Sunday, February 27, 2011

Libya's civil rest spikes up oil prices and rocks global markerts

As tensions rose in Libya, a country with significant oil reserves in Africa, so did the price of oil – up 11.3% for the week. Libya’s longtime leader Muammar Qaddafi shared the following comments to supporters in Tripoli “When needed, all the weapons stores will be opened so that all the Libyan people and the Libyan tribes are armed,” and “Libya will become a fire.” According to Oppenheimer analyst Fadel Gheit, oil producers with exposure to Libya include Hess Corp. (US: HES) with 7.5% of production in Libya, Marathon Oil Corp. (US MRO) 16.8%, ConocoPhillips (US: COP) 7% and Occidental Petroleum Corp. (US: OXY) 2.4%.

MY TAKE: For several weeks, events in the Middle East and North Africa have been unpredictable. Additionally, many companies have been warning that higher fuel and commodity costs could negatively affect profits while driving inflation trends. The industry most sensitive to energy costs is transportation, with airlines feeling the greatest impact. Oil importing countries, such as the U.S., would be negatively impacted by sustained levels of higher fuel costs as well. Note: while the U.S. is a leading oil producer – delivering about 10% of global production, it consumes about 21% of global production.

Positive economic data mixed with headwinds

On Friday, it was reported that U.S. gross domestic product (GDP) for the fourth quarter increased by 2.8% from last year. This was a downward adjustment from the government’s prior projection of 3.2% growth. The downward revision was attributed to weaker state and local government spending where budget cutting is needed. The University of Michigan/Thomson Reuters survey of consumer sentiment hit a three-year high this month of 77.5. Additionally, the U.S. Federal Reserve recently improved its 2011 economic forecast for 3.4 to 3.9% growth (the previous range was 3.0 to 3.6%).

MY TAKE: Economic forecasting is a tough business. Headwinds to the current forecast include U.S. federal, state and local government spending cuts, further challenges in the housing market, heightened oil prices, persistent unemployment, higher food prices, and uncertainty in emerging economies.

Sunday, February 20, 2011

Where is Political Change in the Middle East and North Africa taking us?

A week ago, Egyptian President Hosni Mubarak stepped down and the region's dynamics continue to change. Iranian naval ships are seeking passage through the Suez Canal. Violence has broken out in Bahrain - which is home to the U.S. Navy's presence in the Persian Gulf. Protestors in Yemen are demanding the resignation of President Ali Abdullah Saleh, in office for the last 32 years. In Jordan, activists are seeking political reforms. In Libya, where Muammar Quaddafi has been in power since a 1969 military coup, protesters are clashing with the government.

MY TAKE: The complexities of the region influence many global dynamics. Drivers of the current unrest include high unemployment, food shortages, corrupt leaders and repressive political systems. While there are many factors for investors to consider, a test of regional economic stability will be the reopening of its banks and the Egyptian Stock Exchange - that remains closed since January 27.

Sunday, February 13, 2011

Egypt after Hosni Mubarak, now what happens?

Hosni Mubarak has stepped down as president, and weeks of demonstration by protestors are subsiding. However, as the military takes over many questions remain.

MY TAKE: The action over the past few days is a historic victory by the Egyptian people. The challenges ahead include how the transitional government will evolve and how the issues of significant poverty and high unemployment are managed. My daughter and several of her schoolmates had planned to travel to Israel and Egypt this coming week. Recent events now will limit the trip to Israel. I look forward to her insights about the region when she returns.

The inflation debate continues to intensify

Equity markets in many developing regions have performed poorly as their inflation rates approach and extend beyond 4% (see chart). This past week, China's central bank, in its continuing fight against inflation, raised interest rates for the third time since mid-October. Inflation is challenging several other economies including Brazil, India, Indonesia and South Korea; and the UK is approaching the critical 4% tipping point. Senior managers at firms such as Kraft Foods, Inc (US: KFT), Kellogg Co. (US: K) and PepsiCo, Inc. (US: PEP) have suggested that increased commodity price inflation may negatively affect their business. Additionally, the Reuters/University of Michigan US consumer sentiment survey, noted that inflation expectations, which were 2.2% in September have increased to 3.4%. Providing an alternative perspective, Federal Reserve chairman Ben Bernanke told the House Budget Committee this week that “inflation is expected to persist below the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our statutory mandate to foster maximum employment and price stability.”

MY TAKE: In an increasingly interconnected global economy, trends such as inflation are likely to be shared in one way or another by most market participants. While the Federal Reserve and some economists may discuss inflation in terms that often excludes the impact of food and energy costs, if people feel like there is inflation, they will likely behave as if there is inflation. As many events in the past few years have demonstrated – perception is a significant factor in shaping reality.

Sunday, February 6, 2011

For the bulls - strong manufacturing data is reported

Many equity markets rebounded this past week, as a strong report from the Institute for Supply Management (ISM) reported that the US manufacturing sector grew at a faster rate in January with the Purchasing Managers Index (PMI) registered 60.8% - its highest level since May 2004. When the index is 50 or greater, the manufacturing sector is in a period of growth/expansion. These results were the sixth consecutive month of month-over-month growth in the sector.

MY TAKE: With continued strong new orders and production growth, it is likely that employment trends in the sector are improving as well. This growth, coupled with the effects from the second round of quantitative easing (QE2) are likely driving commodity prices, such as energy, metals and chemicals higher - increasing inflation concerns in various global regions.

For the Bears - U.S. unemployment dropped to 9%, but job creation remains weak

On Friday, the US government unemployment rate fell to 9%, from 9.4%, but payrolls increased by only 36,000 in January. Although estimates suggested an increase of 140,000, the results may have been negatively impacted by severe weather conditions. Additionally, Federal Reserve Chief Ben Bernanke said this past week "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established".

MY TAKE: Consider the following: 1) unemployment rate declines include both people finding work, and people exiting the work force, 2) many economists believe job growth of 250,000 per month is needed to sustain an economic recovery and 3) the percentage of people in the U.S. either working or looking for work (16 years and older) is 64% - the lowest level since 1984.

For the Cautious - a few potential spoilers to consider

In prior months, the list of issues for investors to worry about focused primarily on sovereign debt and residential real estate problems. More recently, inflation, Middle East and Northern Africa instability, and the persistent increase in many equity and commodity prices, are now on the list.

MY TAKE: It is important to consider the inter-connected nature of global economic trends in our investment processes. I continue to seek out "high conviction" equity ideas, where the price/valuation has encountered significant dislocation.