Don't get fooled, corporations are still in recession
With earnings season wrapping up, now is as good a time as any to take a bird's eye view of the health of US corporations.
After disastrous expectations from analysts, 71% of S&P 500 companies who have reported their quarterly earnings thus far have beat consensus projections for profits (about 87% of the S&P 500 have reported as of Sunday).
However, in spite of the beats, companies are still in a profit recession. Defined as two or more quarters of negative earnings growth, we are now three quarters deep into this corporate-specific recession. Profits dropped by 7.1% for S&P 500 companies year-over-year for the first quarter. "Global corporate earnings are in recession now although they are not yet falling as fast as they do during US economic recessions," wrote Jan Loeys, global strategist at JPMorgan.
Based on on Loeys' analysis, it does not appear that it is easing up any time soon. "Past episodes where soft US earnings reversed course saw either strong fiscal or monetary stimulus or strong growth in productivity," wrote Loeys in a note to clients. "With central banks having much less to give today, fiscal policy neutral, and productivity falling, it much harder to expect higher company earnings over the next year." Loeys' isn't overly worried about this, despite the fact that in almost every occasion such a profit drawdown corresponds with the dramatic policy action he outlines above or a broader, economy-wide recession. "Falling profit margins have been the important warning signal and cause of an eventual US recession and we thus continue to see an elevated risk of such a contraction over the next 1-2 years, even as the immediate risk appears low," wrote Loeys.
Chinese firms go on a buying spree for American companies
Direct investments from China put over $15 billion into transactions in the U.S. last year, a near-30 percent increase compared to the previous year and a new all-time high. Early indication points to 2016 as yet another record year for Chinese investments, according to a report by the National Committee on U.S.-China Relations and a research firm Rhodium Group.
"In 2016, China's outbound foreign direct investment (OFDI) will likely grow even faster than in previous years," the report said. "A more pronounced slowdown in economic growth and concerns about the stability of the renminbi exchange rate have visibly accelerated the pace of Chinese deal-making abroad since mid-2015, with a record $100 billion of announced M&A transactions worldwide in the first three months of the year."
A significant share of that capital outflow has already found a home in North America. So far this year, 72 deals (including merger/acquisition and private placement) valued at over $7.5 billion have closed and 27 new deals valued at over $33 billion targeting U.S.-based companies have been announced. This compares to 59 deals valued at $2.9 billion closing during the same period last year, per data compiled by S&P Capital IQ.
It's not only the number of deals but also the size of those transactions that's grown over the years. The average deal announced so far this year is a whopping $1.5 billion, an eight-fold increase from last year. Moreover, of 27 deals announced this year, five are valued in excess of a billion dollars each and include high-profile transactions such as the acquisition of luxury hotel owner Strategic Hotels & Resorts by Anabang Insurance Group for $8.2 billion, Ingram Micro by Tianjin Tianhai Investment for $7.2 billion (upon completion of the transaction, Ingram Micro will operate as a subsidiary of TianjinTianhai, consolidated under HNA Group) and GE Appliances by Qingdao Haier for $5.4 billion.
Endo pharmaceutical to slash 740 jobs
Suffering from several “previously unanticipated headwinds,” Endo is embarking on a plan to speed up its restructuring efforts that will hit two of its manufacturing plants hard. The new strategy, which executives said they’re starting “shortly,” will impact 740 jobs.
Endo plans to close a site in Charlotte, NC, and reduce its employee base in Huntsville, AL, as it battles pressure from “new competitive entrants; … greater than expected price erosion across the generics sector; and delays on regulatory actions related to certain Endo products,” CEO Rajiv De Silva said in a statement. On Thursday, those pressures forced Endo to lower its revenue and EPS expectations for the year, moves that sent investors running for the doors and the company’s shares down almost 40% the same day. CNBC said it was Endo’s third-worst single-day performance in the company’s history.
In response to the market challenges, the management team has drafted an “accelerated restructuring” that’s expected to save $60 million in 2017. Both sites affected in the move were former Qualitest sites, Endo senior director of corporate affairs Heather Zoumas Lubeski said in an emailed statement. The Charlotte operation, which is being closed, has 390 employees. The much larger Huntsville operation, which will lose about 350 jobs, currently has 1,248 employees. "The Company will be providing resources to help employees manage through this transition," Zoumas Lubeski said.
According to Endo’s website, Qualitest sites in Huntsville boast more than 320,000 square feet for manufacturing tablets and capsules and 180,000 square feet for producing liquids. Charlotte is an 88,000-square-foot plant for tablets and capsules. More than 60 products will be discontinued with the move, execs said. The announcement comes as Endo works to incorporate its $8 billion Par Pharmaceutical buy completed last September.
Middle class feeling crunched, fueling protestor fire
The economy’s real drag: Us
American consumers aren’t what they used to be — and that helps explain the plodding economic recovery. It gets no respect despite creating 14 million jobs and lasting almost seven years. The great gripe is that economic growth has been held to about 2 percent a year, well below historical standards. This sluggishness reflects a profound psychological transformation of American shoppers, who have dampened their consumption spending, affecting about two-thirds of the economy. To be blunt: We have sobered up.
This, as much as any campaign proposal, may shape our economic future. There’s an Old Consumer and a New Consumer, divided by the Great Recession. The Old Consumer borrowed eagerly and spent freely. The New Consumer saves soberly and spends prudently. Of course, there are millions of exceptions to these generalizations. Before the recession, not everyone was a credit addict; now, not everyone is a disciplined saver. Still, vast changes in beliefs and habits have occurred.
A Gallup poll shows just how vast. In 2001, Gallup began asking: “Are you the type of person who more enjoys spending money or who more enjoys saving money?” Early responses were almost evenly split; in 2006, 50 percent preferred saving and 45 percent favored spending. After the 2008-2009 financial crisis, the gap widened spectacularly. In 2016, 65 percent said saving and only 33 percent spending.
What’s happening is the opposite of the credit boom that caused the financial crisis. Then, Americans skimped on saving and binged on borrowing. This stimulated the economy. Now, the reverse is happening. Americans are repaying old debt, avoiding new debt and saving more. Although consumer spending has hardly collapsed, it provides less stimulus than before. (A conspicuous exception: light-vehicle sales, which hit a record 17.4 million in 2015).
US Manufacturing Needs More Highly Skilled Immigrants
It is no secret that America has a shortage of skilled machinists and toolmakers; IndustryWeek has been reporting on it for years. It’s even more the case when you look for machinists with advanced CNC skills who can work directly from 3-D models to program, set up and make complex parts. I experience this dearth of advanced talent firsthand in my business, and I would like to propose a solution that could accelerate a fix to the problem.
In early 2014, I started ZYCI CNC Machining because I saw an opportunity in the market to build a machining business that leveraged technology to be very responsive, providing quotes within hours and delivering complex, tight tolerance parts within days. The market has responded well, and there is no shortage of customer demand. But my greatest challenge to scaling ZYCI CNC Machining is not customer acquisition or access to capital as it is for many businesses. It is access to skilled and experienced talent.
The reason we have the shortage is well-documented. When American companies started closing factories and moving the jobs to low-cost countries to take advantage of the labor arbitrage, manufacturing was no longer a wise career choice. Parents and counselors advised high school graduates to get liberal arts degrees and go into professional service jobs, not go into jobs where they got their hands dirty and produced products. As such, the trade schools shuttered their manufacturing-related programs due to lack of enrollment, and the companies left tried to survive by hanging onto and maintaining employment of their essential workers. They could not afford to invest in training the next generation themselves. Therefore, our country’s manufacturing know-how that created the tremendous wealth in America skipped a generation.
Trade schools have since revived their programs and companies are hiring apprentices. Those are definitely steps in the right direction, but they are too slow and will take too long to have meaningful impact on the needs of today’s manufacturing businesses. It takes years of experience to learn the machining and toolmaking trades. Further, you need very experienced people for the apprentices to train under in order to learn the skill, finesse and tricks of the trade.
34% of all Americans financially support the rest of the country
The latest employment report was lackluster. The math on the employment numbers has concealed a deeper problem in the economy. Many Americans are struggling and the middle class continues to lose ground. The most startling figure coming out was that 562,000 people dropped out of the labor force. While there is a bit more information on those “not in the labor force” the press is still largely quite on this issue. You can frame the topic in a more poignant way by saying that 34 percent of all Americans financially support the rest of the country. With an aging population and record levels of debt, this might be a problem.
The reality is that 1 out of 3 Americans is supporting the rest of the country. We are talking about the private labor force since government work is supported by this group as well. We have over 94 million Americans not in the labor force. Another 16 million Americans are unemployed but looking for work.
It might be worth breaking down the categories: 112 million in the private sector labor force – this is largely the 1 out of 3 supporting the rest of the country. 32 million government workers – this is supported from funding coming from tax revenues. 94 million not in the labor force – these are people that can work but are not looking. 70 million cannot work – this is mostly children. 16 million unemployed – looking for work and unable to find a job.
This should give you a good sense as to how the economy is doing. The not in the labor force category is really worth exploring further. We have many older Americans hitting retirement age but completely unready to face the financial burden of retiring. The assumption is that once you hit 65 you have all the money in the world to get by. The reality is starkly different in that most older Americans are one Social Security payment away from being homeless on the street and starving.
Greece's creditors consider debt relief
Eurozone finance ministers are prepared to cut the cost of servicing Greece’s crippling debt mountain, following greater than expected progress in talks.
Athens may be offered fixed low interest rates, longer repayment periods and the staggering of bunched repayments. Debt relief has been a major demand of the International Monetary Fund, which regards Greek debt – currently around 180 per cent of GDP – to be unsustainable.
But it has been an anathema to Germany, its main creditor, and small Eurozone states that have undergone harsh austerity programmes which argue that deep-seated reform in Greece is needed.
Technical experts will launch a review of Greece’s loan programme, and a final package of relief ought to be agreed on May 24, just over two weeks away, Eurogroup chief Jeoren Dijsselbloem said. The apparent breakthrough came at a meeting of Eurozone finance ministers in Brussels, the day after the Greek Parliament on Sunday night voted through a round of tough pension cuts and middle-class tax hikes as part of its bailout deal agreed last summer. The narrow vote followed a three-day general strike and fierce street protests.
The world economy is suffocating under record debt
Banking is lucrative because commercial banks create money that makes them money. They fashion money by making largely unbacked loans that become someone’s income. When these people bank these earnings, banks have more assets on which to make more loans that are only partially backed by deposits. Under the fractional-reserve banking system that has operated over the past 350 years, the amount of money banks create is measured by the money multiplier. This ratio divides the amount of money banks create by the sum a central bank injects into the banking system to ignite this process (the monetary base).
It can be said that these money multipliers have gone berserk since the 1980s, when financial systems were liberalised and inflation stifled (which allowed for low interest rates). The world is now staggering under a record amount of debt. Household, corporate and government debt are at unmatched levels in absolute and relative (to GDP) terms.
This unrivalled debt poses an unprecedented threat to the world economy. At some point the debt accumulation must stop, which would mark the juncture at which the debt-fuelled economic model of the developed world is spent. Unmatched debt levels call into question long-term financial stability, for surely not all amounts outstanding will be repaid. Most probably, vast sums will be written off and these actions could trigger systemic banking failures. The lack of a global mechanism for dealing with sovereign default means that any government bankruptcies will be messy, as the saga of Greece shows. Think what would happen if, say, Japan defaulted, an event some warn is inevitable. Excessive bank lending to households is behind the housing bubbles that have wreaked so much damage on economies and threaten to do likewise in other countries. Emerging countries are, as always, at risk; of late, many of their companies, rather than just their governments, have over-borrowed too, often in foreign currencies.
Mega debt is an even more potent threat when populations are ageing and shrinking. Record debt means authorities have limited ammunition to fight the next economic downturn. Stretched government-debt ratios hamper more fiscal stimulus while unmatched debt makes it harder for central banks to boost interest rates to levels from where they could cut to make a difference in a recession. Even if debt is paid down in an orderly fashion, economic prosperity will be curtailed because it would mean consumers, companies and governments were trimming the consumption and investment that propel economies.
London gold market: running on empty?
The price of gold may be soaring, but the London gold market could be in serious trouble. “If we are correct, the London Bullion Market is running into a problem and is facing the biggest challenge since it collapsed from an insufficient supply of physical gold in March 1968.” This is the extraordinary claim made by Paul Mylchreest, strategist at London’s ADM Investor Services International (ADMISI).
Using data from the London Bullion Market and the Bank of England, along with net UK gold export numbers from HM Revenue and Customs, he estimates that the “float of physical gold in London, which excludes that owned by exchange-traded funds and central banks, has recently fallen to just about nothing.” He entitles his piece The Death of the Gold Market.
Mylchreest puts the fall in this float down to a number of factors that have changed the London gold market beyond recognition. These include increased demand from China, central banks and ETFs, along with net export sales of UK gold, which have been rising for two years. “If there is no gold float, there is nothing supporting more than $200 billion of trading every day in unallocated (paper) gold instruments which accounts for more than 95% of gold trading in London,” Mylchreest writes.
“The convention of trading unallocated gold has been based on a fractional reserve system,” he goes on. “It works as long as gold buyers retain confidence that the banks could deliver physical gold if demanded, but our analysis suggests that they could not.” As good as gold? Indeed, research from the Reserve Bank of India suggests that the volume of gold traded on the London Bullion Market Association’s over the counter market is more than 92 times that of the underlying physical market.
Immigrants cost $6200 per household in welfare
Immigrants cost each and every household in America about $6,200 in 2012 to provide for their welfare benefits, according to a new report from the Center for Immigration Studies.
That’s 41 percent more than what taxpayers shell out for “native households,” CIS said, citing comparisons of cash, food, Medicaid and housing benefits that were doled during that year. “Immigrants are such heavy users of welfare not because they don’t work, but because, on average, they have little education and thus earn low wages,” said Mark Krikorian, CIS executive director, in a written statement. “If we continue to permit large numbers of less-educated people to move here from abroad, we have to accept that there will be huge and ongoing costs to taxpayers.”
CIS based its findings on data from the Census Bureau’s Survey of Income and Program Participation. And among the group’s findings: “Illegal immigrant households cost an average of $5,692 (driven largely by the presence of U.S.-born children), while legal immigrant households cost $6,378,” CIS reported.
CIS also found “the average immigrant household consumes 33 percent more cash welfare, 57 percent more food assistance [and] 44 percent more Medicaid dollars” than the average household determined to be headed by natives of the United States.
South Dakota tax haven explained
Central Bank to make new HQ a cash-free environment
The Central Bank is set to install a cashless payment system in its new Docklands headquarters on Dublin's North Wall Quay. The system will be in place in restaurants and shops located within the HQ, stopping staff from using notes and coins on their purchases.
It will be required to handle as many as 50 users at a time and over 2,000 active users total. The move is in keeping with the financial institution's campaign to turn Ireland into a completely cashless society.
The national campaign was launched in early 2014, with the Central Bank claiming that increased electronic payments would save the Irish €1 billion annually.
It immediately set itself up for a tough battle, with Irish people using cash far more than other European citizens (the value of our ATM withdrawals are 66% higher) and being the second biggest users of cheques in the EU. The Central Bank already operates a cashless system at four of its offices. Employees from three of these will be moved into the new HQ by December.
Make Believe Money
Well, the so-called “Judgment Day” last Friday, was simply not what it was cut out to be. I guess in the end though, the Jobs Report did put to bed the thought that the Fed would be hiking rates in June. And the rate hike campers looked like they had lost their puppy, as their shoulders slumped, the chin dropped into their chests, and they shuffled off quietly to the wall boards where they came from. Didn’t hear about the Jobs Report from Friday? Well, it’s all just a little ridiculous to me, that the markets get all wound up over surveys and hedonic adjustments, but it is what it is, so let’s go check the numbers before we talk about the currencies and metals, eh?
According to the report in the Wall Street Journal (WSJ) on Friday. The U.S. labor market decelerated in April, a sign employers may be turning cautious after the economy slowed early in the year. Payrolls rose by a “seasonally adjusted” 160,000 in April, and the Unemployment Rate remained at 5%.
Here’s a little ditty for you that you didn’t see on TV, or hear on the radio or read in the newspaper about the quality of jobs that have been added for the past 2 years: since 2014, the U.S. has added 450,000 waiters and bartenders, and no Manufacturing workers. Boy, I sure get good service when I belly up the bar these days. And here’s another ditty. Since 2014, the oil and gas producers have cut 200,000 jobs. But I don’t recall hearing anyone talk about that. Hmmm…
And wanna know something else about the jobs data? Well, notice above that I highlighted the words “seasonally adjusted”. That means 233,000 jobs were added by the BLS with their Birth/Death Model. These are “make believe” jobs folks, and without the “Seasonal adjustment” we would have had negative job growth in April. But we certainly can’t allow the markets and investors know that! Oh heaven! The Humanity! With “make believe” jobs you get “make believe” labor markets, but don’t let that get in the way of all those that keep saying that the U.S. economy is doing fine.
Fed's Evans favors 'wait and see' on more rate hikes
The U.S. economy's fundamentals are solid and growth this year should pick up to around 2.5 percent, but the Federal Reserve's current 'wait and see' approach to monetary policy is appropriate, a Fed policymaker said on Monday.
Charles Evans, president of the Chicago Fed, also said he would welcome a temporary overshoot in inflation to lift consumer price growth up to the Fed's longer-term target of 2 percent and raise overall inflation expectations from current low levels. "While the fundamentals for U.S. growth continue to be good, uncertainty and risks remain. In my opinion, the continuation of 'wait and see' monetary policy response is appropriate to ensure that economic growth continues," he told a conference in London.
Those risks include weak business investment and the low level of inflation, which has been below the Fed's 2 percent target on a core measure for most of the time since the 2008 financial crisis. "Overshooting a little bit just to make sure you get to 2 percent strikes me as being quite sensible," he said.
The most recent indications from Fed officials point to two more interest rate hikes this year. Financial markets, however, are barely pricing in one more and that is not expected until December, after the U.S. presidential election. Primary dealers on Wall Street took a June rate hike off the table after data on Friday showed 160,000 jobs were created last month, far short of expectations and the lowest reading in seven months. Most now see the next move in September.
A Temporary Tattoo Could Replace Your Credit Card
If you’ve ever been to a music festival, sports stadium or any other crowded event, you may have been concerned about carrying a purse or wallet, which can not only be cumbersome, but can make you the target of pickpockets. And the alternative of carrying a solitary plastic credit card isn’t much better since they can easily slip out of your pocket.
Those concerns might disappear in the not-so-distant future, thanks to technology being developed for ultra-thin, contactless payment stickers similar to temporary tattoos. MC10, a healthcare technology company, is developing tattoo wearables that can affix to a payer’s body as a breathable, waterproof NFC, or near-field communication, payment solution. Think of it as a tattoo that can give you far more than just street cred.
The wearables are designed to pair with a smartphone, which can then allow them to make payments to a merchant using an NFC reader. The “tattoos” are also designed for limited use — once the wearer removes it, it’s rendered useless.
MC10 was originally designed to measure individual UV exposure, but the company hopes to find traction in the payment arena, striking a balance between convenience and security. According to Ben Schlatka, MC10 VP of Corporate Development and Co-Founder, “[The only client] with the platform so far is L’Oréal’s [for its] My UV Patch, a sensor designed to help users monitor their sun exposure.” Developers will be working with third-party brands to customize the patch and are working on designs for hotel room access, event registration, event admission and to expand to the payment arena.
The Robo-Accountants Are Coming
A recent story in The New York Times story sent shivers throughout the alleyways of downtown Manhattan with its bold headline, “The Robots Are Coming for Wall Street.” Conjuring images of Arnold Schwarzenegger, armed with scientific calculator and a mandate to snuff out armies of analysts, the story painted a picture of a not-so-distant future in which half of Wall Street loses their jobs to automation software.
Further evidence suggests that the phenomenon is unfolding beyond Wall Street, affecting the broad professional services sector. The Boston Consulting Group predicts that by 2025, up to one quarter of jobs will be replaced by either smart software or robots. A separate study from Oxford University suggests that 35% of existing jobs in the United Kingdom are at risk of automation in the next 20 years. Among the top 10% of jobs most likely to be automated: insurance underwriters, tax preparers, loan officers, credit analysts, and accounting professionals.
Does that mean we’ll all be getting our tax advice — or, for that matter, financial and legal advice — from robots while we look for new jobs? In some ways, it’s already happening. Robo-advisers have become a fixture in the financial services space, and automated tax preparation apps have been the subject of a tax season advertising blitz.
While some of this transformation has already begun, the future of robo-enabled professional services is not quite as dystopian as the rebellion scene from Terminator or as stark as the research consultants have projected. Instead, we expect to see the industry evolve significantly as it increasingly marries powerful technology with the human element to create a hybrid — a cyborg if you will. This new breed of professional will be powered by big data and enhanced productivity tools.
Sorry, Bernie fans. His health care plan is short $17,000,000,000,000.
Sen. Bernie Sanders has proposed paying for his proposals to transform large sectors of the government and the economy mainly through increased taxes on wealthy Americans. A pair of new studies published Monday suggests Sanders would not come up with enough money using this approach, and that the poor and the middle class would have to pay more than Sanders has projected in order to fund his ideas.
The studies, published jointly by the nonpartisan Tax Policy Center and the Urban Institute in Washington, concludes that Sanders's plans are short a total of more than $18 trillion over a decade. His programs would cost the federal government about $33 trillion over that period, almost all of which would go toward Sanders's proposed system of national health insurance. Yet the Democratic presidential candidate has put forward just $15 trillion in new taxes, the authors concluded.
In principle, national health insurance could make many families better off overall, without imposing unsustainable burdens on the federal budget. For the system to work in terms of dollars and cents, though, the benefits would have to be less generous than they are in the system Sanders has proposed, or the taxes would have to be more onerous for the middle class, as they are in many European countries.
In the short term, at least, almost every household would be better off, as Sanders's proposals for health care, secondary education and more would save ordinary Americans money and provide other valuable benefits. The typical middle-class household, for example, would receive benefits worth $13,000 a year, almost all of it for health care, while paying just $4,500 more in taxes.
The what, when and why of 'Brexit'
Krispy Kreme Sells for $1.35 Billion, Equivalent to 1.8 Billion Donuts
Krispy Kreme Doughnuts has officially agreed to a $1.35 billion sell-off to German conglomerate JAB Beech, a subsidiary of the JAB Holding Company, according to a press release from Krispy Kreme.
The sell price of $1.35 billion could buy you roughly 150 million dozen donuts from the donut giant—a stunning 1.8 billion sugar glazed Krispy Kreme donuts that, put in line, could circle the Earth about four times.
Approved by the donut giant’s board of directors, the agreement features a 25 percent premium to the company’s closing stock price on May 6, which was $21 per share.
Krispy Kreme’s CEO, Tony Thompson said the brand will “remain focused on our long term strategy and continuing to offer our premium, high-quality doughnuts, and sweet treats to consumers around the world.” Jim Morgan, Krispy Kreme’s board of directors chairman said, “For nearly 80 years, our iconic brand has been touching and enhancing lives through the joy that is Krispy Kreme.
The Job Market's Missing Middle
Why are so many people unhappy about a U.S. economy that has generated more than 12 million jobs over the past five years? One explanation: A lot of those jobs don’t pay very well.
The latest U.S. employment report illustrates a persistent contrast between the labor market and the broader economy. Non-farm employers added an estimated 160,000 jobs in April -- less than forecasters expected, but still more than enough to compensate for natural growth in the labor force. The unemployment rate has remained at a low 5 percent (or even lower) for seven months straight.
Yet this apparently ample demand for workers hasn’t generated the wage growth needed to drive consumer spending higher. The average hourly wage was up 2.5 percent from a year earlier, a bit better than in previous months but still nearly a percentage point short of the pace that prevailed before the recession.
Why the disconnect? One possibility is that the mix of jobs being created has been skewed toward low-paying types of work. This could hold average wage growth down even amid strong overall employment gains and decent raises in individual sectors. To get a sense of whether this has been happening, I split the total number of private-sector jobs into three wage groups -- high, medium and low, currently paying an average of about $16, $24 and $35 an hour, respectively. I then tracked each group’s cumulative job losses and gains through the recession and recovery.