Inflation expectations – Much squealing this week as deflation returned to the eurozone in December. But the reality is inflation expectations are falling faster in America. Over the past year the five-year-five-year measure declined 60 basis points in the eurozone and 70 basis points in the US. One explanation is the differing faith central bankers place on the measure itself. Mario Draghi highlighted the five-year-five-year in a speech last August, but Janet Yellen dismissed the gauge last month as “inflation compensation” rather than expectation. Hence if markets believe the metric is important to Mr Draghi any fall increases hopes of a policy easing. That in turn raises expectations of future inflation and limits the original decline. Conversely if Ms Yellen is prepared to tighten policy while disregarding the five-year-five-year, it can fall further. Inflation expectation measures are hostage to central bank beliefs.
Oil – The price of oil affects everything but the supply and demand of oil – at least in the short run. Supply is determined by the cash cost of operating rather than total production costs that include the sunk costs of exploring fields and drilling wells. Wood Mackenzie data show that with Brent at $50 only 0.2 per cent of global supply is rendered cash negative. Even at $40 oil just 1.6 per cent of production is threatened. Meanwhile on the demand side 60 per cent of global oil consumption is for transportation. But the EIA estimates that automobile travel is practically unaffected by oil prices. A 50 per cent price drop increases miles travelled by just one per cent – three miles on a trip from New York to Martha’s Vineyard. If supply and demand won’t budge, how is oil to stabilise?
Yahoo – The new book “Marissa Mayer and the Fight to Save Yahoo” reminds readers the internet company once missed a chance to buy Google. But do not forget Yahoo also turned down a $45bn approach from Microsoft in 2008. Double-doh! Today Yahoo is finally worth more than that again following a 150 per cent rally in its stock price over the past two years. What now? Ms Mayer struggles with a three per cent market share in mobile advertising sales and video viewership levels below a tenth of Google’s (video ad prices are five times higher than banner ads). Bulls see this position as pure potential. And there is certainly operational upside too – for example, Yahoo’s costs are 85 per cent of revenues versus 70 per cent at Google. Rumoured mergers or acquisitions may be bottom-line rather than top-line plays.
Asian banks – Will the market cap of Australia’s banking sector remain larger than India’s? Should you buy Chinese ahead of Japanese banks on one times book value given the former’s price/earnings ratio is half the latter’s? Such are questions for Asian bank investors in 2015. For those positive on the US the last quarter century suggests the region’s lenders, excluding Japan, outperform global stocks by at least a tenth when American economic growth exceeds 4 per cent. Likewise when oil prices have fallen by more than a third over six months you wanted to own Indian, Indonesian and Chinese banks while avoiding the likes of Standard Chartered, which coincidentally on Thursday said goodbye to Asian equities. Speaking of lost business, what would higher interest rates in the US mean for the near tripling of dollar-denominated debt issued by Asian corporates since 2009?
CES – This week five thousand exhibitors have been revealing their latest gadgets at the annual International Consumer Electronics Show in Las Vegas. Among our list below of favourite new products one is made up – can you guess which? A compact digital projector that can display an image 25 times larger than a 60 inch television screen. Smart cutlery. Bluetooth speakers that float in your swimming pool. Phone-controlled insectoids that leap two feet into the air. A 3D chocolate printer. Self-adjusting trouser belts incorporating fitness trackers. A device that measures how high and often you jump. Kids’ sneakers with in-built computer games. A smart baby onesie. Touch screens made out of wood. An electronic workout chair. Glasses that allow users to see wifi signals. Robotic plant pots. Jewellery that vibrates when your phone rings. Email us your answer for the usual prize.
Here’s some more roundups from CES:
Cars at CES: http://bgr.com/2015/01/09/ces-2015-top-25-cars/