Question: What are the oil companies planning on doing with their record profits? Will shareholders see some love, or will the companies just boost high-level executives' salaries? — Chris (Cleveland, OH)
Jonathan Hoenig: While congressmen chastise oil companies over "excess profits", they might also mention how much the companies are investing, spending billions of dollars to improve infrastructure, explore for more resources, and help make safe, affordable energy a reality for all Americans.
Oil and natural gas doesn't just come flowing out of the tap. It takes the ingenious, profit-seeking capitalist to actually get it out of the ground. According to the American Petroleum Institute, the industry will spend $86 billion on capital expenditures this year, up from $76 billion in 2003. ExxonMobil, for example, will spend approximately $18 billion a year from 2007 through 2010. Chevron is currently operating 20 exploration projects that involve outlays of $1 billion or more. There is big risk in spending that kind of money, and we should be thanking big oil companies, not demonizing them.
Also, a great deal of their profit goes right back out the door to investors in the form of stock dividends. Royal Dutch/Shell Group, for example, will pay out at least $10 billion in dividends to shareholders this year. BP will return as much as $23 billion. That money goes to "Fat Cats" yes, but also to pension plans, retirement programs and the bank accounts of plain ol' average Americans.
If the companies do decide to boost their executives’ salaries, it will be well-worth it given their level of expertise. Running a multinational oil company isn't like bagging groceries at Safeway. Not everybody can do it. Those who are successful deserve to be compensated at whatever the market will bear.
Question: Now that my wife and I have sold our house for a nice-sized profit, we would like to seek the help of a financial advisor. I’ve never used one before, and am not really sure what I should be looking for and asking during the selection process. Any ideas? — Jay (Abilene, TX)
Jonathan Hoenig: I'd look for an investment adviser who is actually involved in keeping an eye on your money. I know far too many money managers who spend their days in meetings, on airplanes, at lunches or on sales calls. They're doing everything, it seems, except for watching clients' portfolios. There are plenty of multimillion-dollar portfolios out there that are left adrift like ships on a sea. If your adviser isn't keeping an eye out for icebergs, who is?
So when interviewing managers, don't be afraid to ask! Does someone review the portfolio every day? Every week? Is someone maximizing your cash balances or considering the effect of noncorrolated assets? How are investments screened? Is the portfolio allocation made all at once, or gradually over time?
I wouldn’t look for an active trader, but an actively engaged investor. Most financial advisers can tell you the average annual return for stocks over the past 72 years, or what some Morgan Stanley honcho thinks about the economy. But do they know how to trade? Unfortunately, many individuals put their trust in financial advisers who know precious little about the nuts and bolts of managing a portfolio. What are their performance numbers? Actual results, not hypothetical returns, are vital in separating the wheat from the chaff.
I’d only work with someone who invests his or her own money right alongside their clients. Of course, anybody promising easy money or a fast buck should be avoided altogether. The best place to start is referrals from trusted friends or other professionals, such as your accountant or attorney.
Question: I am a 52-year-old male who earns $35,000 annually. I also work a second job that brings in $300 a month. I have no private retirement savings and live paycheck to paycheck. Can someone like me possibly start a retirement plan at this point? What can I expect in terms of eventual value? — Scott
Jonathan Hoenig: Before you can invest, you must save. And right now, as much as it hurts to admit it, it sounds as if you aren’t cut out to be an investor as much as an aggressive saver. I applaud you for your hard work in trying to earn a living – the next step is to try and hold onto it.
There isn't a stock, bond or mutual fund in the world that will benefit you more than living within your means, staying out of debt and making saving a consistent priority. I’d get rid of HBO and the premium channels, cut my cell phone use to a minimum, and start socking away as much money each month as possible. Your first goal should be to accumulate at least 6 months worth of living expenses in a savings account. It will be a long struggle, but it sounds as if you are up for it. Good luck!
Question: I bought Merck earlier this year at an average cost of $30 per share. Should I hold, buy or sell? — Maureen
Jonathan Hoenig: Poor Merck can’t seem to get out of its own way. Despite an early November win in a Vioxx liability case, the company still has roughly 7,000 lawsuits waiting in the wings. Revenues are down, the drug pipeline is thin, and two of its top drugs are soon to go off patent. In the coming years, both the cholesterol-lowering medicine Zocor and the osteoporosis treatment Fosamax will face generic competition.
The good news is that, despite a drop down to $26 this fall, the stock has since recovered to trade at your average cost per share of $30. What’s next for the stock is anybody’s guess. The trick is to develop a plan to minimize your losses in case the trade doesn’t turn out as planned.
I’d use a stop loss order, which is simply an order to sell a set number of shares if the price falls to a specified level. It's a tool for limiting your downside, and, as simple as it may sound, if you worry about protecting against losses, the gains will take care of themselves.
So if I was long 200 shares of Merck at $30, I’ll plan on placing two stop loss orders under the market. I might place the first stop order to sell 100 shares at $26.90, roughly 10% decline from the current price. The second 100 shares would be sold if the stock dropped to $25.90.
Why not just sell the entire block and be done with it? Just because a stock has moved lower doesn't mean it will stay lower. Most people turn trading into an all-or-nothing proposition, but when exiting a position, I suggest you not think in black or white, but shades of gray.
Selling off a portion at a time ensures that while you might get shaken off a stock, you won't get shut out from its upside altogether. If Merck hits one of your stops, only to turn around and race higher, all the better. You're still long, albeit with a slightly reduced position.
Question: I need some help. I'm 15 and only get 10 dollars a week. My problem is that I cannot save it for more than a few days. I want to save up the money for a video game but there is a girl that always wants a dollar. I like her, so I give in. Please help me. — Gandal
Jonathan Hoenig: Gandal, you are too young to be a $1 a week sugar daddy to a 15 year-old-girl! We live in a world of scarce resources, and at $10 allowance a week, you don’t have much wiggle room to be handing out greenbacks. My advice would be to walk down to your local bank and open up a savings account. Skip the ATM card — it’s a lot easier to save money if you don’t have easy access to it!
Plus, if you save up for the video game, you can invite this young lady over to your place to play it with you! Get a pizza delivered, and you've got a perfect date. My guess is that she’ll be more impressed with a gentleman who knows how to handle his money rather than simply pass it out.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC and is a markets columnist for Smartmoney.com. He appears regularly on FNC's business program Cashin' In.