I have written quite a bit the last few weeks about the media's "darlings" China and Greece. They certainly make for interesting stories. Greece was, like I said, no big deal no matter what happened with them and the euro zone. China was, and continues to be, a big issue. But really what is it that has my attention? Oil. Many investors look at the oil pictures through their own personal lenses. Low oil has to be good because it will cost me 40% less to fill my tank with gasoline. That's got to be great for the economy! If the economy is better, then stocks have to go up! Not so fast. From European think tank GEFIRA.org:
"Commentators are linking the current market turmoil to problems in China. Our team sees the oil price as the main driver behind the market route. Low oil prices are positive for consumers and it will lower production costs for numerous industries. However it will also lower the investments in energy such as sustainable energy and oil producers will see their high profits turn into losses. Low oil prices have devastating effects on the financial sector that is involved in lending to the oil industry and in the trade of oil related derivatives. World oil production is about 90 million barrels a day, representing a cash flow of about nine billion dollars a day which comes down to three trillion dollars a year. With the oil price 40 to 50% lower, this flow is also cut by 40 to 50%. This amounts to 10% US GDP. Compare it with the 0.5% growth we are now missing in China, we prefer to keep our eyes on the oil price. These extreme moves cannot be without consequence."
This is a self-fulfilling downward spiral as oil prices continue to plummet. US shale oil production is a particularly expensive (not to mention destructive) way to get oil. In 2014, the Energy Information Administration said that shale producer's revenue covered about 75% of production costs. Oil at that time was $95/bbl. Perhaps they have gotten more efficient, but I think it's hard to imagine that they have gotten 40% - 50% more efficient. So, investors flee, borrowing costs rise on a parabolic scale which just makes things worse.
Then you have the financial institutions that have provided financing to these shale producers:
Again from GEFIRA.org:
Not only financial institutions selling assets to cover their oil related losses adding selling pressure to the market but also the decline of the share price of oil companies will be a drag on stock indices. Oil and oil related industries are part of nearly all big stock indices; a downturn in oil will in the end have its effect on these indices. The decline of major indices will have a negative effect on related ETF's and comparable products. Most products that track indices are covered by stock portfolios. As investors start to buy these products, managers have to add stock to their portfolio in accordance with the index composition.If indices start to fall, ETF's and comparable products start to under-perform, investors will sell these products forcing portfolio managers to sell stocks, adding extra pressure to the stock markets at large.
Trade well and follow the trend, not the perma-bull OR perma-bear "experts."
Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banking mafia.
On the last trading day of a very volatile month, we swung lower early on in the session. Then we swung higher, and then lower until we finished the day down for the session. The theme here is swings. Swings that have taken place everyday, sometimes every hour depending on the session. With trading conditions extremely...
Today we explore what is know as "dividend capture". Rather than using stock and in-the-money puts, this set-up uses stock and in-the-money calls. To capture dividends in this manner, you'll buy 100 shares of stock, and then write a covered call against those shares. This option should be in the money...
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