The sharp fall in oil prices engineered by Saudi Arabia will likely be fairly short-lived, and indeed it should set the stage for the next major rally in oil. While prices could stay low for another six to nine months or perhaps a little longer, odds look good that within the next 12 to 18 months oil prices will rise much closer to their all-time highs from current levels. Moreover, oil’s drop has shortened the time it will take for commodity prices in general, whose correction began in 2011 with Europe’s recession, to bottom. All this has important implications for the short- and longer-term geopolitical and economic outlook and for U.S. investors.
For the U.S., the lower oil prices are a mixed blessing. On one hand, they will put extra cash in U.S. consumers’ pockets; on the other, the country’s most dynamic industry, energy production, will crumble. For investors, we’ll note that since OPEC first flexed its muscle in the early 1970s, U.S. stock markets have never experienced major declines concurrent with a bear market in oil prices.
The two economies that will benefit the most are Europe—at least over the shorter term—and China. Both are major oil importers, and lower oil prices are a free shot in their economic arm, giving consumers extra cash without the government laying out a penny. But China stands out as the biggest winner by far, with the drop in oil a multifold blessing over the shorter and longer terms alike.
It not only hands Chinese consumers a de facto tax cut; it also gives the yuan more freedom to follow its upward trajectory. This further boosts consumer demand while allowing China to import all the military and other technology it craves. Better times in Europe will also help offset the higher yuan as European consumer spending picks up. As a bonus, China gets to buy oil on the cheap Read more about How to Profit from the Trough in Oil 12-02-14
American families and friends will gather tomorrow for our annual Thanksgiving celebration. We’ll spend time with loved ones, share laughs, watch some football, and more than a few of us will step away from the table having consumed a little too much turkey, trimmings and pumpkin pie. Read more about What OPEC and Your Brother-in-law Have in Common 11-26-14
A surprise rate cut from China and more talk of quantitative easing from the European Central Bank has stocks charging ahead today. While we welcome those moves, we’re a bit nervous about the near-term as share prices were already overbought prior to today’s trading.
That said, we’re introducing a new stock this issue: A leading consultant to the U.S. Department of Defense, intelligence and civil agencies, with a particular strength in cyber security. The stock is a relatively low-risk investment that Wall Street greatly underestimates—and thanks to its strong free cash flow it’s yielding around 10 percent. Read more about A Leading Cyber-Security Play Joins RWI