Friday, May 06, 2011

The April Jobs Report

Here's my post after last month's release of the government's March jobs report. Basically, April's report, released this morning, stated that net non-farm jobs added was 245,000, up about 30,000 from March.

Rereading my post of last month, it's clear that, despite the so-called record number since February of 2006, the US economy is nowhere near so-called 'escape velocity.'

With a need for 8-9 million jobs, and a need for 100,000 new net jobs per month to absorb entrants into the labor force, we're nowhere near a job-creation rate that can begin to clear the unemployed this decade.

And then there's the rise in unemployment, back up to 9%, because, predictably, more job seekers lifted the rate.

Once again, despite any political spin applied by the administration, we see another month of tepid US economic job growth. Which explains continued soft demand and, thus, tepid GDP growth.

Meredith Whitney Reiterated Muni Debt Default Warnings At The Milken Conference

Meredith Whitney made news this week at the Milken Conference in Los Angeles. Once again it was on the subject of municipal debt default. I've followed her remarks on this subject in prior posts here, here, here and here.

I saw a brief clip of her response to a challenge from a CNBC reporter, evidently on a discussion panel.

To her credit, Whitney retorted bluntly, stating that, with as much conviction as any position she has ever taken in her career, she believed that munis remain a default risk.

The program on which I saw this featured a pundit who immediately began blathering about how states are balancing budgets and cutting spending. But Whitney has never contended that state governments are the problem, per se.

In fact, in one of the prior linked posts, I noted that she agreed with Warren Buffett that there won't be any state bankruptcies.

No, Whitney has always focused on municipalities. Beginning with the Harrisburg waste facility bond default, she's contended that its many towns and sub-state-level bonds that will have difficulty continuing payments amidst rising pension liabilities and falling tax collections.

Despite the comments of other pundits that economic growth, though slowly, is resuming, and job growth is positive, neither of these are affecting the continuing overhang of unfunded municipal- and state- pension liabilities.

Whitney has always had her eye on the larger picture of overall municipal balance sheets and income statements. Now, with liabilities remaining problematic and gargantuan, while tax receipts continue to track sluggish economic activity, there would seem to be continuing weakness among municipalities. And, thus, continued risks for that sector's bonds.

Time will tell, but, as Gary Kaminsky said, there's no middle ground on Whitney's call. In a few months, a year, we'll know whether she was right, or wrong.

Thursday, May 05, 2011

The Forest Labs Mugging

It didn't get a lot of coverage, but HHS recently intimidated Forest Labs by refusing to do any more government business with the firm so long as CEO Howard Solomon remains in that position.

According to a Wall Street Journal editorial, neither the firm or the CEO did anything improper after a plea agreement was reached in September. According to the Journal, Forest Labs, as many firms do, settled the charges, rather than litigate, in order to save money. However, having that in her pocket, HHS Secretary Kathleen Sebelius then engaged in coercion.

The editorial notes that, at a minimum, Sebelius' action will drive up costs for everyone, as firms learn to litigate, rather than tacitly admit guilt, only to have that used against them in ways never intended nor imagined.

This is yet another example of how this administration continues to behave in ways which retard private investment and create more uncertainty than is warranted.

All the lose monetary policy in the world- and surely we've seen way too much already- won't overcome this sort of federal thuggery.

As the Journal's editorial noted, it's a federal version of Eliot Spitzer's unwarranted and, ultimately, unproven crusade against AIG's former CEO, Hank Greenberg. Ironically, many have opined that Spitzer's tantrum which led to Greenberg's coerced resignation was, in large part, responsible for AIG's later federal bailout, because Greenberg was absent to rein in excessive risk taking leading up to the financial sector crisis.

In this case, Sebelius continues to try to muzzle health care sector dissent from ObamaCare by any means.

The of unintended consequences remains unrepealed......

Wednesday, May 04, 2011

Starbucks, Yahoo & David Einhorn

Various business media carried stories yesterday concerning Starbucks and Yahoo. Since both were one-time selections in my equity portfolios, I was curious as to the dynamics accounting for positive, or negative, aspects of each company's current buzz.

For Starbucks, a Wall Street Journal story described the coffee roaster chain's steady stock price rise since the depths of the 2008-09 market lows, but cautioned that rising coffee bean prices could affect future profit growth.

Upon reviewing the company's five-year equity prices, relative to the S&P500, I saw that it has, indeed, reached new highs for the period.

I know I've written posts in recent years concerning the company's various strategies involving food, pruning store locations, and selling instant coffee.

But, for me, any solid, genuine rebirth of the company should be driven by revenue and profit growth. What I found when I checked my own numbers was somewhat surprising.

Annual revenue growth rates for Starbucks before the recession were in the 17-21% range. Rather robust, no pun intended. Since bottoming with the recession, the last two years' growth rates have been anemic by comparison- less than half a percent, and 8%. Profit growth rates are, of course, distorted by the recession and the chain's store closings. But pre-recession profit growth was in the 15-22% range, while subsequent growth has been negative, then uninterpretably high, thanks to such low profits in mid-2009. But from last year's first quarter to this year's, profits grew 38%. Hardly faltering.

Still, that said, two years is hardly sufficient time to declare Starbucks a consistently superior performer. Believe or not, my proprietary research has found that such performance is not rare by any means.

The question one has to ask, of course, is to what extent this is repeatable for another few years. Perhaps Starbucks' focus on overseas growth will allow it to regain an ability to earn consistently superior total returns, thanks to detatching its growth from the US economy and consumer, and going overseas for more revenue growth. With a softening US economy apparently ahead, Starbucks' domestic business could be headed for another flattening like that of the recent recession.

Then we turn to Yahoo, the other recent subject of much media attention. This time, it's not Carol Bartz in the spotlight, but hedge fund raider David Einhorn.

Einhorn has amassed a position in the company's equity and favorably commented on its China properties and recent 'shareholder-friendly' changes.

I'm sure remarks like that from Einhorn send chills through Bartz. Increased equity accumulation, requests for board seats, and a spinoff of Yahoo's Chinese interests can't be far behind, can they?

I suppose since Yahoo's equity price has been flat for so long, Einhorn is getting a bargain. Assuming, that is, his math on breakup values is correct, and he is able to effect that.

What I wonder, however, is how long his investors tend to wait for payoffs in these types of moves? Perhaps the patient, trusting nature of his investors gives Einhorn time to wait for Yahoo/Bartz to eventually come around to accept his type of bear hug.

But fellow hedge fund/company acquirer Eddie Lampert's Sears reported falling sales just the other day. His foray into retail hasn't had such a happy ending yet.

Of course, Einhorn probably doesn't want to run any part of Yahoo, so much as put pieces into play and hopefully make much, much more on the skyrocketing value of the Chinese properties than he will lose on the rest of Yahoo. In that regard, it's likely a safer play.

Assuming he can get the firm split up reasonably soon.

Then, again, I've argued that Bartz should just sell or liquidate the firm. This may be one of the last opportunities for a Yahoo CEO to create some value for shareholders from a position of any strength whatsoever. Maybe Einhorn's interest should be greeted with an accommodating attitude. It may be quite some time before another suitor with such manners comes calling.

Tuesday, May 03, 2011

John Cochrane On Inflation, Treasuries & US Spending

John Cochrane of the University of Chicago's Booth School wrote an editorial in Thursday's Wall Street Journal explaining why the US federal budget for 2025, seemingly so far off in the future, matters today.

Cochrane periodically pens editorials in the Journal, and they are always well-written and -reasoned. This one was no exception.

Early on, he associated current returns on a 30-year Treasury of 4.5% with a real 2% return, implying a long term inflation rate lower than 2.5%. With that rather risky bet as a background, he noted that such a belief of low inflation means,

"you have to bet they will solve the 2025 deficit. If you decide that the government will just keep kicking the deficit can down the road, sell your 30-year Treasuries. Sell fast, before everyone else does- because if we all try to sell, we just drive down the price and long-term interest rates rise."

Cochrane went on to chide the government for making the same mistake that Bear Stearns and Lehman did in 2008, i.e., fund excessively short-term for alleged reasons of lower cost, ignoring the risks of funding drying up when refinancing is undertaken. He warns,

"It is cheap precisely because it is dangerous."

So true, because the lender's view of short-term finance is that you aren't liable for the longer-term default. You only have to bet that the borrower, in this case the US, will manage to remain solvent for another few quarters or a year.

I won't go into Cochrane's comments on budget cuts, tax rates, etc., because they are more political in nature, and this is my business blog. However, he closes with these passages,

"The challenge is whether we will accept a vaguely rational tax system and a set of entitlements that protect the vulnerable without bankrupting the Treasury. It's not rocket science.

But we don't have much time. The bond market won't wait. The budget and debt problems will be much harder to solve if long-term interest rates spike, the dollar falls further, and inflation breaks out."

That last line caught my attention after I reread the piece following my reading of the weekend Journal's lead interview with Smithfield Foods CEO C. Larry Pope. Here are some of the passages from that piece,

"Mr. Pope is the chief executive officer of Smithfield Foods Inc., the world's largest pork processor and hog producer by volume. He doesn't mince words when it comes to rapidly rising food prices. The 56-year-old accountant by training has been in the business for more than three decades, and he warns that the higher costs may be here to stay.

It's also a business under enormous strain. Some "60 to 70% of the cost of raising a hog is tied up in the grains," Mr. Pope explains. "The major ingredient is corn, and the secondary ingredient is soybean meal." Over the last several years, "the cost of corn has gone from a base of $2.40 a bushel to today at $7.40 a bushel, nearly triple what it was just a few years ago." Which means every product that uses corn has risen, too—including everything from "cereal to soft drinks" and more.

Inflation: An overview of the prices consumers really pay .What triggered the upswing? In part: ethanol. President George W. Bush "came forward with—what do you call?—the edict that we were going to mandate 36 billion gallons of alternative fuels" by 2022, of which corn-based ethanol is "a substantial part." Companies that blend ethanol into fuel get a $5 billion annual tax credit, and there's a tariff to keep foreign producers out of the U.S. market. Now 40% of the corn crop is "directed to ethanol, which equals the amount that's going into livestock food," Mr. Pope calculates.

The rapidly depreciating dollar is also sparking inflation, although Mr. Pope says that's a "hard" topic for him to discuss, trying to be diplomatic. But he doesn't deny that money is cheap. Investment bankers are throwing cash at the firm—a turnaround from 2008, when money was scarce—even though Mr. Pope doesn't need it right now.

Now food price inflation is popping up across the country. A pound of sliced bacon costs $4.54 today versus $3.59 two years ago and $3.16 a decade ago, according to the Bureau of Labor Statistics. Ground beef is $2.72, up from $2.27 in 2009 and $1.74 in 2001. And it's not just Smithfield's products: "You eat eggs, you drink milk, you get a loaf of bread, and you get a pound of meat," he drawls. "Those are the four staples of what Americans eat in their diet. All of those are based on grains."
"Maybe to someone in the upper incomes it doesn't matter what the price of a pound of bacon is, or what the price of a ham, or the price of a pound of pork chops is," he says. "But for many of the customers we sell to, it really does matter." Workers can share cars when the price of oil rises, he quips, but "you can't share your food."

Mr. Pope also worries about the impact on farmers, who are leveraging up operations to afford the ever-rising price of land and fertilizer that has resulted from the increased corn demand. "There are record prices for livestock but farmers are exiting the business!" he exclaims. "Why? Farmers know they won't make money."

Weather is a factor, too. "We've had the luxury for the last three years of extremely good corn crops, with high yields and good growing conditions. We are just one bad weather event away from potentially $10 corn, which once again is another 50% increase in the input cost to our live production."

Food price inflation isn't a problem confined to America's shores. "This ethanol policy has impacted the world price of corn," Mr. Pope says. The Mexican, Canadian and European industries have "shrunk dramatically. . . . We have an unsustainable meat protein production industry," he says. "We're built on a platform of costs, on a policy that doesn't make any sense!"

Nor does the science. The ethanol industry would supply only 4% of the nation's annual energy needs even if it used 100% of the corn crop. The Environmental Protection Agency has found ethanol production has a neutral to negative impact on the environment. "The subsidy has been out there since the 1970s," Mr. Pope says. "If they can't make themselves into a viable economic model in 40 years, haven't we demonstrated that this is an industry that shouldn't exist?"

So what's the solution? First, Mr. Pope says, get rid of the ethanol subsidies and the tariff. "I am in competition with the government and the oil industry," he says. "It's not fair." Smithfield's economists estimate corn prices would fall by a dollar a bushel if ethanol blending wasn't subsidized. "Even the announcement that it is going away would see the price of corn go down, which would translate very quickly into reduced meat prices in the meat case," he says. Imagine what would happen if the mandate and tariff were eliminated, too.

He also advocates lifting regulatory and tax burdens on business. "I fundamentally don't understand the logic of corporate income taxes," he tells me. "If I have a 35% tax, all I do is take that 35% tax and I transfer it into the price of bacon and the price of pork chops."

Mr. Pope says the "losers" here "are the consumer, who's going to have to pay more for the product, and the livestock farmer who's going to have to buy high-priced grain that he can't afford because he's stretching his own lines of credit. The hog farmer . . . is in jeopardy of simply going out of business 'cause he doesn't have the cash liquidity to even pay for the corn to pay for the input to raise the hog. It's a dynamic that we can't sustain."

Coming on the heels of Bernanke's much-lauded first Fed press conference, Pope's remarks and Cochrane's editorial are quite sobering. Pope is quite explicit in painting the US ethanol policy as damaging to food prices with virtually no impact on oil importation, while ruinously effecting the price of corn as a global food supply mainstay. Then there's weather, which so few of us pay attention to for farming. Pope offers a rather cold-eyed assessment that we're almost certain to experience weather that could more than double current corn prices!

 I wrote about that Bernanke's remarks,

"Yes, Bernanke did attempt to claim that commodity prices have surged due to developing nation demand, as Cramer predicted. Not that it was such a hard call to make.

The trouble is, it's not just oil. I don't think US food demand is down as much as its oil consumption is from a few years ago. But we have broad grocery store inflation approximating 10%.

Bernanke's hopes for moderated inflation while Americans pay more for food and gasoline just aren't believable. Further, technically, inflation is a monetary phenomenon, and Helicopter Ben has been monetizing Treasury debt and presiding over a weakening dollar."

So there you have it. A rather candid triangle of Bernanke spinning the Fed's ultra-cheap dollar policy as having absolutely nothing to do with imported inflation, Cochrane warning that even a whiff of inflation makes today's 30-year Treasury yields razor thin, and Larry Pope, a pragmatic pork processor CEO forseeing years of high food price inflation.

Who do you believe? The government employee, the financial academic and/or the CEO? No more than two can be right. If either Cochrane or Pope are right, Bernanke can't be.

Monday, May 02, 2011

Tablets & Microsoft: More Pundits Finally Catch On To Microsoft's Decline

Looks like reality may finally be catching up to more observers' views of Microsoft after this quarter's results were announced last week.

An article in the Wall Street Journal's weekend edition even suggested Ballmer finally step down.

If I heard reports on Bloomberg and CNBC correctly, Apple, for the first time, out-earned Microsoft in a quarter. The nearby chart displays the price moves of Microsoft, Apple, and Google since inception, along with the S&P500 Index.

It's clear that Apple is the rarity among technology stocks, having been able to regain its meteoric trajectory. Ballmer's Microsoft, on the other hand, has never returned from the drubbing it took in the 2000 bubble-burst, while Gates still ran the show.

The Journal article, and other sources, all largely credit tablets, led by Apple's product, with hurting sales of Windows and Office, due to their dependency on PC platforms.

But I noticed this interesting passage in the Journal article,

"Spending 14% to 15% of revenues on research and development, which Microsoft has done for years, looks extravagant given Microsoft's new product history. Apple, for example, spends less than 3%....some of (Microsoft's) new products, like Windows Vista or the Zune music player, have been duds."

This reinforces something I've observed for years. It's not how much money is spent on research, per se, but how good the research is. Sounds tautological and obvious, but look at those numbers again while considering the new product torrent flowing from Apple since the introduction of the iPod.

Somehow, you get the feeling that Apple's environment is both more attractive and conducive to creative techies, while Microsoft probably resembles some sort of software factory. Its hardware releases have been few and poor, except for the Xbox. But that's something more like an Apple device- it isn't so totally restricted to computing.

However, it makes the point that with an activity like R&D, quality matters more than quantity.

Microsoft looks like it has finally had its growth crimped for good by technological evolution. Tablets are on the rise, while desktops are nearly gone, and laptops are suffering attrition from the tablets.

A product that didn't exist, what, two years ago, has now torn a hole in Microsoft's vaunted cash machines.

Of course, if the firm had split itself up into several homogeneous pieces several years ago, such as Windows, Online, Office, and Gaming, then tablets wouldn't have damaged all four. But, as it is, all must suffer as one equity.

Perhaps, now, even the staid portfolio managers who feel Microsoft is a safe tech stock will see that it is far more vulnerable and risky than they dared imagine.

Sunday, May 01, 2011

Cornpone Buffett Evades CNBC's Questions

If you wanted more proof than I offered in this post that Warren Buffett is one shrewd public relations bastard, and not an open, forthcoming CEO, you need have looked no further than CNBC last Friday.

Becky Quick caught Buffett outside of a traditional Thursday evening bridge game with Fortune writer Carol Loomis. Quick tried to get Buffett to comment on the Berkshire board's published report on the Sokol-Buffett-Lubrizol scandal prior to his Saturday shareholder meeting remarks.

In true cornpone tradition, Buffett guffawed and aw-shucks-ed his way past Quick's questions and microphone. Meaning, in effect, that he totally manipulates CNBC and Quick for his own purposes. He grants them interviews and close-up face time when it suits his needs, then shuts them down when it is inconvenient.

Plus, he uses CNBC to air himself with his own faux-folksy demeanor, the better to use it every time he's on camera.

It's clearly an artifice he's created so that his every corporate move is seen not as that of a calculated, clever CEO, but your that of your wizened old good-natured Grandpa.

Yep, that's Warren. So deft that even the usually-savvy Wall Street Journal columnist Holman Jenkins, Jr., gave him a pass in this weekend's edition.

I nearly vomited from nausea as I listened to Buffett's chuckle-punctuated remarks to Quick as he brushed her off. There was nothing about the subject that would invite humor, so you knew that Buffett thought he ought to be in character because he was, well, on camera.

Imagine the same words and actions from another CEO, not laughing. It would be quite cold, off-putting and look like what it is- damage control.

But Buffett has so defanged Quick and CNBC that they happily play clips of him guffawing his way out of the awkward moment that night. And Quick, once a well-regard reporter for the Journal, simply smiles and refrains from any comments, .either on or off camera, which might jeopardize her prized access to Buffett- but always and only on his terms.