Unemployment, GDp & Inflation reality Check

It’s pretty straightforward – when business is bad, companies miss sales and earnings targets. That makes stock prices go down. The basic symptoms that business is slowing down are that companies fire people and stop buying stuff to make stuff.

This week was a double shot of data release: unemployment & GDP. And things look ok:
unemployment is flattening or down, depending on your choice of metric
GDP is still positive

Except each one of these data points as reported is so warped as to be wrong. In fact, we started the recession but the data is hiding it. Let’s do a deep dive.

UNEMPLOYMENT
Either unemployment improved and dropped from 5.1% to 5% or job losses decelerated from 240,000 jobs down January-March to only 20,000 jobs lost in April.
http://www.bls.gov/news.release/empsit.t14.htm
Construction jobs: -61K jobs
Manufacturing jobs: -46K jobs
Retail: -27K jobs
Movies: +3K jobs (basically the end of the writers strike)
Finance & Insurance: +5K jobs
Real estate: +1.4K
Accounting & Bookkeeping: +9K jobs (tax season)
Accommodation and food: +20K
Healthcare: +43K
Education: +9K
Government: +9K

It seems the only areas of growth are tax driven: government, healthcare and education. (Yes, I call healthcare tax driven not just because of Medicare/Medicaid but because of forced payroll healthcare spending.)

But…wait. Finance and Real estate added jobs? Bars, hotels & restaurants adding people when spending is down and hotels are laying off people (MGM fired 400, for example). The National Restaurant Associationreported that 54% of restaurants had dramatically fewer sales.

Is it possible that these numbers are wrong? In fact, not just possible but absolutely true. The BLS (Bureau of Labor Statistics) uses a flawed methodology. Not a problem if it is always flawed the same way, but it isn’t. The BLS massages the data by extrapolating using trend-based estimates. So if the financial sector is doing well this year, the statistics will be massaged to show growth this year. And vice versa: a bad year last year becomes a bad year this year.

So when the economy is changing – up or down – the jobs data gets it wrong. It happened when the economy began raging in 2003/4 – the BLS missed 800,000 jobs.

Other problems with methodology include ignoring self-employed workers. Real estate agents (500K+ according to the BLS, 1.2M according to NAR) are self-employed. It’s a tax thing (so the companies can avoid paying payroll taxes). And with sales down 40%, a lot of them aren’t working.

Need additional evidence that the BLS methodology is lowballing unemployment? Consider California.


The trend at the State and Federal level is the same: rising unemployment. But California’s is spiking higher and faster.

The point isn’t about data accuracy. Who cares whether the BLS includes real estate agents that haven't made a sale in a year. The point is whether or not folks have money to spend or whether they are belt-tightening. Because belt-tightening leads to a rash of corporate earnings misses, and that’s the definition of falling stock prices.

And the fact is - times are tight and folks are not just spending less, inflation gives them less disposable income to spend.

GDP
GDP for Q4 2007 was 0.6%. It was the same for Q1 2008: 0.6%. http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Great news, right? No recession. Not exactly
* Federal government spending rose 4.6% mainly due to raises. Yep, of that 0.6%, 0.3% came from raises
* Consumer spending was flat at 1%. In fact, durable good spending was down sharply: -6%. That’s consistent with GE and with the unemployment figures that showed a slowdown in hiring in manufacturing of durable goods (we are short consumer goods, consumer services, MGM, ZLC, NKE and HOG)
* Nonresidential construction fell 6% (we are short VMC)
* Residential investment dropped 27%
* Inventories rose $1.8B. This point got a lot of play partly because inventories dropped $18B in Q4 2007 and mostly because companies build inventories in response to sales expectations. Except that this is misleading – again. It’s just holiday seasonality. In Q3 2007, inventory shot up $30B as stores stocked up for the holidays. Then it dropped $18B as stores unloaded their crap and didn’t restock because demand was so light. Now they have added a little bit of inventory.

In essence, without the government giving itself a raise, the GDP was 0.3%. Not quite negative but not flat either. And a slight revision down puts us in recession territory.

INFLATION
It’s 10 days until we see another inflation report. The Fed is playing a game of chicken where they are lowering dollar value and inevitably increasing inflation while they are waiting for inflation to blink as the economy slows and demand softens. Got that?

Just like unemployment, it all depends on the methodology.
First, they exclude oil and food. Food and energy represent ~25% of disposable income and it is inflation at 4%~7% per month!

Second, the remaining inflation is calculated as a bundle of products. Sure some things are increasing in price, but others are dropping, like cars and washing machines. Except the problem with that methodology is that folks are cutting back severely on these durable goods and they can’t cut back on the food and oil they use. What about rising medical and mortgages?

Again, ignore the actual inflation figure. It is used primarily to slow down government payments that are forced to keep up with inflation. Pay attention, rather, to the basic trend: folks are not buying as many things. They can't until/unless they see significant drops in housing, medical, food and energy.

The fact is that inflation is quite high and it is forcing the US consumer to cut back on spending. Less eating out, more home cooking. Reductions in cell phone and cable. Less vacation travel. In short, consumers are cutting back on spending.

We are told to expect a splurge of spending thanks to the stimulus checks that started rolling out, but I don’t think folks are feeling that ready to spend. Most will sock it away, not blow it away.

All signs point to a reduction in spending, which in and of itself will lead to more unemployment and more business contraction.

CONCLUSION
The market is not reflecting bad news because it will respond only to facts as they emerge. Which means when the bad news finally hits the figures, the market will react very badly.

Many short opportunities remain. Luxuries like botox treatments will be put aside (we are short AGN).

No matter how much nitro the Fed wants to add to the gas tank, the gas tank itself is starting to run on empty. You can’t turbo charge what isn’t there.

Q1 GDP was 0.6% - Market is celebrating

Wow, the market is treating 0.6% GDP as if it were good news. SO we haven´ttechnically entered the recession - we are only on the edge. Time to party!

So the bad news happens next month and not this month. The market is behaving like a 4 year old. WHne things turn bad, watch it really pout and scream.

TRID - fascinating

´For the third quarter of fiscal 2008, the company reported net revenues of $55.3 million, representing a sequential decrease of 26 percent compared to net revenues of $75.0 million in the quarter ended December 31, 2007 and a 9% year-over-year decrease from the $60.6 million reported in the quarter ended March 31, 2007´

Sounds terrible, doesn´t it? But this is actually good stuff.
* Cash increased $14M to $3.75 cash per share. Forget the GAAP accounting. They added $14M in cash to their previous $222M. And that will continue to be the case each quarter.
* One time impact by $4M+ foreign income tax event.
* They are selling system on chips and have broadened portfolio

It´s quite simple, really. They can capture the low end market and own the entire field but only by releasing appropriate chips and taking the margin hit. That´s at least 2 or3 quarters away

Or they can merge. Considering that they now trade for $30M (excluding their cash) and they generate $14M cash per quarter, that´s also a no-brainer.

The market is in a show-me mood. So the future cash flow is discounted. $4.25 for a company with $4 in cash in 6 months? I´ll take that risk

Etrade - what I´m doing

Etrade is back above $4. A rate cut could shove it to $4.50
I notice thatthe options are not really very valuable.

The May $4 expire in 2.5 weeks. The stock is $4.15.
But the call is only $0.30 or 3.5% (after subtracting the amount already in the money)

The June $4 expire in 6.5 weeks. They sell for $0.50
That´s 8.7%, better but less dramatic than we saw last month.

I want to wait until tomorrow or Friday to decide the month and the strike price.
I would love an opportunity to sell June $5 for at least $0.30

More Notes from Vacation: Gold and the Dow

Gold is now at a 4 month low
At the same time, the Dow is almost at a 4 month high

Coincidence? Not at all. Understanding why is a key part of why I remain short

Gold as inflation hedge
Really? Inflation is much, much higher than it was several months ago

Gold as dollar hedge
Really? The dolar is even cheaper. In 2007 dollars, gold has fallen in value very hard

Gold as speculative bubble
BINGO!!
Just as the Dow started tanking, gold started roaring.

Money is a river - it has to flow somewhere. With billions flowing into 401Ks every week, money flows. When the stock markets languishes, it flows somewhere else. It went to gold. Now it is in agriculture. I pointed out to folks 1 month ago that gold sell signals were everywhere. My reasoning was that every tout and magazine was talking gold. It´s an olod and true saying that when the shoeshine boys and taxi cab drivers are talking about the asset, you better leave.

Because smart money is heading for the exits when the dumb money starts coming in.

This is why I look at the stock market today and see a bubble. There is no reason for it to rise except for speculation and the Fed pumping the engines. And that has never, ever worked out. It just makes the collapse more painful.

Watch the dumb money flow back into the market - after all, it seems to be rising and that brings back investors. Suddenly we should feel confident because stocks are rising. It´s just another bubble. Like gold and before that housing. The Fed can do its best to keep the body alive for another quarter or two, but it woin´t last.

Feeling certain about the situation also alleviates anxiety. I don´t mind being wrong, but I do mind being uncertain. I may be wrong about timing, but I am certain about the outcome

TRID falling down hard

First the facts:
* TRID is below $5 - closed at $4.78
* Down to $4.30 in afterhours on decent volume (~110K shares in just 1 hour of trading)
* Short volume is down dramatically. Short shares were 7.07 million shares February 26th versus 6.04M

Flat panel LCD TV sales are continuing to sell at an amazing pace: >50% unit sales year-over-year
* Corning is doing great (they make the glass for the panels)
http://www.thestreet.com/s/corning-upbeat-on-lcd-tv-market/newsanalysis/techtelecom/10413644.html?puc=_htmlatb
* Samsung is hitting on all cylinders. "Samsung LCD business generated 53 percent year-over-year growth primarily due to strong sales of larger, 46-inch and above, screen sizes, the company said. " And TRID owns the >42" TV business

I just read that they presented exactly what was expected.
1. Ramping up
* New design wins at a major OEM
* Ramping up at Japanese OEMs
* Sequential sales growth starting with the June quarter
2. Bad news
* Samsung is ramping down fast
* Margin pressure as they develop low-end products

So sales are growing and they remain proftable.

Being negative on this company is dumb. They are already almost at their pure cash position - how much further down can they go?
* Bankruptcy is not possible - they have a pristine balance sheet and $222M cash in the bank.
- $22M debt
- inventory is a paltry $12M - less than 5% annual sales
- liabilities are ~$50M per quarter (including paroll and chip manufacturing costs)
- receivables are $16M
If they stopped selling, liabilities would go down to $25M per year (payroll and other costs). That's 8 year's of operations
* Lower operating costs. Every quarter reduces operating costs in 2 ways
- Options expensing. At $5 per share, their costs are low, low low
- Options backdating costs are falling from less auditing and legal costs
* No incentive to short. I don't have visibility to their current quarter's profits. Last quarter they had $3.68 cash per share. It should be the same or greater.
Now they are $4.30. Shorties can't make much money here.

Notes from vacation

I snuck out of town for some relaxation in Mexico.
I came up for air today and wanted to share some thoughts

My investment premise is that we are headed for a major recession. In addition, as I’ve shared in previous blog postings, history shows that the markets – when they fall - fall very fast.

I call it the LAST GASP THEORY. It is typified by a series of up-and-down cycles in the DOW averaging 10% and ending in one, final surge of ~15%. In addition to this technical barometer of my own devising, another common point shared by recession-related market pullbacks is the deep divide between an exuberant market and an economy already weak and getting weaker. It’s as if everyone knows the party is ending and they want one more dance.

Because it is obvious that a downshifting economy reduces both a sector’s P/E and a company’s ability to meet EPS. Worse, surprises are to the downside not the upside. Oh, certainly, many begin shedding staff and spending to maintain EPS, but sales suffer and very few remain lean and mean.

I believe we are near the top of that final surge – the Last Gasp.
* Economy is either in or near recession - but the markets are simultaneously surging
* Current surge is >10% This is key. Until now, the cycles have been ~10%. Today saw the Dow touch 12,940 – a rise of 11% above last month’s low of 11,650.
* More companies are missing earnings releases and guiding down. I can’t find the citation, but I read that for the first time since the last recession, over 50% of the Blue chip stocks are missing or guiding down.

Am I rationalizing the market surge? Could I just be flat out wrong? I have researched and let the data show that the markets collapse always follows a major surge and right after evidence of the start of the recession.

What I believe is happening is this. Go back to March when the markets began to free-fall. What precipitated that was a combination of banking crisis and liquidity drain. All of a sudden folks realized that the housing collateralized debt was worthless, and therefore most banks and lenders and investment companies were sitting on a pile of worthless assets. Worse, they needed fresh capital to stay in business. The Fed stepped in and did two things. First, it turned on the taps full blast – expanding the money supply at an unprecedented rate. Second, they turned a blind eye to fundamental insolvency at most lenders.

That rush of cash helped and the markets rebounded. Because the banks could go back to lending and confidence was restored.

In addition, the rapid collapse of the dollar has made multinational companies look more prosperous than they really are – by selling the same amount as last year but enjoying the higher dollar value. I have shown that this will end within 2 quarters as the dollar’s downward trajectory slows.

I don’t want to call it, but I think 2 weeks from now is when things go south fast. This week, the market will sing and dance as the Fed drops rates again. But this is the time for a while. The Fed is facing incredible domestic and international criticism as inflation surges and we export our inflationary problems globally. Unfortunately, the Fed counted on the inflation to not come back here, but today’s economy prevents that from happening. Wheat has international prices. As does oil and steel.

The real killer won’t be the market reaction to signs that the Fed is going to end the rate drops. Instead, it will be the April monthly GDP estimates. The recession lights will be flashing. In addition, the April housing data will be out – this is the biggest month for home sales.

I know that I am contrarian and my portfolio’s value is paying the price. But just as the market can zip up 10% in 1 month, it can crash 15% just as fast.