ArcelorMittal, the world’s largest steelmaker provided one of the most realistic outlooks on the potential negative ramifications of QE2. Their story is, I believe, an excellent representation of what is going on currently. Earnings were actually quite strong, however, they continue to see low capacity utilization, weak end demand and are now seeing higher input costs.
Sales were up 30% year over year with EPS rising 48%. The report itself was very good – something we’ve seen consistently this earnings season as the margin story continues to bolster profits. CEO Lakshmi Mittal said the business performed okay, but there remain headwinds:
“The business performed towards the lower end of our expectations against a background of seasonally lower volumes, weakening spot prices and higher costs. Our outlook for the fourth quarter remains cautious as the expected higher input prices continue to work through the business and demand remains muted.”
The key here for investors is the higher input costs and weak end demand. The commodity surge we’ve seen in recent months has been due in large part to the declining dollar and fears of “money printing” at the Fed. Ultimately, with weak end demand this becomes a margin compression story. Mittal says his company is having trouble passing along the higher costs:
“We made some attempts to pass on price rises but those price rises did not stick”
This is Richard Fisher’s “darkest moment” – the unintended consequences of trying to talk inflation into a market. This has potentially broad ramifications if it begins to influence corporate margins (which it will). Corporate executives are likely to defend their margins given the weak economic environment. This could mean a continued hesitancy in hiring. Clearly, this one company does not represent the entire market of companies, but this is likely a story we will hear more and more in the coming quarters if commodity prices remain high and end demand remains weak. After all, QE2 doesn’t create jobs, but it does create fears of inflation. The Fed seems to think this is all good for the economy. And the markets trust them – for now.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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