Archive for January, 2012

Update on Recent Blogs and Fantasy Finance 2012 Predictions.

Japan needs to export more…

I have been asked to explain why my estimate for $/Yen (102) and the Nikkei ( 10100) are so high..

The debt accumulation has become so vast it must figure on the radar of things to worry about. In my blog Economageddon 18th December, I called Japan the elephant in the room. The Yen is now pushing the exporting industries to a point where employment is beginning to weaken. As I mentioned in the BRICs and Steel blog, the steel and shipbuilding sectors are deeply troubled. Japan’s exports are 16% of GDP against near double that for the faster growing economies. As you can see from the chart below, the Yen has been here before. Of course, a lot of water has flown under the bridge since then. Given Japan has just announced its first trade deficit in 31 years, the strength (of the Yen) cannot go unchecked for ever. A caveat to the trade figures must be pointed out: Due to the earthquake, energy imports (to cover the loss of nuclear generation) were much higher, whilst exports for that period were reduced.

Recently, Japanese banks have been acquiring very large overseas assets. A sign that they feel the buying power of the Yen is not to be missed.

GDP has gone from dynamic (emerging) to anemic (developed). It is now the third biggest economy globally where once it was believed it would be the biggest. If the Yen falls to reflect the worsening debt problem, domestic consumption will slow. Overseas luxury goods companies, which have enjoyed great success, will be a casualty.

As for the Nikkei. It has fallen from a high of 39,000 in 1985 (dynamic economy = high PE) to just 8,800 today. In 1996 it was 21,000 whilst the Dow was just 6,000. Since then the Dow has doubled and the Nikkei fallen by just under two thirds. The Yen is back to roughly the same level as in 1996. If, as I believe, the Yen is about to weaken significantly, may be, just maybe, we are on the verge of a major shift in valuations. That is why I believe the Nikkei will be higher than the Dow next year.

I have also been asked to explain why I was so negative on AP Moeller and the head and shoulders formation developed during the global surge of debt.  This chart is back to 1996. I refer to my blog The perfect storm to be read in conjunction with The Plimsoll line is clearly visible. I do believe the company to be very well run but economic circumstances have changed.

Wednesday, January 25th, 2012 Predictions 2 Comments

BRICs and Steel

Its better to be lucky than clever!

When, in 2001, Jim O`Neill wrote a research paper for his employer (Goldman Sachs) he was unaware of the impact the acronym he used would have. In his global economic paper, he wisely forecast a greater role to be played on the world stage by four poor but highly populous nations ;Brazil, Russia, India and China. Since then the aggregate GDP of these four nations has virtually quadrupled to $12 trillion. So, was he right because he was astute or was he just lucky?

In these large populous, poor nations, insufficient infrastructure existed in 2000 to even dream about the levels of output achieved today. In getting to the current position of GDP, a lot of investment has taken place, more importantly, a lot of debt has been accumulated. In fact if you take a look at the global debt accumulated over the period its acceleration and volume are very similar. Global GDP went from $32 trillion in 2000 to $64 trillion in 2010. The big Anglo Saxon economies ran vast trade deficits which were financed by profligate governments not worrying about tomorrow. America and the UK tripled government debt while the citizens did the same. Driving the expansion was a lax approach by regulators on the financial system. The rest is history.

Where do we go from here ?

The biggest single investment a fledgling country can make in terms of employment and output potential is the steel industry. Construction/infrastructure and transportation all rely heavily on various forms. In the production of steel, two main ingredients are essential, iron ore and coal. A large cheap labour force also helps. Luckily for the BRIC theory, these countries had these commodities in abundance. In 1996 China produced 123m tonnes of steel. By 2011 that figure was nearer 700m tonnes. Global capacity is still being added and is expected to grow around 5% annually until 2014. Over the last 5 years the rate of output potential has grown more rapid e.g. South Korea has raised output by 72% since 2008. India has transformed its economy via industrialisation  from 58% agriculture to only 42% today. 61% of its steel output is for construction and infrastructure. The problem now is, total global output capacity of 1,890m tonnes whilst production is only 1,398m tonnes. That would be fine if GDP growth around the world was in good shape,if debt were at a manageable level and consumption increasing. Sadly, none of those factors support current thinking that demand will grow slightly in 2012 and beyond.

Demand is on the wane. In the first 11 months of 2011, global sales were +7.4% but declined 1.1% m o m in November.  In the EU (173m tonnes ann.), November saw a 2.1% decline over Nov. 2010 whilst the annual figure was +3.1%. The EU became a net exporter in August after being a net importer for the previous six months. Imports were 28% lower between May and August. Germany and Spain saw a double digit decline m o m, whilst Italy was up 10% (I expect that to be revised or drop significantly in Dec). With Alcoa (aluminium) and Arcelor (steel) mothballing Spanish production, 2012 looks bleak for them.

China produces around 47% of world steel output. It also has the worlds biggest Iron Ore deposits and is second behind USA in smelting coal. In 2011 output was +8.9%, however,  m o m declines have been evident over the last 6 months with November being the lowest output for 13 months. Of course it is also the worlds biggest consumer (of steel) and with that in mind it is worth noting that the train disaster in Wenzhou froze railway spending from July ( $50bn lost output) losing around 3,000 miles of track construction. With annual GDP growth in the clouds, demand has soared. Construction/infrastructure spending has ballooned over the past decade and accounts for the lions share of output and demand. If the housing bubble is allowed to deflate and the railway ministry cuts 2012 spending by 42% (from $110bn 2010 levels) then demand may well be sluggish at best. Vehicle sales may not help either. In 2009 (incentive induced) sales grew 46%, 2010 + 32% and only +2.5% in 2011. The authorities may see fit to push domestic demand by easing monetary policy but with property and inflation still too high, that may not be just yet. Shipping is an area which will exert downward pressure on demand, see my previous blogs `The perfect storm` and `The plimsoll line is clearly visible` on the subject.

Japan is the third biggest producer (110m tonnes ann.) behind the EU. It has the Yen to contend with. Until its value reflects the economic outlook for the country, see recent blog `Economageddon` the outlook is bleak. It is difficult to assess accurately the current picture due to the post earthquake affects and the flooding in Thailand. However, production in December was down 8.4% on December last year, the biggest monthly decline in 2 years and the fourth m o m decline in a row. 2011 saw a 1.8% contraction overall. Japanese ship yards are struggling with the currency and weak demand. From the worlds biggest player it is now third behind China and Korea. Concerns have been raised that the order backlog could disappear by 2014. The shipbuilders are demanding further price cuts (in sheet steel) to match Chinese and Korean offers.

The Korean production levels (69m tonnes ann.) could be affected by the announcement from the local ship yards that they will order 12% less steel this year. With new orders falling further 2032 will be down as well.

The US car industry accounts for 24% of domestic steel production ( 80 m tonnes), so last years sales increase helped significantly. My recent blog `When is a car not a car?` suggested that a great deal of that sales momentum was down to 2011 capital tax relief.

In conclusion: I am of the opinion that unprecedented debt growth in both public and private sectors drove demand to unsustainable levels. The knock on affect in steel demand was implicit in driving ever more demand for infrastructure spending which in turn drove ever greater demand for commodities. Of course these commodities needed to be transported around the globe. Ship construction grew to record tonnage thus fueling the cycle of more demand. The BRICs along with commodity rich Australia, Canada etc also grew at a frenetic pace. If, as I suspect the debt accumulation is stretched to its limit, global steel production will fall. Capacity utilisation rates peaked in February 2011 at 83% and have since fallen to 71.7%. At some point this year, further mothballing of production will take place thus reducing further the demand for iron ore and coal. If ship owners cannot afford to put their vast fleets on the swing (at anchor) then the supply of steel from scrappage will grow. India currently generates 30% of its steel production from recycled steel. The link between debt and growth cannot be denied, the question is now, can the new world continue its growth trajectory whilst the developed world digs itself out of an almighty mess.

Yes, Mr O`Neill was right to point out the potential but he would not be where he is today had debt not been allowed to get out of control. The global economy could turn very ugly.

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Monday, January 23rd, 2012 BRICs, China, Debt, GDP, National Debt, Shipping, Steel, Yen 9 Comments

Fantasy Finance 2012

Check out the 2012 prediction competition by going to the `Fantasy Finance 2012` button on the tool bar.

You can check out my crazy predictions.

GOOD LUCK!

ps VLCC Just sold for $28.3m vs auction estimate of $39.6m…not good news

Thursday, January 19th, 2012 Predictions 1 Comment

The Perfect Storm

Or is it just a `Storm in a Greek earn?`

If there is one industry group which reflects supply and demand most accurately, it would be shipping. I look at the world as a body. The shipping lanes or seabourn trading routes being the arteries. The ships plus cargo are the life blood supplying the three major continents, being organs. The heart I feel is money supply and importantly the  velocity of money.  Changes in money can quicken or slow the demand cycle which in turn is reflected in the fortunes of the shipping industry. This is where problems can occur. Changes to money supply can develop very rapidly whilst shipping on the other hand cannot be so nimble. Lead times for ship delivery is 2-4 years. The reason for writing today is due to a potentially disastrous imbalance in the worlds health.

I wrote last week about the decline in the Baltic shipping indices. Since then the barometer of daily charter rates have fallen another 20%. Why do I feel the need to update, given, as I explained then that it was a volatile animal? The levels now being indicated would imply income generated will not cover operating costs. This time last year the Index declined to around 1450 from a 2010 range of 4200 to 2000. This lead to many articles fretting about the future of the industry. Whilst they proved true in a sense, the problems of 2011 were not significant. Now however, the index is another 28% lower than then. Adding to this poor outlook is the pricing of the single most important industry cost, Bunker fuel. Over the last 12 months it is up 30%.  . Being a derivative of oil it rightly tracks that commodity. A factor which has exacerbated the pricing is that refineries have invested in improved cracking capabilities, enabling far greater proportion of distillates into more profitable lighter products. As a guide Bunker fuel averaged $100 per ton in the 1990`s and is now around $700.

If this level of the Index were to continue, the implication would be catastrophic! Hence, I have put together some important industry facts.

Greece along with Japan are the largest merchant ship owning nations in the world. For Greece, shipping is second only to Tourism. Thus it is a large employer. That fact has obvious implication given the bleak economic prospects they face. When it comes to financing that fleet the largest player with nearly 20% of the total debt of $66bn is RBS. Way down in % exposure come Commerzbank and Cr. Suisse. The Chinese have used their financial muscle since the financial crash to offer huge financing for new ships built in their yards. The Greek fleet has benefited from the cheap money bonanza pre-crash and has reduced the average fleet age from 23 years in 2005 to 15.9 years in 2011, whilst slightly growing tonnage.

Financing the global fleet is in the hands of only a select band of players (appro.39). Six banks account for around 40% of total debt. HSH Nordbanken (majority owned by 2 German federal states + 11% JC Flowers) $50bn. Commerzbank (via subsid.) $33bn, Dnb $28bn, RBS $23bn, Nordea $18.4bn. BNP $18bn. Interestingly Lloyds and Unicredit are well involved.

The Scandinavian banks have the largest exposure in balance sheet terms and therefore have the most to lose.

The largest corporate owners of ships are AP Moeller Maersk (840) COSCO Group (725), Nippon Yusen 554, Mitsui OSK 509 and China Shipping Group 482. The share prices of the Japanese and Danish companies have reflected weakness in new charter rates up to a point but still trade with an element of optimism that the global economy will grow around 4% this year. If the Index continues to portray significant weakness and pricing does not improve, I can see the like of AP Moeller trading 20% lower to its September 2011 low. Should my worst fears for the global economy be borne out, the 13 year head and shoulder formation would imply something far more unimaginable, so lets not go there.

Given the implications this index decline throws up, it is worth knowing the exposure companies have. It could just be that the Chinese new year or Cyclone Heidi has distorted the picture. Either way, the problems being faced by Greece would be amplified should any of this happen. The potential for China to cut interest rates or Germany to give approval for the ECB to officially commence QE would give expectations a short term lift. Unfortunately, the significant rise in oil (Bunker fuel) that it would lead to would be an offset for the ship operators. The real problem of global debt will not go away easily.

 

CAUTION: Compiling data in this sector can be difficult and I have relied on the Internet to be correct. You are all aware that is a dangerous strategy. Most of the data is 6-12 months old.

 

 

 

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Monday, January 16th, 2012 China, Debt, GDP, Money Supply, Norway, Predictions, QE, Shipping 5 Comments

Review of blogs to date

Nov 10thTesco (being the only company mentioned to date) was highlighted as losing out to discount stores. Luxury retailing was a sector to watch and I still expect that bubble to burst in 2012. They have the highest earnings multiples in the sector. I still think the US Postal service will be a major headache for US Gov in 2012 with possible job losses of 150,000.

Nov 26th…UK Retail… Internet sales, Money Supply and Velocity thoughts all still apply.

Dec 18thGreece. I still believe the chances of them leaving the Euro by April 2012 are about 85%. Just an update since them. Take a look at Defence spending. In 2010 it was E7bn and at 3% of GDP second only (in GDP terms) to USA among NATO members. Whilst 2011 saw its procurement spending fall by E500m, proposals for 2012 include a 50% increase in NATO contribution to E60m and Defence procurement up by 18%. Sadly, the Social welfare budget in slated to fall 9% or E2bn. The most important point I wish to make is that Germany is the main beneficiary of this spending (France second). Portugal and Greece are the two biggest customers for  the German defence industry. I propose that Europe throw a blanket over Greece in terms of border concerns allowing it to slash defence spending by billions. Surely Germany and France should focus on Greek wasteful spending before throwing the people into poverty. Maybe they are more concerned with employment in their own countries!!!! Maybe when Greek people start dying from the huge shortage of life saving medicine, as is widely reported, they will focus on the important things in life.

Spain…Nothing has changed other than the reality of regional deficit deceit is now out in the open. The new government has raised 2011 budget deficit to 8% vs 6% previously stated. Headlines of regional debt downgrade will continue. Property is still 20% over valued with the banks complicit in holding up the value of their vast portfolios. Local authorities continue to cut services, lighting, salaries and general spending. Spain will return to a tourist country. Long live the Peseta, cheap holidays, sangria and Una Paloma Blanca!

Japan…Nothing further to be said. Debt (Y1 Quadrillion) and average citizen age growing fast.

Dec 19th…The Indian Government did remove the import tariff on Jute but this has not stopped the negativity in the industry.

Dec 19thChina. with the growth in auto sales below that of the US for the first time in 14 years, Inflation down to 4.1% and a slower economic growth expectation for 2012, many now forecast the authorities will ease monetary policy. I am not so sure they will want to push the growth button too early. If the world is slowing down, why not wait until that slowdown is well underway and commodity prices have weakened still further. They cannot save the debt laden world from its fate so why try.

Jan 2nd Ireland (Rep. of) Strong growth in the 2011 exports of the Agrifood Industry were reported today. I still believe Ireland will go back to what it does best.

Jan 8th…Sterling closed below its important £/$1.5350 level yesterday. As is the norm with these breaks, it has regained that level today following a fall to its 12mth intraday low of 1.5270. I believe it is now on a downward path to levels mentioned in earlier blog. Of course this is great for the FTSE 100 companies which have $ earnings. Inflation will prove  stubbornly high vs average earnings growth.

News in the media regarding employment has a particularly bleak bias today with news of job losses from Vestas, Delhaize, RBS, UlsterBank (RBS sub in both Rep of Ireland and N. Ireland) and Ladbrokes (Rep Ireland)

Thank goodness the Spanish and Italian Government bond auctions have been well received today. Perhaps all is now OK?

 

 

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Thursday, January 12th, 2012 China, Consumer Debt, Debt, Euro, GBP, GDP, National Debt, UK, USD No Comments

The plimsoll line is clearly visible!

Shipping may hold key to global growth.

I was not expecting to write on this subject until the end of this month when further data was available. It was the recent news flow which changed my mind.

The Baltic Dry Index together with Capesize, Panamax, Supramax and Handysize have now fallen every day since mid-December. Yes, volatility in this Index is nothing new, but it has fallen 27% over that period and 34% since the August 2011 peak. In fact the Index is now back to early 2009 levels when ship charter rates were just rallying from the financial crash lows. As an historical note, the Index had a trading range of between 1000 and 2000 for decades before the golden rush of debt frenzied trade took off in 2002. Yes, the peak of around 12,000 was reached because the lead time between order and delivery is so long and the industry was not prepared.

So with the index now around 1250 it looks to be in for a bounce. That of course depends on many factors. Iran, Chinese new year, Floods, Earthquakes, Strikes etc. Most importantly of course it depends on Supply/Demand.

Steel Industry

The raw materials of this important industry (Iron Ore and Coal) account for 51% of dry bulk sea bourne trade (3.4bn tonnes in 2011). Of course China accounts for a big chunk of this and last year saw 63% of all Iron Ore shipments go to them. Currently, Iron Ore inventories in China are at a record high, which is great if you are about to explode economically. However, Chinese Steel production, which is believed to have risen 9% to 683 million metric tonnes in 2011, declined month on month over the last 6 months.

Shipping Industry

The recent news headlines from the industry have not been good. Several large players have had financial difficulties with yes, you guess it, too much debt. The head long rush in 2007/8 not to miss out on the global economic explosion lead to a huge increase in new ship orders. Currently the world Dry Bulk fleet is around 8,877 ships (585m dwt) with an average age of 12 years. 60% of the fleet is only 2.8 years…very young indeed! Deliveries in 2012 are expected to peak (2007/8 orders) with 1,431 new ships or 62% of current total order book. China saw a 47% drop in new build orders in 2011 with replacement orders lower than 2011 deliveries. Turnover in this industry segment was $112bn up 23% on 2010. Interestingly, the market leader in new construction, Korea, had a 6% increase in new orders to $50bn. However, currently they are in dispute with local steel producers who are refusing to lower sheet prices significantly as they say it will make them not profitable. The situation is being exacerbated by the Chinese steel industry which is offering the Korean shipbuilders what they want (dumping?)

Conclusion

If the implications of the Baltic Indices are that supply of ships is ahead of demand, then further reductions in orders can be expected. Given the youthful fleet, especially by the end of 2012, orders may languish for some years. That of course depends on global economic expansion. As China and the other producers will require significantly less steel in the ship construction process through 2012, it may require less Iron Ore and Coal. Hence less deliveries by sea. The biggest producers of Iron Ore are the BRIC`s and Australia.

 Grand China Shipping problems have been well documented of late with late fuel payments and early return of chartered ships. Interestingly research from major investment houses have highlighted a variety of industries also reliant on shipping.The  Mitsubishi/Morgan Stanley report on waning demand for metals in the electronic industry, JP Morgan Chase warning of a slowdown in semi-conductor and  factory automation systems and lastly Nomura cutting forecasts for global shipments of DRAM`s.

Tuesday, January 10th, 2012 China, GDP, Shipping 4 Comments

Beauty Queen suffers ill wind…Phew!!

Important FX Chart points in £ vs. the $ and Euro.

David Cameron and his chancellor are basking in the glow of accolades bestowed upon them for their tough budgetary approach to the UK`s dire debt problem. Markets have rewarded them with borrowing costs at lows not seen since the 19th century. They should be careful of Greeks bearing gifts!

The coalition are following a correct path of attempting to reduce the government led economy and raise the Industrial Private sector. Firstly, they need to reverse a legacy of the Blair/Brown era which oversaw a reduction of 1 million manufacturing/engineering jobs (a continuation of the previous government) to be replaced by 1 million additional civil servants. At the end of the 19th century, Britain was the leading global manufacturer with 15% of total production. Today it is 9th with 2.2%. Still not bad considering we have less than 1% of total population.

The Ill Wind  *

Sterling has a very important part to play in this re-habilitation. The decline of Sterling (c.25% trade weighted) following the financial collapse, helped, along with the promise of pro- industry reform, breathe life into the now feeble (in terms of total GDP) manufacturing sector. That strong uplift (resulting in a 15-20% improvement in European competitiveness) to export potential, is now showing signs of reversal.

In the second half of 2011, Sterling advanced 6.60% vs. the Euro and fell 5.48% vs. the Dollar. Given these movements UK plc has lost 5% in export competitiveness vs. our largest trading partner (Europe). It could have been worse (-9%) had Sterling matched the Dollar`s performance vs. the Euro.

The additional Pan European austerity measures implemented from January 1st 2012 will reduce disposable incomes still further than the negative wage growth I expect this year. Inflation adjusted incomes in Portugal, Ireland, Italy, Greece and Spain (PIIGS) public sector, will likely fall by 5%. These countries have extremely bloated public sectors which will suffer further as budget cuts take hold. This environment of lower spending is not one you want to be losing traction in.

Making things even worse is Sterling strength vs. the Eastern European currencies over the last 6 months e.g. Poland +17% Hungary +23%. Of course the dire prospects of Hungary and its possible economic collapse have not helped. Industrial investment in Eastern bloc countries has ballooned since EU membership, and as such, view the consumer markets of the rich western partners good hunting grounds for their cheap labour exports. Couple this with talk of significant labour reforms in the PIIGS (labour costs grew 20% vs. Germany 9% over last 5) and things start to look a little ominous for the UK in the coming year. Remember that if they (PIIGS) manage to reform stiff labour regulations, they have enormous unemployment e.g. 23% in Spain.

IMPORTANT CURRENCY LEVELS..I am not saying these chart points will be broken, just what if they were.

£/$  Is near a very important support level of 1.5350. Having been used as a technical support with several bounces from that level going back to Sept 2010. The more bounces the greater the move if breached. 4 such bounces make this a key level. Initial target being 1.50. Two reasons, one being it`s a big round number and they always act as support/resistance, secondly, a trend support line from March 2009 and May 2010 lows.

However, this break of 1.5350 is more likely to herald a move to £/$ 1.40 which is the low point of the last 10 years having acted as support in 2001 and 2009

£/Euro Is near an interesting but not so strong support of 0 .82 or as I prefer 1.22. A breach would indicate a fall (rise in Sterling) of around 3-5%. However, a breach of the 0.78 (1.28) level would indicate a retrench back to 0.68 (1.50 Euro`s to the £) …Unlikely…

So, to recap; if Sterling falls vs. the Dollar our input costs rise putting downward pressure on corporate margins (if prices can`t be raised). If Sterling rises vs. the Euro, will the last one leaving Britain please put the lights out!.

 

* I have assumed a 30% Industrial cost exposure to the $ via Energy and Commodities. I have no idea if that is right..

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Sunday, January 8th, 2012 Debt, Euro, GBP, GDP, National Debt, Predictions, UK, USD No Comments

When is a car not a car?

USA..Car sales for 2011.

2011 has been a truly sparkling year for the re-invigorated US car industry. Many pundits are looking forward to continued impetus in 2012 and projecting good things to come.

Yes, you have guessed it, I don’t quite see it that way. A few questions need to be answered first. Most importantly is to what extent did the once in a lifetime tax incentives have on 2011.

Over the past 4 years various tax incentives have been implemented to stimulate the economy. The Economic Stimulus Act 2008 (Pres.Bush), American Recovery & Reinvestment Act 2009, Hire Incentives to restore Employment Act 2010, Small Business Jobs and Credit Act 2010 but it was the Tax Relief, Unemployment Insurance Re-authorization, Job creation Act 2010 (Jobs Act signed 17 Dec 2010) which brought in the 100% relief.

 Section 179 limits were increased by the ‘Jobs Act of 2010’ – allowing businesses to write-off up to $500,000 of qualified capital expenditures  subject to a dollar-for-dollar phase-out once these expenditures exceed  $2 million. Bonus Depreciation was also increased to 100%`Tax Relief Act 2010` allowing businesses  that exceed the $2 million cap to write-off 100% of qualified assets using first year Bonus Depreciation. Also, small businesses that are  not profitable in 2011 can use 100% Bonus Depreciation (on new equipment only) and carry-forward the loss to future profitable years.To get the deduction for tax year 2011, you have to act this year, as once the clock strikes midnight on 31/12/2011, Section 179 can’t increase your 2011 profits anymore. 

That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It’s an incentive created by the U.S. Government to encourage  businesses to buy equipment and invest in themselves. Several years ago, Section 179 was often referred to as the “SUV Tax Loophole” or the “Hummer   Deduction” because many businesses have used this tax code to write-off the purchase of qualifying vehicles at the time but that particular benefit of Section 179 has been severely reduced in recent years. Section 179 is one of the few incentives contained in any of the recent Stimulus Bills that actually helps small business. Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for Small Business – and millions of small businesses are actually taking action and getting real benefit. In 3Q 2011 Private sector investment in equipment and software accounted for 60% of total growth in GDP and since early 2009 it has risen faster than any postwar (ww11) recovery. Breaking that down, transportation has grown over 100% whilst equipment and software 30%.

Firstly, a little background stats on the market…Cars sales are not car sales. They are a combination of cars and Light-duty Trucks (LdT). So Pick-ups, Minivans, Crossovers and SUV`s are all in the melting pot. The car component made up 75% of the total in 1990, 63% in 2000 and 44% in 2010. Under the Section 179 regulations all vehicles can qualify for some or all the tax relief but of course it is more likely that the LdT segment will meet the more quirky requirements of weight, cab size, Passenger seats etc.

In 2011 the LdT segment increased its share of the market. I cannot help but assume that a significant element of the growth (11.6% yoy)  can be attributable to the tax incentive. Some commentators point to the record average age of vehicles driving demand. Well, for cars that may have some traction but average age has been increasing with build quality : Average car age in 1970 was 5.5 years, in 1990 7.5 years and 9 years in 2000. Various estimate have it around 9.25 this year. The age profile for LdT is more stable with 1970 at 7.25 years, 1990 at 8 years. That level has been the norm give or take up to present times with current estimates at 7.5 years. In the car segment of sales the feature was the demand for small cars (+13.6%) against overall demand up 8.9%. This has been widely attributed to the cost of fuel. In previous fuel related shifts in transport consumption SUV`s and Pickups suffered but in 2011 they were up 25% and 11% respectively.

The industry will be hoping that the enthusiasm of late 2011 is carried through into 2012 especially as inventories at US manufacturers are above the norm. The huge ad campaigns seen in the second half of Q4 may be an attempt to garner as much as possible in 2011 in case 2012 disappoints.

 

 

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Thursday, January 5th, 2012 Consumer Debt, Predictions 1 Comment

IRELAND…Never was a silk purse!

Happy 2012 and good riddance to 2011. That seems to be the consensus of most economic journalists. The consensus seems to be that yes things will get worse in the first half but light can clearly be seen and by the latter stages of this new year, all will be fine and dandy.

As you might have guessed I beg to differ. 2011 as for several years prior, saw a 10% increase in global public debt. Various estimates put it at around $54 trillion. The thing to remember is that this has grown from around $20 trillion in 2000. There can be only one response to that degree of debt build up, GROWTH. And by George did we get it in the bucket load. To highlight just what happened on a more macro scale I am highlighting a small country which benefited significantly and in turn helped drive the world economy even faster.

IRELAND (Rep. of) It could be in worse than Greece.

Widely regarded as an economic miracle back in 2007, it is still a miracle. A miracle that people in power both political and business could be so stupid. The story started so well and with very good economic management following a crazy spend too much and then tax too much period (1977-81 debt binge 1981-1986 tax binge). Following a currency devaluation (ERM terms) in 1986 (Mainly due to the weakness of Sterling, Ireland’s biggest trading partner)  tough spending restraint was implemented to bring down borrowing. A wage/tax agreement meant wage growth stabilized. All this was agreed whilst the UK boosted consumption with heavy tax cutting. The real growth in the economy did not appear however, until 1993. Following a stormy entry and subsequent exit of the ERM by Sterling, Ireland needed another devaluation in 1993. From then on its economic performance was on a meteoric path. The large sums being donated by the European Structural Fund equivalent to 3% of GDP were helping to vastly improve infrastructure. Unemployment went from 16% to 4% by 2000. As the decade progressed and the 1999 EMU launch looked more certain, overseas investment piled into the high interest rate countries, Ireland Spain etc. Given that real interest rates in Ireland averaged 7% prior to the EURO and minus 1% from 1999 to 2007 you can see why. Government spending doubled between 1995 and 2007. GDP grew by 10%+ between 1995 and 2000, averaging 6% 1993 to 2007. Perhaps the most important change was in migration. Long known for high emigration and population decline the economic miracle drove the population higher via immigration, both returning migrants and overseas workers.

All this was of course great news to the Irish Exchequer. Tax revenue soared helping to fuel the machine. Sadly, this is where one of the early mistakes was made. The huge rise in cyclical tax revenue, stamp duty rose 1300% from 1993 to 2007, was seen as structural and its abundance was used as an excuse to reduce real structural taxes eg Income related. Housing starts went from 30,000 in 1995 to 93,000 in 2006. House price inflation between 1996 and 2007 was 330%. Car sales from 64,000 in 93  to 186,000 2007.

Sadly that is all in the past. The last few years have been well documented. 2012 could actually be even worse. Fiscal measures for 2012 include a 2% VAT increase. Motor tax rise between 7 & 30%,  a one off 100 euro household tax, Toll road duty up by 10% on many routes. Bus fares up by approx 10%. Additionally many local authority charges are being raised like a 50-100% increase in burial fees (certain areas).

Given the over reliance on cyclical taxes in the past, the likelihood is that these tax changes will only drive revenues lower not higher. Housing starts are likely to be below 1995 for some time due to a glut of unsold properties. House prices have dropped 47% from peak. Car sales could well be lower in 2012. January is responsible for 25% of annual sales and Q1 50%. The second half (traditionally vey low volume) of 2011 saw a 40% decline over 2010. If January continues this trend, expectations could be for a figure close to 2009 when total sales fell below 1993. The various tax increases applicable to motoring coupled with a decline in the Euro (1/3 of sales from US/Asia) could well confirm the worse. Average car age is only just getting close to long term trend (8 1/2 yrs) having been driven lower (5 1/2) during the boom times. Consumption comparisons got a boost in December from last year due to better weather and discounting. This has not stopped further closures in the retail market.

All things being equal the long term trend toward net migration, which has returned, will continue. More importantly, if the EU carries out its plan to change corporation tax rates to point of sale not production, Ireland will once more return to an Agri based economy. Non Agri employment as a % of the workforce went up 50% during the boom.

Why does history keep repeating itself. Ireland has assumed all the debt of its banking industry which centres mostly on the housing bubble. Its debts are unsustainable and as 2012 brings weaker consumption coupled with higher unemployment, the reality will finally dawn…

Warren Buffett once said `Only when the tide goes out can you see who is swimming with no trunks on` …well, until global public debt starts to decline the tide will not go out. So many naked bathers are yet to be discovered. 2012 could well be the year to cover up the eyes of the young and innocent.

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Monday, January 2nd, 2012 Consumer Debt, Debt, Euro, GBP, GDP, National Debt 3 Comments
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