26/05/2011 - 00:00

Blue skies ahead or a danger it will fall in?

26/05/2011 - 00:00


Save articles for future reference.

The world will soon know what sort of shape the US economy is really in.

Blue skies ahead or a danger it will fall in?

GET ready for a re-run of the 2008 stock market crash and sell now, or buy with your ears pegged back.

If that sounds like confused advice, that’s because it is; but it’s also what you’re hearing today from the best and brightest in the world’s investment banks, as the following two examples from last week illustrate.

Analysts at the highly regarded Japanese consulting firm, Nomura Research Institute, reckon there is a danger of the sky falling in once the US central bank, the Federal Reserve, ends its economic stimulus program known as quantitative easing (QE).

Analysts at the US bank Citigroup reckon corporate profits’ outlook is bright, and getting brighter, prompting a worldwide upgrade of the earnings outlook.

In a nutshell, those two views of the world explain why we have moved away from the GFC into a period that might best be called the GU (great uncertainty).

The cause of the GU is that governments are easing back on their economic stimulus measures, or being forced to do so by their own high debt levels, and no-one really knows what happens as government crutches are abandoned.

Pseudo-technical jargon for the GU is ‘cogitative dissonance’, or a feeling of having two conflicting ideas at the same time which, in the case of the world’s financial markets, is not knowing whether they are poised to rise or fall.

Local evidence of the GU can be found in the way the stock market has been travelling between the tram lines of 4,700 points, as measured by the all ordinaries index, and 5,000 points – but rarely going on either side of those levels thanks to the clash between optimists and pessimists.

Perth property prices are another example of a confused market, with values falling as Western Australia gears up for a period of fierce growth led by massive capital spending on iron ore and natural gas projects.

By the end of next month a clearer picture might start to emerge as the biggest of the stimulus programs – that run by the US government – comes to an end.

That is the time when the world will discover whether the US economy can stand on its own, or whether it will crumble without the aid of artificial support.

Nomura’s view is that grave troubles lie ahead.

In a complex explanation of what’s been happening over the past few years, Nomura’s chief economist, Richard Koo, argues that the end of the second phase of quantitative easing (QE2) in June will rip the foundations out from stock and commodity markets.

He says conventional investment tools, such as discounted cash flows, could be used to justify current stock and commodity prices: “If both gross domestic product (GDP, or economic growth) and corporate profits are expected to increase at a robust pace”.

But if unemployment in the US remains high, house prices

continue to fall, and money supply growth slows, then “major problems arise”.

“That would suggest that share prices and commodity prices are in a QE2-driven bubble and that now may be an opportunity to sell assets that have been lifted higher by QE2,” Koo wrote.

The Citigroup team, in its overall optimistic outlook, agrees on one point with Koo’s gloom. That share prices will remain flat for some time as the world adjusts to a post QE ‘normality’.

However, the outlook for profits is excellent thanks to rising revenues and heavy duty cost cutting.

“Companies (around the world) are not only benefitting from stronger global GDP growth than we originally thought, but the corporate revenue leverage to that GDP is also rising,” Citigroup wrote.

Boiled down, Citigroup sees

global corporate earnings per share continuing to rise as the recovery strengthens, but that increase will take time to flow through the

share prices.

Confused? Undoubtedly. But don’t feel lonely, so is everyone else.

Lighting up

ON much stronger footing – but in a product category that is never mentioned in polite society – is recent research on global smoking – not of the coal-fired power station variety, but of the tobacco variety.

According to a separate piece of research, Citigroup has calculated that worldwide cigarette sales are currently running at $US450 billion a year, and total tobacco sales at $US661 billion – numbers that are obviously well short of the true total because they exclude China and duty free fag sales.

A sales comparison with previous years has not been calculated in what is Citigroup’s inaugural study of the global tobacco market, but a rough estimate can be made using individual corporate sales – and they show a rise in tobacco use, not the fall health authorities crave.

Sales by Imperial Tobacco, for example, rose by 13.4 per cent between 2006 and 2010. Japan Tobacco lifted sales by 7.3 per cent. British American Tobacco by

0.7 per cent and Philip Morris by 2 per cent.

In terms of brands, Marlboro remains the world’s fag of choice with smokers burning their way through an estimated 297 billion sticks, though it was also a brand that declined modestly in the five years to 2010. The fastest growing brand was Pall Mall.

Anti-smoking crusaders will no doubt be appalled by the fact that they are having such a minimal effect on a habit they regard as public health enemy number one.

Deeper thinkers will look at the addiction people have to smoking and wonder whether they’re watching a dummy run for the bigger game of trying to shut down that other form of smoking, coal-burning power stations – an event which will drive electricity prices sharply higher.

Sweet relief

ON a happier note, but still dealing with addiction, it was a pleasure to read that Cargill, the big US commodities group, plans to soon re-start shipments of cocoa from the Ivory Coast after that country’s civil

war ended.

For the past few months there has been deep concern that global chocolate production would be compromised by the war in a country which accounts for 40 per cent of worldwide cocoa output.

Life without cigarettes would be tolerable. Life without chocolate would be intolerable.


“All you need in life is ignorance and confidence and then success is sure.”

Mark Twain



Subscription Options