The Second Line of Dominoes.

financial dominoes2007 saw virtually every financial sector face decline. My own holding in Irish Lifes ‘BankScope’ took a pounding worthy of the national Football team.

One thing you won’t hear many analysts talking about is what the knock on effects may be and where the next disaster may strike, because like many things, money has a knock on effect on other areas, in the same way that expensive oil makes chocolate bars more expensive (It is more in transportations costs to get the chocolate to the shops etc. so at some time there will be a degree of cost push inflation).

So today I will try to consider other areas that may suffer, and some of them are as follows: Automobiles, luxury goods, building materials, and heavy machinery. Naturally there will be some rationale behind this. So I’ll start.

Automobiles: They are inadvertantly tied to the same financial markets that the banks are tied to, the cost of funds has risen and because of the increased risk on car lending (even though it is a secured asset) will play a role in defaults, if people default on their home – which they live in – then they will default on the car in the driveway of that home. For the majority of people (and this is based on gut feeling I don’t have a statistic for this) I believe the roof over their head counts for more than their car. So if people are not paying off mortgages then you can bet that soon car finance will take a big blow, car finance has the issue of dealer distribution as well, because dealers who sell the car often do it on finance and if people are not buying the cars you may see some car dealers go under especially the ones with high overhead or high stocking costs where their holdings are cars that are not selling: watch the luxury dealers in particular, cars over the 100k mark are not shifting at all based on my perusal of ads on the internet. The end result is that car manufacturers will eventually reflect these changes in the form of reduced share prices.

Luxury Goods: Always the first victims of a falling market, if the market was a genuine warzone they would be the front line infantry, armed only with a can of beans and a rock, they get hit hard fast and die a quick death during recessions. I don’t think this sector requires more than two lines to explain. Done.

Building Materials: If housing takes a plunge and confidence world wide in property is falling then the domino effect will mean that the people making the things houses are made from will feel the pinch next, because there are properties being built and they will likely go to completion it will not hit the building materials providers as fast as the actual builders or estate agents but rest assured that these sectors will take the hit next. There was a protest today outside the Dail by construction workers who were concerned about employment agencies who were providing workers at below the standard rates. When jobs are plentiful people will just go where the good pay is, now that sites are closing and folks are getting laid off its call coming to the fore. If the workers are not on sites then the same amount of materials are not being used and thus the stocks of various materials providers will likely dive soon, it may be CRH or KingSpan, but one fact is clear, the fundamentals are pointing towards a downward cycle for companies in this sector.

Heavy Machinery: The big machines that quarry stone, dig huge pits etc. will see less usage and thus less parts will break, and then the building sites they might be working on don’t need them and so the capital outlay will not be paid out to buy new heavy machinery (cranes, buldozers etc). However, this will be to companies that are concentrated on smaller heavy machines, the ones that are making the mega-trucks that are using in opencast mining will probably do well as the commodity prices will give those sectors a boon.

Its vital to look at the second round of fallouts and not just concentrate on the first line of fallen soldiers, so watch this space and we’ll follow this story up in the near future

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