Excess oil greases the skids!

Who knew? “Drill Baby Drill” was in vogue a few years! Oil independence has been a desired goal since the 70’s and the Carter years. Did the drill turn into a screw? If you happen to be confused by recent events, you are not alone.

The Wall St Journal opened an article with “US stocks closed Friday with the biggest weekly decline in years, as the sustained drop in oil prices revived growth concerns.” So winning in the oil fields causes losing in the stock market? Get out the shovels because we need to dig a little deeper to make sense of this.

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The growth in US oil production, due to fracking, on private land, has been controversial to say the least, but without question it has changed the oil debate. As demand grew, the race for more oil created incentive to find supply, resulting in a doubling of US oil production. Our dependence on foreign oil dropped, the dollar surged which had the unintended consequence of demand for oil “dropping off a cliff” as stated in the WSJ. Without getting into the weeds on how it all came about, suffice to say the world is awash in oil and as demand declines, prices continue to fall. Since June, the price of oil is down more than 40%!

“Be careful what you ask for”

What’s good for the importers is a potential disaster for the exporters and Russia happens to be the second largest Exporter of oil. If prices stay low the Russian economy will go into recession; fail to balance their budget and that’s not going to help that “RESET” button. If oil goes no lower and remains at current levels, NONE of the major exporters will balance their budgets next year!

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But declining oil prices is not the end of the story. Growth is slowing in China; deflation in Japan & Europe continue to hamper growth; Russia is a concern along with Iran and the rest of the Middle East. The fall in oil prices has been a significant economic shock and the dreaded concept of “uncertainty” has been revived. As such the market has been in sell mode of late. Granted, in percentage terms it has been a mild event to date, and “over the long term” lower oil prices should be a boost for the US economy.’

The year end is generally a favorable time for the market and could still be in 2014 since there are a couple weeks of trading left. There is no shortage of BULLISHNESS in this week’s issue of Baron’s and I suspect it’s reflected in many financial publications as we close out the year. One of the main arguments given is the lack of attractive alternatives.

Contradictions

And of course it’s easy to find the folks on the opposite side of the fence who say the best trade is “No Trade” because of the uncertain environment that prevails. Volatility has increased which translates into increased risk. Confusion is everywhere as are contradictions:

  1. after black Friday & cyber Monday we read that sales were disappointing
  2. retail sales numbers for November were strong at up 0.7% — HUH?
  3. how does that statistic make sense if Americans are 40% poorer than before the recession?
  4. then we learn that half the country can’t afford their mortgage payments
  5. people are not going to the doctor because of high deductibles on their insurance plan
  6. low paying part time jobs are the norm and the bulk of job growth

So who is right? I don’t have a clue and frankly neither does anyone else with respect to the future. It’s guess work at best because each individual “expert” has reams of research or statistics to back up their forecast. But here’s the rub… it’s that black swan thing that comes out of nowhere and throws a wrench in all the experts declarations. It gets them every time! Remember my blog on Alan Greenspan a while back — the expert who didn’t “see” the housing bubble when it was staring him in the face? And his “specs” are huge!

Here’s my closing advice for now & forever:

FORGET all that mumbo-jumbo and stick to your discipline! TRUST the DOT™! I know I have said it once or twice… but it works!! OH, and do your family and friends a huge favor before the year ends get them to sign up and PAY FOR a subscription to BSIQ before the price goes up in 2015!!! It’s a gift that will keep on giving!!

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