Friday, November 04, 2011

The Groupon IPO

Groupon's IPO, according to this morning's Wall Street Journal, will raise $13B. The article emphasized Groupon's own attempt to liken itself to Amazon, even to the extent of claiming it is a sort of Amazon 2.0.

Groupon has recruited several former senior-level Amazon executives.

For perspective, nearby is a chart depicting the prices for Amazon's equity and the S&P500 Index from Amazon's public inception.

Yes, in theory, one would have enjoyed an enormous return if one had bought Amazon at its public offering and simply held it. But 2000-2002 was a time of steep downdraft for the firm's equity price.

Amazon took a long time to become profitable. It's operation involves substantial physical logistics, as well as inter-related information systems with its many suppliers and customers. In time, all these became barriers to entry, resulting in the firm becoming a one of a kind entity.

In contrast, Groupon is a fairly simple operation. The Journal article mentions how Groupon's founder entertained investment from, then a venture with Amazon, but ultimately chose not to pursue either. Jeff Bezos subsequently backed a competitor to Groupon.

This morning, on CNBC, Melissa Lee noted that Groupon's revenue per customer transaction has declined from over $5 several years ago to, most recently, just over $1. Certainly, the immense publicity regarding the firm's service has declined from its faddish popularity only a few months ago.

To date, after having subscribed to the service back then, I've never actually spent a dime on or with the service. Contrary to its self-described position as the new way the world will buy products, I am hard-pressed to find anything among the offers emailed to me daily for which I'd spend money.

As I explained in a prior post, Groupon presents quirky deals which typically don't fit with my own lifestyle or needs. The Journal has run several articles in the past detailing the problems merchants have with one-time buyers from the service, as well as some sharp-penciled competitors offering better revenue splits.

If the Groupon method of selling/buying takes hold, it's got plenty of competition. If not, it was just a flash in the pan.

In short, Groupon's barriers to entry are far lower than Amazon's, making it seem much less like a near-clone of the now-dominant online seller. It's difficult to dismiss Groupon's IPO as having a very 'party like it's 1999' feel to it. That is,  high point before a downdraft reminiscent of the 2000 technology equity bubble deflation.

Today's Employment Numbers- More Gloomy News

By now you've probably heard or seen the October employment numbers from the BLS. Net jobs were 80,000 and the narrowest unemployment level was notionally down from 9.1% to 9%. CNBC's various reporters and anchors all tried to talk up these continuing weak economic numbers, claiming that, once you got past the anemic new jobs created, all is bright with the US economy.

The phrase that came to my mind was 'angels dancing on the head of a pin.'

I mean, really, look at the trends. How long has unemployment, narrowly measured, been at or above 9%? A year? It's at least twice what Americans are used to seeing.

The widely-defined unemployment measure, U6, is still up in the teens and largely unchanged.

And the monthly jobs number- only +80,000.

You can search various prior posts I've written discussing what the monthly new jobs number must be just to absorb the new entrants into the US labor pool. I feel like I'm writing about France now. That's how sluggish the economy has become on the employment front.

Meanwhile, I read a piece in this morning's Wall Street Journal discussing China's slow but steady rise in innovation ranking, while the US fell from 4th to 5th in the most recent table. Several pundits cited US firms continuing to base more plants and research facilities in China, hiring Chinese PhDs who file patents. And noting that, over time, innovation occurs at and with manufacturing sites, thus slowly hollowing out more of the US manufacturing base from an innovation perspective.

Fresh in my mind as I write this is the anecdote involving recently-deceased Steve Jobs assailing Obama for not opening the US labor market to more foreign-born PhDs. That Apple had to locate plants overseas, in Asia, because it couldn't recruit sufficient numbers of US engineers, so both the engineering and production jobs, numbering in the tens of thousands, went to Southeast Asia. The president's reply was a muddled, political obfuscation involving the complexity of immigration policy.

Much like it ignores the true depth and breadth, and causes, of the current European debt crisis, US equity investors are seemingly sticking their heads in the sand regarding US economic growth and unemployment. As I write this, the Bloomberg anchor is citing 7 years as the time required, at 80,000 net jobs created per month, to re-employ US workers back to, I believe, the 2007 level.

As I wrote here yesterday, there's simply no way these monthly numbers should give anyone confidence that the US economy is healthy and undergoing a normal expansion.

Thursday, November 03, 2011

CNBC's Continuing Non-Coverage of Corzine's Behavior

Rather incredibly, CNBC's Carl whathisname, now on from 9AM to noon, literally laughed while a Fortune magazine writer discussed MF Global CEO Jon Corzine's involvement in and/or knowledge of the use of customer funds by the firm.

The writer, whose name I did not catch, was earnest in contending that no former Republican Senator or Governor would be given the light treatment that CNBC accorded Corzine. Carl literally smirked and laughed at the allegation.

What I found so ironic is that the anchor, whose network has conspicuously not touched the issue all week, found it humorous and only remotely possible that a liberal Democrat is not investigated with the vigor that any Republican would be.

You can't make this stuff up. That's how hopelessly liberally biased the network and its producers are.

In fact, as the writer began to explain his recent discoveries regarding Corzine's involvement, Carl asked if he really wanted to go forward on air with the charges.

Clearly, Carl and his producers were hoping that they wouldn't have to be responsible for breaking bad news about Corzine's potential criminal liability.

After all, that might spoil his next gig as guest host. Then, again, Stever Rattner settled his charges with the SEC, paid a fine, and appears regularly on CNBC.

So maybe Corzine can break new ground, should he be charged with malfeasance, as a soon-to-be-tried guest host.

NBER's Definition of Recession

The US economy is, at best, in the midst of one of the most sluggish expansions in memory. At worst, it's teetering on the edge of a slow slide back into recession- if it ever emerged from the recession declared to have begun in December, 2007.

Thus, it's instructive to revisit the National Bureau of Economic Research's webpages  on recession for clarification on how this official umpire of US economic phases defines recession.

"A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.

The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction.

The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve's index of industrial production (IP). The Committee's use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs."

On its FAQ page, the NBER further explains,

"Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. In 2001, for example, the recession did not include two consecutive quarters of decline in real GDP. In the recession beginning in December 2007 and ending in June 2009, real GDP declined in the first, third, and fourth quarters of 2008 and in the first quarter of 2009. The committee places real Gross Domestic Income on an equal footing with real GDP; real GDI declined for six consecutive quarters in the recent recession.

Q: Why doesn't the committee accept the two-quarter definition?
A: The committee's procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP and real GDI, but use a range of other indicators as well. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in activity." Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates. The differences between these two sets of estimates were particularly evident in the recessions of 2001 and 2007-2009.

Q: How does the committee weight employment in determining the dates of peaks and troughs?
A. In the 2007-2009 recession, the central indicators–real GDP and real GDI–gave mixed signals about the peak date and a clear signal about the trough date. The peak date at the end of 2007 coincided with the peak in employment. We designated June 2009 as the trough, six months before the trough in employment, which is consistent with earlier trough dates in the NBER business-cycle chronology. In the 2001 recession, we found a clear signal in employment and a mixed one in the various measures of output. Consequently, we picked the peak month based on the clear signal in employment, as well as our consideration of output and other measures. In that cycle, as well, the dating of the trough relied primarily on output measures.

Q: Isn't a recession a period of diminished economic activity?
A: It's more accurate to say that a recession–the way we use the word–is a period of diminishing activity rather than diminished activity. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when economic activity is contracting. The following period is an expansion. As of September 2010, when we decided that a trough had occurred in June 2009, the economy was still weak, with lingering high unemployment, but had expanded considerably from its trough 15 months earlier.

Q: How do the movements of unemployment claims inform the Bureau's thinking?
A: A bulge in jobless claims usually forecasts declining employment and rising unemployment, but we do not use the initial claims numbers in determining our chronology, partly because of noise in that data series.

Q: How do the cyclical fluctuations in the unemployment rate relate to the NBER business-cycle chronology?
A: The unemployment rate is a trendless indicator that moves in the opposite direction from most other cyclical indicators. Its level in February 1949 was the same 4.7 percent as in November 2007. The NBERhe unemployment rate is a trendless indicator that moves in the opposite direction from most other cyclical indicators. Its level in February 1949 was the same 4.7 percent as in November 2007. The NBER business-cycle chronology considers economic activity, which grows along an upward trend. As a result, the unemployment rate often rises before the peak of economic activity, when activity is still rising but below its normal trend rate of increase. Thus, the unemployment rate is often a leading indicator of the business-cycle peak. For example, the unemployment rate reached its lowest level prior to the December 2007 peak of activity in May 2007 at 4.4 percent and climbed to 5.0 percent by December 2007. On the other hand, the unemployment rate often continues to rise after activity has reached its trough. In this respect, the unemployment rate is a lagging indicator. For example, in the recovery beginning in March 1991, the unemployment rate continued to rise for 15 months after the trough. The lag was 19 months in 2001 to 2003. In the current recovery, the lag was only 4 months, from the trough in activity in June 2009 to the highest level of the unemployment rate in October 2009."

Clear enough?

What is clear is that there is no single definition by the NBER on what constitutes a US recession.

Thus the headline of a Wall Street Journal article in Monday's edition, Slow Recovery Feels Like Recession.

The NBER FAQ page includes the detail that the entity was established in the 1920s. That's relevant because evidently much of its approach dates from an era way before today's globalized supply chains and tightly-interrelated economies. Even when I studied Samuelson's Economics as an undergraduate at Saint Louis University in the late 1970s, the export component of demand (C+I+G+E) was a sort of afterthought. Now, much of the growth in revenues and profits of the S&P500 has been overseas.

What I don't think the NBER ever imagined and, even now, doesn't quite know how to consider, is a scenario, common to the US economy for over two decades now, in which GDP, based on business exports and sales in units located overseas, grows far in excess of US employment. Scenarios in which there is an absolute bifurcation in corporate profits and revenue growth from the fortunes of the US work force.

Thus, since late 2007, we've seen a disparity between business and individual economic fortunes. What the NBER won't call a recession, because, by some technical measures over which it has discretion to choose, the GDP side of the economy is growing, albeit fitfully, while the unemployment picture clearly portrays an economy still in neutral.

I've argued in prior posts that we are in an entirely new economic era with respect to phases like expansion and recession. Global trade has allowed for the growth in overall business activity for companies based in the US, but that growth, thanks to US immigration and tax policies, and comparative costs and productivity levels, is being serviced by overseas employees and operations. Thus, a lowest percentile of every nation's work forces is becoming unproductive on global terms and, thus, unemployable.

Further, in the US, the Fed's wrongheaded low-interest rate, easy money policy under Greenspan and Bernanke led to substantial overinvestment in housing, which, effectively, poured wealth into unaffordable, unnecessary homes. Fannie and Freddie, mandated by an inept Congress, further fueled this mistake with low-cost mortgages to the unqualified.

Is it really a surprise that the US is mired in an unemployment recession and a fitful, sluggish business expansion, after having destroyed so much private wealth in egregious housing investment?

It shouldn't be. In a newly-multilateral global economy where other nations, such as China, didn't make those mistakes, US economic policy mistakes now carry more immediate and significant penalties. I suspect we are now living through our first bout of such a scenario, and it won't be over anytime soon.

Christina Romer on Bloomberg

Former Obama economic adviser Christina Romer made a brief appearance on Tom Keene's Bloomberg noontime program yesterday. I must say I'm rapidly growing weary of Keene's apparent lack of ability to challenge any of his guests. They all seem, to him, equally profound and worthy of his unstinting praise. It's getting old.

Romer managed, in just a few minutes, to make a complete fool of herself. Never mind that her entire body of work while with the administration for the past three years has been discredited as a complete disaster. Never mind that her work there countered that of her research for years prior.

Yesterday, she argued that if the Fed would just announce that, by golly, they WERE going to lick this economic sluggishness, why, then, people "might feel they'd still have their job next year" and spend.

Her remark really showcased Romer's complete detachment from reality. Does anyone reading this know of anyone stupid enough to rely on the Fed's easing as a reason to suddenly feel their job is much safer than it had been?

The only hope the US economy, and that of the global economic system, has is for central banks to quite maintaining near-zero interest rates and begin to let the down-phase of the economic cycle clean out the excess dreck of the last phase, let prices drop to market-clearing levels for a variety of assets, and thus form a base for subsequent expansion.

Romer's remarks, made with a sort of giddy, goofy looking grin, portrayed her as an ivory-towered idiot.

Wednesday, November 02, 2011

MF's Illegal Use of Customer Funds

You'd think it would be a business news sensation. Perhaps earning a picture on the front page of the Wall Street Journal.

A former co-head of Goldman Sachs, former US Senator from and Governor of New Jersey, gone missing. His residence staked out and the FBI reportedly examining the books of MF Global.

More detail regarding not just a 'missing' $600-900MM of funding in the company's books, causing Interactive Brokers to walk away from a bid to buy MF Global, but the misuse of money in that general amount from customer accounts.

I wrote this post a few days ago regarding the rather mild story of MF Global's Corzine-led big bet on European debt.

Now the story has become much deeper. At least the Wall Street Journal managed a brief piece yesterday suggesting that Chris Flowers, Corzine's backer as CEO of MF Global, has lost his golden touch of late. But no reminder of the connection which the Journal exposed in its January piece on Corzine's appointment as CEO of the firm.

Curiously, this wasn't a big story this morning on CNBC. As a frequent guest host, you'd think they'd have discussed it. But I'm being sarcastic- CNBC is a heavily liberal-leaning network, so it was and is unlikely to do much more than broadcast stories the staff has already read in the New York Times or Wall Street Journal. Bloomberg wasn't much better.

At least I had the satisfaction of watching Bloomberg use the headline of this recent post nearly verbatim on Friday morning.

Of course, MF Global's rapid demise begs the question of how US financial regulators can possibly handle a large, allegedly 'too big to fail' institution, when they were caught flatfooted by the broker's situation. As a registered Fed dealer, one wonders where that regulator was? Not just because of the excessive risk in the European bond positions but, now, the news of misusing customer funds in an attempt to avoid collapse.

It's as if the umpires of a AA minor league baseball game gone wrong are suddenly sent to handle a World Series. If regulators can't identify and measure such outsized risk as MF Global took, not to mention the funny business with customer funds, how are they ever going to manage to pre-emptively flag and liquidate an excessively-risky Citi, BofA or Chase?

Answer- they can't and won't.

Meanwhile, it should be an interesting week for breaking news on Corzine and MF Global.

Ed Lazear's Dominos vs. Popcorn Analogy

Ed Lazear wrote a thoughtful Wall Street Journal editorial on Monday contrasting the conventional dominos view of the US 2008 financial panics and the current European debt crisis with one which he calls 'popcorn.'

Lazear, the previous President's chairman of the CEA, suggested that both crises were more like the various, individual kernels of popcorn exploding independently in hot oil, than a case of dominos toppling one after another.

As a strategist and researcher, I put great value on correct conceptual models, and Lazear, in my opinion, has done some good work here pointing out the fundamental mistake of assuming these financial panics are always domino-like.

Lazear went to some lengths to detail how various banks had binged on mortgage-backed securities long before Lehman's demise. That several shotgun mergers/acquisitions, e.g., BofA/Merrill, Chase/WaMu and Chase/Bear Stearns, occurred before Lehman's filing.

Similarly, in Europe, Lazear notes that the general, common problem are continental governments having lived and promised significantly beyond their means for decades. It simply happens that the unpayable debts are now coming due, with no country really capable of funding the others, or sufficiently strong on its own to avoid problems, either.

Thus, Lazear doesn't see Greece as a triggering event, but, rather, simply the first kernel in the popper to pop. If it had not, Spain, Italy, Portugal and Ireland would still be themselves, and one of them would have been first.

That's not to say there aren't knock-on, domino effects once a major entity, whether company or country, goes down. But the initial shock isn't one of dominos, so much as many bad decisions at multiple entities which happen to come a cropper at nearly the same time.

Tuesday, November 01, 2011

Corzine's MF Global Declares Bankruptcy

Last Thursday's post concerning Jon Corzine's bungling at MF Global evidently drew plenty of traffic yesterday, despite my being unable to post due to power outages.

Imagine my horror though, reading this weekend, pre-Chapter 11 filing, of- you guessed it- J. Christopher Flowers' potential bid for the firm's wreckage.

Did I not predict this one? I did, in this passage from that post,

"The only thing that could top this week's MF Global news is to learn that, as rumors swirl regarding the firm now being an acquisition target, we learn that Chris Flowers' private equity shop is involved in such an acquisition. I don't know what portion of MF's equity is owned by Flowers, but it's just possible that half the value of the rest of the firm, which would now not be paid to own 100% of the firm, might well be more than the losses Flowers has just taken on his share of MF Global.

That would be just too much, wouldn't it, if it occurred? Watching a private equity guy install a partner in a firm on the board of which one of his representatives sits as CEO of the company. Then seeing said CEO dramatically and quickly lop off half the value of the publicly-held firm. Followed by the private equity guy opportunistically buying the now-tainted firm for half of what it would have cost him last year."

What's curious is how silent all the cable news media are about this. Neither CNBC nor Bloomberg, nor even the Journal, bothered to note Flowers' original intrusion into MF Global's board to force Corzine's selection as CEO. Nor do any of them now note how Flowers must have been on board with Corzine's strategy.

Regarding that strategy, I heard it lampooned on CNBC last night as having basically gone all in on a specific European debt play. It's hard to believe Corzine would be so stupid, or Flowers would consent.

Funny, though, isn't it? All that silence on the original Corzine-Flowers connection? Even now they don't remind us that Corzine is a partner in Flowers' group.

Or is it more of being muzzled to power, because nobody with a network with hours of programming to fill wants to cross a private equity mogul like Chris Flowers?

Perhaps the Chapter 11 filing will take Flowers out of contention for swallowing the whole of MF Global on the cheap. We can only hope so.