$590 BILLION ...GONE IN A DAY / CASEY DAILY DISPATCH

$590 Billion…Gone in a Day

Justin Spittler


Oil just hit a fresh 11-year low.

The price of oil dropped 6% today. It’s now down 68% since peaking in June 2014. Oil hasn’t been this cheap since February 2004.

Dispatch readers know the world has too much oil right now. “Fracking” and other new technologies have unlocked tens of billions of barrels of oil that used to be impossible to extract.

U.S. oil production is at a 30-year high, and the U.S. is now the world’s largest oil producer.

According to the International Energy Agency (IEA), oil reserves of developed nations reached a record high of almost 3 billion barrels in September.

• OPEC is also pumping record amounts of oil…

The Organization of the Petroleum Exporting Countries (OPEC), a cartel of Middle Eastern countries, produces 40% of the world’s oil. Until recently, OPEC limited its oil production to keep prices high.

But last month, OPEC abandoned its production limit of 30 million barrels per day (bpd). According to Bloomberg Business, investment bank Goldman Sachs (GS) expects OPEC to pump 32 million bpd this year. That would be a new record.

The economies of OPEC nations depend on oil. For example, crude oil accounts for 83% of Saudi Arabia’s exports. And it makes up 68% of Iran’s exports. These countries must keep pumping oil…even with prices at 11-year lows.

• Shares of major oil companies dropped…

ExxonMobil (XOM), the largest U.S. oil company, fell 0.8%. Chevron (CVX), the second biggest U.S. oil company, dropped 4%.

Oil services companies, which sell “picks and shovels” to the industry, also tanked. The Market Vectors Services ETF (OIH), the largest U.S. oil services ETF, fell nearly 4.5%.

Eventually, this cycle will end with absurdly low prices for oil stocks. We’ll get an amazing opportunity to buy oil stocks at fire sale prices. But, for now, the world is simply pumping too much oil. We’re staying away.

• Energy is just one sector that’s struggling…

If you’ve been reading the Dispatch this week, you know U.S. stocks have had a horrible start to the year. The S&P 500 fell 1.5% on Monday, its biggest year-opening drop since 2001.

Today, U.S. stocks slid again. The S&P fell 1.3% to its lowest level in nearly three months.

Foreign stocks have sold off too. The Japanese Nikkei 225 fell 1% today…and the Euro STOXX 600, which tracks 600 of Europe’s largest stocks, fell 1.3%.

• Emerging market stocks are hitting new lows…

The iShares MSCI Emerging Markets Index (EEM) plunged 1.9% today, and is down 4.4% this year.

That follows a 16% decline last year, its third losing year in a row. Emerging market stocks are now at their lowest level since 2009, when the world was in a financial crisis.

• And Chinese stocks are off to their worst start ever…

The Shanghai Composite Index tanked 6.9% on Monday. The crash erased $590 billion in value from Chinese stocks. China’s stock market is the second largest in the world, behind only the U.S.’s.

The selloff triggered China’s new “circuit breaker” rules, which automatically suspend trading for the rest of the day. The Chinese government put these rules in place to prevent panic when stocks crash. But, like most government rules, they do more harm than good.

Here’s Bloomberg:

While the maneuvers may stabilize the market temporarily, they’re unnecessary because intervention creates price distortions and fosters moral hazard as traders come to view the government as a backstop for shares, according to UBS Wealth Management, Henderson Global Investors and Wells Fargo Funds Management.

Many investors also expect Chinese officials to extend the ban on short selling (betting that a stock will fall). Chinese regulators banned short selling over the summer, and the ban is set to end on Friday.

Chinese stocks are extremely volatile. They have huge booms and huge busts. If you prefer safe, steady investments, don’t buy Chinese stocks.

If you do invest in Chinese stocks, use stop-losses. A stop-loss is a predetermined point at which you’ll sell a stock if it declines. Using a stop-loss will allow you to make money while a stock is rising…then automatically sell when the uptrend ends. It allows you to speculate in volatile stocks without risking huge losses.

• With stocks around the world falling…

We recommend owning a significant amount of physical cash and physical gold. And to avoid major losses, we suggest selling any stocks that are expensive or vulnerable to an economic downturn.

Holding a significant amount of cash will ensure you can buy stocks next time they’re cheap. And physical gold is wealth insurance. It has protected wealth through stock market collapses, economic depressions, and full-blown currency crises.

If you’re interested in other proven strategies to protect your money from a bear market, watch this free video we put together.

Chart of the Day

Emerging market stocks just hit a six-year low.

Today’s chart shows the performance of the iShares MSCI Emerging Markets ETF (EEM), the second-biggest emerging market ETF. As we mentioned earlier, EEM has dropped to lows not seen since the global financial crisis of 2008-9.

Yesterday, Financial Times explained why emerging markets stocks could drop even further…

The emerging markets-focused investment bank [Renaissance Capital] predicts that 17 of the 36 EM countries it covers are likely to be downgraded by at least one of Moody’s, Standard & Poor’s and Fitch in the next 12 months.

Such a tally would comfortably exceed the joint record of 11 sovereign downgrades in 2008, 2012 and 2013.

Credit agencies like Moody’s (MCO) and Fitch downgrade countries whose financial health is worsening. If Renaissance Capital is right about the record amount of defaults coming this year, emerging market stocks will likely take another big leg down.