Wednesday, February 18, 2015

Oil and the Price of Corn Flakes

Lately, I've blogged a lot about mental health (and the two books I've done on that topic), but today I'm going to switch gears. For optimum mental health, I've learned I need to have hobbies or interests. One of those interests is getting my 401K (which is technically now an IRA) to grow in the midst of a turbulent market. I spend a fair amount of time on that. And I've done okay (up double digits last year; up 4.4% YTD 2015). But I'm still perfecting my game.

At the end of last year, I sent stock picks to a few close friends. Almost all of the stocks I picked (DD, DIS, AAPL, DNKN, IBB, COST) were up sharply by the end of January. I think Costco was the only loser, down 0.23% on the month. But I felt like an idiot, because I failed to capitalize properly on my own picks! I spent most of January trying to move money out of the market ahead of downturns, and failed to keep a significant percentage invested on upturns. In other words, I held too much cash; not enough invested.

I'm still learning.

I thought I'd share my notes with you, though, for what they're worth.

Going forward, the big story to watch (for me, at least) between now and summer is the price of oil. Stocks have been hurt whenever oil goes below $50. But we can just about bet on oil going up between now and summer; the question is how much, how soon. (I'm not one of those who thinks we're going to re-test January lows. The closer we get to spring, the less likely that is.)

So far, the oil downturn has been explainable as a supply-driven event, but there is (I'm sure) also a demand component, which has been a bit stealthy. By late May, we should be able to see how much demand reduction there's been (due to crappy economies in the U.S. and Europe). I'd expect to see oil reach $70 by July, ordinarily, but if demand is softer than we think, it could have a lot of trouble getting there, with many false runups along the way. The $60 level is crucial, because wind, shale/sands, and deep-water rigs are not economical with oil under $60. I'm sure our Saudi "friends" would love to see oil stay below $55 forever, to stall investment in non-Saudi-sourced energy. However, the Saudis' power to manipulate the markets is not infinite, and any manipulations will ultimately be short-lived, so $60 oil is not a question of if, but when.

The strong of stomach will want to consider BP and HAL as oil goes up. The latter, currently $44.60/share, should hit $50 by spring, barring something weird happening, but this is a weird market, and HAL is a volatile stock, so beware. The ride could get bumpy.

If you're an aggressive investor, don't wait until spring to begin laying in a few oil-related positions. The time to act is now, or on any pullback in oil. You snooze? You lose.

Kellogg's (K) took a bit of a beating a few days ago and is now on sale at $63-and-change (down from $66.30 on 11 Feb). It will go up. You can probably make 4% on your money here in two months, not even counting the stock's $0.49 quarterly dividend. What's not to like about Kellogg? Significant international exposure. What's to like? Low oil prices. (That, and the fact that the company has just done a reset on expectations, gotten the bad news out of the way, etc.)

Kellogg Company got dinged on 12 Feb 2015. Buying opportunity.

What does the price of oil have to do with corn flakes? Plenty.

You might already know that the corn in a $2.20 box of Corn Flakes costs Kellogg about 14 cents. Processing the corn into flakes costs 26 cents (15% of the wholesale price); add about eight more cents (4.5%) for freight and 12 cents (7%) for packaging. Labor is six cents (3.5%). Advertising and marketing make up 30% of the total cost, with the remainder accounted for by general and administrative (G&A) costs, warehousing, profits, CEO compensation, and other "overhead."

Processing, packaging, and freight (all energy-intensive) account for about 27% of Kellogg's costs. (Raw materials also reflect energy prices, but that's not so important in the overall scheme of things; low oil might save Kellogg a penny or two on the corn in the box of flakes.) If Kellogg can shave a couple percentage points off its processing, packaging, and freight, it translates to big bucks, because the company typically grosses $14.5 billion in sales per year. (Wouldn't you like to have 1% of that?) Bottom line, I think oil will stay low enough long enough to give K some margin-expansion leeway while it figures out how to get skyrocketing overhead under control.

Enough said about Kellogg. What else is worth buying here?

Well, I'm a big believer in biotech, but I'm not smart enough to pick individual stocks in this tricky industry, so I like IBB, the biotech index fund. It finished up 26.8% last year, up 24% in the last six months, and it's up 7.6% YTD. Buy it on any pullback and expect to hold onto it for, say, six months. I like it right here at $326-and-change (17 Feb 2015).

MSFT is still fairly inexpensive and has a good shot at getting back to the high 40s later this year. You could make 10% in a year, or 3% in two months; or it could stay flat, although somehow I doubt it will. I don't think it will revisit $40 any time soon. (If it does, buy even more of it.) Pick up a little bit now, I say, while it's still under $44.

For diversification purposes, you might want to own some defense stocks. Lots of good stuff to choose from here, but based on the great-looking six-month and one-year charts, I have to go with Northrop Grumman (NOC).

Northrop Grumman (blue) vs. the Dow (red), six month chart.

Right now, aerospace/defense is a much safer war/disaster hedge than gold, IMHO, so you should definitely own a few shares of one of the big bomb-droppers (RTN, LMT, NOC, or something in that vein). Forget gold, I say. If you have to own a metal, make it aluminum (AA is primed to break out, though I wouldn't buy just yet).

So those are my picks, for now: NOC, IBB, MSFT, K, BP, and for the strong of stomach, HAL. Let's see how they do in a few weeks or months. 

Now back to our regular programming.

Have you joined the mailing list? What are you waiting for? I just made you a ton of money!

☙ ❧

Meanwhile, I want to thank the following great people for retweeting me yesterday (with a big thanks also to , , and , whose icons didn't show up below for technical reasons). Click into these profile pics and Follow these guys on Twitter! They retweet!

13 comments:

  1. I really wish we did not have to worry so much about the oil price. It really does effect everything. It just shows you how much we rely on it. We should really shift our attention to finding alternative sources of energy for future economic growth. Thank you for this detailed post I will be sharing it further with others.

    Abraham Yates @ Apache Oil Company

    ReplyDelete
  2. They are ready to enhance people-dating ability providing Tinder APK By utilizing Tinder Plus, a customer can use Rewind feature.

    ReplyDelete
  3. Td ameritrade uses over 2,300 common funds that have neither lots neither deal charge, Fidelity Login – www.fidelity.com Ally Invest as well as TD Ameritrade financiers do have this advantage.

    ReplyDelete
  4. Thank you for sharing an interesting and very useful article.
    And let me share an article about health here I believe this is useful. Thank you :)
    Custom Packaging Boxes USA
    Custom Boxes
    Slider Boxes
    Mailer Boxes
    Custom Soap Boxes Wholesale
    Fancy Hard Boxes Wholesale

    ReplyDelete

  5. شركة نقل عفش
    اهم شركات مكافحة حشرات بالخبر كذلك معرض اهم شركة مكافحة حشرات بالدمام والخبر والجبيل والخبر والاحساء والقطيف كذلك شركة رش حشرات بالدمام ومكافحة الحشرات بالخبر
    شركة مكافحة حشرات بالدمام
    شركة تنظيف خزانات بجدة الجوهرة من افضل شركات تنظيف الخزانات بجدة حيث ان تنظيف خزانات بجدة يحتاج الى مهارة فى كيفية غسيل وتنظيف الخزانات الكبيرة والصغيرة بجدة على ايدى متخصصين فى تنظيف الخزانات بجدة
    شركة تنظيف خزانات بجدة
    شركة كشف تسربات المياه بالدمام
    شركة نقل عفش واثاث
    شركة نقل عفش بالرياض وجدة والدمام والخبر والجبيل اولقطيف والاحساء والرياض وجدة ومكة المدينة المنورة والخرج والطائف وخميس مشيط وبجدة افضل شركة نقل عفش بجدة نعرضها مجموعة الفا لنقل العفش بمكة والخرج والقصيم والطائف وتبوك وخميس مشيط ونجران وجيزان وبريدة والمدينة المنورة وينبع افضل شركات نقل الاثاث بالجبيل والطائف وخميس مشيط وبريدة وعنيزو وابها ونجران المدينة وينبع تبوك والقصيم الخرج حفر الباطن والظهران

    ReplyDelete

  6. شركة سكاي لخدمات نقل العفش والاثاث بالمنطقة العربية السعودية نحن نوفر خدمات نقل اثاث بالرياض ونقل عفش بالمدينة المنورة ونقل عفش بمكة ونقل عفش بالطائف نحن نقدم افضل نقل اثاث بخميس مشيط ونقل عفش بجدة
    شركة سكاي نقل العفش
    مدونة لنقل العفش
    شركة نقل عفش بمكة
    شركة نقل عفش بالرياض
    شركة نقل عفش بالمدينة المنورة
    شركة نقل عفش بجدة
    شركة نقل عفش بالطائف

    ReplyDelete

  7. Thanks for sharing such great information, I highly appreciate your hard-working skills as the post you published have some great information which is quite beneficial for me, I hope you will post more like that in the future.
    Custom Printed Boxes
    Custom Boxes with Logo

    ReplyDelete
  8. Hello Everyone !

    USA SSN Leads/Fullz available, along with Driving License/ID Number with good connectivity.

    All SSN's are Tested & Verified.

    **DETAILS IN LEADS/FULLZ**

    ->FULL NAME
    ->SSN
    ->DATE OF BIRTH
    ->DRIVING LICENSE NUMBER
    ->ADDRESS WITH ZIP
    ->PHONE NUMBER, EMAIL
    ->EMPLOYEE DETAILS

    *Price for SSN lead $2
    *You can ask for sample before any deal
    *If you buy in bulk, will give you discount
    *Sampling is just for serious buyers

    ->Hope for the long term business
    ->You can buy for your specific states too

    **Contact 24/7**

    Whatsapp > +923172721122

    Email > leads.sellers1212@gmail.com

    Telegram > @leadsupplier

    ICQ > 752822040

    ReplyDelete
  9. i am a successful business owner and father. I got one of these already programmed blank ATM cards that allows me withdraw a maximum of $5,000 daily for 30 days. I am so happy about these cards because I received mine last week and have already used it to get $20,000. Skylink technology is giving out these cards to support people in any kind of financial problem. I must be sincere to you, when i first saw the advert, I believed it to be illegal and a hoax but when I contacted this team, they confirmed to me that although it is illegal, nobody gets caught while using these cards because they have been programmed to disable every communication once inserted into any Automated Teller Machine(ATM). If interested get through to them on mail: skylinktechnes@yahoo.com  or  whatsapp/telegram: +1(213)785-1553  

    ReplyDelete

  10. We offer custom boxes that give you full liberty of customizing the entire packaging at every step. Packaging is the first thing a customer notices. It has to be spot on to appeal to the customers. The visual appeal ticks a customer before they could actually choose a product. Packaging is the first impression we are committed to make that leaves a lasting impact on the customers.
    Custom Packaging Boxes USA
    Soap Boxes
    Slider Boxes
    Nail Polish Boxes
    Lipstick Boxes
    Pillow Boxes
    Custom Lip Balm Boxes

    ReplyDelete
  11. This is true value content. Your blog post is awesome & very related to the topic. We Provide Hair Fall Treatment with Hair Patches. Our Latest video topic is Mirage Hair Patch Video. You can check this video. To book your service call on +91 9250504810.

    ReplyDelete

Add a comment. Registration required because trolls.