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This is the seventh article in a series of articles covering and summarizing different investment themes/thesis. These themes are usually very powerful and explain the moves of stocks, entire sectors or even the entire market. The relevance of themes for specific stocks, sectors and even the entire market is explained in the first article in the series (linked below).

The previous articles in this series (by the order they were published) can be found here:

Themes 19-21

This article will be the seventh in a series of articles summarizing themes, which are moving specific sectors or markets today. Knowing these themes can help when selecting securities. I'll continue with the following three themes:

  • The welfare bubble;
  • Housing recovery;
  • LED Lighting.

The welfare bubble

Theme

The welfare bubble refers to the trend where a significant number of people voluntarily or involuntarily end up on welfare. Due to increases in social programs over the decades, working or producing more is not necessarily advantageous, and indeed it might be possible to achieve greater material welfare by exploiting and aggregating several welfare programs, depending on the State where one lives.

Through economic crisis and peer experiences, more and more people are exposed to this reality. The end result is a significant increase in welfare recipients in many social programs and a decreased incentive to produce in general.

My own article "Is The U.S. Building An Unsustainable Welfare Support System?" explains and exemplifies how this can happen.

This phenomenon is happening across welfare programs like SNAP (food stamps), disability, section 8 housing, etc. Below are the charts for SNAP and disability.

Positive implications

Although sometimes the statistics don't capture it (because they're usually calculated before taxes and welfare), the extension of welfare greatly reduces inequality and poverty. A reduction in inequality and poverty has a positive effect on many socio-economic and health variables, and might also lead to decreased crime.

Additionally, by giving purchasing power to sections of society which would otherwise have little such income, this favors retailers serving those segments, including Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), Dollar Tree (NASDAQ:DLTR), Family Dollar Stores (NYSE:FDO) and Dollar General (NYSE:DG), which increasingly accept EBT cards in their stores.

Negative implications

A decreased incentive to produce is bound to have societal consequences. Indeed, it should over time lead to the impoverishment of the entire society in which it's practiced. The ability to have income, perhaps even significant income, without producing for others is one such incentive.

Also, financing all this welfare can only be done through taxes or money printing. Taxes can reduce competitiveness and the will to invest. Money printing can, over time, lead to inflation. Both can lead to societal disarray and are broadly negative for stocks in general in real terms (though inflation can take values higher in nominal terms).

Housing recovery

Theme

The housing recovery theme rests on two obvious pillars.

First, new housing starts and sales went too low historically. The natural rate of family formation ensured that housing was going to leave those historic lows. The lows were too low especially when we take into account that the U.S. has a larger population now and most importantly, this population is still growing. Japan managed to have a housing bust lasting 30 years mostly because it also had a stagnated population. The chart below shows how low housing went, historically (Source: Federal Reserve of St. Louis, FRED) :

(click to enlarge)

This is even more evident if we take into account the growth of population over time:

(click to enlarge)

Second, the monetary stimulus by the Federal Reserve, together with fiscal stimulus through housing agencies like the FHA, led to it again being cheaper and easier to finance self-owned housing, also increasing demand.

Positive implications

The most obvious winners of this recovery would be the homebuilders like Toll Brothers (NYSE:TOL), PulteGroup (NYSE:PHM), Lennar Corporation (NYSE:LEN) and others. However, as I've written in my article "Housing Stocks Got Well Ahead Of Housing," these stocks probably got well ahead of the housing recovery (since the recovery was so obvious itself).

A second line of positive effects should hit the suppliers to the homebuilders, be it of materials or labor. Chains catering to home building and improvement, like The Home Depot (NYSE:HD), also benefited a lot, but a case can be made that it, too, got well ahead of itself.

Negative implications

The main negative implication of the housing recovery falls mostly on those seeking to buy homes at sensible prices. The monetary stimulus and easy Federal-enabled credit with low downpayments mean that housing prices are higher than they would otherwise be, and those seeking to buy homes thus have to allocate more resources to that purpose than they otherwise would have to.

LED lighting

Theme

The LED lighting theme emerges from several LED qualities, which make it broadly superior to incandescent lighting and even fluorescent lighting (though closer). These include:

  • Much lower power consumption, up to 90-95% less than incandescent;
  • Much longer life (up to and beyond 10 years of service);
  • Less heat production (can be relevant in certain environments);
  • Much quicker lighting (can be useful in certain applications, like brake lights);
  • Much greater resistance to vibrations and temperature fluctuations.

LEDs have two main disadvantages:

  • The spectrum at which they emit light tends to be more narrow;
  • They are more expensive to make.

However, they're becoming better in those two departments, which makes LEDs incredibly competitive in many applications, including increasingly general lighting.

Positive implications

The main beneficiaries are naturally those LED producers who have decent IP (Intellectual property). These include Cree (NASDAQ:CREE) as well as foreign companies like Nichia or Phillips.

LEDs can also bring significant savings for their users. A good example would be municipalities, which substitute their traffic lights for LED lights, with paybacks in the 2-4 year range both due to much lower power consumption and much lower maintenance.

Negative implications

The companies selling products which are obsolesced by LEDs, or servicing traditional lighting systems which after being substituted by LED lighting start requiring much lower maintenance.

Source: 3 Investment Themes - The Welfare Bubble, Housing Recovery And LED Lighting