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Thursday, April 30, 2015 9:38 PM

LinkedIn Mania Over? Shares Plunge 21% After Hours on Earnings Miss

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It's tough predicting the end to manias. Tonight I ponder a 21% plunge in extended hours trading in LinkedIn. Is the mania over?

Please consider LinkedIn Plunges as Second-Quarter Forecast Misses Estimates.

LinkedIn Corp.’s shares plunged as much as 27 percent after the company delivered quarterly revenue that missed analysts’ estimates for the first time, shaking confidence in a historically stable business plan.

The professional-networking website also forecast sales that missed projections for the second quarter and cut its guidance for annual revenue, citing the strong U.S. dollar and slower-than-predicted growth.

“This is an extraordinary miss for a company that has by and large avoided any major blowups since going public,” said Paul Sweeney, an analyst at Bloomberg Intelligence.

Since its debut as a public company in 2011, LinkedIn has steadily surpassed estimates for sales until now. The company, with its mix of job-related tools for consumers and businesses, has been expanding its offerings every year under Chief Executive Officer Jeff Weiner, through acquisitions and rapid hiring. Those efforts aren’t translating to as much revenue growth as expected, Sweeney said.

Second-quarter revenue will be $670 million to $675 million, the company said Thursday. Analysts had predicted $718.3 million, on average, according to data compiled by Bloomberg. LinkedIn also trimmed its forecast for annual revenue to $2.9 billion, from $2.93 billion to $2.95 billion.

The company’s shares fell 21 percent in extended trading, after dropping 2 percent to close at $252.13. The stock had gained 9.7 percent this year.

Profit excluding some items was $73 million, or 57 cents a share, matching analysts' predictions. LinkedIn’s net loss widened to $42.5 million, or 34 cents a share, from $13.4 million, or 11 cents.
Mania in Pictures

Blame Game

LinkedIn blamed the plunge on strength in the US dollar. It generates 39% of its revenue outside the US.

For the trailing 12 months, linked in lost money. The loss widened from 11 cents a share to 34 cents a share. It has no PE because it has no profit.

Market Cap

Prior to this plunge, LinkedIn had a market cap of $31.74 Billion.


On the theory that everyone in the world will link to everyone else in the world.

I see no value in paying anything for such services. If others come to the same conclusion, I wonder if LinkedIn will ever turn much of a profit.

Premium Services

Every week or so I get an offer to try LinkedIn premium services for free. I never respond to these offers and never will.

My personal policy on LinkedIn is to accept every invite I get. Why? Because it cannot possibly hurt. Perhaps someday it helps. Perhaps not. I have a an amazingly eclectic LinkedIn group. But to communicate with anyone, you have to do it through LinkedIn unless you get their email address.

That's part of the model, but it also sucks.


I have two profiles, one by accident. I set them up under two different email addresses, not realizing I already had a profile. I wanted to merge them, but the procedure was absurd. I do not want to delete and do a mass invite.

I just looked again tonight. They finally addressed this issue in August of last year (See Merging Accounts).

So, if you sent me an invite, and I did not respond, it is likely because you found my inactive profile to which I do not even know my password. Try again in a week or so, and hopefully I will have this fixed.

LinkedIn Mania Over?

Is the mania over? It's hard to say.

The LinkedIn business model may very well be viable, but not if it loses money, and it is struggling to make any.

Can it make enough to support a $32 billion market cap? I highly doubt it. I expect to see this company trading once again at $50. Heck, $10 would not surprise me in the least.

The thing is, stocks generally peak on good news not bad. So maybe more mania is on the way. Don't count on it.

Mike "Mish" Shedlock

2:34 PM

Employment Compensation Costs (Wages and Benefits) Jump in First Quarter

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A BLS report out today shows Compensation Costs up 0.7% December 2014-March 2015 and 2.6% over the year ending March.

Civilian Workers

Compensation costs for civilian workers increased 0.7 percent, seasonally adjusted, for the 3-month
period ending March 2015, the U.S. Bureau of Labor Statistics reported today. Wages and salaries
(which make up about 70 percent of compensation costs) increased 0.7 percent, and benefits (which
make up the remaining 30 percent of compensation) increased 0.6 percent.

Compensation costs for civilian workers increased 2.6 percent for the 12-month period ending
March 2015, rising from the March 2014 increase in compensation costs of 1.8 percent. Wages and
salaries increased 2.6 percent for the 12-month period ending March 2015, which was higher than the
1.6-percent increase in March 2014. Benefit costs increased 2.7 percent for the 12-month period ending March 2015, compared with a 2.1-percent increase for the 12-month period ending March 2014.

Private Industry Workers

Compensation costs for private industry workers increased 2.8 percent over the year, higher than the
March 2014 increase of 1.7 percent. Wages and salaries increased 2.8 percent for the current 12-monthperiod ending March 2015, also higher than the March 2014 increase of 1.7 percent. The cost of benefits rose 2.6 percent for the 12-month period ending March 2015, which was higher than March 2014, when the increase was 1.8 percent.
Private Industry Compensation Percent Change From Year Ago

click on chart for sharper image

Private Industry Wages Percent Change From Year Ago

Employment costs have risen. Expect an even bigger jump in upcoming months now that Walmart and McDonald's voluntarily hiked wages, and some cities and states raised the minimum wage as well.

Extra money in people's pockets is a good thing, but it will hurt corporate earnings and dampen enthusiasm for hiring and adding stores.

Mike "Mish" Shedlock

12:14 PM

Initial Unemployment Claims Plunge to 262,000 - Lowest Since April 2000; What's Going On?

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Initial unemployment claims plunged to 262,000 today bettering the Bloomberg Consensus.

The Fed is ready now to pull the trigger at anytime and today's jobless claims data may have their finger a little itchy. Initial claims, not skewed by special factors, plunged 34,000 in the April 25 week to 262,000 which is the lowest level since all the way back to April 2000. The 4-week average is down 1,250 to a 283,750 level which is just below a month-ago and points to improvement for the April employment report.

Continuing claims, where reporting lags by a week, are also at or near 15-year lows. In data for the April 18 week, continuing claims fell 74,000 to 2.253 million with the 4-week average down 18,000 to 2.291 million. The unemployment rate for insured workers is at 1.7 percent.

The Labor Department says there are no special factors in today's report though adjusting for weekly data surrounding Easter, which fell late in April last year, is always tricky. Still, on its face, today's report speaks to solid improvement in the labor market and to a big bounce back for the April employment report.
Initial Unemployment Claims

Initial Unemployment Claims 4 Week Moving Average

Initial claims are in the basket of leading indicators. Blue boxes show four occasions where claims turned up strong and no recession occurred. Red boxes show four occasions where claims turned up and a recession followed later. The purple boxes show two occasions where claims bottomed just as recession started.

I suspect the next turn higher, whenever it occurs, is likely to be significant. There will not be much of a warning. Other data suggests a recession may have already started.

Explaining the Low Numbers

Reader Tim pinged me with this thought on the numbers.
Hello Mish

We have talked of "job growth" under Obama and how a large number of part-time jobs were created that have led to people needing more than one part-time job to make ends meet. Of course, this is a two-edged sword. You lose one part-time job, and you cannot file for unemployment because you have another part-time job!

My daughter holds three part-time jobs totaling 43 hours and is categorized as "full-time" by the BLS because she works more than 32 hours a week.

One of those jobs just ended. She will drop to 28 hours total and be classified as part-time, with no unemployment eligibility. This is another hidden Obamacare impact, and a probable reason for the huge drop in unemployment filing.
Obamacare Effect

Tim refers to the classification of a full time job as 30 hours under Obamacare. In response, many fast food and retail stores slashed worker hours to 25 or less forcing those workers to take on second jobs. This inflates the strength of the job reports and the initial unemployment claims reports as well.

Because of all the multiple part-time jobs people hold, there may not be much of a jump in claims when the recession starts. It's possible there is no jump at all, just cutbacks in hours.

For discussion of the idea a recession may have already started, please see Real Q1 GDP 0.2% vs. Consensus 1.0%; Disaster in the Details.

Mike "Mish" Shedlock

Wednesday, April 29, 2015 3:02 PM

Fed Cites Weather, "Transitory" Factors in FOMC Statement; No Hat Tricks; What About Consumer Sentiment?

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Don't worry. The First Quarter GDP Disaster, released this morning is transitory.

How do I know? The Fed says so.

Here is the FOMC Statement from today. Emphasis mine.

Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Although growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. 

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
No Hat Trick of Dissent

There were no dissents. My, how things change. At the December meeting there was a Rare Hat Trick of Dissent
But this time, the rationale for opposition changed. Dallas Fed leader Richard Fisher cast a no vote because he believes economic data suggests rate rises will need to come sooner than his colleagues currently expect. Philadelphia Fed chief Charles Plosser remains uncomfortable with language in the Fed statement that suggests the outlook for rate increases is to some degree driven by a calendar date, rather than by the economy’s performance.

Meanwhile, Narayana Kocherlakota of the Minneapolis Fed continues to believe it’s a mistake for the Fed to contemplate interest rate increases at a time when inflation is falling so far short of the central bank’s official 2% goal.

The breadth of the dissent ties up neatly with the challenging outlook for the monetary policy. The Fed has been greeted with an extended run of solid growth and hiring data that it broadly expects it to continue. At the same time, inflation remains persistently below the 2% price target central bankers say they will defend from both the high and low side. Put another way, one side of the outlook favors rate increases, while the other argues for sticking to an ultra-easy money stance.
Unanimously Transitory

If the Fed is unanimous, they all have to be right.


Consumer Sentiment Plunges

And what about that high consumer sentiment?

I am glad you asked, because the consumer confidence report came out yesterday and based on the FOMC statement today that "consumer sentiment remains high", it appears the Fed was not even watching.

The Bloomberg Consensus estimate for consumer confidence was 103. The range was 100.5 to 104. he actual index plunged to 95.2 from 101.3.
Consumer confidence has fallen back noticeably this month, down more than 6 points to a much lower-than-expected 95.2. This compares very poorly with the Econoday consensus for 103.0 and is even far below the Econoday low estimate of 100.5. The weakness, ominously, is the result of falling assessments of the jobs market, both the current jobs market and expectations for the future jobs market. The second quarter, which is expected to be much stronger than the weather-depressed first quarter, isn't likely to get off to a fast start, at least as far as this report goes.

The most striking weakness in April is the assessment of future conditions with the expectations component down 8.5 points to 87.5 for the weakest reading going all the way back to September. And the most striking weakness among the sub-components is employment, where fewer see more jobs opening up 6 months from now and more see fewer jobs available. This spills over into income where fewer see an increase ahead and more see a decrease.

But also weak is the present situation component which is down more than 2-1/2 points to 106.8 for its weakest reading since December. Here the most closely watched sub-component is the jobs-hard-to-get reading which is up nearly 1 full percentage point to 26.4 percent. This reading will hold back expectations at least to some degree for a big bounce back in the April employment report from a very weak March.

Inflation expectations are down sharply this month, 4 tenths lower to 4.8 percent which is one of the lowest readings of the recovery. Gas prices have been edging higher but are still low, the latter no doubt a major factor behind the latest reading.

Buying plans are mixed with automobile and vacation plans down but not home plans which are up. But home buying won't be a featured activity for consumers if their expectations for employment are weak. Today's report, showing weakness in the jobs assessment and in inflation expectations, won't be pulling forward expectations for the Federal Reserve's first rate hike.
Well, who cares if the Fed is watching consumer sentiment or not? Confidence is meaningless because weakness is unanimously transitory.

By the way, there were Only 560 Words In Today's FOMC Statement, Fewest Since October 2012, yet they could not even get the statement correct.

Mike "Mish" Shedlock

12:32 PM

Real Q1 GDP 0.2% vs. Consensus 1.0%; Disaster in the Details

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The first quarter real GDP estimate of 0.2% was released today. In spite of all the extremely week economic reports lately, economists still could not figure out GDP was going to be near zero. The Bloomberg Consensus estimate was for 1.0%.

Note the lowest estimate was 0.2%. No one predicted negative. Who was it that predicted 2.4%? What planet is that person on?

So what else is there to do but blame the weather?

Heavy weather and the strong dollar took their toll on first-quarter GDP which, at only plus 0.2 percent, came in at the very low end of the Econoday consensus. This compares with an already soft fourth quarter which is unrevised at plus 2.2 percent.

Exports were the heaviest drag on the first quarter reflecting the strong dollar's effect on foreign demand. The heavy weather of the quarter contributed to an outright contraction in business spending (nonresidential fixed investment) and an abrupt slowing in consumer spending (personal consumption expenditures).

Price data, reflecting lower energy prices, are soft with the GDP price index at minus 0.1 percent vs the Econoday consensus for plus 0.5 percent. Prices were also soft in the fourth quarter at an unrevised plus 0.1 percent.

Details include an unwanted surge in inventories tied to lower demand and also possibly to shipment constraints tied to the quarter's West Coast port strike. Imports, likely limited by the port strike, did pull down GDP but to a much lesser extent than the prior quarter (imports are a subtraction in the GDP calculation).

Federal Reserve policy makers, in this afternoon's FOMC statement, may downplay first-quarter weakness as temporary. Nevertheless, the complete lack of punch underway in early second-quarter indicators, together with the softness of the fourth quarter when there were no special factors not to mention the lack of inflationary pressures in the economy, offer plenty of fuel for the doves at the Fed who want to hold off the first signals of a rate increase.

Gee, who could have predicted Exports would be the heaviest drag?

Let's take a January 31, 2015 flashback look: Diving Into the GDP Report - Some Ominous Trends - Yellen Yap - Decoupling or Not?
Exports added 0.37 percentage points to fourth quarter GDP. But note the trend. Because of the rising US dollar, export growth is dwindling. Will exports add or subtract to GDP next quarter?

I suggest the answer is subtract. Not only are US exports getting more expensive relative to Europe and Japan, the entire rest of the global economy is slowing rapidly. Our biggest trading partner is Canada and Canada is in recession, with a rapidly sinking loonie (Canadian dollar) on top of it. US Recession

The US won't decouple, just as China did not decouple from the global economy in 2008-2009 (a widely-held thesis I also knocked at the time).

Indeed, now that virtually no economist expects a US recession, I believe we are finally on the cusp of one, just as the Fed seems committed to hike.
GDP Details

Let's dive into the First Quarter 2015 (Advance Estimate) report for details.
The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and private inventory investment that were partly offset by negative contributions from exports, nonresidential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the first quarter reflected a deceleration in PCE,
downturns in exports, in nonresidential fixed investment, and in state and local government spending, and a deceleration in residential fixed investment that were partly offset by a deceleration in imports and upturns in private inventory investment and in federal government spending.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 1.5 percent in the first quarter, compared with a decrease of 0.1 percent in the fourth. Excluding food and energy prices, the price index for gross domestic purchases increased 0.3 percent, compared with an increase of 0.7 percent.

Real personal consumption expenditures increased 1.9 percent in the first quarter, compared with an increase of 4.4 percent in the fourth. Durable goods increased 1.1 percent, compared with an increase of 6.2 percent. Nondurable goods decreased 0.3 percent, in contrast to an increase of 4.1 percent. Services increased 2.8 percent, compared with an increase of 4.3 percent.

The change in real private inventories added 0.74 percentage point to the first-quarter change in real GDP after subtracting 0.10 percentage point from the fourth-quarter change. Private businesses increased inventories $110.3 billion in the first quarter, following increases of $80.0 billion in the fourth quarter and of $82.2 billion in the third.

Real final sales of domestic product -- GDP less change in private inventories -- decreased 0.5 percent in the first quarter, in contrast to an increase of 2.3 percent in the fourth.
Inventories, PCE, Negative Price Deflator
Over time, inventories trend to zero. So the fact that inventories added 0.74 to GDP is not a positive.

Personal consumption expenditures added 1.9% to GDP. Expect that to hold up?

Were it not for a highly questionable negative price deflator, first quarter GDP would have been negative.

With gasoline prices rising, there will be no miracle deflators next quarter.

If I can brag a bit, I nailed this back in January, and economists could not figure it out in spite of weak report after weak report for three more months!

The second estimate of Q1 GDP comes out on May 29. Any number of changes could send Q1 negative.

Mike "Mish" Shedlock

Tuesday, April 28, 2015 6:04 PM

Costco vs. Walmart and Reader Responses Over Minimum Wage

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I received lots of emails and blog comments to my article Reader Question: Is the Minimum Wage Really a Maximum Wage?

In regards to living wage Tesla responded ...

"You clearly have never run a business. if your employees are not able to live , or more importantly , just having living problems in general : they are 1) not going to work hard for you sometimes 2) might steal from you 3) might destroy your business property or otherwise not protect it from other thieves."

Quite frankly, that is ridiculous. If you are concerned your employees will steal from you or destroy your property, you should not hire them in the first place.

And if someone is worth more than the minimum wage and you are afraid they will go elsewhere, then you pay more than the minimum wage.

Look at McDonalds's or Walmart. Did they suffer massive theft or property destruction by employees?

Both recently raised their base pay scale. Why? Because they could not attract a good work force at the wage they were paying. This is how it should work, not by living wage nonsense. 

Carl responded ...

"Another important thing to remember about the minimum wage is that it removes from the workforce all those that are not worth the minimum wage. With a minimum wage, such persons automatically become government dependent."

Yep, exactly.

Ron ...

Reader Dave asks ...

"Hi,  Mish. Costco does pay more than Walmart as a big box business. It also gives employees all holidays off. How do they do it and WMT can't?"

The answer is Costco has a different model. It charges higher prices and its stores are generally in more upscale areas.

Walmart employs about 2.1 million.

Costco employs 192,000.

OK - let's have Walmart pay the same as Costco. To do it will compete in the same space as Costco so it will immediately fire 1.9 million people and close thousands of stores.

Happy with that outcome?
Perhaps not.

So let's just mandate $15.00 an hour higher benefits like Costco, across the board for every US company. Then let's watch another 4 million jobs vanish.

This is all so obvious that it's ridiculous to be even discussing. Yet here we are.

Mike "Mish" Shedlock

12:18 PM

Richmond Fed Manufacturing Index Negative Second Month

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The Fed manufacturing surveys continue to disappoint. Today, the Richmond Fed reading came in at -3 matching the lowest guess on Bloomberg.

The headline index is in the minus column for the second month in a row, at minus 3 vs March's minus 8. New orders are in the negative column for the 3rd month in a row, at minus 6, while backlog orders, at minus 8, continue to extend their long negative streak. Shipments are negative, at minus 6, and capacity utilization is negative, at minus 4.

Yet despite the weakness in orders and despite the weakness in shipments, employment in this report, as it curiously has been in other manufacturing reports as well, is up, to plus 7 vs plus 6 in March. This must reflect confidence that ongoing weakness is only temporary and that order and shipment momentum is certain to build.

Other details include depressed price readings, consistent with other reports as well. The manufacturing sector is being held down by weak exports and trouble in the oil & gas sector, but it's not keeping firms from hiring.
Misplaced Confidence?

The Richmond Fed reports Manufacturing Sector Activity Remained Soft; Employment and Wages Grew Mildly
Overall, manufacturing conditions remained soft in April. The composite index for manufacturing moved to a reading of -3 following last month’s reading of -8. The index for shipments and the index for new orders gained seven points in April, although both indicators finished at only -6. Manufacturing employment grew mildly this month. The indicator gained one point, ending at a reading of 7.

Manufacturers looked for better business conditions in the next six months. Survey participants expected faster growth in shipments and in the volume of new orders in the six months ahead. Producers also looked for increased capacity utilization and anticipated rising backlogs. Expectations were for somewhat longer vendor lead times.

Survey participants planned more hiring, along with moderate growth in wages and a pickup in the average workweek during the next six months.
It's important to note that a single firm hiring one person will counterbalance another firm firing 50. It's entirely possible employment is not as strong as it looks (not that 7 is a particularly strong number in the first pace).

Finally, I suspect confidence is on the high side looking ahead. Given strength in the US dollar and a clearly slowing China, I see no reason to believe there is going to be a big second quarter recovery, or if there is one, that it will last.

This isn't all due to the weather.

Mike "Mish" Shedlock

11:31 AM

Deconstructing and Debunking Shadowstats

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An interesting article came my way today courtesy of a friend "BC". The article is Deconstructing ShadowStats. Why is it so Loved by its Followers but Scorned by Economists? by Ed Dolan.

Mish readers likely know that I believe inflation to be understated, and that I also believe Williams' ShadowStats is wildly on the high side. For example, please consider GDP, Real GDP, and Shadowstats "Theater of the Absurd" GDP.

I have also mentioned food inflation on many occasions. While food prices (especially beef) did jump in the last year or so, I recently bought chicken breasts for $.99 a pound and very lean center cut pork chops for $2.49. Sale prices on center cut pork chops have generally ranged from $1.79 to $2.49 for 15 years! Not on sale, I have seen them as high as $5.49.

So I buy pork chops on sale, and freeze them. Same with chicken and beef. While non-sale prices have gone up more, ShadowStats calculations seem absurd.

Want to combat food inflation? Buy a big freezer, buy food on sale, and freeze it.

I never dove in into Williams' numbers to see where he may have gone wrong. Ed Dolan just did that, with convincing tables, graphs, and commentary.

Here is a snip.

A can of tomato sauce that cost $.25 at Piggly Wiggly in 1982 cost $.79 at my local market in early 2015. Starting from the 1982 price, the CPI predicts that it should cost $.61 in 2015 while ShadowStats predicts that it should cost $2.64. Starting from the 2015 price and working backwards, the CPI predicts that it should have cost $.32 in 1982 while ShadowStats predicts that is should have cost $.08. Based on these calculations, we see that the CPI underestimates inflation, as measured by the Tomato Sauce Index: The ratio of the 2015 predicted price of $.61 to the 2015 actual price, $.79, is .77, an underestimate of 23 percent. The ratio of the ShadowStats prediction to the actual price is 3.32, an overstatement of 223 percent. For tuna, both indexes overestimate inflation, the CPI by 34 percent and ShadowStats by 478 percent, and so on.

Has Williams Simply Made a Mistake?

The fact that the ShadowStats inflation rate fails every crosscheck makes one wonder whether Williams has simply made some kind of mistake in his calculations. I believe that he has done just that. The mistake, I think, can be found in a table given in a post that represents Williams’ most complete explanation of his methodology.

... Williams’ use of a running total of inflation differentials to compute a “cumulative inflation shortfall” of 5.1 percentage points exaggerates the true impact of the methodological changes made by the BLS. A better way to estimate the cumulative inflation shortfall would be to look at the differences between CPI-U-RS and CPI-U before 1983, the year when the BLS implemented the first of the changes that it incorporates in the CPI-U-RS series. That approach is not quite as precise when we use real-world numbers, as Williams does in his original table. As explained earlier, the actual data include statistical noise caused by changes in weighting and in relative price changes among sectors. However, we can approximate the true inflation shortfall by averaging the numbers for 1981 and 1982 from Williams’ table, giving an estimate of -0.45 percentage points.

As mentioned above, Williams’ ShadowStats inflation series incorporates an additional 2.0 percentage point correction to reflect methodological changes that are not captured in the CPI-U-RS series. I would like to examine that number more carefully in a future post, but for the sake of discussion, we can let it stand. If so, it appears to me that, based entirely on Williams’ own data, methods, and assumptions, the adjustment for the ShadowStats inflation series should be about 2.45 percentage points below CPI-U, rather than the 7 percentage points he uses.

In my view, Williams alternative measure of inflation would be more convincing if he were to make this correction. It would also be less likely to feed the anti-government paranoia of some of his followers, who allege that the BLS is falsifies source data and manipulates reported indicators in the way that Argentina and some other countries appear to do.
If you are a true believer in ShadowStats numbers, I suggest you read Dolan's article in entirety for a convincing rebuttal.

By the way, Dolan was quite polite in his rebuttal, concluding with "I would like to thank Williams for taking the time to make detailed comments on an earlier draft of this post. Our private dialog has not yet led to a complete resolution of the issues I have raised here, but I hope that he will address them in future public comments. The search for alternative inflation indicators goes on."

Mike "Mish" Shedlock

1:57 AM

Valuations: Maybe I am Crazy

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Relative vs. Absolute Value

As I watch valuations on stocks soar higher and higher into the stratosphere, I keep asking "where is the value?"

The problem for most is confusing "relative" value vs. absolute value. Stocks may be "cheap vs. bonds" but what does that matter if bonds are ridiculously overpriced?

Fair Value Has Three Digits

John Hussman has an interesting post this week entitled Fair Value on the S&P 500 Has Three Digits.

The last time I quoted Hussman, a manager for a prominent investment firm emailed something on the lines of "Mish, please do yourself a favor and stop referring to Hussman".

Actually, that was likely be good advice. The problem I have with the advice is simple: I happen to agree with Hussman.

Right, wrong, or in between, I say what I believe. I do not say things I disagree with to get blog traffic up, investments up, or page hits up. I say what I believe, and I suspect it has cost me traffic. I upset Republicans and Democrats, equity bulls and bears, and US treasury bulls and bears.

Things are so crazy I have been accused of being a flaming Obama liberal as well as being in Bush's pocket. Truth be known, I never voted or Obama or Bush, and I have never missed voting in a national election since I was 18. Of course, some people think I am crazy to vote at all and that comment has come up when I mention that I vote.

Life would be so much simpler for me if I was obnoxiously one sided, if I never offended anyone ever, or if I purposely offended everyone all the time.

There's value in being universally despised, value in being hated by half the people all the time, or in never saying anything to offend anyone (being universally liked). Traffic-wise, those three models make perfect sense.

You can quote me on this: It's a tough business to annoy half the people half the time, when the half constantly switches.

Nonetheless, here we go again.

Value Investing: Is it Possible? What Does it Mean?

Please consider a few snips from Hussman. Emphasis in bold by Hussman.

Last week, the Nasdaq Composite finally clawed its way to breakeven, 15 years after its spectacular bubble peak in 2000. It’s a testament to the overvaluation of technology stocks in 2000 that it has required the third equity bubble in 15 years to reclaim that 2000 high, at least briefly.

Where is “fair value” today? We have to be careful here because the concept of “fair” depends on your assumptions about what a reasonable investment return should be. If I show you a security that’s expected to pay out $100 ten years from today, and I tell you that the current price is $82, you can quickly calculate that the expected return on that security is 2% annually – and you don’t need to know anything about interest rates to do that arithmetic. Interest rates come in after you do that arithmetic. Interest rates then matter only because they give you something to compare with that 2%. Now, if you decide that a 2% annual return over the coming decade is just fine with you, in view of competing alternatives, then it’s fine to call that security “fairly valued.” But even if you decide that the security is fairly valued, you should still expect a 2% annual return over the coming decade. If you viewed a 10-year return of 8% as reasonable, you’d peg “fair value” at $46.32.

On the basis of valuation measures best correlated with actual subsequent market returns, we can say with a strong degree of confidence that the S&P 500 would presently have to drop to the 940 level in order for investors to expect a historically normal 10-year total return of 10% annually. That 940 figure for the S&P 500 would not represent some extreme, catastrophic outcome. It’s not a level that would even represent undervaluation from a historical perspective. It’s the level that we would associate with average, historically run-of-the-mill long-term equity returns. As we observed at the 2000 peak, “if you understand values and market history, you know we’re not joking.”

Last month, Stan Druckenmiller recounted his own experience with capitulation and performance chasing when he was the lead portfolio manager for George Soros and the Quantum Fund:

“I’ll never forget it. January of 2000 I go into Soros’ office and I say I’m selling all the tech stocks, selling everything. This is crazy... Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two gun slingers. They didn’t have enough money to really hurt the fund, but they started making 3 percent a day, and I’m out. It’s driving me nuts. I mean, their little account is like up 50% on the year. I think Quantum was up seven. It’s just sitting there.

“So like around March I could feel it coming. I just – I had to play. I couldn’t help myself. And three times during the same week I pick up a – don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You ask me what I learned. I didn’t learn anything. I already knew I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So maybe I learned not to do it again, but I already knew that.”
Not Predictions

Please note that 940 is not a prediction by Hussman or by me. It is a value judgment. The S&P "fair value" number would be higher at an 8% discount and even higher at a 6% discount.

And regardless of the discount rate, stocks can overshoot or undershoot. Stocks can also go sideways for 8-10 years doing much of nothing. Japan is proof enough.

Please don't tell me "It cannot happen here". It can.

Pension plans would be destroyed if stocks go nowhere for 8 years. Moreover, I suspect the Fed would be  relatively pleased at such a benign outcome (assuming that was the only adverse outcome).

Where is Value?

Value is always in the eyes of the beholder. People saw value in dotcom companies in 2000, in housing in 2006, in gold in 1980, in Japan in 1990.

Today people see value in negative yield government bonds, in junk bonds that pay interest in debt, and in equities that have a smoothed valuation as high or higher than 1929, 2000, and 2007.

Maybe I am Crazy

I see value in gold and gold miners, in yen-hedged Japanese equities, and in Russian equities at a PE of 6 (see Readers ask "How Does One Invest in Russia?")

But hey, maybe I am crazy. Maybe we see government bonds trading at -5.0% yield and smoothed PEs at 35, topping valuations of 2000 and 1929.

Things are nearly always cheap "relative" to something else. There's a chance the "something else" of the future refers to peak valuations, not now, but rather in 2016.

Feelin' lucky?

Mike "Mish" Shedlock

Monday, April 27, 2015 8:55 PM

Sad News For Greece? Will Greece Kiss Troika's Ass?

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I am convinced the best thing for Greece is to tell the troika where to go. And recent events (at least until today) suggested Greece would do just that.

On the other hand, extreme sentiment is usually wrong. It may not be, it just usually is. So please consider the British betting site, William Hill.

Sentiment is so lopsided that the British betting site William Hill No Longer Accepts Bets On Greece.

"No player seems interested in betting that Greece remains in the euro zone until the end of the year."

Greek Capitulation?

Wow. Zero bets is mathematically as lopsided as it gets.

Meanwhile, please consider Tsipras Reshuffles Negotiating Team to Sideline Varoufakis.

Greece’s outspoken finance minister Yanis Varoufakis has been sidelined after three months of fruitless talks with international creditors to unlock €7.2bn in bailout funds, heartening investors and sparking a rally on the Athens stock market.

Eurozone officials said they were encouraged by the move by Alexis Tsipras, Greece’s prime minister, to overhaul his bailout negotiating team in the wake of an acrimonious meeting of eurozone finance ministers in Riga last week.

The shake-up comes as Athens faces questions over whether it can meet this month’s wage and pension bill of nearly €2bn as well as a €750m loan repayment due to the International Monetary Fund on May 12.

The Athens stock market rose nearly 4.4 per cent on the news and borrowing costs on Greece’s July 2017 bonds were down almost 4 percentage points from Friday’s close to 21 per cent. Yields on Greece’s benchmark 10-year bonds were down a full percentage point at 11.4 per cent.

The socialist opposition Pasok party said the government was “emasculating Mr Varoufakis . . . and attempting to send a message to the Europeans and the IMF indicating political will for an agreement”.

While Mr Varoufakis retained his position as finance minister, Euclid Tsakalotos, deputy foreign minister for economic affairs, was appointed coordinator of the new team. The Oxford-educated economist is close to Mr Tsipras and his appointment was seen as an attempt to shield the new team from Mr Varoufakis.

A government official insisted the finance minister would remain involved, heading a new “political negotiating team” and would remain “in the frame of collective decision-making and execution” by the leftwing Syriza-led government.
Negotiation Shuffle

Betting sites and reality are not exactly the same thing.

Yet, given the "negotiation shuffle" the odds Greece is willing to kiss the Troika's ass just moved up quite a bit, even without German Chancellor Angela Merkel injecting herself into the picture.

This is not a good development for Greece in my opinion.

Mike "Mish" Shedlock

12:50 PM

4th Straight Negative New Orders Reading for Dallas Fed Manufacturing Survey

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New orders in the Dallas Fed manufacturing survey came in negative for the sixth straight month today.

Weakness was expected due to collapse in oil prices, but the business activity range number was lower than any Bloomberg Consensus estimate.

Bloomberg Consensus

Texas Manufacturing Weakens Again

The Dallas Fed reports Texas Manufacturing Activity Weakens Again

Texas factory activity declined in April, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, posted a second negative reading in a row, coming in at -4.7.

Other measures of current manufacturing activity also reflected continued contraction in April. The new orders index edged up but remained negative at -14. The growth rate of orders index held steady at -15.5, posting its sixth consecutive negative reading. The capacity utilization index pushed further negative to -10.4, its lowest level since August 2009, and the shipments index edged up but stayed below zero at -5.6.

Perceptions of broader business conditions remained quite pessimistic for a fourth month in a row. The general business activity index stayed negative but ticked up to -16 in April, while the company outlook index moved down to -7.8, reaching its lowest reading in nearly two and a half years.
Dallas Fed Results

click on chart for sharper image

Weakness remains nearly everywhere one looks. The one bright spot had been the monthly jobs report, at least until last month. That "weather" report comes out Friday.

Mike "Mish" Shedlock

Sunday, April 26, 2015 10:47 PM

Reader Question: Is the Minimum Wage Really a Maximum Wage?

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A reader asked me if I ever hired someone for the minimum wage. He also believes the minimum wage is really a maximum wage.

From Drew ...

Mish, I’m curious if you have ever had to actually pay someone minimum wage to work for you week in, week out, year after year?

I’ve signed plenty of paychecks myself, and honestly, I could never employ someone and pay the minimum wage knowing it was not enough for that person to live on, regardless of whether or not the “market” says I could hire them for that price. I have willingly paid more, and they always very much appreciated it, and I also felt like I got more effort since they knew I was paying them more. But I know that’s not how large corporations work.

I believe you would argue whether or not the minimum is enough on which to live is irrelevant and not the concern of the employer.

If that is correct, then what bothers me is that we have so many businesses whose profitability relies on keeping these wages as low as possible, for as long as possible, no matter how it affects them, no matter how many are on food stamps, subsidized housing, subsidized daycare, subsidized transportation (bus and train passes), all of which are costs not borne by the business but still must be paid in order for that employee to work for minimum wage.

I believe there must be an ethical or moral argument that for a business to be considered profitable it must be profitable for the various entities that rely on that business to produce its profits. The supplier won’t deliver the goods if they are not making a profit, and when Wal-Mart demands a few cents off each pallet next year, it’s the lowest guy on the pyramid that ends up paying for it.

Strangely enough, according to the history of the minimum wage it began with King Edward III setting a maximum wage for laborers in 1348 after the Black Plague.

The minimum wage law we have now is really a maximum wage for unskilled labor, since according to the theory the wage paid would fall below the minimum set if not fixed by law. How Orwellian they have managed to turn it around and make it sound good by calling it a minimum when it really is a maximum wage. This can easily be seen by the mega-corporations that rely on paying minimum wage, and your earlier contention that every dollar increase in the minimum wage would mean marginal locations closing and fewer jobs for unskilled workers.

If they called it a maximum wage, how much easier it might be to organize labor?

Well, I wish I had figured this out a long time ago. At least now I know the truth.


Questions First

First, let's address Drew's question: I have not employed anyone, at any wage, other than myself (self-employed).

Minimum Equal Maximum?

Drew is wrong about minimum being maximum and proof is voluntary pay hikes by Walmart and McDonald's.

Living Wage Nonsense

The one thing Drew is correct about is that I would indeed argue "whether or not the minimum is enough on which to live is irrelevant and not the concern of the employer".

The primary concern of the employer is to make enough profit to stay in business. The primary concern of a public business is to maximize shareholder returns.

It must be that way. If the goal of businesses was hiring people rather than to make a profit, no one would bother!

There are numerous businesses that could not make a profit at $15 an hour. I wonder how many independently owned McDonald's franchises would go under at a $15 minimum wage.

In theory, businesses could raise prices. In fact, they would have to.

But how many people think fast-food is already overpriced? It's a given that the higher the minimum wage the lower the employment if for no other reason than the drop in customer demand.

 I have seen studies that attempt to disprove that statement. Such studies are nonsense. Because of population growth and saturation of stores, employment tends to go up over time in spite of minimum wage hikes, not because of them.

Government Subsidies

Someone asked me the other day "Why is it OK for Walmart and McDonald's to pay wages so low the employees have to be subsidized by the government?"

I responded with four questions:

  1. Would we be better off if Walmart hired no one?
  2. Who sets subsidies?
  3. Are subsidies too high?
  4. How many people on fixed income want and need low prices they would not get if everything had a higher price?

The only way to pay people more is to hike prices or accept lower profit. That sponsors still more questions.

  1. What does higher prices do to those on fixed income with little savings?
  2. Do we throw retirees under the bus like Bernanke did for the benefit of a marginal number of people who get higher wages?

Many people are not worth the minimum wage. Some businesses have so little profit they can only afford minimum wage

If McDonald's workers don't want to work there, why don't they quit? Why don't they find another job or start their own business?

Make the minimum wage $15 and I 100% guarantee you there will be fewer stores and lower overall employment.

Blame the Fed

If money went further, no one would be upset at the current minimum wage. In fact, if money went far enough, people would be thrilled by the current minimum wage.

The problem is not lack of a "living wage". The problem is the Fed demanding higher prices in a deflationary world.

Businesses are not to blame for higher prices and income inequality. Those protesting Walmart and McDonald's ought to be picketing the Fed.

Mike "Mish" Shedlock

Saturday, April 25, 2015 10:20 PM

Greece Boils Over; No Rules, Just Right; German Rabbits

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The inevitable in Greece gets closer and closer. Looking back, I wonder how many rabbits in the hat there were. More importantly, how many still remain?

I believe the answer to the latter question is zero.

Yet, I also point out the propensity of German chancellor Angela Merkel to prolong the "not on my watch" inevitable. Meanwhile, the pot is far more advanced than "simmering".

Greece Boils Over

The Financial Times reports EU Frustration Over Greece Boils Over at Eurogroup Meeting.

Months of mounting tensions between Greece and its creditors boiled over at a high-level EU meeting on Friday with eurozone finance ministers angrily accusing their Greek counterpart of backtracking on commitments and failing to grasp the deep differences that still divide them.

Athens is running desperately short of cash and many eurozone officials fear that, without an agreement to release some of the remaining €7.2bn in its bailout programme, the government could default as early as mid-May.

Eurozone officials briefed on the closed-door, three-hour meeting said Yanis Varoufakis, the Greek finance minister, specifically warned that cash was so tight that government coffers might run dry in a matter of weeks.

The antagonism between Mr Varoufakis and other ministers became so severe during the eurogroup session that Slovenia’s finance minister suggested if bailout talks did not progress more quickly the eurozone should prepare a “Plan B” to deal with a Greek default.

The contentious session undermined claims by Greek officials that a Thursday meeting in Brussels between Alexis Tsipras, the Greek prime minister, and Angela Merkel, his German counterpart, had narrowed the differences. The claims briefly sent the euro rallying in morning trading, but those gains evaporated after news of the differences emerged.
Default Necessary but Grexit Not?

Financial Times writer Wolfgang Münchau says Default Necessary but Grexit Not.
Until last week, discussions with Greece did not go well. That changed when the circus of international financial diplomacy moved to Washington for the spring meetings of the International Monetary Fund and the World Bank. Then it became worse.

My hunch is that this show will go on for quite a while. The Greeks want to merge the talks on the extension of the current, second, loan programme with the talks on the new third one. For that to work they will require temporary bridging finance to get through the summer. This sounds like somebody has a plan. But this is not my impression. I have never seen European finance officials so much at a loss.

The big question — whether Greece will leave the eurozone or not — remains unanswerable. But I am now fairly certain it will default.

My understanding is that some eurozone officials are at least contemplating the possibility of a Greek default but without Grexit. The complexity is severe, and they may not have had the time to work it out. But it may be the only way to avert utter disaster.

On whom could, or should, Greece default? It could default on its citizens by not paying public-sector wages or pensions. That would be morally repugnant and politically suicidal for the Syriza-led government. In theory, it could default on the two loans it received from its EU partners, though it is not due to start repaying the first of those until 2020, and the second in 2023. It could also default on the remaining private-sector bondholders but that would not be a good idea. Greece might need private sector investors later.

It could also default on the IMF and the European Central Bank. The IMF is expecting a series of repayments. The ECB wants its money back in the next few months on debt it holds on its books. Defaulting on the IMF and ECB is the only option that would bring genuine financial relief in the short term. Nobody has ever done that. It might trigger Grexit.

Then again, it might not. Default is not synonymous with exit. There is no EU ruling that says you have to leave the eurozone when you default on your debt.
No Rules, Just Right

There is no "rule" that says "Default is synonymous with exit".

There is common sense. If Greece does not run a primary account surplus (ability to meet funding needs except for debt interest and debt repayments), then how the hell is Greece going to meet those needs?

IMF? US? Russia? ECB? Man in the Moon?

The answers are no, no, no, no, and no.

In French, it's non, non, non, non, et non.

German Rabbits

All that's left is a rabbit in a German hat.
Or not.

Mike "Mish" Shedlock

Friday, April 24, 2015 9:26 PM

New Problem, Old Tracks

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The San Francisco Bay Area Region Transportation system (BART) has a major problem: aging tracks that border on unsafe.

The San Francisco Chronicle details the problem in BART has New Problem: Old Tracks.

The nearly half-century-old system needs to replace its worn steel rails and cross ties. The problem has produced derailments, a drop in train speed in several trouble spots, and a repair schedule that will close the tracks in Oakland over an estimated 11 weekends.

Track maintenance is nothing new for transit systems as equipment and track wear out. But the scale of the problem and BART’s essential role in carting nearly 400,000 daily riders to work, school and appointments make the task important. It’s imperative that the system focus on improving service as quickly as it can — or risk public concerns about safety and reliability.
Rail Refresher Solution

The following video sent by reader Justin is the exact solution. Meet the "Rail Refresher"

That is one of the most amazing pieces of equipment I have ever seen.
How many workers will it replace?

Mike "Mish" Shedlock

1:32 PM

ECB Buys Negative Yield Covered Bonds; Trade Guaranteed to Blow Up

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In a move 100% guaranteed to blow up at a later date, the ECB Said to Start Buying Covered Bonds With Negative Yields.

The European Central Bank started buying covered bonds with negative yields as its asset-purchase program reduces the supply of the highly rated debt, according to two people familiar with the matter.

The central bank bought the debt in the past two weeks, said the people, who asked not to be identified because the information is private. The notes were from Germany, one of the people said.

The ECB has bought 69.7 billion euros ($75.5 billion) of covered bonds since October as part of its latest measures designed to stimulus growth in the euro area. The accumulation of assets is driving down yields and the central bank now holds about 15 percent of the market, according to ABN Amro Bank NV.

“The ECB has caused this situation by being a big buyer and has exacerbated the already negative net supply of covered bonds,” said Joost Beaumont, a fixed-income strategist at ABN Amro in Amsterdam. “If the ECB buys more, yields will go still lower and that’s going to affect the ECB itself.”

The ECB, which is also buying government bonds and asset-backed debt, has said it will buy negative-yielding securities up to its cash deposit rate of minus 0.2 percent.

An ECB spokesman declined to comment on its covered debt purchases.

“Supply in positive yields is getting scarce and the ECB may have no other choice to fulfill its targeted purchase volume than to buy negative-yielding bonds,” said Tobias Meyer, an analyst at Norddeutsche Landesbank in Hanover, Germany.
Trade Guaranteed to Blow Up

I agree with Beaumont's comment this is "going to affect the ECB itself".

In fact I will go one further and suggest this is a "trade guaranteed to blow up", I just cannot say when or even in precisely what ways.

Mike "Mish" Shedlock

12:08 PM

Durable Goods Orders Up but Core Capital Goods Negative Again

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Durable goods orders are somewhat of a mixed bag today, but beneath the headline rise, weakness is easy to find.

The Bloomberg Consensus was for a 0.5% rise, and the actual result was a whopping 4% gain due to transportation.

Yet, transportation for last month was revised lower, and excluding transportation durable goods orders shrank.

More importantly, core capital goods orders declined for at least four consecutive months.

Let's dive into the Census Report on Durable Goods for more details. Here is a table of key items I made from the report.

ItemMarFebJanFeb-Mar %ChgJan-Feb % ChgDec-Jan % Chg
Total New Orders240,175230,911234,272 4.0-1.41.9
Ex-Transportation Orders159,917160,174162,227-0.2-1.3-0.9
Ex-Defense Orders228,119222,394224,6522.6-1.02.2
Transportation Orders80,25870,73772,04513.5-1.88.9
Capital Goods Orders89,67385,58886,7234.8-1.37.1
Non-Defense Capital Goods Orders80,21377,50479,2143.5-2.2-0.3
Defense Capital Goods Orders9,4608,0847,509177.7-6.3
Core Capital Goods Orders68,18968,53770,062-0.5-2.2-0.3
Core Capital Goods Shipments69,61169,88969,789-0.40.1-0.6

Line items (except the last line which shows shipments) are new orders, in millions of dollars, seasonally adjusted. Core capital goods exclude defense and aircraft.

Once again this was another weak economic report excluding aircraft orders that have long lead times and are frequently cancelled.

Mike "Mish" Shedlock

2:34 AM

Supersaturation and Store Cannibalization: McDonald's to Close 700 Stores, 350 Already Took Place First Quarter

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McDonald's is closing 700 stores this year, 350 of which took place first quarter. That sounds like a lot but it pales in comparison to the 32,500 stores in the chain.

Still it is a sign of Multiple Problems for McDonald's

On Wednesday, McDonald’s had reported an 11% decrease in revenue and a 30% drop in profit for the first three months of year, a continuation of its troubles in the last two years as it has struggled to compete with new U.S. competitors, a tough economy in Europe and a food safety scare in Asia.

McDonald’s CFO Kevin Ozan told analysts that the shuttered stores in China, where comparable sales fell 4.8% in the first quarter, had been underperforming for years. In Japan, where McDonald’s is still reeling from the food safety scare last summer, the closed stores were “heavy loss maker restaurants.” As for the U.S., comparable sales were down 2.3%, one of their biggest drop in years as chains like Chipotle ate into sales.

In the last few months, it has made a few moves that telegraph where it is heading, though it is pretty clear how big the challenge will be for the Golden Arches.

For instance, earlier in April the company announced it is testing out a larger, pricier, third-of-a-pound burger for $5, two years after dropping the similar Angus burger line because they were too pricey for McDonald’s diners. Despite that earlier failure, new CEO Steve Easterbrook expressed confidence his customers would go for premium burgers.

But he faces an uphill battle in winning over the millions of burger-eaters in the U.S. that have a dim view of McDonald’s offerings: Nation’s Restaurant News published a survey this month rating 111 limited-service chains on 10 attributes including food quality, and McDonald’s was ranked No. 110, ahead only of Chuck E. Cheese. In-N-Out Burger topped the list.

And he also has to get the thousands of franchisees, who own 80% of McDonald’s locations, on board as he works to transform the company, even as many are still smarting from his decision to raise wages at company-owned U.S. restaurants.
Low Quality at Premium Prices

Can you sell low-quality "premium" burgers in a place that looks like crap? Other than its breakfast menu there is almost nothing I will touch at McDonald's.

Fools cheered when McDonalds and Walmart raised wages.

Here is the other side of the coin: Is McDonalds or any chain going to expand rapidly if wage pressures mount?

Store Cannibalization

Every hike in wages is another marginal store that won't make it, or will not get built in the first place. All these chains do is cannibalizing each other's business.

Every market share gain by Chipotle is a loss by McDonald's, Applebees, Burger King, or someplace else.


Cities are supersaturated with fast food junk. Saturation also applies to grocery stores, sporting goods stores, Target, Home Depot, Lowes, etc.

I keep wondering when it ends.

I don't have the answer, but it will, and I actually suspect soon. The trigger could easily be the rise in wages. When it happens it will be sudden and "unexpected".

Expect another round of "no one could possibly see this coming".

Mike "Mish" Shedlock

Thursday, April 23, 2015 5:28 PM

Spain's Unemployment Rate Increases to 23.7%; 114,300 Jobs Vanish in First Quarter, Public Sector Jobs Rise

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The economic recovery in Spain has gone from jobless to jobloss. Spain shed 114,300 jobs in the first quarter of 2015.

Via translation from El Pais, Spain's Unemployment Rate Rose Slightly in the First Quarter.

The economic recovery has not been enough to create jobs. In the first three months of the year, the economy shed 114,300 jobs. The result has been a slight increase in the unemployment rate from 23.7% to 23.78% according to the Labour Force Survey (EPA) published by the National Employment Institute.

The rise in unemployment could have been higher if not for the significant decline in the labor force. This group has fallen by 127,400 people to 22.9 million.

As was the case in the previous quarter, again, the labor kick is a decline in private employment (143,500), since the public has grown to 29,200 jobs.

Spain Unemployment Rate

Key Points

  • Employed: 17.454 million
  • Unemployed: 5.444 million 
  • Labor Force: 22.9 million
  • Unemployment Rate: 23.78%
  • Youth Unemployment: 50.1%

Those are horrific numbers. The unemployment rate would be higher except for a decline in the labor force coupled with public sector hiring (likely an election ploy given national elections this Autumn).

The only way Spain can grow and hit budget deficit targets is via numbers like these. In fact, I strongly suspect Spain will miss its budget deficit target because of public sector spending.

How long before Spanish citizens have had enough? The next national election may be telling.

Mike "Mish" Shedlock

12:27 PM

Kansas City Fed Manufacturing Report: Nearly a Clean Negative Sweep; US Dollar Effect in Spotlight

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Inquiring minds are digging into the Federal Reserve Manufacturing Report for the 10th District Region.

10th District Summary

Note the near clean sweep in the negative sense. Actually, inventories of materials rising in the midst of a decline in orders is not a good thing either.

New orders, backlog of orders, employment, and length of workweek have all crashed. Prices paid and received are deflationary.

US Dollar Effect in Spotlight

Effect of the strength of the US dollar is notable in the comments

  1. We are experiencing more volatility on revenue monthly. One month may be much higher than previous month or year and then the next month may be much lower, etc.
  2. The durable goods sector just isn't very good, impacted mightily by the price of oil. We are reducing headcount and spending where possible in an effort to withstand this phase of the economy for however long it lasts.
  3. Competition for business is fierce especially with the low cost labor and better logistics from Mexico. We are finding more and more customers moving manufacturing operations to Mexico.
  4. The manufacturers in the energy producing states are struggling to make adjustments given the speed at with oil prices dropped.
  5. Raw material suppliers have announced large increases in price, however, they keep moving the effective dates back. These announced increases are not supported by actual cost increases. Their sales are down so we are not taking the announced increases are seriously. If they do go into effect, our larger inventories will be a cushion.
  6. West coast port disputes have us out of stock on key items. No information available on when we will receive products. We will look at reducing our employee count next month if we do not receive goods in April.
  7. We import dry bulk cement from Asia and Europe so the strong dollar has given us more buying power. We also export the same type products to Canada where the strong dollar has hurt our margins and made it harder to compete.
  8. The strong dollar is good in that it's driving down commodity prices, but bad because it is making us less competitive globally. We're making fewer products but making more money on them. It has been bad for our employees because we have less work (and fewer employees). Overall , it’s a negative for us.
  9. The stronger dollar is undoubtedly creating more opportunity for foreign manufacturers. The impact has only begun to be felt in our bookings.

Comments number two, three, and nine are telling.


I stick with my assessment made in January and commented on twice recently.

Mike "Mish" Shedlock

10:58 AM

New Home Sales Down 11.4% Overall, 15.8% in South; Median Price Declines

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The Bloomberg consensus estimate for new homes sales was an overly-optimistic 518,000. Instead, it's bad news again as new home sales fell a very steep 11.4 percent to a 481,000 annual rate.

  • New home sales -11.4%
  • New homes sales in South -15.8%, West -3.4%, Midwest +5.6%, -33.3% Northeast
  • Median price fell 1.5% to $277,400.
  • Year-on-year, the median price is down 1.7%.
  • Sales are up 19.4% year over year, a discrepancy that points to price discounting by builders
  • Today's report echoes last week's housing starts & permits data and points to stubborn weakness in the new homes market.

New Home Sales in Thousands

The Northeast contributes the least. The South contributes the most followed by the West so weather is not a significant factor.

Above New Home Sales table from Census.Gov.

Single Family Home Sales

Everyone seems to expect a return to the bubble years even though it's pretty clear where the range really belongs.

Demographically speaking, as boomers age, their houses will add to existing supply as they downsize, then pass away.

Mike "Mish" Shedlock

2:05 AM

Seven Year Negative Returns in Stocks and Bonds; Fraudulent Promises

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It is extremely refreshing to see a large, prominent, and historically accurate fund manager lay it on the line.

GMO does that quarter after quarter, with no-nonsense projections.

As of March 31, their 7-Year Asset Class Real Return Forecast is as follows.

Serious Question for Pension Plans

Given pension plan assumptions of 7-8% annualized returns how many of them can survive negative returns for seven years? It's important to note that GMO is talking about "real" inflation-adjusted returns with an assumption of mean-reversion inflation to 2.2% over 15 years.

Still, that leaves US equities at zero to -1% returns and US bonds at negative 2.4% returns.

Even if GMO is wrong by say 3%, many pension plans will be in deep serious trouble at those returns.

Illinois Pension Plans

I keep harping about this issue, but it's an important one. In the state of Illinois, and in spite of an enormous rally in the stock market since 2009, Illinois pension plans are only 39% funded.

A "Special Pension Briefing" last November, shows the Illinois State Retirement Systems are in dismal shape.

Unfunded Liabilities

  • Teachers' Retirement System (TRS): $61.6 Billion
  • State Retirement Systems (SERS): $26.2 Billion
  • State Universities Retirement System (SURS): $21.6 Billion
  • Judicial Retirement System (JRS): $1.5 Billion
  • General Assembly Retirement System (GARS): $0.3 Billion

The above numbers show actuarial (smoothed) asset valuations.

Liability Trends - Not Smoothed

In spite of the massive stock market rally, Illinois liabilities increased every year since 2011.

For still more details, please see Illinois Pension Plans 39% Funded; Taxpayers On the Hook for $105 Billion in Liabilities; It Will Get Worse!.

Any notion that pension shortfalls can be balanced on the backs of Illinois taxpayers needs to vanish now.

How did Illinois plans became so underfunded?

In general, by promising far more than can possibly be delivered.

Summary of Liabilities and Unfunded Ratios

click on any chart for sharper image

Congratulations go to the Illinois General Assembly Retirement System (GARS) for having one of the worst, (if not the worst) pension plan in the entire nation. It is 16% funded.

No doubt, that increases the pressure of the General Assembly to put the burden of bailing out the system on the backs of Illinois taxpayers.

Fraudulent Promises

Pension promises were not made in good faith.

Rather, pension promises were the direct result of coercion by public unions on legislators, mayors, and other officials willing to accept bribes because they shared in the ill-gotten gains of backroom deals at taxpayer expense.

Illinois taxpayers cannot be held accountable for coercion of public officials by public unions. Fraudulent promises will be held "null and void" in any "non-stacked" court of law in the nation.

Given the 31% funding of the Illinois Judicial Pension Plan (JRS), the sorry state of Illinois pensions is likely headed to federal courts.

Mike "Mish" Shedlock

Wednesday, April 22, 2015 10:31 PM

Ukraine Update: Not Quiet on the Eastern Front; Sanitized US News; Wakeup Call From Poland

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Judging from Western media, one might think nothing much is happening in Ukraine. Facts are wildly different as we will discuss momentarily.

Rush to Judgment

As a prelude to current events, please recall the hype when Russian opposition leader Boris Nemtsov was gunned down in March. Western media rushed to judgment. Heck, even friends who should know better rushed to judgment.

Every Western news agency, even some I would have expected better of, was quick to point the finger at Putin.

I commented on Boris Nemtsov on March 6 in Rush to Judgment and Extremely Inaccurate Reporting.

With that backdrop, let's turn our attention to some recent events.

Death Squads Kill Four News Reporters in Ukraine

On April 17, Death Squads Killed Four News Reporters in Ukraine in 24 Hours.

Over the last two days in Ukraine, there have been four prominent killings.  On Wednesday, it was former member of Parliament from the Regions Party, leader of the All-Ukrainian Officers' Union, and one of the founders of the AntiMaidan, Oleg Kalashnikov.  On Thursday, it was journalist Sergei Sukhobok, one of the founders of the ProUA and Obkom websites.  That same day, former editor of the major newspaper Segodnia, well-known journalist Oles' Buzina, was shot dead in his own backyard; and the body of editor-in-chief of the Netishinskii Herald, Olga Moroz, was found dead in her apartment, bearing signs of a violent death.

Three journalists in one day. Four political figures in 24 hours.  Where is the human rights crowd? Where is the international community?  Where are the declarations of Merkel, Obama, Cameron, etc.? Where is the wave of indignation from the Western press? Where?
Page 18

What did those journalists have in common? They were all against the war effort or considered "pro-Russian".

Had four anti-Putin journalists bit the dust in Russia, this would have been front page news for six straight days.

The New York Times devoted exactly one paragraph to the Ukraine killings on page A18 of the Friday, April 17th edition.
A Ukrainian journalist with a vocal pro-Russian stance was killed in Kiev, the capital, by unidentified gunmen on Thursday, a day after a pro-Russian lawmaker was killed in a similar attack. The journalist, Oles Buzina, 45, publicly opposed the protests that led to the ouster of President Viktor F. Yanukovych in 2014. The current president, Petro O. Poroshenko, called for a swift investigation and declared that the recent killings were “conscious provocations” intended to “destabilize domestic politics in Ukraine.” President Vladimir V. Putin of Russia said Ukraine’s government was allowing a campaign of political violence against supporters of the previous government.
Note the slant by Poroshenko. Supposedly Putin is killing pro-Russia supporters!

This is what constitutes "reporting" in the US.

Wakeup Call From Poland

Please consider Polish General ‘Calls Back Support’ of Ukraine over Nationalist Glorification
Retired General Waldemar Skrzypczak, an influential figure in the Polish military, says he withdraws all words of support for Ukraine due to the country’s sliding towards nationalism. Earlier he advocated supplying heavy weapons to Kiev.

The angry U-turn in attitudes towards the Ukrainian government was published on Friday in the Gazeta Prawna newspaper. Skrzypczak said he is outraged with a law that the Ukrainian parliament passed hours after Polish President Bronisław Komorowski spoke before the MPs to express support for Ukraine.

The law gave benefits to all people who fought for Ukraine’s independence throughput history. Those include fighters of the Ukrainian Insurgent Army, or UPA, which was responsible for mass killings of Polish citizens in 1943-44. The tragic events are known as Volhynian slaughter in Poland.

I wonder on what foundation is Ukrainian President Poroshenko building the future of Ukraine. Bloodthirsty nationalism? It’s frightening. I have long been telling that Ukrainians must get rid of nationalism, because otherwise cooperation with Poland would be very difficult if possible at all,” he said.

As early as January, Skrzypczak was calling on the Polish government to send some armor from its reserves to Ukraine to help its government ‘fight against Russia.’
Sanitized US News

The above was from RT, but the translation would be the same from any source. Don't like RT? How about Newsweek?

Please note that Newsweek (Polish Edition) reports Poland Claims US Is Responsible for Destabilization in Ukraine.

This is an English translation courtesy of Watching America Published in Newsweek (Poland) on 16 March 2015 by Marta Ciastoch Translated from Polish by Justyna Demuth.
“The U.S. has spent $5 billion on the Ukrainian revolution, the snipers who shot Euromaidan protesters came from the West, the annexation of Crimea was a justified action, and Nemtsov was killed by Americans,” claims Janusz Korwin-Mikke, a Polish member of the European Union, in the interview for a Ukrainian TV program “Shuster Live.”

“Most citizens of Crimea were, by their own democratic choice, in favor of joining Russia,” argued the Polish KORWIN party leader. He emphasized that the existence of an independent Ukraine is critical for Poland, but whether Crimea remains a part of Ukraine or not, does not really matter. “Ukraine could exist without Crimea, and would, had not the U.S. invested $5 billion to destabilize it,” says Mr. Korwin-Mikke, adding that Ukraine’s loss of Crimea, followed by the loss of Donetsk and Luhansk, is a result of U.S. actions. Mr. Korwin-Mikke appealed to Ukrainians in order to make them realize the true intentions of the USA, which pretends to be allied with Ukraine, but, in fact, uses it against its own conflict with Russia.
The US is supporting neo-Nazis and murderous thugs in Ukraine because we prefer those thugs over Russia.

Mike "Mish" Shedlock

2:22 PM

How to Eliminate Illegal Competition

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Tired of illegal competition? Well, who isn't?

And the Quitman Georgia police department has an ad that can help.

By the way, I believe in legalizing drugs. I just found this humorous.

Mike "Mish" Shedlock

1:23 PM

The Chicago Penalty

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Chicago Pays Price to Get the Deal Done

Comparisons on the Bond Buyer in regards to Tuesday's offerings show Chicago Schools Pay Price to Get Deal Done.

The top yield of 5.63% on a 25-year maturity landed 285 basis points over the Municipal Market Data's triple-A benchmark.

While the board's rating remains in investment grade territory, its yields aren't.

Tuesday's MMD scale Tuesday put a mid-level, triple-B rated credit at a 3.78% yield on a 2039 maturity, underscoring just how severe a penalty the district paid. The Chicago Board of Education is rated between the BBB-minus level and A-minus.

Secondary trades on the board's $6 billion of debt jumped 140 basis points in recent weeks with 10-year paper trading around 250 basis points over MMD and 15 year paper trading at 300 basis points over.

The two tranches offered a C series for $275 million and an E series of $20 million in green bonds. Both carried a general obligation pledge plus an alternate revenue pledge of state aid.
The Penalty

Not only did Chicago have to pay a 285 basis point penalty over top rated bonds, it paid 185 basis points over similarly rated bonds even though the bonds contained an alternate pledge of state aid, and even though Illinois law does not "yet" allow bankruptcy.


Default risk.

Rauner pledged "The taxpayers of Illinois are not going to bail out the city of Chicago, that ain't happenin. But there are things we can do to help them restructure and get their government and their schools turned around, and I'd like to help them.".

Illinois taxpayers should commend Rauner for that stance.

Few Institutional Buyers

Here's a pair of telling comment from the article about who may be taking the risk:

"The 2035 is a discount structure, that typically signifies to me that you got some alternative buyers looking for some pop on the run, so they will try to trade on the headline news," said a Midwestern trader. "The structuring had a fairly deep discount. Only $10 million in the 2035, a little telling on the premium structure, which tells me you only have a few institutional buyers."

"The question that is on everyone's mind is did the Kroll rating do anything? Overall, it has wide spreads but you can really tell by the dollar amount who the buyers are," the Midwestern trader said.

Is this similar to the institutional shun and dump of GM bonds ahead of GM's bankruptcy?

Recall that high-yield GM bonds were dumped on unsophisticated mom and pop investors ahead of that debacle.

No Miracles Coming

I repeat what I said yesterday in Yield on Chicago School Bond Offering Hits 5.63%; Debate Over Risk; Miracles Not Coming; Bankruptcy the Sensible Option.

How is a state that has a $9 billion budget deficit hole going to bail out a single school district that is $1.1 billion in the hole?

The obvious answer is that it won't and can't. There are no miracles to be had. The Chicago Public School system is bankrupt. All it will take to trigger bankruptcy is for the legislature to allow just that.

That said, the law does mandate that parties in a chapter 9 bankruptcy dispute attempt to negotiate a settlement.

Realistically speaking however, history shows that unions will not concede benefits as they believe them to be sacrosanct, even though court decisions prove otherwise.

Detroit made a huge mistake time-wise attempting to forestall the inevitable. Rauner needs to give an out of court settlement a chance, but for the sake of Chicago and Illinois, that chance should be of limited duration.

Bankruptcy the Only Sensible Option

Since downstate voters will not want to bail out Chicago, we may easily be approaching the point the Illinois legislature realizes it has no choice other than to allow municipalities the option of declaring bankruptcy.

This won't come easily for the legislature, but it's the right thing to do. Upstate vs. downstate politics may be enough to tip the tide.

Mike "Mish" Shedlock

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