This Week in Barrons – 5-15-2016:
Ms. Yellen:
After seeing
the movie ‘Money Monster’, I’m trying to get my arms around today’s plight of
the U.S. manufacturing worker. Verizon is
a great example of flat or declining worker pay combined with continued
outsourcing of jobs as a result of NAFTA and other free trade agreements in our
manufacturing sector. SF reminded me
that we are both old enough to remember when manufacturing employees had
pensions and a livable wage. Currently Verizon
(VZ) workers are on strike while VZ corporate continues to outsource
manufacturing to low-wage, non-union contractors in Mexico, the Philippines and
the Dominican Republic.
How much can
Verizon save by moving jobs to Mexico you ask?
If it is at all similar to the auto sector, Verizon can save $50 per HOUR
per WORKER by sending jobs ‘south-of-the-border’. GM reports that their workers
in Mexico earn wages and benefits of $26 per DAY (less than $4 an HOUR) – while
autoworkers in the U.S. earn (with benefits) between $50 and $55 per hour. http://www.bloomberg.com/news/articles/2010-06-09/gm-ford-to-accelerate-growth-at-mexico-plants-where-workers-get-26-a-day.
After
watching ‘Money Monster’, I asked myself: “Why didn’t Verizon (VZ) shifted
their jobs to Mexico prior to 2016?”
After all, this wage discrepancy just didn’t pop-up over night. But shifting jobs to Mexico is a risky move. When analyzing decisions I always start with
the financials. Verizon revenues have
been flat to growing at 4% per year. However,
they borrowed $52B in 2013 / 2014 in order to buy-back almost $60B (25%) of
their own stock. They chose buying back stock
and increased officer compensation over: increased R&D, capital
improvements, and paying a competitive wage to their workers. One of the consequences of that decision is
the necessity of VZ to dramatically lower costs (shift jobs to Mexico) in order
to save enough money to meet stockholder expectations and to pay back those
stock buyback loans. You see if VZ’s
stock does NOT continue to increase in price, borrowing money to buy more of IT
could be viewed as doubling-down in Vegas - an inept decision and potential
grounds for dismissal of the officers.
Ms. Yellen,
I’ve talked endlessly about the ‘unintended consequences’ of keeping interest
rates low for extended periods of time (ZIRP), and the obvious incentives it
gives corporations to borrow tremendous amounts of debt at near zero rates. What we’re seeing is that everyone has their
price – even corporate CEOs. If we allow
corporations to ridiculously compensate their officers (at the expense of the
workers) – they will. Because of their
officer’s personal greed, the ONLY choice left to Verizon is to absorb the risk
of moving manufacturing to Mexico. They
have boxed themselves into a decision-making corner – where the only way out is
risky movement of their manufacturing to Mexico. Their officers will rationalize this as a cost-cutting
move, but (mark my words) it was a move caused by ZIRP and personal greed. Ms. Yellen, you cannot control personal greed,
but you can control ZIRP.
I understand
it’s an election year, and you would like to keep your job. But for the sake of doing what’s right, and
for the sake of the American worker – would you please continue to raise
interest rates, allow the markets to correct, invite investing in corporate
fundamentals back into the picture, and eventually bring our manufacturing jobs
BACK to the U.S? It pains me to say this
Ms. Yellen, but if you don’t – President Trump will.
The Market:
Have you noticed the
number of bankruptcies in the oil sector this year? The following graphic spells it out better
than I ever could. If you wonder why the
financial sector is weak, you need look no further than who’s loaning money to
these bankrupt oil companies.
Factual Top 10:
-
#1 Total business sales have been declining
for nearly two years, and are now down 15% from late 2014.
-
#2 Corporate earnings have declined for four
consecutive quarters, and S&P profits are down 7.1% quarter over corresponding
quarter. This never happens outside of a
recession.
-
#3 April’s commercial bankruptcies were up 32%
and Chapter 11 filings increased 67% over the same period last year.
-
#4 U.S. rail traffic was 11% lower last month
than during the corresponding period in 2015.
-
#5 Challenger, Gray & Christmas reported
that U.S. firms announced 35% more job cuts during April than during March.
So far this year, job cuts are running 24% above 2015.
-
#6 U.S. GDP grew at just a 0.5% rate during
the first quarter of 2016. This was the
third consecutive time that GDP has declined compared to the previous quarter.
-
#7 Barack Obama is poised to become the first
U.S. President to never have a single year when the economy grew by more than
3%.
-
#8 Half of the population couldn't find $400
for an emergency without selling or borrowing something. 51% of the people have no retirement savings,
and 1 in 4 families receive Government assistance.
-
#9 Carl Icahn is 150% net short this stock
market. He is convinced we're staring at
a 20% decline or more. Smart money has now fled the market for the
longest stretch in history.
-
#10 The Fed has said publicly "Falling
asset prices could produce systemic risk". Translated: If
stocks fall, it could blow up the system!
Friday broke a pattern that
could become important. On most Friday's
(no matter how red the market was) the Central Banks would magically levitate the
market to where it was either green (or almost green) for the close. That was done to make the market look healthy
for the weekend TV shows. But last Friday,
that pattern was broken. At 1 pm the
S&P was a bit red, hovering around 2058, and instead of the customary late
Friday rally, the Central Banks allowed it to roll over, and we ended the day
down 17 S&P points. We closed WELL
below the S&P 50-day moving average – which is never a good sign for the
bulls.
Now this is where things
get really interesting. While the 50-day
moving average is psychologically important, technically – it doesn't carry
nearly the weight that it used to in years gone by. It (therefore) isn't
the end of the world that the S&P lost it’s 50-day moving average level.
It does (however) become a little more interesting because the DOW also lost
its 50-day moving average. So we have
both major indices UNDER their respective important levels.
The real test for the
S&P however will be at the 2040 level. If you look back to the beginning of April,
you will see no less than 6 days in a row, where that level held as support. That is significant. If we lose 2040 on a closing basis, you can
pretty much redraw the charts, and we will be in ‘no question’ correction
territory.
Friday we closed at 2046. I’m sure on Monday that the Central Banks will
step up to the plate and do whatever they can to keep things higher. But the struggle is becoming epic, and right
now it feels like the Central Banks are going to fail. For this week I think we're going to see the
market bounce along that 2040 level – trading sideways like those 6 days in early
April. But then, if we don't see a lot of
buy back action, or some more central bank buying – we are heading lower.
What about a bounce? Could we instead get a mindless romp higher
like we did this past Tuesday? Absolutely, but I think that it will fade out
just like the previous one did. The ONLY
thing keeping this market up is FUNNY MONEY, and even that's not having the
same effect. As always, be careful out
there.
TIPS:
Congrats to all who have
followed our AG trade – it’s currently up over 900%. I will be introducing a new trade next week,
similar to that one.
I am:
-
Long various
mining stocks: AG, AUY, DRD, EGO, FFMGF, FSM, GFI, IAG, KGC, and PAAS,
-
Long an oil
supplier: REN @ $0.56,
-
Buy FB – May –
Butterfly centered around $120,
-
Sold RGR – May –
Put Credit Spread – 55 / 60,
-
Long RUT – May –
Butterfly – 1000 / 1080 / 1130,
-
Long TLT – May –
Call Debit Spread – 128 / 133,
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts
and trades – my handle is: taylorpamm.
Please be safe out there!
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