Comparing Income Inequality Among OECD Countries

Posted by David Hunkar on 1 June 2015, 7:29 am

The following chart shows the ratio of the average income of the richest 10% to the poorest 10% in OECD countries based on the latest data available:

Click to enlarge

Source: OECD

Income inequality is the highest in Mexico followed by Chile. However these are emerging countries. Among the developed countries, the U.S. has the highest income inequality. Northern neighbor Canada ranks better in income equality.Highly socialist Scandinavian countries have lower income inequality than other developed OECD countries.

Should You Invest In China Now?

Posted by David Hunkar on 31 May 2015, 12:53 pm

Chinese stocks are red hot this year. Among the BRICs, China is far ahead year-to-date. While the S&P 500 is up 2.36%, the benchmark indices of the BRICs are up higher as shown below:

China’s Shanghai Composite: 42.6%
India’s Bombay Sensex: 1.2%
Brzail’s Sao Paulo Bovespa: 5.5%
Russia’s RTS Index: 22.5%

Source: WSJ

Some Investors may be wondering if now is the time to jump into Chinese stocks. In his weekend article, Jason Zweig of The Wall Street cautions investors against invest in China.From the article:

If this past week’s stumble in Chinese stocks has you thinking about buying, think twice.

On Thursday, the Shanghai Composite Index fell 6.5%, the Shenzhen Stock Exchange Composite Index lost 5.5% and the Hang Seng Index of Hong Kong-listed stocks dropped 2.2%. They changed little on Friday.

Speculative frenzies don’t become safe just because there’s a momentary pause in the proceedings. U.S. investors should shop carefully in China—if at all.

Even after the selloff, the Shanghai index is up 42.6% in 2015 and Shenzhen 97.4%; neither figure includes dividends.

Stocks in Shenzhen are trading at an average of 61.4 times earnings, according to the exchange—nearly twice their level at the end of 2014 and almost 25% higher than where they stood on April 30. By price/earnings ratio, the Shenzhen market is more than three times as expensive as the MSCI EAFE index of international stocks; the U.S. is at about 22 times earnings.

The Shanghai and Shenzhen markets for so-called A shares are dominated by local amateur traders, using borrowed money, who have whipped up prices.

Source: Stocks in China: Still Too Hot to Handle?, WSJ, May 29, 2015

He also notes that the stock turnover rate in Shanghai reached 600% by the end of April. Basically this means very few are holding stocks for the long-term and most of them are just traders flipping stocks in less than two months. Clearly this is not a sign of a healthy market.

However Chi Lo, senior economist for Greater China at BNP Paribas Investment Partners is bullish on China. In an article, he notes that financial reforms undertaken by the state have not been taken into consideration by the China bears.

From Reform is what the China ‘bubble’ advocates have missed:

The view that the rapid run-up in Chinese stock prices since mid-2014 has been mostly driven by liquidity and hype ignores the importance of a strong stock market in advancing Beijing’s financial reform.

In particular by channeling more household savings into equities and, hence, reducing the reliance of corporate funding on banks and shifting it to the equity market. A success transformation could lead to a fundamental re-rating of Chinese equities in the long-term.

Encouraging robust market sentiment helps Beijing to achieve a number of policy objectives, including:

local government debt restructuring

state-sector reform

capital market liberalisation

renminbi internationalisation

economic rebalancing towards consumption-led growth

lowering the cost of funding (via equity financing) for the private sector

EXAGGERATED BUBBLE CONCERNS

Worries about a stock market bubble propelled by margin-financing have been exaggerated. Despite the exponential rise in the A-share market, its market capitalisation is still only about 70 per cent of the country’s GDP. This degree of equitisation of the economy is far below the 90 per cent in South Korea and 150 per cent in the US, for example.

Further, despite recent concerns about margin trading, it only accounted for less than 20 per cent of China’s monthly equity market turnover in the first quarter of this year. This is much lower than the 31 per cent recorded in South Korea and almost 40 per cent in Taiwan.

And the Chinese authorities are not allowing margin trading to expand out of control; they have tightened up margin trading rules twice in the last five months, and will not hesitate to tighten them again if needed.

As argued recently, the sharp rise in A-share prices also reflects the rapid growth of China’s nominal GDP, which has expanded by more than 350 per cent since 2005 (see chart 1 above, click to enlarge), before the onset of the last A-share rally.

Mr.Lo also noted that households in China hold only 5% of their total assets in stocks.

Source: Reform is what the China ‘bubble’ advocates have missed, Money Observer, May 29, 2015

Despite Mr.Lo’s arguments I would be cautious on investing in Chinese stocks especially after the strong run up already. As many Chinese are poor and are becoming part of the middle class, the temptation to get rich quickly is very high. And equities provide one avenue where retail investors are able to speculate easily.

For US-based investors still interested in gaining exposure to China, currently 107 China ADRs trade on the organized exchanges and more than 195 trade on the OTC markets. Investors can avoid internet and other start-up companies like Alibaba Group Holding Ltd(BABA) and focus on established firms like China Telecom(CHA), PetroChina(PTR), CNOO (COO), Sinopec(SNP), etc. Another option is go with ETFs such as iShares China Large-Cap ETF (FXI), iShares MSCI China ETF (MCHI), SPDR S&P China ETF (GXC), etc.

Disclosure: No Positions

Impact of Consistent Buybacks on Stock Price

Posted by David Hunkar on 31 May 2015, 8:47 am

Stock buybacks are generally not beneficial to most investors.Many studies have shown that companies that buy their own stock do not perform well in the long run. Buybacks are mainly an accounting trick to manipulate stocks prices. When companies engage in buybacks their timing is usually bad too. For example, just before crash due to the global financial crisis, buybacks by U.S. firms reached record highs.

In some instances, buybacks can be successful in terms of propelling stock prices higher and higher not just in the short-term but in the long-term as well. US-based auto-parts retailer Autozone(AZO) is a perfect example of this scenario.

Autozone’s stock price closed at $673.62 on Friday and the company has market capitalization of $21.0 billion. The shares outstanding stands at just over 31 million. According to an article in The Wall Street recently, the company has been consistently buying its own shares since 1998.

The following chart shows Autozone’s stock price over the past 10 years and all-time:

Click to enlarge

10-year return chart:

All-time return chart:

Source: Google Finance

In the past 10 years, AZO is up by an astonishing 643% relative to S&P’s rise of just 77%. The difference in the long-term returns are even more fabulous as shown in the chart above.

Here are few more interesting facts from the Journal piece:

Since 1998 Autozone has reduced its share count by four-fifths.
An original investment at the time of Autzone’s IPO would have now grown by more than 93 times.
Autozone’s stock has become expensive as the P/E ratio has grown 12.52 in 2011 to 17.7 now.
The firm has reduced its shares outstanding by a net of nearly 10% annually.

Source: Buybacks Alone Won’t Fuel AutoZone, The Wall Street Journal, May 25, 2015.

The impact of all the buybacks are reflected in the share price as it has consistently grown over the years. The key takeaway is that buybacks can work in rare cases such as this one. It should not be noted that Autozone does not pay a dividend. So investors are purely betting on capital appreciation. Hence the stock may not be suitable for income investors.

In addition, Autozone operates in a consumer staples-type industry since auto-parts are a stable business during economic expansions and contractions. During recessions consumers tend to maintain their existing automobiles by buying parts as opposed to buying new cars. Hence auto-parts benefit from this trend.

Disclosure: No Positions

Related:

AutoZone: Do You Prefer Repurchases Or Dividends? (Seeking Alpha)

A Post On Americans’ Obsession With Pets

Posted by David Hunkar on 30 May 2015, 9:23 am

The U.S. is probably the only country in the world to be home to millions of pet animals. Americans keep all kinds of animals as pets with dogs and cats topping the list. Similar to expenses involved in raising a child, Americans spend billions of dollars for their pets. According to a recent article in The Wall Street Journal spent an astonishing $30.4 billion on pets in 2014. In addition to food and other items, Americans also spent another $28.0 billion on veterinary care in 2011. 56% of U.S. households own a pet.

Click to enlarge

Source: Americans Show Their Pets Love to the Tune of $30.4 Billion, The Wall Street Journal, May 27, 2015

In some ways, high pet ownership in the U.S. can seem strange since more than 50% of households earn less than $50,000 per year. However other factors such as the need for companionship, unconditional love, etc. override financial concerns leading to pet ownership. A quick Google search on this topic brought up the question “Why are Americans so obsessed with pets?” by a foreigner in Quora. Here is a comment made by an anonymous user:

Christ, excuse all of the jack-offs in here…..if it hasn’t been made by the comments posted so far here: Ego. Americans love their ego, especially folks on the East Coast. “I’m so great, our pets are so great, my place is the best, my people are the best, because we’re the best and the toughest”…Jesus. No logic, facts or scientific merit whatsoever. Many people in many countries around the world can afford pets. Do they have a ridiculously heinous pet culture like America does? No. Do they have better educational systems? Of course. American public schools create internet trolls, trailer trash, submissive consumerism, incompetent politicians, an unhealthy obsession with material goods and pets, status symbols, SUV-driving soccer moms, and some of the largest consumer debt in any nation’s history. Not too bright, folks. Not too bright at all. And apparently, despite all of this “buying unconditional love” bull, an estimated 1 in 10 US adults report depression. That’s 3.3 million depressed adults, in this land of plenty. Don’t get me wrong, I love this country and the freedoms we used to have, but we have a strange culture. Maybe I’m not supposed to understand it, I don’t know.

“The United States most closely resembles a huge, poorly thought-out, sick…joke.” ~ George Carlin (2005)

Going back to the Journal article, some of the companies that cater to the pet industry include: Clorox (CLX), Church & Dwight (CHD) and Nestle (NSRGY).

Disclosure: No Positions