Nov 5, 2010 Premium Auto Sales Surging

 

The numbers, however, speak for themselves. High-end European automakers are at or near record levels of profitability, even as the European and American economies continue to muddle along at best and while European governments ponder aggressive new fiscal austerity measures. 

 

What gives? One word: China.

 

According to the Financial Times, “Mercedes car sales increased 17% to more than 317,000 units in the third quarter [of 2010], to a large extent driven by a 140% rise in China to 40,748 vehicles. Mercedes sold one in eight cars in China during this period.”

Consider this. Mercedes, the number one luxury auto in the world, already sells one out of every eight of its cars in China. Its sales to other fast-growing emerging markets are doing well, too.

 

The new rich in China are, also, buying luxury fashion, handbags, watches and jewelry are also booming in this emerging market juggernaut. According to the Economist, Chinese luxury sales grew 20% during 2009, one of the worst global retail years in history. Sales are forecast to grow another 30% in 2010. In five years China will likely be the 3^rd biggest market for luxury goods.

 

Even during an extremely difficult economic climate at home, European and American luxury brands and retailers are enjoying some of their best years in history by following the money to China and other up-and-coming countries. As investors, we, too, need to follow the money which is the purpose of using a relative strength process rather than modern portfolio theory. Our primary ETF portfolios acquired shares of SPDR S&P CHINA fund (GXC) on September 10^th. At the close of the market on November 4^th, it had grown 13.24%.   

 

The Baby Boomers, the largest and wealthiest generation in history, are trading down and scaling back their lifestyles in order to save for retirement. Companies have grown rich catering to the Boomers. Now, whether a large, publically-traded multinationals or a modest local businesses, they need to find new customers. An example of a business under pressure with this demographic shift is Wal-Mart (WMT). We discussed this with Ken Gronbach on our October 9^th radio show. 

 

Companies that figure out how to profit from the Echo Boomers are potentially building a great business model for the next 20 years. Companies that figure out how to profit from the new middle class in China and other emerging markets are, also, positioning themselves to prosper. This is reflected in our ETF portfolios.

 

By constantly checking the relative strength of individual companies, funds, asset classes and countries, we can “follow the money.” Our opinion of what should happen is irrelevant. Where the collective universe of investors actually puts their money to work is identifiable every trading day. It is what it is. When the facts change, we must adjust to the new reality.

 

The Fed’s commitment to intervene in the capital markets is a game changer for investors who for fear or confusion have been exiting the equity markets in droves. Confusion is certainly justified when Mr. Bernanke seeks guidance from the primary dealers in Treasury bonds. Fear, on the other hand, is an emotion causing investors to seek safety in bonds ignoring the increasing risks in the fixed income asset class.