What's Important in the Financial World (5/16/2012) New Greek Elections, Oil Prices Fall

It appears increasingly likely that concerns about the future of Greece will depress equity markets worldwide. Politicians in the country have failed to set a coalition government, despite several efforts. The chance that Greece will withdraw from the eurozone has heightened as new elections may be called in a matter of days. Those elections could be held a month from now. Politicians who reject austerity measures as a means to gain financial aid likely will do extremely well. The relationship of the southern European country to its neighbors is in limbo. But the actions of such a small nation have pulled down stocks in Asia and Europe, and they continued to do so today. Most major indexes have fallen many of the days in the past two weeks. Part of the cause for the sell-offs may be concerns about a global economic slowdown, but each piece of news from Greece is the trigger for additional lack of belief in equities.

Oil Prices Fall

WTI crude reached a six-month low, which is positive news for nearly everyone other than the oil and gas industry. The price moved below $92, down from close to $110 less than 90 days ago. One reason is that U.S. supplies of oil are higher than expected. But the most substantial reason is belief that demand in Europe will be historically low for this time of year. A drop in the rapid expansion in China’s gross domestic product may also be a cause for lower prices. The most important effect on the U.S. economy is that gasoline prices are plummeting. The cost for a gallon of regular based on a nationwide average calculated by the AAA is $3.728, compared to $3.727 the day before and $3.907 a month ago. The fall from the year ago price of $3.955 is extraordinary. The price of premium appears ready to drop below $4 for the first time in months. There is school of thought among some economists that whatever factors might slow U.S. GDP growth in the middle of this year will be partially offset by the lower cost of gas for American families that live paycheck to paycheck. With regular gas above $4, many could not be consumers of anything other than bare necessities. As gas prices fall, that should change.

GM and Facebook

Investors do not seem to care that General Motors (NYSE: GM) has dropped Facebook as an advertising medium. The press made a great deal of the news, but GM’s investment was only a few million dollars over the past year. Maybe skeptics about Facebook’s future reason that other very large advertisers will be unhappy with the result of their marketing on the social network and will withdraw as well. But, in the face of the GM news, Facebook as raised the number of shares it will sell in its initial public offering to 421 million, according to several media reports. That is up 25% from the number expected just a few days ago. This would set the amount of money collected by Facebook at $16 billion and value the company at over $110 billion. Many analysts believe that Facebook’s valuation is much too high. But that has not stopped a nearly insatiable appetite for ownership in the company. Perhaps Facebook users want to be shareholders are well. It works that way with Apple (NASDAQ: AAPL), so there is a precedent.

Relational Investors vs. Pepsi

Shareholder activist firm Relational Investors has bought $600 million of PepsiCo (NYSE: PEP) shares, according to the Wall Street Journal. Large companies are not immune from the kind of attacks recently experienced by AOL (NYSE: AOL) and Yahoo! (NASDAQ: YHOO). The market has been concerned about the stewardship of Pepsi CEO Indra Nooyi for some time. Soda sales have dropped in many parts of the world, in part because of health concerns. That has caused Pepsi and rival Coca-Cola (NYSE: KO) to rely more on sales of bottled water, noncarbonated drinks and snacks. Soda sales have been so huge for so long that replacing them is almost impossible. PepsiCo is too large for almost any one shareholder to attack. Its market capitalization is more than $100 billion, so the Relational Investors position is inconsequential, whether or not the group has reasonable concerns.

Douglas A. McIntyre