Thursday Oct 16 2014
Word Count 782
Crash !
Social mood has moved to more extreme positions which has taken markets down around the world. We have been warning of such an event for the last couple of years in this space. It is here, now. Let’s examine the various topics in a quick over view of what has happened in the last sixty days and the implications that holds.
The Price of Oil and Gas
The price of West Texas Intermediate has fallen from $107 to $80. It rebounded Thursday and Friday morning as I write. That is a 25% drop which has or will affect economies all over the world.. Many economists are taking the position that this will spur the economy. This makes driving cheaper. More people will drive to stores (retail is the basis of the economy) and spend their now extra disposable income.
I don’t think so. I believe the drop in the price of oil and natural gas, is indicative of a weakening economy that simply cannot afford higher energy prices. Compounding the difficulty is there are few oil producing regions that which can afford the option of a lower cash flow. This will affect numerous players in the oil market.
Russia
Vladimir Putin has fashioned Russia to be a commodity economy rather than a consumer economy. With Russia 50% dependent on oil revenue, this puts Putin much more in charge than if say some Russian version of Facebook had a say in what is going on. As long as Putin can bluster his way through various energy deals, as in the Ukraine, things are just fine. But if the price of oil drops 25%, the income to Russia drops 12.5%.
OPEC
Fractured as always, OPEC is doing anything but maintaining stability for the price of oil. The Saudis told the world this past weekend to get used to lower oil prices. They are lowering price to dissuade Western Countries from fracking and producing more oil. This makes sense from their standpoint. But, it is hardly an assurance for cash strapped Venezuela or Nigeria. None of the OPEC members seem interested in lowering oil production.
Panic – Headlines
Stocks Swoon in Frenzied Day, down 415 points
New Push to Check Ebola
Risk of Deflation
HBO Plans Web Service, Netflix drops 25% in After Hours Trading
Wal Mart, McDonalds warn of Rough Spots Ahead
EU Central Bank Balks, Wondering What to Do
What It Means
There are various marginal economies (Kuwait, Iran, Nigeria) that have nothing other than oil to sell. To maintain cash flow they are more likely to increase production for cash, than raise prices. The result will be more supply in a world already awash in oil.
One can read various predictions that oil can be produced in the Balkan, Eagle Ford, or Permian with prices as low as $60. This assumes that bankers who lend on energy exploration or deaf, blind, and dumb. They are not. As fears of ever lower oil prices spread, the lending spigot will be cut off. I have no idea at exactly what price that happens. But it will happen.
Local governments in the Permian Basin and the Eagle Ford have been wondering how they would cope with the demand for services. Careful what you wish for. Now imagine all those new residents are still here, but the without the foundation of ever higher oil prices. Suddenly property and sales tax revenue falls. But demand for services is as high as ever. This is a real problem.
Meanwhile in Austin, the severance tax revenue will shrink. That means lower property taxes for the State of Texas and Texas Counties. Higher Education never saw this coming. State Universities should expect to be rebuffed at the Legislature when asking for more money, in capital and operating budgets.
Stock prices for companies drilling in the Eagle Ford and the Permian Basin have been hit hard. Sanchez Energy for example is down 50% in four months. In the 1973-74 bear market I termed this the black hole of the bear market. Stock capitalization, wealth in the stock market, vanishes as investors panic out of troubled sectors.
Finally, we have expected a top in the five year bull stock market this Fall of 2014. It is 40 years from the 1974 Dow low at 577. With the European Central Bank out of ideas on stimulating its double digit unemployment, China slowing, and Argentina and Venezuela already looking like deadbeat borrowers, the fundamental news is negative.
October has a reputation for the roughest month on Wall Street. And as usual the economists never saw it coming.
Follow Professor Elam on the markets at
http://www.themarketperspective.com
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