Things That Worry Me

When thinking about the current state of the economy and where things are heading, I think it is important to identify things that are potential de-railers. These can be things that may or may not occur, but it is important to think about them and their potential impact on companies and the market as a whole.

Here is a list of a few things that are on my mind currently. Please share your thoughts in the comments!

 

Rising Fuel Prices

Rising fuel prices scare me because they impact the entire economy in so many ways. First, the fixed income consumer must reduce their spending to accommodate higher fuel prices (this includes both low-income and retirees). Second, everything relies on fuel – making goods, transporting goods, powering buildings that provide services, etc. This usually equates to higher prices on pretty much everything. Did you know that the average semi-trailer costs $2,000 in fuel alone? If it is hauling groceries, it is no wonder food prices rise.

With rising fuel prices, there is always the concern for inflation, which leads me to the next fear. However, in the short-term, rising fuel prices should benefit large integrated oil companies, such as Exxon and Chevron.

 

Rising Interest Rates

If the Fed starts hinting at possible inflation in the economy, it will start to raise interest rates. This scares me for several reasons. First, it could lead to a period of stagflation, where rising rates lower economic growth across the economy. Second, I currently love Agency REITs, and REITs rely on low interest rates to fuel their returns and provide high dividend yields. Rising rates will severely impact this market, and make it less palatable.

If rates do rise, it will also decrease consumer borrowing, which could slow the housing recovery even further. The best play I see with rising interest rates is to move into an apartment REIT or self-storage REIT. These REITs generate their income from the rents received. With less people going to purchase homes, rental rates should continue to rise.

 

The Impact of the Japanese Tsunami

The impact of the tsunami on manufacturing in Japan scares me. A lot of high-tech manufacturing was disrupted by the tsunami, and I fear it will take several quarters to get this back online. Right now, if you walk into any retailer’s electronics section, you will see a lot of holes, and even some signs saying that “Due to the events in Japan, we will be out of stock.” If there aren’t products for consumers to even buy, how can we expect retailers to deliver profitable sales in the next few quarters. This could lead to poor consumer spending and company results in the next few quarters. Especially since many retailers are starting to place their holiday product buys right now.

Furthermore, property insurers have taken a big hit in the short term, and may take several quarters for them to make up for the losses. This has lead to a deterioration in this sector, and with more storms ravaging the Southern United States, and hurricane season coming, it could be a bad year for insurance.

To combat this, I would stay out of retail stocks, electronics stocks, and property insurers. There may be plays in groups health coverage or other insurance, but cash may be just a smart a play.

 

When investing, it is huge to look at the potential pitfalls. Does anything else scare you in the near-term? Long-term?