Money Report

The Price of Oil Should Taper Off

Oil has been on a tear. On May 20 a barrel of crude traded at a six-month high of $62.04, up 83% from its February low. The market is responding to the first signs of hope for the economy and rising demand from emerging markets. Shares of oil drillers have benefited, with companies including Atwood Oceanics (ATW), Ensco International (ESV), and Transocean (RIG) up over 50% since the stock market bottomed on Mar. 9. Still, the price of oil may have gotten ahead of itself. Few expect it to fall back to $30 a barrel, but some analysts say a more realistic price may be $45 to $55 a barrel. The drillers, however, don't need $100 oil to thrive, says Dennis Bryan, co-manager of FPA Capital Fund (FPPTX), a value fund with $766 million in assets. "These companies are going to generate a tremendous amount of cash flow and earnings," he says. Still, wait for a pullback of, say, 10% before jumping in.

A Carry-Trade Comeback

On May 25 the U.S. dollar fell to a five-month low, a sign that fundamentals—not fear—may be driving the currency markets. During normal times countries with higher interest rates, such as Australia, attract capital, causing their currencies to rise, and those with low interest rates, like Japan, lose capital, causing their currencies to fall. Traders profit from these fluctuations through a swap known as the carry trade. In this deal, they sell a low-interest currency (like the yen), which they expect to fall, and buy one with a higher yield (like the Aussie dollar). The more the gap between the currency rates widens, the more money traders make.

The strategy fell apart during the financial crisis, as investors fled to safe havens. Values of low-interest currencies rose, high-interest currencies dropped, and traders took huge losses. Now the pros are nibbling at the carry trade once again. "We think it's a good time to start easing in," says Jonathan Xiong, director of global asset allocation at Mellon Capital Management. Investors can take part by shorting the CurrencyShares Japanese Yen Trust (FXY) and buying the CurrencyShares Australian Dollar Trust (FXA). Or they can buy the PowerShares DB G10 Currency Harvest Fund (DBV), which replicates the carry trade strategy with 10 currencies and avoids riskier emerging markets. After losing 28% in 2008, shares are up 8% in 2009.

Credit-Card Bonds

President Barack Obama signed sweeping credit-card legislation into law on May 22, prompting fears the profits of credit-card companies will take a hit. Some money managers now see better values in the investment-grade bonds of credit-card companies than in their stocks. Jeffrey Auxier of the Auxier Focus Fund has owned american express (AXP) stock for more than a decade, but he bought American Express bonds in April. Auxier likes Amex's senior bonds, which mature in 2013 and are now yielding 7%. Charles Kantor, a portfolio manager at Neuberger Berman, in early may purchased some credit-card bonds that mature in 10 years, also yielding 7%—but he won't name names. "We are focusing our attention on financials that don't need to raise additional capital," he says.

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