Industrial Jobs Returning Via Deficit Spending

We are now seeing a trend, assuming the forecast is correct: Manufacturing in U.S. Probably Grew for Sixth Straight Month. Here are excerpts:

Factories are stepping up production as stimulus-fueled gains in demand and record cutbacks in inventory boost orders. . .

Government stimulus helped spark rebounds in the housing and automobile industries, two of the most depressed areas during the recession . . .

Production gains are starting to encourage the hiring needed to ensure the recovery is sustained. . .

General Electric Co. is hiring workers in energy, health care and rail transportation, in part because governments’ economic-stimulus plans have helped lift demand.

GE, whose power-plant equipment generates one-third of the world’s electricity, is bidding to supply new passenger locomotives for Amtrak and in November announced a joint venture in China that would make high-speed rail locomotives that may add 200 U.S. jobs.

“We will create jobs in the United States that could not have been created any other way,” John Rice, chief executive officer of GE Technology Infrastructure, said of the rail programs in a Jan. 28 Bloomberg Television interview.

Please consider the quote from Mr. Rice. These jobs were only created from taxpayer funds. I do not know if they are for worthwhile projects, but it appears clear that socialist-style industrial policy is in effect here. Worse, it is incorrect to say that industrial hiring will "ensure the recovery is sustained". After all, there was a depression in 1920-21. Then there was hiring. There were 3 more recessions/depressions in the remainder of the 1920s. Similarly, the severe recession of 1958 ended with hiring by private industry. Yet there was a (mild) recession in 1960 that helped elect John F. Kennedy. If indeed Mr. Rice is correct and these jobs could only be created by government, that means they do not meet a need of the free market. All industrial jobs are cyclical, but those created by a heavily indebted government are at extra risk.

Meanwhile, unsaid in this cheerleader article is the fact that only about one-sixth of jobs in the U. S. are industrial. The length and depth of job losses shows that reviving industrial jobs, via money-printing and other budgetary gimmicks, does not ensure even an exit from the Great Recession/depression.

But rest assured, larger deficits are on the way, it appears. The government is pulling out all the stops. It is doubling down by making sure that its debt increases faster than private debt shrinks. Plus it is encouraging yet more municipal debt by planning to expand the Federally-subsidized Build America Bonds program.

All this debt is dangerous and ultimately creates more instability.

A few extra jobs at GE don't merit all this.

Copyright (C) Long Lake LLC 2010

Some New Data Not Colored Green as in Green Shoots

Data points we are noting:

1. From TrimTabs July 21:


The disconnection between perception and reality about the U.S. economy is stunning. As Wall Street gains confidence that the economy is recovering, declines in wages keep accelerating. Adjusting for the “Making Work Pay” tax credit, income tax withholdings plunged 9.6% y-o-y in the past week and two days (Friday, July 10 through Monday, July 20) and 6.8% y-o-y in the past three weeks and two days (Friday, June 26 through Monday, July 20). These declines are much steeper than the drop of 5.3% y-o-y in the past three months. Both we and our favorite official Washington economist are unaware of any calendar quirks skewing the data.

2. Next: Subprime-Mortgage Loss Forecast Is Raised by Standard & Poor's:

July 22 (Bloomberg) -- Standard & Poor’s again boosted its projections for losses from U.S. subprime mortgages backing securities, reflecting increasing delinquencies and defaults amid slumping home prices and growing unemployment.

Losses on loans backing 2006 securities will reach an average of about 32 percent of the original balances, while losses for similar 2007 bonds will total about 40 percent, the New York-based ratings firm said in a statement today. In February, S&P said the losses would total an average of 25 percent for 2006 bonds and 31 percent for 2007 securities.

3. Gallup has a nice graph reflecting polling on how people see their companies: Hiring, laying off, or neither.

I am unable to cut and paste it; click HERE to view it. Per the Gallup.com home page, 4% fewer respondents reported that their employer was hiring on the last survey. A look at the graph (first link) shows stability between percent of employers expanding/hiring vs. shrinking their workforces/firing, from December 2008 till now. Of course, during this time unemployment has been soaring. I'm not loving this trend, especially given the reality of a work force that is growing steadily and thus requires net hiring to keep the unemployment rate from rising, and the "New Normal" that older people are deferring retirement. I know of one local MD in his 70s who had to go back into practice due to investment losses. I'm sure he's not the only professional in that situation.

4. Larry Summers gave some downbeat comments within the past few days, suggesting that he was uncertain as to the pace of the expected economic upturn.

5. From a technical basis, here's a 3-month chart of GE, with the red line representing the 50 day simple moving average and the green line the 200 day sma. Bad news:
GE has moved below its 50 day ma, which has begun to descend. It never reached its 200 day sma. Concurrently, Yahoo reports that analyst estimates for GE's 2010 earnings have also begun to descend, from 95 cents 3 months ago, to 94 cents 7 days ago, to 92 cents currently. BofA ("BAC") has a stronger pattern but is not all that different, and perhaps ominously, 2010 earnings estimates for BAC keep dropping; click HERE to view them and scroll down to view EPS trends, "Next year/Dec.-10".

Meanwhile, CNBC may now be reporting that something like 200% of all reporting companies have beaten "estimates" from the group of deep thinkers laughingly called "analysts". No matter that IBM had to somehow lower its SG&A an astounding 19% to wow these seers on the bottom line while missing shrunken revenue estimates. (Note: DoctoRx is no longer long IBM, having sold it on strength this week.) Someone should tell someone else that a company can't starve itself and yet win either an endurance running race or a strength contest.

Nonetheless, what we also somewhat laughingly refer to as "money" has to go somewhere if one has investable funds. People who can afford the risk probably should have some money apportioned into dividend-paying stocks with strong short-term and long-term charts and a history of being shareholder friendly.

EBR will discuss its favorites over coming days: in its estimation, these are among the best of a mangy lot of pre-owned "in"-securities.

Copyright (C) Long Lake LLC 2009

GE Reports

GE has reported June financials that are not being well received by today's stock market voters.
Tangible book value is $13 Billion. Current stock market value is $123 Billion. A mere 4% writedown of GE Credit's receivables will wipe out all tangible book value.

Compliments of Calculated Risk, the conference call points out that adjusted for foreign exchange, second quarter orders were down 23% yoy. Here are CR's comments on GE's comments on their mortgage/real estate prognosis:

To summarize, they expect 30% of their non performing mortgage assets to cure, the value of the underlying assets in their mortgage book are down 12-18% from origination, they expect a 15% loss severity rate (including a modest benefit from mortgage insurance) - these guys must the gods of mortgage underwriting – if anyone wants to bet on the trend of future loss estimates, I’ll take the over – their corporate motto “Imagination at Work” seems fully appropriate here .

DoctoRx here now. GE cares not a whit for any blogger's advice, but here it is: cut the dividend to, say, 1% from the current 3.3% rate. As for the investment community, consider GE a possible CIT in the making. The idea that this overleveraged behemoth with operations ranging from theme parks to medical scanners to mortgage lending to-you name it- is a sensible company is strange. It's a polluted chimera that grew to maximize its share price and enrich Jack Welch amongst others, much as AIG grew to enrich its insiders.

GE stock could go anywhere, up or down, and from wherever it moves to, it could then go anywhere, up or down in either the same or a different direction. At least you know what IBM and J&J do.

Copyright (C) Long Lake LLC 2009

GE and Citi Beat the Street!

GE proudly announced today that earnings per share were down 40% from the year-ago quarter. We are thrilled to recognize that these earnings were a nickel per share above those of the all-seeing, all-knowing analysts.

The loss of GE's AAA rating merited a display on a supplemental slide that it remains well within the top 10-rated Dow 30 stocks, of which only 3 are AAA: XOM, JNJ, and MSFT (and of those, MSFT is only AAA-rated because it recently sold long-term debt for the first time; thus the AAA rating of MSFT is in fact reflective of a downgrade of its financial strength). The saddest thing about the top-10 listing is that T is the 10th highest rated Dow 30 stock with only an A rating.

Perhaps for the first time in modernity, nowhere in GE's press release or either of the additional presentations available on its website is any mention of book value. Econblog Review has therefore gone to Yahoo's Finance section and found GE's tangible book value for the years ending 12/31 2006-8. Here they are:

2006: $25.9 B
2007: $18.3 B
2008: $7.9 B

GE has a market cap of $130 B with a tangible book value of $8 B at the end of last year, and won't even tell investors in writing what that value was at the end of March this year. As a rough estimate, assume that GE's financial services arm accounts for half the company and half the book value. If it is worth even twice book, that leaves the non-financial part of GE selling for about 30X book. GE stock may be greatly overvalued, even at today's shrunken stock price.

In the meantime, we have the charade of financial firms beating analysts' estimates. Citi is the latest. How even an enabler of the financial industry such as Bloomberg has the gall to begin its review of earnings reports from JPM, GS and C with the statement that they beat estimates of the Street when they comprise the Street confounds the mind. Even the fact that C's earnings per common share were negative after payment of preferred stock dividends (in part to you know who) was reported after mentioning allegedly positive operating earnings.

Ignoring GE's and C's "bottom lines", there are many bottom lines for investors. The elephant in the room that is not commented upon much is that by most definitions, the U. S. economy is indeed in a Depression. That this Depression is not the Great Depression is irrelevant to the proper term to use. Retail sales are down an astounding approximate 10% year on year in real and nominal terms. The Fed reports that industrial activity is down low double digits in nominal terms year on year. 20% of the 2000 largest shopping malls have closed recently. Look at the giant companies in or essentially in bankruptcy (or, rescued from such by you and me; don't you feel rich that you could afford to bail these guys out?):

The largest auto company: GM
The two largest mortgage companies: FNM and FRE
The largest insurer: AIG
The largest financial services company, and 2 other giants: C, LEH, BSC
The second largest mall operator: GGP.

There is one defining characteristic of these companies: They were debt-driven companies.

Via the theory of alternation of cycles, these sorts of companies will not be good long-term investments over the next investment/economic cycle. Debt-free companies, and those whose assets are visible, are more likely to provide better risk-rewards. This includes information and medical technology companies, as well as well-positioned natural resource companies with strong financial positions. Not that many such underpriced investment opportunities are available in the public markets. Sometimes the best investment strategy is the best one in life: just sit there, and keep on thinking and learning. A 2% CD or Treasury at a time of falling prices is not disaster.


Copyright (C) Long Lake LLC 2009

As goes GE . . .

Bloomberg.com reports on General Electric's dividend cut announced yesterday by focusing on its CEO, Jeffrey Immelt, in "Jeffrey Immelt Faces More ‘Hours of Doom’ With GE Dividend Cut".

From the GE website:

GE traces its beginnings to Thomas A. Edison, who established Edison Electric Light Company in 1878. In 1892, a merger of Edison General Electric Company and Thomson-Houston Electric Company created General Electric Company. GE is the only company listed in the Dow Jones Industrial Index today that was also included in the original index in 1896.

GE has paid dividends continuously since 1899 and last cut its dividend during the Great Depression.

Like America, GE has changed. From Bloomberg.com:

More than 50 percent of GE’s profit in recent years has come from its GE Capital unit, which includes private-label credit cards, real estate, bankruptcy financing and mid-sized company lending, making it a competitor to most banks.

So, GE has for some years been a financial company in drag, despite a very different public image. The company that lit up America morphed into nothing better than a lender of money.

Before this bear market started in 2007, GE sold for about 10 times its tangible book value, even though neither other financial companies nor mature industrial companies merited that valuation. Could it be that GE was so highly rewarded because it rewarded the financial industry? Here's the evidence:

Since 2003, GE has shed more than $50 billion in businesses and acquired more than $100 billion, eliminating divisions like plastics and adding to health care. Before the credit crisis began in 2007, he sold the U.S. sub-prime mortgage business, which catered to the least creditworthy borrowers. Early in his tenure, he shed all of GE’s insurance divisions.

Basically, the thesis here is that there was an unwarranted love-in between GE and the "analysts". GE did deal after deal, paying large premiums for not-so-profitable medical companies, and the brokerage firms took their fees for arranging the deals and didn't look too hard at how GE could be a perpetual growth machine.

A GE spin-off, the insurance and financial products company Genworth, was spun off to shareholders in 2004. What started as a $20 stock is now around $1. Genworth, like GE, has roots that go back to the 1870s.

What has happened in America?

I have just finished reading Wall Street Under Oath, published in 1939 by Judge Ferdinand Pecora, who led the Senate Commission in 1933 that investigated the Crash.

It's clear that what happened, starting in the 1990s, was that the financial community set out to defraud investors. Everyone on Wall Street knew there is never a "new era" of stock valuations, no matter how exciting a new technology appears to be. However, equity losses suffered by gullible investors were equalled by equity gains by insiders, so all that happened was that some people got rich or richer, and some people lost their investment.

What was new about the 1990s was not the old stock game of "pump and dump", which has occurred over and over again. What was new was that the economic expansion was the first one in American history in which the financial health of the average American company declined. In other words, companies were already leveraging up to buy back their own stock so that they could report a meaningless improvement in Earnings per Share, or in other ways companies were using borrowed funds to leverage their earnings.

Everyone in finance knows that leveraged earnings are riskier than unleveraged ones and deserve a lower price-earnings ratio; yet the Street ginned up a mania that brought P/E's to record levels not far below where Japan's got at the peak of its financial bubble in 1989.

When the 2001 recession and bear market hit, the financial community doubled down. P/E's bottomed at levels where they usually peaked when a bull market ended, rather than where a bear market ended. In other words, the New Era of stock over-valuation was made to persist via stimulative fiscal and monetary policy and greed on the Street.

The financial community created the illusion of stability with a 2003-7 stock market climb that set a record for being the longest bull market without even a 7-10% correction. Might that have been a result of stock manipulation, one wonders in retrospect?

This time, unlike the 2001-2 bear market, the action was in debt, not equity. To keep it simple, a lender values a loan as an asset, but if the loan defaults, both the borrower and lender are losers. Lending is riskier to a society than a straightforward sale, such as a share of stock or a kitchen remodel paid for in cash. It is also more difficult to value a loan than a kitchen remodel, a light bulb, or an aircraft engine. The remodeled kitchen has a value and has a use; the loan can become worthless and has no intrinsic use to the lender that owns the loan. 

At the peak of the economic cycle two years ago, it is said that 40% of the S&P 500's earnings were financial in nature. We now know that most or all, or more than all, of those financial earnings were not earnings at all: the loans just hadn't had enough time to go bad.

GE is thus a close example of America's financial status: old, misunderstood, over-financialized, and in a tailspin.

GE has let its shareholders down in a big way.

America, the owner of the world's reserve currency, has let the world down big-time, as well.

For that reason, serious people are accumulating a much older currency called gold.

Copyright (C) Long Lake LLC 2009

Li Whiz!

Infectious Greed links today to a Wired article, "Recipe for Disaster", about the origins of the CDO mess. The piece highlights a mathematical formula developed by Dr. David Li. More interesting perhaps is a WSJ article linked to in the Wired article from 2005 about the same topic: "Slices of Risk: How a Formula Ignited Market that Burned Some Big Investors".

The 2005 WSJ article begins:

When a credit agency downgraded General Motors Corp.'s debt in May, the auto maker's securities sank. But it wasn't just holders of GM shares and bonds who felt the pain.

Like the proverbial flap of a butterfly's wings rippling into a tornado, GM's woes caused hedge funds around the world to lose hundreds of millions of dollars in other investments on behalf of wealthy individuals, institutions like university endowments -- and, via pension funds, regular folk.

Please read the whole thing. It is astonishing, 3 1/2 years later, to see that the WSJ was reporting that the three largest U.S. banking institutions had about $3 Trillion of exposure to CDOs and credit default swaps, the underpinning for which related to a theoretical complex mathematical formula (which is shown, incomprehensibly, in the Wired article). Dr. Xi's own ambivalence about his formula comes through, as does, in retrospect the arrogance, greed and stupidity of the financial companies that knew they were risking vast sums of money they did not have.

Now that these companies, Citigroup, BofA and JPMorgan Chase, are all being kept "alive" by taxpayers, it is even more maddening to realize that all their risks were disclosed long ago.
This makes the call by such interested parties as Bill Gross of PIMCO (the world's largest bond fund) to protect those who own corporate bonds of these companies nothing but self-serving claptrap. Every systemically important owner of the bonds issued by these financial holding companies knew or should have known that these were risky bonds.

No one but depositors should be protected from the insolvency of these companies. The sooner the guillotine falls, the better. And it looks as if Europe's big banks are in the same boat.

The good news is that all this is intangible stuff. The gamblers who lost need to pay the price. For every losing bet, there is a winner on the other side. Losing gamblers who can't pay their debts can suffer the consequences by working things out with the winners who can't collect. Government, through its various powers, needs to make this process happen ASAP and has been way behind the curve for years.

The productive capacity of the world is undiminished. The powers-that-be need to let failing companies fail and work together day and night to cancel out enough debt and other aspects of the over-financialization of the Western world so that normal business can continue and resume.

The shape of the financial markets is indicating that the more basic the asset, the better. Thus, gold and governmental debt show strength. Unpredictable, hidden "stuff" such as that within JPMorgan Chase and GE Capital are seeing money rush out. Unlike GE stock, which might go to zero, oil has a real use and will not go to zero so long as modern civilization as we know it exists.

So long as business and government continue to flail away and thus fail us, the debt deflation will continue. In that situation, short-to-intermediate highly secure credits, such as U.S. Treasury debt or demand deposits in a strong bank with FDIC coverage in addition, appear to be appropriate for funds that are not allocated as pure risk capital.

Copyright (C) Long Lake LLC 2009

GE Channels Sartre's No Exit; and the End of an Era

Do you want to own a stock whose CEO wears this expression?








Or a stock with a long-term chart that has broken down as this one has?















Or that has terrible earnings momentum, poor earnings quality, a shaky dividend and a likely downgrading of its credit rating?

Well, neither do I, but listen to a money manager:

"'People are going back to scratching their heads and thinking, 'How are these guys going to do it?'" said Peter Sorrentino, senior portfolio manager of Huntington Asset Advisors, which holds 4.8 million GE shares in its funds." (From AP, "GE profit drops 46 pct as finance unit struggles")

What a great quote. Think he's thrilled about his ownership of almost 5 million shares of what turned out to be a dog?

The chart is a year or so out of phase, but it is not much different from the chart of Fannie and Freddie, that of AIG, that of Citigroup, that of BofA, etc. etc. General Electric has lost its way. There is no business exit for it. All of its business lines except medical are in sharp down-phases, and medical is not so hot either due to constrained hospital budgets. This is at least a Great Recession and it is bringing back to earth every stock I know of that has been fundamentally overvalued, including truly great companies both large and not-so-large that really make products that power the global economy, such as Microsoft, Intel, and Intuitive Surgical. There is so little legitimate buying power on Wall Street and Main Street that high-grade muni bonds continue to trade at ridiculous yields relative to Treasuries. Who needs stocks with lots of air left in their valuations? And who needs stocks such as Alcoa with no air in their valuations but no profits either?

Every single shareholder in it who bought GE in the last thirteen years has an unrealized loss on it.

This is a sad state of affairs.

It did not develop in secret. In 1990, Ed Hyman, then the leading Wall Street economist, predicted in an interview that because going back to the 1940s, every decade had had good to very good stock returns except the 1970s, the 1990s were due, by regression to the mean, to have subpar stock returns.

What actually happened in the 1990s was the greatest stock bubble in many, many, many years, exceeding the valuations of 1929 by far. Now we are engaged in a Great Recession (or worse, heavens forfend), and it is simply bringing stock valuations back to earth in an economy that leaves "creative" companies such as GE no place to jump, no new story to try to sell investors, and most importantly no persuasive pitchman, because their enablers on Wall Street are going, going, gone.

The likely end result will be a saner, plainer economy and a saner, plainer stock market that has sufficient undervaluation that conventional valuations can be used by conservative people to say that yes, this company actually has a lot of cash, it has a lot of physical assets, and it not only has profits but it also has unused potential earnings power that can be realized if the economy just ambles along at a slow pace, and it pays a safe dividend that allows you to sit while these corporate assets get turned into increased earnings and free cash flow.

As this blog has demonstrated recently, one stock market titan after another has been failing that valuation test. The stock bubble of the 1990s, combined with an abortive recession 7-8 years ago, combined with a credit bubble and the general over-financialization of America and many other countries, have simply led to an economy and common stocks each of which have no exit to the sunlight except by going down the stairs to the basement from which some companies never escape.

If we and our Government do not panic, this cycle will turn up one of these days. I for one am going to enjoy the Florida and California sunshine as the seasons allow and not lose sleep over an economy that I can't control. And while I will root for GE to get back where it once belonged, I wouldn't want to own its stock at least till the sun shines brightly on the economy.

Copyright (C) Long Lake LLC 2009

GE Shrinks

The first thing one notices about the GE earnings release today is the reader-unfriendliness of the title, along with the lack of information about the actual 4th quarter results:

"GE Earned $18.1B in ‘08; 4Q ‘08 Results in Line with December Outlook; Industrial CFOA of $16.7B up 5%; Cash on Balance Sheet Grew from $16B in 3Q to $48B at YE".

The next thing at least this scribe noted is the current GE motto: "Imagination at Work". In these times, we assume that the imagination relates to earnings manipulation.

In any case, we don't care much about earnings. We care a bit about outlook ("We expect 2009 to be extremely difficult."). We don't give a hoot about dividends, which can lie. We also don't care about a AAA rating. Clearly GE is in practice not a triple-A company, of which there are almost none left in America. (A headline today in Bloomberg.com suggests that France may stop being a AAA-rated country.)

What really matters here, as readers will have noticed, in this environment, is equity. Here's the real bad news. As of 12/31/08, GE had stockholder's equity after goodwill and intangibles of 8 billion dollars. A year early, the same number was 18.3 billion dollars. So the Company is down $10 B in tangible equity. Great year, guys! Keep paying out those dividends!

The corporation as a whole reports tangible equity of $8 B. GE Capital reports $365 B in net receivables.

At the close of business yesterday, GE had a stock market value of $134 Billion. Of this, $126 Billion is "air" under Generally Accepted Accounting Principles. Let Wall Street's geniuses with their valuation models pick fair value and a stock price target for this wheezing behemoth that even today is predicting double digit growth as soon as the recession ends. I can't even guess at what this company is worth. As far as I'm concerned, unthinkable though it sounds, this stock could have no bottom.

Copyright (C) Long Lake LLC