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12/15/2014

At this time of year we’d like to hang up the analysis of the markets and wish everyone a very Merry Christmas but in light of the heavy volatility picking up in the US equity market, Junk Bond markets and global Oil markets, we’ll have to wait a bit to celebrate the holidays.

You’ve heard the highlights regarding the price of oil breaking below $60 a barrel.  To most everyday individuals that would probably be a good thing since the price of gas declines.  Other positives are decreased costs to oil importers, not to mention the cost of peripheral products that depend on oil as a factor of production.  However the consistently lower price of oil is causing significant repercussions in the financial markets in general. 

One of the main problems is that as oil prices increased to over the $100 mark, many new oil ventures became profitable, and with future profitability looking promising, along came leveraged financing to fund the ventures.  The problem now is that with oil dropping some 40%, once lucrative projects are now showing red and the leverage to fund them is beginning to pop.  The result is pressure on organizations in the oil production side and on the financial organizations and assets that were used to fund it (just take a look at the junk bond market)….sound familiar? 

Unfortunately the global economy is not in the best shape to handle pressure on the financial system, given the recession in Japan, bad debt growth in China, not to mention problems lingering in Europe.

Our team once again has to raise the risk profile on Stocks.  Keep an eye on the price of crude and overseas markets to see signs of stability.  Path of least resistance remains for lower prices…but we always have to mention the chance of odd phantom buying coming out of nowhere.

 

Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR

 

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