Caution: Speed Bump Ahead

EditorI went to college in the 1980s. Even though the decade was market by a lust for cash, which led to lavish lifestyles, big hair, and the cocaine wars, one of the television heroes of the day was usually broke.

Thomas Magnum (Tom Selleck), was a private investigator and beach bum. While he personally didn’t own any toys of the rich and famous, he was a permanent guest of the fabulously wealthy Robin Masters. As such, Magnum had access to everything, including the coolest car of the day – a red Ferrari 308 GTS.

Because of the popularity of the show, that car is one of the most recognizable vehicles in history, and it still turns the head of every guy near my age. (For a bit of trivia on that car, read the P.S.)

The world appetite for Ferraris has waxed and waned over the years, but the boost the company received from that show never faded. The car remains a singular status symbol.

Recently the company went public, cashing in on its fame. Unfortunately for investors who bought the shares…

…the offering came right as the biggest potential market is turning down. Coupled with another development, this clouds Ferrari’s future, but it bodes well for another iconic product.

There’s no question that the Chinese economy is slowing. Last quarter, GDP growth fell below 7% for the first time since the financial crisis. Unlike back then, there’s no crisis today. Instead, world demand is simply trailing off without any expectation of a quick bounce back.

Chinese exports fell 9% in July, and 5.5% in August. That’s tough. But what’s more telling is that imports were off more than 13% in August, pointing to a slowdown in both the manufacturing of exports and domestic demand. Unfortunately for businessmen and government officials, financial pressure isn’t the only problem they face.

Chinese President Xi Jinping made rooting out corruption a top goal of his tenure. He has removed several top party officials from their posts and put them on trial, which is just a formality. I’ve yet to hear of any Chinese official charged with corruption who emerged victorious from the court system. To avoid unwanted scrutiny from regulators, people of all stripes are avoiding flashy displays of wealth, like Ferraris.

The double whammy of a falling economy and more cautious wealthy consumers created a shortfall in the car company’s Asian sales. Overall, third-quarter sales beat estimates. Revenue increased 9% and profit popped 62%. But sales in Greater China fell by 50 units, or 24% from the previous quarter.

The company only sold 1,949 units around the world, so a 50-unit shortfall should give it pause, especially since it occurred in the region that’s supposed to account for much of the growth in the years ahead.

Apparently investors are worried about the speed bump. After earnings were announced, Ferrari’s share price fell well below the recent IPO price. The stock then recovered some of its lost ground, but it’s definitely not winning any races.

The story couldn’t be more different for another iconic product that also recently announced earnings.

While sales of its iPhone 6 and iPad both fell slightly shy of expectations, Apple posted a $50.9 billion increase in revenue over the last 12 months, with a whopping $26.9 billion coming from China. The country accounted for 39% of Apple’s sales growth in 2014, 57% in the first quarter of this year, and 66% in the most recent quarter. The strongest numbers were in iPhone sales.

There’s no doubt that cheaper phones are available. They all make phone calls, and many of them provide texting platforms and the ability to surf the Internet. But the competitors aren’t iPhones, which are definitely the Ferraris of mobile communication.

What makes the iPhone different from a Ferrari is that it costs less than $1,000 and fits in your pocket. They still might be a status symbol, but not on a scale quite as grand, which will be Ferrari’s problem for years to come.

Consumers prioritize their spending. When money gets tight, or circumstances become more difficult, they might not be able to “go big” in quite the way they did before. But they can still splurge in small ways. This explains why life in China is looking up for Apple, but could be a hard road for Ferrari.

Consider this when deciding where to put your investment dollars.

Rodney

Follow me on Twitter @RJHSDent

P.S. Here’s some 308 GTS trivia for you: the producers originally wanted to use a Porsche 928, but Porsche wouldn’t make the sunroof bigger (bet they’re sorry now), so they chose the Ferrari with the Targa top. However, the car was too small for the 6’4” Selleck, so they took the padding out of the driver’s seat and bolted it to the floor as far back as it would go. Even with the modifications, he was rarely filmed with the top on the car. Also, they used four different year models, all 308 GTSs, while filming the series. Because of the popularity of the car, the model still costs around $35,000, and parts are said to be breathtakingly expensive.

 

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.