The OECD released on a report last week discussing rising income equality and poverty since the global financial crisis. The report noted that income inequality based on the gini coefficient actually increased in the past few years in developed countries. This is not surprising as the poor and middle-class suffer more as jobs disappeared and many governments implemented austerity programs to cut down on social welfare. On the other hand, as is usual in such situations, the affluent were to able to take advantage of the crisis and increase their wealth due to favorable tax treatments, buying assets at rock-bottom prices, borrow funds at cheap rates for investment purposes, etc. According to the OECD, income inequality has been rising in the OECD countries since the mid-1980s.
From an article by Brian Keeley in OECD Insights:
‘There’s a lot of little kids going hungry round here,’ explained one friend, who works in a local community centre. Indeed, just the other day she had spoken to a family where the child had been chewing wallpaper at night. ‘He didn’t want to tell his mum because he knew she didn’t have the money for supper,’ she explained.”
That’s not from Dickens or George Orwell’s Down and Out in Paris or London, but from a recent column by Gillian Tett in the Financial Times. And she’s writing not about Lagos or Lahore, but Liverpool, a modern city in one of the world’s wealthiest countries.
Of course, the presence of poverty amid plenty – inequality – is not new. In reality, it’s hard to imagine any society functioning without some sort of wealth gap. But the past few decades have seen inequality rise in much of the world. That’s causing concern, and not just for reasons of social justice: A number of economists, most notably, perhaps, Joe Stiglitz, argue that excessive inequality undermines the foundations of growth by restricting the ability of poorer people to develop their human capital and by encouraging what economists call “rent seeking” – in essence, instead of creating a bigger economic pie, the well-off use their economic and political strength to take a bigger slice of the existing pie.
The following chart shows the level of income inequality among OECD countries:
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Source: Income Distribution and Poverty at the OECD, OECD
From the report:
Income inequality increased especially in Spain, where Gini coefficient increased from 0.31 to 0.34. On the other hand, after having increased since the early 2000s, income inequality fell substantially in Iceland, moving down eleven places on an OECD countries’ inequality ranking to the lowest level (Figure 4).
Consolidation policies appear to have been designed in an overall equalising manner. Disposable income inequality also declined in Portugal and New Zealand, although by a smaller amount.
The higher the gini coefficient, the higher the income inequality. Chile has the highest gap between the rich and poor. It is interesting that Iceland has the lowest gini coefficient. The tiny country of Iceland became the basket case of greed and recklessness when some of its banks collapsed and the bankers brought the economy to its knees at the start of the financial crisis. Fortunately unlike other developed countries, Icelandic politicians were smart and actually cared about their country. Iceland implemented some of the boldest policies to rescue the economy and in fact sent some of the crooked bankers to prison in the process. Compared to that, not one banker in the US or UK for example has been sent to prison. As a result ordinary people in these countries continue to pay the price while the bankers and politicians who perpetrated the crisis have moved on with their lives. Or to put it differently they are continuing to enjoy the high life.
No one would be surprised to see the U.S. at the fourth place in the above ranking. Since Turkey, Chile and Mexico are actually emerging countries, in reality the U.S. has the highest income inequality among developed countries. It is interesting that Israel has the next highest income equality though most people would think otherwise. The Scandinavian countries of Denmark, Finland, Norway and Sweden follow extreme form of socialism which leads to some of the lowest income inequality measures among the OECD nations.
Earlier this year I wrote an article discussing the pathetic state of the airline industry in the U.S. due to consolidation of carriers. For travelers it has become a nightmare flying from Point A to Point B. Equity investors have treated most airline stocks like rotten fish that are best avoided at all costs.
A recent journal article noted that years of mergers in the industry is adversely affecting travelers and local economies:
If you’re having trouble finding flights to Memphis, Pittsburgh or a host of other cities, you’re not alone.
A decade of restructuring in the U.S. airline industry has produced a sharp reduction in air service that is curtailing traveler choice and some local economies even as it improves the industry’s health, new research shows.
The study, by Massachusetts Institute of Technology, shows that from 2007 through last year, U.S. airlines cut the number of scheduled domestic flights by 14%. The number of seats offered fell by slightly less, as airlines pushed passengers onto bigger planes, says the study, which was prepared by MIT’s International Center for Air Transportation and is expected to be made public Wednesday.
Source: Leaner Airlines Mean Fewer Routes, Study Shows, The Wall Street Journal, May 7, 2013
Unlike Europe where thriving competition in the industry gives consumers plenty of options at cheap rates, in the U.S. the major carriers hate competition and the state encourages the attitude of these airlines despite the existence of scores of anti-trust laws. The blame can be attributed to all including greedy investors, corrupt politicians, toothless regulators and of course the voting public. While the London underground travelers term the travel experience during peak times as “cattle class”, the U.S. airline industry considers the travelling public as the “Sheeple class” – a combination of sheep and people. As a result fleecing of the public in broad daylight right under the nose of Uncle Sam is common. For example, U.S. airline “collected” a whopping $3.50 billion in 2012 in baggage fees alone according to a report published by not the industry but the government that tracks this figure. The irony of this is incredible to say the least.
The Journal article further added:
Even the nation’s busiest 29 airports lost nearly 9% of their scheduled domestic flights as the major airlines focused on weeding out unprofitable flights and reducing their use of gas-guzzling small jets. Remaining flights also have become more crowded, with the percentage of seats filled—known as the load factor— soaring to a record of nearly 83% in 2012, from not quite 80% in 2007.
Industry executives say that the changes have helped reduce overcapacity and revive the fortunes of the industry after years of losses and bankruptcies, which they say benefits travelers.
But the changes have also affected convenience and cost for fliers. Overall, average domestic round-trip fares have inched up 4% to $374 in 2012 from 2007, adjusted for inflation. Competition on busy routes between big cities and new flights from discount carriers have held some fares down. But at some midsize and smaller airports, the recent service cuts have reduced competition and caused fares to shoot up.
With the proposed merger of American and U.S. Airways, 70% of the U.S. air travel market will be controlled by just four companies: Delta, Southwest, United-Continental and the merged airline according to one study by by Diana L. Moss of American Antitrust Institute. The Journal noted that the four carriers will control 85% of the domestic market.
Lloyds Banking Group (LYG) and Royal Bank of Scotland(RBS) are two of the top five banks based in the U.K. Both these banks used to have solid dividend yields and performed well up until the credit crisis of 2008-09 hit. In order to prevent the banks from collapsing due to heavy losses the British government stepped in and bailed these “Too-Big-To-Fail” banks. Even though many years have passed since the rescue these two banks have yet to return to profitability. Royal Bank of Scotland has been the worst performed compared to Lloyds Bank.
Here is a five-year chart showing the performance of the two banks against FTSE 100:
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Source: Yahoo Finance
Lloyds Bank is up about 20% so far this year based on positive developments such as increasing lending and expectations to post a profit this year. It should be noted however that the bank is 39% owned by the British government. Since the share price has increased and is getting closer to the price paid at the time of bailout, the state may dump its stake at any time. Hence investors need not get too excited about buying shares at the current levels. Llyods has also not reinstated its suspended dividend payments since it hasn’t earned a profit and has not repaid the state.
Founded in 1727, Edinburgh-based Royal Bank of Scotland(RBS) seems to have lost its conservative roots during the bubble years.Currently the state owns 81% of the bank. On Friday the ADR closed at $10.33. But that price is a bit misleading since the company implemented a reverse split in the ratio of 1:20 in late 2008. The stock has fallen heavily from around $16.00 after the split to the current price. RBS also has not paid a dividend since 2009.
Disclosure: Long LYG
The elevator industry is highly concentrated with just four companies accounting for two-thirds of the global market. The these companies are:
- Otis, part of United Technologies of the USA
- Kone of Finland
- ThyssenKrupp, part of the conglomerate by the same name of Germany
- Schindler of Switzerland
Some of these firms can be considered as the world’s top “least popular” transportation companies. They can be considered as least popular since not many people think of elevator makers as transportation companies. However in reality they offer a form of transportation that is simply vertical or horizontal in a fixed location such as a high rise building or an airport or a mall. These companies offer a service that is so important yet mostly under appreciated by people. For example, Schindler moves 1 billion people per day according to their site. To put this figure in perspective, the total world population now is about 7.86 billion.
From an investment point of view, elevator makers are attractive for long-term investment since they operate in a highly specialized industry and have high profit margins.
From an article titled The lift business - Top floor, please in The Economist earlier this year:
People live more vertically than ever before. An estimated 70m the world over—more than the entire population of Britain—move to cities every year. Many live in blocks of flats or work in high-rise offices. Nearly all use escalators (which the big four also make) from time to time. Few can be bothered to take the stairs.
Jürgen Tinggren, Schindler’s boss, talks of a “second planet” of new consumers who are discovering the elation of elevation. Global demand for new lifts has gone from 300,000 a decade ago to nearly 700,000 this year. China, where two-thirds of new units are installed, accounts for much of the rise. Annual revenues are climbing steadily: the Freedonia Group, a consultancy, thinks they will have doubled to $90 billion in the decade to 2015.
The secret to the industry’s whopping margins, however, is maintenance. People hate getting stuck in lifts. So they pay $2,000-5,000 a year to keep each one running smoothly. Since 11m machines are already in operation, many needing only a quick look-over and a dollop of grease every few months, this is a nice business. Margins are 25-35%, compared with 10% for new equipment. Revenue from maintenance is far more stable than that from installations, which are affected by the ups and downs of the economy.
Here is a brief overview of the top elevator companies:
1. Based in Connecticut, U.S. Otis is one of the six units of United Technologies Corporation (UTC), a major defense and aerospace giant. Last year United Technologies’ s total revenue was about $59.7 billion. Currently the stock has a 2.20% dividend yield.
2. Kone trades on the OTC market under the ticker KNYJY. The company has a market capitalization of about $18.0 billion and the current dividend yield is 2.75%. The stock is rarely traded on the OTC market.
3. The German conglomerate ThyssenKrupp AG trades under the ticker TYEKF on the OTC market. It is one of the world’s largest steel producers.
4. Based in Ebikon, Switzerland, Schindler shares on the SIX Swiss Exchange.On Friday it closed at CHF 137.10 per share. In the past year the stock is up by over 25%. The Schindler and Bonnard families control 70.1% of the voting rights of the share capital. Schindler Holding AG is highly illiquid on the OTC market with the ticker SHLAF.
Note: Dividend yields noted are as of May 17, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.
Disclosure: No Positions
Inequality rising in wake of crisis (OECD Insights)
Why austerity may be wrecking the recovery (Maclean’s)
The U.S. crude production is estimated to reach 7.4 million bbl/d this year and 8.2 million bbl/d in 2014 according to EIA. However gasoline consumption alone is projected to be 8.68 million barrels per day. When other products of crude oil such as jet fuel are added the daily consumption far exceeds production making the country a net importer of oil.
However in the past few years, production of oil from Shale rock has increased dramatically. Today U.S. Shale oil production accounts for a significant portion of the total U.S. oil production and even impacts the global oil output.
From a recent report on Shale oil industry in AXA Investment Managers:
The scale and pace of the development are already big enough to modify parts of the US economy. It channelled US$133.7bn worth of investments between 2008 and 2012,1 and hundreds of thousands of jobs in North Dakota and Texas. The result is an unprecedented push in crude oil production, reaching almost 2mbpd (million barrel per day) according to the latest data (Exhibit 2). According to EIA’s central scenario, US shale gas should culminate around 3mbpd by 2020, bringing total US oil output to 8mbpd (10mbpd according to the most bullish estimates, e.g. by BP). Today, US shale oil already represents a very significant 2.2% of global oil output.
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Whether this surge will continue, fall off or even accelerate remains however an open question.
iPath S&P GSCI Crude Oil TR Index ETN (OIL)
Disclosure: No Positions