Weekly Market Commentary 3-21-2011

Climbing the “Wall of Worry” – What Is That?

the scream Edvard Munch

World events once again dominated the headlines last week:

  • Japanese nuclear issues
  • Unrest in the Middle East and Northern Africa (MENA), specifically Libya and Syria
  • The European Debt Crisis, specifically Portugal, Ireland and Greece

Certainly, the equity markets overcame some serious headlines this week to post a nice gain.

S&P 500

s&p 500 in march

The "Mad Dog", Muammar Qaddafi, has continued threating his citizenry which may lead up to a massive exodus into Egypt and Tunisia and further destabilization in the entire region. Other regions to continue to watch are Syria and Jordan as the 2010-2011 Middle East and North Africa Protests continue to unfold

The simple fact is that, according to the CIA World Factbook, the combined GDP of Libya, Jordan, Egypt, Tunisia and Syria amount to less than 1% of global GDP.

Country

GDP (Mil of USD)

Libya

77,910

Jordan

27,130

Egypt

216,800

Tunisian

43,860

Syria

59,630

Total

425,330

World

62,220,000

% of World GDP

0.68%

From this perspective the wall doesn’t look so high, however, if you look at it from the perspective of a global disruption in oil supply it becomes an entirely different “wall of worry” to climb.

Adding to this wall, Japan now has over 300 billion in damages and counting as radiation leaks into the sea. This could have a material impact on global shipping and supply chain management because ships that become radiated will no longer be allowed into any foreign ports. Imagine owning a 200 million dollar ship that becomes radiated. You can almost feel the desperation and worry.

On top of all that is the European Debt Crisis. It’s clear from past research on countries that the pattern seems to be once a defaulter always a defaulter. Portugal is one such nation; it has defaulted 6 times since its independence in 1139. Add to this Germany's upcoming election and lack of desire to back a new €80 billion bailout fund for the Eurozone. The implications of a non-unified European Union are certainly big concerns.

So what is driving equity investors to push the markets higher?

The answer is actually something quite rational: The world’s largest economy, military and best educated enterprising population is improving.

The United States Real GDP was revised up to 3.1% from 2.8% in the fourth quarter of last year. Corporate profits increased 29.2% in 2010, which is in contrast to the 0.4% decrease in 2009. That’s a huge swing in profitability.

So it seems investors have looked rationally at the United States’ economic growth and determined that these future cash flows matter more than the contaminated ships, food supply bottlenecks, crazy dictators, and completely insolvent countries when valuing an asset. Let’s hope these future cash flows continue to be strong enough to withstand the stresses around the world. In reality there is always a “wall of worry”, it just happens to be center stage right now.

Thank you for your thoughts and comments, please keep them coming. Send them to: tphillips@phillipsandco.com

Tim Phillips, CEO - Phillips and Company