Wednesday, January 2, 2008

The Financials of 2008 – What Will We Talk About?

I am not a big fan of forecasts and trend predictions. The papers are filled with year end summations and forecasts. Through my readings I have noticed some financial concepts are being constantly repeated. I believe these will be the main building blocks of the financial discussion in 2008.

Inflation
It’s everywhere. Prices have been slowly yet surely increasing since 2007 started. The increase in oil prices was the most noticeable but other commodities were not late to follow. Industrial metal prices such as: aluminium and steel and basic food prices such as: wheat, corn, soy and other vegetable oils have all sky rocketed. The price increase of basic and raw materials will surely lead to further price increase in consumption goods and foods such as milk, pasta, bread and meat as feeding animals is much more expansive. An increase in transportation prices and in furnished goods is also probable due to the increase in raw material prices. The real estate market in the United States might serve to cool down inflation as prices and home sales are still declining but the general direction seems to be upwards.

Commodities
So, will investing in commodities be a sound move for 2008? It seems so (though I often discourage investing on trends). The nature of commodities is such that balancing surplus demand is a long process which takes time. You can’t just plant a wheat or corn field in a week. There seems to be a bigger trend of growing and even shifting consumption to evolving countries. This is natural of course as this is exactly what these countries are doing: evolving. As countries like Chine and India continue to grow each Chinese or Indian is able to afford greater consumption. Think of billions of people increasing there weekly meat consumption by 2 pounds. The numbers quickly add up.

China
There is little debate over whether China is growing in the long haul. There is a question of whether the Chinese stock market is reflecting that growth accurately. With high inflation and interest levels and a stock market which yielded almost 160% in 2007 China is a scary investment.

Blumberg has recently reported Chinese stock prices have risen to imaginary worth. PetroChina’s market cap is 39% that of Axon Mobile with 50% of the profits. China Mobile’s market cap is 41% that of T&T with 75% of the profits. Stocks in the CSI 300 index are traded at a P/E multiplier of 44.7!

I myself have decided not to participate in the feast for now and I’m waiting for a violent correction due in the Chinese stock market for a better opportunity.

2008 will with out a doubt be a very interesting year where investors will have a harder time generating the handsome returns of 2005-2007.

1 comment:

Art Dinkin said...

Dorian, You make some great points! I went to the grocery yesterday to buy milk for the family. Normally I don't pay attention to the price. I just buy what I need. But since the only item in my cart was the milk I was shocked to learn that it was $3.30 a gallon! And that was after I filled my car with $2.97/gallon gasoline!

Crop prices are definately on the rise. Soybeans are a strong local crop and the price has doubled in the last year or so. I'm told that the soybean futures are up another 20% or so from the current price.

Some consumables (like gas) can be optional. Rising food prices effects everyone.