High Commodity Prices, Margins and Weak Government
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Trading Features / Strategies from Simon Denham of Capital Spreads.
With Crude Oil and other essential commodities continuing to rise as the pound continues to depreciate it is tempting to suggest that the markets seem to be rather sanguine as to the profits expected from many ‘front line’ corporates. As the CEO of Carrefour (after Wal Mart the biggest retailer in the world) warned, the continuing squeeze on margins is becoming very hard to accommodate (and they account in Euros!). High Street prices are not going up by the increase in underlying cost to the retailers so the margins must be under very severe pressure.
Of course some 70% of FTSE 100 stock income is from foreign earnings but even here a large proportion is in US Dollars which has been only marginally stronger than Sterling. The preponderance of mining, tobacco and oil companies in the index is helping to offset the falls in Banking and Retailers. However it must be pointed out that if the remainder of the index had matched the falls in these two sectors we would be another 2000 points lower!
In the midst of all this turmoil the IMF states that the UK is particularly exposed to the current crisis. The exact opposite to Captain Darling who stated (without much evidence) that the UK was better prepared to ride out any economic downturn than the other G7 nations. Who do we believe? Oddly enough, for all of the insults heaped on the Treasury forecasts over the past years they have been the most consistently correct over a longer time horizon. The IMF the most consistently incorrect! This time however the boot is almost certainly on the other foot. A whole host of factors are combining to build a massive brick wall on the highway of continued growth.
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It is easy to fear that commentators are talking our way into a downturn but to ignore or gag the doomsayers is very dangerous in this instance. Ten years of easy decisions have combined to weaken the hand of the UK on the world stage. Even the most diplomatic of interested parties are beginning to put their heads above the parapet. Yesterday saw the head of EON, a German, take the almost unheard of plunge (for a commercial foreign owned company) and criticised the UK government for failing to implement even the most basic of foundations for a serious energy policy. We would all love some wonderful, reliable and cost efficient source of ‘renewable’ energy production but wishful thinking will not provide it. Politicians riding the ‘green’ bandwagon are not going to provide the energy requirements of the next generation. Hard, unpopular and costly decisions have to be made and made now.
Unfortunately with a weakened Labour party in power the chances of this happening are remote. So we can see another three years of drift.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'High Commodity Prices, Margins and Weak Government' edited by SD, updated 10-Apr-08
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