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China Moves to Let Currency Rise


China Moves to Let Currency Rise:

http://biz.yahoo.com/ap/070518/china_economy.html?.v=9

Higher Yuan
= Lower Dollar
= More expensive products in China
= More revenue and profit for WMT
By Vooch at 2007-05-18 15:39 | Stocks | Vooch's blog


China Moves to Let Currency Rise

Doesn't Wal-Mart use USD to buy the majority of their products from China in Yuan? This seems like it would make it more expensive for Wal-Mart to to source products from China. This would put downward pressure on profit margins at WMT - although they may be able to counteract this with other improvements to the business.

Generally, a lower US dollar is good for U.S. based export companies. A higher US dollar is good for US based importers (this is the category that WMT falls under, in my opinion)

Cheers,

Pat
By Pat at Fri, 2007-05-18 17:52 | login or register to post comments

Pat,The Chinese products

Pat,

The Chinese products will cost more, so WMT will have to raise prices, which means higher profits (not lower).

- Vooch
By Vooch at Sat, 2007-05-19 00:48 | login or register to post comments

Vooch

I think I misunderstood your original post.

If Wal-Mart can pass higher input costs on as higher prices at the consumer level then they will have higher revenues. This may result in higher profits but I think it will likely lower WMT's profit margins.


By Pat at Sun, 2007-05-20 14:50 | login or register to post comments

Currency Moves

There's a great article at The Economist website on this topic. For my part, I think it is economic suicide for the US to force the Chinese into a large revaluation of the yuan. I can understand that American politicians are under a lot of pressure to "do something" from voters, but I'm not sure the Chinese will take kindly to the pressure.
Considering the sway the Chinese hold over the US government debt market, I'm not convinced the US is in a position to dictate terms. If not from China, where will the $2 Billion a day to fund the US current account deficit come from? Is there a private equity firm waiting in the wings to buy out the government? Wink

As for WMT, a falling dollar will make everything they sell more expensive. That's okay, though. The government will just change the CPI to exclude food, energy AND things sold at Walmart.

SunTzu
By Suntzu at Fri, 2007-05-18 20:50 | login or register to post comments

Great Article

Thanks for the link to that article. I've noticed that recently more and more people are abandoning the idea that a revaluation of the Yuan will correct the American current account surplus. This article makes the arguement clear. Vooch: Higher input costs for Wal Mart will force them to raise prices to MAINTAIN their profit levels. E.G. If your widgits cost $5 and you sell them for $6 you make $1. If your widgits increase to cost $6, you have to raise prices to $7 to maintain the $1 profit. Theoretically you would actually lose money because fewer people would want to buy widgets for $7.
By sharpsicle at Mon, 2007-05-21 15:28 | login or register to post comments

sharpsicle,Using your

sharpsicle,

Using your numbers...

$5 * 20% profit = $6
$6 * 20% profit = $7.20 (selling price, not $7)

$1.20 profit vs. $1.00 profit = 20% increase in profits

People won't buy less.  They'll demand wages and the government will be forced to increase the minimum wage rate because of inflation.  It's a never-ending cycle.

- Vooch
By Vooch at Mon, 2007-05-21 15:41 | login or register to post comments

What are you talking about?

Vooch:

This is an excerpt my blog (no link because I don't want to keep pimping it):

"April turned out to be a terrible month for American retailers. The bulwark Walmart reported a 3.5 percent decline in same-store sales for April–the worst performance the company has ever reported. This number was signigicantly worse than the analysts’ expectations of 1.1 percent. Meanwhile, Target reported a 6.1 percent decline in same-store sales for April. According to this CNN Money column, a Thompson Financial average which tracks 52 retailers reported a 1.8 percent decline–the worst drop in the index’s seven year history. The usual scapegoats were blamed–weather and petrol. Certainly, rising gasoline prices were a factor, but I suspect a consumer encumbered by rising debt without rising wages to service such debt are beginning to reign in spending."

I probably should have mentioned something about how home-equity borrowing is declining.

What was that about people not buying less? They already have.

Ludwig von Mises is rolling over in his grave from your last sentence.
By smtkr at Mon, 2007-05-21 20:55 | login or register to post comments

rediculous

here's a question for you Vooch: If Wal Mart could sell that widget for $7.20 without a drop in sales, why wouldn't they just raise the price now? I'm guessing that economics wasn't your major.
By sharpsicle at Tue, 2007-05-22 00:43 | login or register to post comments

sharpsicle,For your

sharpsicle,

For your information, I've got a Bachelor's degree in General Business with Minors in Decision Science and Business Information Systems.

The problem is that I've tried to shortcut (ie. use a couple sentences) to describe something that is complex.

Unfortunately, I did a terrible job explaining it, and I'm not going to take the time to explain it in great detail.

- Vooch

P.S.  It's spelled "ridiculous" not "rediculous".  I'm guessing that English wasn't your major.

By Vooch at Tue, 2007-05-22 12:23 | login or register to post comments

Nope

English wasn't my major. Actually i failed english. I studied finance. I have to admit, it's pretty funny that I misspelled ridiculous.
By sharpsicle at Tue, 2007-05-22 12:37 | login or register to post comments

Wal-Mart Margins

My thoughts:

  • Since Wal-Mart does not manufacture anything (to the best of my knowledge), they might be able to pass on higher costs to consumers.  The best-case scenario is that they will pass on these increases fully as to not hurt profit margins.
  • A more likely scenario is that they will have to absorb part of the increase in costs, thus squeezing margins.
  • Their overseas operations might be able to partially offset any loss in the U.S.  But considering most of their stores are in the U.S., this is not very likely.
  • Initially, like everyone else, Wal-Mart's sales and margins will be hit.  It is already going on as they just reported worse ever sales.
  • Long-term, however, because Wal-Mart is such a strong and efficient company, they will thrive.  Their competitors will go bankrupt.  Or their competitors will be so beaten down that Wal-Mart will be able to acquire them at bargain prices.  Either way, Wal-Mart will be one of the last retailers standing.  And of all the retailers out there, Wal-Mart has the best chance of staying profitable should some sort of major recession hit.
  • Finally, as peoples' wallets become thin, shoppers will stop going to the American Eagles and Bodyshops, and possibly start buying necessities at Wal-Mart.  Wal-Mart, after all, will always have the lowest price.  Smile
By Theo at Tue, 2007-05-22 18:02 | login or register to post comments