This post will be brief
If the politicians can't come to a decision on the debt ceiling the United States will default and the stock market will fall at levels on par with 2008. I personally am going 100% cash in my United States portfolio but maintaining my Asia and European positions. This situation is very scary in that it is 100% preventable, all congress has to do is raise the ceiling. Until an agreement has reached I would stay out of US stocks.
Showing posts with label us economy. Show all posts
Showing posts with label us economy. Show all posts
Thursday, July 28, 2011
WMT: Taking Over
Wal-Mart is an engine that shows no sign in slowing up. Now that it has swallowed up all the Mom and Pop stores it is looking for its next target to take down. It has zeroed in on dollar stores like Dollar General (DG) and Dollar Tree (DLTR). Wal-Mart has now opened up 3 Wal-Mart Express stores near its headquarter in Bentonville, Arkansas that look to compete directly with the dollar stores. These stores are basically a smaller version on the mega-mart that can fit into spaces where a traditional store would be too large. The Wal-Mart Express stores have been dominating the market and look to put other stores out of business. Wal-Mart already controls the affordable retail market and is now looking to take the cheap goods market currently controlled by dollar stores. From what I have heard the Wal-Mart Express stores are extremely popular and, being Wal-Mart, their margins are better than that of Dollar Tree and Dollar General. I would recommend stock in Wal-Mart on this news and believe for the foreseeable future Wal-Mart's stock will perform very well. I would also sell my positions in Dollar General and Dollar Tree but also I would look to Wal-Mart Express to take on Drug stores like CVS and Walgreen's.
Monday, June 20, 2011
Week of June 20th:
Big news this week: New federal funds rate comes out in the United States on Wednesday. Expected to be between 0 to 0.25% change. I don't expect it to change much. The rate is already very low however the Feds might want to keep money flowing between banks to avoid another Lehman Brothers crisis where the banks stop lending to each other. It is still way to early to worry about controlling inflation so rate will not go up, this will also panic the markets. Rates should stay where there are. Friday durable goods orders and GDP numbers come out. Look for these to either fall short or surpass expectation. If either of these happen the markets should react appropriately. GDP growth is expected to be at 1.9% and I think the economy is in a faster recovery mode than 2%. The dollar is strong, Japan is rebuilding and housing starts were higher than expected.
Now stocks to watch for,
The biannual Paris Air Show took place over the weekend where Boeing (BA $74.16) preview the longest plane every to fly the 747-8. It still seats less than its rival Airbus (EAD.PA $21.44) A380 but it is more fuel efficient and today that is starting to matter more. Boeing was the clear winner at the show. It filled out new orders for the new 747 as well as orders for the brand new 787 Dreamliner, which will start flying commercially this fall. After Airbus has been stealing the market for the last 3 years it looks like Boeing will own the next few with their fuel efficient fleet. I would recommend Boeing and sell Airbus.
With the Greek Debt Crisis still not begin solved the markets are not going to be bullish this week. However for those of you in the United States, stocks and the dollar should fair better than their European counterparts. I do not have and specifics but look for American manufacturing companies that buy a lot of their raw materials overseas. The strong dollar should help them purchase more goods for the same about of money as they did last quarter. I like US Steel (X $41.07) this week on that news.
Now stocks to watch for,
The biannual Paris Air Show took place over the weekend where Boeing (BA $74.16) preview the longest plane every to fly the 747-8. It still seats less than its rival Airbus (EAD.PA $21.44) A380 but it is more fuel efficient and today that is starting to matter more. Boeing was the clear winner at the show. It filled out new orders for the new 747 as well as orders for the brand new 787 Dreamliner, which will start flying commercially this fall. After Airbus has been stealing the market for the last 3 years it looks like Boeing will own the next few with their fuel efficient fleet. I would recommend Boeing and sell Airbus.With the Greek Debt Crisis still not begin solved the markets are not going to be bullish this week. However for those of you in the United States, stocks and the dollar should fair better than their European counterparts. I do not have and specifics but look for American manufacturing companies that buy a lot of their raw materials overseas. The strong dollar should help them purchase more goods for the same about of money as they did last quarter. I like US Steel (X $41.07) this week on that news.
Friday, June 17, 2011
OPEC: Cartel Breakup?
Last week, talks between member nations of the Organization of Petroleum Exporting Countries (OPEC) were described as the worst ever as the Saudi representative commented. The group could not come together and set a target production for the future. Could a breakup of OPEC be in the future?
OPEC is a cartel no matter how much they hate being called one. They limit the production of crude oil to keep the prices high. It is well known that member countries could produce more than the allotted monthly quota OPEC gives to each member. Recently Saudi Arabia increased its production when Libya ceased production due to the ongoing conflict. The recent talks broke up because some members wanted to increase production to bring prices down while other, mostly countries without excess capacity that do not want to see prices and profits fall.
Many have argued that oil above $100 is not sustainable. I believe Saudi Arabia and other member who want to increase production understand this. Western Europe, China, the United States, and other oil importers will seek other sources of energy with prices this high. For example, ethanol, a gas substitute costs about $3.50/gallon without government subsidies. When oil prices are higher than $80 is when ethanol becomes economically sustainable. OPEC needs to maintain prices so that the importing countries do not seek new technologies that make oil obsolete. While they may bring in record profits now in the future there may be much less demand for oil.
Take this game theory for example
Assuming what they product now is 28,985/month (April 2011 total production in 1000's of barrels) and a barrel of oil's price remains constant.
Their profits will look like this
This is a very rough explanation of oil markets, there are many other factors but basically you can see it is in OPEC's best interest to keep prices where the importers don't search for alternatives.
So I believe OPEC will begin to either raise production to bring down prices or the countries that understand the game I just explained will leave the oil's allocation and begin to produce on their own. There is another game to explain cheating cartels which I will not get into but ultimately a cartel is only good until someone cheats, that is, produces more than what is agreed upon. For the cheater, record profits will be made as the price remains high due to low supple but soon others will realize the cheat has happened and also begin producing more and the cartel is no more. In this example I look to Saudi Arabia as the cheater, they have the most excess capacity and the best relations with the West. I stand by my $80 barrel by the end of summer, it might even go lower.
OPEC is a cartel no matter how much they hate being called one. They limit the production of crude oil to keep the prices high. It is well known that member countries could produce more than the allotted monthly quota OPEC gives to each member. Recently Saudi Arabia increased its production when Libya ceased production due to the ongoing conflict. The recent talks broke up because some members wanted to increase production to bring prices down while other, mostly countries without excess capacity that do not want to see prices and profits fall.
Many have argued that oil above $100 is not sustainable. I believe Saudi Arabia and other member who want to increase production understand this. Western Europe, China, the United States, and other oil importers will seek other sources of energy with prices this high. For example, ethanol, a gas substitute costs about $3.50/gallon without government subsidies. When oil prices are higher than $80 is when ethanol becomes economically sustainable. OPEC needs to maintain prices so that the importing countries do not seek new technologies that make oil obsolete. While they may bring in record profits now in the future there may be much less demand for oil.
Take this game theory for example
Assuming what they product now is 28,985/month (April 2011 total production in 1000's of barrels) and a barrel of oil's price remains constant.
| Increase Production | Keep Production | |||
| Present | 35,000 barrels/month @ $70 | 28,985 barrels/month @ $100 | ||
| Future | 35,000 barrels/month @ $60 | 28,985 barrels/month @ $40 |
Their profits will look like this
| Profits | ||||
| Present | $2.45 billion/month | $2.8985 billion/month | ||
| Future | $2.1 billion/month | $1.1594 billion/month | ||
| Total | $4.55 billion/month | $4.0589 billion/month |
This is a very rough explanation of oil markets, there are many other factors but basically you can see it is in OPEC's best interest to keep prices where the importers don't search for alternatives.
So I believe OPEC will begin to either raise production to bring down prices or the countries that understand the game I just explained will leave the oil's allocation and begin to produce on their own. There is another game to explain cheating cartels which I will not get into but ultimately a cartel is only good until someone cheats, that is, produces more than what is agreed upon. For the cheater, record profits will be made as the price remains high due to low supple but soon others will realize the cheat has happened and also begin producing more and the cartel is no more. In this example I look to Saudi Arabia as the cheater, they have the most excess capacity and the best relations with the West. I stand by my $80 barrel by the end of summer, it might even go lower.
Friday, June 3, 2011
Debt Ceiling: To Raise or Not to Raise
Recently all the talk has been about the United States reaching their $14.3 trillion debt ceiling. Moody's rating agency just announced today that the Aaa rating of the US's short term credit would be under review if no significant improvement had been made in reducing spending or raising the debt ceiling by this July. The government of the US is gridlocked with the conservatives stressing more spending cuts and no raise in the debt ceiling while the liberals want the debt ceiling raised. Both sides are stressing the need to run a surplus to reduce the deficit but lets just look at the debt ceiling.
Politics aside I think the debt ceiling need to be raised and the United States' Aaa credit rating needs to be maintained at all costs. The debt ceiling has been raised 8 times since 2000 and I agree that this trend needs to be stopped however it should be stopped buy reducing the deficit through raising income and cutting spending and not by setting a limit and risking default on our debt. While keeping the debt ceiling where its at does not mean a default is imminent is does mean a review of a credit and I do believe the will lower our rating. If the rating falls from its current Aaa rating it would make paying off our debt even harder. As we saw in corporate examples, companies ran in the red because of cheap credit as a result of their good credit rating. AIG was operating by paying off old debt with new debt until its rating was lower and new debt suddenly cost a lot more than the old debt they were trying to pay off. I realize this is only one factor in AIG's collapse but it is a good example of what could happen to the US.
Last year, 2010, the United States payed $413,954,825,362.17 in interest expense. The total debt from 2010 was $13,561,623,030,891.79 this gives an average interest rate of 3.05% for the year 2010. A downgrading of US debt would cause interest rates they pay on their debt to raise. a 1% raise of rates on 2010's debt would equal $135,290,907,400 more in interest rate expenses or an extra 1% of the US GDP for 2010. This is something the United States cannot maintain for much longer. This year the US debt is $14.7 trillion and I expect for the first time will hit 100% of GDP. The debt ceiling needs to be raised to avoid a downgrading with the stipulation that this will be the last raise and that major reduction measures will be enacted.
All is not doom and gloom when you take it in perspective. The United States is still far from becoming a Japan. Japan has 225% of debt to GDP while the US is flirting with 100%. Even on the list of the worst of countries debt-wise the United States is still behind the world average and ranks 36 out of 128 on the ranks behind the United Kingdom and Germany. Obviously this scaled is skewed towards the debt heavy countries but it shows the United States is not alone in sovereign debt crisis. The entire world needs to look and its spending and revenues and realize what is a maintainable level of debt/surplus is.
Politics aside I think the debt ceiling need to be raised and the United States' Aaa credit rating needs to be maintained at all costs. The debt ceiling has been raised 8 times since 2000 and I agree that this trend needs to be stopped however it should be stopped buy reducing the deficit through raising income and cutting spending and not by setting a limit and risking default on our debt. While keeping the debt ceiling where its at does not mean a default is imminent is does mean a review of a credit and I do believe the will lower our rating. If the rating falls from its current Aaa rating it would make paying off our debt even harder. As we saw in corporate examples, companies ran in the red because of cheap credit as a result of their good credit rating. AIG was operating by paying off old debt with new debt until its rating was lower and new debt suddenly cost a lot more than the old debt they were trying to pay off. I realize this is only one factor in AIG's collapse but it is a good example of what could happen to the US.
Last year, 2010, the United States payed $413,954,825,362.17 in interest expense. The total debt from 2010 was $13,561,623,030,891.79 this gives an average interest rate of 3.05% for the year 2010. A downgrading of US debt would cause interest rates they pay on their debt to raise. a 1% raise of rates on 2010's debt would equal $135,290,907,400 more in interest rate expenses or an extra 1% of the US GDP for 2010. This is something the United States cannot maintain for much longer. This year the US debt is $14.7 trillion and I expect for the first time will hit 100% of GDP. The debt ceiling needs to be raised to avoid a downgrading with the stipulation that this will be the last raise and that major reduction measures will be enacted.
All is not doom and gloom when you take it in perspective. The United States is still far from becoming a Japan. Japan has 225% of debt to GDP while the US is flirting with 100%. Even on the list of the worst of countries debt-wise the United States is still behind the world average and ranks 36 out of 128 on the ranks behind the United Kingdom and Germany. Obviously this scaled is skewed towards the debt heavy countries but it shows the United States is not alone in sovereign debt crisis. The entire world needs to look and its spending and revenues and realize what is a maintainable level of debt/surplus is.
Subscribe to:
Posts (Atom)