WSJ: Consumers in China and Brazil Discover Debt

Number of the Week: Consumers in China, Brazil Discover Debt.Number of the Week
17.1%17.1%: The rise in Chinese credit-card balances in 2009.

While consumers throughout the developed world struggle to shed debt, their counterparts in China and Brazil are piling it on.

In 2009, the year the global recession hit bottom, the aggregate credit-card balances of Chinese consumers rose 17.1% even as those of U.S. consumers fell 8.7%, according to a study by financial consultancy Lafferty Group. Brazilians increased their balances by 28.9%, part of a 9.2% rise throughout Latin America.

More people going into debt might not sound like a desirable development, but in some ways this could be. One of the global economy’s biggest problems has been its dependence on an overstretched U.S. consumer. If folks in places such as China and Brazil are now stepping up and taking on some of the burden, that could provide some much-needed rebalancing.

To be sure, the picture is still unclear. The U.S. is running a large current-account deficit, which means Americans are still spending more than they earn, while the rest of the world — including China — saves to make up the difference.

The data from Lafferty, though, suggest at least the potential for that picture to change. As of 2009, China, Brazil, India and Russia had a total combined credit-card balance of $143 billion, still a far cry from the U.S.’s $849 billion but getting into the same league. Two Chinese banks were among the global top ten by number of cards issued.

The danger, of course, is that consumers in the developing world get themselves into the kind of credit bubble that triggered the most recent global crisis. By international debt standards, it looks like they have a way to go. China’s total credit-card balances amounted to only 2.4% of the country’s annual economic output, compared to 6.0% in the U.S. Brazil’s stood at less than 1%, and India’s was even smaller.

In other words, a little well-placed profligacy might yet do the world some good.

Stock Meeting

Stock Meeting
10-7-2010

ACTION:
-Novozyme on Buy list
-YAR Wally will review for stock committee

Ag names
Yara, YAR
-16B market cap
-1/3 US SALES, S Am exposure, 7-10% sales in Africa, almost 50% to Europe
-currency kicker, Kroner

Gold
-could see a pullback to 1250, 1260
-overbought right now

Fed does nothing: gold drops, market will drop, silver will drop. There is an expectation for action, that is priced in. How much and howling is not priced in.

Novozymes: add to the buy list, rank 2, BT$630 kroner (dkk)
- could break to 630-640
-expensive company, but it is high quality
-enzymes manufacture for detergents, etc.
-2012 next generation of their celulosic enzyme hits the market

Buy and Watch list: columns will be the same on both, updates will go out with the next report

Portfolio management:
-be watchful and ready to react if the market pauses, pulls back
-we have already done some good positioning
-post election cycle has historically been very good
-watch beggar they neighbor attitude

FT: Gavyn Davies: Emerging Equities Will Benefit From Fed Easing

The global implications of QE2

By Gavyn Davies

Published: October 4 2010 15:11 | Last updated: October 4 2010 15:11

The financial markets have now become convinced that another large round of US quantitative easing is on the cards, with predictions focusing on a maximum liquidity injection of $1,000bn over about 12 months – enough to increase the Fed’s balance sheet by 40 per cent and to finance the bulk of the US budget deficit next year.

No wonder the dollar has been falling, gold prices surging and US equities rising in recent weeks.

What about the global effects of another round of quantitative easing from the Fed?

The Bank of Japan and the Bank of England seem likely to follow suit, but the European Central Bank is currently not minded to do so. Whether the ECB can maintain that position indefinitely in the face of a rising euro seems doubtful, but eurozone monetary easing will almost certainly lag that seen in other countries.

Despite this, monetary policy in the developed economies will be eased markedly in coming weeks, and this will pose some severe problems for the major emerging economies, which do not want or need, any form of monetary easing at the moment.

Past experience strongly suggests that the emerging world will be unable to declare monetary independence from the liquidity injection likely in the developed world.

Already, the scale of capital flows into the Asian and Latin American blocs has been exceeding that seen at the peak of the last cycle in 2006/07, with Asian inflows about 60 per cent above that level. Recent research at the IMF has shown conclusively that G4 monetary easing has in the past transferred itself almost completely to the emerging economies, whether or not their own economic circumstances warranted such a move.

In fact, since 1995, the stance of monetary policy in Asia has been almost entirely determined by the monetary stance of the G4 – the US, eurozone, Japan and China – led by the Fed.

There are some legitimate questions about whether these linkages will remain in place now that G4 monetary policy is taking the form of liquidity injections, rather than reductions in short-term interest rates.

One possibility is that US central bank bond purchases will simply result in higher holdings of liquid reserve assets by the US banking sector, with little tendency to transfer any of this dollar liquidity into foreign currencies. That would repeat the behaviour that confronted the Bank of Japan’s programme of QE in the last decade, when the provision of yen liquidity simply got stuck in the Japanese banking system.

But it seems much more likely in the current climate that the increase in the supply of dollar liquidity will cause the dollar to fall, and that has usually been the main channel through which monetary easing has been transmitted to the emerging countries in the past.

The long-term economic consequences of this may not be desirable, but the shorter term impact on markets cannot be ignored.

The IMF research quoted earlier shows that equity prices in Asia and Latin America generally rise when excess liquidity is transferred from the G4 to the emerging economies. But the extent of this is determined in part by the foreign exchange policy of the different emerging economies.

A majority of economies in Asia (following the lead of China and now Japan), and many in Latin America, are likely to increase their foreign exchange intervention by selling their domestic currencies in exchange for dollars. Even though some or all of this will be sterilised by selling short-dated bills to the domestic monetary sector, it will still increase the liquidity of the domestic financial sector, and eventually this leaks into equity prices. Countries like China, India, Korea, Taiwan, Brazil and Mexico may well go down this path, which would be favourable for domestic asset prices on a six to12 month view.

Some other emerging economies, including Malaysia, Thailand, Chile and Colombia may take a different view, allowing more upside in their currencies, and doing slightly less intervention in the foreign exchange markets. The equity markets in these countries may see less upside, but there could still be plenty of scope for currency gains for macro traders.

So far the consequences on emerging currencies and emerging equities (relative to developed markets) of the Fed’s shift towards more QE have been fairly limited.

Some investors have been concerned that a sharp US slowdown may prevent a surge in emerging equities. But there are signs that capital inflows to the emerging world could reach unprecedented proportions in coming months. A combination of slow, but positive, growth in the US, along with more QE, could prove extremely positive for many emerging equity markets. It is a theme to follow.

AAPL, I was wrong...Bernstein on the iPad

Bernstein Initial reaction: Stretched out Touch.
Now: “By any account, the iPad is a runaway success of unprecedented proportion.”

• In the first 80 days, AAPL sold 3M units, the current run rate looks to be closer to 4.5M/quarter. This is destroying all previous records of consumer electronics adoption.
• At the current pace, the iPad is annualizing around $12B in sales.
• Bernstein is forecasting 18M units for 2011 (bullish 2011 estimates have approached the 30M unit mark, translating to $20B in sales.)
• The US market is 45%, about $9B—the total US consumer PC category is about $25B ($19B note/netbooks)

PC’s are feeling the bite.

• In an environment where consumers’ consumption dollars are limited, they are choosing the iPad.
• Using NPD data, unit growth rate for consumer PC’s as of March (just prior to the iPad introduction), was 25%. By June, three months after the iPad, the rate had dropped to 8%, as of August 3%.
• At the notebook level, it’s even more pronounced. Growth fell from 28% in March, to 8% in June, to 1% in August. Consumer notebook sales are on the verge of declining on a y/y basis—this is the first time since the data series began 2005—when y/y growth was 14%.

Cannibalism is happening.

• The iPad is sucking up dollars that would be used to buy other discretionary items (TV and SLR camera sales have declined as well).
• Best Buy is a good example—the cannibalization of the netbook/notebook category was material.
• This could continue into the holiday season—if the luster of a touch screen is enough to draw the money toward it.

JA Solar Announces Supply Agreements With BP Solar For More Than 185 MW

JA Solar Announces Supply Agreements With BP Solar For More Than 185 MW

GlobeNewswire

10/06/10 - 08:00 AM EDT

SHANGHAI, China, Oct. 6, 2010 (GLOBE NEWSWIRE) -- JA Solar Holdings Co. Ltd. (Nasdaq:JASO), one of the world's largest manufacturers of high-performance solar cells and solar power products, today announced that it had signed strategic supply agreements with BP Solar to provide a total of more than 185 MWs of mono-crystalline and multi-crystalline solar cells in 2010 and through 2011.

Under the terms of the agreements, JA Solar will supply BP Solar with more than 100 MW in 2011, beginning in the first quarter. In a separate agreement, which began earlier this year, JA committed to provide more than 85 MW, a significant portion of which has already been delivered, with the remainder continuing through the fourth quarter of 2010.

"We have been working with BP Solar, which has its headquarters in San Francisco, since 2008 and we are very pleased to extend our relationship, as they are one of the world's largest integrated solar energy companies," said Dr. Peng Fang, CEO of JA Solar. "With our leading cost structure, JA Solar provides BP Solar a cost advantage in the residential, commercial and utility markets. This agreement provides JA with firm orders through next year," he said.

"We are very pleased to continue our partnership with JA Solar," said Mike Petrucci, CEO of BP Solar. "A solid supply of high-quality solar cells is critical in meeting our growing demand for BP Solar's proven product line, delivering the highest lifetime value," he said.

ITRI

ITRI raised from sell to hold at Stifel Nicholas

Itron (ITRI/OW) - JPMorgan

The Smart Grid – Unlocked - Itron (ITRI/OW) received a smart water metering contract from the Cleveland Division of Water. ITRI will deploy 425k of its ChoiceConnect 100W water modules, network infrastructure and accompanying software, over a three-year period. The contract is ITRI’s largest water meter automation project in N.America. Landis+Gyr (private) will deploy its Gridstream AMI solution to CoServ Electric’s 150k electric customers. CoServ is an electric coop located in Corinth, TX. Deployment will begin in March 2011 with a targeted completion of 2013. EnerNOC (ENOC/OW) announced that the Turman Group will implement ENOC’s CarbonSMART solution. Turman Group, a wood product manufacturer, will implement the solution throughout its ten-location network. GE (GE/rated OW by JPM multi-industry and electrical equipment analyst Stephen Tusa) introduced the residential GE WattStation electric vehicle charger. The WattStation charges electric vehicles in 4-8 hours and is equipped with technology that allows utilities to manage the impact of EVs on local and regional grids. Coster https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-482257-0.pdf

NATU3.SA, Natura Cosmeticos SA (R$46.50) /Listening to Customers and Reps

NATU3.SA, Natura Cosmeticos SA (R$46.50) /Listening to Customers and Reps

Lore.Serra@morganstanley.com, Jeronimo.De.Guzman

We present our findings from a joint project with our US team that surveyed 800 women in Brazil, spread across income classes and geographies, as well as 90 reps for Natura and Avon. We compare our findings with a similar survey we conducted five years ago, to gauge the underlying trends in the beauty industry in Brazil. We also update our earnings estimates for Natura to reflect stronger near-term growth. We expect that the pace of growth in the Brazilian beauty industry will slow to 10-12% per year over the next five years, vs. the 14-15% growth pace since 2005. Our survey data suggests that a disproportionate amount of historical growth came from Class C consumers. These consumers now spend at high levels relative to their A/B counterparts, who have increased consumption at much lower rates.

9/23/2010: Want Want China Holdings-Stock Meeting

9/23/2010: Want Want China Holdings-Stock Meeting

Full discussion next week, intro discussion today.

Macro, emerging market play: Bill discussed some hedge fund managers see the play as toppy, but if investors look carefully there is room to play.

Wally would hold on investing in Ag commodities/copper, agrees with Michael that the EM consumer is a priority

EM Consumer ETF:
Know your trendy investor acronyms
-CIVETS: Columbia, Indonesia, Vietnam, Egypt, Turkey, South Africa

-EPU would give us exposure to copper

Financial Times series: rise of the EM Consumer
SAB Miller in South Sudan since May 2009, White Bull Beer has spent $37M on factories.

Eggs major source of protein for India and China, competing with Brazil and Argentina for the egg market. Brazil exports to Middle East.

Consumer in developing Asia and Japan reached 4.3T in 2008, 1/3 of private consumption of the developed world. By 2030 could hit 32T, 43% of world consumption.

China
-pushing back against foreigner branding, local branding gaining traction
-Lift 61% of population is middle-class from 1991 to 2008
-IMF expects 34% of population will own cars by 2050, 367M

India:
-Rapid income growth: 33 years to I crease per capita incomes from $100/monh to $500/month; it has only taken 5 years for it to double to $1,000/month
-Penetration of consumer goods is low: 12 cars per 1000 people; 18% own refrigerators; 50% own TV's. China has 128 cars per 1000 people and 80% own TV's
-Provide almost 1/3 of the incremental working population in next two decade

Brazil
- Image conscious, health conscious: personal hygiene, dieting, exercise

Russia
- internet savvy, clicking their way to bargains: groupon.com
- utkonos.ru has 90% of muscovite's food orders

Indonesia
- middle class has doubled in the last 10 years

Vietnam
- is the most eager to spend on electronics
-tied with Indonesia for consumer confidence, behind India, according to Neilso
- large trade imbalance, mostly die to consumer electronics trade with China
- GDP is expected to be 6.5% this year

UBS report on the Future of the Grid - Winners & Losers

Click HERE to get the report out of DROPBOX