Mutual Finance

Oil price rebounds on Thursday October 5th, 2006 on the news that OPEC will cut 1 Million barrels per day production effective immediately. Saudi Arabia, the largest OPEC oil producer, will reduce its output by 300,000 barrels per day. Will this production cut help oil price? OPEC members certainly hope so.

In the short to medium term, I feel that it is a futile effort. For starters, after a nearly harmless hurricane season over the summer, winter is predicted to be warmer this year. As a result, energy consumption is expected to be less burdening.

Secondly, the US crude distillate stocks rose by 3.3 Million barrels last week. That signals the buildup in inventory which is bearish for oil price going forward. Furthermore, the rise of oil price this past year was accompanied with rising inventory, which is puzzling. Therefore, it is about time that oil price declines, no matter what the inventory figure is. That being said, it will take a lot of declining inventory to help prop up oil price.

Thirdly, the rise of oil price has triggered a new oil exploration that would otherwise will not be funded. This project will bear fruit after five to ten years. It is expected that the first batch of this new project will come online within the next one or two years. To recover the huge capital expenditure, it will be best for this new oil production field to keep producing oil. That will put pressure on oil price further.

Fourth, the federal fund interest rate is at 5.25% versus 1.00% several years ago. This would scale down speculations which we believe has contributed significantly to the rise of oil futures. When you can get 5.25% by doing nothing, you would be inclined to not borrow huge and simply put your money in the bank. Furthermore, the effect of interest rate change is felt 9 to 12 months ahead. The Federal Reserve started lifting its fed fund rate on June 30th 2004, until now. Therefore, the effect of 5.25% interest rate will still be felt around one year from now.

Fifth, housing market in the United States has slowed down considerably. Home builders had reported declining profit expectation in the midst of severe slowdown in some areas. There are some bold predictions that forecast a double digit decline in home price until 2009, however, even the most optimistic forecast still foresees a modest decline in home price. This is a picture of a slowing economy, which will dampen demand for oil.

Sixth, natural gas blown out by Amaranth hedge fund, showed how dangerous speculating in commodity market is. This will temper down speculative bet on oil, natural gas for quite some time. We feel that those speculative bet has helped prop up oil price in recent past. Further, the Amaranth blow out clearly shows that commodity price has many speculative excess that can burst anytime.

Seventh, natural gas price and other energy sources has declined sharply. Energy price will generally go hand in hand. If natural gas price has dropped by more than 60% while oil price dropped merely 25%, it brings us two possibilities. Either natural gas price will rise while oil stays constant, or natural gas price will stay constant while oil price will drop. With the action of OPEC members to hastily cut production immediately, we believe that it is the latter.

Eighth, technologies has helped companies getting smarter in locating oil patch. On September 5th, 2006, Chevron announced that it has successfully discovered oil in deep Gulf waters that boost US’s oil reserve by 50%. Yes, you heard it right. 50% more. While it will need billions of dollars to extract the oil and distribute it, it shows that high price of oil will stimulate more exploration and deep drilling. Therefore, oil price cannot rise indefinitely.

Ninth, OPEC members are as addicted to oil as we are to our SUV. They need the oil money. Who would oversee that OPEC members reallly abide by the production cut? In the past, some OPEC members will ‘cheat’ by overproducing and sell it on the black market. While price has dropped over the last two month, oil price by historical standards is still quite high.

Tenth, one of the culprit for high oil price is China, where it has been gulping up oil for its rapid economic growth. That may be true, but China’s economy has grown in the double digit each year way before oil price gets this high. We believe that the recent commodity sharp rise has anything to do with China hosting the Olympics on 2008. It built up its infrastructure ahead of the game and as 2007 approaches, I believe that the construction is almost complete and commodity demand will slacken in the next year, including oil.

In the long run, as oil is in limited supply, its price should rise. However, in the short to medium term, oil price may have taken a breather due to the ten reasons above. All these forces has made it extremely difficult for us to be in the bullish mode for oil, at least for the next twelve months or so.

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When this president’s father was in the Oval Office, he was fond of singing the praises of the “New World Order” that was to arrive. The phrase carried a lot of baggage, especially with conservatives who had long heard the term associated with a one-world government with little room for individual rights. Some believe the first George Bush’s attachment to this term hurt his chances for re-election, and contributed to the movement that brought Ross Perot into the fray and split the conservative vote.

The current president has steered clear of the specific terminology, but only an ostrich with his head in the sand would say that we are not moving headlong toward a reorganization of the world system, and it has become clear that individual rights are at risk. The war in Afghanistan was not only inevitable, but was probably desirable. Iraq was no ones’ friend, and even those of us who questioned the wisdom of invasion had difficulty opposing the end of such an abusive regime. However the trend is disturbing as we now speak casually of invading Syria, Iran, or North Korea. Not only does the war posturing make us globally unpopular (and therefore unable to extol the virtues of free markets), wars also bring with them serious limits on freedom at home. We’ve begun to see some of that.

Laws like the Patriot Act are so comprehensive that most of us are likely violating a half dozen edicts without knowing it. The difference this time is that conservatives are largely supportive of all these actions. Strangely, all the things that Bill Clinton could never have gotten past the Republican Congress are sailing through with little forethought.

Meanwhile, we have lost the attention of nations around the world. We imagined that the menace of communist based philosophies died with the Berlin Wall, but now we are faced with socialists winning elections worldwide. The new look of the “World Order” is not a pretty one, and clearly not one that values freedom. Yet we have no voice in world affairs, where many smaller nations have begun to view America as a bully. The fact that we are “in the right” isn’t important in this area, as one cannot force freedom’s acceptance. It is a tenuous choice that a nation must make for itself. The approach we’ve taken recently has limited our ability to offer our wisdom.

In light of these world changes, it may be wise to consider our investment strategies. It is fair to say that investing overseas may meet with some difficulty, but if trends continue, we may see trouble here as well. Alas, so much of American business success is due to exports, yet we’re faced with protectionist barriers coming up against us in many nations. Some of this is justified, because although other nations tend to have much higher barriers, America has recently begun to impose rather restrictive tariffs as well. The idea of a free-trade zone, such as NAFTA, actually is an enemy to true free trade, because it actually prevents free trade with nations outside the limited trade bloc.

All of this may eventually impact American companies, as they find international trade opportunities severely restricted. The past two decades were a time of relative freedom internationally for travel, trade, and discussion. That may change, and if it does, the impact could be devastating. The last time we restricted world trade to this extent, the period culminated in the great depression. We’re a long way from that today, but without some wise leadership, we may find ourselves facing further difficulties. Thus far, sadly, this administration has shown little strength in economic issues.

Changes in the world make our investment strategies critical to our future. More than ever, a careful plan is vital to our ability to weather the storms that may come in the economy.

To send comments or to learn more about Scott Pearson’s Investment Management Service, visit http://www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor’s Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.

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How many legs does a dog have if you call the tail a leg? Calling the tail a leg doesn’t make it a leg. — Abraham Lincoln

Whew! I almost wrote a really long article about the Social Security System and what it means to Black folks.

Fortunately, I fell asleep while writing it just like you would have reading it. I can’t think of anything more boring then an in depth analysis of what is wrong with Social Security.

I think that one thing the under 40, Black American, internet savvy crowd already knows is that the Social Security system is in trouble and that it won’t be there for us when we retire the same way it is for our parents and grandparents. Something has to give.

One thing is definitely true, the Social Security system won’t exist in the same form and with the same level of promise that it has now.

So, with all the boring stuff out of the way, I want to say a few things about private accounts and what I think they mean for African Americans. I’ll start with the bottom line up front. I think that Social Security private accounts are a good deal for African Americans but with some very serious reservations.

First of all, a private account is the government’s attempt to add an ownership component to the system. However, in this case, your ownership rights will be severely restricted.

I can invest MY money in stocks, bonds, cash, real estate, businesses, mutual funds and any other investment vehicles I so choose. The private accounts system will likely offer a limited range of choices in nothing but paper assets like stocks, bonds and money market accounts that are managed by large Wall Street brokerages and mutual funds - the so-called experts.

Ownership with restrictions is merely the illusion of ownership. Very few things you own will have as many complex rules, restrictions and legal entanglements as private account will have attached to it.

Second, the government is forcing every American to become an investor without committing the resources to raise the level of basic financial literacy in this country. Alan Greenspan has said that basic financial literacy should be taught in our public schools.

The government did this very thing before when they created the 401K retirement system. That system has been a boon to Wall Street, Corporate America and many fellow Americans. However, the pain felt when the 401K gets hurt is not shared as freely as the benefits. Ask employees at Sun Microsystems, Enron, Martha Stewart Omni Media and other companies that have gone belly up or otherwise taken a brutal pounding in the stock market because of mismanagement and corruption.

Who will get hurt when Social Security private accounts take a beating? Will the average citizen be the last to know, as is already the case, when their private accounts hit rock bottom? Without a major, national effort to boost the financial literacy in this country, how will people react to negative news about private accounts? Will the government restrict our ability to react to negative news?

Third, what will the government do should you out-live your private account? Because the account only offers limited ownership not real ownership, I expect that we won’t be able to bet their private account at the casino on the day they retire. I do expect the withdrawals from our private accounts to be amortized over a period of time based on something like the average life expectancy. What happens if you are the lucky somebody that lives a long, healthy life to 120 years old? If your account goes broke, what will the government do for you? If you enroll in private accounts, you agree to a cut in your benefits. Will you suffer if your private account suffers?

Fourth, the new promises are just as shady as the old ones. Private accounts will salvage the system for some time but ultimately will become plagued by their own, new and different challenges that will need to be fixed by a future generation.

No one in either political party wants the truth to get out about Social Security. Socialism is a miserable failure. Taxes will ultimately have to be increased on us no what fix we decide today for the system. When and by how much are the only questions that need to be answered. Cuts and elimination of some benefits are inevitable. Retirement will become anathema in the future.

In the past 10,000 or so years of human history, retirement didn’t exist in any way, shape or form as it does today. People either got too sick to work or died. We’ve tried to change history with our current system but we can’t change humans.

If you send someone a check and tell them they don’t have to work anymore, they won’t work. There are able-bodied and able-minded senior citizens that are not working because the governments sends them a check every month regardless. The truth is, a system set up like this will collapse one day on its own because its not the way of humanity.

I think its good that my generation believes more in UFOs then in Social Security being there for us when we retire. maybe that belief will be the motivation we need to save outside of Social Security to secure our own retirement.

So, with all of these reservations, you may wonder why I think that Social Security private accounts are a good for Black Americans. The answer to that is simple math.

Simple Math Reason Number One: Black males live to an average age of 66 years old. The average Black male now collects one year of full Social Security retirement benefits. The age of full retirement for the under 40 crowd is now set at 67. Watch for proposals to raise that age even more. The average Black female has a live span of 72 years meaning that she collects 5 years of benefits. The average White male and White female have life spans of 76 and 78 years, respectively.

Personally, I would rather pass my life time of Social Security tax dollars on to my children and grandchildren then to a little, old white lady I’ve never known in my life like we do now under the current system. You may not like this truth but that is who is getting your benefits now.

Simple Math Reason Number Two: It is not hard at all for the to earn more then the 2% return on investment that Social Security provides now. A money market mutual fund is paying anywhere from 3% - 5% interest at this time. You could easily and safely earn double what Social Security offers.

Simple Math Reason Number Three: The average Black American has a net worth less then $5,000 and that is only one-tenth of the average White American. Social Security private accounts, because they are form of forced savings, will add to the net worth of Black Americans. All other Americans will see their personal wealth build also so I don’t expect that private accounts will close the racial wealth gap. I do believe that private accounts will inject much needed wealth into the accounts of African Americans and we need the boost most of all.

Also, because we don’t live as long beyond the retirement age (which I hope will one day change), more of the wealth in our private accounts will get passed to our children, helping them to build wealth. So, a legacy of wealth will begin to grow from the seeds of investment into private accounts.

Simple Math Reason Number Four: This relates to what I said about bucking human history by creating this artificially constructed, man-made system of retirement and actually believing that it will sustain us unchanged in perpetuity. The system is breaking down. We need to start taking complete ownership - and control - for our retirement security.

Partial privatization is a step in the right direction. Even if the step is one small incremental one, we must begin somewhere.
I don’t think the destitute and disabled should be left out in the cold without our help and support. I do believe that the truth needs to be told and that no one is telling it today.

So, here is what I have to say: make a plan to provide for your own financial independence, invest heavily into your own financial education, invest your money wisely, prepare for the absolute worst and hope for the absolute best.

God Bless

Bret Searles wrote the book titled “The 7 Simple Secrets to Wealth Building: An African American’s Guide to Wealth Building in the 21 st Century and Beyond” and publishes the ezine Black Wealth Now at http://www.blackwealthnow.com

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