The Congregational Budget Office (CBO) is out with its annual report. It’s a blockbuster. This 165 page monster is filled with dozens of charts, graphs and detailed projections. It will be talked about for weeks. The report provides a dismal outlook for the economy. There is one data point I'd like to focus on.
Here is the CBO forecast for real GDP for 2012 and 2013:
The 1.1% Real GDP number for 2013 surprised me. The CBO’s expectations are way under those of both the “Blue Chip” economists and the Federal Reserve:
What does it mean if the economy is going to slow, as CBO now thinks? Some consequences:
The CBO now forecasts Social Security to run into trouble in just a few years. This is a very substantial change in the outlook for SS. Changed fortunes make it certain that America’s favorite entitlement program will be on the table for a significant re-vamp.
The CBO has answered two critical question:
1) In what year does SS first goes into deficit (including interest)?
2) What is the size of the SS Trust Fund when #1 has been achieved?
Key data is here:
Using this information, we can estimate the Trust Funds (TF) balances over time, and compare them to what SS forecast in its report to Congress ten-months ago:
The bottom line is that the SSTF is going to top out three years ahead of “schedule” and be $800B shy of what it was “supposed” to be.
I think the CBO report has created a big headache for a good number of folks in D.C. Most of them are running for office this year. They certainly won't be able to wave the CBO report as a measure of how well they are doing.
Earlier today, the New York Fed was kind enough to voluntarily disclose the finacial holdings and assets of one former Goldman Sachs employee, and current FRBNY president Bill Dudley. Bill Dudley is also known as the gentleman to have received, when he was stil head of the PPT, aka the Fed's Open Markets Group, a waiver signed by one Tim Geithner on September 19, 2008, allowing him to keep not only his investment in AIG, which was "de minimis" at $1,200, but also in General Electric, which was not de minimis at $106,830. And while his modest holdings of AIG likely did not impact Dudley's protocol of bailing out the failed insurer, his interest in GE, and thus its then fully held subsidiary NBC Universal, parent of such comedy channels as CNBC, could potentially have been a source of conflict. Which is why the Fed has disclosed the full holdings of Dudley as of the 2008 year, in which we find that the bulk of Dudley's net worth was held by JPMorgan Chase Deferred Income Benefit Award (over $1MM) and JPM Chase Deferred Compensation ($500,001-$1,000,000). Was Mr. Dudley also completely conflict free vis-a-vis the bulk of his holdings, and their custodian, and did the New York's Fed largesse to bail out JPM among many others, have anything to do with this particular heretofore unknown detail? Of course not. After all, Jon Corzine is a free man. In other news, anyone who needs urgent access to the discount window or a $1 trillion overnight loan at 0.001% interest, should just call the Fed's 24/7 hotline: 877-52-FRBNY.
This is how the Fed generously classified its release:
In order to promote transparency and in response to media interest, the
Federal Reserve Banks are today making available the financial
disclosure forms and related documents filed by their current presidents
with Federal Reserve Bank ethics officers.
Full Dudley financial disclosure:
Full text of Waiver granted to Bill Dudley, and signed by Tim Geithner:
And as a reference, the New York Fed's code of conduct:
China's goal-seeked economy performed admirably in January, and its Manufacturing PMI came absolutely golidlocks at 50.5, an increase from 50.3, previously, just modestly beating Wall Street expectations of a slight contraction of 40.6, yet a less than earlier whisper numbers which put it at 52. As such, thereis absolutely no indication if the PBoC will further tighten or ease in the next month, just as the PBoC likes it, because while many have been demanding easing in the last several weeks, and especially the housing market, the reality is that hot pockets of inflation still remain. Furthermore, the last thing China needs is to proceed with full on easing just as Bernanke goes ahead and launches QE x which will export more hot money, and thus inflation, to China than anywhere else, with the possible exception of gold.
And here are some observations from Bloomberg's Michael McDonough:
- Headline PMI remained above 50 for two consecutive months; another 50-plus reading in Feb. would be very positive sign,
- Underlying data still weak with new export orders falling to 46.9 from 48.6, while new orders rose to 50.4
- Typically if this were true bottom, all forward-looking sub-components would rise above 50 in a month prior or the same month as headline index
- Building domestic pressure coupled with foreign risks should continue to weigh on the Chinese economy, including the PMI going forward, forcing policy makers to cut RRR and eventually policy rates once they are convinced threat of inflation has been squelched
The first numbers in the Florida GOP Primary have started trickling in with the polls still open, and while as already noted DieBold did 'leak' the final results of the election previously, those who either care what the outcome of tonight's event is, or are masochists, or both, are welcome to follow the latest developments below.
and Live maps:
It is oddly appropriate that when a reader opens the client portal of Goldman Sachs, also known as the bank that does God's work, in order to pull Jan Hatzius' take on today's economic data assortment, one would encounter the following amusingly intentional easter egg...
As a reminder Psalm 138:
1 A Psalm of David. I give thee thanks, O LORD, with my whole heart; before the gods I sing thy praise; 2 I bow down toward thy holy temple and give thanks to thy name for thy steadfast love and thy faithfulness; for thou hast exalted above everything thy name and thy word. 3 On the day I called, thou didst answer me, my strength of soul thou didst increase. 4 All the kings of the earth shall praise thee, O LORD, for they have heard the words of thy mouth; 5 and they shall sing of the ways of the LORD, for great is the glory of the LORD. 6 For though the LORD is high, he regards the lowly; but the haughty he knows from afar. 7 Though I walk in the midst of trouble, thou dost preserve my life; thou dost stretch out thy hand against the wrath of my enemies, and thy right hand delivers me. 8 The LORD will fulfil his purpose for me; thy steadfast love, O LORD, endures for ever. Do not forsake the work of thy hands.
All joking aside, it appears out friends at 200 West have a bit of a mole infestation on their hands...
Presented with little comment except to say that the total lack of volume (and massive concentration of what volume there is at the close) is hardly reflective of a market that is anything other than broken and dying. Last January (2011) the average number of stocks traded on the NYSE per day was 891mm shares vs 661mm for this January (a 26% drop YoY!) and this is down an incredible 59% from January 2008.
Gold outperformed (+0.5%) today (as the rest of its commodity peers lost ground on USD strength today) and Copper and Silver underperformed. But for January, Silver is the clear winner in the global asset return race (at almost a 20% gain) with Gold in 2nd place at around +11.2%. JGBs and the DXY (USD) along with UK Gilts and Oil lost the most ground among the major assets we track. The outperformance of the precious metals as the dollar ebbed along with the general 'last year's losers were January's winners' and vice-versa was evident as Asia Ex-Japan and EM equities surged along with Nasdaq (and Copper). Long-dated Treasuries have just limped into the money for the year as they rallied dramatically today - ending the day at their low yields (new record 5Y lows) with 30Y now -12bps on the week. FX markets gave a little of the USD strength back in the afternoon but the rally in stocks was almost entirely unsupported by risk assets in general (as it seemed like a desperate low-volume try to push ES back to VWAP into the close to hold the 50/200DMA golden cross in SPX) after this morning's dismal macro data. Financials rallied to fill some Friday close gaps but gave some back into the close as CDS inched wider and Energy underperformed as Oil came almost 3% off its early morning highs (managing to crawl back above $98 by the close). IG credit outperformed as HY and stocks were largely in sync but open to close, credit outperformed stocks on a beta basis (after overnight exuberance in stock futures faded).
Selected asset returns YTD (leaving Silver out due to its significant outlier nature on the y-axis at almost 20%) shows the reds (last year's losers) have tended to outperform and the greens (last year's winners) have underperformed in January. The dotted lines tended to be assets that moved only modestly and its clear that SPX and NDX have done well among that group.
A little tighter focus just on the US and precious metals shows an interesting limping lower post Bernanke in Stocks while PMs and Bond surged (perhaps QE was priced in or simply losing its mojo).
ES (the e-mini S&P 500 futures contract) managed to inch back up to VWAP (red oval) and then sell-off modestly into the close as heavy volume came in.
Once again we see ES tickled up by the algos to enable heavy institutional sell orders (much higher average trade size) at VWAP. This rally of the afternoon was not supported by any broad risk driver as Treasuries closed at low yields (and flattest curves), FX carry only just off its lows, and commodities weak with only credit (which we suspect was just being virtuously reracked as we heard volumes were thin in CDX). This dislocation is evident from the CONTEXT chart below, where correlations had been very high all day and fell apart as stocks rallied in the afternoon:
HYG and VXX also underperformed SPY but despite a surge in volumes in cash at the very close today, volumes in January for stocks were ridiculously low on average.
Gold pushed higher all afternoon as its peers stabilized in the red for the day. Copper and Silver have resynced for now and Gold has become much less correlated.
Chart of the day goes to Treasuries in our view though as the sell-off yesterday afternoon and overnight was entirely rejected as macro data in the US along with desperation in the Greek PSI drove safe haven flows (and perhaps some month-end rebalancing) into the entire complex with the long-end (duration baby) benefiting most.
Charts: Bloomberg and Capital Context
Amazon slides 10% after hours as it reports much weaker revenues of $17.43 billion on expectations of $18.26 billion. EPS are not really comparable but appear to beat EPS of $0.16 on Exp. of $0.38. This may not be apples to apples. More importantly, the company guides Q1 to Operating Loss of $200MM to Income of income of $100MM, on Wall Street Consensus of $268MM, and guides to Q1 revenue of just $120-$13.4 billion on Estimates of $13.4 billion: pretty wide range there... This is merely the latst time that the company has disappointed materially, yet Wall Street keeps giving it the benefit of the doubt, on hopes that the Kindle will finally become an iPad-like device. How much longer? Yet the take home message is that the US consumer, contrary to rumors otherwise, is actually not doing all that well.
The good news: operating margin doubles from Q3's 0.7%. The bad news: operating margin is 1.5%:
Amazon number of employees: up, up and away, at 56,200; this compares to 33,700 a year ago.
AMZN After hours:
Operating cash flow increased 12% to $3.90 billion for the trailing twelve months, compared with $3.50 billion for the trailing twelve months ended December 31, 2010. Free cash flow decreased 17% to $2.09 billion for the trailing twelve months, compared with $2.52 billion for the trailing twelve months ended December 31, 2010.
Common shares outstanding plus shares underlying stock-based awards totaled 468 million on December 31, 2011, compared with 465 million a year ago.
Net sales increased 35% to $17.43 billion in the fourth quarter, compared with $12.95 billion in fourth quarter 2010. Excluding the $101 million favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales would have grown 34% compared with fourth quarter 2010.
Operating income was $260 million in the fourth quarter, compared with $474 million in fourth quarter 2010. The favorable impact from year-over-year changes in foreign exchange rates throughout the quarter on operating income was $5 million.
Net income decreased 58% to $177 million in the fourth quarter, or $0.38 per diluted share, compared with net income of $416 million, or $0.91 per diluted share, in fourth quarter 2010.
“We are grateful to the millions of customers who purchased the Kindle Fire and Kindle e-reader devices this holiday season, making Kindle our bestselling product across both the U.S. and Europe,” said Jeff Bezos, founder and CEO of Amazon.com. “Our millions of third-party sellers had a tremendous holiday season with 65% unit growth and now represent 36% of total units sold.”
Full Year 2011
Net sales increased 41% to $48.08 billion, compared with $34.20 billion in 2010. Excluding the $1.09 billion favorable impact from year-over-year changes in foreign exchange rates throughout the year, net sales would have grown 37% compared with 2010.
Operating income decreased 39% to $862 million, compared with $1.41 billion in 2010. The favorable impact from year-over-year changes in foreign exchange rates throughout the year on operating income was $53 million.
Net income decreased 45% to $631 million in 2011, or $1.37 per diluted share, compared with net income of $1.15 billion, or $2.53 per diluted share, in 2010.
- During the nine-week holiday period ending December 31, 2011, Kindle unit sales, including both the Kindle Fire and e-reader devices, increased 177% over the same period last year.
- Kindle Fire is the #1 bestselling, most gifted, and most wished for product across the millions of items available on Amazon.com since its introduction 17 weeks ago.
- Amazon launched Kindle Stores at Amazon.it and Amazon.es. Kindle moved to the top of the bestseller list on launch day in both countries and held the top spot this holiday season. The new Kindle was also the bestselling product on Amazon.co.uk, Amazon.de and Amazon.fr.
- Amazon.com announced the Kindle Owners’ Lending Library, a benefit of Prime membership that offers over 80,000 books to borrow for free – including over 100 current and former New York Times bestsellers – as frequently as a book a month, with no due dates.
- Kindle Direct Publishing (KDP) announced KDP Select, an annual fund of at least $6 million dedicated to independent authors and publishers who participate in the Kindle Owners’ Lending Library. In December alone, customers borrowed 295,000 KDP Select titles, and KDP Select has helped grow the total library selection of books by over 16X.
- Amazon continued to expand its catalog of title offerings for Prime Instant Video, announcing licensing agreements with Twentieth Century Fox Television Distribution, which added the popular FOX and FX television shows Glee and Sons of Anarchy, and Disney-ABC Television, which added popular television shows including Lost and Grey’s Anatomy. These deals bring the total number of Prime Instant Videos to more than 13,000 movies and TV shows from partners such as CBS, Fox, NBCUniversal, Sony, Warner Bros., PBS, ABC-Disney and many more.
- The number of videos purchased or rented from Amazon Instant Video and the number of Amazon Instant Video customers both more than doubled year-over-year in the fourth quarter. In addition, the number of Prime Instant Video streams increased nearly 300% in the fourth quarter compared to the third quarter.
- Amazon Appstore for Android customers nearly tripled in the fourth quarter compared to the third quarter. In addition, customers downloaded more apps from the Amazon Appstore during the fourth quarter than they had during all previous quarters combined.
- North America segment sales, representing the Company’s U.S. and Canadian sites, were $9.90 billion, up 37% from fourth quarter 2010.
- International segment sales, representing the Company’s U.K., German, Japanese, French, Chinese, Italian and Spanish sites, were $7.53 billion, up 31% from fourth quarter 2010. Excluding the favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, sales grew 29%.
- Worldwide Media sales grew 15% to $6.01 billion. Excluding the favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, sales grew 14%.
- Worldwide Electronics and Other General Merchandise sales grew 48% to $10.91 billion. Excluding the favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, sales grew 47%.
- Amazon Web Services (AWS) announced the launch of its new South America (Sao Paulo) Region and U.S. West (Oregon) Region, bringing the total to eight geographic regions worldwide to which the company has deployed its global cloud computing services.
- AWS announced the launch of Amazon DynamoDB, a fully managed NoSQL database service that provides extremely fast and predictable performance with seamless scalability. With a few clicks in the AWS Management Console, customers can launch a new Amazon DynamoDB database table, scale up or down their request capacity for the table without downtime or performance degradation, and gain visibility into resource utilization and performance metrics.
- AWS announced that customers can now run their Microsoft Windows Server applications within the AWS Free Usage Tier – a program designed to help new AWS customers get started in the cloud. Developers and businesses with Windows Server applications can take advantage of 750 hours of Amazon Elastic Compute Cloud (Amazon EC2) Micro Instance usage per month, at no charge for a one-year period.
The following forward-looking statements reflect Amazon.com’s expectations as of January 31, 2012. Our results are inherently unpredictable and may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic conditions and consumer spending, world events, the rate of growth of the Internet and online commerce and the various factors detailed below.
First Quarter 2012 Guidance
- Net sales are expected to be between $12.0 billion and $13.4 billion, or to grow between 22% and 36% compared with first quarter 2011.
- Operating income (loss) is expected to be between $(200) million and $100 million, or between 162% decline and 69% decline compared with first quarter 2011.
- This guidance includes approximately $200 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions or investments are concluded and that there are no further revisions to stock-based compensation estimates.
Graham's Note: This is an excerpt from my latest issue of Private Wealth Advisory in it,
As noted in yesterday’s article, the developed world will be entering a period of lower global growth for the following four reasons:
1) Age demographics: a growing percentage of the population will be retiring while fewer younger people are entering the workforce.
2) Excessive debt overhang.
3) A return to more frugal “common sense” spending patterns in the developed world.
4) Political and Geopolitical uncertainty.
This backdrop is going to engender dramatic changes in the way people choose to spend their money. However, while the “across the board” perspective looks quite bleak, there are going to be truly outstanding opportunities for wealth creation available to those entrepreneurs and businesspeople who are able to think creatively.
The most critical aspects for all businesses going forward are:
1) Selling an experience, NOT a product.
2) Respecting your clients with the intention of building a long-term relationship with them.
3) Using innovation and creativity to navigate shortages of capital.
4) Passion, hard work, and determination.
Regarding #1, the days in which people will buy things simply for the sake of buying them are over. Having been to trade shows and other similar events since the Depression began, I always noted that those vendors who are offering a “widget” based solely on the idea that people have needed that widget before are going out of business.
However, those businesses that are attempting to create an experience for their clients, are finding that people are still willing to pay good money for something that has a strong emotional impact and/ or will provide them with memories.
I will give you a personal example from a dining experience I had in 2011.
Back in November 2011, my wife and I had dinner at Michel at Tyson’s Corner, one of the most recent restaurants opened by legendary French chef Michel Richard.
The food was exemplary, a kind of French-American bistro gone uber-gourmet. However, the highlight of the night was the “chicken” we had for dessert, one of Richard’s signature, whimsical dishes.
See for yourself.
This is a meringue, shaped like a hen, filled with luscious ice cream and sitting atop a nest of brittle sugar “straw,” whipped cream, and a pool of caramel syrup.
It was extraordinary. The combination of textures and tastes was beyond anything my wife or I had seen in a dessert. Adding to this explosion of flavors was the fun of eating “chicken” as a dessert food and this was possibly the most memorable dessert of our lives.
Indeed, this was more than just a dessert, it was a marketing tool for the restaurant as a whole: as soon as our order came out, every table around us ordered one too. By the time we left, I counted six other tables having “chicken” for dessert.
In plain terms, we ordered a dessert, but Chef Richard delivered an “experience.” My wife and I laughed and shared many delightful moments as we butchered our “chicken.” Because of this, I didn’t care that the dessert cost $12. In fact, I probably would have paid $17 or more for it and not even batted an eye.
Now, compare this to your average dessert (brownie, sundae, etc) at most restaurants. How often do you find yourself remembering a random dessert you had months ago? From a business perspective, how many times have you found every other table around you ordering a dessert after they see yours?
This is what I mean by selling an experience. It’s no longer about products, it’s about creating memories and emotional experiences that touch people. That’s where the money will be going forward.
I’ll give you another example.
At a recent dinner party I struck up a conversation with a young entrepreneur who had recently attained an MBA from Harvard. One of his classmates was Will Dean, a former British counter-terrorism agent who competed in marathons, triathlons and the like.
Dean was bored with the average fitness course, so he decided to launch Tough Mudder, a 10-12 mile fitness course that is based on the kind of courses and challenges he had to overcome during his training for the British Special forces (we’re talking about 12 foot walls, underground mud tunnels, etc).
The company’s entire start up cost was probably less than $50K: all they had to do was rent a track of land and build and dig the obstacles (walls, tunnels, etc.).
However, people all over the country have lined up in droves for the experience of pushing themselves to the limit at one of these events. The whole thing is like an enormous playground for adults. It challenges you physically, mentally, and emotionally.
And people are willing to pay north of $150 per pop to participate. Spectators have to pay $50 just to watch. Small wonder that the company made $2.2 million in revenues in its first year and $22 million in its second year. That’s $22 million in revenues, from a glorified fitness course, that was launched DURING the current Depression.
This is what I meant by innovation and creativity finding pockets of wealth. Will Dean saw a niche in the fitness industry (an event that was more challenging and less monotonous than traditional marathons and other fitness tests). He then moved to capitalize on that niche with minimal risk by keeping his start-up costs to a minimum. And today he’s sitting atop a $20 million business with numerous corporate sponsors.
You can learn more about Tough Mudder here:
Dean’s story shows, in no uncertain terms, that if you’re able to think creatively about pre-existing industries, you can make an absolute fortune, even during times of severe economic contraction.
The above two examples concern generating value for entrepreneurs. My final story pertains to seeking out wealth generating opportunities from an investing standpoint.
The financial markets today are heavily if not completely reliant on Central Bank intervention. We now have a time in which virtually every traditional asset class under the sun is overvalued and susceptible to a crash (this is even true for Gold if we get another 2008 event).
With that in mind, investors are going to need to look outside of the capital markets for opportunities to generate returns. Indeed, I fully believe that performing assets (things like lead mines, shopping malls or wood mills) will potentially offer better returns than stocks for instance.
I’ll give you a final example.
A friend of mine is a master baker. Having trained both in the US and in France, he’s now at the level that Yale and other large organizations hire him as a consultant to design their breads and pastries.
Recently my friend told me that he had decided to launch a new bakery (he sold his last one several years ago). Given his reputation, skill, and earlier success (he’s run several very successful bakeries in the past) he would have little if any trouble raising capital for the business.
However, rather than seeking out loans from a bank or other financial entity that would want a claim on his private assets in return, he’s chosen to raise capital from private investors. And he’s offering a 10% yield on all loans.
This is a heck of a return relative to most savings accounts (0.15% at best) or even Treasuries (the 30-year yields less than 4%). And he’s only looking to need the money for 1-2 years before paying it back.
Thus we have a serial entrepreneur, with a nationally recognized talent, offering investors a 10% yield on loans made to fund his latest venture. Having seen his spreadsheets and projections, even by extremely conservative estimates his business should be producing close to $500K in EBITDA within the first three years.
As I said before, there are opportunities to generate value in the real economy today, outside of the volatile and manipulated capital markets. With that in mind, all investors should devote some time over the coming months to seeking out investments outside of what’s on Yahoo! Finance and CNBC. I fully believe some of the greatest opportunities available today will be in the real economy, NOT seen on a stock screen.
For more market insights as well as real world business ideas to create wealth in this current economic contraction, swing by www.gainspainscapital.com. We feature a number of free Special Reports that are designed to help investors navigate the capital markets safely and securely.
Chief Market Strategist