Post 242

A snapshot of what’s going on in the world’s economy.  Financial Ructions and book reviews can be a bit more technical so feel free to skip them.  See disclaimer at the end of this note.

Summary

News

Boeing

In an opinion piece in the WSJ, Holman W. Jenkins, Jr. comments on the Boeing 737 MAX crisis.

  • He says that people are wrong to say that quality control standards suffered at Boeing because the company was too focused on profit.
  • He rightly points out that safety and shareholder profit are not inversely related.
  • However, he misses the point.
    • The issue was not a profit focus but a “short-term” profit focus as well as management becoming more focused on short-term compensation.
      • Note: this is not unique to Boeing.
      • Although management continued to invest in the business, it was a lot easier to boost their pay packages by taking on debt to buy back shares which serves to:
        • Increase earnings per share without investing in the business.
        • Drive Boeing’s share price higher.
      • Executives made hundreds of million on their stock options over the years. 
    • Not only did the short-term focus possibly compromise safety standards but it significantly harmed longer-term profit.
    • And so yes, shareholder profit and safety are not inversely related.

Ferrari: A short history

  • 1920s: Enzo Ferrari races cars for Alfa Romeo.
  • 1929: Forms his own racing team: Scuderia Ferrari.
  • 1945: Enzo Ferrari forms his own auto company 
    • 1947: Produce their first car: 125 S 
      • Top speed was estimated at 130mph (here
      • It had a V12 engine with 118 horsepower (hp) (here
        • The SF90 XX released in 2023 has 1,015 hp. 
        • There is also something called BHP which stands for brake horsepower (here
        • It accounts for the horsepower of the car after subtracting the friction between the tires and the road.
  • 1963: Ferrari was almost purchased by Ford.
    • Enzo Ferrari had second thoughts and cancelled the deal.
    • By 1966, Ford cars took the first three places in the 24 Hours of Le Mans.
      • PM: The 2019 Ford vs. Ferrari film is a good watch.
  • 1969: Fiat buys half of Ferrari.
  • 1988: Founder Enzo Ferrari dies.
    • Fiat buys his shares and increases its ownership of Ferrari to 90%.
  • 2014: Fiat merges with Chrysler.
  • 2015: Ferrari is separated from Fiat Chrysler and listed on the New York Stock Exchange.
    • The share price has grown at a rate of 27% per year since then.
  • PM: Another good movie is the 2013 film Rush which is about the 1976 racing rivalry between James Hunt and Nikki Lauda.
    • Lauda had a fiery accident while driving a Ferrari in 1976 in which he was severely burnt:
      • Accident ‘here
      • Later photo of Nikki Lauda ‘here
      • The Van GO of formula 1?

Ferrari

Car sales by quarter:

  • 1Q/2022: +17%
  • 2Q/2022: +29%
  • 3Q/2022: +16%
  • 4Q/2022: +13%
  • 1Q/2023: +10%
  • 2Q/2023: -2%
  • 3Q/2023: +9%
  • 4Q/2023: -2%

For all of 2023 the number of shipments by engine type:

  • Internal combustion engine (ICE): 56%
  • Hybrids: 44%

Its contract to supply engines to Maserati ended in 2023.

Brown Forman

  • Adjusted sales: -2%.
    • Some countries:
      • US: -2%
      • Germany: +8%
      • UK: -13%
      • Canada: +5%
  • Total shipments over the last nine months: -7%
    • Whisky (Jack Daniels): -8%
      • But their Tennessee Apple was up 33%.
    • Ready-to-Drink: -8%
    • Tequila (Herradura): -9%
    • Wine: +1%
    • Vodka: -7%

My post from December 2023:

Cutting Back On Bourbon

Brown-Forman makes alcoholic beverages.

  • It was founded in 1870 by George Garvin Brown in Kentucky.
  • Their website says it was the first company to sell whiskey in a sealed glass bottle.
  • George Forman (not the boxer) joined in 1890.
  • During prohibition from 1920 to 1933 (can you imagine?) they were given permission to bottle whiskey for “medicinal” purposes.
  • During World War II all of its plants were converted to make industrial alcohol which was used as a solvent.
  • At one point the company diversified into consumer durables and owned Hartmann luggage (sold in 2005 and now owned by Samsonite).
  • Their brands include:
  • Bourbon:
    • Jack Daniel’s
    • Woodford Reserve
  • Slane Irish Whiskey
  • Herradura Tequila
  • Sonoma Cutrer wine
  • They used to own Southern Comfort (1979-2011) but sold it to Sazerac Company.
  • They also recently sold Finlandia Vodka.

Apparel Retail

Lululemon is a Canadian athletic apparel company:

  • Started in Vancouver in 1998.
  • 711 stores.

4Q/2023 Results:

  • Total sales: +16%
  • Comparable sales: +12%
    • Americas: +7%
    • International: +44%
  • For the full year the company expects sales growth to slow, but still in the double-digit range:
    • 2023: +19%
    • 2024 expected: +10-11%

The CEO said that:

  • They are seeing “a shift in the US consumer behaviour of late.”
  • And that they’re dealing with “a slower start to the year in this market.”

PM: Its share price has grown at an annual rate of 22% over the last 17yrs.

Dollar Stores Slowing 

Alimentation Couche-Tard owns 16,700 convenience stores and gas stations around the world and owns the following brands:

  • Couche-Tard
  • Circle K
  • Ingo

3Q/2024 Results:

  • Sales: -2%
    • Merchandise and services: +1.6%
      • US: +0.8%
        • Same store sales: -1.5%
      • Europe etc.: +10.4%
        • Same store sales: -0.3%
      • Canada: -3.4%
        • Same stores sales: -1.2%
  • The company cited challenging economic conditions constraining discretionary spending.
    • Gas: -2.6%
      • US: -7.2%
        • Volume: +2.1%
      • Europe etc. +12.7%
        • Volume: +15.1%
      • Canada: -8.3%
        • Volume: -4.1%
  • Gas sales also fell due to lower gas prices:
    • Year-over-year changes:
      • US: -9%
      • Europe: -1%
      • Canada: -5%
  • The company cited “softness in traffic as a portion of our customers is impacted by challenging economic conditions.”

Mortgage Limits In Canada

The Globe and Mail reports that OSFI (The Office of the Superintendent of Financial Institutions) is considering imposing stricter limits on the amount banks can lend for the purchase of a new home in Canada.

  • Banks will have to limit the number of mortgages that are in excess of 4.5x the borrower’s income.
  • The percentage of new mortgages that exceeded income by more than 450%:
    • 1Q/2022: 26%
    • 4Q/2023: 12%
      • PM: Note that these percentages would be higher in cities with higher home prices like Toronto and Vancouver.
  • Here is some math on 4.5x.
    • Home price: $1 million 
    • Down payment of 20%: $200,000 (no mean feat)
    • Total mortgage: $800,000
    • Required annual income: $178,000.
      • After taxes: $113,068
        • Average tax rate of 36.5%.
        • But marginal tax rate, i.e. on every additional dollar earned: 48%.
        • Handy dandy tax calculator ‘here’
      • Monthly: $9,422
    • Current 5-year fixed mortgage rate: 5.6%.
      • Total monthly payments (ratehub):
        • Mortgage: $4,930
        • Property tax: $833
        • Utilities: $185
        • Property insurance: $50
        • Phone: $60
        • Cable: $20 (PM: Seriously?)
    • Back in 2017 the average was $52.
      • Internet: $60.
      • Total: $6,138
    • That leaves $3,284
      • Car payments
      • Food
      • Entertainment
      • Savings
      • Etc.
      • So doable.

Canadian Inflation

  • Dec: 3.4%
  • Jan: 2.9%
  • Feb: 2.8%
    • Moving UP
      • Electricity: +10.7%
      • Car insurance: +6.6%
      • Shelter: +6.5%
        • Mortgage interest costs: +26.3%
        • Rent: +8.2%
      • Health & personal care: +3.8%
      • Food: 3.3%
    • Moving Down:
      • Telephone services: -20.5%
        • PM: Anyone out there see their phone bill fall by one fifth?
      • Internet access services: -13.2%
        • PM: Ditto.
      • Clothing and footwear: -4.2%
        • Men’s clothing: -5.5%
      • Household furnishings etc.: -1.7%

Goods vs. Services:

  • Goods:
    • Jan: +1.4%
    • Feb: +1.2%
  • Services:
    • Jan:  +4.2%
    • Feb: +4.2%

Core inflation excluding food and energy:

  • Jan: 3.1%
  • Feb: 2.8%

Month-over-month inflation:

  • Jan: 0%
  • Feb: 0.3%
  • Travel tours: +12.3% (148% annualised)
  • Gasoline: +4.0%

Japan Inflation (kyodonews)

Core inflation (excluding fresh food):

  • Jan: 2.0%
  • Feb: 2.8%

Core core inflation (excluding fresh food and energy):

  • Jan: 3.5%
  • Feb: 3.2%

Financial Ructions

Note: ‘Financial Ructions’ is optional-to-read for those who are interested in taking a bit of a deeper dive…

Government Spending

In an opinion piece in the Globe and Mail, former Liberal party finance minister Bill Morneau says:

  • Despite the disastrous state (PM: My words) of our country’s finances that the government needs to spend even more (PM: His words).
  • He mentions that one of the issues is that productivity in Canada has stagnated:
    • PM: Yes, because the government has been increasing spending at a prodigious rate.
      • And can only do so by extracting more and more from the private sector.
  • He also acknowledges the fact that Canada is experiencing declining GDP per capita i.e. the economy is growing slower than the population.
    • And that this “underscores the urgency.”
    • PM: Yes, the urgency is to reduce government spending, not increase it.
  • He notes that when he was finance minister, the economy was growing faster than the cost of borrowing.
    • PM: Yes, but that was only because central banks drove interest rates to zero, which served to destroy the productive capacity of the economy by distorting the all-important price discovery mechanism.
    • On the other hand, it did cause a housing affordability crisis and transferred wealth from those who most need it to those who don’t.
  • He rightly says that a growth agenda needs to come first which will then help to fund the social spending.
    • Yes, but the growth agenda means government getting out of the way and instead “facilitating” the conditions (investment in infrastructure, lower taxation, less bureaucracy) for the private sector to invest and attract capital from outside the country.
    • It doesn’t mean that the “government” should invest more.
  • And that “Good social outcomes always start with prudent fiscal policy and health economies.”
    • PM: Too late.

Foreign Held Debt

US Federal debt held by foreigners and international investors:

  • 2007 (pre-GFC): $2.4 trillion
  • 2020 (pre-COVID): $6.9 trillion
  • 2023: $8.1 trillion

However, although foreign holdings of US debt continue to rise:

  • US issuance of new debt is rising much faster.
  • Such that the percentage of US debt held by foreigners has fallen significantly.

Foreign holdings as a percentage of US Federal debt held by the public:

  • 2007 (pre-GFC): 46%
  • 2020 (pre-COVID): 40%
  • 2023: 30%

PM: Remember that US debt “held by the public” eliminates debt held by other government agencies.

  • Including all of the government agency-held debt, foreign holdings are currently 24% of the total.

Disclaimer: Note that Paulitical Economy™ should not be considered as investment advice, and I have not verified all of the sources of information.  It is meant for general interest purposes only.  Please consult an advisor if you plan on putting any of your hard-earned capital to work during these turbulent times.

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