Unions Go Global

Looks like the US & UK steelworkers unions are going to merge. The United Steelworkers' Union and Unite hope to reach a deal by July to merge the two unions. The combined union will have more than three million members in the UK, US & Canada,

Comments from Andrew Murray, Unite's spokesperson:

"We are dealing with global companies that can move capital - and employment - around the world at will in many cases."

"While big business is global and labour is national, we are going to be at a disadvantage."

Union membership in the US has been on a steady decline, although last year actually saw a growth in membership numbers. UK unions are in a similar decline, yet they still make up a larger percentage of the workforce than in America.

It make sense for unions to want to bulk up, but what is the benefit for a cross border tie-up? It seems that it will set up internal battles amongst the labor leaders from different countries.

US Union Membership as a Share of Wage and Salary Employment

Source: Congressional Budget Office, 2002

UK Union Membership as a Share of Wage and Salary Employment

Source: Department for Business Enterprise & Regulatory Reform, 2006

Source:
'UK And US Unions 'To Join Forces' , by BBC News

Not Really A Loss, Yet

Bloomberg News has a story on banks keeping some of their write-downs off their income statements. They are showing the loss as a balance-sheet adjustment, which is allowed under accounting rules. The idea is that the decline in value of the security can be marked down as an adjustment as long as it is not consider permanent.

So who determines if the loss is permanent? The banks themselves, by using in-house valuation models. The banks have also been quite on letting investors know exactly the type of securities that have been 'adjusted'. Who knows if the value of these investments will ever come back.

A good passage from the article; ``The banks that have taken advantage of this accounting approach are going to have a price to pay later,'' said Hintz, the third-highest ranked securities analyst in an Institutional Investor magazine survey. ``You don't avoid the price. Those that have taken it all in their income statements will come out with clean balance sheets and move on.''

These adjustments seem to indicate that the credit problem/crises is still in its early phases.

Below is chart from the story showing banks with hidden write-downs, along with write-downs on their income statement.

Source:
'Banks Keep $35 Billion Markdown Off Income Statements (Update1)', by Yalman Onaran, Bloomberg News

Graphic of Food Prices

Nice little interactive feature from Portfolio Magazine on the price increases for rice, wheat, corn and soy.

Interesting tid-bit, the UN's World Food Program budget is less than John Paulson's take home pay from 2007.

Source:
'Food Crisis', by Portfolio.com

More On Pickens

Found an posting on a Reuters global investment blog, which cited some research done by Birinyi Associates. Based on Birinyi's analysis you should believe what Pickens says. Below is a chart of the price of oil with data points of predictions by Pickens.

Here is the graph with a couple of data points:

1 Was surprised oil went down this much (19 month low) still thinks oil will average $70 in 2007.

8 Oil may surpass $100 on a geopolitical event and will rise to $80 within 6 months.

13 $100 oil will be routine.

17 Thinks oil wil rise to $150 by end of 2008.

Source:
'Pickens Sees Oil at $150...Here's a Look at His Track Record', by Eliis Mnynadu, Reuters News

There Goes Oil Again

Oil has broken the $129 range, with an intraday high of 129.60 (markets are still open at the time of this post). T Boone Pickens was on CNBC this morning saying that the oil producing countries are 'running out of oil'. He projected that oil will reach $150 dollars a barrel this year due to demand outstripping supply.

A couple of quotes from Pickens' interview with CNBC:

• "The Saudis claim they have more oil," Pickens told CNBC. "They don't. The President wasted his time to go to Saudi Arabia, to say, 'Give us more oil.' They can't give any more oil...they're stacking up the money as fast as they can stack it up."

• 'Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87 million," he said. "It's just that simple. It doesn't have anything to do with the value of the dollar."

• "We are now paying out...an estimated $600 billion a year for oil," he said. "It's four times the cost of the Iraqi war, and not one of the politicians running for president has anything to say about it. I don't know whether they don't know it, or they don't want to mention it."

Source: WSJ.com

Most recently Goldman Sachs increased it's estimate for oil to $141 dollars a barrel from $107, again citing supply constraints. Deutsche Bank, Credit Suisse and Societe Generale have also raised the oil price estimates for 2008 and 2009 based on increased demand and limited supply.

The trend for oil appears to be onward and upward. My guess is that there will be a correction in the oil market when it hits $130 dollars a barrel as traders take profits. It will continue to rise during the summer due to the risk of a hurricane. The wild card in this is at what point will demand be reduced due to price of oil?

Source:
'Oil Rises to a Record After Pickens Says Prices May Reach $150' by Mark Shenk, Bloomberg News
'Pickens: Oil Going to $150, So Move to Gas', by CNBC.com

Frankness From The ECB

In an interview with the BBC, the head of the European Central Bank Jean-Claude Trichet warns that there is 'an ongoing, very significant market correction.' In the BCC, Mr Trichet has compared 'recent rises in energy and food prices to the 1970s oil shock.'

Europe is in a tricky spot right now having to deal with a slow-down in the US, credit problems that have infected European banks, increases in commodity prices and a strong Euro all which are creating headwinds for the EU.

Source:
'ECB head: Credit crunch 'ongoing'', interview by Robert Peston, BCC
'Jean Claude Trichet warns of 'very significant market correction' , by Miles Costello, FT Online

A Play On League Tables

From a website call Here Is The City, a little play on the league tables that the financial industry uses to measure each other. The premise of the table was to look at the total credit losses firms have written down per banking employee.

Below is a graphic representation of the losses per employee.

Source:
'An Incredible League Table - The Credit Crunch In Context', Hereisthecity.com

End Of The America Empire

From the May 12th Newsweek, there was an article adapted from 'The Post-American World' a book by Fareed Zakaria. It was a rather large article, but well worth reading. One may not agree with every point Mr. Zakaria makes but it does get one thinking about how the world will change in the century that has just started.

Below are a couple of passages of interest:

'Look around. The world's tallest building is in Taipei, and will soon be in Dubai. Its largest publicly traded company is in Beijing. Its biggest refinery is being constructed in India. Its largest passenger airplane is built in Europe. The largest investment fund on the planet is in Abu Dhabi; the biggest movie industry is Bollywood, not Hollywood. Once quintessentially American icons have been usurped by the natives. The largest Ferris wheel is in Singapore. The largest casino is in Macao, which overtook Las Vegas in gambling revenues last year. America no longer dominates even its favorite sport, shopping. The Mall of America in Minnesota once boasted that it was the largest shopping mall in the world. Today it wouldn't make the top ten. In the most recent rankings, only two of the world's ten richest people are American. These lists are arbitrary and a bit silly, but consider that only ten years ago, the United States would have serenely topped almost every one of these categories.'

'These factoids reflect a seismic shift in power and attitudes. It is one that I sense when I travel around the world. In America, we are still debating the nature and extent of anti-Americanism. One side says that the problem is real and worrying and that we must woo the world back. The other says this is the inevitable price of power and that many of these countries are envious—and vaguely French—so we can safely ignore their griping. But while we argue over why they hate us, "they" have moved on, and are now far more interested in other, more dynamic parts of the globe. The world has shifted from anti-Americanism to post-Americanism.'

'We are living through the third great power shift in modern history. The first was the rise of the Western world, around the 15th century. It produced the world as we know it now—science and technology, commerce and capitalism, the industrial and agricultural revolutions. It also led to the prolonged political dominance of the nations of the Western world. The second shift, which took place in the closing years of the 19th century, was the rise of the United States. Once it industrialized, it soon became the most powerful nation in the world, stronger than any likely combination of other nations. For the last 20 years, America's superpower status in every realm has been largely unchallenged—something that's never happened before in history, at least since the Roman Empire dominated the known world 2,000 years ago. During this Pax Americana, the global economy has accelerated dramatically. And that expansion is the driver behind the third great power shift of the modern age—the rise of the rest.'

'At the military and political level, we still live in a unipolar world. But along every other dimension—industrial, financial, social, cultural—the distribution of power is shifting, moving away from American dominance. In terms of war and peace, economics and business, ideas and art, this will produce a landscape that is quite different from the one we have lived in until now—one defined and directed from many places and by many peoples.'

'The underlying reality across the globe is of enormous vitality. For the first time ever, most countries around the world are practicing sensible economics. Consider inflation. Over the past 20 years hyperinflation, a problem that used to bedevil large swaths of the world from Turkey to Brazil to Indonesia, has largely vanished, tamed by successful fiscal and monetary policies. The results are clear and stunning. The share of people living on $1 a day has plummeted from 40 percent in 1981 to 18 percent in 2004 and is estimated to drop to 12 percent by 2015. Poverty is falling in countries that house 80 percent of the world's population. There remains real poverty in the world—most worryingly in 50 basket-case countries that contain 1 billion people—but the overall trend has never been more encouraging. The global economy has more than doubled in size over the last 15 years and is now approaching $54 trillion! Global trade has grown by 133 percent in the same period. The expansion of the global economic pie has been so large, with so many countries participating, that it has become the dominating force of the current era. Wars, terrorism, and civil strife cause disruptions temporarily but eventually they are overwhelmed by the waves of globalization. These circumstances may not last, but it is worth understanding what the world has looked like for the past few decades.'

(America) 'remains the most open, flexible society in the world, able to absorb other people, cultures, ideas, goods, and services. The country thrives on the hunger and energy of poor immigrants. Faced with the new technologies of foreign companies, or growing markets overseas, it adapts and adjusts. When you compare this dynamism with the closed and hierarchical nations that were once superpowers, you sense that the United States is different and may not fall into the trap of becoming rich, and fat, and lazy'

'Washington has gotten used to a world in which all roads led to its doorstep. America has rarely had to worry about benchmarking to the rest of the world—it was always so far ahead. But the natives have gotten good at capitalism and the gap is narrowing. Look at the rise of London. It's now the world's leading financial center—less because of things that the United States did badly than those London did well, like improving regulation and becoming friendlier to foreign capital. Or take the U.S. health care system, which has become a huge liability for American companies. U.S. carmakers now employ more people in Ontario, Canada, than Michigan because in Canada their health care costs are lower. Twenty years ago, the United States had the lowest corporate taxes in the world. Today they are the second-highest. It's not that ours went up. Those of others went down'

One of the biggest points I took away from the artcile is that America and its people will probably do fine in the global shift, as long as the governement doesn't get in the way. Quite frankly between the legislative branch and the executive branch and their constant drive to get re-elected it is amazing this country hasn't fallen further behind the rest of the world.

Source:
'The Rise of the Rest', by Fareed Zakaria, Newsweek Magazine

Money In Disease

Interesting article from the Economist about a new focus by pharmaceutical companies on developing countries. The standard operating procedure for most drug companies has been to market drugs to developed countries, where the population could afford the medication. Or they have developed niche products which cost a lot of money per dosage.

Over the past couple of years, emerging market countries have either created generic versions of the drugs marketed by Big Pharma, or just outright copied their drugs ignoring any patent protection. Most of the pharmaceutical companies have just ignored these developing countries.

That attitude may be changing due to these countries expanding middle class. 'McKinsey, a consultancy, estimates that the value of the Indian drugs market will grow from $6.3 billion in 2005 to $20 billion in 2015. China's market is expected to soar even more spectacularly. Given such prospects for growth, says Mark Feinburg of Merck, an American drugs giant, “you've got to be in these markets—it's a great opportunity.”'

To the right is a graph from the Economist showing the major causes of deaths in China, India & Brazil. The graph is not clear on what the percentage of minor deaths are, but looking at the percentages of the Big C's (Cardiovascular, Cancer, Chronic and Communicable) there is a lot of opportunity to sell some medication.

The three countries in the graph equal 2.6 billion people with a total GDP of $12 trillion dollars, growing at 8%. Developed countries (US, EU & Japan) have a population of 127 million, but a total GDP of $34 trillion dollars, growing at 2%. The developed countries are fairly saturated when it comes to the pharmaceutical market. However the market in the emerging economies is still under-served.

The Economist explains that for foreign companies tapping into these markets its not just as easy as opening a factory and selling drugs.

'Serving these markets will mean building up local expertise and research efforts. Where drugs firms have set up shop in developing markets, it has generally been to cut costs, rather than to cater to the needs of locals. But that is changing. Novartis has opened a research centre in Shanghai and has another outpost in Singapore focused on tropical diseases. Merck has struck several deals with firms in emerging markets to do early-stage research. The drugs giants argue that this new approach allows them to tap a global network of innovation, and also provides insights into local markets.'

Source:
'Quagmire To Goldmine ?', by The Economist
The World Fact Book, by The CIA

Don't Mess With Carl

In a letter sent to Yahoo's board, Carl Ichann has threaten to seek control of the board, if it doesn't renew talks with Microsoft. Below is the first paragraph from his letter.

'It is clear to me that the board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft. It is quite obvious that Microsoft's bid of $33 per share is a superior alternative to Yahoo's prospects on a standalone basis. I am perplexed by the board's actions. It is irresponsible to hide behind management's more than overly optimistic financial forecasts. It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo's closing price of $19.18 on the day before the initial Microsoft offer. I and many of your shareholders strongly believe that a combination between Yahoo and Microsoft would form a dynamic company and more importantly would be a force strong enough to compete with Google on the Internet.'

Clearly Mr Ichann motives are driven by money, but he is saying what a lot of people were thinking. What was Yahoo thinking? I am sure that Yahoo thinks that they can go it alone, but what does it have to offer beyond the internet? The buy-out offers gives everyone at Yahoo a nice and neat way out of the business.

Goggle is eating every one's lunch when it comes to making money online, along with developing innovate ways to sell advertising space. Just this week, comScore announced that Google beat out Yahoo for the first time in the number of unique visitors with 141 million views. Yahoo was second with 140 million and third was MSN at 121 million. When it comes to the share of online searches, Google has 59.2% of the market followed by Yahoo at 21.6% and MSN at 9.6%.

Below is a chart of Google, Apple, Yahoo & Microsoft over the past year.

Source: yahoo.com

If Ichann gains control of the board, and Microsoft doesn't want to buy the whole company, will there be more value in breaking up Yahoo?

Source:
'Icahn Threatens Yahoo Board Fight After Failed Bid', by Crayton Harrison, Bloomberg News
'Google Sites Capture #1 Property Ranking for the First Time', by comScore.com

Killing Off Car Maker's Brands

There is a large article in the June issue of Portfolio Magazine on how to save the US car industry. It discusses the problems and potential solutions to reinvigorating the American car makers.

It seems that the former big three, now called the Detroit Three, are stuck in an era when they ruled the industry and had no reason to be innovative. It seems like they have been behind the way in which the industry is moving. It seems that just now are understanding that big SUVs and trucks are hard to sell with gas approaching $4.00 a gallon.

Here is an excerpt from the article:

'How much worse can it get? Try the Dwindling Duo, in which Chrysler is sold to a foreign company—yet again—and smaller versions of G.M. and Ford remain. Or, less likely, the Sole Survivor, in which those two merge out of desperation. The market share the Detroit Three have lost since 2000 is equivalent to a Ford-size company being wiped out. You don’t need higher math to see that such losses aren’t sustainable for long. Another decade like this and the American auto industry could disappear entirely, its factories razed and turned into a lot where people can park all their European- and Asian-made cars.

Yet there is a scenario in which the Detroit companies—at least Ford and G.M.—can emerge somewhat smaller but far stronger. Their size and costs would be based on current realities instead of on pining for the good old days. And their cars would actually be products that people want to buy instead of merely settle for. I’ve been covering the car business for 23 years and have seen corporate crises, ill-conceived acquisitions, boardroom revolts, C.E.O. sackings, and more. Through it all, Detroit’s cycles have been biblical: Prosper, go astray, repent, recover. It’s repentance time now, and there are concrete reasons to believe that the Detroit Three will recover.'

As usual with Portfolio, they have a nice little interactive feature that goes with the story. Below is a screen shot from it, that depicts which brands the article suggests receive the ax.

Source: 'Brands That Should Die', portfolio.com

Unfortunately the auto makers have so many stakeholders and institutional inertia that it will be hard, if not impossible, to make any drastic changes.

Source:
'Who Will Survive?', by Paul Ingrassia, Portfolio Magazine

The Immigrant Innovation Boost

Via The New Economist, there is a research paper, by Jennifer Hunt, which shows a link between an vibrant and educated immigrant student population and innovation in the US. A couple of excerpts from the paper:

'Although there is a large literature studying the impact of immigration on the host country, this literature is more focused on potential costs than potential benefits. One reason for this is that the biggest potential benefits are harder to quantify than potential costs. Amongst these potential benefits are higher productivity, if there are increasing returns to scale in production; the achievement of critical mass in specialized areas of research, development and production; spillover effects of skilled workers through externalities and production complementarities, including of the O-ring variety; increased entrepreneurship and increased innovation in science, the arts and other fields. Some tantalizing facts hint at the possible importance of these effects for the United States.'

'Twenty-six percent of U.S.-based Nobel Prize recipients from 1990-2000 were immigrants (Peri 2007), twenty-nine percent of U.S.-based U.S. patent holders had non-Anglophone names in 2000-2004 (Kerr 2007), and twenty-five percent of founders of public venture-backed U.S. companies in 1990-2005 were immigrants (Anderson and Platzer n.d.), compared to a foreign-born population of 12% in 2000.'

'While in the short run there is some evidence that immigrants crowd out natives, either deterring natives from moving to states with skilled immigrants or deterring them from working as a scientist or engineer, in the long run there is no evidence of such crowd-out, but rather a suggestion that skilled immigrants may attract skilled natives. This is consistent with Borjas (2006), who finds that immigrants do not crowd out natives as a whole from graduate school. The absence of crowd-out means that my estimates of the benefits of immigrants are not offset by reductions in native contributions to innovation.'

Below is a chart from the report, which shows the top 4 states with the most patents. Two things these states share are a great number of quality colleges and universities and a large and diverse immigrant population. The odd thing is that aside from Texas, all the other are high tax states.

Source:
'How Much Does Immigration Boost Innovation?', by Jennifer Hunt

As Oil Goes, So Go The Transports

This makes no sense. Oil has been on a tear the past couple of weeks, rising greater than 20% over the past three months. As one would expect the Dow Jones Industrial Average has been kept on check due to the higher oil prices. It has risen only by 4% over the same 3-month time frame. The chart below shows the DJIA (in blue) compared to the Oil Service Sector Index (in orange). Yes, the Oil Service Sector does not track the price of oil exactly, but is a good proxy.

Source: WSJ.com

Below is a chart showing the DJIT(ransports) (in blue) compared to the Oil Service Sector Index (in orange). Over the 3-month period, the DJIT rose almost 10%.

Source: WSJ.com

Last time I check, the price of oil/gas is a huge expense for these companies. It would seem that the increase would weigh on their bottom line. Has something changed?

I guess not, last Friday FedEx lowered its 4th quarter earnings estimates due to increases in fuel costs. FedEx has been charging customers a surcharge for fuel related expenses, however Chief Financial Officer Alan B. Graf Jr said that these surcharges 'cannot keep pace in the short-term with rapidly rising fuel prices'.

Granted the transportation stocks have responded appropriately to the economic news over the past year, reaching a low of 3,995 back in January. However since that low, the index has risen by 28% to 5,159.

Seems like a good time for a correction in this index.

Source:
'FedEx cuts 4Q profit forecast, blames fuel costs', by Woody Baird, AP

Foreclosures Across America

The Chairman of the Federal Reserve gave a speech this week about the mortgage/housing/foreclosure crisis. For the speech he brought along some nice maps showing among other things mortgage delinquency levels and changes changes in home prices. Here is the link to the text of the speech. Due to my lack of technical skills, I can not save out the images from the speech.

In this week's Economist, there is an article on the speech by the Federal Reserve Chairman. An excerpt from the article: 'His maps—where hotter colours imply more trouble—also make a starker point. The pain of America’s housing bust varies enormously by region.' Below is a map showing the changes in house prices by county between Q4 2006 to Q4 2007.

One of the maps from the Chairman's speech, showed areas which had a large number of non-owner purchased homes. Many of those areas have suffered an increase in foreclosures and a decrease in home prices. There are some areas (Texas, New Mexico and the Northwest) which have a large number of non-owner purchased homes that have not suffered the foreclosures and drop in home prices. Without analyzing the data, are these the next areas which will experience an uptick in foreclosures?

The Economist points out that the data used by Mr. Bernanke, was from the Office of Federal Housing Enterprise Oversight (OFHEO). The OFHEO uses information supplied by the government sponsored entities of Fannie Mae & Freddie Mac. These entities do not make loans to non-conforming mortgages, namely the top & bottom of the potential home owner pool. This is where the prices for homes increased the most and where most of the 'innovative' loan products appeared.

The Economist explains that it is difficult to accurately determine how much further housing prices have to fall, however they write: 'By most measures, prices are still above the levels implied by the fundamentals. Using a model that ties house prices to disposable incomes and long-term interest rates, analysts at Goldman Sachs reckon that the correction in national house prices is only halfway through. They expect an 18-20% correction overall, or another 11-13% decline from now. But their models suggest that six states—Arizona, Florida, Virginia, Maryland.'

'A better measure of housing fundamentals is the relationship between house prices and rents. This is a sort of price/earnings ratio for the housing market: the price of a house reflects the discounted value of future ownership, either as rental income or as rent saved by an owner who lives in the house.'

'A recent analysis by Morris Davis of the University of Wisconsin-Madison, and Andreas Lehnert and Robert Martin of the Fed, shows that the rent/price yield in America ranged between 5% and 5.5% from 1960 to 1995, but fell rapidly thereafter to reach a historic low of 3.5% at the height of the boom. Given the typical pace of rental growth, Mr Feroli reckons house prices (as measured by the Case-Shiller index) need to fall by 10-15% over the next year and a half for the rent/price yield to return to its historical average. Again, that suggests the national housing bust is only halfway through. And, given the scale of excess supply, house prices are likely to overshoot. All told, the pressure on policymakers to help struggling homeowners is bound to increase.'

Over the past weekend, the WSJ had an article on delinquency rates for subprime mortgages. Below is a graph showing delinquency rates for mortgages issued in 2005, 2006 & 2007, along with those from 2000 & 2001, a period of similar default rates.

From the article: 'This early jump suggested that defaults would reach heights unseen in the years since it became routine to package loans into securities. The question now is: Even though the delinquency rates are climbing, will the loans follow the same path as in previous years? In 2000 and 2001, for instance, the growth in the 60-day delinquency rate slowed when those subprime loans were about three years old and peaked after a little more than four years, then started to fall.'

For now the markets are enthralled by the commodity crazy and the mortgage/housing/foreclosure crisis has sort of taken a backseat. Even the politicos are focusing on gas prices instead of home foreclosures. Maybe they realize there is nothing they can do to prevent the correction.

Source:
'Map of misery', by Economist.com
'What's Subprime's Magic Number?', by Liam Pleven, WSJ.com {$$$}
'Mortgage Delinquencies and Foreclosures', speech by Chairman Ben S. Bernanke

The Spike That Popped The Oil Bubble

Goldman has come out with a research note stating that there could be a 'super-spike' in the price of oil. They are projecting that oil will jump in price to $200 a barrel within the next two years. This would be almost a 65% increase in the current price of approximately $120 a barrel.

The note says 'We believe the current energy crisis may be coming to a head, as a lack of adequate supply growth is becoming apparent.' 'The possibility of $150-$200 per barrel seems increasingly likely over the next 6-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.'

Source: wsj.com

The report argues that due to the lack of adequate supply growth by oil companies and increased demand by non-OECD countries will lead to a continued increase in the price of oil. The report goes onto predicate that the price increases will lead to a reduction in demand for oil which will cause a strong correction. Goldman's research note states that the drivers for the increase are firmly in place; low OPEC spare production capacity, poor growth in non-OPEC oil production, restrictions on foreign investment in oil production and strong demand from the developing world.

Two years ago, Goldman was on of the first companies to indicate that oil prices could hit the $100 a barrel price range. Could they be right, again?

Below is a shot from a nice interactive feature from Portfolio magazine.

Source:
'"Super-spike" could lift oil to $200: Goldman', by Santosh Menon, Reuters News
'The World Oil Economy' , Portfolio.com

More on World Food Prices

Liz Ann Sonders has issued market commentary on world food prices. A couple of interesting points:

Americans Spending More on Food

'Most families in the United States can make adjustments around the rising cost of food (and gas) by simply cutting out other discretionary purchases. That being said, the discretionary portion of disposable personal income is at an all-time record low as the amount needed for nondiscretionary or essential items is at a record high, as you can see in the chart below.'

'So, we eat fewer carbohydrates, dine out less, and (perish the thought) drink less beer and liquor while forgoing other luxuries. But many people in developing countries have no such options, and the crisis means elevated risk of actual starvation.'

Most Americans would agree that they are spending more on food over the past year. As the amount of income used to purchase non-discretionary purchases it leaves a lot less available to buy all the other goodies Americans have bought in the past. If inflation continues, we will not be able to spend our way out of the recession, or whatever you want to call this current period.

Will this be the death of the American Consumer?

Some Countries Will Fair Better Than Others

'Of course, rising food inflation hurts some places more than others. The net sellers/producers, notably those with self-sufficient farmers, are the beneficiaries (i.e., Thailand is the world's largest exporter of rice); but those that are net buyers/importers are in dire straits (West Africa and Bangladesh are prime examples). The ability to respond to the crisis varies from region to region, as well.'

'(T)wo charts below, the first for stock markets in countries that are net beneficiaries (net producers) of food inflation, and the second for stock markets in countries where food comprises a larger share (at least one-third) of the consumption basket of the population. With China representing a significant weight in the MSCI Emerging Markets Index, it's no wonder the asset class has moved close to the bottom of the performance rankings so far in 2008.

Winners:

Losers:

Will food stuffs become the next great resource? Food has always played an important part in a country's/society's development. Once people were able to implement farming techniques, the population expanded and workers were able to specialize. Without framing, we would still be hunters and gathers living in caves.

At the rate food prices are heading, there might be a re-migration to the rural areas of America. Instead of kids escaping small towns, big city folk will head out to small towns to farm.

Will this usher in a period of a return to farming?

Here is an earlier post on world food prices and a post on commodities.

Source:
'Beast of Burden: A Global Food Crisis Erupts', by Liz Ann Sonders, Charles Schwab

Stimulus Payments & Consumer Spending

The first round of tax stimulus checks have made their way to some Americans. The question is will Americans spend these checks and if they do what will they buy.

Consumer Spending

The Fed released consumer spending numbers that showed a marginal growth in consumer spending. The report showed a 0.4 percent increase in March, if inflation is taken into account the increase was more like 0.1%. From a NY Times article:

'Most of the money that was spent went toward services, including necessities like haircuts and medical care. Sales of big-ticket items like washing machines and television sets declined in March, the report said, a signal that Americans were putting off large-scale purchases, which are commonly bought on credit. In the first quarter, sales of those goods plummeted 6.1 percent.'

The report also showed that the average Americans income rose just 0.3 percent, barely keeping up with the monthly inflation rate and taxes. This was a drop from the 0.5% increase the month before.

Stimulus Checks

Congress passed the economic stimulus plan earlier this year. The plan was meant to boost the ailing US economy by prodding Americans to spend. (This type of economic 'stimulus' has been a favorite of the Administration and of Congress. They seem to think that we can spend our way out of any economic problem.)

If anything the boost will be short lived, and may not provide that much stimulation to the economy. A report issued by Parks Associates, indicates that 42% of the people they polled plan on saving their money due to the uncertainty with the economy.

Where Will The Checks Go

CNN.com has a series of articles on what 'ordinary' Americans plan to do with the stimulus checks.

Better yet, I like this journalists ideas:

• Put your money where your mouth is by donating your entire check to your favorite presidential candidate, or even your favorite local politician's war chest. So, John Q. Patriot, do you really support Barack, Hillary or McCain? Prove it.
• Guarantee a fine dining experience at your favorite eatery each month by paying up front and asking for a discount on drinks. Just think, $1,200 will get you and your wife into that swanky joint once a month for a year simply by saying, "Put it on my tab."
• Buy that new bicycle or mo-ped you'll soon need for local errands when gas prices get truly ridiculous.
• (H)ost your very own Economic Stimulus Act Block Party in your neighborhood and invite only those poor souls who didn't get a check from Uncle Sam.

Source:
'For a 4th Month, Shoppers Curtail the Desire to Spend', by Michael M Grynbaum, NY Times
'Consumers Saving Rebate Checks', by Laura Palotie, Inc.com
'Rebate checks: How to spend '' CNN.com
'Stimulating Ideas On How To Spend a Stimulus Check', by Jerry Davich, Post-Tribune

Gas Prices Could Be Worse

Americans have gotten use to low prices for a gallon of gas, and now are complaining due to price increases. A study by AIRNIC, reported on CNNMoney.com, shows that the price of gallon of gasoline in the US is the 45th cheapest out of 155 countries surveyed.

The CNNMoney article explains that '(c)omparing gas prices across nations is always difficult. For starters, the AIRINC numbers don't take into account different salaries in different countries, or the different exchange rates. The dollar has lost considerable ground to the euro recently. Because oil is priced in dollars, rising oil prices aren't as hard on people paying with currencies which are stronger than the dollar, as they can essentially buy more oil with their money as the dollar falls in value.'

The price to produce gasoline is fairly consistent no matter what country it is produced in. The biggest reason for the higher cost is due to the amount of taxation placed on each gallon (or liter) sold. The US actually on charges on average .18 cents in taxes on each gallon, one of the lowest tax rates in the world. In France, almost 70% of the price of gasoline is taxes.

US Implications

In the US, the by-product of cheap gasoline is the current status of urban/suburban development. The US has built-up suburban areas of cheap houses far away from other uses forcing Americans to drive their car just to get groceries. This mode of development has exacerbated the current increases to gasoline prices.

Today, the US released data on consumer spending which increased 0.4% from the prior month. However if inflation is taken into account, the increase was only 0.1%. Inflation edged up 0.3% month over month, inpart due to increases in oil and fuel prices.

Larger Implications

The US uses 20.6 million barrels of oil a day. China, the next biggest consumer, uses 7.2 million barrels of oil a day. The US has approximately 303 million people. China has 1,330 million people. If the Chinese ever approach the oil consumption of the US, they could use almost 88 million barrels a day. If we add in India, which has a population of 1,147 million people, they would use almost 76 million barrels of oil a day. Using back of the napkin math, there could be a future demand of almost 200 million barrels of oil just from these biggest users. The current production levels for the world is 84.6 million barrels.

Granted, the assumptions from the paragraph above are not a rigorous analysis but it does indicate that energy sources will become increasingly important in the future.

Source:
'U.S. Gas: So Cheap it Hurts', by Steve Hargreaves, CNNMoney.com
'Consumer Spending Stagnates as Prices Rise', by Michael M Grybaum, NY Times
'The World Factbook' Central Intellegence Agency
'World Oil Balance', Energy Information Administration

Fed Drops Rates & Stocks Fall

The Federal Reserve dropped the federal funds rate by a quarter point to 2%, and dropped the discount rate to 2.25%. The Fed indicated that it was going to take a wait and see approach on further rate drops. The Fed is concerned that inflation may become an issue, regardless of the fact that it already is a problem for many Americans.

'Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.'

Here is how the stock market reacted to the Fed's statement:

Source: bigcharts.com

The market is addicted to the low interest rates that the Fed is doling out. Why else would the market fall on the news? This 'pause' was as widely expected as this interest rate drop.

Source:
'Fed Trims Rate to 2%, Signals Ready to Consider Pause', by Craig Torres, Bloomberg News
FOMC Press Release

Wealthy, Fat, Lazy...and 7-Star Hotels

This is what an massive inflow of petrodollars will do to a local population:

• If the oil price remains at about $100 a barrel, they will reap a cumulative windfall of almost $9 trillion by 2020;
• Almost a fifth of the UAE's native population suffers from diabetes;
• (A) McKinsey (study) reckons a quarter of native employees in Bahrain, Saudi Arabia and the UAE fail to show up for work;
• Burj al-Arab, the world's only seven-star hotel. Guests arrive by helicopter or Rolls-Royce, watch 42-inch plasma TV-screens in their rooms and choose from 13 pillows on which to lay their heads.

Another problem with all of the money coming into the Gulf region is inflation. The Saudis are dealing with an inflation rate of 8.7%, while Oman has an inflation rate 11.1%.

Most local currencies are pegged to the US dollar, which has dropped like a rock lately. This drop in dollars devalues there currency, requiring more local money to purchase goods not priced in dollars. The inflation rate is even hurting foreign workers who send money back to their home countries. Below is a great explanation on how inflation works:

'When an energy exporter converts its petrodollars at the central bank, domestic spending rises. But unless the local economy has a lot of slack, it cannot magically produce more goods and services to meet this fresh demand. Their price instead rises, relative to the price of things that can come in from overseas. According to a study by three IMF economists, a doubling of the oil price results eventually in a 50% rise in the price of non-tradable goods (such as housing), relative to tradables.'

This shows up as inflation. But the price rises should peter out once they have served two useful functions: diverting demand to goods from abroad, and increasing the supply of those goods and services that must be produced at home.'

Source:
'How to spend it', by The Economist

No Bottom For Home Prices Yet

Prices for existing homes, as measured by the S&P/Case-Shiller Home Price Indecies, continue to drop, with 17 of the 20 markets recording record declines. The 10-City index has dropped 13.6% while the 20-City index has dropped 12.4%.

“There is no sign of a bottom in the numbers. Prices of single family homes continue to drop across the nation. All 20 metro areas were in the red for the February-over-January reading. In addition, 19 of the 20 MSAs are still reporting negative annual returns. The monthly data show that every one of the MSAs has now declined every month since September 2007, marking six consecutive months. On top of that, the declines have remained steep with eight of the 20 MSAs and both composites reporting their single largest monthly decline in February." -David M. Blitzer, Chairman of the Index Committee at Standard & Poor's.

Las Vegas, Miami and Phoenix hasve suffered the most, with the YoY change in prices of atleast -20%. Charlotte NC is the only market to reamin positive with a YoY price change of 1.5%. However this market has experinced an increase in the drops in prices over the past three months.

Source:
'Steep Declines in Home Prices Continued in Feburary...', S&P/Case-Shiller Home Price Indices

Will Work for Oil

Interesting chart from thechartstore.com, via Jeffery Saut with Raymond James. It takes an average wage earner 6.8 hours of work to 'buy' a barrel of crude oil, almost a 300% increase from five years ago. Yet the Government sees little inflationary pressures on the average American.

Source: raymondjames.com

Source:
'Investment Strategy'. by Jeffery Saut, Raymond James

New Rise of Nationalism

The WSJ has an article in today's paper discussing the rise in nationalism, and the decline in globalism. Over the past several decades, it seemed that the 'nation' would be a reduced factor in world affairs, and that global commerce would be able to knock down all barriers to local markets. The biggest example of this push towards globalism was the creation and continued expansion of the European Union.

Now many countries are asserting control over market forces. Since 2004 Russia, Venezuela, Bolivia and Ecuador have nationalized once private oil companies. 80% of the worlds oil-reserves are control by state owned firms. Countries continue to throw up barriers on exports and institute price controls for food stuffs.

Countries are also throwing up barriers to investments, especially from sovereign wealth funds which total almost $3 trillion dollars. Some countries have identified critical industries which will be protected from foreign investment.

Even the Internet is coming under nationalist pressures. Many countries have asked ICANN to develop a way for them to use their own local alphabet instead of the Latin based one. While in one respect this makes it easier for the local population to use the Internet, it closes off users from other countries.

"The era of easy globalization is certainly over," Daniel Yergin, Pulitzer Prize-winning author.

Source:
'Rise of Nationalism Frays Global Ties', by Bob Davis, WSJ {$$$}

Investment Definitions - Part 2

More definitions for investors to be aware of. Most of your money is made when you buy a stock (or other type of investments), and using a limit or a stop order will help you purchase a stock at the price you want.

Limit Order - is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. When you place a market order, you can't control the price at which your order will be filled.

For example, if you want to buy the stock of a "hot" IPO that was initially offered at $9, but don't want to end up paying more than $20 for the stock, you can place a limit order to buy the stock at any price up to $20. By entering a limit order rather than a market order, you will not be caught buying the stock at $90 and then suffering immediate losses if the stock drops later in the day or the weeks ahead.

Remember that your limit order may never be executed because the market price may quickly surpass your limit before your order can be filled. But by using a limit order you also protect yourself from buying the stock at too high a price. Some firms may charge you more for executing a limit order than a market order.

Market Order - is an order to buy or sell a stock at the current market price. Unless you specify otherwise, your broker will enter your order as a market order.

The advantage of a market order is you are almost always guaranteed your order will be executed (as long as there are willing buyers and sellers). Depending on your firm’s commission structure, a market order may also be less expensive than a limit order.

The disadvantage is the price you pay when your order is executed may not always be the price you obtained from a real-time quote service or were quoted by your broker. This may be especially true in fast-moving markets where stock prices are more volatile. When you place an order "at the market," particularly for a large number of shares, there is a greater chance you will receive different prices for parts of the order.

Stop Order - is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the specified price is reached, your stop order becomes a market order.

The advantage of a stop order is you don't have to monitor how a stock is performing on a daily basis. The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock's price. Also, once your stop price is reached, your stop order becomes a market order and the price you receive may be much different from the stop price, especially in a fast-moving market where stock prices can change rapidly. An investor can avoid the risk of a stop order not guaranteeing a specific price by placing a stop-limit order.

Buy Stop Order - investors typically use a stop order when buying stock to limit a loss or protect a profit on short sales. The order is entered at a stop price that is always above the current market price.

Sell Stop Order - a sell stop order helps investors to avoid further losses or to protect a profit that exists if a stock price continues to drop. A stop order to sell is always placed below the current market price.

Stop Limit Order - is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or to sell at a specified price.

The benefit of a stop-limit order is that the investor can control the price at which the trade will get executed. But, as with all limit orders, a stop-limit order may never get filled if the stock's price never reaches the specified limit price. This may happen especially in fast-moving markets where prices fluctuate wildly.

See my earlier post with additional definitions.

Source:
'Orders', SEC.gov

World Food Prices

There has been a lot of news coverage, and here, and here, on the increase in the prices for food stuffs across the world. Just this week Wal-Mart, Sam's Club and Costco have put limits in place on how many bags of rice people can buy. Granted the limit is between four to ten bags, but the stores have experienced a run on rice.

This chart compares the futures price of oil (in green) to the futures price of rice, which have moved together over the past three months.

Source: wsj.com

This chart compares the futures price of oil (in green) to the futures price of wheat, which moved together through mid-march but have diverged since then.

Source:wsj.com

The charts above are not meant to be a true technical analysis between these prices, its is just interesting to see them moving in relation to each other.

As the world's population increases, expect to see the prices of food stuffs become a real problematic issue. Some countries are limited in the amount of food that they can grow internally due to climate, governmental policies or state of modernization. How will these countries react when it becomes increasingly expensive to feed their population.

How will the world react? Will countries with a small surplus of crops be willing to export to other countries in need? Will there be an increase in civil unrest and war between countries? Most wars have been started in order to increase a countries access to natural resources.

What are the investment opportunities out there? There will an increased demand for farming equipment, fertilizer, pesticides and seeds. Any one of these, which improves the efficiency of growing crops will be able to charge a premium.

Additional Reading/Listening:
'Soaring World Food Prices', National Public Radio series
'The Silent Tsunami', Economist

Source:
'Rice Shortage Roils San Francisco Stores, Markets, Food Banks', by Ryan Flinn, Bloomberg News