This is where your finance takes place

If you’ve been in an igloo for the past 12 months, I’ll understand that you don’t know what I’m talking about, but if not, no excuse. The past few months have seen major write-offs by the biggest banks in the world, usually American ones. The problem that was going on was mainly caused by asset backed securities. What are they? It’s basically a structured security that is a loan but with a guarantee. Say what? Ok, so you all know what a mortgage is right? Imagine that the bank that gives you your mortgage actually sells its obligation (the loan) and rights (to your payments but also to your house if you do not pay). And let’s say instead of selling your mortgage, they sell 1000 of them at once. Now we’re talking right?

See the problem yet? If the Bank is getting paid for each mortgage that they sell (a spread), what incentive do they have to make sure you can repay your loan? None basically. And why should they worry, they were reselling the loans to investors around the world who had no idea what was behind the loans (a 500K mortgage given to a couple that makes a combined 50K salary..). So anyway, the whole story now is that after the major writedowns of the past few months (and even this week Wachovia Bank (WB) made a 9 billion writeoff), many analysts now think the worse is past us and that it’s time to buy the financials.

No doubt, after months of very tough times, the past week has been the past in a long time for financial stocks in a very long time. And with a lot of stocks having lost up to 70% of their value, they still have a long way to go if you think the crisis is over. I thought about different ways to play this, perhaps buying Citigroup(C) but decided to buy an ETF instead. First I was going to buy XLF (Financials ETF) but eventually changed my mind and bought UYG (Ultra Financials Pro Shares), an ETF that replicates two times the performance of the financial sector. Risky? Hell yes. But I’m taking a risk on this one… I made my buy at 21.25 so we’ll see how it goes. Right now I’m thinking I’d get out once my money is doubled, we’ll see, that could change as my opinion of the markets changes. See the 1Y graph below… has a lot to catch up hey?

As discussed in my latest column, over the past few years, it has become increasingly easy for anyone to play different strategies and markets that were unavailable only a couple of years ago. One of the best examples is surely oil!! It’s the story everyone has heard about. In the past year, oil has more than doubled and many reasons are given to explain the rise. Mainly, the constant demand rise (especially from emerging economies as well as China (not getting into the debate about China being an emerging economy today!). Also, a lot of blame has came from a lot of new investors now investing in this market. I say blame because mostly the rise of oil has hurt consumers around the world, but like any price movement, it’s possible to profit from it (more later!)

But there also seems to be a growing sense that oil is giant bubble that will collapse one day or another. Possible? I certainly believe this thesis. Of course, it’s difficult to predict if the fall will come after oil has reached 150$, 200$ or more… We have all heard crazy predictions but it’s exactly when something is always expected to go up that they eventually go down.

So anyway, today I wanted to present 3 different ETF’s that give you the option of playing the oil market. First off, USO, one of the biggest ETF’s around, that generally moves very closely to the movement of the crude oil that we all hear about. It is a great way to get into the oil investments without all the complications of buying futures (margins, rolling your positions to avoid delivery, etc). As you can see from the graph above, USO has risen about 50% in the past 6 months, not a bad investment hey?

Then, I will also introduce 2 leveraged ETF’s. In the near future, I will discuss the pro’s and con’s of constant leveraged ETF’s (there are obviously some drawbacks). Basically, the aim of these funds is to replicate the return of an asset (Oil in this case), but double the return. So you can buy the BetaPro Bull Fund (HOU.TO) and it should return 200% of your return (minus fees). If you think Oil will go down, it’s time to buy the Bear fund (HOD.TO). As you can see from the graph the returns were a lot more volatile, but if you got it right 6 months ago, you would have enjoyed a 100% return instead of of 50%. But then look at the nice graph from the Bear Fund and you can imagine what would have happened if you thought 100$ for oil was way too much.

So that’s it for now! Best of luck in your oil investments!

You will also have a very large array of possibilities of options if you would like to do so.

The problem with trading futures is that it’s not so straightforward. If you do not know how futures work, here is a quick breakdown. You will buy or sell a commodity, let’s say Crude Oil. When buying or selling, you are not sending any money for the trade. What? Yes, you read correctly. Instead, you will only be sending money when you lose money (if crude oil goes down) or you will get credit if the crude oil price goes down. This process is done daily. Straightforward right? Sure, but the problem is that your broker/exchange will not know how much money you have and thus how much of a loss you can sustain. For that reason, they will require that you post a margin, usually an amount of money left in your account in case your position loses money and you’re not able to pay for your loss. Because of that, it’s not easy to trade for beginner investors.

ETF’s

Probably the easiest way to trade commodities is to trade ETF’s that are created to replicate certain commodities. These are bought the same way a stock is bought. The main advantage is that they are very easy to buy, trade, do not require a margin. The drawback for now is that only a few commodities (Gold, Oil, etc) are available. You can also play the Agriculture sector, but playing corn for example is more difficult….

Single stocks

And finally, you can buy specific stocks to gain exposure to specific commodities. For example, you can buy Suncor (SU.TO) if you wish to gain exposure to oil prices as the company makes a lot more money selling its oil with high prices than low prices.

That’s it for now, we’ll go into specific strategies in the coming weeks..! Stay posted!

image source : mmwinvestments.com

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