FOOD FOR THOUGHT Guess what happened the last time the price of oil crashed: Over the Holiday Season many of you have seen a significant drop in the price of gas at the pumps. In fact my oldest sister took a pic. of the price of gas and how much it has decreased. I replied, be wary of wolves wearing sheep skins. The real truth be told is: There has been only one time in history when the price of oil crashed more than $40 dollars in less than six months. The last time this happened was in the second half of 2008 which proceeded the greatest financial collapse that happened that year. Will it happen again? This time the stakes are even higher. Energy companies account for approx. 20% of the junk bond market. And a junk bond implosion is usually a signal that a major market collapse is on the way. So if you are looking for a canary in the coal mine keep your eyes on the performance of energy junk bonds. If they collapse, that is the beginning that all hell is about to break loose on Wall Street. OPEC has declared a price WAR on the shale oil production. For all intents and purposes OPEC is now engaged in a price war with the U.S. Oil is cheap from Saudi Arabia and Kuwait. But it is more expensive to extract oil from shale formations in places like Texas and North Dakota. So as oil prices decline the cost to produce oil from shale becomes more expensive and companies in the U.S. can not compete. The U.S. now produces more oil than Saudi Arabia and Russia. This revolution has created millions of jobs since the last recession and it has resulted in the creation of millions of jobs that has kept the percentage of Americans employed fairly stable. If the price out stays at or continues to fall, we will see a significant number of shale oil companies go out of business and a large number of jobs will be lost as well. The Saudis know how to play hardball and they are absolutely ruthless. Specifically, if the price gets to low, the energy companies will not be able to cover the cost of production in the U.S. This spending by energy companies, also known as Capital expenditures is responsible for a lot of jobs. The energy sector accounts for roughly one-third of the S&P 500 Capex and nearly 25% of combined Capex and R&D spending. Even more troubling is what this could mean for the financial market. This is one thing we have seen over and over again. The last time that junk bonds collapsed a major stock market crash followed fairly rapidly and those hardest hit were the big Wall Street Banks. Citigroup lost 63% of its value and Bank of America was cut in half. Watch the junk bonds. When they start crashing it is a sign that a major stock market collapse is right at the door. So in conclusion, it might feel good to finally pay less for gas, but I have previously stated, be wary of wolves wearing sheep cloths. Get ready, we are in for a recession/depression the likes of which will make the depression after the stock market collapse of 1929 look like childs play in comparison. Lets hope and pray our children will never have to be/see this come to fruition.😇
Posted on: Tue, 30 Dec 2014 02:11:02 +0000
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