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General Electric, Siemens, Medtronic, Bristol Myers and BP

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^{Published in Business and Finance on Friday, June 11th 2010 at 14:10 GMT by Market Wire}  

CHICAGO--([ BUSINESS WIRE ])--Zacks.com Analyst Blog features: General Electric (NYSE: [ GE ]), Siemens (NYSE: [ SI ]), Medtronic (NYSE: [ MDT ]), Bristol Myers (NYSE: [ BMY ]) and BP (NYSE: [ BP ]).

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Here are highlights from Thursdaya™s Analyst Blog:

Trade Trouble, but Less than Thought

As the world economy started to recover so did the price of oil, and once again our trade deficit has started to deteriorate. This does offer some hope on the trade picture going forward, as the trouble in Europe has caused oil prices to fall again, but nothing like the collapse in late 2008. That effect, though, is likely to be swamped by the loss of U.S. competitiveness on the non-petroleum side as the Dollar has soared and the Euro collapsed in recent months. Keep in mind that this data is for April, and thus is before most of the Greek Drama effects had time to hit, both in terms of the price of oil, and the strength in the Dollar.

The effect of changes in exchange rates often works with a bit of a lag, and the initial effect of a strengthening currency can actually be a decline in the trade deficit (it costs fewer dollars to buy the same quantity of stuff when the Dollar is worth more) but that effect is eventually swamped by the fact that people can get similar goods at cheaper prices from countries with weaker currencies.

For example, a Chinese hospital might have already ordered an MRI machine from General Electric (NYSE: [ GE ]), and with the Dollar stronger, it will show up as being worth more. However, for the next machine the Chinese hospital wants to buy, they might discover that the Siemens (NYSE: [ SI ]) product is just as good (or almost as good), but since the Euro is very weak, they can get the Siemens machine significantly cheaper in Yuan than it would cost to buy another GE machine. This is what economists refer to as the "J-curve."

I tend to worry far more about the trade deficit than I do about the budget deficit. It is the trade deficit that is responsible for our increasing indebtedness to the rest of the world. For each dollar of the trade deficit, we either have to sell off an asset worth a dollar or go into debt for a dollar.

If one thinks of it in terms of selling assets, the picture becomes more clear. In April, we effectively sold off the equivalent of Medtronic (NYSE: [ MDT ]) after we sold off the equivalent of Bristol Myers (NYSE: [ BMY ]) in March. How much longer can we keep that up before we have nothing left?

Remember that every dollar that the trade deficit goes up, there is a dollar less of GDP. If we could eliminate the trade deficit, we would increase GDP by $483 billion at the April rate, or 3.3%.

The core of our deficit problem is our addiction of oil. That actually understates the problem in calling it an addiction, since we really need it to survive. It is kind of like saying a diabetic is addicted to insulin. The BP (NYSE: [ BP ]) disaster in the Gulf really highlights that we cannot drill our way out of the problem. At best, domestic oil drilling can mitigate the problem, but clearly it has to be far more regulated and controlled to make sure that it is done safely than we have seen in the past. Having regulators that are not LITERALLY in bed with the industry they regulate would be a very good place to start...

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