opportunities

oleksandr_tereshchuk
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COVID-19: Oil & Stocks

Cheeeeep GAS

You have already noticed that the gas prices went down. Significantly! The first drop started on February 21st (Friday). Nothing critical, a slight fall down which had stopped on February 28th (Friday), exactly in a week. We are witnessing the Oil War – an epic battle between Russia and Saudi Arabia.

  • Why did the fall stop? 
  • Why did it rise back up? Briefly, but it id
  • Did someone regulate it? 
  • Was there events that caused the stall?
  • Is there an economic mechanism for oil price regulation?

Who controls the oil prices?
 OPEC or the Organization of the Petroleum Exporting Countries was formed to negotiate matters concerning oil prices and production.

How does OPEC do it?
OPEC controls oil prices through its pricing-over-volume strategy. … Thus, when there is a glut of oil in the world, OPEC cuts back on its production quotas. When there is less oil, it increases oil prices to maintain stable levels of production.

Why do oil prices fall?
Factories have been idled and thousands of flights canceled around the world as the coronavirus outbreak. People work from home – they drive less. Shrinking demand for jet fuel, gasoline and diesel. And now – the travel ban between the United States and Europe. It’s a nightmare scenario for the oil market.

What cheap oil means?

  • You will benefit from lower oil prices and the resulting decline in gas prices at the pump, especially in the United States where retail markets react more directly to supply and demand.
  • If you work on oil somewhere in the plant in Texas, Louisiana, Oklahoma, New Mexico or North Dakota, you will most likely lose your job.

Warren Buffett talks oil price plunge

Stock are Down

Let’s see what is happening in market by industry:

Every industry has been negatively affected. Some more, some less. I circled the most affected industries. Let’s look closer:

Consumer Discretionary Sector -> Tesla is doing AMAZING

⬆️ Stocks that are on rise:
⬆️ Technology Sector displays growth:

Grocery Stores Industry shows great Performance. Costco stocks went up. People buy food in bulk! Folks also buy drugs, which is totally understandable and clearly observed from the stocks perspective Pharmacy Services & Retail Drugstore Industry Performance.

People play more video games: Gamestop Corp   (GME)

People are being asked to isolate themselves. This is against human nature, therefore people will find other “safe” ways to socialize. Because people won’t socialize as much, they won’t buy a lot of jewelry and accessories. Apparel industry will also see a dip. 

Shares of Signet Jewelers Are Down

Tiffany & Co. (TIF)

So what does the market tell us?
  1. People are scared
  2. When people are scared, they buy food and drugs. In bulk!
  3. Computer companies are on the rise. Particularly Networking and hardware industries
  4. People spend more time at home and play more video games
  5. When people don’t socialize as much, they worry less about the way they look
  6. People won’t go to the grocery stores as much. Online grocery shopping and delivery will grow
  7. People invest in Gold – one of the safest currencies.
oleksandr_tereshchuk
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COVID-19: The time of great Opportunities p.1

Up to this day I have not given too much of my attention to all the hype around COVID-19 virus. Up until now, however not because of the virus itself, but economical and social changes it caused directly or indirectly. The changes I witness are monumental. Right this moment we live in a really-really interesting moment. Nothing like this had happened before and we are at the front row of sets in theater of life.

Before I dive into the current state of economy and all the exciting things that’s happening, I need to refresh the memory on some of the basics. To make educated decisions and fair assumptions you have to understand how the economy works. This is the first time I actually went back to the knowledge I obtained at MBA school in my ECON class.

Low Interest Rates

As of March 13, interest rates are historically low. The last time we’ve seen such numbers was in 1991. What does it mean to you, economy and society?

Low interest rates are good for the economy: they stimulate people to buy more. Spending drives the economy. One person’s spending is another person’s income. The more people buy, the more is being produced. The more real estate a person owns, the more willing a bank is to grant the mortgage to that person. (coladerall)

Because interest rates are low, people will start to borrow more money. Borrowing will set us into the short-term debt cycle. This cycle works in phases, and typically lasts 5-8 years. 

The phases are: 

  1. Interest Rates are low.
  2. Spending increases. People buy more stuff. Economy expands
  3. Income Increases. One person’s spending is another person’s income.
  4. Prices go up. Especially its noticeable in the real estate market. Because production of goods could not keep up with the growing demand, prices on existing houses go up. Now more people have money and are wanting to spend them, however it takes time to build the house.
  5. Inflation goes up. This is where the problems begin. 
  6. Interest rates go up. 
  7. People borrow less. Fewer people are now able to borrow.
  8. Spending decreases. People spend less.
  9. Income Decreases. Economic activity decreases
  10. Deflation
  11. Recession 
  12. Lower Interest Rates
  13. Repeat. 

Accessible Credit – Expansion 
Hardly Accessible Credit – Recession

With the new knowledge in mind we can assume and expect house prices to rise. Everything happens in cycles and the short-term debt cycle is just a building block of the long-term debt cycle. Each time The Bank lowers interest rates to stimulate the economy and get back on track, we leave more and more debt behind. Debt burden slowly grows until it’s not. Economic collapse is inevitable in countries with credit. People are not good at spotting long-term patterns and it makes it hard for them to spot, even harder to predict when the next crash comes. It all eventually leads to depression…

Key Takeaways:

  1. House prices will rise
  2. People will buy more
  3. Interest rates will remain low for some time (no need to rush)

The questions are:

  1. Why does the government stimulate the economy by lowering IR?
  2. What will be the lowest interest rate in this cycle and when will it occur?
  3. How long will housing prices be rising for, until we reach the ceiling?

YouTube Video: How The Economy Works by Ray Dalio