Market Pulse: Some consequences to relief at the gas pumps
Special to the Bonanza
Crude oil continues to plunge in what some refer to as a Black Swan event, meaning it was sudden and on no one’s radar.
The plunge has rattled the stock market and undermined the credit markets — junk bonds and emerging market debt, for example. We’ve seen this before.
We are told the reason crude has fallen is that there is an oversupply. Demand growth is sluggish, too, but it’s still growth.
Sharply reduced capital spending next year, already announced by several companies and likely for all, means the oversupply will evaporate mid-year while low prices boost demand. That’s how markets balance themselves.
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What is virtually a certainty is that large energy companies will acquire smaller ones or perhaps merge with each other. Acquisitions always pick up when the oil market turns south and financially weaker companies become targets.
One reason is that most large companies have been unable to replace declining reserves by drilling (called “organically”), so they buy them on Wall Street. The recent rumor has Chesapeake Energy being targeted.
There is something else at work other than the oversupply of crude. After all, the oversupply was known many months ago, not just discovered.
What could that something be? One answer is that some might believe the outlook for global growth is deteriorating, the key risk (not rising interest rates) I highlighted for investors months ago. Japan is in a recession and Europe is not growing at all.
Some oil exporters — Venezuela, Ecuador, Brazil, Argentina, Russia, among them — borrowed heavily, a fact that has not been lost on investors in emerging market debt funds, which have been declining.
A further deterioration and rising defaults could trigger another financial crisis, which I see as unlikely and of course in no one’s interest.
Commodity prices go up, go down, then up and down. When oil prices are down, investors act as if prices will never rise again.
When they are high they can’t imagine lower prices. The market moves to the extreme, which creates opportunities for investors. The key is to see what others don’t.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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