New Global Middle Class and Digital Lifestyle Converge at Walgreens 

New Global Middle Class and Digital Lifestyle Converge at Walgreens 

A few days ago we ran across a story that probably didn’t make headlines in too many places. Here at Tematica, however, it was quickly shared with the team because it perfectly depicts the coming together of two of our investment themes: The New Global Middle Class and the Digital Lifestyle. Here is part of the story from Mediapost.com:

Walgreens is adding the Alipay mobile payment platform to more than 7,000 Walgreens locations nationwide. Alipay, operated by Ant Financial Services Group and used by 1 billion people globally, will allow shoppers at Walgreens to use the same payment system commonly used in China. More than two-thirds of Chinese tourists used smartphones for payments abroad last year, according to Nielsen.The Alipay deployment will allow Walgreens to offer the payment system to more than 4 million Chinese travelers in the U.S. at any given time, and Walgreens is the largest U.S. drugstore chain to deploy Alipay, according to Walgreens. “Walgreens is focused on making shopping more convenient for our customers. This collaboration has particular significance for our Chinese customer population, who now has a new way to experience Walgreens,” stated Richard Ashworth, Walgreens president of operations. “Not only can they buy our products via our dedicated store on Alibaba’s Tmall Global marketplace, but they will now also be able to shop in the U.S. using Alipay as they would in China.”

Source: Walgreens Starts Accepting Alipay Payments Nationwide 02/19/2019

 

So here we have a U.S. retailer adding a mobile payment option specifically to cater to tourists coming from China.  The global leader in mobile payments is mainland China, where 61% of worldwide users are based, and Alipay has emerged as the dominant provider, boasting over 850 million active users. In 2018, there were reports of apparel brand Guess adding Alipay as a payment option in 50 of its U.S. stores. That move by Guess followed on the heels of brands such as Lacoste, GNC, Rebecca Minkoff, Holt Renfrew and Harry Rosen offering up Alipay at checkout.

What we will be monitoring closely at Tematica Reseach is whether the use of Alipay can gain a foothold in the U.S. market beyond Chinese tourists. With over 189 million active iPhones in the United States, and most of those Apple (AAPL) devices equipped with the Apple Pay feature, a 2018 survey by CivicScience showed only 1 percent of respondents used mobile payments as their primary payment method over credit and debit cards or cash. With the average Chinese tourist spending over $5,000 on overseas trips, anything retailers can do to reduce the friction of a transaction is well worth it and U.S. consumers witnessing the ease of checkout for those tourists might just tip the balance across other apps as well.

Ep. 95: Short Selling Anyone

Ep. 95: Short Selling Anyone

 

Stocks pop in January, but earnings continue to come down

On this episode of the Cocktail Investing Podcast, we close the books on one of the best Januaries in years for the stock market and trace back the reasons for its inflection point from a painful year-end 2018 for investors. While some issues that plagued the market have rolled back, one, in particular, hasn’t and it’s one investors use to not only value stocks but determine which ones they are willing to pay up for. That includes a brief discussion on earnings from Apple (AAPL), Amazon (AMZN), Facebook (FB) and others, but also prompts a conversation on short-selling.

We round out the podcast with a few Thematic Signals that confirm why Netflix (NFLX) is right to be worried about Fortnite; how consumer products companies like PepsiCo (PEP), Hershey (HSY), and Proctor & Gamble (PG) are embracing our Clean Living Investing theme; and why China is poised to become the largest retail market on the planet as our Living the Life, New Global Middle-Class and Middle-Class Squeeze investing themes intersect.

Have a topic we should tackle on the podcast, email me at cversace@tematicaresearch.com

And don’t forget to subscribe to the Cocktail Investing Podcast on iTunes!

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What Investors Need to Know About the Implications of Trump’s Tariffs

What Investors Need to Know About the Implications of Trump’s Tariffs

 

A couple of days ago, I shared my view that President Trump’s tariff overtures are more than likely a negotiating tactic as he looks to tackle yet another of his campaign promises – international trade. The resignation of Gary Cohn on Tuesday, President Trump’s top economic adviser and the head of the National Economic Council, have certainly fanned the flames that this might not be a bluff by Trump — either that or Gary Cohn was unwilling to play the game.

I continue to think Trump is following the negotiating strategies he laid out in his 1987 book, Art of the Deal. But as an investor, we have to game out the potential outcomes so we can assess the potential risk and position ourselves accordingly. 

 

Should Trump enact the seemingly unpopular trade tariffs on steel and aluminum, what then? 

For starters, with an increase in the cost of importing from other countries and a lack of price pressure on American suppliers, steel and aluminum will become more expensive to U.S. companies. No big surprise there. The companies impacted will be wide, ranging from manufacturers of aircraft, high-speed rail, cars, trucks, construction equipment, motors, satellite dishes, smartphones, tablets and appliances. And let’s not forget cans, which will impact the price of food, soda and beer, as well as a variety of other products.

What this means is the cost production for Boeing (BA), Ford (F), General Motors (GM), Navistar (NAV), Paccar (PCAR), Caterpillar (CAT, Deere (DE), Cummins (CMI), Apple (AAPL), Dell, Whirlpool (WHR), Coca-Cola (KO), PepsiCo (PEP), Molson Coors (TAP), Anheuser Busch (BUD), and numerous others will rise. 

 

Will those companies look to change to domestic suppliers? 

Most likely, but that will take not only time, but require more domestic capacity to come on line. As we’ve seen in the domestic oil industry, it’s not as easy as flicking a light switch – it takes time, and more importantly, it takes people, the right people. That’s right, the skill set to work in a steel or aluminum plant is not the same as working at McDonalds (MCD), the Gap (GPS) or an AMC Theater (AMC).

What we’re likely to see amid a rise in demand for domestic steel and aluminum is rather similar to what we are seeing in the freight industry. The currently capacity constrained domestic truck market has led to sharp increases in freight costs cited by a growing number of consumer product companies ranging from Tyson Foods (TSN) to J.M. Smucker (SJM) and Ross Stores (ROST). 

The same materials constraints is poised to happen to homebuilders this spring, given the current lumber shortage… and yes the current truck shortage could mean a double whammy for homebuilders like Toll Brothers (TOL), D.R. Horton (DHI), Lennar Corp. (LEN) and the rest of the industry, both public and private, as they truck materials to new building sites.

We’ve talked quite a bit about how rising home prices due to low supply have likely priced out a number of prospective buyers. Let’s also remember the rising level of consumer debt and lack of wage gains for the vast majority of workers that Lenore Hawkins, Tematica’s Chief Macro Strategist, and I have been talking about on the Cocktail Investing Podcast and writing about. What this probably means is more consumers will be priced out of the housing market as homebuilders look to offset rising costs with higher prices. Basic economics. 

Getting back to the impact of the proposed Trump tariffs, while they would help potentially level the playing field for steel and aluminum companies like AK Steel (AKS), Steel Dynamics (STLD), Century Aluminum (CENX), Arconic (ARNC) and other, in the short to medium term they will more than likely lead to higher prices. 

While companies may look to offset those rising costs, the reality is that in today’s world where a public company must at a minimum meet the bottom EPS expectations lest it’s stock price get crushed, odds are they will raise prices to minimize the hit to the profits and the bottom line. We’ve seen this time and time again over the years at Starbucks (SBUX) with a nickel here and there price increase with its latest in September ranging from 10 to 30 cents on a variety of menu items. 

To use the lingo favored by the Fed and economists, we run the risk of inflation. Yes, folks, I said it, inflation, and as we know over the last few weeks that word has become a focus for investors as they look to gauge how far and how fast the Fed will boost rates in 2018 and before too long 2019. We know in watching these higher prices will weigh on the buying activity of Cash-Strapped Consumers and most likely others as items become less affordable. Not sure, consider the median U.S. income last year was all of $31,685 compared to $31,248 in 2000 – over 18 years an income gain of just $437! 

This is where I remind you that the U.S. consumer is a meaningful contributor to the domestic economy, (with consumer spending accounting for nearly 70% of GDP) and Lenore would kick me if I didn’t remind you how far along we are in the business cycle. The combination of rising prices and questionable consumer demand also runs the risk of profit and EPS pressure that would likely weigh on stock prices. 

Boiling it down, the question is does Trump want to run the risk of torpedoing the economy and the stock market, two of his much tweeted about barometers for his presidency?

My thought is probably not.

I do, however, expect Trump and his ego will continue down this negotiation path, ultimately compromising for a better trade deal than the current one. And yes, my fingers are crossed. 

Will it be smooth sailing to that destination? Not likely and we can see last night’s resignation of Gary Cohn, President Trump’s top economic adviser, as a sign the waters will be more than choppy over the next few weeks. 

 

The Response from the EU and Its Potential Impact to the Fed and Interest Rates

Upping the ante, this morning the European Union shared its response to Trump’s proposed metals tariffs saying it would take the case to the World Trade Organization and coordinate its actions with other trade partners that are also against the proposed tariffs from the U.S. The EU went on to share a “provisional list” of U.S. products that would see higher tariffs from the EU, if Trump moves ahead with the import tariffs. The full list has yet to be made public, but among its speculated $3.5 billion impact will to items such as peanut butter, cranberries and oranges. Perhaps EU officials have been busy reading Trump’s Art of the Deal? 

What all this looks like… or at least I hope it is… is a good ol’ fashion game of chicken — international trade negotiation style.

Like most games, there tends to be a winner and a loser, and while it’s possible that Trump comes out ahead on this, the risk he runs will impact the American consumer, the domestic economy and at least certain stocks if not the overall market. 

Remember also that the next monetary policy meeting by the Fed is in two weeks. At its January meeting, the Fed was beginning to shake and bake tax reform implications into its outlooks, and I suspect the Fed heads are likely doing the same with a potential trade war. Do I feel bad for new Fed Chief Jerome Powell? Let’s just say that I wouldn’t want his job, but then again given my pension for calling it like I see it they probably wouldn’t want me. 

 

Black Friday Clicks vs Bricks

Black Friday Clicks vs Bricks

 

A Look at the Official Kick-Off to the 2017 Holiday Shopping Season

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Coming off the Thanksgiving holiday, this week Tematica’s investing mixologists Chris Versace and Lenore Hawkins discuss the meaning of the litany of data points for online shopping on Thanksgiving as well as overall results for Black Friday. Expectations were running high for continued wallet share gains by digital shopping, a key aspect of our Connected Society investing theme, and they did not disappoint. What was surprising was the percentage of holiday shopping done via smartphones.

Both the objective data, and as Chris and Lenore share, the anecdotal evidence, point to brick & mortar retail traffic over the holiday shopping weekend that was hardly robust. Per data from ShopperTrak, brick & mortar retail sales fell just under 2% year over year. No wonder retailers like Kohl’s (KSS) and JC Penney (JCP) were trying to put a positive spin on things by talking up their digital shopping. We continue to see brick & mortar retailers as challenged and remain bearish on mall operators.

While the holiday shopping season is off to a stronger start than last year, we still have some reservations about the final tally matching the National Retail Federation’s typically overly optimistic holiday shopping forecast calling for 3.6%-4.0% growth over last year. On the one hand, we’ve had tepid wage growth, ballooning credit card debt and student debt, which tells us the Cash-Strapped Consumer will be out in force this holiday shopping season. As we point out, roughly two-thirds of shoppers over the Thanksgiving to Cyber Monday period were looking to capitalize on retailer deals and promotions.

To hammer the point home, Cyber Monday is expected to be the biggest stand-alone day of the shopping long weekend. Expectations call for $6.6 billion to bought on Cyber Monday, up 16.5% year over year. To us, however, the real context is that’s not only looking like another record year, but it’s 32% greater than Black Friday online sales this year.

Which companies are best positioned to capitalize on our Connected Society, Cash-Strapped Consumer, Rise & Fall of the Middle Class and Affordable Luxury investing themes this holiday season?

You’ll have to listen to the podcast to find out. Along the way, you’ll learn what the number two gift item will be this year and we’ll mention a sleeper gift card company that is a contender for our Cashless Consumption investing theme as well.

 

Companies mentioned on this podcast

  • Adobe Systems (ADBE)
  • Amazon (AMZN)
  • Apple (AAPL)
  • Best Buy (BBY)
  • Blackhawk Networks (HAWK)
  • JC Penney (JCP)
  • Kohl’s (KSS)
  • Macy’s (M)
  • MasterCard (MA)
  • National Retail Federation
  • Simon Property Group (SPG)
  • Shopify (SHOP)
  • ShopperTrak
  • Starbucks (SBUX)
  • Target (TGT)
  • Visa (V)
  • Wal-Mart (WMT)

 

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Books we’re currently reading:

 

 

 

The Rise and Fall of the Middle-Class Part 1

The Rise and Fall of the Middle-Class Part 1

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The Economic Impact of the Expanding Global Middle Class

This week, Tematica’s investing mixologists Chris Versace and Lenore Hawkins walk through the global impacts of the Rise and Fall of the Middle Class, focusing in Part I of this series on the Rise portion of this investing theme. The expanding global middle class will account for nearly half of all consumption in the coming years, but as we discuss the where and why behind this new middle-class is reshaping industries and business models at Amazon (AMZN) and General Motors (GM) to McCormick & Co. (MKC) and many, many more.

For over 90% of the past two millennia, China and India dominated the global economy, generating over half of the world’s GDP in terms of real purchasing power. The end of the 17th century saw a seismic change with the start of Europe’s Industrial Revolution, which later spread to the New World. From 1820 to 1950 Asia’s share of GDP plunged from just under 60% to 16 percent and by the middle of the 20th century the West had come to dominate global growth with the United States generating over a third of world GDP by the end of World War II and when combined with Western Europe, accounted for nearly 60% of global GDP. However, this would not be permanent.

Asia’s return to its multi-millennial dominant role began in the 1950s and started accelerating in the 1980s to rise from 16% to over 30% by 2000. Today Asia’s share of global GDP, excluding the Middle East, has reached a 160-year high of 43%. During that time, the share of the United States and Western Europe has fallen to a 166-year low of 33%, with the U.S. share cut to half its mid-20th peak and Western Europe losing nearly one-third of its share just since the start of the 21st century — all part of the story behind the Rise portion of our Rise and Fall of the Middle Class as the west loses its dominance while emerging economies come into their own.

The incredible volume of sales generated by Alibaba (BABA) over the weekend for Singles’ Day illustrates the reemergence of that economic power and the convergence of our Rise and Fall of the Middle Class with the Connected Society as a stunning 90% of the transactions were done via mobile, which we discussed here earlier in the week. As the center of gravity for middle class households shifts from west to east, it will open up new opportunities for those companies that adjust their strategies accordingly, generating tailwinds for growth. Those that miss this tectonic shift will face challenging headwinds.

Along the way, our mixologists talk about which sectors and companies are poised to prosper from the emerging middle class in the East as well as giving an assessment of the recent moves in the markets.

 

Companies mentioned on this podcast

  • Alphabet (GOOGL)
  • Amazon (AMZN)
  • Apple (AAPL)
  • Ford Motor (F)
  • General Motors (GM)
  • Home Depot (HD)
  • McCormick & Co (MKC)
  • Samsung (SSNGY)
  • Target (TGT)
  • Wal-Mart (WMT)
  • Whirlpool (WHR)

 

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Books we’re currently reading:

COCKTAIL INVESTING: Panera Challenges McD’s, Apple Watch flubs, and the SEC gets hacked

COCKTAIL INVESTING: Panera Challenges McD’s, Apple Watch flubs, and the SEC gets hacked

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This week, Tematica’s investing mixologists Chris Versace and Lenore Hawkins face-palmed after learning the Securities Exchange Commission (SEC) has been compromised in a cyber-attack. This ironic breach mere days after Equifax broke the news on its breach… as we discuss, this increasing pain point that spills out of our Connected Society investing theme is fodder for our Safety & Security one.  As our portfolio mixologists touch on that, they dish on the Fed’s latest missive coming out of its September monetary policy meeting and on a variety of data points for our Connected Society, Food with Integrity and Fattening of the Population investing themes. Chris and Lenore also mix in the latest economic data, and share why S&P 500 Global Ratings’ first rating cut to China’s sovereign credit rating in nearly two decades is important for investors.

  • After last week’s not-too-special event, we share our view on why it’s so disappointing there are connectivity issues with the new Apple Watch model even before it begins to ship.
  • As Apple tries to get itself back on track, Google is scooping up the team at smartphone company HTC that helped Google develop its Pixel phone. We share why Google is making this move and it’s got something to do with its core search business. Here’s a hint – it isn’t good news.
  • Why is Post Holdings pivoting its business with the purchase of the packaged foods business at Bob Evans? Believe it or not, it’s all about the sausage!
  • What do drones in Greece and being a neighbor of comedian Kathy Griffin have in common? The answer ties into one of our investing themes.
  • Who’s hiring and who’s not hiring for the year-end holiday shopping season? Part of the answer ties to where people are shopping for toys that is part of our Connected Society theme.
  • What’s the story behind Panera Bread CEO Ron Shaich challenging McDonald’s, Wendy’s and other fast food companies? The answer ties into our Food with Integrity investing theme and if you’ve seen the documentary Super Size Me you can guess where this is going. You can practically see Lenore roll her eyes at the response from McDonald’s.
  • The Fed expects to hike interest four times before the end of 2018 as it embarks on selling securities on its QE bloated balance sheet, but its economic forecast calls for year over year declines in 2018 and 2019. As Chris and Lenore face-palm, they put some much-needed perspective on this, and explain the real reasons for the Fed’s actions.
  • Over the coming week, we’ll be eyeing several key economic reports, including the Flash U.S. September PMI report, the August reports for Durable Orders and Personal Income & Spending. We’ll also be watching Hurricane Maria as we look to get a final tally on hurricane-related damage and what it means to 3Q 2017 GDP.

Companies mentioned on this podcast

  • Alphabet (GOOGL)
  • Amazon (AMZN)
  • Apple (AAPL)
  • Bob Evans (BOBE)
  • Burger King (QSR)
  • Equifax (EFX)
  • HTC
  • KB Home (KBH)
  • Kohl’s (KSS)
  • Panera Bread (PNRA)
  • Post Holdings (POST)
  • Macy’s (M)
  • McDonald’s (MCD)
  • Nest
  • Nordstrom (JWN)
  • Target (TGT)
  • Toys R Us
  • United Natural Foods (UNFI)
  • Wal-Mart (WMT)
  • Wendy’s (WEN)

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China and Trade – It’s Complicated

China and Trade – It’s Complicated

On Monday, August 14th I spoke with David Asman and Melissa Francis, hosts of After the Bell on Fox Business, about the recent moves in the market and the discussions around trade relations with China. I pointed out that while trade is often discussed in the media as a transaction in which there is a winner, (the country with the trade surplus) and a loser, (the country with trade deficit) trade is much more complex.

First off, any theft of property, be it intellectual or otherwise cannot be accepted. Trade between individuals, businesses or nations must include respect for the property rights of all parties involved. Property rights and the respect for them is vital for economic development. Without them, innovation faces enormous headwinds.

Putting that aside, the focus of any discussion on trade with China is typically centered on American workers who are displaced by competition from China, but this negates that many American jobs factories and offices that would not be able to exist without access to complementary Chinese workers in Chinese factories. The lower-cost labor available in China allows a myriad of ideas hatched in the U.S. to become viable products, which in turn then can create hundreds and thousands of jobs in engineering, design, marketing, logistics, retailing, finance, accounting, and manufacturing that might never have existed  because an entirely domestic production would have been cost-prohibitive. If all of the components in Apple’s (AAPL) iPhone had to be manufactured and assembled domestically, it would cost multiples more and all the businesses that exist today thanks to the ubiquitous nature of such smart phones would never have come into existence.

The nearly half a trillion dollar in annual trade between the U.S. and China is also not a one-way street. For example, in 2016, according to the U.S. Department of Commerce, the United States had a $17 billion trade surplus with China in agriculture and an $8 billion surplus in transportation equipment. From a geographical perspective, eight U.S. states run trade surpluses with China, including West Virgina, Louisiana, Oregon, and Washington state.

Bottom Line: International trade, like most everything in life, isn’t a simple matter. Making major changes to trade policy with a significant trade partner will naturally result in some winners, but also in some losers. When such impactful rules of the game are potentially changed, we at Tematica revisit those companies that benefit from our Thematic tailwinds to assess how and if they may be affected. For now, the talk around trade with China has been just that, talk. We will keep a vigilant eye on this however for any movement that could have a material impact on the companies we follow.