A Balanced Diet?

As the oil price continues to crater it is starting to have an impact on the market.  Oil stocks are dropping fast and countries that rely predominantly on oil exports are starting to feel the pain.  As an example Exxon Mobil is down 15% since August, the Indexes of Oil Refining and Oil Pipelines are also down 15% over the same period while the Oil and Gas Equipment and Services Index is down almost 50%.  This is having an impact on the overall market and when one considers that most analysts have factored in an average price for oil of $85 a barrel in 2015, the price of crude oil will have to make a dramatic recovery from its current price of $58 to set that bar in 2015.  If oil continues to spiral lower that number will have to be taken lower meaning that there is a lot more pain to be felt not only in the oil stocks but the oil producers.

Saudi Arabia has always been the most prolific oil producer in the globe, able to manipulate prices to suit itself and its OPEC friends.  The last time oil fell this far the Saudis cut supply and watched as their neighbors continued pumping oil and stealing market share from their generosity.  They have learned their lesson and this time around they have not taken the gloves off but have continued full ahead with pumping.  They can afford to as they have almost $1 trillion stashed away in foreign reserves.  The laggards of Russia, Iran and Venezuela are really feeling the pinch as none of them have this luxury.  Their currencies are now in free fall causing widespread inflation in their countries.  It is only a matter of time before there is widespread civil unrest in these areas and this will have global impacts but that is for another blog.

So it is interesting then that my trading has formed what I term a "balanced diet".  I have four long positions and four short positions.  The longs (investment that expect the price to rise) are Gold, Silver, 10-year Treasuries and Corn.  The first three are a direct result of the weakness being seen in the market and the rush for people to seek protection.  Gold and Silver in particular look like their day in the sun may return soon after a three year hiatus while Corn is benefiting from global demand and a perceived lack of the ability to supply.  Whether this works out that way we will see as with reduced crude prices comes the ability to plant more crops so this may not work out but only time will tell.

On the short side (investments that are expected to fall in price) are Crude Oil (still), Natural Gas, the S&P 500 and Copper.  All of these are pointing to a weakening global economy which is interesting as the fall in the price of Crude Oil should benefit global output.  Today the consumer sentiment numbers were published and they were the highest since 2002.  A large part to this is the benefit that the consumer is seeing in the reduced price at the pump and this is having a direct impact on their spending ability.  So with the double benefit of global growth and consumer sentiment you would expect the market to benefit but the current fear is that  the lower crude prices will pull the globe into a period of deflation.

Already Europe and Japan are struggling with deflation and even China and the United States are seeing inflation well below their respective targets.  Could the decades of fighting the inflation beast finally be the death of it resulting in the emergence of something far more sinister?  This is what concerns the market at present and this is why it looks like it will test its October lows in the not too distant future.  Maybe having a balanced diet is the answer - as long as it includes a few pieces of Hawaiian Fudge!