil buyers. But without increasing their official production quotas, most oil importing nations are skeptical this will stick. And even if it does, it will do NOTHING to ease the shortage of refining capacity, over which OPEC has NO control.
Washington is equally helpless. It has already released strategic oil reserves. It has already promised the moon and the stars to all those affected by Katrina. And as I stressed yesterday, it’s already flat broke. Thus …
As an Investor,
You Have Two Choices
You can be another financial victim of this crisis, suffering losses in stocks and bonds that are already falling in value.
Or you can prudently and deliberately shift some of your money to investments that are appreciating rapidly.
Here in Money and Markets, I have not held back on my guidance on what to buy or when. I also have not pulled any punches.
I have shared with you some of the key investments I have recommended to my subscribers, such as Enerplus (ERF) that’s been making new all-time highs.
And I’ve been guiding you to an exchange-traded fund (ETF) that has been in the vanguard of the energy boom — the Oil Service HOLDRs (symbol OIH). This ETF represents a basket of companies dedicated to oil exploration, construction and repair. And it’s soaring.
So I hope you have acted on my recommendations. If so, great. If not, it’s not too late to do so.
But naturally, given the rapid run-up in prices yesterday, it would be prudent to wait for at least a one- or two-day dip, which could take place this week.
OIH Surges to
New, All-Time Highs
Last week, I explained it this way:
“The energy-boom express train has come to a momentary stop. A narrow door has opened. And some investors are boarding … I think [OIH] is headed as high as the $130 zone, just on this move.â€
Yesterday, the OIH started to do just that, surging $4.20, or over 3.5% … reaching 123.70 … and paving the way for still further gains.
If Hurricane Rita’s path shifts in a less threatening direction, and if the OIH pauses or declines today or later this week, it will be a buying opportunity.
Reason: It still has quite a long way to go on this move.
Moreover, there is no indication that this is the last, or even next to the last, move in these stocks.
Some investors ask: Is this really an oil play? Or is it mostly a stock market play? Yesterday’s market provided a simple answer: The Dow and most of the rest of the stock market were down pretty sharply. But these oil stocks went through the roof. So it’s clear that they have charted a separate, independent, upward path.
Oil Stock Option
Rises 20 Times Faster
Since the beginning of June, the rise I just showed you in the OIH has been dramatic. It has 
jumped from $94.31 on June 3 to $123.70 yesterday, up a hefty 31% in just three and a half months.
Meanwhile, options that Larry currently has in his Energy Options Alert portfolio have surged many times faster. No, he didn’t recommend the options at their low. Nor do I think he will be able to catch their exact high.
But in the same timeframe that the OIH was up 31%, one of the options he currently has in the portfolio has surged over 600% from its price in June to yesterday’s close.
Moreover, you wouldn’t have to be a market timing genius to have taken advantage of some portion of this move:
I count at least three buying opportunities in this option — the first in early June, the second in late August and the third just last week.
These were not the first such opportunities. And they won’t be the last. Indeed, right now, Larry is about to issue a new recommendation to his Energy Options Alert subscribers on another, similar option that has yet to surge to new highs, but could easily do so in the next few days.
If you have speculative funds available, I don’t think you should miss it. His service is close to being sold out. So if you’re interested you should call 1-877-719-3477.
My Five Golden Rules
The dramas you’re seeing right now — in the Gulf of Mexico … on the New York Mercantile Exchange … at the OPEC meeting in Vienna … and in selected oil stock options — are not pre-scripted. Nor are they likely to unfold without unrehearsed surprises.
The financial markets, like the nascent Hurricane Rita, are likely to make many twists and turns that no one can foresee.
That’s why, personally, I do my utmost to follow five golden rules, and I hope you will do the same. Here they are …
Golden rule #1. No matter how good an investment may look to you today, never over-invest. Never risk money that you may need for your daily living expenses, your children’s education, your parents’ long-term health care (not to mention your own), or, God forbid, emergencies and natural disasters.
Golden rule #2. Always keep a solid nest-egg of cash in reserve, and make sure you stash it in the safest investments you can find — U.S. Treasury bills or money market funds that invest exclusively in short-term U.S. Treasury securities.
Despite any threats to the American dollar, this is the single best place for your keep-safe money, in my opinion. If you’re paying your bills in dollars, if you’re making purchases in dollars, and if you’re investing in dollars, you need to keep most of your liquid funds in dollars as well.
Moreover, the yields have been steadily improving and should go up again today, with the Fed widely expected to raise its short-term rates — AGAIN — by a quarter of a point.
Click here for our updated list of money market funds dedicated to Treasury securities.
Golden rule #3. To protect yourself against a dollar decline, allocate a modest portion of your money to investments that tend to go up when the dollar goes down. Everbank offers foreign-currency CDs right here in the
United States
. Gold ETFs, such as GLD, are good counter-dollar investments as well. In times like these, even investments in the energy boom can be good hedges against the declining purchasing power of the dollar.
Golden rule #4. When it comes to speculative investments, use only the funds you can afford to lose. Always recognize that stocks that go up can also go down …. and stocks that go up the most quickly are often among those that come down with the greatest speed as well.
There are exceptions, and I think energy, gold and natural resources are among them. More importantly, there’s certainly no law that says you have to HOLD a stock that’s falling. But no matter how good your timing or your selection, SOME degree of risk is unavoidable.
Golden rule #5. Unless you are a sophisticated trader, never borrow money to invest and never buy investments that expose you to unlimited risk.
How Do Options Fit in
to This Picture?
If you are intent on protecting every penny to your name, then stick strictly with guaranteed, fixed-income investments.
And if you are satisfied with the kind of returns that stocks alone can deliver, they may be adequate for your needs.
However, if you wish to aim for the kind of high returns that only options can deliver, consider allocating a modest portion of your money, say, up to 10%, toward their purchase.
Even in the worst-case scenario, you can never lose more than you invest. And you never need to use borrowed money. So you can take advantage of the enormous leverage they offer while still abiding by all of my golden rules.
Good luck and God bless!
Martin
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478
