International Week in Review: UK Still The Star Economy Edition

This is over at XE.com

http://community.xe.com/forum/xe-market-analysis/international-week-review-uk-still-star-performer-edition

Weekly Indicators for June 9 - 13 at XE.com

 - by New Deal democrat

No surprise here.  The big story is what the events in Iraq are doing to the price of Oil.

Is Intel A Good Buy With Today's Increased Revenue Announcement?

     I love dividends.  Not only do they provide a floor for a stock's price, they also indicate a company that has consistent earnings and a solid industry position.  Additionally, in a low rate environment, any dividend yield above the prevailing 10-year treasury is attractive.  So when Intel announced they were expecting an increase in their sales earlier today, I took a look at their fundamental position to see if they looked like an attractive investment.

    Let's start with their industry position.  According to the Finviz website they belong to the semi-conductor broad line industry and their market capitalization is $139.18 billion, making them over 2.5 times the size of their nearest competitor (TXN).  They have gross sales of $52.89 billion, which is 4.3x the size of TXN (whose gross sales were $12.3 billion).  This means that while comparing their performance to their industry will be helpful, we should also remember they are really in a unique position.

     The industry has a PE ratio of 21 while INTCs is 15, indicating they are under-priced via that particular metric.  At the same time they are over-price via the price to sales metric and about evenly valued at price to book.

     However, it's from a margin perspective that Intel really shines.  Remember that as the biggest player in the semi-conducter field, they are in a position to extract large concessions from suppliers.  This ability is evident in their margins as they have a gross, operating and net margin of 60.63%, 22.95% and 17.95% -- all far above their industry average.  These are the kinds of margins that allow the company tremendous financial freedom relative to their competitors.

     Their cash flow statement is solid.  In 2011, 2012 and 2013 they generated $20.7, $18.8 and $20.9 billion in cash from operations, which more then covered their primary investment activity of adding to plant, property and equipment at a pace between $10 and $11 billion per year.  Like most companies with excess cash, they have invested a larger than usual percentage of their liquid assets in securities, which accounts for the bulk of their remaining investment activities.  The majority of their financing activities have gone to dividend payments and share buybacks over the last three years.

     They have liquid assets of $18 billion and $20 billion in 2012 and 2013, which more than covers their short-term liabilities for both years (which were $12.8 and $13.5, respectively).  They only have $13.1 billion in long-term debt, which is also more than covered by their liquid assets, let along their total assets.  They have net equity of $51.2 and $58.2 for 2012 and 2013.  The bottom line is their cash flow and balance sheet are in great shape.

     The problem has been revenue, which has declined from $53.9 billion 2011 to $52.7 billion in 2013.  Overall, this only represents a decline of only 2.2%.  At the same time, operating expenses have increased 18%, lowering the operating margin from 32% in 2011 to 23% in 2013.  There has also been a decline in their net margin from 23.9% to 18.2%.  None of these are fatal, especially considering their cash flow, but the decline is probably a big reason for the stock's underperformance over the last few years.

     The company's biggest problem is they derive a large percentage of their revenue from PC sales, which are in a slight decline:

The stock today jumped as much as 7.5 percent to $30.06, the highest intraday level in 10 years, after the world’s largest semiconductor maker raised its second-quarter revenue forecast yesterday after the markets closed. Intel also said annual sales will increase for the first time since 2011, buoyed by improving business demand for personal computers.

The higher forecast provides another hint of optimism in the PC industry, where Intel gets most of its revenue, after two straight years of declining global shipments. Even as consumers shun PCs in favor of mobile devices, demand for Intel’s microprocessors is getting a lift as companies replace aging computer systems, said Ian Ing, an analyst at MKM Partners.

“In the short to medium term, it looks like the market has stabilized, and business and corporate PCs are driving a lot of strength,” said Ing, who has the equivalent of a hold rating on Intel stock. “It’s really a nice positive for them, even without needing the consumer to come back yet.”

.....

Intel’s chips power more than 80 percent of the world’s PCs, so for now the company remains dependent on that market. To keep revenue growing beyond this year, Intel will have to win business in handheld devices or woo more consumers back to PCs, said Cody Acree, an analyst at Ascendiant Capital Markets LLC.      

Only time will tell if Intel can make serious in-roads into the table and mobile phone market.

However, PCs aren't going anywhere.  And while their popularity may be down, they are still a big component of corporate American, thereby giving Intel a market.  And they are clearly THE p
layer in that market.  As such, this is an attractive stock, especially given their increased sales forecast.

As with anything you read on this blog, this is my opinion, worth exactly what you pay for it.  In other words, do your own research and come to your own conclusion.

Condominium construction increases

 - by New Deal democrat

There was a good article in Bloomberg yesterday on a recent increase in condominium construction:

For the first time since the U.S. housing crash, new condominium towers are sprouting ....  “We’re in the very early stages of a long recovery in condos,” Sam Khater, deputy chief economist for Irvine, California-based CoreLogic Inc., said in a telephone interview. “Now you’re seeing rental booming, but today’s renters are going to be tomorrow’s condo buyers.” ....

 Builders broke ground on 22,000 for-salemultifamily residences last year, up 4.8 percent from 2012 and 47 percent from the post-crash nadir in 2010, Census Bureau data show. In the first quarter, 8.5 percent of the 71,000 multifamily units that started construction were built as for-sale properties, up from a 6.9 percent share a year earlier, according to the data.

"There's a lot of pent-up demand from first-time homebuyers and condos are a good first stop,” [David] Crowe[, chief economist for the Washington-based National Association of Homebuilders]. said in a telephone interview. “Dense developments like condos give the lifestyle they’re looking for.”

As I pointed out in a series of posts last month, the single family home market has been dead in the water since early 2013, not contracting significantly, but its growth completely stopped by higher prices and higher mortgage rates.  Meanwhile, renting has been booming, with near record low vacancies, and median rental prices increasing over 5% in the last year.

As in the late 1960s and 1970s, when increasing interest rates coincided with the surge of Boomers hitting adulthood, multi-family construction of condominiums is booming.  With cramped employment prospects and record student loan debt, Millennials are following the same path.

We are seeing a secular surge in apartment and condominium building, that will be followed, once economic conditions are more propitious, by a boom in building of new single family homes.

 Housing starts and permits for May will be released on Tuesday, and I expect to see a continued YoY decline in single family home construction.  Whether multi-unit construction continues to rescue the overall housing market is the more interesting question.

Oil Breaks Consolidation And Heads Higher On Iraq Tensions

 

 

 

Earlier this week, we learned that Iraq is literally falling apart.  An insurgency has captured the northwestern parts of the country, Kurds have seized key cities and now it is reported that Iran is sending in troops to at least help the Maliki Regime.   This is the type of news that sends oil prices higher, which it has.  Oil has been remarkable quiet for the last few years.  But this recent news from the Middle East is severe and adds a disturbing wrinkle to oil's price calculus.

The death of mortgage refinancing and the danger of recession in later 2015

 - by New Deal democrat

I have a New post up at XE.com, discussing the relationship between mortgage refinancing and the last two recessions.  If real wages don't pick up, and interest rates continue to choke off refinancing debt, then we enter the danger zone for a new recession one year from now.

What is Carl Icahn Thinking in Taking an Interest in Family Dollar?

Last week, the financial world learned that Carl Icahn had taken a 9.4% interest in Family Dollar.  The question for this move is, why?  Let's start by looking at the industrial sector, which the FINVIZ website classifies as "discount variety stores."  The top three players here are Wal-Mart, Target and Costco, which no one is going to target for a hostile takeover, simply based on the sheer size of the companies. 

However, the next group of companies -- Dollar Tree, Dollar General and Family Dollar -- are smaller and therefore far more attractive.  From a purely tactical perspective, Family Dollar has the smallest market cap at 7.56 billion, meaning this company is simply easier to attack.  And, to make this possibility more attractive, family dollar stock has under-performed competitors over the last three years by a wide margin:

When a stock underperforms at this level its for one (or a combination of) of three reasons: the sector is in a downturn, management is not performing well or the market is simply over-looking a bargain.  Icahn clearly believes the latter is the case.  And, I agree with him.

FDO is clearly the "red-headed stepchild" of the group.  And, it's not for lack of revenue performance:

As the chart shows, the year over year revenue growth of FDO, DLTR and DG are all solid (FDO is in orange and has not reported its final 2014 numbers yet).

What Icahn is thinking is this company can be merged with one of its competitors to achieve better financial efficiencies.  Consider a comparison of the three companies' net margins:

Dollar tree is clearly the winner of the three in financial efficiency, with a net margin between 2%-4% higher than FDOs.   

And it's not just in the net margins.  The company's cash/investment ratio has been positive for the last three years, indicating they can self-finance expansion through existing sales.  An expand they have, increasing their store count from 6655 in 2009 to 7916 in 2013.   They have also moved to better manage their own internal infrastructure:

At the end of fiscal 2013, each distribution center served an average of 720 stores, compared to 744 stores in fiscal 2012. Our tenth distribution center in Ashley, Indiana, began operations in June 2012, and our eleventh distribution center in St. George, Utah, began operations in July 2013. The opening of the eleventh distribution center reduced the average stem miles between our distribution centers and our stores by approximately 7% at the end fiscal 2013, as compared to the end of fiscal 2012.

 

The bottom line is pretty clear: this is a good company that could easily be merged into one of its larger rivals, thereby achieving better efficiencies.  What Icahn has done is to purchase a solid percentage of shares in a small (as expressed in market cap) company that will make a good partner for one of its two larger rivals.
 

The REAL "real unemployment rate" for May 2014

 - by New Deal democrat

This month the usual suspects did not run any "real unemployment rate" articles, which assume there is no such thing as Boomers retiring in droves. Only the EPI updated its "missing workers" number based on estimates from a research paper published 7 years ago.

In fact, let me make a general announcement that will save you a lot of time reading useless or misleading analysis:  any time you see an article citing the employment to population ratio, or the civilian labor force participation rate, for the entire population, ignore it.  It's useless BS garbage. Retired Boomers are skewing both numbers drastically,  Both numbers are going to trend down for years, as Boomers move out of the labor force and into senior citizenship.

With that caution, let me update the "REAL real unemployment rate."

In order to be counted among the unemployed for purposes of the monthly jobs survey, a person must have actively looked for a job during the reference period.  But what about people who are so discouraged that they have completely stopped looking for work and have simply dropped out of the labor force?

The monthly household jobs survey measures exactly this in a statistic called "not in labor force, want a job now."  Here's what that metric shows for the last 10 years:

The number of discouraged workers rose by nearly 2,000,000 in the wake of the Great Recession. In 2012 and 2013, it declined by about 1/3 of that number.  Disturbingly, it has risen since the beginning of this year by over half a million.  This looks like a real trend.  I suspect it is fallout from the termination of long term unemployment benefits.  Supposedly this was going to spur those lazy moochers < /snark > to finally go out and find employment.  Instead, it looks like it has caused a fair number of  the long-term unemployed to simply give up hope.

In order to find out what the "real" unemployment rate is, including such discouraged workers, we simply add the number of people shown above to both the numerator (unemployed) and denominator (civilian labor force, which excludes those adults not interested in jobs, like retirees) of the statistics used for the unemployment rate.  Here's what that shows for the last 10 years:

The usually reported unemployment rate (U3, in red) is currently 6.3%.  The "real" unemployment rate including those who want a job but haven't looked (blue) is back up to 10.0%.

While this is by no means good, it is important to compare apples to apples.  Note that the current rate is equivalent to that of late 1994, and even at the height of the late 1990's tech boom, the best economy the US has seen since the 1960's, this rate was 6.7%.

We can perform a similar calculation to get the "real underemployment rate," i.e., which adds those who are working part time for economic reasons or are otherwise marginally attached to the workforce:

The "real" underemployment rate is 16.1% (red) vs. 12.2% (blue).  Again, note that even in the 1990's tech boom, this rate never got below 9.9%.

Back in March I wrote that The cutoff in unemployment wasn't just vile, it explained a lot of Q1 economic weakness.  Almost 1/3 of all of the people who affected in all of 2014 were cut off in January, and more have been cut off each month since.  It appears this is showing up in the "REAL real unemployment rate," even if not the official one.

Recent UK News Points to Stronger UK Economy and Pound Sterling

This is up at XE.com

http://community.xe.com/forum/xe-market-analysis/recent-uk-numbers-point-stronger-uk-economy-and-pound

Ranking The Major Central Banks From the Most Likely To Least Likely to Raise Rates

This is over at XE.com

http://community.xe.com/forum/xe-market-analysis/ranking-major-central-banks-order-most-likely-least-likely-raise-rates

My Questions About Apple

When my wife and I were house hunting, I was obsessed with getting an I-Phone.  I remember telling her as we were out driving, "If I had an I-phone, I could look at a map and find near-by restaurants."  I eventually purchased one and was very pleased.  I later upgraded to the then newer model and was still happy. 

However, over the last year or so I became less than happy.  Service was slower than anticipated.  And, finally, the new operating system that was launched about 6-8 months ago was very unsatisfactory as it literally ate battery life.  The last straw was my inadvertently dropping the phone shattering the glass.  Now I have a Galaxy 5 which I'm very pleased with along with a new data provider.

All that being said, there are two points on Apple's financials that really leave me wondering about the company.

First of all is the lack of R&D.  Here's a chart of R&D expense as a percentage of revenue:

The response to this is these percentages actually represent billions of dollars of expense -- and they do.  The latest figure represents over $4 billion in expenses.  But, in response, consider this: what was the last really big Apple product?  It was the I-Pad and that was a long time ago in technology years.  That, combined with the death of their primary creative mind in Steve Jobs indicates they should be spending a lot more to come up with the next big thing.

Here is their statement from the latest 10-K regarding R&D:

Because the industries in which the Company competes are characterized by rapid technological advances, the Company’s ability to compete successfully depends heavily upon its ability to ensure a continual and timely flow of competitive products, services and technologies to the marketplace. The Company continues to develop new technologies to enhance existing products and to expand the range of its product offerings through research and development, licensing of intellectual property and acquisition of third-party businesses and technology. Total research and development expense was $4.5 billion, $3.4 billion and $2.4 billion in 2013, 2012 and 2011, respectively.

10-K's are notoriously bland documents, so we're not going to see a statement like, "Shit.  Steve Jobs, the man who revolutionized multiple businesses is dead and we're now up a creek without a paddle."  At the same time, there doesn't seem to be any acknowledgement that their business is changing.   

Second, according to the company's latest 10-K, they have $92 billion in marketable securities on their balance sheet.  Now, short-term investments are part and parcel of treasury management nowadays, so the act of doing this shouldn't be an issue.  But, here's the key question for me: with this amount of securities, isn't Apple now as much a mutual fund as a technology company?  Consider this page from their latest 10-K which discloses their investment philosophy etc....  It looks a great deal like a mutual fund disclosure. 

These questions are actually periphery to the company's basic business.  They own some of the strongest tech products ever and command a very loyal following.  But, I also think it's important to remember that the times are changing for Apple and we need to change the way we look at the company in order to tailor our expectations accordingly.

International Economic Week In Review: The ECB Actually Does Something Edition

This is up over at XE.com

http://community.xe.com/forum/xe-market-analysis/international-week-review-ecb-actually-does-something-edition

Weekly Indicators for June 2 - 6 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is Up at XE.com.

The high frequency data is booming.

Live-blogging D Day hour by hour, as it happened

 - by New Deal democrat

For those of you who are interested, the blog World War 2 today, which normally posts one item per day, "live-blogging" what happened in the war exactly 70 years earlier, has been running numerous posts since late on June 4, on almost an hourly basis by now, as to the immediate prelude to and operation of the D Day landings in Normandy.

This is absolutely top-notch blogging, giving you a real sense of "you are there" as each facet of the landings begins to unfold.  By all means check it out.

May jobs report: same old, same old

- by New Deal democrat

HEADLINES:

• Not in Labor Force, but Want a Job Now: up +292,000 to 6.438 million
• Employment/population ratio ages 25-54: 76.4% down -0.1%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: $20.54 up $.03

In May 217,000 jobs were added to the US economy.  The unemployment rate was unchanged at 6.3%.  April was revised downward by -6,000. There was no revision to the March number.  

Since we knew the general range of job growth and unemployment, as I indicated last Sunday I would focus on the 3 above headline numbers as to "real" unemployment and wages.  These numbers for May tell us that we made no headway - in fact we went backward -  in bringing back discouraged workers into the workforce and into jobs.  

Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago.  The big increase this month was not welcome.

After inflation, real hourly wages probably declined slightly from April to May, but April was revised higher.  The YoY change in average hourly earnings is +2.4%.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were generally positive.

• the average manufacturing workweek rose from an upwardly revised 40.9 hours to 41.1.This is one of the 10 components of the LEI, and will contribute significantly towards a positive number.


• construction jobs increased by 6.000. YoY 188,000 construction jobs have been added.


• manufacturing jobs  also increased by 10,000, and are up 105,000 YoY.


• temporary jobs - a leading indicator for jobs overall - increased by 14,300.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - rose by 15,000 from 2,447,000 to 2,461,000 compared with December's 2,255,000 low.

Other important coincident indicators help us paint a more complete picture of the present:

• The average workweek for all nonsupervisory workers remained unchanged at 33.7 hours.


• Overtime hours were unchanged at 3.5 hours.


• the index of aggregate hours worked in the economy rose by 0.2 from 108.1 to 108.3.  This is a new record.


• The broad U-6 unemployment rate, that includes discouraged workers decreased from 12.3% to 12.2%.


• The workforce rose by 192,000. (partially offestting last month's number, which was the big Harbinger of DOOOOM at -806,000) Part time jobs for economic reasons decreased by 196,000.

Other news included:

• the alternate jobs number contained in the more volatile household survey increased by 145,000 jobs.  The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been entirely made up, with the household survey showing a 1,895,,000 increase in jobs YoY.


• Government jobs increased by 1,000.

• the overall employment to population ratio for all ages 16 and above was unchanged at 58.9%, and has risen +0.2% YoY. The labor force participation rate was also unchanged at 62.8% , and has fallen by -0.6% YoY (but remember, this includes droves of retiring Boomers).

In summary, this report was another good report, with good internals, based on the standard of the last decade.  It is a mediocre report when measured against a longer timeframe.

Where the report is disappointing is in making headway against the real slack in the labor force, including discouraged workers, and in wages, which are still stagnant.

Same old, same old.

Of corporate profits, progressives, and the business cycle

 - by New Deal democrat

Yves Smith has a piece up at Naked Capitalism this morning on "why economists don't recommend real remedies" in which she says:

I hate criticizing writers whose work I generally like, but as a contrast to this talk, I suggest you look at a new post by Ed Lambert at Angry Bear. In it, a left-leaning blog (and remember, Angry Bear has been vigorous in its defense of Social Security), we see an strong argument against having workers get a better deal. Why? It will lower corporate profits, which will lower asset prices and give the confidence fairy a sad. I am not making that up. This shows the degree to which liberal economists have been intellectually captured by the orthodoxy and/or have been inculcated to live in fear of the Market Gods. If you can’t get parties who are ideologically sympathetic to argue for real remedies rather than a “recovery” only for the top tier, how can you possibly exert any pressure on the minions of the 1%?

 (my emphasis)

Except Lambert isn't saying that labor's share of productivity should stay low.  To the contrary, Here's his concluding paragraph:

Profit rates just simply went too high and labor share went too low. Bringing these back into a sustainable balance will trigger an unstable financial situation, which would likely produce a recession.

(my emphasis)

In what sense is stating that labor share is too low arguing that it shouldn't be increased?  Lambert is simply stating a fact from business cycle analysis:  recessions don't happen when corporate profits are increasing, they happen when corporate profits are decreasing.  Here's his explanation:

Firms do not want to see their profit rates fall… even though their aggregate profit rates are very high already. If profit rates start to fall, asset prices will fall. This will have a cascading effect to investment and consumption. The problem is that asset prices are dependent upon very high profit rates which are based on a historically very low labor share. This situation is unsustainable. People are demanding higher wages because they are struggling terribly. Moreover, government assistance increases to make up for low wages. There are calls for higher taxes on capital.

Even if labor share rose and profit rates were to back down from 9% to a more sustainable 8% (which is still high historically), asset prices would fall and there would be a negative cascading effect upon the economy.

The simple fact is, as I pointed out last week in a post at XE.com

Corporate profits, particularly as adjusted by unit labor costs, are a long leading indicator for the economy,  They typically decline by at least one year before the overall economy does, and sometimes make their high near mid-cycle.

Unsurprisingly, given the rest of the GDP report, Q1 corporate profits, both unadjusted and as adjusted by unit labor costs, declined....

Corporate profits are a long leading indicator, typically turning down over a year before the next recession.  That is simply a fact, as originally shown in detail (pdf) by Prof. Geoffrey Moore, who was instrumental in establishing the index of Leading Economic Indicators and went on to co-found ECRI.

If you don't believe me, here is  Cris Sheridan at Financial Sense discussing the downturn in corporate profits in the first quarter:

If you do this for the 60 years of data and 8 complete business cycles shown in the chart [below], you’ll find that BEA’s measure of corporate profits peak on average over a year before the stock market peaks and over two years before the onset of an economic recession.

Recessions typically mean that millions of workers get laid off.  Does Yves Smith want that?

The question is, if there were a uniform increase in corporate taxes, would that operate the same as when forces naturally generated by the economy lead to a decrease in profits?  Typically, when faced with a sustained downturn in profits, companies start looking for ways to economize. This can include hiring freezes, and if the squeeze continues, layoffs. But what if every company, across the board, faced a uniform increase in taxation?  Would they react the same to that as to a decline in profits endogenous to the economy (since their relative share of profits compared with other companies would be the same)?  

Like both Edward Lambert and Yves Smith, I believe that the Labor share of productivity is too low and must be raised.  So long as both profits and wages rise in tandem, we should get broad-scale growth.  At the same time, I know that a decrease in corporate profits typically has preceded a recession. 

While I think Lambert is correct that stock prices would decline, as the "p" part of the P/E ratio would have declined, it is well to remember that the stock market has famously "predicted 9 of the last 4 recessions." In other words, an externally imposed, uniform decrease in profits, as opposed to an endogenous decline, might not create the "cascade effect on the economy" from asset price declines that Lambert fears. While a decrease in stock prices would create a negative wealth effect, the increase in consumer spending by Labor would likely more than make up for that (since Labor spends more of its income than the wealthy).  And another paradoxical result of the business cycle is that employment doesn't lead spending, it is consumer spending that leads jobs.

 To test this, we need to examine past examples of the sequelae to increases in corporate profits.  Needless to say, those would be nearly non-existent after 1980. I'll poke around and if I find something worth following up on here, I'll post it.

Joe Weisenthal needs to start reading my Weekly Indicators column again

 - by New Deal democrat

I guess Joe Weisenthal of Business Insider must have stopped reading my Weekly Indicators columns, because otherwise he would have known two weekends ago that Gallup personal spending is at its highest since 2008, instead of posting it on Monday, and he would have known about the Spring spring two months ago instead of yesterday.

By the way, Joe, our new agreement with XE.com allows Business Insider to pick up the items we publish there, so long as credit for the original publication goes to XE along with a link.

So BI readers could have found out about the downturn in corporate profits, and why it isn't a big deal yet,  last week instead of waiting to Hussman and Shedlock yesterday to claim it as a harbinger of DOOOOOM!

Just sayin'.

P.S.:  On another matter, the new post-recession high in vehicle sales in May is about the 101st confirmation that there isn't going to be any economic downturn this year.  According to Prof. Edward Leamer's research, car sales are typically the second domino to fall, before the onset of a recession, after housing.  Typically vehicle sales have turned down over half a year before the onset of any recession.

Consumer spending pattern suggest mid-cycle has passed

 - by New Deal democrat

Spending on real PCE's looks like it is consistently outpacing real retail sales.  I have a post up over at XE.com on the significance in this change in the pattern.

If the ECB Doesn't Act Now ...

Inflation and unemployment data from the EU add more pressure on the ECB to act:

http://community.xe.com/forum/xe-market-analysis/if-ecb-doesnt-act-now

Euro and Pound Break Uptrend

This is up over at XE.com

http://community.xe.com/forum/xe-market-analysis/euro-and-pound-break-uptrends