Thursday, Dec. 4, 2014

I have worked on Wall Street for 42 years and one of the things I have learned is good news is rarely all good and bad news is rarely all bad. The current good news, at least for the US consumer, is the rapid drop in oil prices. We are all looking forward to receiving a 30% discount at the gas pump. In today's age of globalization there will be unexpected consequences of a dramatic price drop of an essential commodity. The easiest and most obvious is that the oil producers will be under pressure because of the lower price, but what about the banks who jumped into the shale oil /fracking business to finance the projects? Oil is a capital intensive business and somebody has lent  a lot of money to projects that may not be viable anymore. Oil producing countries have been living fat dumb and happy for the last 30 or so years because they had all the money they needed. What happens if they get squeezed, will they have to liquidate their investments like London Real Estate or US Treasuries? Do we even know what they own? What is the political impact of the lower revenues vs expectations of OPEC citizens concerning government largess? What about mutual funds who sold indexed stock funds when oil companies are a big part of the composites? For every winner in this scenario like Airlines (because of reduced fuel costs) there will be a loser (citizens of Alaska who receive a state dividend from the trans Alaska pipeline).  The impact of this move will pop up in unexpected places.

At the end of Caddyshack (greatest movie ever?) Bill Murray starts blowing up the gopher holes and nobody know where the next blast will be, the markets appear to be in a position to repeat that performance. Be careful where you step.