Big Mike's Contrarian Investing Blog

Iran and the oil risk premium

Oil is surging. I sure regret selling my oil stocks.

The current price clearly represents a risk premium associated with the British soldiers being held by Iran. The worst case scenario (or best case from the perspective of investors long oil) is that a war with Iran results in Iran cutting off oil supplies from the Persian Gulf, which would cause an unprecedented spike in oil prices. I’m not the only person who knows about this worst case scenario. It’s factored into the current price.

Holding these sailors hostage is a pretty dumb diplomatic move. If Iran’s goal is to obtain nuclear weapons, Iran ought to be laying low until such weapons are finally ready. Then Iran can act all belligerent and say, “Ha ha, we have nuclear weapons, what are you gong to do about it?”

It also doesn’t make sense to piss off the British. When Argentina pissed them off by taking over the Falkland Islands, they went to war against them.

The most likely resolution is that Iran will give the sailors back, there will be no cutoff of oil, and prices will retreat.

Sold more HEC

Since I purged my portfolio of oil and gas stocks, the stocks I sold have gone up, while the ones I kept (half of HEC, TRLG, LIZ) have gone down.

So I have no doubt that, by now, no one is listening to my advice.

Today I got rid of more of my HEC. There are sill 20,000 shares in my IRA, but at the current low price of 0.40 that's worth bubkes.

The theory still remains that the global recession to be caused by the coming crash in real estate will cause the price of everything to go down.

Bill Fleckenstein says the economy is tanking

Bill Fleckenstein says that the economy is tanking, on account of the collapse in the housing market.

I wonder if he's still bullish on gold and silver?

I sold all of my oil and gas stocks

Today I sold off nearly all of my oil and gas stocks. I still have a few shares of HEC and a pink sheet stock that's hard to unwind, but that's it. (This is sure going to be painful a year from now when I have to pay capital gains taxes on everything.)

People who followed my recent advice to buy HEC and EPEX lost money. Sorry.

This was a pretty tough decision, because I've been bullish on oil and natural gas since 2000. That's seven years of bullishness. But I suddenly realized that the oil and gas sector has been in a bear market for a year and a half now. I don't want to ride a sinking ship down further.

Some might think "ah ha, here is the final capitulation of a long time bull, and that means the market has bottomed." I sure hope that's not the case. I saw Phil Flynn on CNBC this morning being bullish on oil, so I would think that means I'm not the last person to capitulate. Phil admitted that oil will tank if the economy goes into recession.

The unraveling of the subprime mortgage lending market ought to be a clear signal that a recession is coming. Alan Greenspan said recently that there was a one third chance of a recession. And he has been an eternal optimist for ages. So while, in the long run, oil and gas are great investments because of the Peak Oil theory, in the short run it's a bad investment because of the coming recession.

That's my take. If there is now a huge surge in the oil and gas sector, I surely know that my investing magic is completely gone.

Natural gas storage report

102 bcf draw.

This is less than the 5-year-average draw of 117 bcf for the same time period.

Next week the draw will be way above average because it's damn cold here in the northeast. But the next draw will also most likely be winter's last hurrah.

Meanwhile, my recent stock recommendations of Edge Petroleum (NASDAQ: EPEX) and Harken Energy (AMEX: HEC) have not performed well since I recommended them. No wonder why no one reads this blog.