accessibility adapter TM

Font Adjustments

Contrast

Cursor and Zoom

Display Adjustments
ADA Site Compliance Logo

Powered By ADA Site Compliance
Terms and Conditions

Skip to main content
  • Your Pershing Account
  • Contact Us
  • ars linkedin
  • ars twitter
ars investment parners logo
< Back
  • Who We Are
    • The Power of Partnership
    • Core Principles
    • Our People
  • How We Work
    • Building Relationships
    • Our Approach
  • Our Strategies
  • Outlook, Insights, and News
    • Latest Outlook & Insights
    • News
    • Archives
    • Video Library
  • Your Pershing Account
  • Contact Us

Month: June 2008

The Outlook

Posted on June 8, 2008June 4, 2024 by stav
As of June 4, 2008
IndexYTD % ChangeMarket Value
Dow Jones Industrials-6.6%12,390.5
S&P 500-6.2%1,377.2
Nasdaq Composite-5.6%2,503.14
*YTD % Changes use the index with dividends
Looking back over many decades, we do not find any period that is comparable to today’s environment and where the investment opportunities as well as the risks are so striking. We are in one of the greatest periods of global change from an economic, social and political perspective. The impact of this distinctive period will be felt for a considerable period of time. Over the past several years the environment has been a challenging one in which to build capital yet a rewarding one for those recognizing the beneficiaries of these times. We have found it typical for many to compare past decades with the present, but if we are correct that this business cycle is particularly distinctive, then an emphasis on past similarities could lead to incorrect conclusions and disappointing investment results.
CategoryPastPresent
World Population4 billion6.6 billion
United StatesLeading creditor nationLeading debtor nation
U. S. DollarLeading reserve currencyStrong competitive currencies & U.S. dollar leadership in question
U.S. Banking systemRegulated and low risk profileLess regulation/oversight, more risk
Financial systemFew complex financial productsProliferation of complex and unregulated financial products
Exchange ratesFixedManaged and Floating
U.S. Energy postureNet exporterNet importer
U.S. Fiscal and Dollar policyLow trade and fiscal deficits as a percent of GDPHigh trade and fiscal deficits as a percent of GDP
Inflationary forcesDisinflationRising inflation
Investment SourcesDomestic and National poolsGrowth of Sovereign wealth funds for cross border investments
Global resources investmentLow commodity prices resulted in under-investmentUnder-investment has led to major shortages and higher prices
World leadershipUSSR & U.S. leading powersU.S. & Multiple emerging powers
BRIC: Brazil, Russia, India, ChinaSmall global GDP contributorsGreater size and strongly growing
EnergyLow costHigh cost
Industrial materials/power generationGlobal surplusesGlobal shortages
AgricultureFood surplusesFood shortages
Skilled labor/access to equipmentEasy availabilityShortages
ConsumersUnder-leveragedOver-indebted
The drivers of our Outlook are the continuing power of the global economic environment and the impact of systemic underinvestment in critical areas such as energy, infrastructure, food and materials. Investors who have benefited from the major drivers of world economic growth should realize that these trends will not be going away any time soon. Those who analyze the U.S. economy and investment opportunities must, more than ever, take into account the needs of the global marketplace.

We believe the historic growth rates we have seen in the U.S. over the past ten years will be difficult to achieve for the foreseeable future because they were based on increasing use of borrowed money. Today, the banking system is attempting to repair its capital base, and its ability and desire to lend have been seriously curtailed. Consumers, municipalities and banks are all being forced to repair their finances at the same time. This should result in slower U.S. growth and will require the Federal Reserve and the federal government to maintain an expansive monetary environment (in other words create more money).

World Economic Growth Is No Longer U.S. Centric
Secular growth in demand is derived from the rising living standards of more than 3 billion people in economies that are industrializing. As shown below there is broad-based global growth occurring in areas greater than just the BRIC countries (Brazil, Russia, India and China). In fact over 70% of the growth in the industrializing economies is occurring outside of China. While all eyes are focused on our troubled financial system which remains under considerable stress involving the de-leveraging of the financial system, write-offs in the banking system, increasing home foreclosures and the need for debt reduction by consumers, the global industrial economy is in an upward trend of considerable magnitude.
The Impact of Global Underinvestment
A global supply/demand tipping point has been reached as evidenced by the extreme shortages in agriculture, equipment, power, transportation and water. This is made apparent by riots in various countries over food shortages. Underinvestment in farming over many years, the diversion of resources from important agricultural needs, droughts and changes in dietary habits in industrializing countries have taken a serious toll on the world’s food supply. Currently there is a scarcity of other essentials needed to address society’s basic needs. Unprecedented shortages and seismic changes are going to have significant ramifications on what we sometimes take for granted. It will impact political leadership, government policy and the educational focus in both the U.S. as well as other countries around the world. Entry level Geologists in the mining and energy industry are now being paid more than MBAs in the financial industry, for example, and Geologists saw a 44% increase in compensation during the last year due to the lack of available trained personnel. According to the National Association of Colleges and Employers there has been a year-over-year shift in the salary direction and rates for newly graduated students in several professions as highlighted in the chart below.
ProfessionSalary% IncreaseProfessionSalary% Decrease
Product Engineer$62,54216.8% ?Accountant$46,4303.2% ?
Aerospace Engineer$62,45414.3% ?Teacher$32,3450.4% ?
Design/
Construction Engineer
$55,35713.6% ?Management Trainee$41,7400.3% ?
The Global Demand for Steel
Today nearly 90 percent of world demand for steel is derived from outside the United States. This is being led by strategic investments in infrastructure by many countries particularly the BRIC, Southeast Asian and Middle Eastern nations. They are undergoing extensive industrialization including the building of airports, railways, power generation facilities, schools, bridges, dams and hospitals. In China, the demand for steel will increase further as it rebuilds after the recent earthquake tragedy. Steel prices have recently been raised with iron ore pellet prices being increased by 87% over the past several weeks. In addition, carbon steel and hot rolled steel, among other products, are all going up sharply in price.

Demand for steel exceeds supply and major U.S. steel companies are the prime beneficiaries of this imbalance. The amount of steel required for a single facility was well highlighted in a recent Wall Street Journal lead article on the $7 billion expansion of the Motiva oil refinery in Port Arthur, Texas. Once expanded it will be the largest crude oil refinery in the United States. What is particularly relevant in terms of our ongoing views of infrastructure spending is that this refinery expansion alone will consume more than 27,000 tons of structural steel and require 450 miles of pipe. This will increase the capacity of the refinery from 275,000 barrels per day to 600,000 barrels per day by 2010. Most of the world’s oil is of the heavier or acidic type, which means that significant additional investment will be required over time to refine this lower quality oil. This is a reminder that the quantities of steel and other raw materials needed for global infrastructure development are necessary, vast and will be ongoing well into this century.

Oil Supply, Demand, and Disruptions
Among the reasons the major oil companies have not been able to boost oil production relative to demand are production declines in older major fields that have not been sufficiently offset by new discoveries. Reserve replacement has been extremely difficult and costly. Furthermore, a large percentage of the world’s known petroleum reserves are located in politically difficult areas such as Iran, Iraq, Nigeria and Venezuela. Problems such as attacks on oil facilities in Nigeria are currently reducing world production by an estimated one million barrels a day. In addition Iraq’s production capabilities are still short of reaching their pre-war level. The solutions to reducing global energy demand growth and increasing supply continue to prove extremely difficult to implement in the current geo-political environment. At the same time, global demand has been rising, contributing to higher oil prices.
Monetary Creation
Since our last Outlook of February 27, the Bear Stearns rescue operations by the Federal Reserve to protect the financial system, and therefore the U.S. economy, have been imaginative and correct actions. The U.S. Federal Reserve continues to make vast amounts of money available to the U.S. economy. The Central Bank is committed to injecting up to $150 billion per month for the next six months into the U.S. economy to offset the capital losses in the financial system and to counter the contractionary effects of the banks’ inabilities and unwillingness to lend. The Federal Reserve continues to significantly expand this program and is, for the first time, accepting credit card debt, student loans and auto loans as collateral from banks to counteract persistent liquidity pressures in the U.S. and Europe. This is an unprecedented change in the role of the Federal Reserve. In addition, their newly-created Term Securities Lending Facility can lend up to $200 billion to twenty different banks and investment firms. This monetary creation increases our concern that down the road we will be looking at a significantly higher rate of inflation.
Deficit Spending & Trade Deficit
The U.S. federal budget deficit is now expected to be well over $500 billion because of the slowdown of the economy. The supplemental budget for Iraq and Afghanistan is adding to this deficit and is likely to bring it to $700 billion. In addition, the trade deficit, which continues to be burdened by imported oil at rising prices, will bring the total U.S. deficits to between $1.4 and $1.5 trillion, or more than 10% of the U.S. Gross Domestic Product. At this time, industrial prices, energy prices, raw materials prices and agricultural prices are all rising and are expected to create real headwinds for consumer spending while reducing tax revenues. These growing deficits create major policy challenges for the next President and Congress.
Inflationary Pressures
The inputs of production have been rising in price, and manufacturers have no choice but to pass these cost increases on to their customers. On May 29th Dow Chemical announced a 20% price increase on all of its products. Several companies followed with increases of their own. Separately, the railroads have continued to raise freight rates, and there are indications that they may continue to do so at a 7-8% rate per year for the next several years. Companies are considering or have implemented fuel surcharges as another way of increasing prices. Those who expect U.S. inflation to moderate in the second half of the year may be understating the impact of the current price increases. These inflationary pressures are being augmented by deficit spending and a required easy monetary policy.
Conclusion
From the global dynamics described we believe a successful investment strategy should continue to reflect the forces at work which are notably different from past periods. We will therefore continue to invest in and look for high quality and undervalued companies, many of which are U.S.-based, that benefit from the secular trends that are now in place. To meet the demands of the global marketplace, significant and sustained increases in spending will be necessary. Companies benefiting from this flow of capital will continue to represent the best opportunities for investment returns and are typically the least represented in the broad market indices. The challenges of identifying the beneficiaries and capturing investment returns over the past eight years can best be observed in the underperformance of the S&P 500. Investors in the index have experienced significant volatility and, at the same time, would have lost money both before and after adjusting for inflation.

The competing dynamics that investors face today involve global growth versus diminished U.S. growth. It is our view that as long as global growth continues, the beneficiaries, both domestic and foreign, will continue to be among the most rewarding investments that can be made. Given the enormous amount of dollars in the global economy, large amounts of capital will continue to flow to those regions and industries where investors can feel comfortable that returns can be significant and risks well-contained. One should continue to avoid the industries that had benefited from the over-leveraging that had occurred over the past decade and which now are retrenching and repairing their balance sheets at a cost to their existing shareholders. Furthermore, investors should be mindful not to expose themselves to industries and companies which cannot pass on their rising costs. We believe investment in the beneficiaries of global growth will continue to offer the most attractive rates of return over time even as the U.S. becomes a smaller piece of the total world economy.

Posted in The OutlookLeave a Comment on The Outlook

Recent Posts

  • What Matters Now: Reflections from the First 90 + Days
  • Volatility Strikes, Opportunity Knocks
  • What Matters Now: Time to Take a Fresh Look at Your Planning Needs
  • What Matters Now: The Narrow “Magnificent” Rally Broadens
  • The Investor Dilemma: Caught Between Optimism And Pessimism

Recent Comments

    Archives

    • April 2025
    • February 2025
    • January 2025
    • December 2024
    • October 2024
    • September 2024
    • August 2024
    • June 2024
    • May 2024
    • March 2024
    • February 2024
    • January 2024
    • December 2023
    • November 2023
    • October 2023
    • September 2023
    • August 2023
    • July 2023
    • May 2023
    • April 2023
    • March 2023
    • February 2023
    • January 2023
    • December 2022
    • November 2022
    • October 2022
    • September 2022
    • August 2022
    • July 2022
    • May 2022
    • April 2022
    • March 2022
    • February 2022
    • January 2022
    • November 2021
    • October 2021
    • September 2021
    • August 2021
    • June 2021
    • May 2021
    • March 2021
    • February 2021
    • January 2021
    • December 2020
    • November 2020
    • October 2020
    • August 2020
    • June 2020
    • May 2020
    • April 2020
    • March 2020
    • February 2020
    • January 2020
    • December 2019
    • November 2019
    • October 2019
    • June 2019
    • May 2019
    • March 2019
    • February 2019
    • January 2019
    • December 2018
    • November 2018
    • September 2018
    • July 2018
    • April 2018
    • February 2018
    • December 2017
    • October 2017
    • July 2017
    • April 2017
    • February 2017
    • December 2016
    • November 2016
    • October 2016
    • July 2016
    • April 2016
    • March 2016
    • January 2016
    • December 2015
    • September 2015
    • July 2015
    • May 2015
    • April 2015
    • January 2015
    • October 2014
    • August 2014
    • March 2014
    • December 2013
    • October 2013
    • August 2013
    • April 2013
    • January 2013
    • October 2012
    • July 2012
    • April 2012
    • December 2011
    • November 2011
    • July 2011
    • December 2010
    • October 2010
    • June 2010
    • March 2010
    • December 2009
    • November 2009
    • August 2009
    • May 2009
    • April 2009
    • December 2008
    • September 2008
    • August 2008
    • June 2008
    • February 2008
    • December 2007
    • August 2007
    • May 2007
    • December 2006
    • July 2006
    • May 2006
    • January 2006
    • September 2005
    • June 2005
    • March 2005
    • December 2004
    • November 2004
    • August 2004
    • May 2004
    • March 2004
    • January 2004
    • November 2003
    • September 2003
    • June 2003
    • April 2003
    • February 2003
    • December 2002
    • October 2002
    • August 2002
    • May 2002
    • April 2002
    • March 2002
    • January 2002

    Categories

    • Conference Call
    • News/Updates
    • Survey
    • The Outlook

    Meta

    • Log in
    • Entries feed
    • Comments feed
    • WordPress.org

    The Latest Outlook & Insights

    SUBSCRIBE
    Stay up-to-date on ARS Investment Partners' latest thought leadership.
    Sign up to receive The Outlook — our timely newsletter featuring our investment and economic thinking — and highlights from our latest market insights will be emailed directly to your inbox.
    display previous three outlook snippetsdisplay next three outlook snippets

    This is a carousel outlining recent posts from The Outlook. Each panel displays three posts. Use the Previous and Next buttons to navigate.

    Conference Call
    April 2025
    What Matters Now: Reflections from the First 90 + Days
    Listen
    The Outlook
    April 2025
    Volatility Strikes, Opportunity Knocks
    Read
    Conference Call
    February 2025
    What Matters Now: Time to Take a Fresh Look at Your Planning Needs
    Listen
    Conference Call
    January 2025
    What Matters Now: The Narrow “Magnificent” Rally Broadens
    Listen
    The Outlook
    January 2025
    The Investor Dilemma: Caught Between Optimism And Pessimism
    Read
    Conference Call
    December 2024
    A Special Year-end Call with Dr. Ed Yardeni and Arnold Schmeidler
    Listen
    SEE MORE   SUBSCRIBE   VIEW ARCHIVES

    ARS Investment Partners LLC
    529 Fifth Avenue, Suite 500
    New York, NY 10017

    • Legal
    • Privacy Policy
    • Client Relationship Summary
    • Disclosure Brochure
    • Contact Us
    • ars linkedin
    • ars twitter

    All investing involves risk, including the potential loss of principal.

    © 2025 ARS Investment Partners, LLC

    ADA Site Compliance-Accessibility Policy