Consumers

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The market is holding up very well as it looks like nothing has changed as far as monetary policy. Additionally the geopolitical landscape remains at a simmer for now. We will be getting the highly watched labor report and one should continue to expect improvements. The jobs data could even help push this market higher out of the resistance consolidation zone.


Consumers


Courtesy of wikipedia

Our nation has been singularly focused on our own economy as THE only economy that matters for decades. In many economic reports we measure consumption solely based on the US rate of consumption; Gas, food, movies, cars, phones, and anything consumable. We sometimes include Japan and Europe, the other like-minded, friendly trading partner nations. Canada is usually the ignored neighbor to the north and Mexico is blasted in the media as a place of peasants trying to jump the boarder. Perhaps this view is maintained because the US had been the world’s largest consumer and wealthiest nation on the planet for decades. However, our arrogance can be our undoing.

The BRICs, and China specifically has already taken the crown in largest consumption in several sectors; computer sales, car sale, smart phones, and it is only a matter of time before they out consume us in every single category. The rest of the BRICS nations also continue expand and consume more, not as strongly as China, but expand none-the-less.

Volume!

For some reason U.S. politicians believe we can win this trade and consumption war, but the fail at understanding the fundamental components of volume. China has over 1.3 billion people and India over 1.2 billion; compare that to the U.S. population of 300 million. So if a company is trying to sell a widget the sheer volume in China and India compared to the U.S. The footprint of possible consumers is just enormous. There are other fundamental factors as well to consider.


Courtesy of wikipedia

Wage Growth!

Wage growth in the emerging markets and BRIC nations continues to remain over 10%, in less than 10 years wages are doubling. This moves populations from the subsistence spending to actual consumers and eventually brings them to a level of disposable income levels. We have seen that in China in the last couple of decades, I had been in China in the 1970s and 1980s, back then the population road bicycles and to own a car you needed to be a state official. Today, China is the world’s largest car consumer and the nation has not only their own car manufacturers, but both European and U.S. automakers have auto-plants there to meet the rise in consumer demand. Meanwhile in the U.S. wage growth is barely measurable and if we factor inflation, it’s negative.

Access to Credit!

Consumer credit is another factor, in the emerging markets and BRICs only a minority of the consumer population has access to credit and in many cases mortgages are only offered to the higher income earners, unlike the west. China has 390 million credit cards in circulation as of 2013, which is slightly below the number of credit cards in circulation in the U.S. In the U.S. we have more credit cards issued than we have in total population by a factor of 1.3 and I am not even including debit/bank cards. China is a traditional “savings” culture and has a higher savings rate than the U.S.; they also tend to not carry a high level of debt on their credit cards. However, that is changing as the “western culture” of spending is starting to become ever more addicting. Credit Cards in circulation in China are growing at almost 20% per year, while in the U.S. growth is flat.


Courtesy of wikipedia

I think I have spelled out at the very fundamental level why I have been Bullish on the BRICs and emerging markets and continue to remain Bullish. It’s simple, they have billions of people compared to our millions, they continue to see double digit wage growth, only about 20% of the population has access to credit cards and credit, and their savings ratios remain high compared to the U.S. and the Western world.


Western Stagnation!

U.S. and western companies continue to set-up shop in these nations, expand manufacturing and retail. If we look at the Great Recession and the subsequent years of S&P top-line revenue and sales growth, it has solely come from the emerging markets and BRICS. In fact if you remove the growth from these areas, we would have seen contracting sales, revenue, and earnings.

Politicians are recently using the bully-pulpit with the latest “tax inversion” moves, but it far more than taxes that are seeing companies move off-shore, they are moving to where the consumers are and this also contributes to lowering the cost of doing business. Companies are not patriotic, they are only loyal to their consumers and if their consumer growth is in China, then that is where they will go.

The comparison to the Western consumer is dramatic. The Western consumer has stagnant wage growth, population growth in the West is flat to negative, the West has a flat to negative savings rate, and the West carries excessive debt at higher interest rates. You could say that the typical Western consumer is tapped out; they have reached their debt limit, fighting inflation with flat wage growth and care barely cover interest payments. The is starting to become the norm in the West as we see a shrinking Middle Class as they see flat wages, stagnant job growth, and inflation. Yet, the upper-middle and higher-income earners in the West continue to do fine and have a higher savings rate.


Ignore the Government Data!

If we ignore the GDP (official U.S. growth), CPI (official U.S. inflation rate), and U3 (official U.S. unemployment rate) – all of which reflects a solid growth U.S. economy, and instead pay attention to earnings, retail sales, same-store sales, savings rate, borrowing rates, and consumer debt we see a completely different picture.

The U.S. consumer is very weak relative to where they had been and relative to the emerging market and BRIC consumer.

Three types of companies

We should expect to see more consolidation and strategies to reach the struggling U.S. and western consumers. Dollar store sector continues to grow, which caters to the ever growth segment of U.S. consumers. Dollar General is raising its all-cash bid for Family Dollar Stores. Bulk retailers, Dollar Stores, and discount chains that are domestically reliant businesses are struggling to gain a piece of the pie and also squeak out a better margin and larger sales.

As investors there are three segments that we need to pay attention to:

1. BRICS / Emerging Markets: Companies that are gaining traction and market share in the BRICs and emerging markets. We should expect to see top-line revenue and sales to growth and hopefully off-set stagnant and contracting western growth.

2. LUXURY: Companies that focus on global luxury brands, these companies continue to see new growth in the BRICS and emerging markets, and continue to have a loyal following and strong sales in the West.

3. Western Consumers: Companies that are stuck in the West and must adapt to the new weaker western consumer of flat wage growth, higher interest on debt, higher debt, limit credit access, part-time job growth, and higher taxes and medical costs. Walmart has introduced their banks and other services to tap this growth western consumer class. Dollar stores have come out of nowhere and are now consolidating to get a larger piece of the new westerns weak consumer.

Understand what bucket the company falls into, who it services, and where growth is coming from, and also their ability to grow. Those companies stuck in the U.S. will not find new growth, but must adjust their business practices and models to cater to the existing weaker consumer, while also navigating more regulations, taxes, fines, and fees. Expect margins to thin if they are not able to get a head of this contraction.


Support & Resistance

INDU 17,000
We continues hold above the 17,000 and will most likely try to build a support level in here. The Labor Report released later this week can certainly jolt the market.

NDX 4000
This is the low support range, we could get a pull back into the 4050 consolidation zone in the short-term. Apple’s new release iWallet or iWear something can send some short-term volatility into this index.

SPX 2000
This looks like a consolidation zone for now, waiting for the Labor Report this week. A pull-back to the 1975 level would be the first support area on any pull back. The VIX could increase to the 13 range this week heading into the Labor Report, even if the market doesn’t move that much.

RUT 1170
I would look at the 1170 as the short-term support. If the RUT moves to 1200 on the Labor Report, expect the reset of the market to follow suite.


Upcoming Labor Report

The Labor Report will be interesting for a couple reasons; first we have a FOMC meeting in September and it will certainly set the tone for that meeting, and second we have a mid-terms coming up and it will impact the election.

Three results:

To Hot: 300,000+ jobs and U3 below 6%
This could create a market sell-off as it could raise concerns that the Fed would raise rates sooner and also fully end their accommodation.

To Cold: 100,000+ jobs and U3 increases above 6.5%
This could create a market rally as it could raise expectations the Fed will leave rates at zero and also increase QE.

Just Right: 250,000+ jobs and U3 at 6.2%
This is just good enough for the mid-terms and for Obama to wave his victory flag, but it is not to hot or cold for the Fed to make any serious changes to their current policy. The market could rally on the news, meaning slightly good news for the economy and the Fed will stay the course.

It’s a balancing act for both the mid-terms as well as the Fed to maintain existing accommodative policy. So far they have done a fairly good job as their speeches imply improvement, but also caution. They are stuck and can’t raise rates or completely end accommodative polices, so it is now all about crafting the message.

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