Finally! The stock market roller coaster ride of 2011 is over. Some were expecting a so-called “Santa Claus” rally in December but that seemed to arrive early with a 490 point rally on November 30th. Buoyed by news that the world’s central banks were banding together to make emergency funding available to Europe’s troubled banks, the stock market enjoyed one of its best days in years.
After a month of choppy volatility that has kept investors on edge, it was a welcome respite. It appears that—at least for now—the world as we know it isn’t ending. But given that our retirement portfolios are on the line, we should read headlines like these with a skeptical eye. The coordinated action by the Fed, the European Central Bank, the Bank of England, the Bank of Canada and the Bank of Japan would seem to assure us that, at least for the time being, we won’t have another 2008 “Lehman Brothers moment” where the financial system goes into cardiac arrest. Let’s hope so.
But the action does nothing to address the excessive government debts that led to this crisis in the first place. Italy still has debts in excess of 120% of GDP, and much of the rest of the Eurozone is not far behind. And while I like the enthusiasm of those who suggest that Europe can grow out of its problems, if only the countries implement the proper free-market reforms, I simply cannot share in this enthusiasm. Aging demographic trends in much of the Eurozone make the fast-growth of the post-World-War-II years next to impossible.
Suffice it to say, Europe has some very difficult choices to make—such as whether there should be a unified Europe at all. All of this creates uncertainty, and markets tend to hate uncertainty.
What will happen in 2012? I suspect that 2012 will look a lot like 2011. Lots of volatility and lots of uncertainty. (Look for my annual predictions column in the Edmond Sun in late January.) None of the problems hurting the economy have gone away to any great extent.
However, as we enter 2012, we have a lot to look forward to in the New Year. And we will have a presidential election, with all of the excitement and hope that a new election cycle brings.
Regardless of what happens in the European sovereign debt crisis, life will indeed go on. European states have defaulted on debts numerous times over the centuries. The cycle of debt and default is, for better or worse, part of the rhythm of history. As investors, we simply have to be smart about how we allocate our funds and be prepared for whatever surprises the markets have in store for us. Happy New Year.
Finally! The stock market roller coaster ride of 2011 is over. Some were expecting a so-called “Santa Claus” rally in ....
Finally! The stock market roller coaster ride of 2011 is over. Some were expecting a so-called “Santa Claus” rally in December but that seemed to arrive early with a 490 point rally on November 30th. Buoyed by news that the world’s central banks were banding together to make emergency funding available to Europe’s troubled banks, the stock market enjoyed one of its best days in years.
After a month of choppy volatility that has kept investors on edge, it was a welcome respite. It appears that—at least for now—the world as we know it isn’t ending. But given that our retirement portfolios are on the line, we should read headlines like these with a skeptical eye. The coordinated action by the Fed, the European Central Bank, the Bank of England, the Bank of Canada and the Bank of Japan would seem to assure us that, at least for the time being, we won’t have another 2008 “Lehman Brothers moment” where the financial system goes into cardiac arrest. Let’s hope so.
But the action does nothing to address the excessive government debts that led to this crisis in the first place. Italy still has debts in excess of 120% of GDP, and much of the rest of the Eurozone is not far behind. And while I like the enthusiasm of those who suggest that Europe can grow out of its problems, if only the countries implement the proper free-market reforms, I simply cannot share in this enthusiasm. Aging demographic trends in much of the Eurozone make the fast-growth of the post-World-War-II years next to impossible.
Suffice it to say, Europe has some very difficult choices to make—such as whether there should be a unified Europe at all. All of this creates uncertainty, and markets tend to hate uncertainty.
What will happen in 2012? I suspect that 2012 will look a lot like 2011. Lots of volatility and lots of uncertainty. (Look for my annual predictions column in the Edmond Sun in late January.) None of the problems hurting the economy have gone away to any great extent.
However, as we enter 2012, we have a lot to look forward to in the New Year. And we will have a presidential election, with all of the excitement and hope that a new election cycle brings.
Regardless of what happens in the European sovereign debt crisis, life will indeed go on. European states have defaulted on debts numerous times over the centuries. The cycle of debt and default is, for better or worse, part of the rhythm of history. As investors, we simply have to be smart about how we allocate our funds and be prepared for whatever surprises the markets have in store for us. Happy New Year.
Finally! The stock market roller coaster ride of 2011 is over. Some were expecting a so-called “Santa Claus” rally in ....
I have grown tired of hearing money managers and Wall Street analysts promoting stocks, hardly ever revealing they don’t mean investors should necessarily buy them immediately. The qualification, “if one has a five-year investment horizon”, is usually revealed in a footnote, if at all. They figure that if they use that caveat, it will probably work out.
Even billionaire investor Warren Buffett uses the phrase. If asked by an interviewer about the timeliness of an investment, Buffett invariably says, “Well I don’t know what the market’s going to do over the next year or two, but I buy for the long-term. I’m sure if someone has a five-year time horizon this would work out very well.” If you had Warren’s money, you could easily take such a long term view also.
But how advisable is it for ordinary investors to make investments without considering the timeliness of the purchase? Will they be able to hold them if they lose 40 percent of their value before they begin to recover and prove they were a good “five-year time horizon” investment? Or would the loss in the meantime be more important to them than it would be for a multi-billionaire, or a fund manager investing his clients’ money?
Even with long term intentions, it’s often hard to keep the faith after a big hit to the portfolio. And yes, even super-investor Warren Buffett has had numerous periods when investors in his holding company, Berkshire Hathaway, have been down as much as 49% and it took five years for it to get back to even. In fact, it’s down well over 20% from its February high so far this year.
Is it even a sure thing that having a five-year time horizon will make all things right? Perhaps. But that is what was said about the Japanese market when it began to decline from its 1989 peak. Here we are more than 20 years later and in spite of numerous bull markets since, the Japanese Nikkei Index is still down more than 80 percent from its 1989 level.
The truth is that there’s a time to hold them, and a time to fold them. More importantly, there are times for some people to sell them short. As I’ve been warning you, this year is probably one of those times. After a possible year-end rally, I urge you to be cautious. A rough period for most investors is probably underway.
Securities offered through Securities Service Network, Inc., member FINRA/SIPC. Householder Group Financial Advisors, LLC, a registered investment advisor.
I have grown tired of hearing money managers and Wall Street analysts promoting stocks, hardly ever revealing they don’t mean investors should necessar....
With the barrage of economic information hitting the newswires these days, most of us want just one simple question answered: Is it getting better or worse out there?
The good news is that the economy is not imploding - yet. For now it appears that the United States will limp along without a major default or crisis event. Europe might be another matter, although it looks like Spain and Italy will avoid having to go to the European Union hat-in-hand for a bailout (or at least not right now).
While the sky may not be falling just yet, that doesn’t mean that it is sunny. The economy is still very weak, and improvement - when it comes at all - is painfully slow.
We have two recurring and interrelated themes. Americans are out of work in the highest numbers in decades, and the national housing market - which did so much to fuel the economic boom of the mid-2000s - appears to be stuck in terminal decline. The housing crisis has gotten so bad that the White House recently proposed converting 250,000 foreclosed properties held by government controlled Fannie Mae and Freddie Mac into rentals, with Uncle Sam playing the part of landlord.
While it has become fashionable to bash any and all government responses to the crisis, there might actually be some merit to this proposal. Sure, the government is unlikely to be any more effective as a landlord than it is in its other endeavors.
Even so, as unappealing as this might be, it is still probably better than flooding a weak market with a massive number of foreclosures that will immediately push down prices further. Falling home prices put more Americans underwater on their mortgages and encourage them to simply walk away. Better to have a renter living next door to you in a government-owned house than to have it be vacant and derelict.
As investors, we are presented with similar issues. There aren’t a lot of “good” options for investment out there, but there are plenty that “aren’t that bad.” It’s not realistic to expect 15-20% returns from buying and holding the average investment. But we can still generate modest but respectable returns by taking a careful, tactical approach to investing and by focusing on income.
We will get through this rough patch. It will take time, but America’s economy will eventually get its legs back and will run again. In the meantime, we will continue to seize opportunities as we see them.
Securities offered through Securities Service Network, Inc., member FINRA/SIPC. Householder Group Financial Advisors, LLC, a registered investment advisor.
With the barrage of economic information hitting the newswires these days, most of us want just one simple question answered: Is it getting better or worse ....
A recent Reuters news headline read, “Fewer German Nudists as Numbers Dwindle.” I had to wonder whether that was a problem for the global economy. Maybe demand for sunscreen was about to go down, or the demand for blindfolds was about to plummet.
I soon learned that Germany, particularly former East Germany, has a tradition of public nudity that goes back to the early 1900s. Seven million Germans claim to regularly sunbathe in the buff, and there is even a formal organization—the German Free Body Culture—that boasts 500,000 registered nudists. Who knew? Sadly, it appears that the era of the German nudist may be drawing to a close.
According to Reuters, “The naked sunbathers who once crowded Germany's Baltic beaches and city parks are becoming an endangered species due to shifting demographics, the fall of the Berlin Wall, growing prosperity and widening girths.” I knew there was a demographic connection somewhere. Your fearless researcher will leave no stone unturned or towel untouched in the search for the naked truth.
It seems the number of German nudists is shrinking at a rate of about 2 percent per year. But then, the number of all ethnic Germans, regardless of their propensity to disrobe, is also in decline as Germany has one of the lowest birthrates in the world. Reuters reports that the number of Germans has fallen by 3.2 million over the past three decades. The population of the country has remained roughly constant only due to large scale immigration.
Of course, as Germany shrinks it also ages. Twenty-something nudists who were comfortable frolicking about in their birthday suits might be a little more modest about doing so in middle age.
What does this have to do with your investments? Everything. Demographics are the underlying macro economic forces that drive everything from corporate profits to school enrollments to pension solvency—and yes, German nudity as well.
As the American Baby Boomers continue to downsize their spending habits in preparation for retirement, they will continue to act as a giant brake on the U.S. economy. Each dollar saved by a Boomer is a dollar not spent in the economy, which means lower corporate profits and higher unemployment. This is a major reason why the Great Recession that started in 2008 has lingered as long as it has and why it will continue to linger for years to come.
Not all demographic news is bad though. Looking at more positive trends, we see that American births are near all-time highs and children’s clothes and toy stores are full—even in a recession. The children of the Baby Boomers are now having children of their own, creating incredible opportunities for those catering to the needs of new parents. As investors, we should always keep the demographic big picture in mind when allocating our precious capital. There are great opportunities out there, even in a deep recession. However, an investment in a German nudist resort is not likely to be one of them.
Nick Massey is a financial advisor and owner of Householder Group Financial Advisors in Edmond, OK. He is also co-host of America’s Wealth Management Show on News Radio AM1000, KTOK. Nick can be reached at www.nickmassey.com. Securities offered through Securities Service Network, Inc., member FINRA/SIPC.
A recent Reuters news headline read, “Fewer German Nudists as Numbers Dwindle.” I had to wonder whether that was a problem for the global e....
Long time readers know that I place a great deal of emphasis on the study of demographics and its long term effect on global economies. China is a very interesting demographic study. Some have argued that America’s days of global economic dominance are numbered. China is nipping at our heels and is considered by some to be the country of the future. While I agree that the United States has some painful economic adjustments to make over the coming decade, I do not for a minute believe that China will rise to economic prominence. They will be big of course, but that is not the same thing. To quote American demographer Phillip Longman, “China will grow old before it grows rich.”
Many people are aware of China’s infamous One Child policy, but most are not aware of the coming catastrophic effects of the policy. The modern consumer economy is built on a foundation of constantly rising populations. Companies grow by selling their products to an ever-growing pool of potential consumers.
But what happens when those consumers reach late middle age and stop buying as much as they used to? What happens—as is the case in Japan today—when the population actually begins to shrink? Who buys the products on your shelves? Where do you find workers? And who funds your pension?
An article in The Economist recently noted that China is suffering from a demographic problem of a different sort: too low a birth rate. The data imply that the total fertility rate, which is the number of children a woman of child-bearing age can expect to have, on average, during her lifetime, may now be just 1.4, which is far below the “replacement rate” of 2.1 that eventually leads to the population stabilizing.
Slower growth is matched by a dramatic aging of the population. People above the age of 60 now represent 13.3 percent of the total, up from 10.3 percent in 2000. In the same period, those under the age of 14 declined from 23 percent to 17 percent. A continuation of these trends will place ever greater burdens on the working young who must support their elder citizens, as well as on government-run pension and healthcare systems. China’s “demographic dividend” (a rising share of working-age adults) is almost over.
The Economist goes on to describe how the One Child policy has skewed China’s gender ratio as well; far more baby boys are born than girls. In 2010, for example, 118 boys were born for every 100 girls. This guarantees that roughly one fifth of China’s young men will have no possibility of marriage or normal family life. Given that this will mean tens of millions of young men without the civilizing influence of marital life, the implications for China’s social stability going forward are not good. China is not going to become the number one global economy in the foreseeable future.
Securities offered through Securities Service Network, Inc., member FINRA/SIPC. Householder Group Financial Advisors, LLC, a registered investment advisor.
Long time readers know that I place a great deal of emphasis on the study of demographics and its long term effect on global economies. China is a very....
It’s a funny world we live in. Rising commodity prices have many Americans worried about inflation. Soaring gold and silver prices reflect fear that the U.S. dollar is about to collapse. The Fed, while it has ruled out an official “Quantitative Easing 3” for now, continues to maintain one of the laxest monetary policy regimes in history. And to cap it all off, the infighting between Congress and the White House has led to Treasury Secretary Tim Geithner openly using the dreaded “D” word—default—saying that it would have catastrophic consequences on the financial markets and the economy.
Citing the ballooning national debt and annual budget deficits that refuse to shrink down to normal size, credit rating agency Standard & Poor’s already reduced its outlook on the United States, raising the possibility that the country will lose its AAA credit rating.
One might think that with this volatile combination of risks, Treasury yields would be soaring. After all, investors should want to be compensated for lending to a U.S. government that looks like an increasingly bad credit risk. Legendary bond fund manager Bill Gross, the founder of PIMCO and the largest money manager in the world, recently liquidated U.S. government bonds from his portfolios.
Yet a funny thing happened. Treasury yields have been steadily falling since February and are now at roughly the same levels of a year ago. What gives? Why are investors continuing to buy Treasuries with yields as low as they are?
One simple answer is that the demand for Treasuries is higher than usual due to lack of alternatives in the fixed income world. Despite all our problems, U.S. Treasuries are still the safest debt instruments in the world. With issuance of new non-Treasury debt falling, investors have the unappealing choice of U.S. Treasuries or climbing up the risk scale to something like municipals or high-yield junk bonds. At least in the case of Treasuries, investors can be certain they will be paid back, even if it is potentially in depreciated dollars.
But perhaps a better explanation is that for all the inflammatory rhetoric, the bond market simply isn’t that concerned about inflation risk right now. At a time when Americans are paying off the excesses of the past and the aging of the Baby Boomers is sapping consumer demand, a period of prolonged disinflation or deflation, like that experienced by Japan, would seem more likely.
Interestingly, 98 percent of “Big Money” investors were neutral or bearish on Treasuries as of last month’s survey. Only 2% were bullish. The market has a funny way of doing precisely what no one expects it to. Don’t be at all surprised if Treasury prices stay high, and interest rates stay low, for a lot longer than most investors think.
Securities offered through Securities Service Network, Inc., member FINRA/SIPC. Householder Group Financial Advisors, LLC, a registered investment advisor.
It’s a funny world we live in. Rising commodity prices have many Americans worried about inflation. Soaring gold and silver prices reflect ....
It’s no secret that many Baby Boomers have not adequately saved for retirement. Many are in complete denial and think that it will somehow all magically work out. The Employee Benefit Research Institute (EBRI) conducts regular surveys of workers and retirees. As the March 2011 EBRI Retirement Confidence Survey shows, workers and retirees are concerned. Their fear is that they will not have saved enough money to enjoy a comfortable standard of living in their retirement years. They should be scared. In fact, they should be terrified.
According to the report, the general consensus among workers is that they need roughly $250,000 in retirement savings that can be used in addition to a pension or Social Security to create a comfortable retirement. While this may or may not be the right number, but it serves as an anchor point to see how close or far away workers are from that number. Frankly, I think the number is too low.
It almost doesn’t matter though because almost nobody is even hitting that number. Shockingly, almost 30 percent of workers have saved less than $1,000 for retirement. Another 17 percent or so have saved between $1,000 and $10,000. With the stated goal of $250,000 in mind, only 10 percent of workers have actually accomplished this goal.
But this number is possibly misleading, because it includes workers of all ages. You would not normally expect a twenty or thirty-something worker to have salted away a quarter of a million dollars. The problem is that this report doesn’t break out the numbers by age. However, it does give us another very useful piece of information – the percentage of current retirees by the amount of retirement savings they have. When we put both of these measures (retirees and workers) together, it is even more disturbing.
Of current retirees, over 25 percent have $1,000 or less of retirement savings, and an additional almost 15 percent have less than $10,000 in retirement savings. Put another way – over 50 percent of workers AND retirees have less than $25,000 saved for retirement.
In looking at these figures, we should all recognize a number of facts. First, we are not saving enough to care for ourselves in retirement. Second, as our population ages, a larger number of people will be in retirement and looking for some organization or entity to help them get by. (That’s you and I.) Third, this does not bode well for the health of our entitlement programs or the level of our tax rates in the years to come.
As we wrestle with the difficult choices our country is going to have to make over entitlements, government debt and deficit spending, this just adds to the problem. Unless more people wake up and start doing something more to help themselves, this is not going to end well.
It’s no secret that many Baby Boomers have not adequately saved for retirement. Many are in complete denial and think that it will somehow all ma....
The first quarter of 2011 was quite amazing. Not from the standpoint of the US equity markets having their best quarter in a decade, but from the standpoint of the markets moving higher while so many things have gone haywire. The Arab Spring has brought us oil prices near $120 per barrel, adding to our already climbing food and energy costs. Greek and Irish 10-year bonds are yielding more than 10% as investors fear that these countries will become deadbeats and not pay on their debts. Japan suffered a catastrophe, which has been followed by a nuclear nightmare. In the US our Federal Reserve is nearing the end of its money-printing binge, which may or may not lead to financial Armageddon. In the face of all this, our equity markets shrugged and marched higher. Amazing! Is it warranted? We’ll soon find out.
rn
rn
There were some positive signs in our economy, no doubt. We are not shedding jobs as we were in 2008 and 2009. According to the Bureau of Labor Statistics we are currently adding around 200,000 jobs per month. This is nice, but since our workforce is growing by roughly 100,000 per month, the extra 100,000 jobs created won’t go far to alleviate the unemployment problem. Profits are strong, but that is for corporations. As for individuals, our income actually declined a small amount in the last several months.
rn
rn
The real test of how this year, and even this recovery from the Great Recession, will unfold is coming in the month of June. It is June 30th to be exact, that the recent round of money printing by the Federal Reserve is set to end. When the Fed prints money, it ends up in banks as deposits, which overloads our economy with “cheap” dollars. This is supposed to make lending easy, and therefore spur on economic activity, particularly in areas that involve debt, like housing and durable goods.
rn
rn
For the past two years the Fed has been cranking the printing presses, and will have created over $2.3 trillion out of thin air by the end of June. What do we have to show for it? A lightening run in stocks, soaring food and energy prices, a tepid recovery in our economic growth, a very mild recovery in employment with falling wages, and a housing market that has yet to bottom. If this is what trillions of newly printed dollars will purchase, it will be interesting to see what happens when the printing presses stop.
rn
rn
So while it might have seemed like our equity markets could do no wrong, even in the face of tremendous headwinds and difficult events overseas, it is possible that much of that strength has come through the efforts of the Fed. In the months ahead we will find out just how sustainable this recovery really is. Keep a close watch on your investments; it could get very dangerous for your financial health!
The first quarter of 2011 was quite amazing. Not from the standpoint of the US equity markets having their best quarter in a decade, but from the stand....
While the economy continues to modestly improve, the housing bust is regrettably far from over. One popular private-sector indicator, the Case-Shiller 20-City U.S. Home Price Index, has fallen to its lowest levels since the onset of the mortgage crisis. But perhaps most disturbing is the broad nature of the weakness. The index is not being dragged down by a handful of troubled areas like Miami, Las Vegas, or Phoenix.
Sure, these areas saw the biggest gains during the boom and have consequently suffered the most in the bust that followed. The pain, unfortunately, is spread much wider. Prices declined in 19 or the 20 cities that make up the index. The only metro area to see prices rise was Washington D.C.
Picking through the Case-Shiller data, we do see a few points for cautious optimism. While 19 of 20 cities saw declines in the last month of 2010, not all of these were new post-crash lows. Some cities had seen modest recoveries in the preceding months, and it’s not wise to read too deeply into one month’s worth of data. Still, eleven of the twenty markets hit their lowest point since the beginning of the housing bust: Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland, Seattle and Tampa.
In another example of the muddled condition of the housing market, the National Association of Realtors reported that more people bought previously occupied homes in January, but the increase in sales was due to a surge of foreclosures and all-cash deals and not first-time home-buyers.
Foreclosures represented 37 percent of sales in January. Cash transactions accounted for 32 percent of sales, and in particularly hard-hit places like Las Vegas and Miami, cash deals represent half of all sales! The high number of these distressed sales is, of course, a major reason for the falling prices seen in the Case-Shiller Indices.
It is good to see these houses being snapped up for cash, of course. An investor who is able to pay cash for a house is one that is unlikely to sell again at distressed prices. This is good for the long-term health of the markets affected. But on the other hand, one of the reasons that cash purchases are so high is that mortgage lending standards are much stricter than in the past. Less mortgage credit means that fewer people will be able to bid for houses, which means that a real recovery in prices is likely to be many years away.
How are we to interpret all these mixed data? To start, you have to look past the noise and find the trends that really matter - like demographics. Demographic trends do suggest that demand for starter houses and rentals should be relatively strong in the years ahead once the current supply glut is worked off. Depending on the area, this might take a while. But if you buy judiciously, demographic trends are on your side.
Unfortunately, the same can not be said of trade-up “McMansions.” Demographic trends in this segment are terrible, for lack of gentler word. The Boomers will be net sellers for the foreseeable future, and there are no obvious sources of buyers in most areas. The news is not all bad. We just have to know how to interpret what we see reported, keeping an eye on the big picture.
While the economy continues to modestly improve, the housing bust is regrettably far from over. One popular private-sector indicator, the Case-Shiller ....
Risk is a funny thing. Everybody loves it when it works out; but it can be quite painful when it doesn’t. We hear a lot about risk versus reward. If someone were to ask, “How did you do last year?” (with your investments), an appropriate answer might be “Compared to what?” You see, if you were to measure your performance against the S&P 500, which was up 12.88% in 2010, you might not have done as well if you had been quite conservative with your investments. What if you were conservative and only made 5%? Is that bad? Well, if you compare it to the overall stock market, yes. However, if you compare it to the risk-free rate of return, that was pretty good if you didn’t take a lot of risk doing it.
The “risk-free rate of return” is a term analysts use to identify what you could have earned without taking any risk. Typically that is something like short term T-bills or CDs. In a time not too long ago, you could have earned 3% in T-bills or perhaps 4% in a one year CD, all guaranteed and no risk.
If you could make 4% on a risk-free investment (and were happy with that), but instead you invested in a diversified portfolio of stocks and bonds and earned 5% - well, that’s not too impressive. In fact, it’s pretty awful given the extra risk you had to take to make 1% more.
Today, however, the risk-free rate of return in T-bills, money market funds and CDs is almost zero. Given that scenario, if you managed to earn 5% in your portfolio and you took a minimal amount of risk doing it, then you might consider that fairly significant excess performance. Oh sure, making 12% in the market is far better; but you have to consider the extra risk it would have required you to take to achieve that. In retrospect, if you had done that in 2010, it would have worked out and you would have been quite happy. But what if it didn’t? In January 2010 you didn’t know for sure that was going to happen. In fact, there were many times during the year that it didn’t look like that was going to happen at all.
The point is no matter how much we try to ignore it, risk versus reward is a factor we constantly have to measure. Big returns are nice, but how would you feel if the opposite happened? Many people experienced that first hand in 2008 and found out the thrill of victory may not be enough to offset the agony of defeat when it comes to investing. Unless you’re truly an aggressive investor who can stomach occasional big losses, don’t measure your investment performance against the stock market. Measure it against the risk-free rate of return and stop driving yourself crazy. In the words of Bobby McFerrin’s song, “Don’t worry, be happy.”
Risk is a funny thing. Everybody loves it when it works out; but it can be quite painful when it doesn’t. We hear a lot about risk versus r....
The headline comes from the October 29, 2010 issue of Financial Times. Given that unemployment has barely budged from its 30-year highs and that the economy is barely growing - even by the government’s sometimes rosy estimates - the headline above might seem a little improbable.
The numbers, however, speak for themselves. High-end European automakers are at or near record levels of profitability, even as the European and American economies continue to muddle along at best and while European governments ponder aggressive new fiscal austerity measures.
What gives? One word: China.
According to the Financial Times, “Mercedes car sales increased 17% to more than 317,000 units in the third quarter of 2010, to a large extent driven by a 140% rise in China to 40,748 vehicles. Mercedes sold one in eight cars in China during this period.” Think about that for a minute. Mercedes, the number one luxury auto in the world, already sells one out of every eight of its cars in China. And this says nothing about its sales to other fast-growing emerging markets.
Of course, it is not just fancy autos that the new rich in China are buying. Luxury fashion, handbags, watches and jewelry are also booming in this emerging market juggernaut. According to The Economist, Chinese luxury sales grew 20% during 2009, one of the worst global retail years in history, and sales are forecast to grow by another 30% in 2010. In five years China will likely be the third-biggest market for luxury goods. (see “Bling is Back,” The Economist, October 23, 2010).
Even during an extremely difficult economic climate at home, European and American luxury brands and retailers are enjoying some of their best years in history by following the money to China and other up-and-coming countries. As investors, we too need to follow the money. The Baby Boomers, the largest and wealthiest generation in history, are trading down and scaling back their lifestyles in order to save for retirement. Companies that have grown rich catering to the Boomers - be they large, publically-traded multinationals or modest “mom and pop” businesses - need to look elsewhere for new customers.
Companies that can figure out how to profit from the Echo Boomers - the children of the Baby Boomers - are potentially building a great business model for the next 20 years. And of course, companies that can figure out how to profit from the rise of the new middle class in China and other emerging markets are also putting themselves in a fine position to prosper.
There is no “one size fits all” approach to investing, of course. But by learning to “follow the money,” we can seize good investment opportunities as they arise.
The headline comes from the October 29, 2010 issue of Financial Times. Given that unemployment has barely budged from its 30-year highs and that the ec....
For several years now I have written about demographics and the effect it can have on businesses. Among other things, I have talked about Harleys, Twinkies, Lingerie, and Barbie.
I’ve used the example of Harley-Davison several times because they represent the perfect demographic story. Before I start getting hate mail, let me say that I am a motorcycle rider myself and like Harleys. But from a demographic standpoint, they and their peers in the “big bike” business have a big problem. US motorcycle sales shrank by 14.1% in the third quarter of 2010, extending the grueling decline to 15 consecutive quarters. And that was a 14.1% decline from the already deeply depressed sales figures in 2009.
According to the Financial Times, “Sales are now less than half the level at the peak of the market in 2006. Highway bike sales totaled 383,000 last year, down from 660,000 in 2008 and 724,000 in 2007.” Some of Harley’s Japanese competitors did not even produce 2010 models.
You cannot say that Harley’s problems are due to bad management. Actually, Harley’s management team generally gets high marks and their products certainly have a loyal following. No, Harley-Davidson’s problem is bad demographics. The primary purchasers of Harley’s big bikes are white males between 45 and 55 years old. Not all, of course; but the majority. All of this was fine 15 years ago when Baby Boomer males first began to enter this demographic sweet spot. Harley never had it better. The largest generation in history had just become their best customer.
Unfortunately, those days are gone. The Boomer male has passed this stage and many have shaved off the beard and put away the leather jacket. Good luck selling the used bike though. Used bike prices have plummeted in recent years. Not that there aren’t a lot of Harley type motorcycle riders out there. There are just less of them and even less in numbers coming up behind them.
To bolster sales, big bike manufacturers are increasingly looking to overseas emerging markets and are having some success in certain markets. The problem is there are a limited number of consumers in emerging markets who want and can afford a $20,000 plus motorcycle. As hard as Harley has tried to reach out to other demographic consumer groups – younger and non-Caucasian men and women, for example – Harley’s future has already been written in demographic stone. Except for the occasional surprise, sales of the company’s iconic bikes should continue to disappoint investors for the foreseeable future.
So there you have it. Harleys is becoming another victim of changing global demographics. Of course, as a proud Boomer myself, I think I may have to go fire up the bike and have a beer – just out of protest. And then I’ll go home early before it gets past by bedtime.
Nick Massey is a financial advisor and owner of Householder Group Financial Advisors in Edmond, OK. Nick can be reached at www.nickmassey.com. Securities offered through Securities Service Network, Inc., member FINRA/SIPC.
For several years now I have written about demographics and the effect it can have on businesses. Among other things, I have talked about Harleys, Twinkies,....
A recent Bloomberg headline read, “Brazil to Buy Excess Dollars amid Worldwide Currency War.” Brazil’s foreign minister is upset that the soaring price of the Brazilian currency is making the country’s exports uncompetitive and he made is quite clear that “devaluing currencies artificially is a global strategy” and Brazil is “not going to lose this game.” You can certainly forgive the gold bugs for their enthusiasm when they read comments like that.
Currency devaluation is nothing new, of course. Debasing precious metal coins with base metals has been a practice of governments since the dawn of civilization. Today, the dirty work is done by central bank open market operations. Brazil’s strategy (which is the same one employed by most governments) is to weaken its own currency by selling it to buy dollars or other currencies.
I was surprised, however, by the Brazilian finance minister’s bluntness on a subject that most governments won’t so openly admit to.
Brazil has a problem today that it would have loved to have had in the past. International investors are flocking to the country because of the country’s growth, attractive interest rates, and newfound stability. Investor inflows and robust exports have sent the Brazilian currency
soaring. As a result, Brazil has had to limit the amount of foreign capital entering the country by instituting taxes on short-term inflows.
Brazil and much of the rest of the developing world appears to have its act together this time. Developing countries are by and large following policies of macroeconomic stability and have largely escaped the debt crisis that is bogging down the developed world. With some notable exceptions, they have also avoided overt trade wars using high tariffs and restrictions. Many analysts (including myself) feared that the financial meltdown and global recession would lead to a wave of protectionist sentiment, much as th e Smoot-Hawley Tariff of 1930 did when it wreaked so much havoc on world trade at the beginning of the Great Depression.
Maybe we actually learned something from this and no such trade war will come to pass this time. Or will it, but just in another form? Instead, we now have the currency wars. It seems that everyone would like to devalue their currency so their exports become more competitive in the
global market. The problem is that everyone can’t do it at the same time. If someone’s currency goes down in value, someone else’s has to go up. It’s a zero sum game and it could become a problem if everyone tries to do it. It then becomes almost a race to the bottom to see who can get their currency lower to increase export trade.
Of course, going too far with it has serious consequences for a country in the future. That is one of the reasons gold is going up so much lately as people try to hedge their currency loses through the purchase of precious metals and other commodities. Today it seems we are fighting trade wars with currency manipulation instead of tariffs. A true escalation of competitive currency
devaluation could spiral into something bigger. Investors currently racing to emerging market bonds for their attractive yields should take this under consideration.
Nick Massey is a financial advisor and owner of Householder Group Financial Advisors in Edmond, OK. He is also a guest analyst on CNBC and Bloomberg. Massey can be reached at www.nickmassey.com.
A recent Bloomberg headline read, “Brazil to Buy Excess Dollars amid Worldwide Currency War.” Brazil’s foreign minister is upset that the s....
A few months ago the Wall Street Journal ran a story about commercial real estate owners taking a very hard line with their lenders. In essence, the commercial property owners are telling the lenders that they can either restructure the loans - which is code for “write-off some of the principal I owe you” - or you can take the building back. The bank doesn’t want the property back because then they would be stuck with it and it could adversely affect their capital ratios with the FDIC.
The example they sited in the article was Taubman Centers, Inc., run by Mr. Robert Taubman, which stopped paying interest on its $135 million loan outstanding on a property in Atlantic City, NJ. Taubman Centers, Inc. estimates the property is only worth $52 million.
Here’s the catch – the company is not in financial trouble and has the money to make the payments. The implication of the article was that many businesses are in the same situation where they own property that is underwater to a point where there is no realistic expectation of making any profit on the property. They just made a bad investment. So what do you do with a bad investment? Well, many are choosing to cut their losses and default on the loan.
By the way, the article quotes Trepp, LLC as estimating that of the $1.4 trillion in commercial loans coming due in the next 4 years, over half of them are on properties that are underwater. While one can argue about the ethics of making the decision to default, this is certainly a way for an individual company to rid itself of a burdensome loan in an effort to find better investment opportunities.
But what about the people who made the loans? Those would be bondholders and banks. Those people, who tend to be regional banks and then corporate bond investors such as pension funds and endowments, are stuck with the properties, which they in turn must try to sell and realize quite a loss. So these lenders take a hit that the business, such as Robert Taubman, did not want to take. Why do people like Taubman do this? Because they can. Their business loans are non-recourse, meaning the lenders cannot go after them personally. This is the main difference between corporate owners and residential homeowners.
Very few states in the US have non-recourse mortgages. California does, for the most part, but they still have a way of going after the most egregious “strategic defaulters” - those people that could easily pay their mortgages but choose not to because they think it’s a bad deal.
However, just because businesses that are in strong financial shape can pay their mortgages, does that mean they should? If I am an investor in a company that bought a property that has turned into a drag, I might want the company to unload it any way it could. However, if I’m a stockholder in a bank or a stakeholder in a pension fund that has lent that company the money, I’m sure I’d see it much differently. No matter which side you fall on, it seems obvious that there will be repercussions from these decisions for many years.
Nick Massey is a financial advisor and owner of Householder Group Financial Advisors in Edmond, OK. He is also a guest analyst on CNBC and Bloomberg. Nick can be reached at www.nickmassey.com. Securities offered through Securities Service Network, Inc., member FINRA/SIPC. Householder Group Financial Advisors, LLC, a registered investment advisor.
A few months ago the Wall Street Journal ran a story about commercial real estate owners taking a very hard line with their lenders. In essence, the commerc....
2601 Kelley Pointe Parkway, Suite 202
Edmond, OK 73013
Phone: 405-341-9929
Fax: 405-341-9979
nmassey@householdergroup.com
Map and Directions
Nick Massey, CERTIFIED FINANCIAL PLANNER™ professional, is an OSJ Manager offering securities through Securities Service Network, Inc.,a registered
broker-dealer, member FINRA and SIPC.Investment Advisory Services offered through Householder Group Financial Advisors, LLC, a Registered Investment
Advisor not affiliated with Securities Service Network, Inc.
We are registered to sell Securities in the following states: AR,AZ,CA,FL,KS,MO,MS,NC,OK,OR,TN,TX,NM,MI,NJ,WA.
Copyright(c)2010. Nick Massey. All rights reserved