Qaddafi Duck

March 2, 2011 - John Osbon (2 mins to read)

All eyes are on Libya and its infamous dictator, Colonel Qaddafi. Beyond his support of international terrorism and his murderous assault on his own people, Qaddafi is truly an odd duck. Whether he threatens martyrdom while wearing earmuffs on national TV, insists he can’t resign because he “holds no position,” or is accompanied by young gun-toting female bodyguards, his actions are eccentric, unpredictable and ruinous to everyone except himself.  Qaddafi may appear cartoonish and buffoonish, but he is also very dangerous.

(His nearest dictator rival in weirdness, Hugo Chavez of Venezuela, who had already changed the national flag and coat of arms to his liking, proposed a unique time zone for Venezuela, set to the half hour, to “save time.”  Dictatorial self-absorption knows no limits, I suppose.)

His quirks aside, Qaddafi and what happens in Libya are serious business, since Libya is one of the carefully balanced Jenga blocks of “frenemies” that is the Middle East.  Trouble in Libya means trouble for everyone. Unrest there applies a “fear tax” on the price of oil.  Oil is up markedly since the civil unrest and regime change in Tunisia, Egypt, and now Libya. Unlike Tunisia and Egypt, Libya is a major oil player, ranking 9th in world reserves, ahead of the US at #11.

Who has the oil

Enlarge Map here.

What does oil price instability mean for your investment portfolio? It may seem obvious that higher oil prices would hurt stock prices by raising the cost of doing business and depleting disposable incomes. But real price data tells a different story. As the chart below shows¸ there is very little recent correlation between the Dow (blue), an index of global oil stocks IXC (red), and OIL, an exchange traded note meant to track the price of oil (green).

Stock prices change in reaction to many factors, real and perceived. Trying to base investment decisions just on future oil prices – which are themselves impossible to accurately predict – is narrow-minded speculation, in my view.

Remember that between December 2007 and December 2008, the price of oil went from $88 to $145 and back to $37. Meanwhile the Dow fell from 13,000 to 8500, under the weight of the mortgage meltdown, another unpredictable (or at least largely unpredicted) market influencer. Even if we knew in advance what oil prices would do that year, who would have guessed where stock prices were going?

Instead of guessing, we index. By holding a wide variety of asset classes over the long term, we avoid the temptation to jump in or out of securities based on the hour-to-hour news feed. Because the last thing we want to do is base investment decisions on the words, actions or costume changes of a quack like Qaddafi.

Weekly Insights

delivered to your inbox


This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.

Weekly Articles by Osbon Capital Management: