What We're Reading

gdp (22)

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We’ll start with the obvious: the number one export for many countries here is crude oil or related petroleum products. Middle Eastern countries made up a significant portion of global oil export revenues during 2015 with shipments valued at $325 billion or 41.3% of global crude oil exports.

Saudi Arabia, Iraq, United Arab Emirates, Kuwait, Iran, and Oman were all among the top 15 exporters of crude oil in 2015. Russia and Kazakhstan, countries on the Central Asian part of the map, were also members of that same group.

Regimes in the region found that there were many other corollary benefits from this economic might. Unrest could be stifled by rising wealth, and these countries would also have more influence than they otherwise would in global affairs. Saudi Arabia is a good example in both cases, though a…

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The New Face Of Competition For Profits

The world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end. Our new McKinsey Global Institute report, Playing to win: The new global competition for corporate profits, projects that the global corporate-profit pool, which currently stands at almost 10 percent of world GDP, could shrink to less than 8 percent by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years (exhibit).

Exhibit

From 1980 to 2013, vast markets opened around the world…

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Britain Declares Deflation

According to The Economist, in May 19th official statisticians announced that Britain entered deflation in April, with consumer prices standing 0.1% lower than a year earlier. It is first time since 1960 that annual inflation has been negative. Back then, prices pepped up again quickly. The Bank of England expects a similar rebound this time, on the basis that the recent fall in the price of food and fuel will be a one-off. But for inflation to return to the bank’s 2% target, sustained growth in wages is necessary. That means the bank is keeping a close eye on inflation expectations; if Britons start accepting lower pay rises on account of stagnant prices, deflation could…

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Admin

Remain Long China. The QE Continues

I see no reason why not to stick with Shanghai at this point.  They're behind us at in terms of supporting their economy and it's not an easy ride (as Ben Bernanke will attest). 

According to BusinessInsider, a bunch of data about the state of China's economy came out Tuesday night, and altogether it told us one thing — nothing the government has been doing to save its economy from falling deeper into a slowdown is working.

Since November, China has cut benchmark interest rates three times, including once Saturday. It has also loosened mortgage policies to prop up the housing market.

But none of it's enough. Especially when you look at the data from Tuesday night.

Lets walk through the scariest…

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The Four Global Forces Breaking All The Trends

In the Industrial Revolution of the late 18th and early 19th centuries, one new force changed everything. Today our world is undergoing an even more dramatic transition due to the confluence of four fundamental disruptive forces—any of which would rank among the greatest changes the global economy has ever seen. Compared with the Industrial Revolution, we estimate that this change is happening ten times faster and at 300 times the scale, or roughly 3,000 times the impact. Although we all know that these disruptions are happening, most of us fail to comprehend their full magnitude and the second- and third-order effects that will result. Much as waves can amplify one another, these trends are gaining strength, magnitude, and influence as they interact with, coincide with, and feed upon one another. Together, these four fundamental disruptive trends are producing monumental change.

1. Beyond Shanghai: The age of urbanization

The first trend…

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Admin

Time To Ring The Register

Traders dumped high fliers and the broader stock market was slammed amid worries about the first profit decline in six years and more signs of nagging weakness in the U.S. economy.

Stocks fell sharply, as the VIX [ .VIX 15.44  +1.82 (+13.36%) ] jumped more than 13 percent. The Dow [ .DJI 17718.54  -292.60 (-1.62%) ] was off 292 points at 17,718 Wednesday, and the S&P 500 [ .INX 2061.05  -30.45 (-1.46%) ] fell nearly 1.5 percent to 2061. The Nasdaq [ .IXIC 4876.52  -118.21 (-2.37%) ], affected by selling in tech and biotech, lost 2.4…

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Was Prior Growth An Anomaly

Over the past 50 years, the global economy expanded sixfold as the world’s population and per capita income each grew at unprecedented speed. The global population more than doubled while average per capita income almost tripled to about $13,000 at 2012 purchasing power parity. However, there are significant doubts that this growth bonanza will continue in the long term given that the demographic tailwinds of the past half century are now waning.  Hundreds of millions of people were lifted out of poverty.  Yet without significantly boosting the one engine the world economy still has—productivity growth—this period may prove to be a historic anomaly. 

Unless we can dramatically improve productivity, the next half century will look very different. The rapid expansion of…

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Admin

Energy Contagion - The Big Unknown

Indeed, I've read much concern over this area as oil collapsed so it does merit a warning.  From ZeroHedge:

The S&P 500 Energy sector stocks are down over 12% year-to-date, tumbling over 3% today to fresh 20-month lows. The spread (or risk) of high-yield energy credits surged again today, breaking above 850bps for the first time... The overall high-yield credit market is being dragged wider by this contagion as hedgers try to contain the collapse that is possible. For now,…

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Countries Hurt By Lower Crude Oil

As the price of oil extends a free fall that began this summer, countries around the world that rely on oil revenues are bracing for an imminent economic and budget hit.  The drop is widening budget gaps in the Gulf states like Saudi Arabia, the United Arab Emirates, Qatar, Oman and Bahrain that rely heavily on oil to pay government services.

With oil and gas production accounting for some 70% of Russia's government spending, Moscow also faces a big shortfall—after budgeting based on $100-a-barrel oil for 2015. Russia's economic growth was already slowing before the plunge in oil prices. Trade sanctions imposed by the U.S. and Europe—in response to the…

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Global Growth Is Slowing Down

IT HAS been a consistent theme of this blog in recent months that global growth has been slowing, a fact some investors may have missed in the good news about American GDP. The latest confirmation came from the World Trade Organisation, which cut its forecast for trade growth this year from 4.6% to 3.1% and for 2015 from 5.3% to 4%. The WTO doesn't forecast economic growth directly; it takes its lead from other international organisations (Rabo Bank reckons the IMF is set to reduce its growth forecast in the next few weeks).

What is interesting from…

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Icahn: "income inequality.....is dampening GDP growth"

Among other things, I’m known to be a “reductionist.”  In my line of work you must be good at pinpointing what to focus on – that is, the major underlying truths and problems in a situation. I then become obsessive about solving or fixing whatever they may be. This combination is what perhaps has lead to my success over the years and is why I’ve chosen to be so outspoken about shareholder activism, corporate governance issues, and the current economic state of America. Currently, I believe that the facts “reduce” to one indisputable truth which is that we must change our system of selecting CEOs in order to stay competitive and get us out of an extremely dangerous financial situation. With exceptions, I believe that too many companies in this country are terribly run and there’s no system in place to hold the CEOs and Boards of these inadequately managed companies accountable. There are numerous challenges we are facing today whether it be monetary policy, unemployment, income…

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S&P on Income Inequality, Education, Jobs and Taxes

The topic of income inequality and its effects has been the subject of countless analysis stretching back generations and crossing geopolitical boundaries. Despite the tendency to speak about this issue in moral terms, the central questions are economic ones: Would the U.S. economy be better off with a narrower income gap? And, if an unequal distribution of income hinders growth, which solutions could do more harm than good, and which could make the economic pie bigger for all?

Given the decades--indeed, centuries--of debate on this subject, it comes as no surprise that the answers are complex. A degree of inequality is to be expected in any market economy. It can keep the economy functioning effectively, incentivizing investment and expansion--but too much inequality can undermine growth.

Higher levels of income inequality increase political pressures, discouraging trade, investment, and hiring. Keynes first showed that income inequality can lead affluent households…

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SPX And Recessions

Given today's big GPS miss (-2.9% vs. expected -1.8%), I felt we should take a look at the historical performance of the S&P500 when it comes to recessions.  For all of those who harp that the stock market is not the economy, past reactions to recessions is certainly interesting.

Click image to enlarge.

Chart courtesy of ElliottWaveAnalytics

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Throwback Thursday Reads

  • On this day in 1965: In a boardroom on Cove St. in New Bedford, MA, a young, crew-cut Warren Buffett takes control of decrepit textile maker Berkshire Hathaway Inc., whose stock closes that day at $18 a share. Over the next thirty-three years, the stock price rises to $84,000 a share.  Source: Roger Lowenstein, Buffett: The Making of an American Capitalist (Random House, New York, 1995), p. 130. Courtesy of JasonZweig
  • GS, MS and others revised their GDP # to a negative after today's poor construction spending numbers.  A negative GDP print has many wondering if we are, in fact, in a recession.  A recession as defined by the Fed is two consecutive GDP reports. 
  • The weak U.S. recovery has nothing to do…

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Is The Emerging Market Boom Over?

During the last few years, a lot of hype has been heaped on the Brics (Brazil, Russia, India, China, and South Africa). With their large populations and rapid growth, these countries, so the argument goes, will soon become some of the largest economies in the world – and, in the case of China, the largest of all by as early as 2020. But the Brics, as well as many other emerging-market economies – have recently experienced a sharp economic slowdown. So, is the honeymoon over?

Brazil's GDP grew by only 1% last year, and may not grow by more than 2% this year, with its potential growth barely above 3%. Russia's economy may grow by barely 2% this year, with potential growth also at around 3%, despite oil prices being around $100 a barrel. India had a couple of years of strong growth recently (11.2% in 2010 and 7.7% in 2011) but slowed to 4% in 2012. China's economy grew by 10% a year for the last three decades, but slowed to 7.8%…

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The sharp increases in investment that have driven China’s rapid economic growth for the past 30 years are not sustainable, and consumers can’t provide additional demand unless wealth is redistributed toward Chinese households. The most obvious consequence of rebalancing is that it will result in much slower growth over the medium term. While many economists now project that average annual economic growth will fall to between 5 and 7 percent a year during the next decade, I expect it to slow even more, perhaps to 3 to 4 percent a year. In modern history, no country that has experienced an investment-driven growth “miracle” has avoided a slowdown (such as Japan’s after 1990) that surprised even the pessimists, and it is hard to find good reasons to think China will be an exception. 

As…

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Are Corporate Profits Sustainable?

This in followup to my post on Corporate share repurchase programs and my thought that they have increased of late in an effort to boost EPS. 

Please consider this view on Corproate profit sustainability from Califia Beach Pundit:

The fact that corporate profits have tended to track nominal GDP over time is not unusual, but the degree to which profits have outperformed nominal GDP in recent years is exceptional. I've argued for a long time that the market looks at the first chart above and sees a compelling case for corporate profits to revert to their long-term mean (just above 6% of nominal GDP). That would of course imply either a huge decline…

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U.S. Private Sector De-leveraging; Where Are We?

You know those moments.......when you were at a family function or out for a few cocktails with friends when someone brought up the topic of the economy or stock market.  Those conversations were fairly easy to side step  and ensure you'd still be on speaking terms tomorrow.  The last five years, however it's an entirely new ballgame and avoidance is not becoming any easier.  I think the basic problem for the general public (and many small investors) is that they expected a snap back in jobs in 2-3 years, as is normal after a recession.  The problem isn't the current administration.  The problem is that we didn't simply experience a recession.  We experienced a global financial crisis which is a horse of an entirely different color.  …

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