Sunday, September 27, 2015

Focusing on the Pope, a Catepillar and some Beetles

  • Last week, during Pope Francis’s U.S. visit, his comments included “It goes without saying that part of this great effort [to address poverty] is the creation and distribution of wealth. The right use of natural resources, the proper application of technology and the harnessing of the spirit of enterprise are essential elements of an economy which seeks to be modern, inclusive and sustainable … Business is a noble vocation, directed to producing wealth and improving the world. It can be a fruitful source of prosperity for the area in which it operates, especially if it sees the creation of jobs as an essential part of its service to the common good."
  • Separately, as industrial equipment manufacturer Caterpillar, Inc. announced it would reduce its staff by 9% over the next four years, CEO Doug Oberhelman said "We are facing a convergence of challenging marketplace conditions in key regions and industry sectors – namely in mining and energy … we have to manage through what can be considerable and sometimes prolonged downturns … as these market conditions have emerged, we are taking even more decisive actions now.
  • In addition, responding to Volkswagen’s diesel emission scandal, its newly appointed CEO Matthias Müller said “My most urgent task is to win back trust for the Volkswagen Group – by leaving no stone unturned and with maximum transparency, as well as drawing the right conclusions from the current situation.” 
  • Note: the diesel problem 1) was identified in a May 2014 study “In-Use Emissions Testing of Light-Duty Diesel Vehicles in the United States” at West Virginia University, 2) likely involved 11 million JettaPassatSportWagenBeetle and Audi A3 diesel engine vehicles worldwide, and 3) could result in up to $18 billion in fines by the U.S. Environmental Protection Agency; as well as other regulatory, criminal and civil actions around the world.
MY TAKE
  • Regarding the Pope – While there have been concerns that the Pope has a negative view of capitalism, his message seems more focused on the potential for business, government and community leaders to address the challenges of income inequality and job creation.
  • Regarding Caterpillar – The company’s actions are another indication of a fragile global economy.
  • Regarding Volkswagen – This problem will likely result in significant business disruption at VW in the short/medium term, but a focused management response could result in a stronger business franchise (although the diesel car market may be permanently impaired.)

Sunday, September 20, 2015

As Global Cross-Currents Increase... Part 2

  • Last week, after the U.S. Federal Reserve announced it would not increase interest rates in September, Chair Janet Yellen said ”the [U.S.] economy has been performing well and we expect it to continue to do so … The outlook abroad appears to have become more uncertain of late and heightened concerns about growth in China and other emerging market economies have led to volatility in financial markets … There are "very high levels of part-time, involuntary employment and labor force participation suggests that at least to some extent the standard on employment rate understates the degree of slack in the labor market.” 
  • Separately, as Hewlett-Packard announced plans to cut another 25,000 to 30,000 jobs, CEO Meg Whitman said this action will "enable a more competitive, sustainable cost structure." In addition, about 60% of the firm’s U.S. and Western Europe services staff will be replaced by workers in Costa RicaManila, the Philippines; Sofia, Bulgaria; and Bangalore and Chennai in India by 2018.
  • As Qualcomm cut 1,314 jobs in San Diego and hundreds elsewhere because of slowing smartphone growthPresident Derek Aberle said “A workforce reduction is never easy …The company is providing [support] for those employees affected during this difficult time.” Note: Qualcomm plans to cut its 31,300 global workforce by 15 % over the next year.  
  • As Union Pacific Railroad began to cut several hundred jobs in Omaha and other locations, CEO Lance Fritz said “this is an extremely difficult decision to make because of the impact it will have on all our employees … However, for our company’s long-term success we must take these painful actions to balance workforce levels with today’s business demands.”
MY TAKE
  • Regarding China – Yellen’s comments about China surprised some market observers (because the Fed has historically not publicly commented about other governments); but her concerns validate the view that global markets are increasingly interconnected.
  • Regarding a slack labor market – Confronted with weak economic growth, business managers continue to increase profitability by replacing “high cost” staff with outsourced and/or automated alternatives – a process that can result in stagnant wage growth and continued income inequality.
  • Regarding maintaining low interest rates – The global economy remains fragile, expect more market volatility.



Sunday, September 13, 2015

As Global Cross-Currents Increase ...

  • Last week, in the Washington Post article “Why the Fed must stand still on rates”, former U.S. treasury secretary Larry Summers said, “the data flow suggests a slowing in the U.S. and global economies and reduced inflationary pressuresEmployment growth appears to have slowed downcommodity prices have fallen further, and the general data flow has been on the soft side … when people argue that a 0.25 % hike will have little impact … my head spins a bit … I believe that conventional wisdom substantially underestimates the risks in the current moment. It bears emphasis that not a single postwar recession was predicted a year in advance by the Fed, the federal government, the International Monetary Fund or a consensus of forecasters … now is the time for the Fed to do what is often hardest for policymakers. Stand still.”  
  • Citibank chief global economist Willem Buiter said “We consider China to be at high and rapidly rising risk of a cyclical hard landing … should China enter recession – and with Russia and Brazil already in recession – we believe that many other emerging markets, already weakened, will follow, driven in part by the effects of China’s downturn on the demand for their exports, and, for the commodity exporters, on commodity prices … We believe that a moderate global recession scenario has become the most likely global macroeconomic scenario for the next two years or so.”  
  • As Standard & Poor’s cut Brazil’s investment grade credit rating to junk, it said   “We find that the ongoing investigations of corruption allegations against high-profile individuals and companies — in both the private and public sectors and across political parties — have led to increased near-term political uncertainty.” 
MY TAKE
  • Regarding Summers’ comments – There has been significant debate about how an interest rate increase by the U.S. Federal Reserve would affect the economy. Historically, there is little evidence that a rate increase would avoid at least some market turbulence.  
  • Regarding Buiter’s comments – With global markets increasingly interconnectedweakness in any major economy will likely have broad global impact.
  • Regarding Brazil’s downgrade – In recent years, improving economic trends in the BRIC countries (BrazilRussiaIndia and China) attracted significant investment capital. Today's economic challenges in emerging markets suggest pursuing more prudent investment approaches.