UAW Strike
Based on recent readings, it looks like the UAW will strike against the auto makers. I’m certain the auto makers will need to increase pay for the auto workers, but this could perhaps cause them to raise the prices of their cars to cover the increase in labor costs. I hope the head of the union and union workers read the following. It now takes 42 weeks of income to buy the average new car. This compares with 2019 when it was 33 weeks. How far do the unions think carmakers can increase prices on consumers and still make a profit? I honestly don’t believe the union leaders explain to their workers the reality of running the businesses that they strike against. Financial statements of all the automakers are public information that could be read by a CPA and give the union and its workers a reality check.
Government Shut Down
Here we are in September and the end of the federal government's fiscal year is fast approaching ending on September 30th. The question is will the government shut down in October if the Democrats and Republicans can't agree on funding legislation. At our firm, Wilsey Asset Management, we don’t worry about short term movements in the market caused by political turmoil because we know that they will come up with some type of a settlement sooner or later. Looking back in history in 1978 and 1979 the market did decline when the government shut down. But, in total there have been six shutdowns since 1978 that lasted five days or more and on all other occasions since 1978 the market increased. This included a 10% climb during the December 2018 to January 2019 shutdown. I do believe investors have come to understand government shutdowns are now, sad to say normal and they will come to a resolution at some point. So, with that said, we will not be selling any positions in our portfolio based on a government shutdown. I'd recommend the same for all investors. We all know market timing does not payoff.
Apple in China
The news for Apple in China should concern shareholders. China recently announced that they would ban iPhones and other foreign-branded devices at work for officials at central government agencies and they would not be allowed to bring them into the office. It was then reported by Bloomberg that China is planning to extend the ban on iPhone use to state-owned corporations. China does make up a good chunk of revenue for Apple as it is currently accounts for around 19% of total revenue. I do find the timing of these reports somewhat odd as Huawei, which is a big competitor to Apple, recently announced their new smartphone known as the Mate 60 Pro that is capable of ultrafast data connectivity to rival 5G. This will definitely threaten Apple’s market share in the country. Back in 2019, Apple held 56% of smartphone sales over $600 in China while Huawei held 39% of the market share. As Huawei has had to battle limitations on components due to US restrictions their market share sank while Apple’s expanded. In 2022, Apple held 70% of the market share compared to just 11% for Huawei. As the battle between the US and China continues, I do worry this could cause a big sales hit to Apple. Not to mention, who knows what else China could look at banning when it comes to Apple’s service revenue in the country.
Credit Cards
Last quarter Visa had $8.1 billion in revenue and earned $4.2 billion. MasterCard had similar results with $6.3 billion of revenue and net income of $2.8 billion. If you have been following me for a while, you know, how opposed I am to merchants now charging a 3% fee if you use a credit card on the purchase. They say if you pay cash, you can save that 3% credit card fee. Whether I like it or not that seems to be sticking and I have to believe this will be a big headwind to the credit card companies. One reason for the growth of these companies has been the increased use of credit cards. In 2016, 31% of purchases were in cash and credit card purchases were just 18%. In 2022 cash purchases dropped to 18% and credit card purchases climbed to 31%. I believe that trend will be changing going forward as consumers save 3% on their purchases by paying cash. Also adding to problems for Visa and MasterCard is what is known as FinTech and other non-bank financial firms which includes companies like PayPal that offer peer to peer payments bypassing the networks. I don’t see how these things cannot reduce the growth of the big credit card companies which trade at around 25 times forward earnings. The credit card companies point out they saw 22% of the revenue in the last quarter come from value added services such as fraud protection and data analytics. But I believe you would still have to use the credit cards to get the services. I’m confident that the financial industry is changing and this will hurt the revenue and earnings of Visa and MasterCard.
Retail Space
There is currently approximately 4.8% of available retail space, which is the lowest in 18 years according to CBRE data. That compares favorably to the office vacancy rate of 18.2%. It seems to me that just a few short years ago those numbers were complete opposites. As an investor, one must look down the road 2 to 3 years and understand how market forces will change. On the retail side prices will increase which will eventually cut off the demand or increase the supply and prices will fall. Office space prices will fall, and some office spaces will either be converted to other uses or completely taken off the market. This will eventually cause a much lower vacancy rate because of lower prices, which will eventually allow once again prices to increase as contracts renew.
Car Exports
I read some surprising news last week that was shocking to me. We all know how well Japan does with exporting their very dependable cars. One may think they are the world leader in exports of cars but they have been taken over by China. And unfortunately, the top destinations for the Chinese auto makers are Russia, followed by Mexico, Saudi Arabia, and even Belgium, which was a surprise. We have not seen many Chinese cars in our market here in the US. I hope that will continue as opposed to giving China more economic power by buying their cars. I do believe domestic automakers have done a great job with many great models of internal combustion engines and electric vehicles.
Small Banks
This year has been a very difficult year for small US banks as we have seen a few of them go under. Other small US banks have lost a large amount of deposits, which is putting pressure on those banks as well. Even with this, the small US banks still have an annualized growth on credit of 1.9%. This is a positive number, but it is the lowest in nearly 12 years. I do believe some of the smaller banks will continue to struggle, but the height of the worries is in the past.
Population Growth
China is going to have further problems down the road as the growth rate in the population will slow and they will have less younger workers to take care of the older population. Just three years ago the average number of children born to a Chinese woman was 1.3. Today that number has dropped to 1.09. This is well below Japan’s level of 1.26. We are doing far better here in the United States with an average 1.8 children born to a US woman. This will help United States continue to grow long-term.