Monday, May 17, 2010

Should we be more worried about China or Europe?

Of course we have our own issues with that little spill in the Gulf and the flooding in Nashville which has been woefully underreported, but I think we need to bump China up on our worry list.

In the good old days, when stocks were a representation of a company's future earning power and not just a ticker symbol to gamble on, the stock market was seen as a forward looking indicator of economic activity. Well, China clearly got the most bang for their stimulus bucks and in 2009 they seemed to be saving the global economy by buying up every natural resource in sight. This propped up economies like Canada and Australia that have large natural resources available for sale to highest bidder. Well, as I've been noting China's stock market is in a bear market right now. Down 22% this year and falling. Should we be concerned that the engine of global growth seems to be choking on too much stimulus? I'd be concerned if I was long Canadian loonies....

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The worst stat you'll see today: "Perhaps no more than half of those who began a four-year bachelor’s degree program in the fall of 2006 will get that degree within six years, according to the latest projections from the Department of Education."

We need to be honest with ourselves and our kids. Not everyone is cut out for college, but no one has the guts to tell little Johnny or Suzy the truth. In much the same way that the housing bubble was caused by many parties - aggressive lenders, the Fed's cheap money, Wall Street, homebuyers, etc - the education bubble is being extended by many enablers - guidance counselors, schools that put 90% of their kids on the "honor roll", the Fed's cheap money, universities, students....

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The Empire Manufacturing Index is not a terrible relevant indicator of health because NY State is not a major manufacturer anymore, but it's worth noting because it is our home state. The expectations were that this number would hold steady around 30, but instead it fell sharply to 19.

"The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve for a tenth consecutive month in May, albeit at a slower pace than in April. The general business conditions index fell 13 points, to 19.1. Similarly, the new orders and shipments indexes also moved lower but remained at positive levels. The inventories index dropped back to a level near zero after rising into positive territory in March and April.

Six-Month Outlook Remains Favorable, but Level of Optimism Falls
The future index readings were somewhat lower than in April but showed that New York State manufacturers expect conditions to improve further over the next six months. The future general business conditions index fell from a lofty 55.7 last month to 42.1. The future new orders and shipments indexes also declined."

In general, it seems that while manufacturers feel things are still improving the pace of improvement has slowed. This might tie neatly with the trend in stimulus spending which is peaking right now and will fall in coming months. If so, then expect the chatter about another round of stimulus to grow.

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Other things to watch this week:

* The Icelandic volcano is going to wreck European travel again this week. I think global businesses have had about enough of these delays and I expect we'll see a severe cutback in global business travel if we have one more major disruption.

* The progress on the oil spill will be watched closely. The cost to the coastal communities is going to be enormous and it feels like "Heckuva Job Brownie" is in charge. We've been lucky so far that this oil has not come ashore, but that does not mean that it's not impacting the Gulf.

Cheers!

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