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The End Of The Big Box Retailer
Flash sales, the trunk show for the modern age, will shift online sales further
Department stores like Nordstrom, Saks, and Nieman Marcus are just beginning to see new online competition from flash sale sites Business Insider Intelligence projects flash sales could hit $6 billion by 2015, fueled by HauteLook, Rue La La, and Gilt Groupe.
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The End Of The Big Box Retailer
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The End Of The Big Box Retailer
2. AMERICA IS AGING
The U.S. is getting older and a sea of baby boomers are setting their sights on retirement. That is presenting a host of problems that the country will have to face over the next decade, including the everincreasing life expectancy rates' impact on healthcare costs and social security funding.
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America Is Aging
42.1
The projected median working age In America, up from 35.4 in 1986
45%
Of Americans believe they will have to retire later than expected
59%
Of Americans aged 55+ have less than $100K saved for retirement
Source: UNC Institute on Aging, AARP, Merrill Lynch, Gallup, Rutgers University
75%
Of Americans expect to have to work after retiring
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America Is Aging
Adding to concerns of senior preparedness are Social Security and Medicare funding issues
The aging of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security and MedicareWithout significant changes in government policy, those factors will boost federal outlays relative to GDP well above their average of the past several decadesa conclusion that holds under any plausible assumptions about future trends in demographics, economic conditions, and health care costs.
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Source: CBO
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The Mobile Revolution
Over the past several years, the top five U.S. manufacturers have shifted considerably
Although Samsung continues to lead the U.S. market, with 25.7 percent of total sales in May, the second through fifth largest OEMs are in a tight race. LG and Apple follow closely, while Nokia and RIM have been pushed out.
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The Mobile Revolution
Carriers are markedly differentiating themselves from one another through new technology and pricing plans
Some examples: Sprints Unlimited Everything Plan & Verizons Share Everything Family Plan Below, updated subscriber counts for the top four American wireless carriers through the first quarter of 2012:
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The Mobile Revolution
109.8 M 55.7 M
103.9 M 33.3 M
4. A WEAKENING INFRASTRUCTURE
Underinvestment in major infrastructure projects has weakened the backbone of the U.S. its interstate highway system. The World Economic Forum currently ranks the U.S. 16th in terms of infrastructure quality. Worse, spending is not anticipated to pick up over the next decade.
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A Weakening Foundation
Budget constraints have weighed on public construction spending, which has fallen 15% from its peak to $274 billion in 2012
Total Public Construction Spending in the United States
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A Weakening Foundation
And yet two of the countrys largest infrastructure projects remain on track
A notable exception to this slowdown is New York City, which has seen its largest capital expansion in history under Mayor Michael Bloomberg. The city will spend upwards of $50 billion over the next 10 years on projects like the extension of the 7 train and the Second Avenue Subway. In contrast, New Jersey Governor Chris Christie nixed a planned $8.7 billion tunnel under the Hudson river that would have doubled the number of commuter trains entering the city, saying the state could not afford it.
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A Weakening Foundation
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Rise Of Student Loan Debt
New Delinquencies in U.S. Personal Loans (Loans 30+ Days Past Due)
Young people arent the only demographic saddled with student loan debt
Those over the age of 30 comprise 60.4 percent of borrowers of student loan debt and 75 percent of the total dollar amount of student loan debt long after they have graduated from college
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Rise Of Student Loan Debt
Elevated consumer debt levels are likely to weigh on spending for some time
Mitsubishi UFJ Morgan Stanley economists opined in a recent report on student loan debt:
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Rise Of Student Loan Debt
It will not be easy for those under the age of 40 to pay down debt given the concentration of student loan debt in this cohort. Many parents who took out student loans for their children will be unable to save enough for retirement, making it difficult for them to pay down debt after they retire. Further, if sluggish incomes lead to continued drawdowns of savings and credit card use, the household deleveraging process could drag on.
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The need to import energy is expected to decline over the next 20 years
The EIA estimates that most of the gains will come from increases in natural gas and renewable energy production as a portion of total energy generation. In fact, the EIA sees the U.S. becoming a net liquefied natural gas exporter in 2016 and an overall net exporter of natural gas in 2012. Liquid reliance, which depends heavily on auto use and miles driven, is also seen declining as consumption needs by U.S. consumers remain below pre-2008 crisis levels.
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The U.S. Energy Boom
Green energy production has yet to ramp up as weak business conditions hold back growth
On the green front, state rules impacting electricity generation and federal laws on ethanol blending will have the greatest impact on the country's shift to renewable resources. However, the recent investment by the federal government in a number of green technologies has fallen under scrutiny; the failure at Solyndra and continued difficulty at First Solar have put the survivability of the U.S. solar industry into question.
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The U.S. Energy Boom
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As consumers put off new car purchases, the countrys fleet has aged meaning Americans will have to replace older vehicles soon
Cars on the road today are some of the oldest ever recorded, with the countrys fleet averaging more than 10 years old. Consumers are beginning to head back to dealerships again and purchase new vehicles.
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Car Culture On The Decline
Source: Citi
Over the next several years, auto sales will likely be range bound near 14 million, but there are huge headwinds that could push sales lower
If the density ratio faces a decline each year solely because of the older generations tendency to de-stock, the void is left for the younger generations to pick up the slack The name of the game here is to keep the density ratio as flat as possible (return to 1990s density ratio could equal 12-13mln SAAR for years, stable ratio 14-15mln overnight). In other words, the longer-term outlook for U.S. auto sales in many ways depends upon younger generations accumulating as many vehicles/household as their parents.
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Car Culture On The Decline
Source: Citi
And even as the U.S. population continues to increase, Americans are driving less
Part of that may be due to an increasing shift to urban living but its also due to Americans staying home instead of vacationing as the weak economy persists.
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Car Culture On The Decline
Still, sales appear to be healthier than they were years ago, even as inventories jump
Incentives from U.S. automakers declined 4.1 percent to an average of $2,482 per vehicle in July, even as industry wide incentives increased General Motors has had issues with full size pickups, which it over produced this year to meet demand forecasts. The automaker currently has 136 days of inventory on hand, or 238,165 units on lots
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Car Culture On The Decline
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The increasing partisanship of Congress has negatively impacted the countrys finances
Long term plans for deficit reduction have been deadlocked in Congress as a debate over added stimulus and cost cutting rages on. Congressional malaise led to a downgrade by Standard & Poors in 2011, stripping the U.S. of its AAA rating. The ratings agency explicitly noted the difficult political backdrop as a reason for its downgrade.
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The Partisan Divide
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The Partisan Divide
And routine federal appointments and programs are now hamstrung by partisan politics
Polarization has made appointments incredibly difficult. President Obama has had trouble appointing even moderate justices to the bench, and it took him years to fill open slots on the Federal Reserves Open Market Committee. And votes that used to be routine, like the aforementioned debt ceiling increase, have become fraught with debate as the Tea Party has leveraged its voice over the Right
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The Partisan Divide
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Major Effects on the Budget In 2022 from ACA Ruling (Billions USD)
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A New Health Care Mandate
Lets take a look at what those differences actually amount to at the patient level Cost in America Coronary bypass: $67,583 Hip replacement: $38,017 Appendectomy: $13,003 Cost per hospital day: $3,949 Angiogram: $798 Cost in France
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A New Health Care Mandate
Coronary bypass: $16,140 Hip replacement: $11,353 Appendectomy: $3,164 Cost per hospital day: $655 Angiogram: $204
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States will have to raise taxes to make up for the shortfalls, or significantly cut services
California, one of the worst pension offenders, has already had to make Worse, the state level austerity is acting as a drag on the economy as towns are forced to layoff workers.
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The Pension Crisis
Source: BEA
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The Pension Crisis
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The Flash Crash of May 6, 2010 remains a vivid example of the dangers of high frequency trading
A widely circulated CFTC white paper concluded that high frequency traders did not trigger the Flash Crash, but their responses to the unusually large selling pressure on that day exacerbated market volatility.
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High Frequency Trading
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High Frequency Trading
Lack of confidence in these algorithm trading systems may keep retail investors away from the market
[The Knight Capital incident] is likely to further negatively impact the exchange industry. Investor confidence, especially within the retail segment, is already low due to the "Flash Crash", MF Global bankruptcy, and other such events. Meanwhile, the increasingly fragmented market structure also has long-term institutional investors frustrated. KCGs problems simply add to the headwinds, and as a result we believe volumes will likely be negatively impacted further.
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High Frequency Trading
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Prices have stabilized and localized again meaning massive swings in one region are not necessarily impacting other areas of the U.S.
And Visible inventory has fallen sharply, Liz Ann Sonders of Charles Schwab says. In fact, the drop has brought this measure back down to its 30-year average. Caveat: there remains a multitude of homes in shadow inventory (homes in foreclosure pipeline or vacant but not-forsale).
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Housing Market Recovery
Defaults have started to trickle down even as banks begin to foreclose on properties at higher rates again
Delinquencies on mortgages declined by 86 basis points year-on-year to 7.58 percent, new data out of the Mortgage Bankers Association shows. Banks, which had paused initiating foreclosures as they dealt with the robo-signing debacle, are beginning to work through the shadow inventory that had built up.
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Housing Market Recovery
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Employment by U.S. manufacturers has grown by more than half a million people since 2010
U.S. manufacturers have added some 524,000 jobs since 2010. Gains are coming from improved competitiveness, which could bring as many as two to three million jobs back to the United States. U.S. unit labor costs declined 10.8 percent between 2002 and 2010, a decrease matched only by Taiwan.
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U.S. Goods Producers Return
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U.S. Goods Producers Return
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Source: Citi
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Less Profitable Banking
And banks will have to slash costs across operations to return to expected levels of profitability
Expect cuts in fixed income trading:
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Less Profitable Banking
Given we expect the overall revenue pool to remain below normal levels due to the macro environment plus our expectation that regulatory headwinds will stiffen from 2013 through 2015, our analysis of top global investment banks shows fixed income trading ROEs are likely to remain in the mid to high single digits for sometime. Keith Horowitz and Craig Singer, Citi
And investment banking:
Our 7.0% [2013 estimate of] post regulatory RoE for the investment banks could fall to 6.6% post this regulation (excluding the impact of the latest market risk proposals). We estimate banks would need to cut staff by -19% on average and compensation by -9% in order to return to market acceptable 10% -13% RoEs. Kian Abouhossein and Nana Francois, JP Morgan
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Percent Change in Crop Yield in 2020 (L) and 2050 (R) Under a Climate Breakdown
Source: Mercer
Climate movement presents a host of actions investors will be forced to contend with
1. Regional divergence, in which certain countries like the EU and China take the lead while the U.S. and Japan continue to lag 2. Delayed action, where there is no major policy response to excess emissions until 2020 3. Stern action, named for Nicholas Stern and entailing a swift and immediate policy response to climate change 4. Climate breakdown, in which climate change is never adequately addressed with policy and investors are left open to climate-related catastrophes
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Climate Change
Source: Mercer
But, the market for climate change-related technology investments could be a $5 trillion a year business by 2030
Mercer estimates, based on International Energy Agency data, suggest that additional cumulative investment in efficiency improvements, renewable energy, biofuels, and nuclear and carbon capture and storage could expand in the range of $3 trillion to $5 trillion by 2030 across the mitigation scenarios examined in this study. This presents meaningful investment opportunities that are still in their infant stages. Climate Change Scenarios: Implications For Strategic Asset Allocation (2012)
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Climate Change
Source: Mercer
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The countrys post office is deeply indebted and has already defaulted on some of its debt
In August, the U.S. post office failed to make a payment to make a $5.5 billion prefunding payment for retiree health benefits and will likely default on a second similar payment of $5.6 billion due in September. The agency says it will run out of cash in October of 2012. Nonetheless, there is little the agency can do alone because of Congressional mandates including increasing service as new homes are added in the U.S. (the USPS says it services 700,000 new delivery points every year)
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End Of The Post Office
Source: USPS
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End Of The Post Office
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The rise of smaller cities, like Boston and Washington D.C. will lead the countrys growth over the next decade
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Cities Powering Growth
The true vigor of Americas urban economy comes from a broad base of dynamic middleweights and the relatively high per capita GDP they achieve. There are just over 255 middleweight cities in the United States, compared with just over 180 in Europe. And they generate more than 70 percent of US GDP today, compared with just over 59 percent in Western Europe. In fact, the top 28 US middleweights alone contribute more than 35 percent of US GDP. The dynamism of middleweights in the United States is a characteristic of todays global urban expansion, making them an interesting group to understand for both US and global growth prospects.
Source: McKinsey Global Institute
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Source: SUSPS
News Corp. is investing heavily in a new broadcast network specifically aimed at the Hispanic market: MundoFox
MundoFox is a collaboration between News Corporation subsidiary Fox International Channels (FIC) and RCN Television. FIC CEO Hernan Lopez told Variety in April that there is an increasing demand for quality Spanish-language content in the U.S. from both viewers and advertisers. And they have reason. Below, Hispanic viewers as a part of major broadcast shows:
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Changing Demos
"Two and a Half Men" on CBS 611,000 Hispanic Viewers "Grey's Anatomy" on ABC 583,000 Hispanic Viewers "Glee" on Fox 518,000 Hispanic Viewers Modern Family" on ABC 798,000 Hispanic Viewers
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Under Republican proposals, defense spending could hit nearly $1 trillion by 2022
Should Mitt Romney become President, he has pledged to massively increase defense spending. Though his budget and tax plans lack detail, Romney says he plans on cutting taxes significantly. To meet deficit reduction targets and reach this level of military spending, Republicans would have to make significant cuts to non defense discretionary spending and entitlements.
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Military Spending Pressured
The Fiscal Cliff could cap spending more than $100 billion below both Democrat and Republican plans
The third option is that we hit the fiscal cliff full on. The caps mandated by the Budget Control Act would lead to significant cuts in Military spending to about $455 billion a year. However, spending would remain well above the post cold war average, and continue to significantly outspend China, our closest rival in defense spending.
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Military Spending Pressured
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Companies are aggressively trying to cut costs as they find blockbuster drugs harder and harder to develop
High rates of attrition and high regulatory barriers make the discovery of new drugs incredibly expensive. That has led to a wave of acquisitions of smaller biotechnology companies by large firms seeking innovation, including GlaxoSmithKlines recent $3.01 billion offer for Human Genome Sciences
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The Pharma Patent Cliff
Source: FDA CDER, PhRMA and PricewaterhouseCoopers analysis. Note. Data on R&D spending for non-PhRMA companies are not included.
Drug companies, understanding that billion dollar plus drugs are harder to come by, are shifting their strategy
Pharma companies are exploring treatments like personalized cancer therapies, specifically tailored to each patients cancer cells. Below, a look at new treatments and big themes in the sector:
Biosimilars:
Drugs made from and similar to human antibodies.
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The Pharma Patent Cliff
Personalized medicine/ The development of drugs targeted to a certain group of people coupled with a test companion diagnostics: for a mutation or disease variant.
Combination therapy:
Compliance technology: Ways to make sure patients are taking their medicine.
Deep sequencing:
Bringing the time and cost for research down. Possible examples are scanners that can show if a treatment is reducing a tumors energy consumption, and greater use of genetically modified mice.
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To contact the reporters on this presentation please email Eric Platt at eplatt@businessinsider.com. Eric Platt, Matthew Boesler, Max Nisen for Business Insider
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