Wednesday, June 11, 2008


The FTSE100 made the same bottoms as were made in US markets, in January and March. England is gradually catching up to the US economic slowdown. Job losses have been reported four months in a row.

The world wide slowdown will ultimately hit the developing nations, like China, harder than the developed nations. Developed nations are not as cyclical because we are no longer dependent on the manufacturing of goods for our economic health. Countries like China thrive off of the production of low priced goods. When the consumer reduces consumption just a little bit, it is a blow to China.

The slowdown will reduce the demand for oil. The EIA has once again lowered its estimate for demand and of course for production for this year. US gasoline consumption is estimated to be down only 440,000 barrels for the year but the down turn is the new trend. The person who buys a 40 MPG car and parks his truck except for secondary use, is not going to trade back if the price per gallon falls even $1 or $2. The July buyer who reduces his consumption in 2008 by 10% compared with 2007 will reduce his 2009 consumption by 20% compared with 2007.

What will the consumer do with the 20% savings? What will he do with the savings when his actions combine with the actions of others to bring the price down? History shows strong stock markets in 82, 86, 91, and 2002 after significant drops in the price of oil. History shows the consumer will find other ways to spend his disposable income. Over the past 5 years, a significant portion of ones increases in income have been eaten up by additional fuel costs. When the cycle turns, consumers will continue to see increases in earnings but they will also see a reduction in the cost of commodity based goods. The timing is just right for all sorts of powerful new phones and gadgets and even second homes.

Job loss and high inflation are two lagging economic indicators. Job loss and inflation always make it seem that the wheels are falling off the economic buss at the end of a down turn. The coming CPI report is likely to be a doozy given the spike in gasoline prices but the slowdown that already happened is the cause of the job loss and the inflation in non commodity prices. After business has hit bottom, it turns up. The upturn means an increase production, an increase in the supply of goods and a decrease in price. The increase in production gradually means an increase in hiring. Thus, inflation rates slow and unemployment rates fall, long after the stock market turn has hit second, third and forth gears. The current cycle stock market bottom was in January and it was successfully tested in March. The next up leg should be very strong.

A Goldman analyst is getting a lot of TV time this morning. He is discussing at great length about how weak the economy is and how bad the inflation rate. In other words, it is as bad as it gets. Investors should constantly remind themselves that Goldman and other investment banks make huge profits buying when the average person is selling and selling when the average person is buying. Investors should follow the advice of Grandma and "follow what Goldman does, not what it says". When you hear about job losses, you should remember that they come at the end of an economic slowdown. England just announced the 4th month in a row of job losses. The upturn in the market will lead the upturn in the economy.