Monthly Archives: June 2016

Building A Framework for Future Earnings Considerations

To demonstrate “fair” values for equity issues, I’ll elaborate on techniques in credit analysis to identify illustrate the relationships between bond yields and equity yields.


  • Credit Analysis: franchise power (reputation), capital (leverage), earnings power
  • Yield to Maturity: market price, coupon, term to maturity (and here, sketch relative yields for different credit classes & characteristics of each class)

Financial Risk Profile Assessment
(per Standard and Poor’s)

Default Probability

Switching Costs

  • Financial switching costs (e.g., fees to break contract, lost reward points)
  • Procedural switching costs (time, effort, and uncertainty in locating, adopting, and using a new brand/provider)
  • Relational switching costs (personal relationships and identification with brand and employees)

Per Wikipedia

To-Do: June 29, 2016

Site structure progress moving steadily forward. Outstanding items:

  • Add time structure to “Micro / Macro Structures” category (and rename category, perhaps: systems)
  • Continue to log and index sidebar / migrate images to imgur
  • Continue research on Norwegian Cruise Lines, Priceline, Skechers, VIP Shop
  • Reference: Credit Suisse, Operating Leverage
  • Also, consider synthesizing notes from McKinsey Valuation, Security Analysis, One Up on Wall Street
    • Develop integrated investing framework
  • Leisure: Meditations, Marcus Aurelius


Impacts of Brexit

Direct Effects

  • Even if the UK fell into a recession, which is a distinct possibility, the direct knock-on effect on global GDP through lower UK import demand would be minimal as the UK accounts for only 3.6% of global imports of merchandize goods and 4.1% of global imports of commercial services
  • Business investment around the globe is likely to be dampened somewhat due to the heightened uncertainty about the global implications of Brexit and the tightening of financial conditions…Nicola Mai estimates a negative impact on GDP of around 0.3%. The effect on the U.S. and other regions would likely be smaller

Related “Swing” Factors

  • Further strengthening of the dollar in response to global risk aversion would be a problem not only for U.S. growth prospects but also for all the dollar debtors in emerging markets, and could also push commodity prices lower
  • China might react yet again to dollar strength by allowing a more rapid depreciation of its currency against the greenback, which could intensify global growth and deflation concerns
  • …we anticipate further action by virtually all major central banks to limit the potential damage.
    • We expect the Bank of England to cut its official interest rate from 0.5% to zero relatively soon and, if more is needed, to restart quantitative easing
    • 50:50 chance on additional European Central Bank easing before Brexit
    • Bank of Japan easing at the next policy meeting on 29 July and sees a high probability of currency intervention to weaken the yen in the near future
    • …in the U.S., a July hike is now completely off the table, September is not impossible but a low probability because the dust from Brexit may not have settled yet and the U.S. presidential race will be in full swing

Most importantly, investors will have to factor in a higher chance of a stagflationary outcome over the next three to five years: even lower growth or near-stagnation coupled with a significant rise in inflation

  • Current or future governments turn more protectionist by erecting barriers to trade and migration…
  • …and take up or intensify the battle against inequality by redistributing income (through taxation and regulation) from capital to labor.

Source: Barrons (June 2016)

China Middle Class

  • …research suggests that within the burgeoning middle class, the upper middle class is poised to become the principal engine of consumer spending over the next decade….a new, more globally minded generation of Chinese will exercise disproportionate influence in the market.
  • Along with affluent and ultrawealthy consumers, upper-middle-class ones are stimulating rapid growth in luxury-goods consumption, which has surged at rates of 16 to 20 percent per annum for the past four years
  • …many G2 consumers were born after Deng Xiaoping’s visit to the southern region—the beginning of a new era of economic reform and of China’s opening up to the world. They are confident, independent minded, and determined to display that independence through their consumption.
  • …They are also more likely than previous generations to check the Internet for other people’s usage experiences or comments. These consumers seek emotional satisfaction through better taste or higher status, are loyal to the brands they trust, and prefer niche over mass brands
  • …middle-class growth rates will be far greater in the smaller cities of the north and west. Many are classified as Tier-three cities, whose share of China’s upper-middle-class households should reach more than 30 percent by 2022, up from 15 percent in 2002.

Source: McKinsey (June 2013)

China Consumption

  • Growth in spending on annual discretionary categories in China is forecast to exceed 7 percent between 2010 and 2020, and growth of 6 to 7 percent annually is expected in a second category of “seminecessities.”
    • Growth Rates, from 2010 to 2030:
      • Transportation and Communication: 15-20%
      • Recreation, education, and culture: 15- 21%

Source: McKinsey (May 2015)

Chinese Consumers

  • When asked about their expectations regarding future income, 55 percent of consumers we interviewed were confident their income would increase significantly over the next five years
  • They are allocating more of their income to lifestyle services and experiences—over half plan to spend more on leisure and entertainment (the 50 percent surge in box-office receipts in the past year is just one indicator of that trend).
  • Chinese consumers are also increasingly trading up from mass products to premium products: we found that 50 percent now seek the best and most expensive offering
  • Two-thirds of Chinese consumers say that shopping is the best way to spend time with family, an increase of 21 percent compared with three years ago. Malls—which combine shopping, dining, and entertainment experiences the entire family can enjoy—have benefited most from this trend
  • Consumers also reinforce family ties through travel: 74 percent of consumers say it helps them to better connect with family, and 45 percent of international trips were taken with family in 2015, compared with 39 percent in 2012. More than 70 million Chinese consumers traveled overseas in 2015, making 1.5 trips on average, and shopping is integral to this experience. Some 80 percent of consumers have made overseas purchases, and nearly 30 percent actually base their choice of a travel destination on shopping opportunities.

The Chinese consumer is evolving. Gone are the days of indiscriminate spending on products. The focus is shifting to prioritizing premium products and living a more balanced, healthy, and family-centric life.

Source: McKinsey (March 2016)