[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]P[/dropcap]ressured by China’s drop in manufacturing and Oil prices, stocks in the United States have been taking a beating, down more than 10% and are entering into correction territory. For a bull market that has been on the run for the past 6 years, one might be tempted to say that a correction was overdue and that is what you are seeing being played out. Falling Oil prices and rising interest rates are pressuring many Shale based Energy companies in the United States as they have to pay back their loans in a climate where they are getting substantially lower returns for their product (Crude oil).
As stocks seek a bottom, this might be a good time to buy.
Extracting crude from Shale is done using a fracking process. To give you an idea of how lower crude costs hurt Shale gas companies, a key step in hydraulic fracturing is the pumping of so-called proppant into a well under tremendous pressure to open cracks from which oil and gas can flow. Proppant is a combination of water, sand and additives that depends on the type of formation being drilled. The average cost of Proppant per barrel varies between $3.58 – $11.08. This is just one component in the Shale extraction process that illustrates the fact that for Shale based Crude extraction to be profitable, the price needs to be north of $50 per barrel.
[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]U[/dropcap]S companies are reporting strong quarterly returns, barring the Energy sector, which leads one to believe that the underlying fundamentals of the US economy are strong, notwithstanding the pressure exerted by lower oil prices. You can view low oil prices as a “tax break” because it forms the bedrock of pricing in many household commodity items. Mohammed El-Erian of Alliaz Capital, in this Fox News’s “Sunday Morning Futures” with Maria Bartiromo, said the following about US Economy:
“We are experiencing a lot of volatility. Growth and wages are lower than where we could’ve been, but let’s not forget it’s an economy that creates a lot of jobs,” the Allianz SE’s chief economic adviser said.
As stocks seek a bottom, this might be a good time to buy. All you need is a cash cushion, a list of good companies to put it in and patience, tons of patience as you will not be able to call the exact bottom so you will have to buy small chunks and be alert for signs of uptick. Happy investing!