consumer spending
Japanese Stocks in a Bubble Again?
By George Leong for Investment Contrarians | May 23, 2013
Japan is currently on cloud nine, with exports bursting out of the gate and Japanese stocks flying high. The benchmark Nikkei 225 index in Japan is up a whopping 48% this year.
Fueling the massive climb in the stock market has been the steady decline in the value of the Japanese yen triggered by the significant money printing by Prime Minister Shinzo Abe’s strategy to inject $2.4 trillion into the Japanese economy over the next decade.
It’s the same everywhere you go around the world. Money printing triggered by record-low interest rates and major monetary and fiscal stimulus is driving the economy and spending.
Yet what about the impact on the inflation rate of the importing country?
The devaluation of the yen against the greenback and other major global currencies makes Japanese goods much cheaper for foreigners, but it also creates a higher inflation rate for Japan.
In the chart below, the gap (as indicated by the blue oval) that has developed between the yen (as shown by the red candlesticks) and the U.S. dollar (as reflected by the green line) is clearly shown. In my view, while Japan is currently seeing growth, the country’s strategy is risky.
Chart courtesy of www.StockCharts.com
The widening gap between the two currencies will present problems in the future for the Japanese consumer due to the rising inflation rate.
Let me explain: the weak yen translates into higher prices paid for imports as more yen are required to pay for the same goods now than in the past.
For now, import prices are starting to edge higher—slowly but surely.
Over time, if the yen … Read More
Consumers Spending Less; Just Ask Wal-Mart
By George Leong for Investment Contrarians | May 21, 2013
All of the talk about the negative impact of the sequestration on consumer spending appears to have some validity.
While the rich consumers are continuing to spend on luxury items, those who are making less money and are influenced by the fragile jobs market and flat income levels continue to worry, which could likely impact consumer spending going forward. The effects of this, along with the widening gaps between the rich and the poor and the middle class are affecting consumer spending by Americans. In fact, we are seeing a widening income gap in many countries around the world, so it’s not just an American phenomenon—its impact on consumer spending is global.
Wal-Mart Stores, Inc. (NYSE/WMT) is a good barometer on the state of consumer spending around the world, especially with the lower- to middle-class consumers.
The company reported its results last Thursday, and it seems like Wal-Mart is facing some hesitation in consumer spending.
In the fiscal first quarter, the company’s net sales grew a mere one percent year-over-year to $113.4 billion, which was below the Thomson Financial consensus estimate of $116.4 billion. The sales reading was also shy of the low range of the estimate of $114.6 billion.
The low-cost retailer blamed the decline in consumer spending on a delay in tax refunds, adverse weather, and the rise in payroll taxes. The key comparable U.S. store sales fell 1.4% for the 13 weeks ended April 26, 2013, which represents the first contraction in this key metric in many quarters.
My concern is that Wal-Mart is facing sales pressure at a time when money is cheap. What will happen … Read More
Why Today’s Weak Durable Goods Numbers Foreshadow Low Confidence
By George Leong for Investment Contrarians | Apr 26, 2013
Consumers appear to be holding back on buying non-essential goods, and this could impact the economic recovery.
The durable goods orders contracted a dismal 5.7% in March, according to the United States Census Bureau, representing the largest decline in seven months—a far cry from the 4.3% rise in February and well below the Briefing.com estimate calling for a four percent decline.
Taking out the volatile transportation portion, durable goods fell 1.4%, versus the Briefing.com estimate of -0.1%, equaling the second straight month of declines.
The durable goods readings have largely been inconsistent, as reflected in the chart below, and suggest the economic recovery may be at risk.
Chart copyright © Lombardi Publishing Corporation, 2013;
Data source: United States Census Bureau, April 25, 2013
When consumers are more confident, they tend to spend more on major purchases in the retail sector, such as homes, vehicles, furniture, appliances, and travel. This will impact the economic recovery, gross domestic product (GDP) growth, and the ability of companies to expand their businesses.
But whether it’s the added taxes or the fragile confidence from the lack of strong jobs growth, the decline in the demand for goods that are deemed non-essential should be a red flag that not everything is proceeding along smoothly, which could affect the economic recovery.
The fact remains that jobs creation is fragile and not expected to ratchet higher until 2014 and 2015, due to the slow economic recovery.
The recent 88,000 jobs created in March was weak, so it will be interesting to see what happens with the April non-farm payrolls reading due next Friday.
Retail sales have also been … Read More
Don’t Be Fooled by the Retail Numbers—Just Be Selective
By George Leong for Investment Contrarians | Apr 16, 2013
When interest rates are as low as they are and consumers begin to hold back on their spending, you have to wonder about the prospects for the retail sector going forward.
With the higher taxes on those earning over $400,000 and other tax increases as a result of the sequestration, we may be seeing some evidence of reduced spending.
The U.S. Department of Commerce said retail sales in March contracted by 0.4% on both a headline and an ex-auto basis, which was below the Briefing.com estimates of flat sales and 0.3%, respectively. This was the second decline in retail sales in the last three months.
While it may be premature to assume a new downtrend for retail sales, I wonder if the decline in take-home pay for some Americans has resulted in less consumer spending.
Or, it may be the softness of the jobs market that is making consumers nervous. With only 88,000 new jobs created in March, the jobs numbers must have had some impact on consumers and the retail sector.
Even consumer sentiment appears to be fading a bit as evidenced by the Thomson Reuters/University of Michigan Consumer Sentiment Index reading of 72.3 in April. This reading represented the worst reading since July 2012, and it’s well below the 76.0 estimate by Briefing.com and the 78.6 reading in February.
According to my estimate, the retail sector continues to be full of opportunities, but you also need to be careful on what retail stocks you buy.
You would have been sideswiped if you bought J. C. Penney Company, Inc. (NYSE/JCP), as the company posted horrible results and subsequently fired … Read More
America’s Auto Sector Says Thank You to Mr. Bernanke
By George Leong for Investment Contrarians | Apr 4, 2013
The impact of the Federal Reserve’s low interest rates and easy monetary policy can be seen everywhere. The housing sector is seeing another boom thanks to the Federal Reserve. So is the retail sector and consumer spending, in spite of the fact that jobs growth is not at pre-recession levels. The Dow and the S&P 500 also achieved more records on Tuesday. Again, the stock market wealth and all of the 300,000 or so newly minted millionaires have the Federal Reserve to thank.
On Tuesday, the automobile sector joined in on the fun, as easy money and cheap financing rates for new vehicles helped to drive up sales to the highest levels since 2007.
At Ford Motor Company (NYSE/F), sales increased six percent to 236,160 vehicles sold in March, while at General Motors Company (NYSE/GM), sales jumped 6.4% to 245,950 in March.
You can get a 60-month financing term for a new vehicle for as little as 2.24% at the Bank of America Corporation (NYSE/BAC) and 2.69% at Capital One Financial Corporation (NYSE/COF). (Source: “Auto Loan Rates,” My Bank Tracker web site, last accessed April 2, 2013.) The average 60-month rate is around 4.12%, according to Bankrate.com, down from 4.52% a year ago.
You can also thank President Obama for helping to save the auto sector, as the move is apparently paying dividends.
While the renewed spending across America is good for the economic recovery, you kind of have to wonder about the ramifications down the road, when interest rates begin to ratchet higher.
Some members of the Federal Reserve are already beginning to voice their opinion to start reducing … Read More
Fed’s Easy Money to Cause Next Financial Meltdown
By George Leong for Investment Contrarians | Mar 14, 2013
The Federal Reserve may be responsible for the biggest financial meltdown yet to come. In fact, this meltdown could be even bigger than the subprime mortgage crisis in 2008.
Let me explain. We all know the Federal Reserve has created an artificial economy that has been built on the availability of easy access to cheap money due to near-zero interest rates. There is no argument here. Via its aggressive quantitative easing programs, the Federal Reserve has produced an economy that is dependent on cheap capital.
Some would argue the Federal Reserve didn’t have a choice; if they didn’t introduce monetary policy, the housing market and banking system may have collapsed. I agree to that extent, but with the economy now in recovery, you kind of wonder why the Federal Reserve continues to allow the flow of easy money.
Recently at its January Federal Open Market Committee (FOMC) meeting, the Federal Reserve suggested that it would have to review the possible stoppage or slowing of its $85.0 billion in monthly bond purchases. The market reacted by selling stocks. Federal Reserve Chairman Ben Bernanke then came out and said that the central bank was committed to its monthly bond buying as long as the economy and employment remain fragile. So which is it? The Federal Reserve needs to really think about reining in its easy monetary policy and reducing the amount of the M2 (all money in circulation, plus savings deposits, time-related deposits, and market-money funds) money supply in the system.
Here’s the dilemma:
The climate of historically low interest rates has driven a false sense of comfort. Consumers are buying more … Read More
Shocking Data Could Sink These Stocks
By Sasha Cekerevac for Investment Contrarians | Mar 5, 2013
The American economy, as with most developed nations, is based primarily on consumer spending. With the collapse in the housing and stock markets several years ago, a big chunk of wealth evaporated overnight. This hurt consumer sentiment, which resulted in a significant slowdown in economic growth.
For economic growth to regain momentum, consumer spending needs to increase, but it needs to be based on a solid footing. It’s one thing if consumer spending was increasing due to higher disposable income, but it’s quite another if consumer spending was increasing due to higher levels of debt, which would lead to fragility when it comes to long-term economic growth.
New data from the Commerce Department stated that personal income declined by 3.6% in January, far worse than economists had expected. However, personal consumption increased by 0.2% in January. (Source: Sparshott, J. and Morath, E., “U.S. Incomes Fall, Spending Rises,” Wall Street Journal, March 1, 2013.)
The higher payroll tax is clearly hurting disposable income for most Americans. Disposable income, which is the amount of income left after taxes, decreased by four percent in January. According to the United States Department of Commerce, this is the largest decline on record. With economic growth being extremely weak, this type of decrease in income has the potential to severely impact consumer spending for some time.
This information was collected prior to sequestration. If budget cuts are to be enacted without revisions, it will be difficult to see how economic growth will accelerate through the remainder of the year. Consumer spending will most likely suffer at some point, because incomes are not growing, taxes are rising, … Read More
Market Decline Starts: The Stocks That Will Fall the Most
By Sasha Cekerevac for Investment Contrarians | Feb 26, 2013
One of the most important criteria for getting the economy back to optimal speed is for consumer confidence to begin accelerating. Much of a developed nation’s economy is based on consumer spending.
When making an economic forecast for a developed nation, taking into account shifts in consumer spending is extremely important. With new information raising doubts that consumer confidence will rise anytime soon, a more cautious economic forecast is necessary.
According to the Bloomberg Consumer Comfort Index, in February, the difference between positive expectations and negative expectations by consumers remained at –7 from the previous month. While current conditions by consumers in the Comfort Index rose during the week of February 17 to –33.4 from –35.9 the previous week, clearly, there is still a substantial amount of negativity when it comes to consumer confidence. (Source: Smialek, J., “Consumers in the US hold negative economic Outlook as fuel climbs,” Bloomberg, February 21, 2013.)
The composite reading in the Comfort Index shows a weak yet stable belief in the underlying economy. Interestingly, men have turned slightly more optimistic, with 34% reporting an improvement in the economy for February, versus only 24% in January. However, women turned more pessimistic in their opinion, with only 26% stating the economy is improving in February, versus 32% in January. Overall, the data points to continued weakness in consumer confidence.
I believe that several factors are causing this reduced level of consumer confidence. The obvious factor is the two percent increase in the payroll tax for Social Security. My economic forecast has to incorporate the lower level of take-home pay, especially for the middle- and lower-income earners…. Read More
Profiting from the Global Growth of the Middle Class
By Sasha Cekerevac for Investment Contrarians | Feb 20, 2013
While much of the text in American newspapers talks about the declining level of the middle class domestically, investors might be missing the greatest growth of wealth in history.
As investors, our goal is to determine which firms will report strong and growing corporate earnings. With much of the world increasing its wealth at a rapid rate, companies with international revenue and corporate earnings should do well over the next several decades.
According to the Boston Consulting Group, there will be approximately one billion middle-class consumers in China and India by 2020. While it took Britain 150 years during the Industrial Revolution to double income per capita (America took 30 years), China and India are moving at a much faster pace. (Source: “The Emerging-World Consumer Is King,” The Economist, January 5, 2013, last accessed February 15, 2013.)
This explosion in the global middle class will mean a massive increase in consumer spending for items that most North Americans take for granted. For companies that are able to serve this consumer spending demand over the next few decades, corporate earnings should rise substantially.
Some companies that immediately come to mind include Unilever PLC (NYSE/UL) and Kraft Foods Group’s international division, Mondelez International, Inc. (NASDAQ/MDLZ).
An increase in consumer spending by this growing middle class will drive corporate earnings for firms that can provide everyday items of better quality as well as snacks and foods that are beyond the basics needed for life to function. For life to exist, no one needs to drink a can of Coke or eat an “Oreo” cookie. And the hunger for sugary treats is not limited … Read More
Why You Need to Look to the Emerging Markets for Growth
By George Leong for Investment Contrarians | Jan 22, 2013
The key to the global economy is a rise in consumer spending. My view is that the emerging markets will continue to be an excellent place to invest some capital, whether it’s the BRIC countries (Brazil, Russia, India, and China) or the Southeast Asian “Little Tigers,” comprising Hong Kong, Singapore, South Korea, and Taiwan. I’m bullish on this area of the world. My reasoning is that the newfound wealth and growing middle class in these markets will drive consumer spending and economic growth.
Famed technical analyst Louise Yamada is looking positively at the emerging markets and believes they can outperform the U.S. market. (Source: Macke, J., “Emerging Markets Set to Outperform the U.S. Says Yamada,” Yahoo! Finance web site, January 17, 2013.)
A good indicator of global consumer spending patterns is MasterCard Incorporated (NYSE/MA), since the company has a presence in over 210 countries. In a third-quarter press release, MasterCard reported that its worldwide purchase volume surged 12% in the third quarter on a local currency basis. In the press release, MasterCard President and CEO, Ajay Banga, also noted that emerging markets continue to provide opportunities for growth. (Source: “MasterCard Incorporated Reports Third-Quarter 2012 Financial Results,” MasterCard Incorporated web site, October 31, 2012, last accessed January 21, 2013.)
What is interesting is the emergence of credit in the emerging markets, where cash has long been king. In these growth regions, the per-capita income is rising, helping to drive consumer spending and economic growth.
Just take a look at the iShares MSCI Emerging Markets Index (NYSEArca/EEM) chart that shows the stock market rally since mid-November 2012.
Chart courtesy of www.StockCharts.com
The … Read More
Why You Shouldn’t Believe Japan’s New Stimulus Will Work
By George Leong for Investment Contrarians | Jan 15, 2013
Japan, under newly elected Prime Minister Shinzo Abe, will aggressively try to get the country’s economy back on track after more than two decades of economic stalling, but it will not be easy. Armed with a new stimulus spending of $116 billion, the hope is that the stimulus spending will drive consumer spending and help revitalize an economy that has been in a comatose state. (Source: “Japanese government approves $116bn stimulus package,” BBC News, January 11, 2013.)
Abe is looking to add significant stimulus, including a whopping $2.4 trillion over the next 10 years to try to drive Japan’s gross domestic product (GDP) growth to spur its comatose economy. (Michael Schuman, “Will Japan’s New Prime Minister Start a Debt Crisis?,” Time, December 17, 2012, last accessed January 14, 2013.) But it will not be easy, as the past decades have shown.
Japan entered a technical recession in the third quarter of 2012, with its GDP growth contracting 0.9% and continuing to be impacted by decades of stagnant growth. In fact, from 1980 to 2010, Japan’s average GDP growth was a minuscule 0.6%.
The new stimulus sounds great, but there’s a problem, as the country’s debt levels represent some of the highest in the world and make the U.S. situation seem like a cakewalk.
Japan’s debt as a percentage of its GDP was a humongous 208% in 2011—the worst in the world, according to the International Monetary Fund. Greece, with its financial crisis, is comparatively better at 161%, and the U.S., with its crippling debt levels, is relatively strong at 103% in 2011. (Source: “List of Countries by Public Debt,” Wikipedia … Read More
The Rich and Poor Divide Isn’t Good for America
By George Leong for Investment Contrarians | Jan 9, 2013
There is a crisis in America, relative to the widening income gaps between the rich, the middle class, and the poor. This ultimately impacts consumer spending.
In the fiscal cliff talks, President Obama decided to compromise on the Bush-era tax cuts after raising income taxes on those individuals earning in excess of $400,000 annually and over $450,000 for married couples. These groups account for roughly the top one percent of income earners, according to the Tax Policy Center. (Source: “Fiscal Cliff Deal Will Raise Taxes On 77 Percent Of Americans: Tax Policy Center Analysis,” Huffington Post via Associated Press, January 2, 2013.)
The World Economic Forum suggested the widening of the income gap will have a global impact. (Source: “Income disparity, debt lead risk list,” Yahoo! Finance via Associated Press, January 8, 2012.)
The failure to achieve tax increases for all income earners making over $250,000 was a disappointment to President Obama, and it further increases the widening gap between middle-class America and the top one percent. With the income gap between the rich and poor widening, this is becoming more of a major issue that will need to be addressed, as it impacts consumer spending.
In my view, this is an issue that needs to be dealt with, as there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as an avenue for income distribution needs to be looked at. This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with … Read More
Why the Fiscal Cliff Deal Is Pathetic
By Sasha Cekerevac for Investment Contrarians | Jan 3, 2013
When it comes to making an economic forecast for the U.S. economy in 2013, a huge stumbling block was the uncertainty prior to the deal to avert the fiscal cliff. The just-announced new deal to avert the fiscal cliff is absolutely pathetic and will not accomplish what many were hoping for; a comprehensive long-term deal to lower the U.S. budget deficit and create an environment that will foster long-term gross domestic product (GDP) growth.
The level of uncertainty has recently started to impact consumers. The impact on consumer confidence was noted during the latest Conference Board Index in which consumer confidence fell six percent to 65.1 in December from November, the lowest since August 2012. (Source: “The Conference Board Consumer Confidence Index® Declines,” The Conference Board, December 27, 2012.)
GDP growth is heavily dependent on consumer confidence. Since the majority of the U.S. GDP growth is based on consumer spending, any pullback in consumer confidence is a worrying sign, with its potential for lowering an economic forecast for 2013.
An interesting dynamic was that consumers assessed that current conditions improved in December from the previous month. Business conditions rose to 17.1% from 14.6% the previous month; however, expectations for business conditions over the next six months declined to 17.6% from 21.3%.
This might seem contradictory, but it really shows that while the current economy is somewhat improving, the political grandstanding and ineptitude to avert the fiscal cliff have been increasing concerns for the future GDP growth of the American economy. This type of uncertainty will certainly put a damper on any economic forecast.
This new compromised deal has plenty of … Read More
Why “Plan B” Is Set to Fail
By George Leong for Investment Contrarians | Dec 20, 2012
The U.S. House of Representatives is planning to throw out a “Hail Mary” in the ongoing “fiscal cliff’ discussions, but I really doubt it’s going to work. Frustrated by the lack of a resolution to the pending automatic budget cuts and income-tax hikes, the Republican-controlled House is looking to push forth what they call “Plan B,” which extends the Bush-era tax cuts to those making less than $1.0 million.
This is no secret development that will resolve the fiscal cliffhanger and budget cuts, but the Republicans are proposing that their tax plan be passed in the House to try to avoid the fiscal cliff. The problem is that Plan B will not get approval in the Democratic-controlled Senate, so it will fail. President Obama has moved the threshold for the tax cuts to $400,000, up from the U.S. presidential election talk of $250,000, but we all know there needs to be some compromise.
Moreover, besides the tax cuts, the two parties are also divided on the budget cuts to Medicare and Social Security, the two largest components of the mounting $16.3-trillion national debt. The legal limit is $16.4 trillion, hence the need for the budget cuts.
As I have said in the past, we need to get the country working and back on its path as the world’s dominant economy and superpower. Of course, to achieve this status, the United States had to spend trillions on defense, another major area that will see budget cuts.
I love capitalism, and the idea that you can generate unlimited wealth to drive consumer spending. This is the reason why the United States is … Read More
Why the Ballooning Student Debt Should Be on Your Radar
By John Whitefoot for Investment Contrarians | Dec 12, 2012
We’re two weeks away from surviving the Mayan Doomsday and three weeks away from stepping over the fiscal cliff. But the unabated student loan debt is just getting warmed up. Instead of dealing with the problem, Washington’s policies continue to stoke the fire. And that economic strain spells continued misery for America’s ongoing credit crisis woes.
Outstanding student loan debt has surged 165% in just seven years, from $360 billion to $956 billion. Furthermore, the average loan balance for U.S. college students has increased more than 68% since 2005 to $27,000. (Source: “Student Loan Debt History,” Federal Reserve Bank of New York web site, last accessed December 11, 2012.)
On a more granular level, student loan debt jumped $42.0 billion, or 4.6%, over the previous quarter to $956 billion. During the same period, car loan balances increased for the sixth consecutive quarter to $768 billion. U.S. credit card debt held firm at approximately $601 billion.
Eleven percent of all student loan balances are 90 or more days delinquent, surpassing all other forms of debt. Credit cards, car loans, and mortgages are all in better shape than student loans, with 90-day delinquency rates of 10.0%, 4.3%, and 5.9%, respectively.
According to the Federal Reserve, student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008, and it is the largest form of consumer debt outside of mortgages. What’s more is that unlike credit card debt, student debt is not forgivable in bankruptcy.
And that is creating a nightmare scenario for graduates young and old. In fact, every age group is experiencing … Read More
Why You Shouldn’t Get Too Excited About the Jobs Picture
By George Leong for Investment Contrarians | Dec 10, 2012
The labor picture remains precarious. On one hand, Citigroup, Inc. (NYSE/C) announced it was cutting 11,000 jobs worldwide, as the financial services sector continues to be hard hit; while on the other hand, Apple Inc. (NASDAQ/AAPL) announced it would produce at least one of its computer products in the United States.
Wall Street was relieved last Friday after the much-anticipated jobs readings offered much-needed hope that job creation in America continues to be on track.
Job growth is showing signs of wanting to edge higher, as the unemployment rate made a surprising decline to 7.7% in November; 146,000 workers managed to find full-time work, which was well above the 80,000 jobs estimated by Briefing.com.
And while I’m pleasantly surprised with the drop in the unemployment rate and continued job creation, the decline in the unemployment rate was attributed to fewer people looking for work, according to the Labor Department. Many people during Hurricane Sandy did not search for work.
Let’s take a closer look at the unemployment rate based on data from the Bureau of Labor Statistics. The November reading was the lowest reading since a 7.3% unemployment rate in December 2008, but the number remains well below the four-percent level we saw during 2006 and 2007. On the plus side, the unemployment rate has improved from the recession high of 10.0% in October 2009, which was the highest level since the 10.8% during the December 1982 recession.
The trend of the unemployment rate shows the improvement since August 2011, when over nine percent of Americans were officially unemployed.
It took close to five years for the unemployment rate to … Read More
Why the 98% Matter in the U.S. Economy
By George Leong for Investment Contrarians | Dec 7, 2012
President Obama is on a fiscal cliff campaign to show why middle-class America really needs the help. Of course, Republicans want the Bush-era tax cuts to also apply to the top two percent of income earners. This is the major sticking point holding up a deal.
I love capitalism and the idea that you can generate unlimited wealth to drive consumer spending. This is the reason why the United States is one of the richest countries in the world, with its gross domestic product (GDP) growth driven by consumer spending. Yet despite the ability to create wealth, the income gap between the rich and poor has been widening, which ultimately impacts consumer spending. In my view, this is an issue that needs to be addressed, as there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as an avenue for income distribution may need to be fixed.
This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the Great Recession that began in 2008. Lower income levels impact consumer spending and economic growth.
The median family income plummeted to an inflation-adjusted $45,800 in 2010 compared to $49,600 in 2007, according to the Survey of Consumer Finances, a publication of the Federal Reserve. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into less consumer spending by the middle class as income levels fade…. Read More
Why You Need to Have Money in the Emerging Markets
By George Leong for Investment Contrarians | Nov 15, 2012
Global networking giant Cisco Systems, Inc. (NASDAQ/CSCO) beat on revenues and earnings estimates in its 2013 fiscal first-quarter on Tuesday. What was interesting, but not a surprise, was the company’s good performance from its Asia-Pacific and EMEA (Europe, the Middle East, and Africa) regions; albeit, it was mostly because of the Middle East and Africa regions, as the Europe division continues to be a drag on the stock’s growth due to economic contraction in the eurozone.
The Asia-Pacific and EMEA regions now account for 41% of the company’s total revenues. (Source: “Cisco Reports First Quarter Earnings,” The Network, November 13, 2012.) The results demonstrate the growing importance of the non-U.S. markets, particularly Asia, and the emerging markets to Cisco among other multinational companies.
Take a look at the recent results from global credit card provider MasterCard Incorporated (NYSE/MA). Consumer spending is on the rise; at least via credit cards. MasterCard is a good global barometer on consumer spending, as the company has a presence in over 210 countries. In a third-quarter press release, MasterCard reported that its worldwide purchase volume surged 12% in the third quarter on a local currency basis (“MasterCard Incorporated Reports Third-Quarter 2012 Financial Results,” Yahoo! Finance via BusinessWire, October 31, 2012, last accessed November 14, 2012.) MasterCard President and CEO, Ajay Banga, said, “Additionally, emerging geographies and governments continue to provide great opportunities for growth.”
Again the interesting point to note is the growing use of credit in the emerging markets where cash was king in consumer spending. MasterCard clearly sees new markets in these growth regions where the per capita income is rising, helping to … Read More
Why Obama Must Be Aligned with China’s New Leaders
By George Leong for Investment Contrarians | Nov 9, 2012
We are at a major point in the history of China as the country gets ready to welcome its new leadership group that will dictate what China does, especially with its economic growth, for the next decade. Moreover, it will be critical for President Obama to establish a stronger relationship with whomever will run China during his second term in office, as it could set up how the world looks in 10 years.
The world’s two top economies have similar economic growth goals: to expand their economies, drive income levels higher, and push consumer spending.
The 18th National Congress of the Communist Party of China, which began yesterday. will set in motion the transfer of power in the communist party that occurs every 10 years. There is yet to be an announcement on the new appointments, but the good money is betting on Xi Jinping, the vice-president of China, becoming the next president, replacing Hu Jintao. Li Keqiang, the vice-premier, will then become the next premier, replacing Wen Jiabao.
Already there are questions regarding what type of people the new leaders will be. The consensus is that the relative youth and moderate stance of Xi Jinping and Li Keqiang could make China more in tune with the modern world, which could see the development of better relationships with its key trading partners, including the United States, and could drive economic growth.
For China, the change at the helm comes at a critical juncture, as the country is currently facing stalling economic growth following years of explosive gross domestic product (GDP) growth that propelled the country to overtake Japan as the … Read More
Why Big Oil Is to Blame for High Gas Prices
By George Leong for Investment Contrarians | Nov 6, 2012
While oil prices have fallen to the $85.00 level, the price of gasoline continues to be stubbornly high, and you can blame this on the greed of the big oil companies.
Despite the decline in oil prices, it still costs me over $100.00 to fill up my gas-guzzling SUV.
According to the U.S. Energy Information Administration (EIA), the price of regular gasoline averaged $3.57 per gallon across the U.S. as of October 29, which is still well below the historical average U.S. high of $4.11 per regular gallon reached on July 18, 2008.
If you live on the West Coast, the cost of gas is staggering, at an average of $4.04 per gallon.
In my view, the price of gasoline makes little sense at the current level. Again, blame the oil companies and speculators.
Go back to July 2008, when gasoline was at $4.11 per gallon. The World Texas Intermediate (WTI) oil prices at that time peaked at $145.00 a barrel, so the high gasoline prices at that time made sense. During the recession, WTI oil prices fell to $30.28 a barrel. On Monday, WTI oil was prices sat at $85.00 a barrel.
In my view, there is absolutely little connection between oil prices and gasoline; but then again, maybe I’m missing something? Perhaps the oil companies aren’t greedy, and it’s just a bad rap? The reality is that the government accounts for 11% of the cost of gasoline, with nine percent for distribution and marketing, 18% for refining, and 62% for the cost of the crude. (Source: U.S. Energy Information Administration, last accessed November 5, 2012.)
In other words, … Read More
Why I Continue to Favor the Discounters
By George Leong for Investment Contrarians | Nov 2, 2012
I recently discussed the upcoming key holiday shopping season that officially begins with the critical Black Friday on November 23 and its importance to the retail sector.
Discounter Target Corporation (NYSE/TGT) reported a slower rise in sales in October and will be betting on the holiday shopping season when some retailers can generate up to 40% of the company’s total annual sales. (Source: AP, “Target October sales figure rises,” Yahoo! Finance from The Associated Press, November 1, 2012.)
Consumer spending drives the retail sector, economy, and gross domestic product (GDP) growth.
Retail sales for October, excluding drugstores (comprising of 18 national retailers polled by Thomson Reuters), surged a better-than-expected 4.7% versus the estimate of 4.3%. (Source: “Retailers Report an Upbeat October,” The New York Times, November 1, 2012.)
The pickup in the retail sector is encouraging; and with the current decline in gasoline prices, the pickup in jobs, and the growing strength in the housing market and prices, retail sales could be strong.
I believe the department stores and some of the specialty retailers will fare well; the key for success in the retail sector is selective picking.
My advice is to continue to stick with the leading discount bellwether retail stocks. In the large-cap retail sector area, the top companies are Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST).
Costco reported a seven-percent jump in its key same-store sales reading in October, as reported on its web site. The results continue to show steady growth; but for that extra bit of growth, you should look at the smaller discount companies in the retail sector.
Costco, … Read More
You Know Inflation’s a Problem When the Cereal Box Gives Away Gas Cards
By John Whitefoot for Investment Contrarians | Oct 15, 2012
Elections are important, maybe even the cornerstone of a democracy; but sometimes voters are just too busy to listen to everything being said by the Obama or Romney camps. Thank heaven sound bites can sum up everything we think we need to know.
Here are some recent tidbits from Capitol Hill:
The U.S. Department of Labor recently said that unemployment plummeted in September to 7.8%—the first time the rate dropped below eight percent since February 2009. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, October 5, 2012.)
Auto sales rose in September by 13% from a year earlier to nearly 1.2 million. (Source: “September 2012 Auto Sales,” Automobile Magazine, October 9, 2012.) U.S. home sales jumped to their highest level in two years, and builder confidence has reached its highest level in more than six years. (Source: WRAPUP 2-U.S. new home sales dip, but prices scale 5-year high,” Reuters, September 26, 2012.) Consumer confidence jumped in September. (Source: “Consumer Comfort in U.S. Stayed Near Three-Month High Last Week,” Bloomberg, October 11, 2012.)
Yup, everything is rosy. The U.S. economy is picking up steam, the housing market is turning around, and the U.S. is creating jobs. The economic turnaround is in full swing, and Americans are happy.
But if you believe the economy is getting better, you must truly be the world’s greatest contrarian, despite the overwhelming evidence to the contrary.
I think it’s all about perspective.
The so-called “encouraging” news reminds me of that scene near the end of Titanic, where a deckhand fires off a rescue flare into the night; people onboard the sinking ship or in the lifeboats … Read More
Why Larry Ellison’s $500-million Island Purchase Is the Problem
By George Leong for Investment Contrarians | Sep 28, 2012
There are the rich and then there are the mega-rich. A study showed that those with a net worth of at least $25.0 million tend to spend more lavishly on vacations and home renovations, compared to their spending on clothing, cars, and jewelry, according to the Spectrem Group. Then there’s the CEO of Oracle Corporation (NASDAQ/ORCL), Larry Ellison, who purchased the sixth largest island in Hawaii for a cool $500 million. When you are worth over $30.0 billion, dropping half a billion dollars on an island is not a big deal.
As I recently discussed, the income gap between the top one to five percent of income earners and the other 95%–99% is widening, which will likely present problems down the road. In 2009, the Internal Revenue Service pegged the adjusted gross income (AGI) level for the top one percent club at $343,917. To be included in the top five percent, the AGI was $154,643.
While the presidential candidates debate about the economy and monetary policy, one thing is sure—America is on fragile ground and needs a jump start to drive consumer spending in the economy.
Retail sales are showing improvement, but consumer spending on durable goods was horrible in August, when spending on non-essential goods and services cratered at -13.2%, versus the -5.0% estimate and the -4.1% in July. Even when you eliminate the spending in the transportation market sector, consumer spending on durable goods fell 1.6%, again worse than the -0.2% estimate and revised -1.3% in July. Of course, Ellison and the other top five percent aren’t concerned with a personal budget. The reality is that America as … Read More
What China Needs to Do to Pump up its Economy
By George Leong for Investment Contrarians | Sep 14, 2012
China continues to show evidence of economic slowing with stalled consumer spending, lower imports, and stagnant exports in August. Industrial Production is also weak and suggests weak foreign demand and domestic consumer spending.
At the heart of China’s slowing is the spending crunch involving Europe and the U.S., which is impacting the Chinese economy and threatening a possible “hard landing.”
The superlative growth of China’s GDP growth over the last decade has largely been fueled by export demand for cheaper Chinese-made goods. The country built thousands of manufacturing plants and added significant capacity to handle the substantial influx of foreign business.
While this strategy works when global economies are strong, the problem arises when export demand declines, as we are seeing now in China. There are many plants operating well below capacity, and it could get worse if the financial crisis in Europe doesn’t improve soon. For instance, the country’s aluminum-producing plants are cutting production. We are seeing the same in other sectors across China as the country’s economy slows.
To drive the economy, we are seeing hundreds of millions in new government spending. Most recently, China announced 30 new infrastructure projects worth about $157 billion.
But while fiscal spending will help, the responsibility for China’s success will fall squarely on the shoulders of its consumer spending. The current structure of the country’s growth is largely dependent on foreign demand for goods, but China realizes that it also needs to drive consumer spending higher in order to help minimize the negative impact of any global slowing moving forward and create a more balanced economy powered by both export demand and … Read More
The Death of the Middle Class
By George Leong for Investment Contrarians | Sep 12, 2012
I love capitalism and the idea that you can generate unlimited wealth. This is the reason why the U.S. is one of the richest countries in the world, with its GDP growth driven by consumer spending. Yet despite the ability to create wealth, the income gap between the rich and poor has been rising, which ultimately impacts consumer spending. In my view, this is an issue that needs to be addressed, because there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as a form of income distribution may need to be fixed.
This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the great recession that began in 2008. Lower income levels impact consumer spending and economic growth; therefore, lower income levels mean lower GDP growth and an extension of the current recession.
The median family income plummeted to an inflation-adjusted $45,800 in 2010, compared to $49,600 in 2007, according to the Survey of Consumer Finances published by the Federal Reserve. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into lower consumer spending by the middle class as income levels fade.
What is worrisome is that the recession resulted in a greater disparity in incomes between the poor and the rich. It’s common for the chief executive officer (CEO) of a large company to earn multiples of regular workers. According to … Read More
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