Tuesday, August 18, 2015

As the world's central energy commodity, oil is a good indicator of economic activity. With the nearly universal conviction that the previous bounce in oil prices to around $60 signaled a stronger economy and thus stronger oil demand, logic would dictate that we now consider the opposite: That the new slide in oil prices is signaling new weakness in the world economy. If so, it's the kind that ought to frighten even the optimists this time. 
Having said all this, it might be wise to take any day's price reports in the same way as the low or high temperatures on a particular day. A cool morning in summer does not mean winter is right around the corner. Nor does a hot day in mid-winter spell the end of the season. What's more important is to look at the overall picture to see if the season is changing--or even more important, if the climate itself has shifted, both literally and metaphorically. 
That takes a lot more analysis than the daily market reports can provide and than most people--even those whose job it is to follow markets--have patience for. 
In that regard the long view suggests that the acute investment slump in oil which is unfolding will lead to tight supplies in a few years (because of all the wells that are not going to be drilled to replace the depletion from existing wells). That would set us up for a price spike at some point as it takes a considerable amount of time to ramp up new drilling after a long period of decline. 
All this assumes that the current seeming weakness in the economy doesn't morph into something that would cause a long-term economic decline or stagnation which would keep oil prices low for a much longer period.
DYI Comments:  The possibility of a global recession is growing stronger, however, that possibility negates lump summing into your favorite oil/gas/service stocks/mutual fund.  Dollar cost averaging is the perfect method when an asset category is cheap(good value) but may become even cheaper.  No one knows for sure the direction of oil prices especially in the short term.  The only time when it is recommended to lump sum is when the VIX ratio sky rockets(October 2008).
S&PASX 200 VIX vs S&P/ASX 200 line chart
 At these low prices you are setting yourself up for the next upward run in oil/gas prices.  This is a great time to get in with elevated dividend yields and low stock prices in relation to sales, earnings, and dividends.  The same can be said regarding mining companies as well.  Happy hunting!

Doomsday clock for global market crash strikes one minute to midnight as central banks lose control

1 - China slowdown

The Chinese economy has now hit a brick wall. Economic growth has dipped below 7pc for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.

2 - Commodity collapse

The China slowdown has sent shock waves through commodity markets. The Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices, fell to levels last seen at the beginning of this century.

3 - Resource sector credit crisis

With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.

4 - Dominoes begin to fall

The great props to the world economy are now beginning to fall. China is going into reverse. And the emerging markets that consumed so many of our products are crippled by currency devaluation. The famed Brics of Brazil, Russia, India, China and South Africa, to whom the West was supposed to pass on the torch of economic growth, are in varying states of disarray.

5 - Credit markets roll over

Credit investors are often far better at pricing risk than optimistic equity investors. In the US while the S&P 500 (orange line) continues to soar, the high yield debt market has already begun to fall sharply (white line).

6 - Interest rate shock

Interest rates have been held at emergency lows in the UK and US for around six years. The US is expected to move first, with rates starting to rise from today’s 0pc-0.25pc around the end of the year. Investors have already starting buying dollars in anticipation of a strengthening US currency. UK rate rises are expected to follow shortly after.

7 - Bull market third longest on record

The UK stock market is in its 77th month of a bull market, which began in March 2009. On only two other occasions in history has the market risen for longer. One is in the lead-up to the Great Crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.

8 - Overvalued US market

In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 stands at 27.2, some 64pc above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.
 

Geometric Standard Deviation Average

DYI Continues:  My model portfolio remains the same based upon our averaging formula for our three asset categories.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  8/1/15

Active Allocation Bands (excluding cash) 0% to 60%
85% - Cash -Short Term Bond Index - VBIRX
15% -Gold- Precious Metals & Mining - VGPMX
 0% -Lt. Bonds- Long Term Bond Index - VBLTX
 0% -Stocks- Total Stock Market Index - VTSAX
[See Disclaimer]

Stocks and long term bonds are priced to the moon providing future returns to be dismal.  Expect at these levels stocks to deliver a nominal return of 2% and a real return after inflation, taxation, fees and commission plus trading impact costs of around -2% to -4% on average for the next ten years. Long bonds around 2% to 3% nominal and real return approximately 0%. Cash(short term bonds) at these levels is the better deal.  So hang on to head while everyone else is losing theirs.  Better values are ahead.
The Great Wait Continues
DYI   
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