— BNET Business Dictionary

We’ve seen a run up of banks, real estate, and commodities, just to see all three crash in unforgettable fashion. Now, investors are a little more skeptical…at least, you’d think so…

Recently, daily rags like Wall Street Journal and New York Times have run articles about the run up of SUVs in the past few months. Any normal, intelligent, even skeptical person would say, “Don’t you people remember the first half of 2008?” Investors are a fickle bunch, aren’t they?

So the question remains: Who would buy an SUV after oil and gas prices hit their all-time highs just a few months ago?

Well, obviously many of these new-SUV owners are assuming energy prices will remain low. After all, July’s $147-per-barrel of oil was a fluke. It was all caused by oil speculation and shady deals, and had nothing to do with the two-million-barrel gap between global supply and demand. I mean just because the world uses 87 million barrels of oil every day, and it can only produce a maximum of 85 million barrels shouldn’t mean higher oil prices.

Or if you prefer, as Fatih Birol, the International Energy Agency’s chief economist, says we only need to “[bring] four new Saudi Arabias on stream” over the next two decades. That shouldn’t be a problem, right?

If you aren’t detecting the sarcasm, I apologize. I’ll be perfectly clear. People, who think oil and gas prices will stay cheap, are absolutely nuts! There is nothing indicating cheap oil prices in the near future.

So, the second question that pops up: Why would people think that?

The clientele effect is the emotion-based reasoning behind why consumers buy certain things. The most obvious example of this is dividend investing.

Many income investors pick which dividend-paying companies based on a number of criteria. The most common is the consistency of the company’s dividend. If a company pays a dividend for 25 years straight, there’s a good chance a large portion of its investors are fixated on that dividend.

Say, for instance, the company cuts or suspends its dividend. Investors will certainly flee immediately, causing the share price to fall. That’s the clientele effect. The reason for investing changes. Therefore, you must sell.

It also works in reverse. Say the company dramatically increases its dividend. Investors will flock to the company boosting share prices.

The rationale for the groupthink is simple. If a company is optimistic about its operations and future growth, it will typically increase its dividend. Likewise, if a company is going through a rough patch, or expects to shortly, it will cut or suspend its payments.

That’s the long definition of the clientele effect. So what does this have to do with crazy SUV sales?

SUV buyers are viewing the recent drop in oil prices as an indicator of future prices. They are “investing” in brand-new SUVs because they feel that prices will stay cheap enough to cost effectively drive one. The opposite occurred not too long ago.

In early July, $150 oil was all but here, and SUV prices were slashed in half. Dealers couldn’t give them away. GM and Ford’s recent losses prove that.

So, how can you benefit from the clientele effect? Simply buy before a positive indicator, and sell before a negative one. No one is perfect at guessing the market, but you don’t have to be. You have to look at all the facts available. Even better, you can join us at Penny Stock Fortunes by and let us do the hard work for you.

Sincerely,
Jim Nelson

November 19, 2008

P.S.: Dividend investing is an area that we’ll continue to follow over the coming weeks. So, be sure to keep an eye out for a special report called Retirement Plan B that will be headed your way soon.

The Clientele Effect and Oil was originally featured in the Penny Sleuth.