Sunday, March 27, 2011

Syria joins MENA unrest, as Egypt reopens its stock exchange

This week, Syria joined the list of other Middle East and North African nations (Bahrain, Egypt, Jordan, Lebanon, Saudi Arabia, Tunisia and Yemen) where protestors have marched against their government. In addition, the Egyptian Stock exchange, which shut down on January 27 after several days of steep declines associated with political instability, reopened this past Wednesday. The result - Egypt's equity market continued to decline to its lowest level since April 2009 - down 27% for the year.

MY TAKE: Political and economic instability in the MENA region is likely to negatively affect a broad array of industries in the short to medium term. However, the Egyptian market may stabilize soon as the government takes supportive actions - this may be a reasonable barometer to gauge its economic recovery.

U.S. housing challenges increase economic crosscurrents

This past week, the U.S. Commerce Department revised GDP for the fourth quarter of 2010 upward from 2.8% to 3.1%. However, the Thomson Reuters/ University of Michigan consumer sentiment index dropped to 67.5 in March from 77.5, its lowest level since Nov. 2009. Additionally, the National Association of Realtors reported that 1) the number of existing single-family home sales declined 9.6% from a year ago, 2) the number of existing condominium and co-op sales decreased by 10.0%, 3) the median price for single-family homes dropped by 4.2% and 4) condominium prices dropped by 11.1%. Additionally, the U.S. Census Bureau reported that February sale of new home dropped to its lowest level on record (which is tracked back to 1963), a seasonally adjusted annual rate of 250,000 single-family new homes.

MY TAKE: Given that consumer spending accounts for 70% of U.S. economic growth, these changes in consumer confidence and residential home sales are noteworthy. The overall weakness in housing is likely attributable to 1) high unemployment, 2) supply overhang, 3) the continuing foreclosure crisis and 4) a constrained mortgage credit environment. The implications are that many homeowners with a significant part of their saving invested in their home and owners of mortgage-backed securities may be at risk. The economic crosscurrent will likely persist. Corporate earnings have been strong in recent quarters and employment trends seem to be improving.

U.S. unemployment drops, but hourly wages and labor participation remain flat

On Friday, the U.S. Department of Labor announced that the unemployment rate fell to 8.8%, from 8.9%, and payrolls increased by 216,000 in March. Strength in healthcare, hospitality, manufacturing and mining sectors was offset by layoffs by state and local governments. At the same time, the labor force participation rate (people in the US either working or looking for work - 16 years and older) was 64.2% for the third month in a row - the lowest level since 1984, and increases in hourly wage and number of hours worked continue to be muted. In a Financial Times interview, Minneapolis Federal Reserve president Narayana Kocherlakota said unemployment should drop to 5-6% in coming years but was unsure about a recover in the labor participation rate.

MY TAKE: Over the past 6-7 months, global markets have benefited for strong corporate profits, along with the effects of the Federal Reserve’s QE2 monetary policy. In the longer term, if the labor participation rate and wage trends do not improve, the implications of structural changes to income distribution must be considered.

Sunday, March 20, 2011

The Importance of Stabilizing Japan's Infrastructure

While Japan's hard-hit Sendai region is not a major manufacturer hub, the disruption of its power generating capacity is negatively affecting many of the country's industries including its high profile auto and semiconductor sectors. Japan is a leading supplier of materials used in lithium-ion batteries, polarized film used in liquid crystal displays, silicon wafers used in computer chips, along with many other technology-oriented components and materials. In the automotive industry, Volvo and Volkswagen AG are concerned about limited assess to automotive parts, while General Motors Co. plans to temporarily halt or limit production at its Shreveport Louisiana, Zaragoza, Spain and Eisenach, Germany facilities because of limited part supplies. Boeing Co. is concerned about access to airline parts and Sony Ericsson said production of smart phones might be impacted.

  • The human tragedy in the northeast region of Japan is catastrophic and the country's transportation, communication and electrical power infrastructures are under significant stress. 
  • While speculation continues on the negative impact to the country's economic centers, there is a significant lack of clarity. The stability of Japan's power grid will likely be a significant determinant in the speed of a Japanese recovery and the region's impact on its global trading partners. 
  • In the days ahead, we will learn more about the potential risks to the global supply chain.

Confronting geo-political information overload

Five significant global dynamics, each with its own set of economic consequences, are confronting investors: 1) the Japan earthquake - catastrophic, 2) unrest in North Africa and the Middle East - unpredictable, 3) European sovereign debt - problematic, but perhaps manageable, 4) China's growth - uneven with some inflation and 5) the U.S. recovery - positive, but with a significant fiscal deficit and persistent unemployment issues. Individually, analyzing each item is a challenge. Collectively they are shaping the dynamics of global growth for years to come.

MY TAKE: In the short term, investors will likely confront a mix of both fundamental analysis and reactive speculation on each of these topics. As a result, markets will continue to be volatile in the short term as investors react to each positive and negative news item.

Sunday, March 13, 2011

Thoughts from a legendary investor - Carl Icahn

Given that global markets have been rough for the past several weeks, consider the words of Carl Icahn as he returned money to investors this past week "While we are not forecasting another market dislocation, this possibility cannot be dismissed. Given the rapid market run-up over the past two years and our ongoing concerns about the economic outlook, and recent political tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis."

The Japanese Catastrophe, Nuclear Energy and the Global Economy

The earthquake: a magnitude of 9.0 is among the most powerful in history (others include: 1960 - Valdivia Chile (9.5), 1954 - Prince William Sound Alaska (9.2), 2004 - Sumatra Indonesia (9.1), and 1952 - Kamchatka Russia (9.0). Its geologic effects included creating massive tsunamis, shifting the Earth's axis by about 4 inches and moving parts of Japan's eastern coast about 12 feet closer to North America. In addition to significant loss of life and destruction in the country's northern region, the damage to several nuclear reactors in the area is still unknown. Japan's Chief Cabinet Secretary Yukio Edano said there was a "significant chance" that radioactive fuel rods had partially melted in two reactors at the Fukushima Daiich nuclear power facility. While Hidehiko Nishiyama, a senior official at the Ministry of Economy, Trade and Industry said the core of one of the reactors had undergone some melting. Note: documents from Tokyo Electric Power Co., the operator of the Fukushima nuclear plants, suggest that their facilities were tested to withstand up to a magnitude 7.9 earthquake.

MY TAKE: This catastrophe reminds us of the fragility of life and the harsh results that the forces of nature can deliver. Additionally, the global nuclear power debate will intensify. In Germany, Chancellor Angela Merkel ordered safety checks of the country's 17 nuclear power stations, while 60,000 anti-nuclear protestors gathered in Stuttgart. At the same time, Chinese Vice Minister of Environmental Protection Zhang Lijun said, "Some lessons we learn from Japan will be considered in the making of China's nuclear power plans ... but China will not change its determination and plan for developing nuclear power." Bottom line - recent events in Japan and other areas around the world have increased the level of uncertainty for the global economy.

Sunday, March 6, 2011

If U.S. unemployment is dropping, why doesn’t it feel like an economic recovery?

On Friday, the U.S. Department of Labor announced that the unemployment rate fell to 8.9%, from 9.0%, and payrolls increased by 192,000 in February – the lowest level since April 2009. Strength in the manufacturing and service sectors was offset by increasing layoffs by state and local governments.

MY TAKE: While the unemployment rate is improving, the Labor Force Participation Rate (people in the US either working or looking for work - 16 years and older) is 64.2% - the lowest level since 1984, and 2) hourly wage growth continues to be muted. (click on chart for expanded view). As discussed in the past, many economists believe job growth of at least 250,000 per month is needed to sustain an economic recovery. Additionally, a period of elevated oil prices has the potential to negatively affect both consumer and business spending, with the potential of weakening economic growth and accelerating inflation trends.