Long Term Trends: Part 5: Consumer Debt

Here are some current trends:

1. Gas and Energy Prices remain expensive and may remain expensive in the future.
2. Food Prices remain high and may remain high in the future.
   
3. Consumer Income may not keep up.
   
4. People can no longer use their houses as ATM machines.
   

With consumers being squeezed, what will the consumer (the U.S. Consumer) do? Will they start saving more or will they continue to spend?

This will depend on many factors, such as culture.

In Japan, there is a greater inclination to save compared to Americans.

However, in the United States, the Savings Rates over the last decade is below 4%, a very low personal savings rate. Even during the recession of 2001, the savings rate remains low.

So Americans (and other cultures) still want to spend despite being squeezed by higher gas, energy, and food prices. This means that in order to continue spending, consumers will need to incur more consumer debt.

Ways to play this

Two obvious plays on increasing consumer debt include:

1. Mastercard (MA)
   
2. Visa (V)

Other plays include:

1. American Express (AXP)
   
2. Portfolio Recovery Associates (PRAA) - Engaged in purchase, collection, and management of portfolios of defaulted consumer receivables.
   

Credit Cards Used to Finance Healthcare Procedures

In the July 2008 edition of Consumer Reports, there is an article that details the increasing use of credit card to finance health care procedures. According to the article, $45 billion is spent today, and it could triple to $150 billion in 2015.

Beware of Rising Charge-Offs

Beware of Rising Charge-Offs. In the first quarter 2008, the Big Three all reported rising charge-offs. For example, the Bank of America charge-off rate increase from 4.73% to 5.19 percent.

Long Term Trends: Part 2: Agriculture

In Part 1 of our Long Term Trends Series, we highlighted Energy, Oil, Oil services, Oil Sands, Natural Gas, Oil Pipelines, Refineries, Oil Shipping, Coal, Coal Services, Nuclear, Environment Cleanup and Alternative Energy.

In Part 2, we highlight Agriculture.

In a previous post, we highlighted reasons why there is a food crisis and food inflation, and why these are long term trends.

This is a long term trend that we can profit from.

Select companies include:

1. Monsanto (MON), the biotech of seeds. Do you want drought resistant seeds and higher yielding seeds?
   
2. Deere (DE), farm equipment company.
   
3. Potash (POT), the fertilizer company.
   
4. Archer Daniel Midland (ADM), handles Oilseeds Processing, Corn Processing and Agricultural Services.
   
5. Bunge (BG), handles Agribusiness, Fertilizer and Food Products.
   

Growth of Agriculture in Brazil

Brazil has invested heavily in their sugar cane based ethanol infrastructure. Recently, CNBC had a segment on one of their documentary shows (Business Nation?) highlighting an Iowa farmer going to Brazil and doing well there. Land is cheaper, weather is great year round, and lots of opportunities abound.

This highlights the agriculture growth story, and also shows the potential for growth in areas all around the world such as Brazil.

Agriculture appears to be a good long term trend we profit from.

Reasons for Global Food Crisis/Riots/Shortages. Can we Profit from Trend?

In many parts of the world, there are food riots as the price of rice has gone up to painful levels. What are the reasons behind this and how can we profit and play this trend?

According to Raj Patel, author of Stuffed and Starved: The Hidden Battle for the World Food System, there are five main reasons for the high food prices:

1. Food production is heavily dependent on fossil fuel and oil prices are soaring.
   
2. Biofuel production is boosting prices.
   
3. As nations get richer, they demand more meat, shifting grain "out of the bowls of the poorest people into the stomachs of livestock."
   
4. Poor harvests may be the front end of climate change.
   
5. Speculation on food prices fuels spikes.
   

Soaring oil prices are a main reason as food production is dependent on fossil fuels. In addition, higher fossil fuels encourage alternative energy solutions which includes biofuel production such as ethanol. Rather than providing food for people, fields are being used to produce biofuels such as ethanol. Some people have criticized subsidies for ethanol for encouraging hunger and global warming.

In addition, as the global boom continues, and as nations get richer, nations start preferring more meat. According to worldwatch.org, it takes an estimated five pounds of grain to produce a single pound of beef.

There is also a growing trend as the global food crisis continues where countries with a surplus, such as China, Cambodia and Egypt, have imposed policies that discourage outflow of surplus rice to conserve supplies for domestic consumption. According to an article by Lala Rimando, some exporting countries are holding on to their stocks waiting for the time to unload when prices go further up.

How do we play this Trend?

The most direct way continues to be the agriculture plays. Companies such as Monsanto (MON), the biotech of seeds, Potash (POT), the fertilizer company, and Deere (DE), the farm equipment company, stand to profit.

This trend will most likely continue to be a multi-year trend, and the agriculture sector appears to be a good play.

What about Fast Foods and Restaurants?

Demand for meat will increase, but that also means that the cost of food and meat will increase. But what will rise faster? Demand or the cost of the underlying food product? Let us wait and see what will happen.

Health Foods?

Some people propose and suggest that people go vegetarian because of this crisis.

But will this be a widespread phenomenon?

It would be a good idea to keep track of the health food companies, companies such as Hain-Celestial (HAIN) and Whole Food Markets (WFMI). In general, people will start to be more health conscious and this is good for the health food companies.

Your Ideas

Do you have any stock ideas or thoughts on this long term trend? Please do comment.