Know Your Finances: Will the bull slip on oil?

Posted by Ellen Le on March 9, 2011

Just when the economic
recovery seemed to finally be taking root, parts of the Middle East decide to
rise up and cry out for more freedoms. More power to the protesters, I wish
them success in their endeavors. Democracy shouldn’t be kept from anyone. But, we
need to be prepared for possible repercussions.

Concerns over
disruptions in oil flow and subsequent price increases are real. Investors so
far have shrugged off troubles in Bahrain, Tunisia, Egypt, and even Libya,
though Libyan oil production has been cut in half. The concern is with Saudi
Arabia, where there supposedly are large protests scheduled for March 11. The top three countries we import oil
from are Canada, Mexico, and Saudi Arabia, in that order. Saudi provides about 10 percent of our
imports, while Libya accounts for less than 1 percent. So, disruptions in oil
flow from Saudi Arabia would be a big deal. And, oil prices (especially futures
prices) are reflecting that.

Oil prices closed at
almost $98 a barrel on Friday after peaking last week at more than $103. The
all-time high was $147 in 2008.
Analysts say that oil would have to stay above $130 a barrel for a
period of time before economic demand would seriously suffer.

Our Gross Domestic Product
has been growing for six straight quarters and, up until very recently,
expectations have been for 3-3.5 percent growth in 2011. If oil prices keep
climbing we could see GDP growth estimates cut to 2.5 percent.

Companies may decide to
pull back on planned capital spending projects and employee hiring. Our nascent
recovery could be stalled.

The bull has been making
some serious dust over the last two years, climbing almost 100 percent. I consider prices of the highest
quality stocks to be mostly fairly valued, not cheap and not ridiculously
overvalued. But, that depends on if earnings growth can stay strong and deliver
into 2011 and 2012. Oil prices can be a game changer. We have three pieces of
advice for long-term investors:

• Don’t dump stocks out of
fear. Do trim stock positions back to long-term asset allocation objectives and
replace with short-term bonds or bond funds.

• Don’t chase oil stocks.
Trim positions. Maintain a position of 8-13 percent of your total stock
portfolio in energy stocks. Energy stocks have rich dividends.

• Look to relatively
undervalued high dividend stocks in other sectors to invest in, such as
healthcare, telecom, and utilities.

Remember to avoid the
daily noise and focus on the longer term.

* Ellen Le is the founder and
president of Ascend Investment Management (www.ascendinvmgt.com). She has been
a financial planner and investment adviser for more than 20 years.
I look forward to receiving your questions
about anything related to investments, retirement planning, or the economy.
Send them to: ellen@ascendinvmgt.com and write “Chadds Ford Live” in the
subject line.

About Ellen Le

Ellen is the Founder and President of Ascend Investment Management. She was born in Philadelphia and has lived in the Delaware Valley for most of her life. When she is not researching investments and managing portfolios, she pursues her interests in tennis, bridge, hiking and art. Beginning her investment career in 1981 as a stockbroker at E.F. Hutton and Co., Ellen now has over 20 years of investment management experience. Prior to founding Ascend in 2006, she managed high net worth assets for many years at Bank of America, Mellon Bank, and most recently at Davidson Capital Management. At Davidson Capital Management, Ellen served as a Senior Vice President and Senior Portfolio Manager of the firm. She managed assets for more than 50 family relationships and was a core member of the firm’s Investment Committee.Ellen earned a BA in History from Brown University and a MBA in Finance & Investments from The George Washington University. She is a member in good standing of the Chartered Financial Analyst (CFA) Institute, which is a global organization dedicated to setting a high ethical standard for the investment profession. Her professional memberships include the Delaware County Estate Planning Council, Women Enhancing Business (WEB), and the Chadds Ford Business Association. She is a docent with the Delaware Art Museum and an active volunteer with the Brown University Alumni Association.