Y = F(C,L) Economics simplified.

Y(output)=a function F of capital C and labor L.

This is a very simplistic  representation of how things work. Capital goods and labor are the two major inputs to produce something. Typically a whole range of combinations of capital and labor can be used to produce something. The (theoretical) equilibrium would be found at that point where the marginal utility of the capital and labor inputs are equal. For the sake of simplicity lets just assume the production process was in equilibrium before the second great depression started. The reduction in interest rates, essentially to zero and, on a real basis to as low as –4%, substantially reduces the cost of capital, certainly compared to the rather rigid labor costs. The net effect is that producers will try to change the mix of the two input factors such that more capital will be used to the detriment of labor, that is jobs. This shift in mix is amplified further by recent tax and accounting changes that allow faster depreciation of capital assets and more favorable tax treatment.

     That this is happening big time is clearly illustrated, for instance, by the number of geothermal units installed, compared to the sales of fire wood. The geothermal units are very expensive (capital intensive ) but require no labor once installed. Firewood is extremely labor intensive. You see this happening to a great extent especially in rural areas. It simple kills jobs.

    The Fed. amazingly enough has not given much thought to this unintended side effect of their policy (another conundrum??). Rather than propping up the stock markets and hoping the wealth effect will kick in at some point (need another 35% up ,according to some), raising interest rates may do the job a lot quicker.

Recent take-overs, mergers and B-waves.

Danaher Corp’s , DHR, recent take-over bid was done rather precisely at the peak of a B-wave in the target stock Beckman Coulter, BEC. Both are shown below;

dhr bec

Note that the “currency” of the take-over (stock/cash) is at a high as DHR is quite obviously peaking. What is more interesting is that the target, BEC, is also at a high. It would seem that the “relative” values are less important than that they are at highs. This phenomenon can be observed in quite a few of these situations recently. Here are just 2, Ensco and Pride International Inc. , PDE, and the TSX, X.

pde x feb 2011 big

All are at double tops and have completed clear B-waves. except the Toronto Stock Exchange X. All are sells.

EWG , German ETF

The DAX is close to having recouped all of its losses. For some reason this is not the case for quite a number of related indices such as the Euro Stox50 and EWG. Not sure why but may have to do with the composition and weightings used. Anyway, here is the EWG.

ewg

Clearly we are not even close to the 2007 highs, having regained just 61.8%. We wonder if this is a better reflection of reality. If so this market could soon be in trouble.

X Toronto Stock Exchange.

x feb 2011

The TSE does in six months what it took one hundred years to do. Everyday we are up 50/100 points no matter what the news. We have one Fed. member saying that we are pushing the envelope. another saying that we should seriously review QE2. China increases interest rates, now at about 6%-plus, but here in Canada we still believe the nonsense about our great banking system etc.etc. I will stick to the basics. This is a sell, period!

The stock looks to open today at around $42.60 up about 2 1/2dollars from yesterday’s close. The TSX will end up as a minority shareholder of the new company, clearly it is seen as the pig in the Ham & Eggs joint venture. There are lots and lots of regulatory issues that need to be dealt with and one can only wonder how they are going to assert that this is in the interest of Canada after the Potash nonsensical position. The OSC, which has no teeth will have to step aside for the English version, FSA. All of this can get very messy! Reported earnings for the quarter (came out this morning) were lower than expected and below last years by about 20% or so.