Back to Main

The Big Picture

By: Ted Allrich
Posted: 3/23/2011 12:34:00 PM
Referenced Stocks: ASH;CAT;DD;DOW;GE

With several major developments occurring around the world, many investors may wonder how they could affect their portfolios or their lives.  Here are two of the current, newsworthy events and how investors may interpret them.

Libya: The oil from Libya totaled about 2 million barrels a day before the revolution, half of which was exported.  About 1 million barrels a day are no longer available to the world.  That isn't enough to really affect the price of oil for a long period of time.  Plenty of other countries can supply that amount without straining their capacity.  But they're unlikely to step in to fill the gap when oil prices are above $100 a barrel.  That price should recede once the conflict finishes and a more stable government is in place. 

The whole middle East is going through a transition with Egypt at the forefront.  As new governments are voted in or appointed, new policies will emerge.  Almost all Mid-East countries rely on oil to sustain them so disrupting oil supplies for a long time is not in their best interest.  For Libya, oil represents 95% of its exports and 25% of the country's Gross Domestic Product.  It has the largest proven oil reserves in Africa and is the continent's third largest oil producer after Angola and Nigeria.

Personal Portfolio effect: minimal.  Very few companies rely on Libyan demand for sales.  Its oil exports are small and may take years to re-enter the supply chain.  That won't affect the price of oil measurably unless the current conflict spreads to other countries which is highly unlikely since the purpose of the uprising is to eliminate a despot.

Japan: Earthquake, tsunami, radiation.  But the devastation didn't hit the country equally.  Tokyo is still mostly intact as is most of the rest of the island.  The northeast corner bore the brunt of the damage, especially the nuclear power plants.  The radiation now spewing from them is contaminating food and water.  The global air streams will carry it everywhere.  It's a question of how much concentration it has as to whether it will be harmful.  It's certainly harming those in a 50 mile radius of the plants.  Food grown in the area shows high levels of radiation and can't be eaten.  Water also is not drinkable if it's from that area.  It will take years to correct all the damage.  And more will come.

Personal Portfolio effect: Directly on Japanese companies that export, on U.S. companies that export to Japan.  Demand for Japanese products will diminish as fear of radiation keep consumers from buying, even if they've been declared safe by the Japanese or American governments.  It's the way all people react when they don't know exactly what the truth is or fear the worst.  Long delays (think Japanese cars) will discourage orders and see them go to competitors.  Supplies from Japan (think semiconductors) will diminish or stop until there is a more normal business environment there.  Airlines to Japan (Delta is reducing flights to Japan due to lower ticket sales) will fly with fewer passengers, cut back service. 

Supplies to Japan will grow.  Any company with infrastructure machinery will see higher demand.  Food, water, basic necessities will also be needed.  Japan is already the U.S. agriculture's third largest customer.  Construction equipment and supplies for rebuilding homes and commercial space will see increases in orders.  U.S. companies such as Caterpillar (CAT), GE (GE), DuPont (DD) for chemicals along with Dow (DOW) and Ashland (ASH) should see increases.  Japan accounts for 4.7% of all U.S. merchandise exports and 8.2% of services such as travel.  Together, they represent .7% of the U.S. economic output.

The final comment: this too shall pass.  Any stock in a portfolio that isn't directly affected by oil or the Japanese devastation may see some price erosion when the stock market in general is reacting to news.  But if the stock, say it's a medical device company, doesn't need oil or isn't depending on Japan for demand or supplies, will continue to prosper. 

Think back on all the difficult times in the last 10 years, beginning with 9/11.  The world seemed like it was ending, that terrorism was going to break the American way.  It didn't.  It changed many things but not the basic American way of life and business.   Within several months of that date, the stock market rallied back.  It will again.  And you can prosper from it if you look at the big picture and realize that terrible things happen, and people have a way of coping and then improving on the past. 

One final, terrible example: the Japanese endured the bombings of Hiroshima.  It truly was a scorched earth policy.  It seemed their world had ended.  But it didn't.  The Japanese pulled together and rebuilt.  It took decades to overcome the devastation, but they perservered.  They will again.  Investments in the best companies in Japan will be rewarding, but it will take time.  U.S. companies depending on Japanese supplies will see them flow again.  Some will take longer than others.  U.S. companies that can supply Japan with needed goods and services will see increased business.

There has been tragedy.  But in the rubble, there is opportunity.  And the will of the Japanese to prosper again will prevail.  Just as the American spirit is alive and well and returning our economy to more normal levels.  It will all take longer than anyone likes, but it will happen.  It always has.

- Ted Allrich
March 22, 2011