Monday, June 23, 2008

No Appreciation

According to a report from Credit Suisse, investor's have "No Appreciation" for the consequences of oil trading above $130 for the past 3 weeks.

Investors haven't fully appreciated the effects of crude oil's price surge, Stuart Pearson and Arndt Ellinghorst, London- based Credit Suisse analysts, wrote
in a note to clients today. The analysts said they expect European automotive-industry earnings in 2009 to fall by 5 percent, versus a consensus estimate of a 12 percent increase. ``Only a few industry executives and financial-market observers have ever experienced such a dramatic worsening of the external environment,'' the analysts wrote. ``Some players might even end up loss-making.''

Au Contraire, messurs Pearson and Ellinghorst: I think investors in American financial, auto, and airline stocks have a very PAINFUL appreciation of the high price of Oil. So, in honor of George Carlin, I will make a few observations and predictions on the Human Condition American:
  1. Detroit is doomed. 50/50 at least one of the big Auto manufacturers enters bankruptcy by 12/09, 75/25 they both are in bankruptcy by 12/10.
  2. The fallout from this destroys the presidency of whoever wins in November. In conjunction with these bankruptcy filings, the U.S. Pension Benefit Guarantee Corporation, along with Fannie Mai, Freddie Mac, and FHA, are all in DEEP crisis before 12/10. DEEP, DEEP, DEEP CRISIS.
  3. Several Big Banks and Brokerage firms will fail. The first Big Failure will be acquired or merged a la Bear Stearns. The second failure will not be so lucky. Nor the third (nor the fourth).
  4. Multiple compression (fancy Wall Street speak for declining declining P/E valuations) will be quite stark in the formerly big multiple names. Why would anybody pay 40 times earnings for a company that will cannot grow? If the company benefits from hyperinflation (price, not monetary). There will be precious few of these.
  5. The failure rate for small businesses will set a new record.
  6. Food prices will rise by 15% to 25% in 2009.
  7. The Chinese Yuan will appreciate substantially against the U.S. $.
  8. New York City Real Estate prices will fall, HARD. Mortgage defaults will challange banks in this market greatly (my nod to understatement).
  9. Total Vehicle Miles Traveled will continue to fall 3% to 8% per year.

Feel free to hold me to this. Let us see how I do. Please feel free to peruse my old posts to see how I have done in the past.

BTW, I wish I could be more specific, and name names of companies I thought would fail. For the most part I must remain very general, or it will appear that I am giving investment advice, or worse, that I am trying to influence prices of issues I own. Still, there are not too many auto manufaturers in Detroit, and as a disclosure, at this moment I have no position in them.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

5 comments:

Anonymous said...

"Total Vehicle Miles Traveled will continue to fall 3% to 8% per year."

And with it, GDP will fall 3%-8% per year. Total Vehicle Miles and GDP have been in virtual lockstep for nearly a 80 years now.
After all, the GDP is "made of" moving people and goods, besides making those goods. Spatial activity means economic activity. To work, shop, use services mean moving around in a modern society.

So we can expect a declining standard of living, at least in the traditional, current sense of the word, from here on in, to the tune of roughly 5% per annum. Classical collapse (in the Tainter or Diamond model).

A Quaker in a Strange Land said...

Maybe. I was in your camp, but my fellow fund manager Dr. Lalani keeps telling me that "having people drive around in circles does not increase GDP". Maybe he is right, but there will be SOME effects from this.

Hope all is well.

Anonymous said...

I agree with Fallout11 on this one. It certainly does increase GDP to have people drive in circles. When they are bored with driving they stop to buy and eat stuff. If they are not driving then the entire impulsive shopping thing is curtailed. When I ride a bike or a scooter I can't just buy a bulky thing just because it is on sale. Hard to take it home with me on spur of a moment.

Chuck H.

A Quaker in a Strange Land said...

Point well taken, Chuck. I shall report back to our resident mad scientist forthwith!

Anonymous said...

Stuart Staniford over at The Oil Drum has done a few articles on this previously, and Eric Janzen over at ITulip.com covered it briefly recently as well, complete with charts and tables.

While energy used per unit of GDP has fallen over the past 30 years as we outsourced our old industrial capacity and the like, all such gains in "efficiency" have been eaten up by increased consumption, leaving energy usage and GDP still tied virtually in lockstep.
The graphs really make this point.

Remember also that anytime anyone buys anything or sells anything, transportation/shipping remains involved, and truck transport is still the prime mover of most goods (from cheap crap at Chinamart to videos from Netflix) and services (from pest control to pizza delivery to plumbing) in the US.