Deleveraging by American Consumers Continues

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Consumers in the U.S. started fixing their finances last year. This process has gained momentum in the last quarter and this week we learned that the savings rate reached a high of 6.9%. Americans have been reducing their debt and spending less during the past few quarters.

Household-Debt-Laibilities

Household liabilities fell to 131.1 % of disposable income (after-tax income) in the last quarter from a peak of 141.0% in 2007.At the end of 2008, the number stood at 133.9%. In the first quarter consumers paid down debt and did not add new debt to their finances. From the above chart, we can see that liabilities grew form about 87% of after-tax income in 1990 to an all-time high in 2007 due to the availability of cheap credit and excessive borrowing. In this decade household debt-to-income ratio rose considerably faster than previous years.For the first time ever, households debt fell for two quarters in a row for 4Q, 2008 and 1Q,2009.

Since the U.S. economy is a consumer-based economy the fall in debt growth has a negative impact on a any recovery.

A historical chart of the household liabilities is shown below.

Household-Debt-Historical

Source: BEA,  Flow of Funds of the United States, Federal Reserve

From the late 80s households continued to accumulate more liabilities up until last year. In Q1,2007  total household liabilities decreased by $255b compared to taking on about $2.8T debt in Q1,2008. Just like the borrowing binge went on for many years, the deleveraging process will continue for a few years.

Small and Medium-Sized U.S. Banks Have Large Share of CRE Loans In their Portfolio

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The total number of banks in the U.S. declined further last year. At the end of 2008, about 7100 banks were in operation compared to 7300 in  2007 as per the Federal Reserve Bulletin, June 2009.

US-Banks-Total

From over 12,000 in 1990 the number of banks has fallen to 7100 last year.The share of assets held by the largest 10 banks grew by 1% and the assets of the top 100 banks grew by 1.5%. These two category of banks account for 54% and 82% of all total assets at the end of 2008.

Commercial Real  Estate mortgages have started to go bad following the path of residential mortgages. However CRE mortgages form a major portion of the small-to-medium sized banks as opposed to large banks.

US-banks-CRE-Loans

Source: Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008, Federal Reserve Bulletin, June 2009

As the chart shows the share of CRE loans relative to all total loans is very high for small to medium-sized banks. When more CRE borrowers default in the coming months those small and medium banks that have high exposure to this type of loan will have more losses. The Federal Reserve defines the size of the bank as the total assets held at the start of each quarter. This past Friday the FDIC shutdown four banks. Banks that are located in the bubble states of CA,FL, NV and AZ with high CRE loans on their books may be adversely affected.

A Review of the S&P High Yield Dividend Aristocrats

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The S&P High Yield Dividend Aristocrats is part of the  S&P Dividend Aristocrats index series. This constituents in this index have followed a policy of raising dividends each year for at least 25 consecutive years.

In addition, all the constituents are members of the S&P Composite 1500 . The stocks are equally weighted and are re-weighted quarterly.

The constituents of the S&P High Yield Dividend Aristocrats are:

[TABLE=166]

Consumer staple stocks such as KMB, JNJ, MCD, etc. are excellent dividend payers and long-term value stocks. Financials will still experience wild rides due to worsening economic conditions. There may be a few surprises in future quarterly earnings reports as some banks may announce additional new losses.Many banks have also reduced their dividend payouts significantly over last year.

A Look at Top Five China ADRs by Market Cap

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The economy of China is stable and growing due to the government stimulus program focused towards infrastructure per World Bank’s Quarterly Update. Imports of raw materials have increased though exports have not due to lack of demand from overseas. China has tremendous potential to grow the domestic market.

About 42 Chinese ADRs trade in the New York Stock Exchange(NYSE) and many more in the NASDAQ and OTC markets. In this post, lets take a look at the largest five companies by market capitalization that are traded in the NYSE.

1.PetroChina Company Ltd (PTR) is one of the largest integrated oil and natural gas producer and distributor in China. Last year the company had total revenus of $145B. The profit margin is about 11% and the average annual earnings growth is 8%. The current dividnd yield is 3.95%. As the demand for gas continued to rise in China in recent, PTR did performed well with revenues rising 28% annually.

2.China-based life insurer China Life Insurance Co Ltd (LFC) offers “a range of insurance products, including individual life insurance, group life insurance, accident insurance and health insurance products”. At the end of last year China life had “102 million individual and group life insurance policies, annuity contracts and long-term health insurance policies”. LFC pays a dividend of just 0.91%.

3.China Petroleum & Chemical Corp aka Sinopec (SNP) is another integrated oil company with operations in the Chemicals sector as well. SNP operates 16 oil and gas producing fields. Sinopec pays no regular dividends. Similar to Petro-China, SNP’s total revenues rose 26% annually over the past 5 years.

4.Telecom services provider China Telecom Corp Ltd(CHA) has a market cap of $7B. CHA’s current yield is 2.19%. Last year’s total revenue was $27B. Revenue growth was flat at 4% in recent years. Additional new services and offerings such as Blackberry and other mobile technologies should help the company achieve higher growth in future.

5.Aluminium producer Aluminum Corp of China Ltd (ACH) is “principally engaged in the extraction of aluminum oxide, electrolyzation of virgin aluminum and the processing and production of aluminum.” ACH does not pay dividends. Profit margin is a solid 20% and last year’s revenue was $9B.ACH seems inexpensive compared to its peers since the P/E is just 6.62.