I bet you’ve noticed the prices at the pump! It’s pretty crazy.  Two days ago I heard an analyst on 680 News saying that there was no reason for gas prices to have escalated at the pump.  He’s got me all fired up – I don’t believe the guy knows what’s going on in the world.

Crude oil prices have been moving up silently for the past few weeks, the sudden jump is because of a few reasons that won’t be going away in a hurry.  Here they are:

1.       The Fed’s statement that it will buy USD40 billion worth mortgage backed securities is a signal that the economy has not stabilized yet.  While the market was hoping for a stimulus, when it came it confirmed the fear that things were not well.  So we got what we wanted, but that wasn’t really what we wanted.  What we really wanted was a signal that the economy was beginning to thrive.  We did not get that signal.  When the economy thrives, people do things, they travel etc., companies gear up production, and all of this translates into a demand for oil and other commodities.

2.       Because a lower demand is expected and for other financial reasons not relevant for this discussion, the number of oil rigs operating in North America is 50% lower than last year.  This means that the supply of crude in the future will be lower.  If you think prices are already too high, keep  your eyes peeled you will soon see the price at the pump go over$1.50 a litre.

3.       Another complication is the political situation in the Middle East.  The question about the strike on Iran is “when?” As Iran is a key player on the supply side of crude, this does not arguer well for prices at the pump.

What should we do as consumers? Watch our belts – stop using those credit cards – you should absolutely leave home with out them.

What should we do as investors?  Well, isn’t that an interesting question.  If you are 15 to 20 years away from retirement, you don’t need to pay any attention to the news – just keep socking the monthly 10%. 

If you are five years or less away from retirement, then I would say build a core portfolio of blue chips and take specific satellite positions in banking, new technologies, real estate and health care.  These specific positions should be the part of your portfolio that does not need to come into play for the next ten years.

If you are a retiree who is consuming investments, you’ve got trouble.  Bonds are no longer a safe place for you to be, and if you are going to buy bonds, for heaven’s sake don’t get into a bond mutual fund.  Buy a high coupon and hold it to maturity with the intention of consuming the coupon payments.  Be careful about investing in stocks – dividends are still good for health, and growth sectors are still good for your ten year money.  However, I strongly advise you to keep the next 2 years of income in cash or GIC.  This will insulate you towards the events of the market.
Be wary of stocks in the energy sector – with everything that’s going on in the world, if we get hit with another warm winter, investments in the Canadian side of the sector will not do well.

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