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Is Cheap Gas a Good Thing?

Is Cheap Gas a Good Thing?

While the stock market has been making new highs over the last few weeks, there is one sector that continues to drop… dare I say plummet!

In June, a barrel of oil cost $107, today (less than six months later) we are at $66 per barrel. That’s a drop of 38 percent.
This has certainly had a positive impact for us at the pump. Nationally, gas is at $2.72 while Georgia has an average of $2.65… and falling. To put that in perspective, in June, Atlantans were playing closer to $3.70!

This is wonderful for you and me as we are able to enjoy this drop in price when we’re filling up our cars… but what about the rest of the US economy?

Energy stocks have hit a brick wall. While many energy sector stocks were up around +15 percent this summer, they’re now looking at a minus 10 percent return for the year.

There are several reasons why we have seen oil prices drop since the summer. First, there has been lighter demand growth around the globe for oil. China and Europe’s slower economies haven’t been as demanding of “black gold” as they face slower growth in 2014. Second, there is a persistently higher supply right now due to new drilling technology, tremendous amounts of new oil supply found right here in America, and the Middle East oil power houses having decided to keep their output supply as-is.

In a much anticipated announcement on Thanksgiving Day, OPEC (Organization of the Petroleum Exporting Countries) decided not to cut their production targets. They, of course, could have chosen to stabilize the price by producing and exporting fewer barrels of oil per day… but that’s not how it played out. Why would they do this?

There are oil producers/competitors all over the world that can’t survive with oil prices much lower than they are today. The US’s new oil producers represent some of that contingency and there are many other international producers likely to decide to shut down higher cost oil exploration, as well.

Ultimately, I think the countries in OPEC (especially Saudi Arabia) are flexing their muscles in an effort to reassert themselves back into the director’s chair. Unfortunately for the Saudis, though, I just don’t see this playing out in the long run. They are just too dependent on their one trick economy. On top of that, low gas prices are good news for consumers and businesses here in the US.

Let’s circle back to the original question; are low oil prices bad for our economy? Is it bad for oil dependent companies?

Of course it is, at least in the short term. However, the major US oil companies have plans in place for situations just like this and are likely set to ride out this drop in prices. In the meantime, economic growth for the third quarter was actually revised up from 3.5 to 3.9 percent. That’s almost 4 percent growth! It’s easy to see where this comes from, as well.

For every $1 per gallon drop in prices at the pump, you and I are going to save about $1,000 a year on gas. Just think about how big a dent that is for a family bringing in $50,000 a year?! That extra money is going to get spent somewhere, whether it’s Target, Amazon, Delta, or even a neighborhood shop.

This is exactly why we have seen stocks for airline companies, retailers, and hotels rally as oil prices have dropped. It’s not just these guys that win when the cost of oil and gas goes down, though. Transportation actually gets a huge lift. UPS and FedEx rallied on the oil price drop, as well. The chemical industry, groups producing plastics, rubber, asphalt, paint and more, also saw an increase in value. Even agriculture got a bump.

While OPEC drops the price of oil around the globe, leveraged oil companies (the ones with the most debt) are no doubt feeling the pain. US oil stocks also get hurt (i.e. the recent pain we’ve seen in the stock market). However, while OPEC plays the waiting game with their competition, the US consumer economy should be getting a huge boost!

The energy sector makes up less than 10 percent of the S&P 500, so a fraction of the overall market is getting hurt. Meanwhile, many of the other nine sectors in the S&P (and don’t forget you and me) are likely getting a little relief .

Bottom Line
Could this take out some of the most marginal, border-line energy companies across the globe? Yes. Could this dip hurt the junk bond market? To some extent, yes. However, the way I see it, for now the good outweighs the bad when it comes to low energy prices.

Read the original article here.


 

‘The US Economy Is Actually Doing Well’

If the last time you heard that “the economy is doing well” and thought to yourself “no way that’s true,” and “the source must be crazy”, then this blog is written for you.

I consistently discuss the state of our economy on WSB radio, and here in many of my blog posts. I’ve noted the economic bounce back we’ve experienced over the last several years and more recently noted how the economy is firing on multiple cylinders. I’ve also noted that we’ve been out of the recession since 2009 (also according the NBER who officially keeps tabs on economic cycles). While I continue to discuss extensive data to support the economic expansion we’ve been seeing, I’ve been amazed by the number of responses I’ve received from people who say that they don’t believe me (and not all of them say it so nicely). In my post several weeks ago I referenced a survey by the Public Religion Research Institute which said that 72% of US survey respondents still think we’re in recession.

I understand that when you see two of your neighbors out of work for months at a time, or your 25-year-old son can’t find a job, it’s easy to think that the economy hasn’t recovered. But, according to the Bureau of Labor Statistics US employment is actually at just 5.8% as of November. While it might not feel like the economy has recovered based on what you see around you, as investors, we have to look at the bigger picture when talking about the economy. We can’t zoom in on what we see happening in our own backyard.

One of my favorite Warren Buffett analogies has to do with the US economy and how it related to an “Economic Pie.” To breakdown his idea into simple terms, he believes that as the “pie” gets bigger, investors will, over time, participate in that growth. It’s important to know, though, that it doesn’t necessarily mean that every single ingredient in the pie, or even every slice, has to get bigger or grow at exactly the same time.

Now let’s look at how this translates into the real world today. At any given point in the economic cycle we will see unemployment numbers fluctuate, consumer confidence jump up and down, the housing market zigzag and manufacturing constantly move in fits and starts. While we rarely see every single economic indicator move up at the same time, it’s the sum of the pieces moving together in an upward (growing) direction that really matters. The pie as a whole is what we need to pay attention to – not just what you see anecdotally. And, as a whole here are a few important points to note the economic progress that we have made since the recession ended in 2009:

  • Unemployment – Peaked at 10.1% in 2009, today it stands at 5.8%
  • Housing – Housing starts bottomed in April of 2009 at close to 450,000. Today we are building close to 1.0 million new homes a year.
  • Manufacturing – The ISM manufacturing index has risen from below 35 (indicating severe contraction), to nearly 60 today (any number above 50 spells expansion)
  • The question is will we continue to see a moderate to strong economy over the next 6 to 12 months?

Economic forecasting is a difficult business; however, building on where the economy stands today and factoring in the impact of lower energy prices – the outlook is healthy:

  • Lower energy prices = increased consumer spending
  • Lower energy prices = continued low inflation
  • Low inflation allows the Federal Reserve be patient about raising borrowing rates
  • Continued low rates are a tailwind for the economy, jobs, housing and the stock market.

Bottom Line

Warren Buffett’s analogy about the “Economic Pie” getting bigger is exactly what has happened here in the US over the past 5.5 years. While the economy sometimes feels like it’s zigzagging and confusing, overall we’ve been seeing the pie grow. As this continues we will see continued prosperity in the US. That’s good news! Even if it’s sometimes hard to see.

Read the original article here.


 

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