Some Investors Dodge a Bullet

Winston Churchill has been quoted as once saying, “There’s nothing more exhilarating than to be shot at and missed.” Such must be the feeling of investors today who found recently they had rather more exposure to falling crude oil prices than previously thought. Chevron just announced  the indefinite suspension of a project in the Canadian Arctic, an unsurprising response to lower oil prices. Some of the most expensive fields are offshore, and the impact is being felt squarely by companies such as Transocean (RIG), down 62% YTD, and Noble Corp (NE), down 48% YTD.

Investors lightening up on energy exposure are in many cases selling everything in that sector, often by lightening up on an ETF. So the S&P Energy ETF XLE is down 32% YTD including companies like Kinder Morgan (KMI) and Williams (WMB) with their predominantly fee-based business models.

It further occurred to me that the historic linkage between lower oil and slower economic activity may well be provoking many risk models to quantify investments in cyclical companies as more risky than before. Crude oil usually falls in price as economic activity weakens, but rarely causes such absent other factors. A historically high correlation between crude oil and GDP may well be influencing quantitative measures of risk in spite of the generally positive impact on GDP. Unfortunately there is no data available to support this so it’s really just a supposition on my part, but seems quite plausible to me.

Meanwhile, stocks such as truck manufacturer Navistar (NAV) and Hertz (HTZ) which can surely only benefit from lower gasoline prices notwithstanding their recent weakness are both benefiting from Carl Icahn adding to his holdings.

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