Archive for February, 2012

Warren hits the Buffers?

Has Warren Buffett found another Tesco, has the champagne gone flat?

If you click on the image below, you will see BNSF weekly rail traffic for 2012 vs 2011. It is given in a week over week basis and year on year total. If the US economy is gaining traction then someone should tell the railroad customers. I may well be wrong but it looks suspiciously like the fourth warmest winter on record spurred (economic) growth which is now falling back. Of course this is only seven weeks of data and is at best a snapshot. I would be happier with another three or four weeks before making any assumptions.

The chart breaks down the three main segments of Warren Buffetts railroad company. Freight Wagons or Carloads to Americans, make up 53% of volume with Containers 40% and Trailers 7%. Within the Carload segment, coal is king making up just under 50% of volume. Then comes Grain, Chemicals and Motor Vehicles. The second half of the chart breaks down the three industrial components.

BNSF is the second largest freight network in the USA.

This is just an observation of the US economy and its momentum. I would like to add that if fracking success continues, coal demand will suffer further. If my observations re Steel and Iron Ore run true, then expect more bad news see BRICs and Steel/ Iron Ore plus various updates for details.

 

Thursday, February 23rd, 2012 Predictions 1 Comment

UK Debt

UK Public Finance figures for January 2012

Todays report has been given positive press on the slightly better than expected surplus in what is the biggest tax take month of the year. Of course things are not always as they seem. The primary reason for the improvement was a £2.5bn swing in local government finances. I for one would not trust anything from local bodies which is based on estimate. Major revisions may well take place.

More important is the revenue side of the equation. This is broken down as follows, with 2012 revenue vs 2011 … a) Production (wide basket of taxes incl. Excise, import etc) £15.5bn vs £15.6bn b) VAT £8.6bn vs 8.7bn, c) Income £24.6bn vs £24.8bn and d) Corporation/Petrol revenue £9.2bn vs £8.5bn. The important fact is that in January, VAT and Production tax were both lower than 2011, Income was only slightly higher with Corporation/Petrol up 10%. In 2010 the combined  tax take was £50bn, in 2011 it was £59.25bn and in 2012 £60.90bn. Given that Government spending is still increasing, all be it only slowly, any further deterioration in employment or an increase in Gilt yields could derail any thoughts of a give away budget. The growth of Income from taxation is slowing and debt is continuing to grow c. £122bn this fiscal.

Tuesday, February 21st, 2012 Debt, UK 1 Comment

Global Barometer indicates a possible chill.

Update from the 7th February blog…Iron Ore

I mentioned earlier that I believe Iron Ore is the barometer for global growth. See previous blogs for reasoning. As an update, last week saw the sharpest fall in steel re-bar prices since October last year. Iron Ore traded lower for the eight consecutive day to the lowest level since late December last year. Forward pricing is negative indicating further declines. With volumes low all eyes are on the beginning of the Chinese construction season in March which is hoped will stabilize prices. It is worth noting that if Iron Ore prices do not improve, the 100 million plus tonnes of inventories mentioned in Iron Ore will be throwing up losses of around $5bn for the owners.

Following last weeks warning of a grim outlook (Chinese Commerce Ministry) and falling house prices, the authorities have moved once again this weekend (second time in 3 months) , cutting banks reserve requirements by 50 basis points to 20.50%. We will have to see if this spurs positive price action.

Having been busy this past week with the day job, Landscaping, I have missed the continuation of the great equity bull market. Spurring things on was the positive economic data from USA which helped optimists with the belief that all global debts have been repaid and the US is moving into never never land.

A review of recent posts:

Oil nears all time high 6th February. In Sterling terms, Oil is now making new all time highs so expect another 3-4 pence per litre at the pumps.

Update on recent blogs 25th January. The Yen has started to weaken, I continue to expect further weakness. see chart. AP Moeller short got stopped out but I still fell the stock is not reflecting reality.

Beauty Queen suffers 8th January and Will the next Italy 18th December Both highlight the UK economy and Sterling. I have to admit Sterling has rallied strongly but again I still cannot see anyone wanting to own either Sterling or Gilts once the monthly budget deficit starts reflecting weaker employment and lower tax take overall whilst spending cuts are still just smoke and mirrors.  The Public Sector borrowing figures are released on Tuesday and are possibly the most important of the year. Income taxes peak in January and 2011 saw $33bn vs £27bn in 2010. However, the growth in revenue was halted in the second half of 2011 vs 2010. I would not be surprised to see a below expected figure which will weaken Sterling and Gilts. If this happens, expect even higher prices at the petrol pumps! Happy motoring.

Finally, good luck to Greece. I have made many happy visits to Greece, most memorably to jointly host a large dinner/reception at Posidoina festivals in the 80`s. I believe a Greece free of the Euro would be able to rebuild itself. A 40% weaker currency (Drachma) would see a flood of investment. The many billions shifted abroad by wealthy Greeks would be sucked back. I only hope they can choose politicians who can be trusted and not just lurch to the left as is possible.

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Sunday, February 19th, 2012 China, Debt, Oil, UK, Yen No Comments

The Post is Pony (cockney term).

US Postal Service.

I have mentioned it in the past but following the loss announced today for the xmas trading quarter, my contempt for politicians has deepened. Their ability to kick cans down the road knows no bounds. The debt (postal) at the the US treasury amounts to $15bn. This accumulated loss is not part of the Federal Budget Deficit. Unless action is taken to stem the losses, estimated to be around $14bn in 2012, they will run out of operating cash by the late summer. Sounds just like Greece! With postal volumes falling by 6% annually, expenses have to be cut fast. With over 600,000 employees, many pensioners and high fixed cost base, the weakening year on year volume means action is required soon. The plan submitted by the executive requires 252 sorting offices, 4000 post offices and around 200,000 to be eliminated. Because the losses are not part of the ongoing budget arguments, politicians have been happy to sweep the problem under the carpet. Why do we let these people run our lives!

Is it any wonder that the US economy can continue to grow when the government spends the way it does. I know the most recent GDP numbers reflected stronger private sector growth and weaker federal spending but the huge tax incentive for business to write off spending was bound to stimulate growth. The truth is, the deficit will still grow by $1 trillion in this fiscal. With the developed world in debt up to its eyeballs, someone has got to tell the politicians that the game is up. Make some hard decisions, either we have a very harsh ten years or if they continue with QE etc, eventual world anarchy.

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Thursday, February 9th, 2012 Debt, National Debt 2 Comments

Fantasy Finance 2012

Due to the Greek debt negotiations coming to a climax prior to the original competition close date. I have brought forward the closing date to tomorrow the 10th February at 6pm London time. see earlier blog Fantasy Finance 2012

Thursday, February 9th, 2012 Predictions No Comments

Iron Ore

A barometer of world health.

Iron Ore demand has been a big driver of BRICs growth over the past decade. Global demand for steel in construction, machinery etc coupled with significant demand to increase the capacity of supply infrastructure, has increased demand for Iron Ore beyond all expectations. I believe the commodity is the `canary in the mine` for the current global economic model. If prices maintain stability, then demand in China remains sufficient to meet the 2012 global growth expectations of the IMF at around 3.5%… see my blog BRICs and Steel  and The plimsoll line is clearly visible  and The Perfect Storm  for more on the subject.

Today, the China Iron and Steel Association website gave this update on Iron Ore stocks;

As China’s demand for bulk raw materials slows down, there are reports of huge iron ore stockpiling in a number of domestic ports. A source with Dalian Port said iron ore stocks there have reached an all-time high of 4.8 million tons. On the other hand, buyers have delayed their collection rates with sluggish downstream consumption.

The same case is true for many other ports, some of which have seen their deposit period of as long as more than half a year, far in exceed of the normal period of three months. At present, iron ore inventories at 19 main ports are already at their record level of 94 million tons.

I am no rocket scientist but if the deposit period (the time the Ore spends at the port) goes from three to six months, either the steel industry expects a demand explosion or stocks will have to be reduced.

Shipping stocks have rallied strongly over the last week with the likes of Goldman and Jefferies upgrading various players price targets. Yes the stocks have fallen a long way from the highs but not all players can survive. European bank exposure of $500bn means little fresh money will be available to finance bailouts. Hence, secondhand ship values will fall far lower than anticipated, straining debt covenants even further. Ship scrappage so far this year is already way above 2011. This will reduce the Iron Ore demand still further.

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Tuesday, February 7th, 2012 BRICs, China, GDP, Predictions, Shipping 1 Comment

Oil nears all time high

UK Consumption.

Brent crude in Dollar terms is still $30 below its all time high of $145. However, in Sterling terms it is within a whisker of its all time high of £74.60. If Sterling falls from its current level, and I still believe it will, the inflationary impact may be just what the Bank of England and the Government could do without. Once again we have a factor which will assert downward pressure on disposable incomes. Even without any further Sterling weakness the higher pump prices will reduce demand. If this pricing persists until late summer the government may have to delay once again, the planned sharp increase in fuel duty.

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Monday, February 6th, 2012 Debt, GBP, National Debt, Oil, Predictions, UK No Comments

Employment, Quality not Quantity.

US Employment figures.

According to some journalists, last Friday`s release marked the turning point for the economy, putting it on a firm footing towards continued expansion. In the blogosphere however, a very different picture is being painted. A tsunami of wrath has been unleashed over the weekend, claiming that the significant revisions to population and employment have been doctored to give a lift to the current administration. Mistrust of the authorities handling of the data must have some political motivation. There are however, some very articulate, factual articles which do lead one to question the impressive employment growth in January. It is impossible to know from my lowly arena whether there is any foundation in these allegations, but I do have some observations of my own:

  • Since 1976 the net effect on employment (in January) due to adverse weather has been the loss of 424,000 jobs. In January 2012 that number was only 206,000.
  • The proportion of the population in employment is at a 30 year low.
  • Earnings growth is very weak at 1.9%
  • Total income taxation has not improved with the job creation.
  • Part-time employment remains little changed and very high.

The employment gains in January look impressive and well spread throughout the economy. It will take another two months to know exactly what affects the mild winter has had on the seasonal adjustments.

Since the end of the recession job creation has lacked quality. McDonald’s and Starbucks may keep on employing but they do not do much for the long term health or wealth of the economy. Since February 2010 food services have created 487,000 jobs. The sad fact is, disposable incomes are declining. The on-going cull of jobs in the finance industry along with 20-30% compensation cuts for those that remain, will just accentuate this process. According to the Bureau of Labour Statistics, blue collar inflation adjusted incomes fell 12 cents in 2011 (the steepest rate since the stagflation of 1980) with the economy as a whole falling by 16 cents.

US Government debt will grow by another $1 trillion this fiscal year, a level which is unsustainable and needs to be greatly reduced. With the income tax cut and unemployment extensions still to be concluded, the all important austerity discussions are still being kicked down the road. Debt and future medical/social costs are compounding at an alarming rate. The optimists in the investment community are gambling that ever larger quantities of QE will lead the economy into strong tax generation growth mode. If future corporate earnings are to meet their expectations, consumption will need to rise substantially from here. With the spectre of lower disposable incomes that scenario looks increasingly unlikely. Previous recession recoveries of the normal V shape, have been driven by a pick up in the real-estate market which followed the resurgence of industrial production due to restocking. This is a new economy and one that has never been seen before, standard recovery expectations should not be applied. It probably follows that the falling participation rate in the economy (people in registered employment) indicates growth in the black economy. This is a worrying trend and will reduce the governments ability to raise tax revenues significantly.

The UK and Europe were buoyed (last week) by the rebound in the Purchasing Managers Index (PMI) reports. Along with the US data, they helped drive share prices higher. I cant help reflect on this time last year that saw the same indices rally strongly only to fall back for the rest of the year. As we proceed through February we will get a slew of economic data for January. I believe this will be a sobering reminder of the much lower consumer activity. Retail sales are going to drop significantly and unemployment will grow still further from already elevated levels. The UK public debt could become a feature. January is the most important month for income tax collection. Tax on income and wealth in January 2010 was £ 27.347bn… and in January 2011 £ 33.092bn.

Similarly to the US, many poor quality jobs (in tax payment terms)  have been created in 2011 but many very high salary jobs have been lost. Total compensation in the City will be 20-30% lower and historically they have accounted for a large slice of the national income. The honeymoon period could be coming to an end. Government spending is still higher year on year, spending will have to be cut in real terms.

With the highs seen Friday and a low VIX level, it was a good time for me to initiate a PUT option on the FTSE. This will expire March 16th (fingers crossed). The Greek drama may well end in a deal to reduce debt (giving a short term fillip to markets) but it is only likely to result in anarchy. Happy trading!

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Monday, February 6th, 2012 Debt, GDP, National Debt, PMI, Predictions, UK No Comments
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