DailyFinance.comhttp://www.dailyfinance.comDailyFinance.comhttp://o.aolcdn.com/os/df/2013/img/2-dailyfinance_logo_m.pngDailyFinance.comhttp://www.dailyfinance.comen-usCopyright 2013 Weblogs, Inc. The contents of this feed are available for non-commercial use only.Blogsmith http://www.blogsmith.com/Could U.S. Economy Hit Long-Anticipated 'Goldilocks' Scenario?http://www.dailyfinance.com/2011/03/21/just-right-could-u-s-economy-finally-hit-long-anticipated-gol/http://www.dailyfinance.com/2011/03/21/just-right-could-u-s-economy-finally-hit-long-anticipated-gol/http://www.dailyfinance.com/2011/03/21/just-right-could-u-s-economy-finally-hit-long-anticipated-gol/#commentsFiled under: , , , ,

Even though the markets are feeling pessimistic, the economy appears headed into a rare, but oft-predicted, scenario of strong growth and low inflation.Whenever Wall Street starts talking about a "Goldilocks" scenario for the economy, investors should be wary. The term refers to a scenario where economic conditions are neither too hot nor too cold, but just right -- a period of strong growth, but little inflation.

It's easy to see why pundits seem to trot out the ideal -- and unlikely -- term as often as possible: Such a scenario makes it easy to peddle stocks and make lofty economic predictions.

Investors could be forgiven for dismissing this prospect as a fairytale. But now, even as markets fixate on all the tragedies unfolding and investor sentiment hits new lows, the U.S. economy may be the closest it has ever come to justifying a "Goldilocks" outlook.

Manufacturing Boom

The manufacturing sector, after all, is embarking on the type of boom that has historically coincided with the start of major bull runs. Meanwhile, core inflation remains subdued.

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In the past, declarations of Goldilocks scenarios have often come too early -- or been downright catastrophic. For example, many pushed the outlook during the winter of 2009, in the wake of the financial crisis, but were proven wrong: The economy still had plenty of challenges to muddle through.

High-profile pundits even forecast the scenario prior the savage downturn, a position that -- in retrospect -- could hardly have been more disastrously false.

But the evidence, this time around, is compelling.

A long series of evidence, including data from Thursday's Philadelphia Fed Index, has been indicating a U.S. manufacturing renaissance. And a look under the hood paints an even stronger picture of growth.

At 43.4, the index registered the highest reading since January 1984, a point that coincided with the start of among the largest sustained economic expansions in U.S. history. Economists had predicted the index would drop to 30 after roaring growth the previous month.

Orders and Optimism Rise

The new-orders index, meanwhile, picked up to 40.3 to post the highest reading since November 1983, economists at Ned Davis Research wrote in a client note. Shipments and unfilled orders reached their highest values since the summer of 2004.

Firms' optimism about prospects for the next six months, meanwhile, rose to its highest level since February 1993, when the U.S. economy was about to turn the corner following a different recession.

That optimism translates into business spending. More firms plan to increase their capital expenditure in the next six months, bringing that component of the index to its highest level in over a decade.

Industrial production also has grown 5.6% from a year ago, according to Ned Davis Research. The business-equipment segment, in particular, has gained 14.5%, representing its fastest yearly pickup in 13 years.

Doom and Gloom

Doomsayers have long warned that the turnaround was unreal, and some continue to insist that another downturn is around the corner.

"The uptrend that began in early July has come to an end," David Rosenberg, chief economist of Gluskin Scheff, wrote in a note to clients Friday. "Evidence is mounting that the economy and corporate earnings are losing precious momentum."

But the conference board's closely watched Leading Economic Indicators paint an entirely different picture.

The index rose for its eighth straight month in February, and its annualized six-month rate of change accelerated to 8% from 6.5% to mark the highest level in 10 months, Ned Davis Research notes.

With plenty of slack in the economy and labor markets, meanwhile, inflation continues to be subdued.

So while it's understandable that investors are cautious -- they've heard plenty of Goldilocks predictions in the past, only to be burned badly -- the scenario is now probably as real as it has ever been.

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]]>core inflationeconomic growtheconomic recoveryeconomicseconomyinflationinflation rateInflationFearsInflationRateInflationRatesmanufacturingmanufacturing sectorNed Davis ResearchPhiladelphia FedPhiladelphia fed manufacturingPhiladelphia Federal ReserverecessionRecovery Actu.s. economyVishesh KumarMon, 21 Mar 2011 06:30:00 ESTThe Perils of Pessimism: Are Investors Ignoring the Good News?http://www.dailyfinance.com/2011/03/17/investors-focus-on-tragedy-ignore-the-good-news/http://www.dailyfinance.com/2011/03/17/investors-focus-on-tragedy-ignore-the-good-news/http://www.dailyfinance.com/2011/03/17/investors-focus-on-tragedy-ignore-the-good-news/#commentsFiled under: , , , ,

It's easy to be pessimistic these days, with financial markets tumbling amid news of tragedy and instability. But there are good reasons for investor optimism too.The financial markets have been in a sour mood lately. Major U.S. indexes tumbled this week, giving back all of the year's gains, and investor confidence has plunged.

It's easy enough to understand the pessimism. After all, the markets are famous for being frenetic, and the spate of tragedies unfolding across the globe certainly hasn't helped.

Early optimism about democratic reforms in Middle Eastern countries, à la Egypt, has instead morphed into a bloody civil war in Libya. Oil prices have surged as a result of growing instability in the region. And if that weren't enough, a brutal earthquake led to a tsunami that killed thousands in Japan -- and raised fears of a major nuclear catastrophe.

But investors would be wise to stave off the gloom with a more levelheaded approach. While the improbable sequence of tragedies is dominating the headlines today, a booming world economy -- one that is sparking a manufacturing renaissance in the U.S. -- may end up being the bigger story for the markets over the intermediate term.

More Evidence of a Strong Recovery

A roaring result for the closely watched Philadelphia Fed index Thursday provided the latest evidence that a strong recovery is under way. A key gauge of the health of the manufacturing sector, the index posted its fastest expansion since 1984. That's after it came in far ahead of economist's expectations the month before, as well.

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"Starved of industrial activity in the depths of recession, manufacturing is feeding the recovering U.S. economic beast," analysts at TD Economics write in a research note.

The rapid growth of the middle classes around the world, along with the resurgence of U.S. consumer spending, is fueling demand for goods like cars and auto parts.

These sectors suffered a particularly brutal downturn during the depths of the recessions, as shell-shocked consumers pulled back and a credit crunch made financing even harder.

"But as the ranks of consumers in the market for new vehicles swells, and with banks more willing to finance their purchases, it is no surprise that the auto industry is roaring back to life," TD Economics analysts write.

Why Disaster Isn't Imminent

For the pessimistic pundits who get more airtime when markets fall, the strong economic growth is merely the prelude to another disaster. And runaway inflation -- which has long been predicted, but with little basis in reality -- is usually named as a top contender.

As the consumer-price-index data released Thursday shows, core inflation remains tame. True, food and fuel prices have risen sharply. But those hikes aren't due to a big trend; instead, crop shortages -- caused by a severe winter -- and the turmoil in the Middle East are driving those prices up.

With plenty of idle capacity waiting to come online, the U.S. economy has considerable room to grow before inflation becomes a widespread concern.

Industrial production remains 5% off its peak prior to the recession, and a lower-than-average amount of capacity is currently in use, according to TD Economics. "Until these ceilings are breached, inflationary pressures should remain muted," they write.

Amid the horrid, moving footage coming in from all over the world, it's no surprise that markets and investor sentiment have tumbled lately. Still, investors would be far better served by paying closer attention to the cold, hard facts that paint a far brighter picture instead.

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]]>consumer spendingeconomic recoveryeconomyInvestinginvestor sentimentinvestorsJapanjapan earthquakeJapan nuclearjapan nuclear crisisjapan nuclear meltdownJapan nuclear plantsjapan nuclear radiationjapan tsunamijapanese nuclear reactorslibyalibya protestsmanufacturingmanufacturing sectorrecoveryu.s. economyU.S. manufacturing sectorUS manufacturing increasesVishesh KumarThu, 17 Mar 2011 19:00:00 ESTEurasia Group's Ian Bremmer Maps Out the Investing Pitfalls of Political Unresthttp://www.dailyfinance.com/2011/03/11/eurasia-groups-ian-bremmer-maps-out-the-investing-pitfalls-of-p/http://www.dailyfinance.com/2011/03/11/eurasia-groups-ian-bremmer-maps-out-the-investing-pitfalls-of-p/http://www.dailyfinance.com/2011/03/11/eurasia-groups-ian-bremmer-maps-out-the-investing-pitfalls-of-p/#commentsFiled under: , , , , ,

Turmoil in the Middle East has led to spiking oil prices and sent financial markets reeling recently, a combination of events that should underscore the rapidly rising importance of political risk for investors in an increasingly interconnected world.

But despite the resurgent impact of local politics on world markets, Wall Street isn't well-equipped to analyze political risk -- and understandably so. Most traditional investors, after all, have focused on evaluating the relative merits of different U.S. stocks, rather than, for example, the internal dynamics of the Libyan regime.

So earlier this week, DailyFinance sat down for an interview with Ian Bremmer, president of The Eurasia Group, a leading political risk consultancy. Bremmer dissected some of the most salient developments and trends taking shape across the world, cutting through the generalizations that often enshroud them.


Welcome to a 'G-Zero' World

The toppling of Egyptian dictator Hosni Mubarak led to plenty of euphoria about the prospects for reform in the Middle East. But investors should hardly be surprised that the task of ousting Moammar Gadhafi in Libya is proving far more onerous, given the vast institutional differences between the two societies.

Skittish oil markets now seem to anticipate massive unrest in Saudi Arabia. But those fears, says Bremmer, are vastly overblown. So are worries that other authoritarian societies like China, a cornerstone of the global economy, will experience big upheavals.

The international community, meanwhile, is scrambling for ways to react to Libya. French proposals for targeted air strikes and heated U.S. debates about the feasibility of imposing a no-fly zone have dominated recent headlines.

Investors shouldn't hold their breath for quick fixes, Bremmer said. With global powers focused on their own internal problems, he says, a "G-Zero" world is emerging in which international consensus and coordination will be more difficult to muster then they have been in the past.

Beware of Generalizations

While the world may be growing more chaotic, it's also finding major new drivers of economic growth in rapidly rising emerging markets. Investors, though, should try to be more discerning about the prospects for different countries rather than reaching for blanket generalizations.

Seemingly reasonable categorizations of countries potentially poised for rapid growth like the Next 11 have garnered plenty of popularity. But investors should be aware of the vast differences that exist among these countries. Look beneath the surface before jumping in.

Today's rapidly shrinking world offers more opportunities for investors than it used to -- and more pitfalls. The trick, as always, remains being able to differentiate between the two.

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]]>chinadictatoregyptegypt protestseurasia groupfeaturedvideoG-20G-ZeroIan Bremmerlibyalibya protestslibya unrestMoammar GadhafiNext 11no-fly-zonepoliticsprotestsrevolutionsaudi arabiaVishesh KumarFri, 11 Mar 2011 16:45:00 ESTAs the U.S. Picks Up Steam, Emerging Markets Still Hold Promisehttp://www.dailyfinance.com/2011/03/09/as-the-u-s-picks-up-steam-emerging-markets-still-hold-promise/http://www.dailyfinance.com/2011/03/09/as-the-u-s-picks-up-steam-emerging-markets-still-hold-promise/http://www.dailyfinance.com/2011/03/09/as-the-u-s-picks-up-steam-emerging-markets-still-hold-promise/#commentsFiled under: , , ,

Markets tend to be maniacal.

The newfound enthusiasm about the outlook for the U.S. economy provides the latest example. In the wake of the financial crisis, some high-profile investors had declared that the U.S. faced years of malaise ahead and that only the emerging world offered near-term prospects for growth.

Capital rushed overseas as money managers marveled at the characteristics -- such as low starting points for income and strong demographic profiles -- that seem to position major emerging markets like Brazil, India and China for heady growth ahead.

But that interest has waned considerably this year as the U.S.'s prospects have improved dramatically.

Overlooking Emerging Potential

"The substantial fund flows into emerging-markets equities over the past couple of years -- nearly $100 billion in 2010 alone -- have now swung in the opposite direction," analysts at Batterymarch Financial Management wrote in a research note this month. "In the last two months, many investors have been taking profits and reallocating assets to developed markets, whose prospects are improving while inflation creates headwinds in the emerging economies."

Many investors may now be overlooking the same emerging-markets growth prospects that they were once so enamored with. And that might open up more opportunities for other investors looking for diversification and growth than were available when those emerging markets were far more popular not long ago.

Take India. When prospects for the developed world looked bleaker, investors focused on the country's strong GDP expansion rate for a democratic country with a large, well-educated, English-speaking population.

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But fears about inflation and a wave of prominent scandals about wireless-spectrum auctions have since taken center stage.

At the start of February, the MSCI India Index had dropped 20% from its high on Nov. 10, Batterymarch Financial Management notes. The fall is even more striking considering that, in the same period, the Standard & Poor's 500 stock index has rallied about 10% in the U.S.

The present, though, may provide a better opportunity for investors to take profits from the U.S. and rotate into India. Valuations are more attractive than they have been, and the country still has plenty of potential for strong underlying growth, even if investors seem to be ignoring it at the moment.

"As 2011 unfolds, India has some difficult weeks ahead as it tries to deal with the challenge of inflation, as well as a modest balance of payments," Jim O'Neill, the head of Goldman Sachs Asset Management, wrote in a note to clients in January. "But, given the power of their underlying story, even if the current moment might not be the absolute best time to be investing, smart policy behavior will allow this remarkable underlying story to unfold."

The Growth Story's Still Booming

How remarkable? O'Neill provided some anecdotes about the growth taking place. IndiGo, a previously little-known Indian airline, recently put in an order for 180 commercial aircraft -- A320 passenger jets, to be exact -- from Airbus. That's the single biggest airline order in history, but IndiGo indicated it's just beginning: The company said it may need 4,000 aircraft over the next 15 years.

An impressive new airport was constructed in not much more than a year, O'Neill wrote, and the Indian Aviation Minister claims that 400 such airports could be built in the future.

This kind of booming growth overseas is leading to a job-creating manufacturing revival here in the U.S. as well. After all, world trade is hardly a zero-sum game. Growth in the U.S. doesn't preclude growth in emerging markets, and vice versa.

But investors looking to tap into the overseas growth may be might better off buying on the emerging-market dips, when the recovery at home is getting all the attention.

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]]>AirbusaircraftairplaneairportBatterymarchBatterymarch Financial ManagementBrazilchinadeveloping countriesdeveloping worldDevelopingNationsemerging marketemerging marketsGoldman SachsGoldman Sachs Asset ManagementIndiaindigoInvestingInvestmentinvestmentsinvestorsjim oneilloneillVishesh KumarWed, 09 Mar 2011 13:45:00 ESTNow Creating American Jobs: The Boom in Emerging Marketshttp://www.dailyfinance.com/2011/03/08/emerging-markets-create-american-jobs/http://www.dailyfinance.com/2011/03/08/emerging-markets-create-american-jobs/http://www.dailyfinance.com/2011/03/08/emerging-markets-create-american-jobs/#commentsFiled under: , , ,

U.S. factory worker in Dublin Va. Volvo plantA presidential election year is fast approaching. And as politicians and the press know well, few things get voters' attention like talk about the U.S. losing its economic advantage to other countries.

It shouldn't be surprising, then, that both parties have upped their rhetoric on what America needs to do to stay ahead, and major press outlets are featuring the story prominently.

But investors should be more discerning when it comes to the constant metaphors used to frame the world economy as if it were a war or zero-sum competition. While worries about China overtaking the U.S. get plenty of ink, investors should remember that economies cooperate as much as they compete when it comes to how things work on the world stage.

And as fast-growing emerging-market economies trigger a U.S. manufacturing boom that's finally showing marked job gains, that cooperative element of world trade is on full display.

Production and Hiring Are Surging

Fears of currency wars generated plenty of unneeded anxiety last year, and shrill accusations of countries stealing jobs from each other continue to abound. But rather than merely creating competitors, the red-hot growth in emerging economies also helps the developed world. Despite widespread cynicism about their prospects, manufacturing powerhouses like Japan and Germany are getting a major boost from the rise of the developing world.

The U.S. is witnessing a much-needed manufacturing renaissance as well. Production across the country is surging, and that's leading to big employment gains in the manufacturing sector.

Goods-producing employment rose by 70,000 in February, led by "healthy manufacturing gains" of 33,000, analysts at TD Economics wrote in a research note this week. Given the pessimism that has plagued the U.S. outlook, the potential for a virtuous cycle may have been easy to dismiss.

Consumer Strength Is Undermining the "New Normal"

A year ago, some analysts had bucked the prevailing gloom to predict that rising emerging-market demand would trigger a manufacturing boom in the U.S. and help rebalance the domestic economy. But a far more pessimistic outlook put forward by bond giant Pimco, which it called the "new normal," got all the attention. According to that view, investors would have to go overseas to find growth as U.S. consumers focused on paying down debts for years and dampened demand at home.

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While the "new normal" got the spotlight, instead it's the "new mix" view that's proving to be correct. For starters, the U.S. consumer is hardly as moribund as those in the "new normal" camp were predicting. As job losses abate, consumers are becoming more confident and willing to take out loans again. Witness the unexpected gains in consumer credit in to start off the year.

Increased hiring is likely to make consumers even more comfortable and boost overall demand. And booming global growth is further helping U.S. consumers, much as the "new mix" camp predicted.

"Jobs -- at leas in the private sector -- appear to have finally showed up at a party that started a long time ago," analysts at TD Economics wrote. "Economic growth is likely to accelerate further in the second quarter, which should make [200,000 plus jobs a month] the new normal." At that rate, in the coming year the U.S. will make up for 2.4 million of the 8.7 million jobs lost during the downturn.

A Healthy Rebalancing Is Underway

Other analysts also see the potential for strong manufacturing sector job growth ahead. Working off data from the Conference Board, analysts at Ned Davis Research wrote in a research note that hiring is expected to continue in March in both manufacturing and services.

"Notably, the net share of manufacturing firms planning to add to their payrolls rose to the highest since July 2007," the analysts wrote.

As presidential elections get closer, politicians will espouse plenty of big ideas to get America on the right track. But investors should take the rhetoric with a grain of salt. A healthy rebalancing of the world economy is already underway, and the U.S. is far more competitive than it's often given credit for.

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]]>Columnseconomic growthemerging marketsemploymentfactory jobsglobal economyhiringNew mixnew normalPIMCOrecoveryUS manufacturing increasesVishesh KumarTue, 08 Mar 2011 09:30:00 ESTThe Scariest Part of Soaring Oil Prices: Investors' Fearshttp://www.dailyfinance.com/2011/03/07/the-scariest-part-of-soaring-oil-prices-investors-fears/http://www.dailyfinance.com/2011/03/07/the-scariest-part-of-soaring-oil-prices-investors-fears/http://www.dailyfinance.com/2011/03/07/the-scariest-part-of-soaring-oil-prices-investors-fears/#commentsFiled under: , , , , ,

Soaring oil prices pummeled the market Friday. But the sell off was more about paranoia than real risk. Investors should know the drill by now.

A closely watched jobs report on Friday showed that employers did plenty of hiring in February, adding to the evidence that a strong economic recovery in the U.S. is gaining steam. But investors largely ignored the news: Instead, markets sold off again as oil prices soared amid escalating violence in Libya.

Part of the anxiety is understandable. Rising oil prices tend to slow overall economic growth while depleting consumers' purchasing power at the same time. Spiking oil prices played a major role in the excruciating stagflation of the 1970s, for example.

But as with many other economic topics, like inflation, investors are better off taking a measured look at what rising oil prices would really mean for the economy rather than just running scared. Despite all the paranoia, the actual impact may be less than skittish investors fear.

Slim Odds That Crisis Will Spread

The brief spell of jubilation that marked the success of pro-democracy demonstrators in Egypt stands in stark contrast to the bitter violence now spreading through Libya. And given Libya's position as a midsized oil producer, many on Wall Street are busy trying to figure out what a shutdown of its oil output would mean for the world economy.

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"The collapse of the Mubarak government in Egypt two weeks ago has been quickly followed by a deteriorating situation in Libya, where Colonel Qaddaffi now appears to have lost control over much of the country, resulting in the first significant hit to oil production," JPMorgan Chase (JPM) analysts wrote in a note to clients this week. "Even more importantly, risks are real and growing the crisis will spread to other oil producing countries such as Bahrain and, in the worst case scenario, Saudi Arabia."

But the bank puts the odds of further contagion in the region at a paltry 5%. And it sees a more welcome scenario, one in which increased production and social measures push prices down to $95 per barrel, as a far more likely ending.

The Only Thing to Fear Is Fear Itself

Even steep rises, though, may not have as large of an impact on the world economy as many alarmists think.

JPMorgan calculates that a 10% surge in oil prices would cut the world's gross domestic product by just 0.25%. By that reckoning, oil prices that climb to $110 a barrel would translate into about a 19% increase in overall prices throughout the economy during the first quarter of 2011. That would raise inflation by 1.3% while chopping 0.65% from consumer spending, resulting in a 0.43% hit to overall GDP growth.

The bank also calculated how rising oil prices would affect corporate earnings, a key element of stock valuations. There, too, the projected impact was far more muted than many investors might think. According to JPMorgan, a 10% rise in oil prices would translate to only a 1% cut in earnings per share.

But while the real impact on global growth and corporate earnings might be muted, the impact on investor psychology remains a real risk for stocks. "A key support for risky assets so far has been benign inflation and strong growth; the Middle Eastern crisis has not introduced upside risks to near-term inflation as well as downside risks to growth," JPMorgan analysts wrote.

Fear itself, then, might be the most legitimate concern for stock market investors.


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]]>economic crisiseconomic dataeconomic growtheconomic impacteconomic impact of oileconomic recoveryeconomic stimulusEconomicseconomyJP Morganjp morgan chaseJPMJpMorganJPMorgan Chaselibyalibya crisislibya demonstrationslibya oillibya protestslibya unrestlibya violenceoiloil impactoil priceoil pricesoil shockVishesh KumarMon, 07 Mar 2011 11:00:00 ESTBeyond Today's Chaos Are Tomorrow's Investing Opportunitieshttp://www.dailyfinance.com/2011/03/03/todays-chaos-tomorrows-investing-opportunities/http://www.dailyfinance.com/2011/03/03/todays-chaos-tomorrows-investing-opportunities/http://www.dailyfinance.com/2011/03/03/todays-chaos-tomorrows-investing-opportunities/#commentsFiled under: , , ,

Libya refugeeWall Street tends to lurch from one crisis to the next. Whether it's inflation,deflation or an overblown sovereign debt crisis, there always seems to be plenty to spook markets dominated by famously short-term traders.

Escalating violence in Libya is the latest cause for panic. Oil prices have spiked in recent days as traders fear that growing chaos in the region could cause a major disruption in supply.

Part of the apprehension is justified. Libya, after all, is a midsize player in the oil markets. And given that country's fragmented loyalties, even the ouster of dictator Moammar Gadhafi would still leave another set of challenges unresolved for the country.

But beyond the current Libyan chaos, there's plenty of cause for optimism at home. And investors with a longer-term view of the markets should consider the ongoing uncertainty caused by events in the Middle East as a potential opportunity to buy stocks.

The ISM Data's Good News

Oil jitters may be obscuring growing evidence that the U.S. economic recovery is picking up further steam. The country's manufacturing sector has been growing strongly, thanks to booming exports, and signs of robust job creation also continue to build.

The recently released ISM index data showed the manufacturing composite index clocking in at its highest level since May 2004, and it marked "a modest acceleration to already robust activity," analysts at Ned Davis research wrote in a client note this week.

But the most impressive gains may have been posted where it matters the most: employment.

At 64.5, the ISM employment component came in at its highest level since January 1973. That implied an increase of 70,000 factory workers for the month, the biggest gains in 21 years, excluding the return of striking autoworkers in August 1998, the Ned Davis analysts noted.

A Refreshing Change

As some analysts had predicted early on, booming overseas growth is leading to an export and manufacturing renaissance in the U.S.. At 62.5, the ISM index's export component is at record highs, and "ISM noted exports were driving new orders and production," Ned Davis analysts wrote.

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Given the drubbing that the U.S. manufacturing sector has endured over the past decade, it's refreshing to see it lead the economic recovery. Indeed, focusing on manufacturing may actually be yielding too strong a reading of the U.S. economy's strength, ironically enough.

"Historically, the February PMI [purchasing managers' index, which is part of the ISM manufacturing index] corresponds to 6.4% real GDP growth, although we think that overstates the health of the underlying economy and reflects more of the recovery in manufacturing and exports," analyst at Ned Davis Research wrote.

Traders might be fretting about oil, but other investors with long-term time horizons are also sounding optimistic notes.

Where the Farsighted Are Looking

Legendary investor Warren Buffett had an upbeat assessment of the U.S. economy this week. Looking across Berkshire Hathaway's companies, Buffett -- who's looking for big acquisitions again -- said growth has finally gotten to the point where businesses needed to start hiring. So far, Buffett said, businesses had been able to simply make do with less labor.

Buffett's inside view of Berkshire's businesses meshes extremely well with the macroeconomic data being circulated this week. Companies like machine-tool makers and semiconductor component manufacturers with exposure to broad swaths of the overall economy are doing particularly well, Buffett said.

As traders focus on the day-to-day fluctuations in the price of oil, more farsighted investors might want to look at the big picture and wade in instead.

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]]>buying opportunityColumnsemploymentISM Manufacturing IndexjobslibyamanufacturingMideast turmoilstock market outlookus exportsVishesh KumarThu, 03 Mar 2011 06:30:00 ESTLabor's Fall -- Not Oil's Rise -- Is Key to Inflationhttp://www.dailyfinance.com/2011/03/01/labors-fall-not-oils-rise-is-key-to-inflation/http://www.dailyfinance.com/2011/03/01/labors-fall-not-oils-rise-is-key-to-inflation/http://www.dailyfinance.com/2011/03/01/labors-fall-not-oils-rise-is-key-to-inflation/#commentsFiled under: , , , ,

Wisconsin labor protestPopular revolts and populist stirrings in the Middle East and the American Midwest have fixated Wall Street lately.

At first glance, the connection between rebels in Libya and public sector union demonstrators in Wisconsin is hardly obvious. But both are vital to markets right now, since how those movements fare will determine the direction of key macroeconomic trends that could propel or derail the blooming economic recovery.

Both are also keys -- in rather unexpected ways, perhaps -- to the inflationary fears that have been growing lately -- not just on Wall Street but on Main Street. For all the attention focusing on the inflationary role of rising oil prices, it may be the disintegrating power of organized labor on full display in Wisconsin that keeps inflation in check.

Stagflation Fears

For plenty of pundits, the imminent arrival of major inflation is a foregone conclusion, thanks to the Fed's nearly unprecedented easing of the money supply following the financial crisis. These economy-watchers point to the rising prices of a range of commodities, from metals to cotton to foodstuffs, as evidence that their predictions are playing out.

Surging oil prices are only adding to that panic. The pessimistic view is that crippling, 1970s-style stagflation is in the cards as spiking energy costs put the brakes on economic growth and reduce consumer purchasing power in one blow.

But rather than succumbing to the alarmism of any of these hyperinflationary scenarios, investors are better off taking a more measured approach. A recent research note by Citigroup (C) stock strategist Tobias Levkovich points to why.

What Causes Real Inflation? Wage Growth

Despite all the worry over the impact of rising oil prices, recall that the U.S. is now a largely services-based economy, and observe that the rising wages that have led to real overall cost rises in decades past are nowhere to be found today. In the inflation pessimists' superficial comparisons of the current environment to the 1970s, the dwindling impact of labor unions is often overlooked.

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"[I]nvestors often forget that cost of living adjustments built into labor contracts during the late 1960s and early 1970s, when the private sector had 25%-30% unionization rates, forced upward pressure on companies across the business spectrum and causing a massive change in inflation expectations," Levkovich wrote. "Such conditions do not exist currently due to productivity enhancement via technological advances, outsourcing and offshoring."

Levkovich makes a compelling argument when he dismisses the widespread concerns about oil prices. He points out that oil rose from $9 a barrel in 1998 to $147 in 2008, a steep climb that nonetheless hardly resulted in a surge in the consumer price index. The low rate of private sector unionization -- from 6% to 7% -- may have helped prevent prices from spiraling upward.

Investors Aren't Worried About Inflation

Of course, the more conspiratorial of the inflation alarmists have another explanation: CPI figures are manipulated to understate inflation, they argue.

On that topic, Levkovich echoes a point recently made in a research note by Jim O'Neill, the high-profile head of Goldman Sachs Asset Management (GS): If the figures are simply being manipulated, why do inflationary pressures fail to show up in both investor and consumer perceptions?

"Intriguingly, the 10-year TIPs [Treasury Inflation-Protected Securities] breakdown level does not suggest that the bond market is overwhelmingly anxious about any spike in core CPI trends, plus the University of Michigan long-term inflation survey data is also not suggesting an imminent change in inflation expectations," Levkovich writes.

These points should help clarify the debate currently intensifying about whether the Fed should start to tighten the money supply and raise interest rates just as the economy is picking up some momentum.

Despite plenty of howling from a certain variety of pundits, any evidence of runaway inflation is scant. And investors need look no further than the other half of the Fed's mandate -- promoting employment -- to see why.

Get info on stocks mentioned in this article:


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]]>Columnscommoditiesconsumer price indexCPICrude oil futures are upegypt protestsfedFederal Reservegold bugsinflationinterest rateslibyalibya protestsloose money policymiddle east protestsohio protestsoil pricesorganized laborraisessalaryStagflationtruthTunisiaunionswage growthwageswisconsin protestsVishesh KumarTue, 01 Mar 2011 12:00:00 ESTStartup Covestor Combines Social Networking With Investing [Video]http://www.dailyfinance.com/2011/02/28/covestor-social-networking-investing/http://www.dailyfinance.com/2011/02/28/covestor-social-networking-investing/http://www.dailyfinance.com/2011/02/28/covestor-social-networking-investing/#commentsFiled under: , ,

Investors should have heard plenty about the game-changing potential of social networking companies by now. After all, many have come out of nowhere to command stratospheric price tag in a matter of years.

Facebook, for example, was recently valued at $50 billion, while social network for professionals LinkedIn recently garnered a $3 billion price tag on private secondary exchanges.

But other startups are trying to let investors tap into the power of social networks even more directly. Covestor, for example, lets its users easily mirror the portfolios of other successful investors.

More Transparency, Lower Costs

On the other hand, investors who want to showcase the stock-picking work they've done and build up their portfolios can use the technology to earn a following and get compensated in the process.

Covestor aims to bring transparency and reduce costs, founder and Chief Operating Officer Simon Veingard tells DailyFinance in a video interview. Those attributes have been sorely lacking in the financial industry.

Individual investors have long complained about hidden fees and mediocre performance. But the financial crisis led to an even greater clamor for accountability, says Veingard, and has further helped boost the company's prospects. For more on Covestor's strategy, see the video above.

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]]>Covestorfeaturedvideoinvesting communitysocial networkingstock portfoliostock-pickingVishesh KumarMon, 28 Feb 2011 11:00:00 ESTWhy Abrupt Government Budget Cuts Could Stall the Recoveryhttp://www.dailyfinance.com/2011/02/28/why-abrupt-government-budget-cuts-could-stall-the-recovery/http://www.dailyfinance.com/2011/02/28/why-abrupt-government-budget-cuts-could-stall-the-recovery/http://www.dailyfinance.com/2011/02/28/why-abrupt-government-budget-cuts-could-stall-the-recovery/#commentsFiled under: , , , ,

Federal budget cuts could put the economic recovery at risk, according to a new Goldman Sachs report. There's no shortage of alarmism directed toward investors.

Slight upticks in the price of food or oil -- or even a garden-variety slowdown in the consolidation phase of an economic recovery -- are enough to set off howls of an imminent doubled-dip recession.

But ironically enough, real threats to the budding economic recovery often garner dismissive attitudes instead.

The hostile response to a recent report by investment bank Goldman Sachs (GS), which highlights the risk of a dramatic cut in government spending just as the economy gains momentum, is the latest case in point.

Modest Cuts, Big Potential Losses

The argument is straightforward enough. "Fiscal drag is quickly re-emerging as a focus, only a couple of months after an agreement to extend tax cuts and unemployment benefits appeared to have neutralized most of the drag from federal fiscal policy for most of 2011," Goldman Sachs analysts wrote. "We see federal spending cuts as the most important near-term risk."

The analysts admitted that the proposed cuts were modest in size. They call for shaving off about $25 billion of spending in 2011 and $50 billion in 2012.

But the suddenness of the slashing could hit GDP growth hard in the near term, even if spending leveled off in the long run.

"Since the cut would be phased in abruptly, it could result in a drag on growth in Q2 by as much as one percentage point, but would quickly fade over the next two quarters as spending stabilizes at a lower level, with little effect versus current policy on the rate of real GDP growth by year end," the analysts wrote.

The British Example

Plenty of commentators viewed the report as a devious Goldman Sachs attempt to play politics and arm Democrats with talking points as the debate over government spending heats up. But investors would be wise to ignore the political rhetoric and look at the evidence instead.

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In the U.K., Prime Minister David Cameron also took a hawkish stance on spending and made deep cuts. While Cameron's tough talk was well received initially, the British economy lost major momentum as a result and is now on the brink of a second downturn.

The U.K. admittedly had far less room to maneuver than the U.S. does. Speculators were hammering the British pound in the wake of the European debt crisis, and a run on the currency was a real risk at the time. But in both countries, demand-destroying cutbacks could stall recovery at a critical juncture.

Indeed, there's evidence that cutbacks at the state and local levels already are having an outsize impact on U.S. economic growth.

Looking through the revised fourth quarter GDP data released Friday, TD Economics analysts noted that government consumption was notched down to minus 1.5% from minus 0.6%, with the revision focused at the state and local levels.

"This category tends to have a relatively small influence on GDP as a whole, but in today's release it did account for 0.2% percentage points of the downward revision in the GDP estimate," the analysts wrote.

Look Past Doomsday Scenarios

At a time when government spending is still picking up some of the slack left by still-dampened private demand, it's hardly shocking that government pullbacks are having a bigger impact then they would in ordinary times.

Over-the-top doomsday scenarios get plenty of attention. But investors should keep a closer eye on more measured arguments like Goldman's instead.


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]]>austerityausterity measuresAusterityProgramColumnseconomic recoveryeconomyfederal budgetFederal Spendingfederal spending cutsFederal spending deficitGDPGDP GrowthgoldmanGoldman SachsGoldman Sachs GroupInvestingInvestmentinvestorsrecoverystimulusTax cutsunemployment benefitsVishesh KumarMon, 28 Feb 2011 10:30:00 ESTThe Mideast Mess Could Make U.S. Markets Look Betterhttp://www.dailyfinance.com/2011/02/25/mideast-mess-make-us-markets-look-better/http://www.dailyfinance.com/2011/02/25/mideast-mess-make-us-markets-look-better/http://www.dailyfinance.com/2011/02/25/mideast-mess-make-us-markets-look-better/#commentsFiled under: , , ,

Libyan rebelsAs turmoil grips the Middle East, it's the "oil" part that Wall Street is worrying most about.

Soaring oil prices have been taking a toll on stocks as violence escalates in Libya. Some of the concern is well justified. Libya, after all, is a midsize player on the world oil stage, and as signs of unrest spread to Bahrain and Saudi Arabia, it's understandable that some investors are heading for the sidelines.

But there's no shortage of hype and fear-mongering, either. Predictions that oil might hit $220 a barrel by investment bank Nomura, for example, lead individuals to quickly jump to doomsday scenarios.

What to Keep in Mind

Savvy investors, though, should take a more balanced approach. The deterioration of Libya is far more troubling than the ouster of Hosni Mubarak in Egypt, and oil prices may remain justifiably elevated as a result. But also note that Saudi Arabia's pledges to pump more oil to compensate for Libya make the chances of cataclysmic spikes more remote.

Here's another key point to keep in mind: While higher energy prices will restrain overall global growth, they could hurt emerging markets far worse than the U.S. -- and that difference could also help boost demand for domestic stocks.

The most immediate concern is Libya. Plenty of blood has already been shed, and Libyan strongman Muammar Qaddafi has vowed to fight to the bitter end. Still, his grip on power appears to be waning, and a TV appearance Thursday seemed to strike a slightly more conciliatory tone.

A huge trouble yet to come is coping with the power vacuum that would emerge if Qadaffi were to be deposed, given the central role that tribal alliances play in the country.

"Tribal support is a key element that will decide both Qadhafi's fate and possible outcomes of the ongoing uprising -- and currently the role of many tribes remains ambiguous," analysts at political risk consultancy Eurasia Group wrote in a note to clients this week. "The tribal element directly impacts the loyalty of the armed forces, and Qadhafi remains very skilled at exploiting the fragmented tribal system that dominates Libyan society."

Who Suffers More?

Qadaffi's ouster, in other words, wouldn't be the end of Libya's problems but the start of a new set.

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Among those problems will be the continued fallout for oil markets and higher energy costs on economic growth. Analysts at investment bank Merrill Lynch recently noted that emerging-market energy importers like India, China, Korea and Indonesia are particularly vulnerable to spiking energy costs.

But the post-industrial U.S. economy has actually grown less energy-intensive over time. And the energy sector itself now represents just 5.4% of U.S. GDP compared to 10.6% in 1980, the analysts note.

The U.S. also has cheap and abundant natural-gas resources to soften the low of higher oil costs, especially for power generation and industrial uses.

All of this bodes well for the relative attractiveness of a U.S. economy that continues to deliver better-than-expected data.

Adding to a Tailwind

Recall that not long ago, the "new normal" scenario that was taken as gospel on Wall Street held that investors would have to flock overseas to find growth as the U.S. looked at years of malaise. That scenario has proven to be vastly overblown.

But higher oil prices and a renewed premium on safety could add another tailwind to the growing enthusiasm for U.S. investments already under way. Corporate profits continue to boom, and cash-rich companies are returning capital to investors via buybacks in a sign of business confidence. The chances are now rising that this capital will get redeployed in the U.S. given the rising tensions overseas.

There's plenty of paranoia about what oil prices blasting higher would mean for the U.S. economy. But investors shouldn't overlook the good possibility that elevated prices would also have a silver lining for U.S. financial markets.

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]]>Columnsegypt protestsemerging marketsHosni Mubaraklibya unrestMideast turmoilMuammar Qaddafioil pricesUS stock marketVishesh KumarFri, 25 Feb 2011 06:30:00 ESTInflation Seems Like a Safe Prediction, but It's Hardly So Simplehttp://www.dailyfinance.com/2011/02/22/inflation-factors-are-not-simple/http://www.dailyfinance.com/2011/02/22/inflation-factors-are-not-simple/http://www.dailyfinance.com/2011/02/22/inflation-factors-are-not-simple/#commentsFiled under: , , ,

Gasoline pricesWall Street's penchant for overreaction aside, it's understandable why many investors might be bracing for scorching inflation ahead. Already posting a stronger rebound than many commentators had expected, the U.S. economy shows signs of picking up yet more steam. Some high-profile economists are expecting growth rates as high as 6% in the year ahead, and bellwether companies like Caterpillar (CAT) continue to report strong global demand.

That by itself is often enough to result into inflationary pressure. But lately, fears of a conflagration in prices have been exacerbated by the vast easing measures the Fed continues to take in response to the financial crisis.

The reasons to count on major inflation under these circumstances seem straightforward enough. But much like the actual impact of spiking commodity prices, the way inflation plays out is far more complicated. And while the usual pressures get plenty of press, countervailing forces can be far easier to overlook.

Restarting Idled Resources

While U.S. GDP may be ready to deliver impressive gains, measures like industrial production, which took a major hit during the recession, still have a ways to go. Indeed, industrial production remains 6% below its pre-recession peak, analysts at TD Economics wrote in a research note this week, and it will take another year to close the gap even at the present three-month average growth rate.

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"Throughout the post-recession expansion, growth in [industrial production] has stemmed not from the generation of new productive capacity, but from increased utilization of existing resources that had lain idle during the downturn," analysts at TD Economics wrote in a research note.

That means plenty of spare capacity can still be brought on-line, and that should help dampen inflationary forces. "With industry operating below potential, we believe inflation will stay subdued for now," the analysts wrote. "And with a fair amount of slack to absorb, the Fed will be in no rush to tighten monetary policy soon."

All that money the Fed created, meanwhile, might not lead to inflation as directly as some of Ben Bernanke's most strident critics claim. Along with the raw supply of money, the amount of that cash put into circulation -- sometimes called the velocity of money -- plays an equally important role.

Dormant Cash Isn't So Dangerous

And that leads to a much more complicated relationship to inflation than the constant howling about the obviously dire consequences of the Fed's money-printing would suggest.

"In order for any monetary variable to be reliable, the so-called 'velocity' of money in circulation needs to be stable, which is not often the case," Jim O'Neill, the high-profile head of Goldman Sachs Asset Management wrote in a research note. More money supply, in other words, doesn't simply translate into inflation. Cash laying dormant doesn't bid up the value of prices.

It's also natural for investors to think back to times when inflation ravaged the economy, like during the 1970s, when assessing risks. But things have changed dramatically since then, and the fact is that inflation has remained at benign levels for decades since that awful time. A combination of many fundamental shifts in the economy is often credited for this.

"Originating with the tough anti-inflationary policies of Paul Volcker at the Federal Reserve in the U.S., the widespread introduction of deregulated markets, globalization, and the introduction of the Internet have all been huge forces to bring the inflation process to where we broadly sit in current times," O'Neill wrote.

Given an economy now gaining steam and a vast expansion in the money supply, it's easy to assume inflation is up next. The causes of inflation, however, are anything but straightforward. And investors are better off keeping a close eye on incoming data than blindly believing the pundits who have a simplistic view of inflation.


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]]>Ben BernankeColumnsinflationInflationRatemonetary policymoney supplypaul volckerpricesquantitative easingvelocity of moneyVishesh KumarTue, 22 Feb 2011 14:00:00 ESTRising Mideast Tensions Could Send Investors to the Sidelineshttp://www.dailyfinance.com/2011/02/21/rising-mideast-tensions-could-send-investors-to-the-sidelines/http://www.dailyfinance.com/2011/02/21/rising-mideast-tensions-could-send-investors-to-the-sidelines/http://www.dailyfinance.com/2011/02/21/rising-mideast-tensions-could-send-investors-to-the-sidelines/#commentsFiled under: , ,

Libyan protestersWhen the social unrest sweeping the Arab world initially jumped from Tunisia to Egypt, it elicited plenty of undue pessimism. While many commentators feared that radical elements were taking over, the end of Hosni Mubarak's dictatorship in Egypt is instead likely to set the stage for more moderation and progress in the country.

But the region's turmoil may now be reaching a tipping point. Deadly violence is engulfing Libya, where Muammar Gaddafi's regime is using extreme force against protesters, and major pressures are being felt in Iran, Bahrain, Yemen and even China. In the long run, the hope is that the changes being ushered in may prove to be a cornerstone of further global economic growth and political stability.

More immediately, though, the uprisings are likely to create exactly the type of uncertainty that investors dread. And a U.S. stock market that has been moving steadily higher could finally see its momentum broken as a result.

Chaos Before Resolutions

Doomsayers are out in full force when it comes to analyzing the unfolding event across the Mideast. But the driving forces -- a younger generation seeking more freedom and opportunity -- offer plenty of reason for optimism over the long haul. About 60% of the Mideast's population is under 30, and a recent survey of youth in nine Mideast countries found their top wish is a desire to live in a free country.

The long-standing tensions in the region -- clearly one of the thorniest problems in geopolitics -- may eventually be resolved constructively, thanks to a new generation. But the process will be packed with plenty of chaos first. And while the immediate consequences for financial markets were relatively subdued with Egypt, the battles now engulfing Libya will have far more impact.

Unlike Egypt, Libya is a sizable player in world oil markets. The country produces 1.8 million barrels of crude oil per day, 90% of which is exported, analysts at global intelligence firm Stratfor wrote in a note to clients. That amounts to more than 20% of the 8.4 million barrels per day for Saudi Arabia, the world's biggest oil producer.

Rising oil prices act like a growth-dampening tax on the global economy. And crude rose sharply on global markets Monday amid prospects of less supply coming out of Libya. The March futures contract spiked up more than 6%, closing above $91 a barrel.

Adding to Uncertainty

But tensions are mounting in unexpected ways that go beyond mere supply and demand. Iranian warships are poised to enter the Suez Canal in a move that would be seen as a provocation by Israel. As the hard-line Iranian regime sees protests swelling at home, its motivations are fairly easy to understand: Brinkmanship could help deflect attention away from domestic repression and stoke nationalist sentiment, particularly in the more conservative countryside.

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That will only add to the uncertainty even if the move isn't as belligerent as it seems on the surface.

The stress is being felt as far away as China, where authorities are rushing to quell demonstrations in the Communist-led nation before they spiral out of control. Protesters inspired by events in the Middle East are clamoring for more openness and progress at home. But Beijing's authoritarian regime is clamping down on Internet access and mobile devices to try to maintain order.

Warm sentiments aside, investors should keep in mind just how precarious a situation China is in. The country walks a tightrope that attempts to use red-hot growth to deal with massive urbanization as people migrate from China's rural areas in search of employment.

Wildcards Raise the Risks

Close economic coordination that ranges from an export sector with razor-thin margins to a managed currency is required to keep that economic engine going. While Chinese officials have managed an impressive juggling act so far, wildcards like a sudden domestic push for openness add to the risks.

The social turmoil unfolding around the globe may eventually create a safer and more prosperous world. With that day a long way off, however, investors can't be blamed for heading to the sidelines as things shake out.

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]]>bahrain protestsChinese protestsColumnsglobal financial marketsHosni MubarakIraniran protestslibyalibya protestsMideast oilmideast protestsMuammarGaddafioil pricesstock market outlookSuez CanalVishesh KumarMon, 21 Feb 2011 17:00:00 ESTThe Real Problem With Inflation Isn't on Wall Streethttp://www.dailyfinance.com/2011/02/17/the-real-problem-with-inflation-isnt-on-wall-street/http://www.dailyfinance.com/2011/02/17/the-real-problem-with-inflation-isnt-on-wall-street/http://www.dailyfinance.com/2011/02/17/the-real-problem-with-inflation-isnt-on-wall-street/#commentsFiled under: , , ,

Food aisle in grocery storeLast summer, many on Wall Street feared that the budget woes of the tiny Greek economy would threaten the very existence of the European Union and throw the world back into a brutal recession.

Then, what in hindsight proved to be a run-of-the-mill mid-recovery consolidation and slowdown phase was heralded as setting the stage for a double-dip recession. Soon, many high-profile investors were saying a brutal deflationary spiral awaited the U.S. economy.

Of course, none of these dire forecasts played out that way. But a new bogeyman is already being created as the prior fears drift away. As commodity prices post sharp gains, rampant inflation is supposed to torch corporate profit margins, destroy stock values and throw the economy into another tailspin, judging by the slew of recent news reports.

Most Pain at the Lower Rungs

But as with the prior bouts of alarmism, investors will be better served by taking a levelheaded approach. Pundit prognostications aside, inflation remain at benign levels. Companies and most consumers should be able to deal with rising commodity prices far better than the current howls over inflationary prospects would imply.

And the real concern about inflation tends to get overlooked in the overall hysteria: the harsh toll that rising prices could take on those at the lowest end of the country's socioeconomic spectrum.

It's true that inflationary pressures are rising. Wholesale prices excluding food and energy lifted at the fastest pace in two years last month, according to government data released Wednesday.

But that should hardly be surprising. The economy is witnessing a fairly sharp rebound, after all. Economists at Goldman Sachs (GS) see U.S. GDP expanding as much as 5% this year, while Deutsche Bank (DB) sees it possibly rising closer to 6% under the right circumstances.

Don't Overlook the Slack in the Economy

It would be odd not to see some inflationary pressures under these conditions, and investors should keep things in perspective.

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"Although the recent pickup in some commodity prices is showing up in the core PPI, inflationary pressures remain quite low for now," analysts at Ned Davis Research wrote in a note to clients Wednesday. "We continue to expect low consumer inflation in the intermediate term, mostly due to the large amount of slack in the economy."

For one thing, the role commodity prices play in the actual costs of products may be far less than many think. Some back-of-the-envelope calculations, for example, imply that the price of wheat accounts for only 12% of a loaf of bread's cost.

That's in line with analyst estimates that wheat and corn combined account for only 14% of the cost of goods sold by General Mills (GIS), and that company seems to be coping with rising commodity prices just fine through modest pass-through price increases.

Any eventual toll on most consumers is likely to be modest as well. Necessities like food, gas, clothing, personal care products and cleaning and laundry supplies account for less than a quarter of U.S. household spending.

Wrong Time to Cut Heating Oil Assistance

Rather, the real worry about rising commodity prices should be about how households at the lowest end of the income distribution will cope. Analysts at JP Morgan (JPM) estimate that households in the bottom fifth of income distribution spend 9% of after-tax income on gasoline, compared to less than 2% for those in the top fifth.

President Obama's approach of talking tough but making only cosmetic budget cuts may make sense broadly. But cutting back on assistance with heating oil to the poor is particularly misguided at this juncture.

Wall Street's current preoccupation with inflation may prove as ephemeral as many other jitters have recently. But far worse, the fallout for the most vulnerable corners of Main Street, meanwhile, continues to get overlooked.


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]]>Columnscommodity pricesconsumer pricesdeflationdouble-dip recessionEuropean debt crisisfood inflationinflationlower-income familiespovertyVishesh KumarThu, 17 Feb 2011 06:30:00 ESTObama's Budget Cuts: Less Than Meets the Eye, Thankfullyhttp://www.dailyfinance.com/2011/02/15/obama-budget-cuts-political-not-fiscal/http://www.dailyfinance.com/2011/02/15/obama-budget-cuts-political-not-fiscal/http://www.dailyfinance.com/2011/02/15/obama-budget-cuts-political-not-fiscal/#commentsFiled under: ,

Less to Obama's Budget Cuts Than Meets the Eye -- Thank Goodness The latest bout of brinkmanship in Washington, D.C., is over the federal budget. President Barack Obama unveiled his proposed cuts earlier this week with plenty of tough talk about fiscal responsibility, and a parade of high-profile Republicans lined up predictably to say the spending reductions fell short of making a real difference.

Thankfully for American workers and investors, the Republicans have it right.

With presidential elections approaching in 2012, the White House is revving up its PR campaign in a move to portray itself as tough on government spending. The first glimpses of the approach were unveiled during the State of the Union address, when few concrete measures were described, despite plenty of soaring rhetoric.

While taking a tough posture, the proposals outlined this week are similarly fluid.

"President Obama's Fiscal Year 2012 budget epitomizes his shift from a policymaking strategy to a public relations strategy," analysts at political risk consultancy Eurasia Group wrote in a note to clients. "The shift is intended to appeal to independent voters and preserve his current lead going into the 2012 election by taking few risks rather than proposing an ambitious agenda for congressional action."

Savings Based on Unrealistic Assumptions

Despite presidential lip service about belt-tightening, forecasts still put government deficits at $1.6 trillion, or 11% of GDP, "which makes clear that the president's spending-cut proposals do not add up to much in the near-term," the analysts note.

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And while the outline over the medium term shows a substantially shrinking deficit, much of that drop is built on unrealistic gimmicks.

It assumes, for example, that the Bush tax cuts for the wealthy will be allowed to expire in 2013 and that war spending will decline sharply based on a troop withdrawal time line that Eurasia Group analysts see as unrealistic.

Several hundreds of billions in reductions are supposedly to be found in initiatives like eliminating tax breaks for oil, gas and coal companies, and capping itemized tax deductions for the wealthy. While such changes are easy to propose, attempts to accomplish all of them have hit roadblocks on Capitol Hill before, the analysts note.

But odd as it seems, investors should welcome this particular version of political maneuvering specifically because it is likely to lead to such small results. Using superficial cuts to provide political cover may be exactly what the economy needs. Major slashing of government spending could cause consumer demand to evaporate at a time when the economy is finally starting to show some self-sustaining momentum.

A Cautionary Tale From Britain

Indeed, the brutal toll that major pullbacks in government spending can take on an economy trying emerge from a recession is on full display across the Atlantic.

British Prime Minister David Cameron initially won plenty of accolades for promising to get the U.K.'s fiscal house in order. But Cameron's grand $128 billion, four-year plan of spending cuts and tax hikes is looking much shakier now. Instead of expanding as economists had forecast, Britain's economy unexpectedly contracted in the last months of 2010, and some now fear a double-dip recession may be in the cards for that nation.

In fairness to Cameron, Britain may have had far less choice about budget-cutting than the U.S. has. The British pound faced massive pressures last year after speculators hammered the euro during the heights of the European debt crisis. By contrast, despite all the hype about the dollar facing an immediate crisis, the greenback remains the world's reserve currency of choice. That gives the U.S. far more latitude than Britain could hope for.

And President Obama's strategy of deflecting more severe budget-cutting pressures through token pullbacks as the economy recovers may be just what's needed.

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]]>budgetbudget cutsColumnscongressdavid camerondefense spendingdouble-dip recessionEnglandfederal debtFederal deficitjobsobamaobama budget 2012recoveryrepublicansspendingspending cutstax breakstax loopholestaxesVishesh KumarTue, 15 Feb 2011 15:10:00 ESTJapan Could Be the Best of Both Worlds for Investorshttp://www.dailyfinance.com/2011/02/06/japan-could-be-the-best-of-both-worlds-for-investors/http://www.dailyfinance.com/2011/02/06/japan-could-be-the-best-of-both-worlds-for-investors/http://www.dailyfinance.com/2011/02/06/japan-could-be-the-best-of-both-worlds-for-investors/#commentsFiled under: , ,

Japanese stock market with American and Japanese flagsWhen it comes to economic stagnation, Japan serves as the poster child for most investors. The phrase "turning Japanese," after all, serves as shorthand for the unrelenting deflationary mire that has gripped the country for decades.

But things may be slowly changing behind the scenes. Japan's exposure to booming economies in the region like China and India may be fueling a resurgence in corporate earnings. That means the poor sentiment surrounding the country may give investors a chance to pick up a highly stable market on the cheap.

Japan's domestic economic woes should be familiar to investors.

A corporate culture based on tenure over merit has stifled generations of younger workers who often scramble from one form of temporary work to the next. During its boom years in the 1980s, the Japanese model was known for its focus on quality and incremental innovation.

Bargains by Comparison

But that image took a major hit when a massive real estate bust set off a deflationary spiral. What was once seen as long-term thinking came to be regarded as a tendency to seek stability at any cost when the lost decade of the 1990s set in.

The reputation for stagnation has taken a toll on the values of Japanese stocks, and some investors now see them as bargains. The Tokyo Stock Price Index, or Topix, trades at a price-to-book value of just 1.1. By comparison, the price-to-book value, which looks at market value versus a company's assets, for the S&P 500 index stands at 2.3.

While investor sentiment remains sour, the earnings picture has started to turn nonetheless. Japan's concentration in the manufacturing of industrial equipment and consumer electronics has played well into the rapid industrialization in Asia. In 2009, for example, China overtook the U.S. as Japan's largest export market.

A slew of big Japanese companies like Sony (SNE) and Hitachi (HIT) have recently announced strong results. Investment bank Goldman Sachs (GS) anticipates earnings to approach the record levels seen in 2007, and stockpiles of cash to continue to mount as well.

Corporate Japan Gets Leaner

The growth comes amid once-again-surging exports. Shipments from Japan jumped 24% in 2010 compared to the prior year, marking the first expansion in three years.

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Corporate Japan also shows signs of getting leaner as competition in the region heats up. Recent mergers in the steel industry are aimed at creating more efficiency and scale to take on global competitors, for example.

Some Wall Street powerhouses have stared to warm up to Japan. Deutsche Bank (DB) predicts that Japanese stocks could gain 20% in the first half of 2011, and Goldman Sachs also sees substantial upside in the year ahead.

Exposure to Japan may have another appeal for investors. While the country benefits from trade with fast-rising emerging markets, it still offers the security of a developed country. Japan provides a way to take advantage of growth in the developing world while also offering the downside protection of a safe-haven.

A Turn for the Better?

Exchange-traded funds like the iShares MSCI Japan Index Fund (EWJ) offer investors cheap, easy ways to take part in the rise of Japanese big-cap stocks.

Thanks to booming emerging markets, a turn for the better may finally be in the offing for the long-suffering Japanese economy. And the prevailing sour sentiment for the time being could present investors with an interesting entry point.


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]]>Columnsemerging marketsinvesting in JapanJapan China tradejapanese exportsJapanese Stock MarketVishesh KumarSun, 06 Feb 2011 08:00:00 ESTConsumers, Not Stocks, Will Feel Inflation's Pain Firsthttp://www.dailyfinance.com/2011/02/03/consumers-not-stocks-likely-to-feel-the-pinch-of-inflation-fir/http://www.dailyfinance.com/2011/02/03/consumers-not-stocks-likely-to-feel-the-pinch-of-inflation-fir/http://www.dailyfinance.com/2011/02/03/consumers-not-stocks-likely-to-feel-the-pinch-of-inflation-fir/#commentsFiled under: , , , ,

As the U.S. economy slowed over the summer, some high-profile economists argued that Japanese-style deflation was on the horizon.

Even more hysterical voices said a return to 1970s-style stagflation -- a stagnant economy that nonetheless sees purchasing power decline thanks to runaway inflation -- was in the cards.

Now, amid a remarkable bounce back in manufacturing activity around the world, another worry looms. Surging commodity prices amid booming demand are leading to fears of inflationary forces.

Don't Worry So Much for Corporate Profits

While the worries are real, investors should also keep them in perspective. The downside of better growth than most predicted should be welcome, given the alternatives for now.

And for all the talk that spiking inflation will crush profit margins and the stock market, the real toll may instead be on consumers at the lower end of socioeconomic sector, the people already hit hard by the recession. Consumers struggling to make ends meet, not corporations with surging profits, are most at risk.

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Evidence of an accelerating recovery keeps mounting. The Institute of Supply Management (ISM) reported earlier this week that factory activity in January expanded at the fastest pace in nearly seven years.

At 60.8, the ISM index signaled strong expansion. Even the reading of 57 that many on Wall Street had expected would be consistent with a GDP growth rate of over 4%, analysts at JPMorgan (JPM) wrote in a research note this week.

And the ADP private sector employment report on Wednesday added to encouraging signs on the jobs front.

Rising Energy and Food Prices

Despite the overall bullish ISM data, signs of inflationary pressures are mounting, too. The prices-paid component of the index jumped to 81.5 from 72.5, the highest since July 2008.

Prices at the gas pump are rising, and food costs could go up as well. Retail gasoline prices have moved up 15% since August, analysts at JPMorgan wrote, and rising financial markets are indicating food costs could go up, too.

"While food prices have not moved up nearly as fast as energy prices," the analysts said, "prices of exchange-traded foodstuffs remain on the rise, and eventual steeper increases in final consumer food prices seem likely."

Concerns About Cutbacks on Basic Items

For the moment, inflation seems unlikely to tank the stock market. In fact, interest rates around the current level have historically been associated with price-to-earnings multiples in the low- to mid-20s, according to some analysts. Even with the recent rally, the S&P 500 still trades at less than 15 times this year's earnings estimates.

Rather than slamming the stock market, rising prices may disproportionately hit the wallets of financially ailing Americans, and chatter about cutbacks on basic items is on the rise.

For example, according to JPMorgan, households in the bottom fifth of income distribution spend 9% of after-tax income on gasoline -- while the top fifth spends only 2%.

Fears that rising prices will dampen overall consumer demand are also misplaced, given the massive purchasing power amassed by the wealthiest. Final sales and big-ticket items like auto sales have continued to do well.

Instead, if prices rise rapidly the "burden will fall disproportionately on the lower end of the income distribution," analysts at JPMorgan wrote. That means Main Street will feel any inflationary crunch before Wall Street does.


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]]>commodity pricesconsumer spendingconsumerseconomic recoveryinflationinflation rateInflationFearsInflationRatemanufacturingpricesrecoveryrising pricesStagflationVishesh KumarThu, 03 Feb 2011 12:00:00 ESTOut of Egypt's Chaos, Opportunity for Investors?http://www.dailyfinance.com/2011/02/01/egyptian-protesters-chaos-mubarak-opportunity-investors-buy-stock/http://www.dailyfinance.com/2011/02/01/egyptian-protesters-chaos-mubarak-opportunity-investors-buy-stock/http://www.dailyfinance.com/2011/02/01/egyptian-protesters-chaos-mubarak-opportunity-investors-buy-stock/#commentsFiled under: , , ,

"The time to buy is when there's blood in the streets," legendary financier Baron Rothschild declared more than a century ago. The same principle could hold true for times when protesters, police and the army are taking to the streets of Egypt.

The Market Vectors Egypt Index ETF (EGPT) tumbled about 15% in the days following the outbreak of political chaos in the country. But it posed a sharp rally of nearly 8% on Monday as investors regained some confidence.

While plenty of doomsday scenarios are circulating, a more levelheaded look at Egypt suggests that the sell-off could provide a good entry point for investors. Its economy is growing fast and has plenty of room to run. And while apocalyptic predictions prevail, the changes that are likely to be ushered in may in fact help the country's development.

A More Moderate Track Ahead?

With a growth rate of about 6% in 2010, Egypt's economy outpaced all the Gulf states except Qatar, and economists polled by Reuters at the end of last year predicted average gains of another 5.4% in 2011. With a per capita GDP of $2,270 in 2009, Egypt has plenty of room to rise as its economy plays catch-up. Certainly, there's reason to think this process is already well under way: Per capita GDP has roughly doubled from $1,041 over the past five years.

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Most headlines, meanwhile, have focused on the possibility of the country slipping into extremist hands if the regime of dictatorial President Hosni Mubarak is displaced. Often mentioned as a contender for power in a post-Mubarak scenario is the Muslim Brotherhood, the country's largest opposition party, which advocates a return to Islamic law.

But the country has better odds of taking a more moderate turn that could boost commercialism. The secular, urbane Mohamed ElBaradei -- the former U.N. International Atomic Energy Agency head and secular democratic opposition leader -- is more likely to emerge as the new face of Egypt than the leader of a radical group.

And while fears of extremist groups taking power are getting more media attention, the bulk of Egypt's population is showing significantly warmer feelings about the U.S. over the last few years.

In 2007, only 11% of Egyptians viewed U.S. influence on their country as "mostly positive," while 59% said it had a "mostly negative" impact, according to a BBC poll. But in June 2009 -- the first survey after President Obama delivered his high-profile speech in Cairo -- positive opinions about U.S. influence had soared to 45%, with negative views at 29%. That puts Egyptian attitudes about the U.S. in the same league as those of the British or French.

The Egyptian stock market, meanwhile, remains cheap. Its trailing price-to-book ratio is approaching levels not seen since 2003, and is well below its average over the last decade. The chaos engulfing Egypt, in other words, provides patient investors with a good opportunity to buy.


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]]>blood in the streetsColumnsegyptegypt demonstrationsegypt protestsegyptianegyptian governmentextremistsGDPGDP GrowthHosni MubarakMohamed ElBaradeiMuslim Brotherhoodper capita gdppresident obamaRothschildstock marketVishesh KumarTue, 01 Feb 2011 11:00:00 ESTWashington Spin, Not Substance, Is Just What Investors Need Nowhttp://www.dailyfinance.com/2011/01/27/obama-economic-policy-spin-recovery-state-of-the-union/http://www.dailyfinance.com/2011/01/27/obama-economic-policy-spin-recovery-state-of-the-union/http://www.dailyfinance.com/2011/01/27/obama-economic-policy-spin-recovery-state-of-the-union/#commentsFiled under: , , , ,

As Economy Recovers, Obama Turns From Substance to Spin President Barack Obama's State of the Union address Tuesday was packed with soaring rhetoric. The country needed a new "Sputnik moment," Obama said, and his national policies would help us create more world-leading companies like Facebook and Google (GOOG).

The speech sure was a crowd-pleaser. A poll by CBS (CBS), for example, found a staggering 91% of viewers approved of Obama's proposals.

But investors looking for cues about the shape of future policy shouldn't get take any of those plans as done -- or even doable. Despite the lofty sentiments expressed by President Obama, the White House seems to have moved from substance to spin amid growing signs the economic recovery is gaining steam.

"After two years of ambitious proposals and policy achievements, President Obama used Tuesday's State of the Union address to frame a new narrative about the economy and bipartisanship," analysts at political risk consultancy Eurasia Group wrote in a note to clients. "The speech underscored that the president is moving from a policy-making strategy to a public relations strategy."

Standing Back and Letting the Recovery Happen

No news should be good news as far as the markets are concerned. Strong signs indicate that the U.S. is recovering more rapidly than most had predicted, and highly respected analysts like Deutsche Bank's (DB) Peter Hooper are anticipating a GDP growth rate close to 6% under the right circumstances in the year ahead.

Under those conditions, feel-good rhetoric and flowery oration may in fact be a better way to go than heavy-handed policies that have the chance of backfiring. Speeches about getting tough on spending, for example, will be better than the kind of big budget slashing that could deliver a major blow to overall demand.

A light-touch approach is especially promising given how broad-based the signs of a recovery are. As corporate profits soar, job growth is picking up and may be underestimated at the moment.

Housing, VC and IPOs All Surge

Even the battered housing sector showed signs of life as new-home sales soared passed expectations on Tuesday. The 17.5% surge in sales marked the biggest jump since 1992, analysts at Ned Davis Research wrote in a report Tuesday, and sales in the Western region jumped 71.9%. Median sale prices rose to their highest levels since July 2008. "We expect housing activity to stabilize in the coming months and gradually pickup as the year progresses," the analysts wrote.

Venture capital investment grew 19% to $21.8 billion in 2010 to post its first gains since 2007, according to the MoneyTree Report by PricewaterhouseCoopers.

The IPO market also continues to heat up, a sign that investor risk appetite is gaining momentum. Issues by Demand Media (DMD) and Nielsen Holdings (NLSN) soared on their debuts Tuesday -- up 33% and 9%, respectively.

The key now is not to let the politically charged environment interfere with the advancing recovery.

GOP in Spin Mode, Too

Based on its official response to the State of the Union address, the Republican party also seems intent on limiting its ambitions to the cosmetic.

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GOP rhetoric about fiscal responsibility aside, the $50 billion that Eurasia Group expects the Republicans cuts from this year's spending to be a drop in the bucket compared to the $1.48 trillion deficit.

"The big takeaway on fiscal policy is that neither the president nor Republican respondent Paul Ryan (R-Wis.) spent much time on entitlements or other large drivers of the deficit," the firm's analysts wrote. Like the White House, "Republicans must convince the public that the limited spending cuts they deliver are meaningful."

Political posturing and grandstanding like the recent visit from China's president elicited will be in abundance. But investors should be thankful that actual measures should be in short supply.


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]]>Barack Obamabudgetbudget cutsColumnseconomic policyfederal debtFederal deficithiringhiring outlookhousinghousing marketjob growthjobsobamapoliticsreal estaterecessionrecoveryspinState of the UnionunemploymentVishesh KumarThu, 27 Jan 2011 09:30:00 ESTThe Economic State of the Union: America Is Already Creating Jobshttp://www.dailyfinance.com/2011/01/25/the-economic-state-of-the-union-america-is-already-creating-job/http://www.dailyfinance.com/2011/01/25/the-economic-state-of-the-union-america-is-already-creating-job/http://www.dailyfinance.com/2011/01/25/the-economic-state-of-the-union-america-is-already-creating-job/#commentsFiled under: , ,

Help wanted signPlans to create jobs and restore American competitiveness will be the centerpiece of President Obama's State of the Union speech Tuesday night. And understandably so, given the elevated level of unemployment and gloomy national mood.

But while the angst over jobs has led to soaring political rhetoric, investors would do well to take a more sober look at the issue. Despite dire proclamations from both sides, a healthy economic turnaround may already be underway in the U.S.

Critics on the right have accused the Obama administration of creating an environment hostile to business and harmful to job growth. Those on the left have bemoaned the economic stimulus measures and Fed policies as inadequate for restarting robust growth and job creation.

The reality, though, is that the jobs picture has been quietly brightening behind the rhetoric, thanks to a strong economic recovery. Indeed, America may already be more competitive than the political posturing lets on.

Better Fundamentals Are Driving Business Decisions

The latest indication that hiring may be about to further accelerate came from a National Association for Business Economics survey of 84 of its member businesses. The percentage of businesses planning to expand payrolls in the next six months outpaced those planning to shed jobs by 35 points, the highest pace since the question was first asked a decade ago.

Much has been made of President Obama's supposedly pro-business turn lately. And some House Republicans were quick to try taking credit for the healthier outlook by saying they helped usher in more business certainty, according to reports.

But, according to the NABE release, the "majority of respondents anticipate no increase or decrease in investment spending or employment in response to new tax policies, suggesting business decisions are being driven by the fundamentals of the improving economy."

Businesses do have plenty to be optimistic about. Profits and share prices have delivered a prolonged surge, defying once-pervasive predictions that the U.S. had entered a dark new economic era. Employment, too, has fared far better than the dire rhetoric would convey.

Job openings soared to 4.7 million at the end of the year according to some Internet sites. Despite the hand-wringing, job growth is already outpacing that posted at the end of the prior two recessions. And upward revisions to monthly government figures may indicate that job growth has been even more robust because government employment measures tend to underestimate during upturns.

Needed: A Surgical Approach to Job Growth

But if anything is more predictable than job growth following an economic recovery, it may be the overreaching pessimism that precedes it.

"Remember the jobless recovery of the Bush years? A few years later, it turned out that job growth was pretty good, at least compared with initial estimates," wrote the often bearish money manager John Mauldin in a research report this month. "But did anybody care three years later?"

Some problems like long-term unemployment continue to be deeply troubling. But rather than a wholesale American renewal, what's needed is a surgical approach instead. For example, training and investments in education can help the U.S. labor force get into the hefty number of positions that are already open.

Plenty of media attention will no doubt be lavished on President Obama's words about his economic and jobs outlook. And both parties will try to take credit for any turnaround that does materialize. But despite the posturing in Washington, there's less to it than meets the eye. Job growth is simply following in the wake of a prolonged economic expansion -- as it has in the past.

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]]>Columnseconomic growtheconomic recoveryeconomic stimulusemploymentjob creationjob growthjobspresident obamaState of the UnionVishesh KumarTue, 25 Jan 2011 06:30:00 EST