Euro Zone consumer prices fell 0.6% in January vs. the previous year. Services inflation, traditionally more domestically driven, fell to 1%, according to Eurostat. Meanwhile, core inflation—excluding food, energy, alcohol and tobacco—was just 0.6%, the lowest on record.
Largely due to the price wars among major world oil producing countries, the crude oil price has tumbled more than 50% since last summer. The magnitude of the drop within such a short period is astounding and has caused great confusion regarding its impact. How will it affect different sectors and companies? Is it overall a good or bad thing for investors?
There is no doubt that plunging oil prices is a disaster for the energy sector. Hailed and embraced by many as a revolutionary growth sector for decades to come in recent years, the sector may suffer as much as the technology sector experienced during the aftermath of the explosion of dot com bubble. However, the damage might not be contained to the energy sector, currently only 8% of the S&P 500 Index. Industrial companies that supply equipment to energy companies may suffer, financial companies that lend money to the energy sector may suffer, lodging and leisure companies that serve mostly the energy companies may suffer, etc. Some quintessential American industrial companies have already mentioned their exposure to the energy sector as a source of disappointment in their recent earnings release and more may come if oil prices keep plunging or simply stay at current levels.
There is no doubt either that plunging oil prices should boost consumer spending and thus the companies could benefit from rising consumer demand. However, compared with the damage to the energy companies that is swift and relatively easy to quantify, there is a delayed effect on consumer behavior and it is far more challenging to quantify the benefit. Corporate America, especially the energy companies, is the most capitalist and efficient entity on earth. Energy companies essentially drill for profit/money not for oil and they have already reacted to plunging oil price through merger & acquisition, cut in spending and mass layoffs. Unlike Corporate America, consumers do not react to oil prices in real time. Just because a consumer saves $100 last month on gasoline does not mean they will “pre-spend” $1,200 projected savings of next year or even spend $100 more next month. The average consumer probably has not figured out the amount of the savings or does not even bother to do so yet. Plus, they might be skeptical on how long oil prices will stay low. It takes time for consumers to change their spending behavior and boost their spending even if they are convinced that low oil prices are here to stay.
It is even trickier for companies that may potentially benefit from rise in consumer demand to figure out the exact benefit. Consumer discretionary companies in theory are the biggest beneficiaries of plunging oil prices, as consumers can spend their gas savings on things like restaurants, clothes, etc. However, this is also a very competitive sector and gaining advantages over their competition is far more important than how to benefit from macro factors, such as lower gasoline prices. That is why while energy companies and other potential “victims” of plunging oil prices are busy slashing their earnings projections, very few potential “beneficiaries” advertise their good fortune.
In conclusion, the damage of plunging oil prices to the affected companies is generally front-ended and relatively easy to quantify. The potential benefit is more back-ended (the time lag effect) and difficult to discern. While low oil prices are a net positive for the U.S. economy and companies, especially in the long run, the sudden change is likely to cause confusion and turmoil in the short term.
HOW MUCH?
The European Central Bank has finally decided to use a policy tool that has already been employed by the U.S. Federal Reserve, the Bank of Japan and the Bank of England. It will buy a mix of government and other bonds at a rate of €60 billion a month until September 2016 at least, and possibly for longer, using freshly created money in an effort to reverse a fall in consumer prices that began in December, and raise the inflation rate towards its 2% target.
WHAT IS IT?
Known as quantitative easing (QE), the policy is employed when interest rates have hit zero and is an alternative way of providing monetary stimulus. The policy is intended to work by lowering long-term interest rates, thereby encouraging investment, which has been very weak in the euro-zone. It also signals to consumers and businesses that the central bank is committed to reaching its inflation target. Raising inflation expectations is another way of lowering the real interest rate.
WAS THERE CONSENSUS?
The 25-member governing council’s wasn’t unanimously in favor of the new program. While the vote breakdown will not be published, it’s likely the decision was opposed by the two German members, and possibly others. German policy makers don’t believe there is a risk of deflation in the euro-zone, while Germans also worry that QE is a form of central bank financing of government deficits, a taboo in the euro-zone’s largest members. German policy makers also fear it will ease pressure on governments to press ahead with painful economic reforms.
HOW WILL IT WORK?
Each of the 19 central banks in the euro-zone will buy bonds issued by its own government, and take the losses should that government default. That’s intended to prevent taxpayers in one country from taking a hit from debt problems in another, but critics say it raises questions about the coherence of the euro-zone, revealing deep, underlying splits within the currency area.
HOW WILL IT HELP?
One immediate way that QE may aid the euro-zone’s economic revival is by pushing the euro lower against other major currencies, or at least ensuring its depreciation since May isn’t reversed. That could help exporters and increase output, while it could also help raise inflation by making imported goods and services more expensive in euro terms.
Click here to see charts that explain the above: http://on.wsj.com/1BiLtBw
(Source: WSJ)
U.S. consumer prices rose at 0.8%, the slowest annual pace in more than five years in December and are poised to slow further in coming months amid the global plunge in oil prices. That was sharply slower than the 1.3% annual growth pace seen in November, and the lowest annual reading since October 2009.
Excluding the volatile categories of food and energy, so-called core prices rose 1.6% on the year, slowing from a 1.7% annual gain in November and 1.8% annual growth in October.
(Source: WSJ)
Venture capitalists invested $48.3 billion in 4,356 deals in 2014, an increase of 61 percent in dollars and a 4 percent increase in deals over the prior year, according to the MoneyTree™ Report by PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data from Thomson Reuters. In Q4 2014, $14.8 billion went into 1,109 deals. Internet-specific companies captured $11.9 billion in 2014, marking the highest level of Internet-specific investments since 2000. Additionally, annual investments into the Software industry also reached the highest level since 2000 with $19.8 billion flowing into 1,799 deals in 2014. Dollars going into Software companies accounted for 41 percent of total venture capital investments in 2014, the highest percentage since the inception of the MoneyTree Report in 1995. “With the fundraising environment improving in 2014 and non-traditional investors increasingly joining venture capital firms in later-stage funding rounds, more capital was deployed to the startup ecosystem in 2014 than any year since 2000,” said Bobby Franklin, President and CEO of NVCA. “
Read the full article here: http://bit.ly/EWM2014VCInvestment
(Source: PWC)
In the next thirty years, it is estimated that over $16 trillion will be transferred to a younger generation as the ultra-high net worth individuals (those with wealth in excess of $30 million in assets) pass their wealth on to their children. Of this wealth, at least $6 trillion is expected to occur in the U.S. Most of those passing on their wealth will be first generation, or self-made individuals, or those that have little or no experience with wealth succession planning. Without adequate planning, up to half of these fortunes may be captured by inheritance taxes, as estate taxes can be as high as 50% in some developed nations. Source: Wealth-X and NFP Family Wealth Transfers Report.