The following list is designed to illustrate the wide range of possible implications of an oil price decline, both direct consequences and their ramifications:
Lower prices mean reduced revenue for oil-producing nations such as Saudi Arabia, Russia and Brunei, causing GDP to contract and budget deficits to rise.
There’s a drop in the amounts sent abroad to purchase oil by oil-importing nations like the U.S., China, Japan and the United Kingdom.
Earnings decline at oil exploration and production companies but rise for airlines whose fuel costs decline.
Investment in oil drilling declines, causing the earnings of oil services companies to shrink, along with employment in the industry.
Consumers have more money to spend on things other than energy, benefitting consumer goods companies and retailers.
Cheaper gasoline causes driving to increase, bringing gains for the lodging and restaurant industries
With the cost of driving lower, people buy bigger cars – perhaps sooner than they otherwise would have – benefitting the auto companies. They also keep buying gasoline- powered cars, slowing the trend toward alternatives, to the benefit of the oil industry.
Likewise, increased travel stimulates airlines to order more planes – a plus for the aerospace companies – but at the same time the incentives decline to replace older planes with fuel-efficient ones. (This is a good example of the analytical challenge: is the net impact on airplane orders positive or negative?)
By causing the demand for oil services to decline, reduced drilling leads the service companies to bid lower for business. This improves the economics of drilling and thus helps the oil companies.
Ultimately, if things get bad enough for oil companies and oil service companies, banks and other lenders can be affected by their holdings of bad loans.
* * *
To give you an idea about how events in one part of the economy can have repercussions in other economic and market segments, I’ll quote from some of the analyses I’ve received this week from Oaktree investment professionals:
Energy is a very significant part of the high yield bond market. In fact, it is the largest sector today (having taken over from media/telecom, which has traditionally been the largest). This is the
Like a roller-coaster that takes you higher and higher, it's fun to anticipate the drop ahead but now we're running out of oxygen at these levels (and yes, we're shorting again) as the Russell challenges 1,200 again and the Dow, S&P and Nasdaq come close to their highs yet again.
Fortunately, this was all foreseen this week and we sold a lot of our shorts in our Short-Term Portfolio on Tuesday's dip and now it's our bullish Long-Term Portfolio that's zooming along with the markets, adding $35,000 this week, all the way to $590,375 (up 18.1% for the year) at yesterday's close. Our STP dropped to $175,711 (up 75.7%) but that's a combined $766,086 – a new years high (up 27%) for our combined virtual portfolios – just in time to end the year, too!
This is very much in line with our "Get Rich Slowly" strategy we discussed over the weekend as we're well outpacing our 20% goal in all four of our Member Portfolios. As you can see on the chart, getting consistent returns of 20% or more puts you on a path for exceptional portfolio growth and the key to getting there is to follow Warren Buffet's Rule #1: "Don't lose money!"
That's why we run our Yin and Yang strategy on our two main portfolios. The $500,000 Long-Term Portfolio is generally all bullish (given our long-term bullish outlook) and we offset/hedge those bets with a generally bearish Short-Term Portfolio. That allows us to maintain our long-term positions when there are market dips, like we just had, without having to panic in and out of positions that are designed, for the most part, to take advantage of time decay using our "Be the House – Not the Gambler" strategy that has been our theme for 2014.
Our long-term outlook remains bullish and short-term, we still expect a sell-off no later than January earnings (very disappointing overseas revenues, energy sector collapse, low retail sales) and we began adding back short positions to our Short-Term Portfolio to lock in our Long-Term gains and lean a little more bearish into today's Quad-Witching event.
Yesterday, when we reported the latest rumor of Russian gold selling, this time out of SocGen, we said that “it should be noted that SocGen and its “sources” have a conflict: in an indirect way, none other than SocGen is suddenly very interested in Russia stabilizing its economy because as we wrote before, “Russia Contagion Spreads To European Banks : French SocGen, Austrian Raiffeisen Plummet” which also sent SocGen’s default risk higher in recent days. So if all it will take to stabilize the RUB sell off, reduce fears of Russian contagion, and halt the selloff of SocGen stocks is a “source” reporting what may or may not be the case, so be it.”
Moments ago, as if to deter further speculation that Russia is indeed converting hard money earned from real resources for fiat paper, the Russian monetary authority made it quite clear, that at least in November, Russia not only did not sell any gold, but in fact bought another 600K ounces in the month of November.
RUSSIAN MONETARY GOLD HOLDINGS RISE VS 37.6M ON NOV. 1
RUSSIAN MONETARY GOLD HOLDINGS 38.2M TROY OZ AS OF DEC. 1
So add another 600K to the chart below:
Which of course means that the very “Russia is selling” rumors that were so effectively used to keep the price of gold low into the recent risk-flaring episode, were capitalized on by the very same Russia, which we do however know sold some $8 billion in US Treasurys in October bringings its total holdings of US paper to the second lowest since 2008…
… and which used these same low prices not to sell, but to buy. At the lowest prices possible.
Yesterday’s epic market surge, the biggest Dow surge since December 2011 on the back of the most violent short squeeze in three years, highlighted just why being caught wrong side in an illiquid market can be terminal to one’s asset management career (especially if on margin), and thus why hedge funds are so leery of dipping more than their toe in especially on the short side, resulting in a 6th consecutive year of underperformance relative to the confidence-boosting policy tool that is the S&P. And with today’s session the last Friday before Christmas week, compounded by a quadruple witching option expiration, expect even less liquidity and even more violent moves as a few E-mini oddlots take out the entire stack on either the bid or ask side. Keep an eye on the USDJPY which, now that equities have decided to ignore both HY and energy prices, is the only driver for risk left: this means the usual pre-US open upward momentum ignition rigging will be rife to set a positive tone ahead of today’s session.
On the last trading day of the week, markets have been subdued with most European equities trade lower after coming off best levels with the FTSE MIB among the underperformers due to the weakness seen in the Italian banking sector with Banca Carige shares halted. Furthermore, the SMI is also under pressure as Roche (-5.3%) discontinued their scarletred drug trial with MorphoSys (-8.3%). In fixed income markets, Bunds initially edged lower taking cues from yesterday’s continued post-FOMC sell-off across USTs, but has since pared those earlier losses as choppy price and light volumes dictate the state of play.
One hour ago a Reuters report was released citing ECB sources, stating that in any QE program, officials are looking into making weaker Euro-zone countries face a large cost and take larger risk burdens, the reports further suggest that the ECB could require weaker central banks, such as Greece or Portugal, to make provisions to cover any potential losses from a sovereign bond buying QE program. A step in this direction could help push Germany into accepting a sovereign QE program. However, these comments failed to impact the market and if anything pushed European stocks lower.
Asian equities traded mostly higher after the rally on Wall Street, which saw…
All of this was perfectly obvious months ago to anyone who cared. To wit:
… while we understand if Saudi Arabia is employing a dumping strategy to punish the Kremlin as per the “deal” with Obama’s White House, very soon there will be a very vocal, very insolvent and very domestic shale community demanding answers from the Obama administration, as once again the “costs” meant to punish Russia end up crippling the only truly viable industry under the current presidency.
So with great delight we present the latest blowback from Obama’s “brilliant” strategy to cripple Putin: in addition to the default wave about to crush America’s own shale industry, America’s biggest foreign ally and military partner when it comes to “ideologically pure missions of liberation” – the UK, and specifically its North Sea oil industry which according to the BBC is in a “crisis” and according to Robin Allan, chairman of the independent explorers’ association Brindex, the industry was “close to collapse”.
The story is the same as in the shale patch, only in the far colder and stormier North Sea: “Almost…
If there’s one thing we have learned about Barack Obama, it’s that he is a master of deception and absolutely loves to lie to the public. He seems to enjoy conning the plebs to such a degree, I think he actually receives blasts of dopamine every time he does it. The bigger the lie, the better the rush.
The latest example relates to his issuance of executive orders, or lack thereof, something that Obama Inc. has actively attempted to portray as evidence of his restraint when it comes to executive power. Here are a few examples from a USA Today article published earlier today.
First, from the man himself:
“The truth is, even with all the actions I’ve taken this year, I’m issuing executive orders at the lowest rate in more than 100 years,” Obama said in a speech in Austin last July. “So it’s not clear how it is that Republicans didn’t seem to mind when President Bush took more executive actions than I did.”
Harry Reid also proudly chimed in:
In a Senate floor speech in July, Majority Leader Harry Reid said, “While Republicans accuse President Obama of executive overreach, they neglect the fact that he has issued far fewer executive orders than any two-term president in the last 50 years.”
Finally, the message wouldn’t be complete without some words from Bootlicker in Chief Jay Carney:
“There is no question that this president has been judicious in his use of executive action, executive orders, and I think those numbers thus far have come in below what President George W. Bush and President Bill Clinton did,” said Jay Carney, then the White House press secretary, in February.
WASHINGTON — President Obama has issued a form of executive action known as the presidential memorandum more often than any other president in history — using it to take unilateral action even as he has signed fewer executive orders.
Like executive orders, presidential memoranda don’t require action by Congress. They have the same
While today’s rabid explosion in the S&P500, coupled with a literal break in the NY Fed/Citadel market boosting algo which went haywire in the last moments of trading and pushed the S&P up to 2130 in milliseconds via Kevin Henry’s preferred SPY ETF, may be the stuff of market manipulating legends, nothing compares to the far more berserk situation China finds itself in, where a 50% surge in the Shanghai Composite over the past few months – not on improving fundamentals but just the opposite, hopes of massive liquidity injections to halt China’s economic hard landing – has found the PBOC scrambling to find a way to, politely, burst the stock market bubble without causing too much pain.
This is because as reported overnight, China’s seven-day repurchase rate, a gauge of interbank funding availability in the banking system, surged 139 basis points, to a 10-month high of 5.28% in Shanghai, the biggest since Jan. 20. The reason for the sudden cash crunch, according to Bloomberg, is that subscriptions for the biggest new share sales of the year lock up funds. Twelve initial public offerings from today through Dec. 25 will draw orders of as much as 3 trillion yuan ($483 billion), Shenyin & Wanguo Securities Co. estimated. In other words, the scramble to allocate capital into China’s surest way of making money, IPOs, has led to a drying out of general liquidity in the entire market.
This in turn forced the PBOC to intervene and inject short-term money loans to commercial lenders in order to prevent the kind of interbank liquidity lock up that emerged in China in June 2013 in the aftermath of the first Taper Tantrum (and which before all is said and done, will likely take place again) and which sent global capital markets around the globe reeling before China resumed its massive liquidity injections which are at the heart of China’s debt-fuelled bubble in the first place.
From Bloomberg: “The IPOs are affecting the market, leading to cautious sentiment with fewer institutions willing to lend,” said Li Haitao, a Shanghai-based analyst at China Guangfa Bank Co. “Quite a few traders found it very difficult to meet their funding needs yesterday.”
Why? Because everyone wants to get rich quick so badly, they are risking collapsing the entire market.…
The 40% drop in oil prices over the past 6 months has garnered a lot of attention recently, most of it focused on the economic stimulus lower oil prices should provide the global economy, the impact on currency and fixed-income markets and the increase in economic pain suffered by exporters such as Iran and Russia. In this article, I draw on historical data to assess the potential increase in geopolitical tail risk that lower oil prices may represent. I believe this is an overlooked consequence of lower oil prices that, while low probability, would have an outsize impact on the global economy – a classic "fattening of the tail". I look at monthly and aggregate data to smooth out daily fluctuations and avoid having us mistake the forest for the trees.
The data shows that in the 1980s, the most-cited oil price war, the average price of oil dropped from approximately $28/barrel in 1985 to a low of $11.58/barrel in July 1986 (US Energy Information Administration data for monthly average front month futures contract price). This would be analogous to a drop from $60/barrel to $25/barrel in 2014 prices, using the US Bureau of Labor Statistics CPI calculator. Prices subsequently rebounded almost 60% from that July 1986 low, ranging between $16/barrel and $20/barrel for the rest of the 1980s. (There were a few months in that 4 year timespan where the average dropped below $15/barrel, but I want to focus on the big picture in this article.) Inflation-adjusted to 2014 price levels, oil prices ranged between $29/barrel and $37/barrel.
Then something dramatic happened. Between July 1990 and October 1990, prices nearly doubled from approximately $18.50/barrel to $36/barrel. You have probably deduced by now that this was when Iraq invaded Kuwait. For the next 3 years, $20/barrel went from being a ceiling for oil prices to being a floor. Subsequently, prices dropped in the rest of the 1990s until doubling and then tripling in the 2000s for reasons that are beyond the scope of this article.
Fast forward 25 years and we are again seemingly in the middle of a price war with no bottom in sight. This time, though, it may indeed be different. It would be foolish to assume the Russians do not remember the impact of the
Break-even rates are the difference between treasuries and the same-duration Treasury Inflation-Protected Securities (TIPS). The break-even rate turned negative yesterday for the first time since 2009.
In theory, break-even rates reflect investors’ expectations for inflation over the life of the securities.
When break-even rates are negative, it's an indication investors expect price deflation for the duration, in this case for two years.
From Bloomberg ... The drop in the break-even rate followed a Labor Depart...
Those who took advantage of markets at Fib levels were rewarded. However, this looked more a 'dead cat' style bounce than a genuine bottom forming low. This can of course change, and one thing I will want to see is narrow action near today's high. Volume was a little light, but with Christmas fast approaching I would expect this trend to continue.
The S&P inched above 2,009, but I would like to see any subsequent weakness hold the 38.2% Fib level at 1,989.
The Nasdaq offered itself more as a support bounce, with a picture perfect play off its 38.2% Fib level. Unlike the S&P, volume did climb in confirmed accumulation. The next upside c...
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Stocks have needed a reason to take a breather and pull back in this long-standing ultra-bullish climate, with strong economic data and seasonality providing impressive tailwinds -- and plummeting oil prices certainly have given it to them. But this minor pullback was fully expected and indeed desirable for market health. The future remains bright for the U.S. economy and corporate profits despite the collapse in oil, and now the overbought technical condition has been relieved. While most sectors are gathering fundamental support and our sector rotation model remains bullish, the Energy sector looks fundamentally weak and continues to ran...
Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...
I officially bought 250 shares of EZCH at $18.76 and sold 300 shares of IGT at $17.09 in Market Shadows' Virtual Portfolio yesterday (Fri. 11-21).
Click here for Thursday's post where I was thinking about buying EZCH. After further reading, I decided to add it to the virtual portfolio and to sell IGT and several other stocks, which we'll be saying goodbye to next week.
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Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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