Wry & Dry

Oil price collapse takes Rupert Murdoch's betrothal from headlines

January is aptly named the 'Silly Season' and so Wry and Dry usually spends it somnolently pondering the smaller issues of life, tending the weeds, chasing possums, hosing the driveway, etc.

But W&D's sense of January's silliness was alerted by that well-wrinkled, but well-heeled, media mogul Rupert Murdoch (aged 84) announcing his betrothal to former model and Mick Jagger wife, Jerry Hall (aged 59).  Between them, they have 5 ex-partners and 10 children.  How will they manage Christmas dinner, W&D asks?

And W&D, now awake to the Silly Season, has been drawn to the media frenzy about the price of oil.  And its seeming effect on the future of mankind.  Well, that is how W&D saw the media's reaction to the dramatic price fall to about US$28 per barrel.  

Headlines to match those of the death of a princess.

And the consequence for the share-markets.

Shares band 3

As readers can see, the January price share-market fall just gives up, more-or-less, the December rally.  Is it as bad as it looks?

And so W&D has ceased hosing down his driveway and returned to the Collins Street Salt Mine to hose down some of the media hysteria.  And see if this is an opportunity.

1.  A lower oil price is not all bad.  In fact, it's a good thing.

It's all about Economics 101.  Or even Samuelson on Economics, circa 1971.  Demand and supply.

Firstly, to a certain extent the oil price decline is a reflection of a concern about global economic growth (see more on China, below).  That is, it is telling a story about future demand: a slower global economy will consume less oil.  Less demand means lower prices (ceteris paribus, as any economist might say).

Secondly, and more critically, there is too much oil sloshing about the world. No doubt about it.  And the International Energy Agency has said as much.  The US oil shale boom, continued OPEC production and the lifting of sanctions on Iran (so it can now export oil) have added to the over-supply.

Even the fiscally-thinner Clive Palmer could work out that falling demand and rising supply is going to cause a large fall in the price of anything.

But what the media seem to be missing is that, although the low price of oil points to an expectation of lower global growth, it also means that the world doesn't have to spend billions of dollars on oil.  As W&D said last year, "where has the half a trillion dollars gone?"  That is, the half a trillion dollars not being spent on oil purchases.

This lower price of oil is like a massive tax cut to the world.  It will flow through to cheaper, well, almost everything.  Mind you, that in itself causes conniptions with economists and academics who worry about falling retail prices.  But give W&D a break, if Josephine Main Street's petrol bill is $10 per week less, then she has $10 per week to spend on other things.  Or save.  The same applies to a company where a main supply input is oil-based: costs go down, profits go up.

In aggregate, the (significantly) lower price of oil will lead to lower inflation and higher GDP growth.  

This will take time to work through.

But in the meantime, as markets and media are want to do, the focus is on the negatives of an oil price drop.

2.  Markets over-shoot

As W&D keeps on saying, in the short-term markets are driven by emotion.

Sell cartoon

Dennison Hambling, First Samuel's Chief Investment Officer, addresses this issue in Investment Matters, below.  Readers should take the time to review his comments. 

For now, markets are getting cheaper (and readers know that it is foolish to sell things that are cheap).  But might get still cheaper.  But wait! There's more...  First Samuel clients' share portfolios are not the market.  And are structured very differently.  And so are doing better than the market.

W&D's investment words are: consider your own portfolio, not the market.  It's what you own that counts.