How does it happen? August brought us $3.00+ gasoline and endless reports that the end was near and we were nearly out of oil. Yet, here we are (October 26th as I write this) and in my unscientific survey I see gasoline below $2.00 in New Jersey and under $2.50 in New York!
Naturally, I did some digging at the Energy Information Administration website. According to their masthead, the EIA provides "Official Energy Statistics from the U.S. Government." They have reports of every stripe - short term forecasts, long term forecasts, home energy use. You name it, they've got it!
Now, when it comes to Government forecasts, I have a healthy sense of skepticism. So, I chose to focus on the Short-Term Energy and Winter Fuels Outlook. Answers started to present themselves on page 4 of this report, "For the first 6 months of 2006, average demand was down 130,000 bbl/d, or 0.6 percent, from the previous year due to mild weather—which reduced heating oil, residual fuel oil, and propane consumption— and rapidly rising prices, which greatly affected motor gasoline and jet fuel demand growth."
But wait, there's more! On page 5 I hit pay-dirt, "On September 30, total motor gasoline inventories were estimated to be 215 million barrels, 18 million barrels above last year’s end of September levels and above the upper bound of the normal range. These inventories are expected to remain ample during the heating season."
So, are we led to believe that, after all the hyperbole, it's a simple matter of supply and demand? The chart below indicates that prices will rebound some going into the New Year with retail gas prices at approximately $2.20 per gallon (national average).
Will we ever return to the prices of yesteryear? I suppose not. Will we see a bit of price stability? Well, the road ahead looks like less of a roller-coaster ride and that, by itself, is a comfort! But don't get lulled into believing that prices will continue to stay at this level or decline further. Remember, even modest adjustments to your energy expenses will have a positive effect on your pocketbook.
Can Russell Give Us Value?
With razor thin expense ratios and less of a bias toward management agendas, Index Funds and ETFs (Exchange Traded Funds) tend to be my favorite funds.
The Russell 1000 Index contains the one-thousand largest components (companies) of it's larger parent - The Russell 3000 Index. And the stocks contained within the index constitute approximately 90% of the equity traded on the U.S. Exchanges (see this info at Street Authority.com).
Where 33% of stocks in the S&P 500 Index are related to Financial Services and Healthcare, the Russell 1000 has 35% in those same sectors. Similarly, other sectors - Industrial Materials, Hardware, Consumer Goods, Consumer Services, Energy, Software, Business Services and Media - track almost identically in percentage to the S&P 500.
So, what accounts for its continual upward bias? Of course, part of the answer is size. One-thousand companies certainly provides a broad representation of the market and can obscure poor performance by some of the fund components.
Still, just as the DJIA sports a P/E of 23+ and the S&P 500 a P/E of 18+, the Russell 1000 is approximately 17.2. While better then the Dow, you w start of a start of a major bull run from a P/E of 17.2. By the same token, a rising tide raises all ships and certainly ships sporting a lower P/E will rise higher. Will the trend continue? Is this a place to be invested? Was the decline of last week a cause for concern?
Well, if you're invested in this fund, a 7.21 point decline certainly doesn't mean that you should pull your money out. However, I do tend to believe that we may be witnessing the beginning of a changing trend. So, if you are on the sidelines, you may want to stay there for a bit.
Editors Note: This article has been changed to correct some errors made in the original post. Sorry for any inconvenience this may have caused.
The P/E Ratio - Part I
Today I begin a multi-part series on the P/E - or Price-To-Earnings - ratio. This week we look at what two factors make up the P/E.
As its name suggests the P/E ratio expresses the relationship between the share price and the earnings per share. So, what are earnings? Simply, income less expenses. In fact, earnings are often called a "bottom line" number because of its appearance at the bottom of the Income Statement.
Often the Income Statement reports the earnings per share (EPS) yet, sometimes they report a total earnings number. In that case you would divide total earnings by total shares outstanding for the EPS number.
Many financial websites report EPS for the trailing - previous - twelve months (ttm). Occasionally you'll see an analyst estimate of earnings twelve months into the future - an estimated EPS. Some websites update the P/E daily to reflect the effect of the day's share price.
Let's work with an example....
Mythical Glass Co has a share price of $20.00 and earnings of $2.00 per share: 20/2 produces a P/E of 10.
Another valuable statistic (and one of my favorites) derived from the P/E ratio is Earnings Yield. In long form, the formula is E/P * 100. Returning to Mythical Glass Co - 2/20 *100 = 10%. In other words, the share price invested is producing a yield of 10%!
When you have an opportunity, go to Yahoo Finance, plug in a company stock symbol - i.e. AT&T (T) - and check out the P/E.
Coming up we'll look at historical P/E ranges and how you can use the P/E as one of your tools in making investment decisions.
Next Time In the Fund Informer...
I'll take a look at The Russell 1000 Value Index, do more exploration of the P/E ratio and, I'll have a special bonus for you as well.Is there something you'd like to see more - or less - of? Click here and let us know.
Till next time...
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