World’s Most-Traded Commodity on fire sale, selling at 64% discount

Standard
OIL

A POPULAR OIL-BASED ETF (symbol: OIL)

A ONCE-HOT MARKET COOLS DOWN TO SUB-ZERO TEMPERATURES

The above picture is an extreme example of the bargains available in the energy sector. I don’t necessarily recommend that ETF but it shows how hard oil has been hit in the marketplace.

The commodity is suffering short-term and long-term issues. According to Nasdaq.com, the 2008 price of crude oil was about $140 per barrel and is now not quite 50 dollars.

WHAT’S THE MATTER WITH OIL?

First, the short-term problem. There’s a global growth slowdown, excluding the U.S., fortunately. The biggest lame duck is China. The fastest-growing economy losing their momentum spells big trouble for all sorts of commodities, ranging from copper and lumber to energy.

Another very short-term, seasonal issue is winter. We just use less gas, and oil, in the winter. We’re not running around having fun in the sun. We’re stuck in the house and at work, using natural gas and electricity.

LONG-TERM, SYSTEMIC OIL PROBLEMS

The major problem: technology, in the form of fracking and horizontal drilling. These two methods are smothering long-term high oil prices. They’re responsible for the U.S. turning around a 60-year (!) trend of fuel importing and turning into a fuel exporter.

That’s huge news. A systemic problem. We’re now in the league of Saudi Arabia and other major oil reservists. This change will have lasting impact in the industry and market.

That being said, is the world going to abandon oil use? Not any time soon. That’s why I’m optimistic about the price of oil coming back. I even made a prediction, earlier in the year, that oil would be 50% higher by the end of December. We’ll know very soon if I made a foolish prediction.

*       *       *

A few widely-held ETFs that are oil plays (and year-to-date performance*):

  • USO: Unites States Oil Fund (-27.90%)
  • DBO: DB Oil Fund (-27.71)
  • IEO: iShares U.S. Oil/Gas Exploration & Production (-21.40)
  • XLE: Energy Select Sector SPDR (-21.06)

And a few popular oil-based stocks (with year-to-date performance*):

  • XOM: Exxon Mobile (-17.25%)
  • CVX: Chevron (26.82)
  • BHI: Baker Hughes (-6.28)

* Data sourced from Morningstar.com

Advertisements

Will China contagion infect the U.s.?

Standard

china pic2

BIGGER NEWS THAN GREECE OR PUERTO RICO

The Chinese stock bubble popping, their economy slowing and China using less resources…that’s a pretty big deal. These things will impact economies, markets and companies.

HOW IMPORTANT IS THE CHINA BUBBLE?

It’s actually a lot less of an impact on U.S. investors than the media lets on. First of all, the major bubble is in “A” shares which American investors can’t even directly own. Those indexes have dropped over 40 percent.

As a comparison, the largest China ETF (exchange-traded fund), the one most U.S. investors would have, has only dropped about 20 percent. The fund is called iShares China Large-Cap (symbol: FXI). It dropped but only half as bad.

This stock run-up, and drop, was mainly caused by heavy margin buying. Chinese investors are accumulating shares with debt, encouraged by their government to do so. The government was still encouraging it during the plummet.

Leveraging like that can be very dangerous. Especially in an over-valued market. The price and euphoria reminds me a lot of the Tech Boom…and Bust. Even the P/E ratio is similar, a little over forty. This is very high for any major index. The higher this climb, the more over-valued the shares, the harder the drop will be.

CHINA IS BEGINNING TO EXPERIENCE AN ACTUAL “NEW NORMAL”

Bill Gross should be happy now. There is a dynamic economy experiencing his vaunted new normal. It’s just not the U.S. like he predicted. It’s China having the slow-down. The government even conceded, in their estimates, that the economy will “only” grow at 7.5% a year for the near future. This is lower than their previous double-digit GDP growth.

MORE AMERICAN COMPANIES EXPERIENCING REVENUE DECLINES

Besides the weakness in commodities like copper, which China is the largest user of, there are many drops in multi-national company sales. Not all of it’s caused by the overseas slowdown but it must be impacting revenue somewhat.

There could be opportunities in natural resources, China and other Chinese “plays” like Australia. I haven’t fully looked into these yet but, if the drop continues, it could make those investments more attractive. And I certainly wouldn’t bet against this giant economy for the long-term.

does greece matter?

Standard

Greece flag

GETTING RID OF GREECE ANXIETY…

I recently wrote an article about the importance, or lack of importance, of Greece to the U.S. economy. First off, Greece is a wonderful country, having contributed a lot to modern life. Things like democracy, Western philosophy. Big things. But one stat I included in the article sums up their impact on the U.S.:

* Annual U.S. trade with Greece is about one day’s worth of China/U.S. trade

Total annual imports and exports between Greece and America are about $1.821 billion. Total annual trade! Total U.S./China trade for the same year, 2014, was $590 billion. Almost 324 times more trade activity with China!

So forget that anxiety being fed to us by the media. The worse it gets over in the Euro zone the better our economy and market looks to investors. And, since the markets are ultimately a popularity contest, their problems could boost our strength.

The bigger issue could be China’s current problems. I’ll leave that for another post.

Will a Dollar Crash Cause a “25 Year Depression”?

Standard

I was on a website last Friday and saw an ad. I rarely click on ads but I couldn’t resist. The headline mentioned something about a 25-year depression. That’s a pretty bold claim. And I know there’s about a million of these outrageous claims on the internet. But what if??

So I clicked on it and started watching a video by Jim Rickards. He sounded pretty qualified despite the puffed-up claims to expertise. And he mentioned something I had read about before that really could be catastrophic: the world going off of the U.S. dollar.

I had worried about this for my kids and future grand kids. But I didn’t think it would happen too soon. Yet it could happen and it wouldn’t be good for America.

To oversimplify the issue, when the world completely drops the U.S. dollar as a reserve currency it will make the price of what we consume at home hugely more expensive. So we can then either consume less or finally start selling more. Or both.

The consume less part would happen right away. We would be forced to do that. Our weak dollar simply wouldn’t buy as much imported stuff (apologies to my high school teacher for using ‘stuff’ as an actual noun).

And we are, thankfully, already starting to sell a little more. Mainly fuels due to the dynamic oil/energy sector.

So it’s a worrisome problem. And it got me thinking: would the world just drop our currency overnight? Unlikely. It’s similar to the holding of our Treasury bonds by foreign investors. They wouldn’t want to sell these bonds all at once, dumping us. That would be horrendous for the values of the bonds. They would all lose billions & billions of dollars. Similarly, dumping the U.S. dollar would hurt the countries importing to America, namely China and other low-cost producers. Not to mention all of the European importing countries and Japan.

Would you harm your biggest client? I don’t think they would either. Everyone sells to everyone in this global mix. So the international community has a vested interest in seeing a slow removal from the dollar. If there’s a removal at all.

What can an investor do? You can increase your international exposure. If you use mutual funds you can get many that are denominated in those foreign currencies. Not only would you be diversifying your portfolio you’d be creating some “currency insurance” within it, too.

Check out this article for another way to diversify out of the U.S. market and dollar: Investing In Stuff