NEW YORK (
) -- I was just on
for oil for the rest of the year and beyond.
Although the spot was about oil, an interesting conversation emerged about investing that went beyond just the oil market -- and my ideas on investing, and how to go about it.
I was given only six minutes on air to try and get the point across and couldn't. But now, back at TheStreet.com offices, I can give you a fuller explanation of what I needed to say on air.
Trish Regan asked me for my advice on how to invest in oil for the next year or the next 10 years and give my outlook. And the question made me think about how I trade oil of course, but also my general game plan for investing in everything.
To me, the art of investing is all about finding dislocations -- historically unusual relationships that are more likely to "correct" themselves to historic norms. On the TV spot, the question pertained to the dollar, which has continued to show relentless weakness, and which had been impacting the price of oil to the upside for weeks. Since the dollar is so closely correlated to the price of oil, you must track and try to predict the dollar's movement in order to correctly predict the future price of oil.
I said on the air that I see enormous dislocations in the technical nature of dollar trading right now. I said I expected a significant technical rally of the dollar and with it, a technical downdraft in the price of oil, perhaps as low as reaching a 50-handle (somewhere in the mid to high $50-a-barrel level).
Looking beyond that, I was thinking of all the great trading opportunities that are almost always to be found in the dislocations we can uncover.
At the March lows of this year, the dislocation in credit spreads pointed me to seek out high-yield and convertible bonds as a possible investment of value.
The historic price differential between crude and natural gas is normally between six and 12. But recently, natural gas had sunk to levels making it 25 times less expensive than crude. Although the fundamental story for natural gas was bleak and remains so, it still did not stop me from examining natural gas stocks as a better value for investment in the energy sector, compared to integrated oil. We've seen some rallying in the price of natural gas, but an even firmer uptick in the natural gas stocks usually correlated to gas prices.
Sometimes, dislocations and betting in the "return of normalcy" can be a dangerous investment game. Long Term Capital Management's disaster story in foreign debt and bond volatility, to name one famous result, was a misinformed bet on a dislocation that never ended. So you have to watch the fundamentals, too.
But in debt spreads, for example, the fundamental would be a 50% default rate on corporate debt -- very unlikely. And for natural gas, it would be a halt in the widespread use and conversion towards Natty, which looks impossible right now.
For refiners, depressed because of horrible and dislocated margins from crack spreads, the fundamental would be a move away from gasoline in powering our cars -- very unlikely indeed. And with the dollar, the fundamental that would have to change is if the euro becomes the currency standard. Possible, but not within the next few months.
It's on these types of dislocations that I will find the best trading and investment opportunities. Keep your eye out for them and try to ignore the fundamental arguments. Remember, it is the fundamental argument that inspired the dislocation to begin with.
-- Written by Dan Dicker in New York
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.