Spending won't return
Austerity owns us all
More than half cut back
Wednesday, June 30, 2010
Tuesday, June 29, 2010
The Haiku of Finance for 06/29/10
Lazy union slob
Want to make some more money?
Quit whining and WORK!
Want to make some more money?
Quit whining and WORK!
Labor's Losers Cause Trouble In Logistics
If there's one thing you can count on hearing from union laborers, it's a never-ending stream of demands to be coddled and lionized. That old saw is appropriate after a quick scan of today's logistics-related headlines.
Here we have those greedy, corrupt Teamsters preparing to demand reinstatement of YRC Worldwide's pension contributions that they so wisely surrendered last year:
The Teamsters union will hold a national conference call Tuesday for its members at YRC Worldwide on the company's "re-entry" into its multiemployer pension plans.
How and when the nation's largest trucker re-enters those plans is a critical issue for YRC as it struggles with rising operating costs and falling liquidity.
YRCW's position ought to be clear: No reinstatements until we're clearly and sustainably (IMHO minimum three quarters) profitable, got it Teamsters? Clueless union leaders need to wake up and realize that YRCW's avoidance of funding those pensions (along with its potential 3PL ventures) may be one of the few things keeping it out of bankruptcy. Drivers ought to be grateful they have any jobs at all in this economy without pining for a return to the salad days of yesteryear. If unions don't like their meager pensions and salaries, well that's just too darn bad. I'm sure plenty of illegal immigrants would love to drive their trucks for $5 an hour under the table while they save money by living ten to a room. Sheesh. I have zero sympathy for these union knuckleheads.
If that isn't enough to get me riled up, check out this dandy. Office clerks at ports want to renew their cushy labor contracts:
The contract covering about 950 office clerical workers at the ports of Los Angeles and Long Beach expires at midnight Wednesday, and it does not appear that an agreement will be reached by the deadline.
(snip)
Office clerical workers process bookings and other documentation at marine terminals in the port complex. The OCU is affiliated with ILWU Local 63, the marine clerks division, but office clerical workers have a separate contract.
Check out how much these glorified interns make in the above article: $80,000 per year! That's outrageously high. Are unions playing some kind of sick joke on businesses by demanding more pay than their skills deserve? It is unconscionable to this writer that office clerks, secretaries, administrative assistants, coffee fetchers, and other minimally skilled drones in dead-end jobs make twice what an entry-level college graduate makes. The Pacific Maritime Association's position ought to be clear: If you have an entry-level skill set, you get to collect an entry-level wage. I'll bet the PMA could find hundreds of underemployed UCLA and USC grads who'd be happy to make half what these unionized jerks make for the same menial work, so they won't have any trouble at all breaking a strike. Go ahead and break it!
I for one am sick and tired of reading about workers with entry-level skill sets demanding middle-class wages. Truck drivers and secretaries simply do not add as much economic or social value as accountants or engineers, but they unfortunately think so thanks to many decades of indulgence by an entitlement culture. These mouth-breathing slobs need to get over their greed and materialism. They should realize that global labor arbitrage is quickly revealing the true worth of their services. Wages in low-skill jobs are being arbitraged down and no amount of trade protectionism or union obstructionism is going to stop it.
CEOs of the world, unite! We have nothing to lose but that chain around our earnings known as "unionized labor."
Full disclosure: Anthony J. Alfidi, our glorious CEO, has thankfully never belonged to a union because he has far more important ways of making a meaningful contribution to civilization.
Monday, June 28, 2010
Greece Gets IMF Smiles, Spain Next
Attention Euro-folks! Prosperity awaits if you'd just follow Greece's lead:
Okay, maybe calling it prosperity is a stretch. Solvency, maybe. Survival? Okay, maybe that too. The rest of Europe, notably Spain, got the memo but doesn't want to read it just yet:
Maybe the IMF should give the Spanish a little pep talk in the press or something. How about a lollipop or something similarly sweet to make them eat their greens first? I must be way more mature than than Europe's leaders, because years ago I abandoned any hope of anyone giving me something for free.
Greece will overcome its huge debt crisis with its austerity plan, an IMF official said Sunday as a poll showed a majority of Greeks fear that unpopular pension reforms will be in vain.
Poul Thomsen, the head of the International Monetary Fund mission dealing with Greece, told To Vima daily that Athens is making progress on its "ambitious" programme of cuts.
Okay, maybe calling it prosperity is a stretch. Solvency, maybe. Survival? Okay, maybe that too. The rest of Europe, notably Spain, got the memo but doesn't want to read it just yet:
Now, governments across Europe say they have little choice but to pull back on social benefits, at least for now. Tax revenues are falling; populations are aging and rising deficits are everywhere, threatening the euro.
(snip)
The reforms, however, may be politically explosive. In Spain, they come at a particularly hard time. The austerity measures are hitting a population that is already reeling from the highest unemployment in the euro zone — 20 percent over all, 40 percent for its young people.
Maybe the IMF should give the Spanish a little pep talk in the press or something. How about a lollipop or something similarly sweet to make them eat their greens first? I must be way more mature than than Europe's leaders, because years ago I abandoned any hope of anyone giving me something for free.
Sunday, June 27, 2010
The Limerick of Finance for 06/27/10
Dangerous deficits lurk
It's our fault, which we cannot shirk
Benefits and job growth
Electorates demand both
World leaders just can't make this work
It's our fault, which we cannot shirk
Benefits and job growth
Electorates demand both
World leaders just can't make this work
Ant Tribes Coming To America
China is catching up to the U.S. in many ways. Its economy grows by leaps and bounds while its urban centers experience growing pains and its public infrastructure matures.
There is one way that the U.S. may catch up to China. The downward mobility of recent college graduates is becoming very pronounced in the Middle Kingdom:
"Ant tribes" of underemployed college graduate are pronounced in urban China thanks to a combination of an ongoing real estate bubble and low wages for educated professionals. The popping of that bubble will help make urban life more affordable but problems will remain. China needs another market for its goods to replace the U.S. and developing its own domestic market for goods is still a work in progress.
I expect a similar development of ant tribes here in the good old U.S. College graduates who counted on that four-year degree to put them on the road to the middle class are in for decades of disappointment. Recent graduates are accordingly adjusting their employment expectations downward. Now all they need to do is take a page from the ant tribes' playbook and live triple to a room. The deterioration we'll see soon in suburban McMansions abandoned to foreclosure will accelerate the concentration of the underemployed in makeshift living arrangements.
It is only a matter of time before the phenomenon of stagnant living standards and reduced expectations becomes the dominant narrative in the American economy.
There is one way that the U.S. may catch up to China. The downward mobility of recent college graduates is becoming very pronounced in the Middle Kingdom:
The dreams of many young educated Chinese are running up against the realities of China's rapid economic ascent. Rising living costs and low salaries — the result of a surfeit of university graduates — are dashing high expectations.
(snip)
The competition for jobs is fierce. Nearly 70 percent of high school graduates are expected to enroll in university this year, according to state media, compared with 20 percent in the 1980s. There are more college graduates than readily available jobs — a once unthinkable situation.
"Ant tribes" of underemployed college graduate are pronounced in urban China thanks to a combination of an ongoing real estate bubble and low wages for educated professionals. The popping of that bubble will help make urban life more affordable but problems will remain. China needs another market for its goods to replace the U.S. and developing its own domestic market for goods is still a work in progress.
I expect a similar development of ant tribes here in the good old U.S. College graduates who counted on that four-year degree to put them on the road to the middle class are in for decades of disappointment. Recent graduates are accordingly adjusting their employment expectations downward. Now all they need to do is take a page from the ant tribes' playbook and live triple to a room. The deterioration we'll see soon in suburban McMansions abandoned to foreclosure will accelerate the concentration of the underemployed in makeshift living arrangements.
It is only a matter of time before the phenomenon of stagnant living standards and reduced expectations becomes the dominant narrative in the American economy.
Saturday, June 26, 2010
Friday, June 25, 2010
YRC Worldwide Isn't Giving Up
Management at YRCW hasn't given up. They need cash to pay the company's bills:
There's nothing wrong with selling assets as long as using the cash to fund what you have left will get you back to profitability. What's left is going to be tied to 3PL brokers:
That's actually a pretty smart move! YRCW can save money on the "last mile" by delivering to local freight forwarders instead of door-to-door at the end customer. This will cut idle time for drivers and thus cap their driving hours. This strikes at the heart of those intransigent Teamsters who've been killing YRCW's regional units by not budging on wage cuts.
YRCW, there may be some life left in you yet. Use those 3PL brokers as a club to hit your unionized drivers and you can turn this thing around.
Full disclosure: No position in YRCW.
Struggling less-than-truckload giant YRC Worldwide said it will sell part of its YRC Logistics operation for $37 million to private equity investor Austin Ventures and partner with that firm on some overseas trade services.
There's nothing wrong with selling assets as long as using the cash to fund what you have left will get you back to profitability. What's left is going to be tied to 3PL brokers:
Eventually, it plans to launch new products and services with 3PL partners and closely integrate its less-than-truckload operations into their supply chain networks.
That's actually a pretty smart move! YRCW can save money on the "last mile" by delivering to local freight forwarders instead of door-to-door at the end customer. This will cut idle time for drivers and thus cap their driving hours. This strikes at the heart of those intransigent Teamsters who've been killing YRCW's regional units by not budging on wage cuts.
YRCW, there may be some life left in you yet. Use those 3PL brokers as a club to hit your unionized drivers and you can turn this thing around.
Full disclosure: No position in YRCW.
Thursday, June 24, 2010
Hot Thursday Items
I invariably look for a single theme when I want to write about macro headlines. Today I can't find one. Here are my random thoughts on a bunch of hot items.
New home sales go down the tubes after Uncle Sam decides to stop handing out free coupons to would-be flippers. So many homebuyers wanted to bring back 2004, and now we're going to repeat 2008. Yeah, thanks a bunch.
Speaking of homes going south, Fannie Mae is going to have its hands full cracking down on all those deadbeats who just finished using up those homebuying tax credits. Maybe they can hire all the people who will soon be let go from Census headcounting jobs and use them to nail foreclosure notices to front doors. In many cases they'll probably nail notices to their own doors.
Chinese auditors appear to be more honest and prescient than than their European counterparts about the danger of debt overload. More honest, but probably not more intelligent. We'll know they've gained on the West in the intellect department when they stop funding U.S. federal deficits.
The U.S. financial reform bill is about to become a paper airplane, bearing as much resemblance to real regulatory improvement as a paper airplane bears to a real jumbo jet. If it's any consolation to my concerned readers (all three of them), Europe isn't having much more luck enacting its own regulatory improvements. The Bilderbergers are about to win another round against reform as their Sitges consensus takes hold among decisionmakers. What was that consensus? Did you miss it? It was the realization that "the dark side of the welfare state" allowed freedom to "people with incomes." That's the kind of threat that keeps your average aristocrat hitting the scotch.
Hey, maybe I found a single theme after all - stupidity! That's such a common theme nowadays that I'm at risk of overusing it.
New home sales go down the tubes after Uncle Sam decides to stop handing out free coupons to would-be flippers. So many homebuyers wanted to bring back 2004, and now we're going to repeat 2008. Yeah, thanks a bunch.
Speaking of homes going south, Fannie Mae is going to have its hands full cracking down on all those deadbeats who just finished using up those homebuying tax credits. Maybe they can hire all the people who will soon be let go from Census headcounting jobs and use them to nail foreclosure notices to front doors. In many cases they'll probably nail notices to their own doors.
Chinese auditors appear to be more honest and prescient than than their European counterparts about the danger of debt overload. More honest, but probably not more intelligent. We'll know they've gained on the West in the intellect department when they stop funding U.S. federal deficits.
The U.S. financial reform bill is about to become a paper airplane, bearing as much resemblance to real regulatory improvement as a paper airplane bears to a real jumbo jet. If it's any consolation to my concerned readers (all three of them), Europe isn't having much more luck enacting its own regulatory improvements. The Bilderbergers are about to win another round against reform as their Sitges consensus takes hold among decisionmakers. What was that consensus? Did you miss it? It was the realization that "the dark side of the welfare state" allowed freedom to "people with incomes." That's the kind of threat that keeps your average aristocrat hitting the scotch.
Hey, maybe I found a single theme after all - stupidity! That's such a common theme nowadays that I'm at risk of overusing it.
Wednesday, June 23, 2010
Tuesday, June 22, 2010
BP Has Probably Limited Its Liability With $20B Fund
A few days ago I had speculated about whether BP's establishment of a compensation fund at the behest of the U.S. government was premature. After all, isn't it the job of civil courts to determine corporate liability? I just couldn't see what would possess BP's execs to do this given their fiduciary obligations to shareholders.
The justification is a bit clearer now:
Hat tip to The Market Ticker for noticing this one. I'm not an attorney so I can't determine whether any claimant will be limited to accepting BP's "make whole" payments in exchange for a promise not to litigate. The claimants would have to be willing to sign a lengthy, iron-clad agreement prior to collecting their check. Some people will still be willing to take their chances in court. BP has certainly reduced the number of claims they can expect.
The justification is a bit clearer now:
In the end, one aim of the fund—and a prime reason BP agreed to it—will be to minimize lawsuits against the company. To do that, Mr. Feinberg will offer big lump-sum payments to workers and businesses as an enticement to stay out of court.
"At some point, I will have to make an offer—'You take this amount in full satisfaction of your claim, but only if you waive your right to future litigation,'" Mr. Feinberg said. "And if I package it right, people will see that it makes no sense to fight it out in court."
Hat tip to The Market Ticker for noticing this one. I'm not an attorney so I can't determine whether any claimant will be limited to accepting BP's "make whole" payments in exchange for a promise not to litigate. The claimants would have to be willing to sign a lengthy, iron-clad agreement prior to collecting their check. Some people will still be willing to take their chances in court. BP has certainly reduced the number of claims they can expect.
Monday, June 21, 2010
Refreshing The Alpha-D For July '10
A fairly uneventful June has passed, as far as my portfolio is concerned anyway. My GDX holdings went through the strike price of the covered call options I had that expired last Friday, so I bought back almost all of them today. The small amount of GDX I didn't buy back will be subject to a long-term capital gain. Fine with me, as the cash I reaped will be available for any undervalued equities I notice.
I sold covered calls on GDX, FXI, and TDW.
I also sold cash-covered puts on the three tickers mentioned.
I maintain my tiny positions in long puts against IYR and LMT, betting on declines in real estate and defense at some point fairly soon.
Here's a final word on undervalued equities. I'd like to add SCHW, KEX, and FLIR to my long positions because they have excellent fundamentals. I'm just waiting for very attractive prices. I'm all about patience.
I sold covered calls on GDX, FXI, and TDW.
I also sold cash-covered puts on the three tickers mentioned.
I maintain my tiny positions in long puts against IYR and LMT, betting on declines in real estate and defense at some point fairly soon.
Here's a final word on undervalued equities. I'd like to add SCHW, KEX, and FLIR to my long positions because they have excellent fundamentals. I'm just waiting for very attractive prices. I'm all about patience.
Saturday, June 19, 2010
Internet Kill Switch Should Be A Moneymaker For Somebody
Predicting the development of new industries is hard. Predicting the direction of procurement dollars is not nearly as hard. The U.S. government didn't go to all the trouble of creating a National Cybersecurity and Communications Integration Center just to let it sit idle. It has to have something to do in order to justify its budget.
The construction of an Internet kill switch gives the cybercommand a reason to live. Granted, the wording of the proposed legislation (currently named the Protecting Cyberspace as a National Asset Act of 2010) would locate the authority to activate this kill switch in an Office of Cyberspace Policy in the White House. Realism will require the enabling infrastructure to be somewhere else because managing the Internet from the Oval Office just isn't feasible. The SCATANA order to ground all air traffic on 9/11 ultimately came from the FAA, not the White House. Executive leadership should be allowed to paint in broad strokes. Execution is for those agencies like the FAA and DHS that have their hands on the controls.
Some lucky team of prime contractors will make a lot of money enabling the NCCIC with the necessary kill switch technology and protocols. If the enabling legislation isn't passed, the program will simply move to some agency's black budget anyway. My task as an investor and analyst is to figure out which companies are in the best position to line up this work.
The construction of an Internet kill switch gives the cybercommand a reason to live. Granted, the wording of the proposed legislation (currently named the Protecting Cyberspace as a National Asset Act of 2010) would locate the authority to activate this kill switch in an Office of Cyberspace Policy in the White House. Realism will require the enabling infrastructure to be somewhere else because managing the Internet from the Oval Office just isn't feasible. The SCATANA order to ground all air traffic on 9/11 ultimately came from the FAA, not the White House. Executive leadership should be allowed to paint in broad strokes. Execution is for those agencies like the FAA and DHS that have their hands on the controls.
Some lucky team of prime contractors will make a lot of money enabling the NCCIC with the necessary kill switch technology and protocols. If the enabling legislation isn't passed, the program will simply move to some agency's black budget anyway. My task as an investor and analyst is to figure out which companies are in the best position to line up this work.
Friday, June 18, 2010
BP Recriminations Begin
BP is losing friends. Anadarko is moving to distance itself (probably to limit its potential liability):
Speaking of liability, what in the world is up with BP agreeing to fund $20B worth of reparations in the absence of a finding of culpability in a civil court? Has BP's executive leadership forgotten that it has a fiduciary duty first and foremost to safeguard its shareholders' interests? And why aren't Halliburton and Transocean subjected to such an indignity along with BP?
It is indeed very likely that BP will eventually be held liable in civil courts for a host of litigation claims, but that is why those courts exist. Obviating time-tested legal procedures under the pretext of placating political leaders smacks of a banana republic. I for one am not inclined to jettison hundreds of years' worth of jurisprudence in torts, bankruptcies, and such just to provide a platform for politicians to pantomime a facsimile of leadership.
Anadarko Petroleum Corp., which owns a quarter of BP PLC's blown-out oil well in the Gulf of Mexico, late Friday blasted BP "reckless decisions and actions" that led to the well's explosion.
Anadarko Chairman and CEO Jim Hackett's statement came after some elected officials said Anadarko should help pay for the massive cleanup and spill-related claims. Company spokesman John Christiansen said the comments were in response to "a week's worth of testimony" and other information and data compiled on the disaster.
Speaking of liability, what in the world is up with BP agreeing to fund $20B worth of reparations in the absence of a finding of culpability in a civil court? Has BP's executive leadership forgotten that it has a fiduciary duty first and foremost to safeguard its shareholders' interests? And why aren't Halliburton and Transocean subjected to such an indignity along with BP?
It is indeed very likely that BP will eventually be held liable in civil courts for a host of litigation claims, but that is why those courts exist. Obviating time-tested legal procedures under the pretext of placating political leaders smacks of a banana republic. I for one am not inclined to jettison hundreds of years' worth of jurisprudence in torts, bankruptcies, and such just to provide a platform for politicians to pantomime a facsimile of leadership.
Thursday, June 17, 2010
Wednesday, June 16, 2010
European Contagion Ready To Leap To Spain
It's not official yet, but the IMF and ECB are about to get a lot busier crafting a bailout for Spanish government debt:
Lots of luck with that one! The bond market will never tolerate a bailout of the size required to save Spain. The best case scenario is a narrow passage of an austerity package in Spain, with all its attendant deflationary effects. Throw any growth projections for Europe out the window.
The head of the International Monetary Fund is to visit Spain amid reports Madrid is seeking a bailout while the government bit the bullet and approved crucial reforms of its rigid job market.
The cabinet agreed the sweeping labour reforms, deemed essential for reviving the economy and fending off a Greek-style debt crisis, despite a union call for a general strike against them.
Lots of luck with that one! The bond market will never tolerate a bailout of the size required to save Spain. The best case scenario is a narrow passage of an austerity package in Spain, with all its attendant deflationary effects. Throw any growth projections for Europe out the window.
Tuesday, June 15, 2010
Logistics Knowledge Shows Phantom Recovery At Peak
Some military historian said something once about amateurs studying tactics and professionals studying logistics. Let's take that to a whole new level and see what logistics data tells us about the U.S. economy right now.
China's TEU traffic is at an all-time high. This covers both exports and imports, with exports to Europe climbing almost 50% yoy. Somebody's buying all that stuff.
Meanwhile, back here in the U.S., industrial production is slowing. Looks like raw material demand is slipping. Why bother making stuff here when we can import it all from China, right?
If we're not making stuff here, there's less of a need to truck things hither and yon through our hinterland. That's why spot bids for truckload freight are falling. Truckload carriers aren't the only ones feeling a pinch. My favorite LTL basket case, YRCW, is looking for even more cash to burn. Its execs can read the same data that I read. Maybe the deteriorating industry picture will give them more leverage to push for union givebacks.
There you have it. The logistics roundup for today is a pretty picture for Chinese import/export handlers and not so pretty for their shipping counterparts in the U.S. I expect to see further deterioration in both countries' economies in the months ahead, with more pronounced declines in logistics traffic in the U.S. leading the way to a double-dip recession.
Full disclosure: No position in YRCW.
China's TEU traffic is at an all-time high. This covers both exports and imports, with exports to Europe climbing almost 50% yoy. Somebody's buying all that stuff.
Meanwhile, back here in the U.S., industrial production is slowing. Looks like raw material demand is slipping. Why bother making stuff here when we can import it all from China, right?
If we're not making stuff here, there's less of a need to truck things hither and yon through our hinterland. That's why spot bids for truckload freight are falling. Truckload carriers aren't the only ones feeling a pinch. My favorite LTL basket case, YRCW, is looking for even more cash to burn. Its execs can read the same data that I read. Maybe the deteriorating industry picture will give them more leverage to push for union givebacks.
There you have it. The logistics roundup for today is a pretty picture for Chinese import/export handlers and not so pretty for their shipping counterparts in the U.S. I expect to see further deterioration in both countries' economies in the months ahead, with more pronounced declines in logistics traffic in the U.S. leading the way to a double-dip recession.
Full disclosure: No position in YRCW.
Monday, June 14, 2010
Starbucks' Free Wi-Fi Might Be Tasty
Job seekers can now surf online classifieds from someplace other than the county unemployment office. Starbucks is vying for their attention:
Man, the regulars must really be cutting back on frappuccinos. This brings back memories of the immediate aftermath of the dot-com crash, when the next generation of net entrepreneurs started their Web 2.0 projects while surfing Wi-Fi in SOMA cafes. There probably won't be as much spillover (pun intended) effect this time as the next-gen web space is already pretty crowded.
Will it work? SBUX is near its 52wk high, so the market thinks it's doing something right by shutting underperforming locations. I still think it's in for a rough road as Peak Oil and limits to middle-class salary growth put the brakes on premium coffee as a lifestyle choice. I do like the occasional frappuccino once or twice a year, but I can easily afford it.
Full disclosure: No position in SBUX.
Starbucks Corp. will begin offering unlimited free wireless Internet access at all company-operated U.S. locations starting July 1, part of an ongoing effort to bring more customers in the door.
Man, the regulars must really be cutting back on frappuccinos. This brings back memories of the immediate aftermath of the dot-com crash, when the next generation of net entrepreneurs started their Web 2.0 projects while surfing Wi-Fi in SOMA cafes. There probably won't be as much spillover (pun intended) effect this time as the next-gen web space is already pretty crowded.
Will it work? SBUX is near its 52wk high, so the market thinks it's doing something right by shutting underperforming locations. I still think it's in for a rough road as Peak Oil and limits to middle-class salary growth put the brakes on premium coffee as a lifestyle choice. I do like the occasional frappuccino once or twice a year, but I can easily afford it.
Full disclosure: No position in SBUX.
Sunday, June 13, 2010
The Limerick of Finance for 06/13/10
Finance overhaul is a sham
Wall Street still needs victims to scam
Lobbyists run amok
They scheme 'round the clock
Into bills, loopholes they will cram
Wall Street still needs victims to scam
Lobbyists run amok
They scheme 'round the clock
Into bills, loopholes they will cram
Broken Pension Plans Magically Fix Themselves
Let's take a fun trip through the looking glass into never-never land over the rainbow, or some such nonsense. Oh, the agony of pension fund managers who watch their unfunded liabilities gradually grow larger, unabated:
Whatever shall we do? Fear not, my dear. We can always borrow the money to fill up the pension plan . . . er, from our pension plan:
If any of the above sounds like a good idea to you, I must congratulate you for getting the quality of government you deserve. This fun fairy tale is par for the course in economically illiterate America. It's certainly fun reading. My highly intellectual regular readers will of course see right through this shell game.
If you're counting on a public pension to be there for you in any significant way, you need to stop counting. Many Americans can't count anyway thanks to those very same public employees teaching in public schools.
Seven states will run out of money to pay public pensions by 2020. That hasn’t stopped them from hiring new employees.
Whatever shall we do? Fear not, my dear. We can always borrow the money to fill up the pension plan . . . er, from our pension plan:
Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.
And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.
If any of the above sounds like a good idea to you, I must congratulate you for getting the quality of government you deserve. This fun fairy tale is par for the course in economically illiterate America. It's certainly fun reading. My highly intellectual regular readers will of course see right through this shell game.
If you're counting on a public pension to be there for you in any significant way, you need to stop counting. Many Americans can't count anyway thanks to those very same public employees teaching in public schools.
Saturday, June 12, 2010
Keynesianism On Its Deathbed
Future historians will look back on this era as a time when economists discredited themselves by clinging to a theory that's on its last legs. That theory is Keynesianism. Simply put, Keynesians believe a sizable enough macroeconomic stimulus can jumpstart a new economic cycle of growth. People like Robert Reich just can't let go:
Reich misdiagnoses aggregate corporate strategy. Companies aren't sitting on cash because they lack investment opportunities. They're sitting on it because they don't want to be caught without a recourse to pay their bills if the short-term credit markets (particularly commercial paper) freeze up again in a repeat of 2008's credit crunch. The danger of a repeat increases with each passing day as the federal government's huge borrowing needs crowd all other debt offerings out of the bond market.
The Keynesian prescription of more debt and more stimulus is distorting the U.S. economy's ability to recover. Let's put J.M. Keynes back in the ground and let him rest. It's time to revive a much older and more venerable economic strategy: austerity.
American Corporations are sitting on huge piles of cash but they're not investing, and they're creating only a measly number of new jobs. And they won't invest and create jobs until they know there are customers out there to buy what they sell.
(snip)
Keynes prescribed two remedies -- both of which are now necessary: Government spending to "prime the pump" and get businesses to invest and hire once again. And, as Keynes wrote, "measures for the redistribution of incomes in a way likely to raise the propensity to consume." Translated: Instead of big tax cuts for corporations and the rich, tax cuts and income supplements for the middle class.
Reich misdiagnoses aggregate corporate strategy. Companies aren't sitting on cash because they lack investment opportunities. They're sitting on it because they don't want to be caught without a recourse to pay their bills if the short-term credit markets (particularly commercial paper) freeze up again in a repeat of 2008's credit crunch. The danger of a repeat increases with each passing day as the federal government's huge borrowing needs crowd all other debt offerings out of the bond market.
The Keynesian prescription of more debt and more stimulus is distorting the U.S. economy's ability to recover. Let's put J.M. Keynes back in the ground and let him rest. It's time to revive a much older and more venerable economic strategy: austerity.
Friday, June 11, 2010
Thursday, June 10, 2010
Never Let Them See You Sweat
Folks at the World Bank are starting to sweat about a double-dip:
That means you need to worry too. Ben Bernanke knows how bad things are in Europe; he should understandably be concerned about how the destruction of Europe's common currency would evaporate all those euros the Fed has taken into its electronic vaults in swaps for dollars.
The World Bank and Ben Bernanke are on the same sheet of music. They just won't tell you how bad things are really going to get.
The world recovery continues to tread cautiously forward, but Europe's debt crisis could trigger a "double-dip" global recession if markets lose confidence in governments' willingness to pay off their debt, the World Bank warned in its latest Global Economic Prospects 2010 report released Wednesday.
That means you need to worry too. Ben Bernanke knows how bad things are in Europe; he should understandably be concerned about how the destruction of Europe's common currency would evaporate all those euros the Fed has taken into its electronic vaults in swaps for dollars.
The World Bank and Ben Bernanke are on the same sheet of music. They just won't tell you how bad things are really going to get.
Wednesday, June 09, 2010
Frederick's of Hollywood Loses Its Appeal
Frederick's of Hollywood (FOH) was once the gold standard in women's intimate apparel. It lost that mantle years ago and probably cannot recover. Market leader Victoria's Secret, a unit of Limited Brands (LTD), has over $5B of the intimate apparel market, while FOH has only $175mm. Catching up will prove very difficult for FOH given the following hurdles.
FOH can't rely upon its storied brand name for pricing power. Their target market is the aspirational middle class with average income of $87k, age 18-55. In a macroeconomic environment saturated with employment worries, this is not a clientele with price inelastic demand for nonessential apparel.
FOH seems to be focusing its international growth strategy on gaining a retail foothold in South Korea and Eastern Europe. The problem with this strategy is that FOH has always focused on owning and operating its own stores, seeking an A-level retail space in B-level shopping centers. Victoria's Secret has minimized such an overhead requirement in non-U.S. markets by licensing its brands through its La Senza unit to licensees in 49 countries. If FOH wants real long term growth it needs to penetrate markets where middle classes are still growing (the BRIC nations come to mind). Doing so with an ownership-only strategy for retail outlets will require knowledge of on-site retail space management practices in multiple countries that FOH simply does not possess. FOH may have come to this realization late in the game; their 10-Q for Apr. 24, 2010 mentions a global licensing agreement for a new swimwear line and discussions with potential licensees for lifestyle products in China, Brazil, and elsewhere.
Further glaring weaknesses in FOH's marketing strategy include a lack of co-branding with comparable aspirational lifestyle products and product placement in entertainment media. Frederick's needs placement in trendy movies or TV shows viewed by their target demographic. Look no further than the publicity Manolo Blahnik shoes gets from the Sex And The City entertainment franchise to see FOH's huge missed opportunity for both co-branding and placement. FOH could have minted money from a partnership with either one.
FOH is not out of options yet. Its brand has residual value; selling the company to a major apparel maker like Abercrombie & Fitch (ANF) would add a historic intimate line to a clothier with a large retail presence.
The company's leadership is currently determined to go it alone with a turnaround strategy. FOH trades as a penny stock because its net income and retained earnings are both negative on an annual basis, having declined precipitously for three years in a row. Operating margin, ROA, and ROE are all negative as well. FOH's most recent 10-Q (dated April 24) reveals a tiny quarterly profit of $218k while total sales declined by 8.5%. That is encouraging for short-term solvency but not long-term growth. A new marketing strategy may not be sufficient to keep the company independent for long if topline growth continues to deteriorate. Fortunately for any potential acquirer, the current CEO's background as an investment banker may come in handy if a larger retailer wants a classic intimate brand.
Full disclosure: No position in any company mentioned in this post.
FOH can't rely upon its storied brand name for pricing power. Their target market is the aspirational middle class with average income of $87k, age 18-55. In a macroeconomic environment saturated with employment worries, this is not a clientele with price inelastic demand for nonessential apparel.
FOH seems to be focusing its international growth strategy on gaining a retail foothold in South Korea and Eastern Europe. The problem with this strategy is that FOH has always focused on owning and operating its own stores, seeking an A-level retail space in B-level shopping centers. Victoria's Secret has minimized such an overhead requirement in non-U.S. markets by licensing its brands through its La Senza unit to licensees in 49 countries. If FOH wants real long term growth it needs to penetrate markets where middle classes are still growing (the BRIC nations come to mind). Doing so with an ownership-only strategy for retail outlets will require knowledge of on-site retail space management practices in multiple countries that FOH simply does not possess. FOH may have come to this realization late in the game; their 10-Q for Apr. 24, 2010 mentions a global licensing agreement for a new swimwear line and discussions with potential licensees for lifestyle products in China, Brazil, and elsewhere.
Further glaring weaknesses in FOH's marketing strategy include a lack of co-branding with comparable aspirational lifestyle products and product placement in entertainment media. Frederick's needs placement in trendy movies or TV shows viewed by their target demographic. Look no further than the publicity Manolo Blahnik shoes gets from the Sex And The City entertainment franchise to see FOH's huge missed opportunity for both co-branding and placement. FOH could have minted money from a partnership with either one.
FOH is not out of options yet. Its brand has residual value; selling the company to a major apparel maker like Abercrombie & Fitch (ANF) would add a historic intimate line to a clothier with a large retail presence.
The company's leadership is currently determined to go it alone with a turnaround strategy. FOH trades as a penny stock because its net income and retained earnings are both negative on an annual basis, having declined precipitously for three years in a row. Operating margin, ROA, and ROE are all negative as well. FOH's most recent 10-Q (dated April 24) reveals a tiny quarterly profit of $218k while total sales declined by 8.5%. That is encouraging for short-term solvency but not long-term growth. A new marketing strategy may not be sufficient to keep the company independent for long if topline growth continues to deteriorate. Fortunately for any potential acquirer, the current CEO's background as an investment banker may come in handy if a larger retailer wants a classic intimate brand.
Full disclosure: No position in any company mentioned in this post.
Tuesday, June 08, 2010
Europe Gets Its Own TALF While Bond PMs Get A Clue
The phone lines between Washington and various European capitals must be overheating as Ben Bernanke and Tim Geithner mentor their aspirants across the water. Europe has launched its equivalent of the TALF:
The main difference with the U.S. TALF is that ours is funded by a single sovereign authority, the U.S. Treasury. This EFSF can be undermined if one sovereign government decides to back out and refuse to contribute, leaving other countries on the hook. Watch the CDS market for bets on which nation will be first to heard for the exit.
In other news, bond portfolio managers come late to the game once again. They finally figure out that the bond market is behaving kind of bubbly. Really? You don't say? I've been saying that for what, a year and a half now? I don't expect to hear from any bond fund about a job offer since I'm too prescient for their tastes.
The European Financial Stability Facility would sell bonds backed by the guarantees and use the money it raises to make loans to euro-area nations in need, the finance ministers agreed yesterday in Luxembourg. The new entity would sell debt only after an aid request is made by a country.
The main difference with the U.S. TALF is that ours is funded by a single sovereign authority, the U.S. Treasury. This EFSF can be undermined if one sovereign government decides to back out and refuse to contribute, leaving other countries on the hook. Watch the CDS market for bets on which nation will be first to heard for the exit.
In other news, bond portfolio managers come late to the game once again. They finally figure out that the bond market is behaving kind of bubbly. Really? You don't say? I've been saying that for what, a year and a half now? I don't expect to hear from any bond fund about a job offer since I'm too prescient for their tastes.
Monday, June 07, 2010
Airlines: The Unreliable Investment
I like the transportation sector, but I don't think I could ever buy stock in an airline. Their earnings are just too unpredictable:
The recent drop in fuel costs is probably another factor in this turnaround. Still, I would never commit my own money to an industry with such wild swings in fortune. Note that European airlines are still having trouble even after the skies have cleared of volcanic ash. That second leg down in the Sovereignty Crunch will send more airlines into a tailspin. I like that metaphor. Hey, I like all of my metaphors.
The world’s airlines will book net profits of $2.5 billion in 2010, the International Air Transportation Association said, just three months after it forecast a $2.8 billion loss.
The $5.3 billion turn round since the group’s March forecast is driven by a faster-than-expected recovery in the global economy, IATA said in its latest market forecast today, June 7.
The recent drop in fuel costs is probably another factor in this turnaround. Still, I would never commit my own money to an industry with such wild swings in fortune. Note that European airlines are still having trouble even after the skies have cleared of volcanic ash. That second leg down in the Sovereignty Crunch will send more airlines into a tailspin. I like that metaphor. Hey, I like all of my metaphors.
Sunday, June 06, 2010
The Limerick of Finance for 06/06/10
Hungary might just be a black swan
How long can this drama go on?
French banks could implode
From a sovereign debt load
The euro, once strong, will be gone
How long can this drama go on?
French banks could implode
From a sovereign debt load
The euro, once strong, will be gone
Saturday, June 05, 2010
Hungary - The Next Black Swan?
Well, it looks like we need to add an "H" to the PIIGS. Hungary's leaders are now furiously backtracking from their comments that their government may soon be insolvent:
Haven't you ever wished you could take back something you said in haste, even though you knew it was true? I've been there. It hurts to realize that what you just blurted out in a moment of clarity and honesty can't be un-said.
All of this bad European news is certainly good for the dollar. Uncle Sam likes it too as long as it makes Treasuries easier to sell to the nervous and gullible.
Hungary’s economic situation is stable and recent comments about a possible default were “unfortunate,” the government said, pledging to stick to the budget deficit goal approved by the country’s creditors.
Haven't you ever wished you could take back something you said in haste, even though you knew it was true? I've been there. It hurts to realize that what you just blurted out in a moment of clarity and honesty can't be un-said.
All of this bad European news is certainly good for the dollar. Uncle Sam likes it too as long as it makes Treasuries easier to sell to the nervous and gullible.
Friday, June 04, 2010
U.S. Treasury Taking Donations To Reduce National Debt
NPR broadcast a story today on efforts by individual Americans to reduce the federal government's debt. The U.S. Treasury has had the equivalent of a sinking fund for some time. A small number of patriotic Americans are willing to dig into their pockets of their own volition and throw money into the gaping maw of Uncle Sam's bag of IOUs.
That's cute. Really.
I'm not inclined to tell people that their hobbyhorse is an exercise in futility. I'd rather just wait for the day when the government quietly defaults on most of its obligations.
That's cute. Really.
I'm not inclined to tell people that their hobbyhorse is an exercise in futility. I'd rather just wait for the day when the government quietly defaults on most of its obligations.
Thursday, June 03, 2010
Wednesday, June 02, 2010
Is BP A Good Buy?
Today I got an email inquiry from a fellow private investor and longtime reader of my blog. He wanted my opinion on whether BP is a good buy given its current troubles. Here's my reply in its entirety.
I don't mind admitting that my business hasn't reached its breakeven point yet. I'm well aware that it will take a very long time for me to earn an income from my online presence.
Hey! You've definitely got the right mindset. Buying a beaten-down stock is often a winning play but I just don't know enough about BP's other operations to say whether this is true. Looking at some stats on Reuters for BP . . .
5yr EPS growth is abysmally low - bad
Cap spending growth exceeds industry average - bad
ROE 5yr ave is 23% - good
And from Yahoo Finance . . .
Long-term debt less than 2X net income, thus manageable - good
Free cash flow is positive - good
I wouldn't buy BP given the two bad items above. I also haven't read their annual report and thus I'm not sure what their total reserves or extraction costs look like. Those are the two most important factors in estimating a commodity producer's future profitability.
BTW, thanks for giving me my blog post for today. I'm still not profitable yet but I'll wait as long as that takes.
I don't mind admitting that my business hasn't reached its breakeven point yet. I'm well aware that it will take a very long time for me to earn an income from my online presence.
Tuesday, June 01, 2010
Too Much Education Leaves A Killer Debt Load
Here's a horror story in personal finance. Too much debt can kill your earning potential before your career even gets started:
This is becoming an all too familiar refrain. College kids hopped on the higher education treadmill only to find themselves earning menial wages and drowning in debt. Like homeowners who assumed real estate would always go up in value, Generations X through Z assumed their marketability in the labor force would always go up, especially with more education. Taking out loans for bachelor's degrees, MBAs, and law degrees was the human capital equivalent of a home equity loan for a while.
The trouble with this approach to maximizing one's utility is that indebted college grads now face a job market with permanent impairments. Global wage arbitrage pushes wages in the global North down to those in the South. Corporate indebtedness puts a ceiling on future salary and bonus increases. Sovereign indebtedness puts a floor under future tax assessments. Mix it all together and you have a milieu that will kill off any middle class aspirations in most college grads for decades to come.
Here's an easy acid test. If you need to take out a loan to obtain a degree, you're better off without the degree. Don't become a debt slave in hopes of paying loans off with higher future earnings. Instead, get some affordable skill training and go right to work. Live at home or get a roommate. Eat cheaply. Live simply. Save every penny and invest in things that generate cash flow (index funds, non-leveraged real estate, and resilient communities). Stay away from college and its endowed hucksters until you're financially independent. You'll have something to teach your instructors if you wait long enough.
Today, however, Ms. Munna, a 26-year-old graduate of New York University, has nearly $100,000 in student loan debt from her four years in college, and affording the full monthly payments would be a struggle. For much of the time since her 2005 graduation, she's been enrolled in night school, which allows her to defer loan payments.
This is not a long-term solution, because the interest on the loans continues to pile up. So in an eerie echo of the mortgage crisis, tens of thousands of people like Ms. Munna are facing a reckoning. They and their families made borrowing decisions based more on emotion than reason, much as subprime borrowers assumed the value of their houses would always go up.
This is becoming an all too familiar refrain. College kids hopped on the higher education treadmill only to find themselves earning menial wages and drowning in debt. Like homeowners who assumed real estate would always go up in value, Generations X through Z assumed their marketability in the labor force would always go up, especially with more education. Taking out loans for bachelor's degrees, MBAs, and law degrees was the human capital equivalent of a home equity loan for a while.
The trouble with this approach to maximizing one's utility is that indebted college grads now face a job market with permanent impairments. Global wage arbitrage pushes wages in the global North down to those in the South. Corporate indebtedness puts a ceiling on future salary and bonus increases. Sovereign indebtedness puts a floor under future tax assessments. Mix it all together and you have a milieu that will kill off any middle class aspirations in most college grads for decades to come.
Here's an easy acid test. If you need to take out a loan to obtain a degree, you're better off without the degree. Don't become a debt slave in hopes of paying loans off with higher future earnings. Instead, get some affordable skill training and go right to work. Live at home or get a roommate. Eat cheaply. Live simply. Save every penny and invest in things that generate cash flow (index funds, non-leveraged real estate, and resilient communities). Stay away from college and its endowed hucksters until you're financially independent. You'll have something to teach your instructors if you wait long enough.
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