Energy Prices Down Big Today

Energy prices are down again today huge due to the above normal temperatures across the Eastern United States. Oil prices are down to $56+ per barrel, natural gas prices are below $6.50 per btu, and gasoline and heating oil are both trading lower as well.

My belief is that these price lows are temporary due to weather, a slowing economy, and a US dollar that is reflating in the short-term since the dollar has dropped significantly in December against most major currencies. A major energy trader on CNBC noted that oil supplies have been gradually decreasing in the US as the prices have been going lower. He noted that if demand should spike due to abnormally cold weather or due to a heat wave this summer, then prices could be much, much higher from where they are today.

The best market gains can always be made with contrarian bets. Today presents one of those contrarian opportunities if one is underexposed to energy and wishes to increase their commodity exposed and is not afraid of volatility over the next couple of years, particularly with many energy stocks trading at 2007 expected P/E ratios of below 10.

Mutual Funds had Large Distributions in December

A friend of mine asked me for a few mutual fund recommendations for his IRA shortly after Thanksgiving. He took my recommendations and spread some of his money among those mutual funds. Last week I spoke to him and he said that he sold out of two of the funds because he noticed the share prices had dipped 10%, and the correction made him nervous. I asked him whether he had looked at the number shares owned in each of those funds and the total value of the money invested in each fund, and he hadn't. I told him that he worried for no reason and he should have called me before selling the funds. Here is why.

Mutual funds that have been successful disburse a portion of the fund for capital gains purposes in mid-December each year. In the case of a retirement fund, the gains get reinvested into the mutual fund, so one ends up with more shares of the mutual fund at a lower price. My friend was not aware of this and thought that his investment in the mutual funds that recently had distributions had actually declined rather than stayed even or even increased.

Always consult your financial advisor prior to selling a mutual fund because of a perceived loss that may not actually exist due to capital gains distributions.

So what are capital gains distributions? They are a distribution of profits from a mutual fund that result from the sale of securities in the mutual fund portfoliothat are taxed in a taxable account.