January 16, 2010

Market Insights - 16 January 2010

Dear Friends & Fellow Investors

Here  is the latest issue of Market Insights. As always, please email any questions to: . 

In This Week's Issue
• Weekly Snapshot
• Chart Of The Decade
• Previewing 2010 
• About Inflation
• 2010 Oil & Energy Prices
• The Shape Of Jobs To Come

Weekly Snapshot
• Financial firms are on track to pay over $145 billion in bonuses for 2009 (WSJ)
• US consumer prices rose 0.1% in December and increased 2.7% annually (BLS)
• Euro area annual inflation up to 0.9% (Eurointelligence)
• Intel reported a fourth-quarter profit of $2.3 billion beating estimates (AP)
• China’s exports in December rose by 17.7% compared with December 2008 (Economist)
• Germany said its economy shrank 5% in 2009 and probably stagnated in the Q4 (WSJ)
• Germany's 2009 budget deficit was 3.2% of gross domestic product (WSJ)
• Financial Crisis Inquiry Commission began first hearings in Washington (FT)
• European Central Bank keeps rates steady at 1% (Eurointelligence)
• Obama proposes new levy on large banks and financial companies (Economist)
• Industrial production up by 1.0% in euro area (Eurostat)
• US Retail sales in December 2009 decreased 0.3% from November to $353.0 billion (ESA)
• US trade deficit in November 2009 increased 9.7% to $36.4 billion (ESA)
• Google threatens to quit China “no longer willing” to censor results on its Chinese site (FT)

Chart Of The Decade
Here’s another decade chart comparing important events with the exchange rate of the Euro versus US$.


    Click on chart for larger image

Previewing 2010  
Last week’s jobs report and some of the mixed economic news this week put a bit of a damper on the markets.  Germany’s 5% drop in GDP came as a clear reminder of the ongoing disconnect between the financial markets and the real economy.  As we pointed out last week, a sustainable recovery must find a sound footing in the real economy i.e. via a healthy labor market.  More jobs will lead to more consumption which will lead to more realistic company earnings.  The crowd on Wall Street is still relatively bullish but there are also increasing numbers of forecasters who do not believe in a V-shaped recovery.  Gerald Celente of the Trends Research Institute has a much more sobering outlook for 2010 calling for a depression rather than a recovery.  While one might not agree on the timing of a depression this soon after markets have rebounded, one should consider the possibility that the 2008/09 recession did not complete its course and further deleveraging is needed before real sustainable growth can resume.   I leave it up to your judgment as to whether his forecast is plausible.  However, whichever way the economy may turn in 2010 and beyond, I could not agree more with his recommendation of going back to basics.  A bit more frugality cannot be bad; becoming more conscious of the way we consume, wasting less and saving more would also mean living healthier.  On that note, I’ll check on those fruit trees in my backyard.

About Inflation
As the Bureau of Labor Statistics reported, the consumer price index, the broadest and official measure of consumer inflation, increased 2.7%  over the last 12 months before seasonal adjustment.  Although the debates among various camps of economists continue as to whether we are experiencing inflation or deflation, the most simple measure on a personal level would be to compare your personal expenses and general living standard with our personal wealth or income.  Are you feeling the pinch when looking into your wallet?  Most of us do as wages have generally not kept up with rising price levels.  Shadowstats.com has an alternative way of measuring inflation and this alternative CPI measure feels a lot closer to reality.


Chart: Courtesy of ShadowStats.com

2010 Oil & Energy Prices
Please consider the Short-Term Energy Outlook provided by US Energy Information Administration (EIA)

Highlights from the report are:

EIA expects that the price of West Texas Intermediate (WTI) crude oil, which averaged $62 per barrel in 2009, will average about $80 and $84 per barrel in 2010 and 2011, respectively.  EIA's forecast assumes that U.S. real gross domestic product (GDP) grows by 2.0 percent in 2010 and by 2.7 percent in 2011, while world oil-consumption-weighted real GDP grows by 2.5 percent and 3.7 percent in 2010 and 2011, respectively.

Escalating crude oil prices drive the annual average regular-grade gasoline retail price from $2.35 per gallon in 2009 to $2.84 in 2010 and $2.96 in 2011.  Pump prices are likely to pass $3 per gallon at some point during the upcoming spring and summer.  Projected annual average diesel fuel retail prices are $2.98 and $3.14 per gallon, respectively, in 2010 and 2011.

EIA expects the annual average natural gas Henry Hub spot price for 2010 to be $5.36 per thousand cubic feet (Mcf), a $1.30-per-Mcf increase over the 2009 average of $4.06 per Mcf.  The price will continue to increase in 2011, averaging $6.12 per Mcf for the year.

The annual average residential electricity price changes slightly over the forecast period, falling from 11.6 cents per kilowatthour (kWh) in 2009 to 11.5 cents in 2010, and then rising to 11.7 cents per kWh in 2011.

Projected carbon dioxide (CO2) emissions from fossil fuels, which declined by 6.1 percent in 2009, increase by 1.5 percent and 1.7 percent in 2010 and 2011, respectively, as economic recovery contributes to an increase in energy consumption.

Along with the forecasts came an interesting chart showing crude oil prices based on the estimates from the short-term energy outlook (STEO) as well as the current futures prices on the New York Mercantile Exchange (Nymex).  Ranges are calculated on an assumption that crude oil futures prices have a volatility of 95%.  This would mean that a relatively wide band is given for possible price changes in 2010 ranging from $45 to $162.


The rather wide price range assumes we see the same volatility levels as depicted towards the end of 2008.


However, with current volatility below 30% and assuming that prices may fluctuate somewhat less than in 2008, we would consider an average price volatility of 60% to be sufficient.  The resulting price band is then narrower with outliers between $65 and $113.  Based on that, we expect energy markets to be somewhat  volatile but to remain in the narrower price band.  Unless another massive deleveraging process takes place, it is hard to conceive that prices would return to levels in the $40 range.  Taking a stab, we predict an oil price between $80-$100 by the end of this year. 


The Shape Of Jobs To Come
In our previous assessments of economic trends, we concluded that a sustainable US recovery is only viable if more jobs are created domestically. The same could be said for much of the developed world.  No jobs = much less consumption which also spells trouble for the BRIC countries, at least in the medium term.  Where then should these jobs come from?

The answer, not surprisingly, lies in innovation.  The much needed job growth is invariably going to happen with the creation of new technologies and new industries.  Presumably, many of the fastest growing future jobs are not invented yet. Rohit Talwar and Tim Hancock of Fast Future Research published a fascinating report of a survey on the future of jobs.  The survey narrowed down a list of 20 jobs: 

1.    Body part maker
2.    Nano-medic
3.    ‘Pharmer’ of genetically engineered crops and livestock
4.    Old age wellness manager/consultant
5.    Memory augmentation surgeon
6.    ‘New science’ ethicist
7.    Space pilots, tour guides and architects
8.    Vertical farmers
9.    Climate change reversal specialist
10.  Quarantine enforcer
11.  Weather modification police
12.  Virtual lawyer
13.  Avatar manager / Devotees Virtual teacher
14.  Alternative vehicle developers
15.  Narrowcasters
16.  Waste data handler
17.  Virtual clutter organiser
18.  Time broker / Time bank trader
19.  Social 'networking' worker
20.  Personal branders

A more detailed description of these jobs is available here.  The full report can be accessed here.

Reading through this report, I found "The Science and Technology Timeline 2010 – 2030" (pages 104-120) most fascinating.  These are the much needed scientific breakthroughs upon which future job growth would be based on.  Sounds like science fiction? Not really, considering the advances and the fast pace of technological change we have witnessed in the last two decades.

In terms of finance jobs, an important driver for change may be rooted in shifting perception of money and wealth.  Already, companies are experimenting with new forms of compensation (perhaps as a result of the recent financial crisis) which may eventually trigger a paradigm shift in people's attitudes.  The relatively small list of future finance jobs implies that traditional finance might actually get the much needed overhaul and that new forms of compensation and monetary systems may come forward.  Time being the ultimate form of value, particularly for people who have money, could indeed turn into a new monetary form called time credit.  Good-bye investment banker - say hello to the "time banker".

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

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