July-October 2011

Prediction due October, 2011:


Regarding Nations…. US stocks will be higher. The US economy will continue to grow, and unemployment will decrease, again falling below 9% and perhaps below 8%. EUROPE will continue as it is now, with growth and contraction: GREECE’s $350 billion in debt will not be solved. Developing world growth will continue apace. CHINA’s inflation will increase and will likely force a continued rise in the Yuan; export growth will slow.



Measuring Markets…. Most base commodity prices will plateau or even decrease. Global food prices will continue to increase, forced by weather disruption and increasing middle class consumption. Consumer durable items will continue to decrease in price because of oversupply in manufacturing and falling overall demand in the US and Europe, however rising wages and Chinese inflation will begin to offset this.



Concerning Companies…. The combination of rising labor and high commodity costs have and will squeeze the profits of manufacturers because US and increasingly European consumers will not pay higher prices which companies will try to charge. This will hurt companies producing commodity consumer wares; beware clothing companies whose main cost is labor. Food companies will also see inflation hurt profits, perhaps with the exception of fast-food companies expanding in China. The internet will continue to grow quickly internationally. Shipping will grow with the US economy. Natural gas generators will be in demand, and perhaps we may be at the beginning of a long natural gas industry growth as efficient LNG gas transportation begins to operate. Medical expenditures will begin to rise. Software, privacy and efficiency related industries will grow.



Current Economy:



Stock valuations have fallen recently. Four regional economic bodies weigh on current stock valuations - the US, Europe, China and Japan. Uncertainty now leads to a highest-ever bid to have lunch with Warren Buffet and ask his advice. Newspapers suggest the US economy could stop growing and fall into a “double-dip recession”. The Euro may disintegrate. Modern China could have its first economic contraction due to its property market and general inflation. I do not agree with these opinions, and I will discuss each of the four regions briefly. China I will discuss in more depth.



Crisis Points: US, EU, China, Japan.



US: the coming end of US Federal QE2.

America has been devaluing the dollar now for three years without this “dispensed” cash really creating any obvious difference, and now we are at a “final moment”, when the US will stop buying its own debt, or printing money. Investors and companies are waiting and wondering, “is it gonna hold?” The largest worry is that the US will not be able to refinance its debt cheaply in coming years, squeezing the US government in unprecedented ways. If the US does not grow this could be the case. So there is caution, as there should be…

In the last month the US economy has slowed more than expected, and it has slowed even before the end of the Federal stimulus program QE2. US economic information could be read as caution across the board (hiring, investing, producing, buying), but the early onset of this US slowdown is also a result of Japanese manufacturing stopping during this period. US Car and computer companies have not been able to produce enough, and the second-hand car market has increased unexpectedly. Supply-line disruption from Japan has led to additional industrial slowdowns, but this is likely not a larger trend but a short-term affect that will reverse itself because there is demand for these products. I believe in August the US economy will grow faster than anticipated as Japanese companies begin producing again, US demand is higher because the US did not fall off a cliff in June, and Japan’s demand for imports increases to rebuild after its disaster (US exports to Japan are already increasing).

Assuming the US continues to grow in June, this current fall in stocks is likely now bottoming. However, if the US Fed ceases to create the money that is most used in the global economy this will have other effects. Commodities may fall in price, global interest rates may continue to rise, and the dollar should stop falling. Current cheap debt will grow more expensive in dollar denominations, while global inflation will likely ease (with the exception of China), thus letting debt from these countries cheapen. IF the US does not keep growing, a steep fall is likely for the stock market. It is interesting to note that while the greater stock market has declined, there is an internet service and social-networking IPO “bubble” in the US. This bodes well for the continued growth of the internet, but also reveals underlying confidence in the US economy as a whole (see below, European IPO’s). However, like any "bubble" this could pop, hurting the US economy. Hopefully Groupon's valuation does not fall until 2013.

I believe the US economy is now stronger than it looks. For the last two years small businesses and ventures have had no easy access to money through debt or stock, so there is now a supply of hardened companies that remain profitable but cautious. Now some of these small companies are buying bankrupt rivals. US banks are now the most “capitalized” in the world, which means they have more money to spend than any other nation’s banks. Loans are starting to appear for even the more risky firms that have survived until now, like global shipping companies. US unemployment has stopped its ascent.

After October…. Longer-term, the US government will have increasing trouble finding buyers for its debt because China has been now selling (not buying) US government debt, and Europe may resort to a QE2 of its own to keep Greece, Ireland, Portugal, Spain and even Italy solvent. All of this bodes for slow future growth until new developing regions go into high gear. It is the hope of the US that its own citizens will begin saving more, in banks, thus effectively buying US government debt. If they do not and the US economy does not grow (which would increase tax income), this will then be a crisis and probably require a QE3. Warren Buffet has said, the country that controls the global reserve currency can devalue its way through any crisis... Maybe.


Europe: Rising Debt and Current Debt Crises.

Europe’s stock market has not fallen as far as I think it should. Recently in Singapore the German leader told the world that the Euro currency is stable. In conjunction, a number of European “analysts” reported Europe’s problems were behind it, and the world should worry about America. That Europe’s problems are behind it is not true. While Germany’s economy is growing quickly, and it is now leading the world in IPO stock offerings of industrial companies, this also shows two things, that European investors believe German industrial and global growth will continue in the near term, but that global private investors are cashing out of German companies. Where this cash will go is anyone’s guess.

Europe as a whole is something Warren Buffet has said he will watch from afar, and I too have sold my European stocks (only to watch these rise). I expect European stocks to gradually fall into 2012 if Greece is not dealt with. Bloomberg suggests that Europe will likely wait until 2013 to let Greece default to give its banks time to sell assets and to let certain financial treaties come into effect before this shock. Politically Europe may be forced to act sooner. As this crisis drags on, it will likely depress European consumption and may spark political crises. Already banks are refusing any loans for ventures in Greece. And if Greece cannot get loans and start growing again, it will again default on its new debts, requiring a new bailout. This stretching may go on with a new Greece crisis every few months. As with Citibank in 2008, there are now some papers suggesting the Euro as a whole is technically bankrupt. If it is true that in Italy, Germany and France banks may also default if Greece and Ireland were to together stop payments on their debts, this may be the next financial crisis as short sellers corner the Euro. Of course, unlike a bank, Europe could print more currency if it had to. It is not mentioned much in the talk of world economies, but the EU is both the biggest world economy and China’s largest customer, so falling European imports and currency would depress China’s growth. Europe is also lobbying China to buy its debt.

China: Debt Crises in a Closed Bank System.

Because China has been raising interest rates to slow inflation (which is now China’s largest public problem) it has forced local governments to default on their loans quicker. Announced two weeks ago, the central government, Beijing, would assume local government debt of over $400 billion. This is like paying off Greece, and China has lots of extra money. However by forgiving local government debt, these governments will have renewed incentive to continue borrowing. This would push inflation even higher. So China’s central government, Beijing, will need to slow new bank loans to local governments. However, there are two issues here, one is that many loans in China are private, between individuals and companies and families, and China has to stop these from replacing state loans, especially to local governments. Also, the local government insolvent debts will all be concentrated in Beijing, who will now need to announce a plan for how it will pay its own banks the interest on these loans, and this may lead to added attention toward how internal Chinese debt from bankruptcies in 2005 have still not been accounted for. If they were, China’s growth would be less than published.

This action hasn’t been in the news traditionally, but it will be going forward because a number of large international investors are now actively promoting the idea of various Chinese problems, mostly regarding property prices. China is in a property building boom though some analysts claim by 2012 the country will already have enough apartments to house the entire population. So sometime in the future Chinese property prices will likely fall, and because new apartments are also investments among the rich, their prices might fall quickly and steeply. To push this problem into the future, new regulations may force those investing in second and third apartments to have to hold them for years. Money is also being spent on low income housing to ease the slowdown. Overall Chinese debt is the immediate problem because it is connected with consumer inflation and a trend of lower return on investment, generally, in China, and I think it is behind two stories recently in headlines. One is the death sentence given to a powerful female CEO who had been orchestrating informal loans for other companies, and the second is the $450 billion dollar bailout of China’s local governments. Both these actions, I believe, are trying to target inflation, which is now China’s largest problem. There are currently large-scale riots in three provinces over price increases, and there have been many over the last two years. They are increasing.

China has money to throw at this problem, and while there is no crisis (yet), this bailout action will have effects on the Chinese economy. The most obvious effect seems to be the likelihood of the RMB increasing in value. Currently China hopes to cover these loans with the implied credit of Beijing, thus indirectly insuring its banks. It can then control inflation by forcing the banks to only give loans to low-inflation projects, because the banks are run by the government, but this will also slow overall job growth, and it will decrease tax revenue (and this project can only work if informal loans are curtailed). China has tried raising wages but this will also increase inflation, so a likely step would be spending foreign reserves to permanently remove bad debt. It may prove necessary for China to use its foreign reserves to pay off these loans. If China does use its foreign holdings to pay off these debts, this will force an appreciation of the RMB’s value.

Going forward, China's growth in direct investment and in exports will slow because of internal implications and because of slowing European consumption. China will likely see some short term financial crisis which may offer a short-lived buying opportunity in Chinese stocks.

Japan: a last smile for now.

The tragedy and economic consequences of the Japanese nuclear disaster will unfold for the next decade and more, and as the extent of radiation poisoning in what was the cleanest country on earth becomes apparent, Japan may be in for the biggest economic crisis of the four economic zones discussed so far. In the near term however, Japan’s economy should not only grow but add to global economic growth beginning in August as it solves its electricity problems allowing its factories to run at full speed both to deliver on pent-up demand and to rebuild itself. Reconstruction projects should begin to run smoothly. And overall Japan to be growing in October.

Warren Buffet and that creeping abyss

Somehow I think of Davy Crockett when I think of Warren Buffett this morning, reading the news. In terms of media icons, the original stock picking Fonzie has just been accused of having in his wardrobe some stolen clothes. Chachi is broken hearted. Now two inside boys trading on the sly. And there is a backdrop of dreariness. Radioactive oceans and rain and tap-water in Japan. War is spreading in Africa. It seems likely this fire will spread, but to where, next. Two revelations like this at a company are a turning point. Two bad apples can be coincidence but if there is more then there will be blood. Is someone blackmailing Warren Buffett with still other skeletons? Is the media? Attacks by those shorting a company's stock have been popular these last few years, and what would be the biggest, most unbelievable short? Or are news releases (plural) going yet now to follow with deeper revelations that this is in fact the wikileaks press-release on a major financial institution.

A new question this year now is what effect on the market would wall street's last pillar of integrity have if his integrity were revealed to be a conjuring, not unlike that wizard of Oz.

Japanese Reactor Meltdown and Tsunami Earthquake

The meltdown of the Japanese reactor after the earthquake and tsunami is being discussed as having the potential to create a global economic slowdown by disrupting corporate profits that rely on Japanese manufacturing directly or indirectly. Japan will have less electricity which will slow its manufacturing along with damaged infrastructure and factories. Many companies have built Japan into their supply chain. But the impact of the loss of capacity, much of it semi-permanently over the middle term, will also involve an increase in demand for everything used in rebuilding. America's Hurricane Katrina actually helped spur US economic output, and the same should happen in Japan. Furthermore, Japan’s spending increase can largely be funded by its citizens, and the bond markets are not yet concerned. IF the nuclear incident can be contained soon, the Japanese crisis will lead to higher spot freight shipping rates as well as increased demand from a number of industries, such as metals, building materials and equipment, and green infrastructure producers.

Midway through the Second US Quantitative Easing

Did German market-sentiment just hit an all time high? The US stock market is rising because QE2 seems to have worked, possibly by forcing money into stock markets, increasing household wealth, and thus increasing consumer spending, and, today, the official jobless rate has just fallen below 9%. QE2, a type of money creation in the US, has also increased inflation in global economies, which is leading other countries to raise interest rates. Europe has some economies still likely unable to meet debt payments, however Europe's central bank has announced it will begin increasing interest rates, following much of the developing world these past six months. Inflation in both Europe and the developing world may soon taper off, but increases in food prices (and perhaps oil) may persist.

Protests across the middle east and north african countries are creating uncertainty. About 40% of the world's energy comes from the Gulf States that are also host to a number of U.S. military bases. Any weakening of the nations on the Arabian Peninsula also strengthens extremist groups. So far terrorists have not made use of the chaos in Egypt, Lybia and elsewhere, but it seems likely they will try to engineer some mass killings. So far American interests and oil supplies have not been affected, but this could also happen.

The immediate worry for America is that house price declines have not yet bottomed and interest on US debt may increase. Especially if the QE2 program does not have a followup US growth will likely slow again. The Democrats lost control of congress in the fall, and while this could be positive for the economy, the divisive politics now, for example, threaten to shut down the federal government over budget arguments.

When considering corporate profits, increases in prices of commodities, including food, cotton and energy is resulting in cost increases for a wide array of corporations. Those with proprietary products or services and those who sell to other businesses can pass these costs on in the form of price increases. However, corporations that sell to consumers will find themselves in a less profitable situation with input costs rising and sale prices being held down by households that cannot afford the price increases with wages rising so modestly, consumer credit still fairly tight, and increased global competition. This means that current earnings forecasts for the second half of 2011 are too high and will have to be revised down.

It is easier to predict profits than to predict the actions of people. But leading up to the ending of QE2 it seems the sentiment of investors will be fragile. And democracy in the middle east may not be a likely outcome as is now assumed.

(Update. Internet investing was profitable, though these stocks are pulling back from their PE's in the 70's. NFLX was the real winner. Akami more than doubled. Now it is down to $38, even as the overall market continues to rise, but remaining at a PE of 40 it is too risky to buy. Not many obvious deals now. One possible opportunity, car maker BYD, HK:1211 dropping to a PE of 15 at $30. But China's car market is slowing.)

Going Into Fall, Rally Falters

The calls for bottoming have come out of rebounds in Singapore, France, Germany and others, while USA continues to deteriorate, though positive headlines seem to balance those bad. The question these last few weeks has been will America come back strongly, with 4% growth, or will growth be below 2%, perhaps tipping into another recession within a year.

What seems clear to me is that Western consumers cannot spend like they did, so unless the few companies with cash begin battling for market share by expanding, we are in for slow growth. Inflation in food prices with deflation in goods and services seems likely.

Guessing what can grow...

the internet is a low cost comfort, which makes Akami at a PE of 20 and a price of $16-19 seem reasonable.

the FSYS, CELG have returned well. investing in DBA has not.

People's Psychology is Midway through the 60's

Looking over an old New York Times in my bathroom, I enjoyed the photo of a sad video maker, under headlines that amateurs are caught in the middle between Youtube and Warner. She looked so wistful and sad. The photo reminded me of a hippy signalling that the 60's were over. Recalling working for a dot com at the turn of the century, and the dreamlike multifloor stadium new-years party, the explosion of websites, all offering new services, something "like" the arrival of pot and lsd on the social scene, in fashion, and movies - definitely mind expanding, and not all positive. But now we may be getting to the point after the party on the world scene, those tulmutuous later years, just before the grim 70's.

What does this mean for people and profits, well, the profits will fall off, and the people will have to settle down, risk adverse for a period under the tarps.

Second Spring Since the Crisis Beginning

in all economies, there's the push it through mentality, embarassing for Egypt, who read the alarmist news and killed all their pigs. I wonder how many of those were for export? And while the stock markets continue to climb, to a peak, really, it seems, with jutting peaks and crenalations. in the news, all the reporters seem to be rattled, wondering how it is that they didn't see something, and so they're making pig flu into "A" and hundreds into millions; fart - history does repeat itself.

The mentality now with regards to the final stages of the gloabl crisis is blind. I enjoyed how executives last fall spoke of the bad assets passing through the system, like a stomach bug. And now all commentators are talking about pushing it through - enough accounting, and it may be the bottom.

I recall last february asking a friend about his job in three d designing for drug company packaging, and he said the drug industry wasn't touched by anything. Now the drug companies are seeing that I put off getting my teeth cleaned. I don't even get my molar's pulled.


global capacity for auto production is said to be 90 million vehicles - demand is now 60 million.