The Collapse in Oil Prices is Not an Unprecedented Event

Posted by on

Oil prices have fallen heavily since 2014. Prices reached more than $125 per barrel just a few years ago. On Friday Brent crude futures closed at $38.72/bbl.

For a few years it seemed oil prices would hold forever at around $100/bbl. Oil producers, refiners and others enjoyed a great earnings period as US consumers were hit with paying over $3.00 per gallon of gasoline and phrases like “pain at the pump” became a standard headline news title by the media. From June 2014, oil prices started to fall dramatically leading to plunge of more than 50%. Nowadays some experts are projecting oil prices to reach as low as $10/bbl or below. According to an article by the IMF, though the collapse in oil prices may seem like an unprecedented event, actually there were three major oil price declines in the past.

Click to enlarge

Past Oil price Collapses


The table below shows the similarities and differences of oil price collapses:

Past Oil price Collapses-Similarities and Differences

Source: Finance & Development Magazine, IMF, December 2015

Here are a few points to remember about oil:

  • Oil is one of the most widely traded commodities. Since all commodities are volatile and unpredictable, oil is no different. In fact, oil is more than other commodities due to many factors including speculation, OPEC, shale oil, supply and demand, etc.
  • Oil prices can increase or decrease for a multitude of reasons. So equity investors should not change their investment decisions based on oil prices alone. For instance, two guys with firecrackers can punch a hole in some pipeline in Nigeria and cause global prices to go down. Similarly the OPEC cartel can restrict production to raise prices. Nobody in the world knows exactly where oil prices go next.
  • While low oil prices adversely affect the stocks of companies in the oil industry it does not mean all other industries will also be impacted. There are winners and losers of low oil prices. Hence investors should not panic and instead should focus on picking up cheap stocks from sectors that are bound to benefit from low prices.

Related: Which Sectors are Winners and Which are Losers from Lower Oil Prices ?, TFS

Related ETN:

  • iPath S&P GSCI Crude Oil TR ETN (OIL)

Disclosure: No Positions

Is China Stock Market A Colossal Casino?

Posted by on

Investing in emerging markets involves more risk than developed markets. Among the major emerging markets, the Chinese equity market is considered by some investors as one huge casino. This year the Shanghai Composite Composite Index is down about 19% year-to-date. Last year Chinese stocks had a tumultuous year to say the least.

The following chart shows the long-term return of the Shanghai Composite Composite Index with all the ups and downs over the years:

Shanghai Composite Long-term returns

Source: Yahoo Finance

Though volatility in emerging markets is expected, the China equity market is a class of its own. Unlike other emerging markets, the Chinese market is dominated by retail investors who seem to be extremely impatient to get wealthy. Here is an interesting cartoon depicting the Chinese investors and the stock market:

Click to enlarge

China Stock Market Casino

Credit: Nichols Cartoons

In China, people spend their past time watching the stock market. Brokerage offices have giant monitors with theater like settings so that investors can sit and watch the market. Senior citizens especially seem to spend their past time even their whole day in these places.

An excerpt from a recent BBC article:

Making friends and money

Last year I went to a brokerage house in Shanghai, the sort of stock exchange shop floor. All around me were people of a certain age, all busily trying to fill the family coffers.

They arrive in the mornings with their flasks of green tea and spend the entire day watching the red and green flashing lights and making bold decisions about their future. It’s also a venue for socialising: people are making friends and, of course, passing on tips of the trade.

This isn’t just an interesting phenomenon – it does have implications on the market.

Large numbers of small traders can move in unpredictable ways, which can add to the swings we’ve seen in the last week. Experts call it “herd behaviour”.

Source: China’s stock market and the rise of the ‘pyjama traders’, The BBC

Some photos of retail investors in China:

HAIKOU, CHINA - AUGUST 26: (CHINA OUT) Investors have a rest at a stock exchange hall on August 26, 2015 in Haikou, China. Chinese shares plunged on Wednesday with the benchmark Shanghai Composite Index down 37.68 points, or 1.27 percent, to close at 2,927.29. The Shenzhen Component Index fell 298.22 points, or 2.92 percent, to close at 9,899.72. (Photo by Luo Yunfei/CNSPHOTO/ChinaFotoPress/ChinaFotoPress via Getty Images)

China Brokerage Office-3

China Brokerage Office-2

Note: In China, red means stocks are up and green means they are down. 

Sources: Time, BBC

I do not know the answer to my title question. But one thing is clear. Investing in China is not the for the faint of heart. In addition to high state invention in the functioning of markets, extremely high retail participation makes volatility even higher since retail investors are the usually the first to bail out when markets decline and tend to pile on to equities when markets keep rising.

Knowledge is Power: Oil Stocks For Income, Emerging Markets Myths, Global Exposure Edition

Posted by on

Click to enlarge

Andre-3

Photo Courtesy of: Andrej Ciesielski in Hong Kong

For more awesome photos of Andrej visit his site.

Five Bank Stocks Yielding More Than 5% Dividends

Posted by on

After the recent rout in equity markets worldwide some of the banking stocks are worth a look at current levels. Since share prices have declined, high quality banks have dividend yields of more than 5%. Unlike banks that are still bogged in credit-crisis era issues, the following banks are relatively in healthy shape and are listed here for further research:

1.Company: Nordea Bank AB (NRBAY)
Current Dividend Yield: 6.66%
Country: Sweden

2.Company:Svenska Handelsbanken AB (SVNLY)
Current Dividend Yield: 5.30%
Country: Sweden

3.Company: DBS Group Holdings Ltd (DBSDY)
Current Dividend Yield: 6.55%
Country: Singapore

4.Company: Banco Latinoamericano de Comercio Exterior SA (BLX)
Current Dividend Yield: 6.90%
Country: Panama

5.Company: Westpac Banking Corp (WBK)
Current Dividend Yield: 6.40%
Country: Australia

Note: Dividend yields noted above are as of Mar 2, 2016. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Dividends from Aussie banks are franked. So dividend withholding taxes will not be deducted for US investors. Singapore is one of the few countries in the developed world that withholds 0% for investors.

Disclosure: Long WBK