Note: Over the past week, I was incredibly busy preparing my October Strategy Report for my Investment Community. Because I have a very small team, I may not be able to release a public Youtube video this week (if I have time, I might be able to turn this email into the video). I strongly dislike missing uploads, but I do have to prioritize certain agenda items first (such as taking care of my Investment Community first) when I’m running into capacity constraints.
For this reason, the usual insights I share in my public Youtube videos will be placed into this email - that way you get my updates even if I cannot produce a video this week. I have also added a voice over so in case you prefer audio, you can also listen at the top of this email! Let me know if you like this feature (you can press the like button to let me know!)
The best way to support my work is to share my emails and Youtube videos/channel with friends & family. I sincerely appreciate you helping me in advance.
Dear Public & Private Investment Community (all my friends),
Here is the agenda for this email:
A brief discussion behind Economic Data vs. the Local Economy
Assessing Nike as a unique perspective to understand the state of the Consumer
Just a quick thought on OPEC Oil Production / Russia
A note on how to stay healthy and strong in this environment
The State of the U.S. Consumer: Still Spending (a lot). But for how much longer?
There’s economic data and there’s the local economy. Or at least what we are able to visibly observe of the local economy.
The economic data that we have been seeing lately has been for the most part very bearish. I’m sure you can agree with this. Yet the local economy doesn’t show any signs of slowing.
Here is the data:
Consumer confidence is still at multi-month lows
The Personal Savings Rate is now at multi-year lows (see image below)
Credit card balances are swelling larger and larger, and the APRs behind all these credit cards are going higher as well!
Mortgage rates are now near the 7% region, and the cost of financing a home today is causing demand destruction in many parts of the U.S.
Gas prices, although lower than it was earlier this year, still consume a significant portion of disposable income.
So why is the local economy still appear to be so strong? This seemingly contradicts almost all the data that we observe and collect.
Only 1/3 of my friends on Youtube believe that their place of employment has a strong outlook. The rest say either neutral at best or the company faces challenges.
And many of our friends also believe the unemployment rate is going from 3.7% (where it is now) to 4.1% by the end of this year.
A 40BP or .4% raise in the unemployment rate to 4.1% might not seem like a lot, but this will impact hundreds of thousands of good people in the U.S.
So my conclusion is that from a macro level, most of the consumption that we are seeing on the local economy is all being financed on credit. Credit card balances will get larger and that means the negative repercussions of getting laid off will possibly result in higher credit card delinquencies for Visa and Mastercard - the two largest card processing companies by transaction volumes.
American Express caters to a more affluent consumer base, but as we’ve seen lately, even a sizable portion of the “richer” folks in the U.S. are living pay check to pay check.
If you enjoy my content, it would be so much to me if you could share my emails or my Youtube channel with friends & family. My priority at the moment is helping as many good folks as possible. Thank you!
Now here’s insights that I found from Nike’s Earnings Call that you want to pay attention to.
The company is planning to liquidate a lot of its inventory later this year during the holiday season (so…it’s probably a good idea to keep Nike’s website on your radar if you like their shoes because you could get some amazing discounts!)
Inventory is up a staggering 65% from a year ago. And it might take them up to THREE quarters to clear all the inventory.
Because of China’s soft economy (17% of Nike’s annual revenue), Nike will need to discount further in Greater China in order to compete for marketshare against other brands - lowering their average selling prices across their product distribution.
Given my background in equity research, I almost always like to go through the earnings call transcripts to read the primary source of information.
Although it is very time consuming, this is precisely why I believe that my research for my Community has an edge - I am considering the most objective data points for analysis.
Here, we had a question from Guggenheim asking Nike Management about their thoughts on Nike’s supply and demand dynamic.
Nike’s management responded by saying that North America (which is Nike’s largest business segment) had the largest inventory growth out of all their geographies.
As for China’s inventory level being down 3%, that’s because of production issues and inability to transact - NOT because of powerful consumption demand!
While this is just a glimpse into their business and the macro environment (with far greater comprehensive analysis provided inside our community), we can see that the U.S. consumer cannot fool us with their spending activities.
We know the state of the situation (I just showed you), and we will not let our eyes fool us.
I expect this coming quarter’s earnings outcomes for consumer discretionary companies to be challenging.
Companies that do most of their business at the B2B level or have a significantly irresistible products will of course do just fine. But for companies that have “discretionary” products that aren’t quite distinguished and consist of most of their revenue, we have to be careful.
In my future emails (or future videos), I’ll talk more about my opinion on OPEC+ and their decision to cut oil production.
I am sad to say this, but there’s data to suggest that there are forces that might move gas prices higher again.
Although you’ve almost never heard me talk about oil stocks/energy stocks since I naturally don’t want this sector to go higher, in my October Research Report released on Oct. 2nd, I finally gave my members the green light on the XLE ETF after a tremendous pull back in this sector.
In a section where I highlighted opportunities across timeframes, I provided a bullish opinion on XLE ETF in the 75/share region for intermediate-term investing (see below - I bought a tiny position myself in XLE). Now 81/share.
To be honest, I’m not really happy about my oil position going up.
But I have to provide my opinion on asset classes that I think will appreciate in value. My members might not be happy with higher oil prices, but at least an appreciating XLE ETF will offset the cost at the pump.
And the more political drama that takes place, the more tailwinds there are for oil.
Things you need to do.
If you’re on my email list, I consider you one of my online friends.
For that reason, I wish to help you and give you as helpful advice as possible.
Take care of your health and do frequent exercise. I try to take as many daily walks as possible (get those 10,000 steps!)
Reduce any high-interest form of debt ASAP! I do think the Fed will get past 4% Fed Funds rates by year-end. This means higher auto loans, credit card APRs, higher mortgage rates.
Learn how to build skills that can help you navigate the storm (for example, I teach our friends how to be stronger analysts to invest with frameworks)
Add as much value as you can at your workplace or to your clients - make yourself irreplaceable! People who can stay employed during this period of time will end up with stronger resumes because they most likely end up doing more work.
Look, I’m counting down the days when things will get better for markets and the outlook.
Far too many people have been priced out of housing and the stock market as the asset class bubble has made it hard for the ordinary person to own a home or own assets.
But a reset is coming, and for some people, that could be good news.
I hope you will be among this camp. And I will do everything I can to help you.
-Larry
Twitter: https://twitter.com/LarryCheungCFA
Insta: https://www.instagram.com/larrycheungcfa/
