Category: National information

Don’t Panic

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September 29th marked at least the third ‘worst day in banking’ this year. With six or seven different ways for the average citizen to find out simultaneously that the House of Representatives turned down the so-called ‘bail-out’ and that Wall Street didn’t like that, it is easy to understand how fear could well up in such a short time. The worst thing any investor can do is to sell into a market panic, unless minimizing your portfolio is the goal.

Remaining calm when all around you is chaos is easier said than done, but there are a couple of things you can do to practice calming your nerves.

First and foremost, focus on the facts. The media is in extreme competition for your attention, and the current theory is that you’ll pay attention to extreme reporting. That means that every event is a ‘crisis,’ complete with its own title, and that the consequences are reported as earth-shattering every day. With all forms of media shouting doomsday headlines at you every minute of the day, it’s easy to forget that the US economy hasn’t even experienced contraction in GDP yet. Unemployment is at 5%, not the 25% of the Great Depression, or even 10% that we experienced in western PA in the early 1980’s. We are most assuredly in an economic slowdown nationally (probably a recession already), but it’s about time for one of those anyway, just like in 1989-1990 or 2001-2003, or any time we have five or six years of growth.

Focus on your investment objectives. Unless you are trading for short term cash growth (in which case-good luck), these tough days for the stock market will pass. If you have an account managed by a professional, your money is probably being used to buy more stock in undervalued companies that will grow that much more rapidly when recovery comes, whether that’s next quarter, next year or next decade.

Focus on the region. Construction and real estate fundamentals in western PA are better than normal. Vacany rates are declining, rents are increasing, and job creation is accelerating. We have massive investment in industrial construction that will produce manufacturing jobs. Legal and accounting firms here continue to grow as their businesses have grown beyond regional borders. Even our banks have steered clear of the poison that has affected other regional institutions. And we all know how strong the healthcare and technology sectors have become in the region.

There is daily evidence that businesses here will be cooling off their plans for construction projects. Doubtless contracting in 2009 will be slower that the past few years, unless some real clarity about the financial markets happens in the next few months. That’s OK. It won’t be fun to endure a slowdown, but the upside is that contraction is the natural response to an extended period of economic growth, and western PA has had the growth. Moreover, the next wave of growth, be it from more tech jobs, healthcare or energy, is already building to keep the downtown relatively short and shallow.

Is the Commodities Chokehold Over?

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At noon today, the spot price for oil had recovered about half its losses to sit at $97 and change per barrel. Earlier the price had plunged to just over $93. Gold was up to $780 an ounce, but that level is some $300 below its mid-summer high.  Copper was down to $3.13 per pound, almost a dollar a pound off its summer high (which was almost a record level). After more than a year of rapidly increasing commodity prices, the world’s cooling economic outlook may finally have broken the fever tht has infected basic materials and buildings products for construction.

About the only thing looking up today is diesel, and even that is trending back. Hurricane Ike had plowed into literally the worst spot in North America for the refining business, the channel that runs from the Gulf, through Galveston Bay and into Houston’s refinery row. But as the storm receded another day it looks like damage will be minimal. Some enterprising sorts in the Gulf and Florida have jumped prices at the pump by 50 cents or more (one group of knuckleheads added a buck on Saturday and are now in possession of indictments from the Florida Attorney General’s office), but locally the price of diesel has gone up a dime or less.

The parts of the world that were driving high prices for oil, steel, copper, aluminum, etc. are beginning to slow down. China expects to become a net exporter of steel by 2009. India’s infrastructure needs to catch up to its growth again. The European Union nations, which consume roughly two-thirds what the US does, is experiencing the same kinds of problems (housing slump, reeling financial firms) our economy is, and will be in a recession by the start of 2009. So there is a real decline in demand for the pereviously overheated commodities worldwide. And, as usually happens, the rising prices spurred expansion of supply capacity, which will come on line just as demand craters for a lot of basic materials.

Don’t be surprised to see oil below $75 after Christmas. If the illiquidity in the financial markets continues until that time, there will likely also be a double-digit decline in non-residential construction nationally, which will further pressure prices. None of this is new, of course. After the last oil crisis in the late 1970’s triggered a global recession, prices of commodities gradually and steadily declined until they hit record lows in the mid-1980’s (remember gold at $300/ounce, oil at $10/barrel?).

In Pittsburgh, some of this nonsense will have an effect on our economy, but overall we have become insulated by skill and luck from this economic wretching. Perhaps PNC Bank is the best example of our good economic fortune: as the rest of the banking business was being clobbered today, PNC’s stock prices fluctuated with 5% of its 52-week high.

There are some potential bad consequences to a commodity bubble bursting, but all-in-all a pull back shows that markets will swing back towards equilibrium. At the very least, falling commodities will mean falling building components. For a region which continues to have demand for new construction at high levels, cooling commodities makes pro formas that much more appealing.

Don’t panic.