Is this a bear market? If it is, is this a typical bear market? I feel a typical bear market, a true bear market is as a result of the possibility of a recession. And the many problems that come along with a recession. Investor being so pessimistic on the economy that they don’t want to stay fully invested. The feeling that the markets are overvalued. All reports I read does not support the notion that we are heading into a recession. Our economy is doing pretty well. Earnings are are good. Stocks and the market are not overvalued. Unemployment is way down from recent years. Things are not perfect but the conditions do not warrant this type of market fall. What is the problem?
Well, according to The Options Coach, that’s me! I think this volatile market is a result of the falling oil prices. Energy is the economy! Today crude oil went below $30 a barrel. In resent months the fall of oil prices has been the most important economic event effecting the entire world economy. While we are all enjoying lower fuel prices and feel that lower oil prices does nothing but help everyone; this is not quite true. Yes it cost less to heat our homes. Trucking is cheaper. Flights are cheaper and we can get from one place to another driving our cars for a lot less money.
I am not an economist! I only know what I read and what I read on this subject is what I believe. Although lower oil prices are always welcomed by consumers, the global impact of the fall in oil prices is much more difficult to explain, since many countries depend on oil as a major revenue source and lower prices hurt their economy. Lower oil prices will cause a weak global economy, which could more than outweigh the benefits of lower oil prices for you and me. Having said that, let’s examine with the Cliff Notes version, how lower oil prices are not good for global economies.
There are many countries economies impacted by lower oil prices, whether they are huge exporters or importers. It would take too long to look at all of them so let’s narrow it down to exporters. When the price of oil is too low the countries are spending more money to drill and process the crude than the money they make selling the oil. These oil drillers have huge bank loans out and they cannot afford to pay the interest on the loans. This starts to effect the banking and credit systems. Do you remember 2008? Let’s look at Russia.
Russia has by far been one of the countries that have been most adversely affected by the recent plunge in oil prices. It’s oil revenues, which constitute more than half of its budget revenues and approximately 70% of its export revenues, have dropped significantly, with an estimated US $2 billion loss in revenue for Russia per dollar fall in oil prices. Oil dropped below $30 a barrel from over $100 in resent years. That’s a huge amount of money out of Russia’s economy. Russia’s currency has as a result collapsed, which forced its central bank to raise interest rates and sell its foreign currency reserves to support the Ruble. According to many reports the Russians need oil prices to be above $105 a barrel to balance Russia’s budget. This is a very serious problem not only in Russia but for all oil exporters. This collapse in oil prices and the ensuing chaos can continue to wreak havoc until we relive 2008 again all over the world. I know this is a very short synapses of a very big problem but I feel this is a major part of what’s happening to the market. This is only one of the problems as a result of low oil prices. Since I try to limit the size of my post, you must investigate this. There’s a lot of material. Too much for this email. If you plan on getting into the market you must look into this issue and it should be considered when making investment decisions. Do your homework!
If you have anything to add to my article please email me. I’m very interested in this oil story.
As always, read my “Message of the Day”, everyday!
I added 2 new pages under Philosophy,Strategy & Risk. “Naked Options” and my “1Week/1%” strategy.
Steve
The Options Coach