Wednesday, August 12, 2009

Giffen goods, potato effect and Wal-Mart

Giffen Goods are a type of inferior goods for which demand falls as prices rise.

As consumers income rises, they are able to afford better quality goods.

The typical examples are matches (replaced with lighters), or basic staple foods (such as potatoes). As your income increases, you replace basic staples with meat, or higher quality grains, fruits and vegetables.

Why bring this up?

Because with the ongoing recession, the companies, brands and products which tend to cater to lower-income families are usually strengthened.


- Wal-Mart (WMT) (it never really fell of the cliff with the collapse of the stock market, but has risen from $46 to $50 since February.

- McDonald's (MCD) (likewise, has risen from $46 to $56 since March).

- Costco (COST) (up from $38 in March to $48 today).

- Yum! Brands (YUM), which is Pizza Hut, KFC, Taco Bell, Long John Silver and A&W (up from $21 in December to $35 today).

These stocks are counter-cyclical, insofar as they would tend to go up when the economy is going down.

On the other hand, the fast-food chains may face some additional regulatory or legal hurdles if the movement against fat, low-nutrition and high-calorie (junk) food continues to build strength.

There are even proposals to tax junk food, although, as The Economist argues, this may not have the effect that is sought ("Like the foods they aim at, fat taxes look appetising but can have nasty effects").

In any case, within a strategy of risk diversification, including some of these stocks in your portfolio may make sense.

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