Many believe that this outcome - US Shale Oil companies going broke - is one of the outcomes Russia is after out of their price war with Suadi Arabia. Lots of talk so far from Trump but only talk. He hasn't done anything to prop up his US on-shore oil producers other than try to talk up the oil price and suggest that production cuts from both Russia and the Saudis were coming. It will be interesting. The USA had become the world's largest oil producer in recent years. That status may soon change if things continue as they have been in recent weeks.
I won’t be buying for a while, I don’t think. I was highly tempted today but if we have a look at where we are in the big picture, there is probably going to be a fair bit more pain to come. These are just my thoughts and I am happy for others to point out any weaknesses or to disagree entirely:
2. The selling at the moment is panic induced, not in response to any new information about how companies are going. It is difficult to see which firms are going to be issuing profit downgrades and by how much, given the supply and demand side of the equation are both going to get hammered. Making an informed decision as to how “cheap” a company is now, based on past earnings is pure guesswork. I suspect we are just anchoring to previous SP levels that were inflated to irrational levels, not making a rational assessment of the future prospects of those companies.
3. No one is clear how long the economic effects of the pandemic will be felt. I am guessing that the medical effects will be around for 12-18 months. Investors go through a series of well recognised stages, a bit like a grief reaction, but at some point capitulation and despair set in. This should be when the valuations are at their best. The flip side is that panic only lasts for so long, so there may be some rally in response to panic fatigue, however I don’t think that will be enough to over-ride the worsening economic data.
4. My portfolio iwas very much invested in growth companies. Generally these trade on elevated multiples during the good times but crash spectacularly during the bad times. There is usually a lag time after a recession when improved economic indicators start to appear and the SP has not yet recovered or reflected this. That may be the safest window to aim to buy in as further losses are considerably less likely. At the moment we have no idea how bad things are going to get.
If you have spare cash then exercising extreme caution, patience and restraint will be challenging when we have always been taught to buy on dips.
You can probably guess that I don’t think this is a “dip” but something far more substantial and would recommend waiting for hard data before dipping your toe back in.
I don’t trust myself to do this effectively as I am already seeing bargains everywhere, so will be handing all my cash to Joe Magyar and Matt Joass to do it for me in about 6 months time.(lakehouse capital and maven funds respectively)
as to the collapse in oil prices:
the bigger risk may contagion in US corporate bond markets. Lots of highly leveraged non-profitable shale drillers are going to go bust . Banks and financial institutions will take a big Hit, and everyone stops lending to each other in a rerun of GFC liquidity crunch. I don't think this is likely but if stocks drop much more into recession territory then a lot of margin calls will come home to roost as well, more panic etc etc
As always best of luck!
A big drop in the price of oil has a lot of far ranging consequences.
Good for consumers, but a lot of industry and credit market negatives. A good overview here: https://www.cnbc.com/2020/03/08/putin-sparks-an-oil-price-war-and-us-companies-may-be-the-victims.html