Column: Economic Musings
by Fred Ruopp Fred Ruopp, a veteran investor named one of the Top Value Managers in the country, a serious Catholic, and founder of Chelsea Management, Fred Ruopp, Sr., provides a wealth of pithy insights on different economic sectors, beginning with national considerations. His insights follow:
While U.S. economic activity has not yet turned positive, clear signs of a rebound are emerging. Industrial production figures suggest a bottom, the inventory cycle is turning, and both business and consumer confidence is improving. It should be remembered that, just as unemployment was a lagging indicator at the beginning of this recession, improvement in this area could come well after the economy has returned to growth. In a press release issued July 8th, IMF Chief Economist Olivier Blanchard, said, “The good news is that the forces pulling the economy down are decreasing in intensity. The bad news is that the forces pulling the economy up are still weak. The balance is slowly shifting, and this leads us to predict that, while the world economy is still in recession, the recovery is coming.”
While substantial problems in the U.S. and world banking and finance systems continue, a greater feeling of resiliency and stability is currently felt through efforts of the Federal Reserve and Treasury. Europe and other parts of the world which have similar problems are not as advanced in their resolution as is the U.S. However, the Europeans have moved with alacrity on infrastructure loans and have a bigger social safety net, i.e., pensions, unemployment compensation, and health insurance that tend to mitigate the effect to a large extent on its citizens. A substantial increase in IMF funding has been agreed to by the major industrial nations to help combat problems in non-U.S. and non-EU members. Both Russia and China are attempting to convince others such as India and Brazil to limit the use of the U.S. dollar as a world reserve currency. They are concerned about the prospects for lower dollar value and what this will mean to the very substantial holdings they have already. A lower dollar reduces, in effect, their profits as their product prices are in dollars.
Crude oil having touched $73/barrel on an intraday basis has had a pullback to $62. This is part of normal profit taking and should be expected. With economic recoveries apparently underway in China, India, Brazil and the U.S., it is likely that, over time, the price will work higher rather than lower. This is aided not only by an end to shrinking demand, but also by attrition in new oil drilling activities owing to the low crude price in early 2009. A 10% to 15% drop in drilling costs for oil and gas has been positive for earnings at the drilling companies. These industries remain, of course, subject to swings in the basic commodity price.
As world equity markets recovered in the 2nd quarter and investors started to consider the interest rate climate that a recovery might bring, interest rates rose in general with the benchmark 10-year U.S. Treasury Bond yield rising from around 3.40% to over 3.75%. More recently, as equity markets have consolidated and economic indicators have pointed to a more muted rebound, rates have begun to return to previous levels with the 10-year Treasury bond presently yielding under 3.50% We still favor selected corporate bonds, municipal bonds and U.S. Agencies for their safety and relative yield.
After rebounding sharply from the lows of early March, equity markets appear to be entering a period of consolidation as participants digest recent corporate earnings and economic data. With the Dow Jones Industrial Average now 1500 points above last winter’s low of about 6500, any consolidation that keeps the average above that level can be looked at as positive and provide good opportunities to add high quality long-term holdings.
A well-grounded and thoughtful Catholic, Los Angeles-based founder and CEO of Chelsea Management Company, Mr. Fred Ruopp, Sr., is ranked by Kiplinger's as one of the... MORE »