Hello and welcome to “Financial Insight”. Let’s first focus on a piece of news from mainland China.
Today’s Focus: Despite the high cost of the War of Ha, how long can the Israeli economy withstand it? How did $250 billion escape China’s supervision? China’s economy is really struggling, high-end cosmetics brands sales are disastrously low! Musk shouts himself hoarse, Trump concept stocks soar by 400%!
According to a report by The Wall Street Journal on Wednesday, from June last year to June this year, as much as $250 billion may have evaded Chinese supervision and flowed out of China.
It is well known that the Xi Jinping regime is most concerned about capital outflows. Therefore, over the past decade, the Chinese Communist Party has introduced more and more stringent regulatory measures to prevent capital outflows. Currently, individuals in mainland China are limited to an annual foreign exchange purchase quota of $50,000. Violators will face hefty fines and even imprisonment if they violate the rules.
Financial institutions in Hong Kong have also started implementing strict restrictions on cash deposits. Now, anyone who deposits over $10,000 in a week must provide proof of the source of the funds.
Despite this, capital flight cannot be fundamentally eradicated, which also illustrates that, due to the scarcity of investment opportunities in China, people spare no effort to find ways to move funds out of mainland China.
For example, people will transport valuable items overseas, sell them abroad for US dollars, or overstate the costs of imported goods, pay the overstated part in US dollars abroad, and then deposit them in overseas banks.
In addition, some have started to consider using cryptocurrencies. For example, they will ship computer hard drives containing cryptocurrencies overseas, exchange them for cash, and then transfer them to other places.
Furthermore, art auctions also provide a way to transfer funds. A professional from a large auction house told reporters that most transactions in mainland auction houses are dominated by wealthy Chinese people who want to move funds out of China. Their methods are not complicated: first, they transport a painting or other valuable artwork to Hong Kong and sell it at an auction. However, the funds are not repatriated to mainland China but are deposited in Hong Kong in US dollars or other foreign currencies. Subsequently, the sellers will find opportunities to transfer the funds to other places.
We have an episode dedicated to a detailed explanation of how to use art auctions to launder money. Interested friends can watch that episode.
Additionally, according to individuals from family offices managing the assets of Chinese billionaires, in order to circumvent Chinese regulations, some entrepreneurs have set up shell companies overseas in the names of family members and then used these companies to acquire shares of Chinese companies. This allows the Chinese company to be re-designated as a Sino-foreign joint venture, thereby circumventing the restrictions of the Chinese Communist Party on individuals. Assets in China will be transferred overseas as stocks, options, or in other ways under the identity of foreign investors. Of course, this method of transferring funds is slow but can move a large volume of assets. Many high-ranking elite families often use this method because the amount of assets they want to transfer is too substantial.
The escalation of capital flight also indicates the extent of the deterioration of the Chinese regime’s economy. According to data from the International Monetary Fund, by 2025, China’s economic growth rate is expected to slow from the current 5% to around 3%, whereas before 2020, its growth rate was close to 7%.
Moreover, according to Barclays Bank, since 2021, the epic collapse of the real estate market in China and has led to an estimated loss of around $18 trillion in household wealth. All of these have fueled the massive flight of capital.
Now let’s turn our attention back to the United States and focus on the housing market. On Wednesday, the National Association of Realtors (NAR) released the latest data, showing that existing home sales in September hit a new 14-year low in the United States, mainly because people are generally expecting further declines in loan rates and property prices to become more attractive. As a result, many potential homebuyers are cautious.
In September, the total number of existing home sales in the United States was only 3.84 million units, 40,000 units less than market expectations, a 1% decline from the previous month, and unadjusted existing home sales fell by 4.9% year-on-year compared to the same period last year.
Over the past two years, the US existing home market has been stagnant. One major reason is the so-called “lock-in effect”, whereby homeowners who bought homes that year hope for an increase in prices, while prospective buyers hope for further drops in loan rates. Consequently, homeowners are reluctant to list their homes for sale, and buyers are reluctant to take out loans at high-interest rates.
As of September, the median sales price for homes in the United States was $404,500, a 3% increase from the same period last year.
In September, the inventory of existing homes was about 1.39 million units, up 23% year-on-year. However, the current supply of homes is still below pre-COVID-19 levels. At the current sales rate, it will take about 4.3 months to exhaust the inventory on the market, indicating that although housing inventory continues to rise, overall market supply remains tight.
Whether the real estate market will rebound depends on the pace of further interest rate cuts by the Federal Reserve late in the year and the situation that unfolds after the US election is finally settled. Once all of this has further clarity, the US housing market is expected to change accordingly.
If you have a Costco membership card, you may have noticed a change. When you enter Costco stores, you must now scan your Costco membership card at the entrance. Yes, this is a new measure introduced by Costco to reduce the sharing of membership cards.
On Tuesday, Morgan Stanley reported that Costco is implementing a membership scanning device nationwide in the United States, and market research shows that this measure has led to higher membership conversion rates. The number of members at some Costco stores is growing at double-digit rates, which will bring a growth effect similar to that of “Netflix.”
In 2023, the streaming giant Netflix took a series of measures to reduce password sharing, which resulted in a growth of 20-25 million members in six months. This initiative inspired Costco.
As a membership-based warehouse club, Costco’s main revenue source is membership fees, which contribute nearly 70% of net profits. Rapid membership growth will undoubtedly increase Costco’s cash revenue and profits.
According to J.P. Morgan’s estimate, after the implementation of the membership card scanning program, Costco’s membership growth will reach 8% in the 2025 fiscal year, with an expected increase of 4 million members in North America. This will bring about an earnings growth of $0.54 per share.
Morgan Stanley rates Costco’s stock as “hold” with a target price of $950.
Zhihan Ma, a Chinese female analyst from Bernstein, on Tuesday rated Costco as outperforming the market for the first time with a target price of $1016, which means the stock has a 15% upside potential.
Zhihan Ma acknowledges that Costco’s valuation is high with a P/E ratio of 50 times, far higher than the industry’s average P/E ratio of around 14 times. But she believes that Costco’s consistent strong sales and profit growth year after year leave room for additional stock price gains. Nowadays, American consumers are increasingly focusing on value, which means they will turn more and more to retailers who can provide attractive everyday groceries. At the same time, Costco’s business model also helps the company stand out. The quality of its products, including the popular private label brands Kirkland, Golden Hare, and other premium products, will inspire customer loyalty.
The US election is heating up. Although Trump is trailing Joe by 1.7% in opinion polls, in the betting market, Trump is leading Joe by 18.2%. On the blockchain betting platform Polymarket, there have been more than $2.3 billion in bets, with 64.1% of bets forecasting Trump’s victory.
Furthermore, with Musk wholeheartedly campaigning for Trump, “Trump concept stocks” such as “Trump Media Tech Group DJT” and PHUN have continued to soar recently, with DJT rising by nearly 200% and PHUN up by 400% in just one month.
Will gamblers be more sophisticated? It will be revealed in just over a dozen days!
In the previous two episodes, we discussed the negative impact of China’s weakening economy on the international luxury goods industry. Now, this negative impact continues to expand. Sales of international high-end cosmetics brands, once favored by women in mainland China, are also declining across the board, and some have even been “cut off at the waist.”
For many international high-end beauty and skincare brands, Chinese women’s penchant for skincare was a massive cash cow, but now this once-thriving tree is shivering in the autumn wind.
French cosmetics giant L’Oréal, which owns several well-known brands like Lancôme and Maybelline, announced its global sales report for the third quarter of this year on Tuesday, showing a growth rate of 3.4%, much lower than the market’s expected 6%. The main reason, of course, is the weak Chinese market, which has seriously dragged down overall performance.
Northern Asia, which is the main market for L’Oréal Group, accounts for a quarter of its revenue. However, after the mainland’s real estate crisis, L’Oréal’s sales in this region have plummeted. In the third quarter of this year, while sales in North America exceeded expectations, L’Oréal’s sales in North Asia dropped by 6.5%, further worsening compared to the 2.4% drop in the second quarter.
L’Oréal Group CEO Nicolas Hieronimus stated that the decline in sales in the Chinese market in the third quarter was significant, with the most significant drop in high-end luxury products, reaching double digits.
Due to investor concerns about China’s consumer capabilities, L’Oréal’s stock has declined by 20% since June, evaporating its valuation by about €50 billion.
However, L’Oréal is not alone. American beauty giant Estée Lauder, who released their financial report for the fiscal year 2024 at the end of August, shocked even more than L’Oréal.
For the fiscal year ending June 30, 2024, Estée Lauder Group’s net profit was only $390 million, a 61% plunge from the previous year. The main reason was a significant decline in sales in the Chinese market, leading Estée Lauder in mainland China into a “closing period.”
Japanese brand Shiseido, loved by Chinese women, saw its profits in the first half of 2024 plummet by 99.9% compared to the same period last year, dropping to ¥15 million, which is less than $100,000! This is a far cry from the market’s average expectations! Do you know how much the market’s average expectations were? It was ¥3 billion, which is nearly $20 million!
The downturn in Chinese business is also the main reason for Shiseido’s profit decline, with sales in mainland China’s stores during January-June falling by 10%-15%.
After this financial report was released in August, Shiseido’s stock plummeted by 16% that day, marking the largest drop since 1987.
Amid the complex situation of the Chinese economy, Shiseido is set to announce new business strategies next month to readjust its business positioning in China.
This Monday, consumer goods giant Procter & Gamble (P&G) also released its first-quarter financial report for the fiscal year 2025, showing a year-on-year net sales decline of 1% for the three months ending September 30. Skincare product sales fell by over 20%, with the biggest drag being the plummet in skincare brand SK-II sales in the Greater China region.
Once a hit among Chinese consumers, SK-II experienced 20% sales growth for 15 consecutive quarters at its peak, leading the entire beauty department of P&G. However, following the irreversible turn of China’s economy, SK-II began a downward trend starting in 2023.
As 2024 nears its end, the word “luxury” is gradually drifting away from the lives of Chinese people.
Next, let’s focus on oil prices. Despite the uncertainties in the current international situation, many regions in the US are experiencing a decline in fuel prices. According to the American Automobile Association (AAA) oil price tracking system, as of this past Tuesday, the average price of regular gasoline was $3.16 per gallon, down by 4 cents from a month ago.
Additionally, Gas Buddy’s tracking system shows that as of this past Monday, the median US oil price has fallen below $3 per gallon for the first time since the beginning of the year.
Ezra Peterson, Senior Director of Way.com, states, “Over the next one or two months, we should see a slight decrease in gasoline prices. Following the transition into spring, gasoline prices are expected to remain relatively stable. ”
Experts point out that the current season tends to witness a decrease in oil prices due to reduced demand. Moreover, some gas stations in certain regions are switching to winter-blend fuel that eases vehicle start-ups, which in turn reduces the demand for crude oil.
In fact, having ramped up refinery production and stabilized reserves, the US has significantly decreased its reliance on fluctuations in the global oil market.
Halloween is just a week away, and many households have already decorated their entrances, bought candies, and are waiting for children to come knocking. However, with prices continuously on the rise, Americans’ Halloween spending this year is expected to shrink significantly.
While Halloween may not be as significant as Christmas and Thanksgiving, it remains a consumer hotspot where many people spend a significant amount on yard decorations, buying candies, and costumes each year.
The National Retail Federation forecasts that the average Halloween spending per person this year will be around $104, $4.62 lower than the historical peak in 2023. Nevertheless, the total Halloween spending across the nation is expected to reach $11.6 billion, lower than last year but still several billion higher than over a decade ago.
Katherine Cullen, Vice President of the National Retail Federation, states, “While Halloween may not make it to the top ten important events tracked by the National Retail Federation, it is undoubtedly the focus that attracts consumers’ attention most during this time, bringing them many exciting moments.”
According to the National Retail Federation’s estimates, nearly 72% of Americans plan to celebrate Halloween this year. In terms of spending, candy accounts for the most significant portion, with 67% of people buying candies, decorations, and Halloween costumes. However, people will be more cautious in their spending this year.
Katherine Cullen, Vice President of the National Retail Federation, says, “We have noticed that while people are willing to spend on these holidays, they are also looking for more cost-effective ways in their budgets.”
“For $5, I saw the same one on Amazon for $13.”
According to a survey by the Retail Federation, this year, 12% of consumers, especially young consumers, will buy Christmas costumes at second-hand stores to save costs.
In addition, due to the historic high prices of cocoa beans leading to a rise in chocolate prices, expect to see a reduction in chocolate quantities in Halloween candies this year, with various gummies or fruit candies taking their place.
In the context of the prolonged Middle East conflict, the Israeli front line is extending. Although devastating blows have been dealt to Hamas and Hezbollah through large-scale airstrikes and targeted assassinations, Israel is paying a high price for this war. Besides severe casualties, their rising fiscal expenditure raises concerns about the country’s economic prospects.
Economists point out that with sharply increasing military expenditures, stagnant economic growth, especially under the pressure war has placed on government budgets, Israel may face issues such as reduced investments and increased taxes.
According to data released by the Stockholm International Peace Research Institute (SIPRI), Israeli monthly defense expenditures soared from $1.8 billion before Hamas launched “Operation Al-Aqsa Flood” on October 7, 2023, to around $4.7 billion by the end of last year, and with the widening military operations, expenses are expected to further escalate.
Last year, the Israeli government spent $27.5 billion on military expenditures, accounting for 5.3% of Israel’s annual economic output, compared to 3.4% in the US. In the three months following the attacks, Israel’s GDP shrank by 5.6%.
War has brought economic burdens, with conscription and extended service periods affecting the labor force. Concerns about security issues will inhibit new investments, disrupted flights will deter many tourists, and the tourism industry will suffer.
The key is that this war appears to have no hope of ending. Against the backdrop of escalating conflicts in the Middle East, Moody’s rating agency announced for the second time this year at the end of September a downgrade of Israel’s sovereign ratings due to the increasing economic burdens brought on by multiple ongoing military conflicts.
Apart from that, an energy crisis is also a severe threat that Israel must confront. In the entire Middle East turmoil, the energy industry has become a prime target. On October 1, Iran launched more than 200 missiles at Israel, prompting Israel to consider a counterattack. Subsequently, Iran warned that if Israel dared to retaliate, their oil and gas fields, refineries, power plants, etc., would be the first to become ruins, turning off Israel’s power and water supplies nationwide, causing industrial stagnation, transportation paralysis. Although Iran’s threats may have some boasting tone, Israel has to seriously consider the consequences should the conflict escalate.
On October 15, in response to this, Israeli officials were quoted by the media as saying that Israel would not attack Iran’s nuclear facilities or oil installations in retaliation for earlier missile strikes. Why did Israel suddenly give up on retaliation? In fact, it was due to energy supply considerations.
In October 2023, Hamas bombed Israel’s two main power plants, severe damages to the power facilities, power lines were damaged, causing parts of Israel to suffer a power crisis, with locals panic-buying power generators and emergency lighting tools.
In June this year, Hezbollah in Lebanon also released a video showing a drone infiltrating Israel, capturing images of Israel’s energy facilities and infrastructure in Haifa, Israel’s port city.
Yoram Laredo, Director of the Israeli National Emergency Management Agency, stated that Israel’s power system infrastructure is under attack, but the country is not prepared for long-term power outages. In the event of a full-scale war, 60% of Israel’s areas will face power outages for 48 hours, and the northern region may even face a power outage of several months. Therefore, Israeli experts unanimously acknowledge that energy security may ultimately become a fatal weakness.
Like most Middle Eastern nations, Israel is hot, arid, and has scarce water resources. However, unlike its oil-rich neighbors, Israel is an energy-poor country. Israel’s oil resources and coal reserves are meager and must rely heavily on imports. As for the distribution of power generation, Israel’s power grid depends on 144 power stations distributed throughout the country, mainly powered by oil, natural gas, and coal.
In this energy structure, if Israel’s energy assets come under attack, major gas drilling platforms will be shut down, natural gas supplies will be cut off, and substitutions with diesel or coal will be made. However, due to the limited reserves of coal and oil that Israel relies on, mainly imported, should disruptions occur in shipments due to attacks on port