Wednesday, March 16, 2011
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.
Friday, March 4, 2011
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.)
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.)
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