Tag Archives: economy

labor force participation in the US

June 30, 2016 By in employment, Uncategorized Tags: , , , , , Leave a comment

A little more than a week ago, the government released a report by the President’s Council of Economic Advisers on the declining labor force participation among prime-age men.  “Prime-age” is defined as being between 24 and 54.

The gist of the report:

–the US has seen a continuing, steady falloff in labor force participation by prime-age men since the 1960s

–the trend is similar in other advanced countries, but more severe in the the US than anywhere other than in Italy

–the decline comes across all age groups and ethnicities, although the worst experience is among black men

–education plays a part.  In 1964, labor participation among men with a college degree was 98%; last year the figure was 94%.  In 1964, the rate among men with less education was 97%; last year it was 83%

–relative wages for less-educated men have fallen as well, from 80% of the college graduate wage in the 1970s to 60% now

–the mechanism for the decline in participation appears to be that jobs are eliminated during recession, with only some of the positions restored during the ensuing recovery

Two other points:

–the average country in the OECD (Organization for Economic Cooperation and Development = advanced nations) spends 6x the percentage of GDP that the US does on job search and job retraining for people out of work.  That puts the US at the bottom of the OECD pile.  If the unemployment people are anything like the VA, the situation is even worse than the figures imply.

–an unusually large number of US males have been in jail at one time or another in their lives.  They have a particularly hard time finding jobs afterward.

My thoughts:

–the situation described in the report is obviously not new, but, worldwide, we may have reached a tipping point in voter discontent

–economic theory maintains that the best position for a country is to allow free trade.  It stresses, however, that for this openness to create real benefits, governments must step in when globalization causes job losses to retrain displaced workers and reintegrate them into the workforce.  That’s the part Washington seems to have systematically ignored.

The poor employment situation for large chunks of the population is not going to go away by itself.  The solution is probably not to elect a latter-day Ned Ludd, however.  The government shakeup in the UK that appears to be happening in the wake of the “Leave” vote on Brexit may end up being a template for the US as well.

oil at $50 a barrel

June 8, 2016 By in oil and natural gas, shale oil, Uncategorized Tags: , , , , , , , , Leave a comment

It has been a wild ride.

Crude began to run up in early 2007.  It went from $50 a barrel to a peak of around $150 in mid-2008.  Recession caused the price to plunge to $30 a barrel late that year.  From there it began a second, slower climb that saw it break back above $100 in early 2011. Crude meandered between $100 and $125 until mid-2014, when increasing shale oil production from the US caused supply to outstrip demand by about 1% – 2% a year.  That was enough to cause a second slide, again to $30, that appears to have ended this February.

Since then, the price has rebounded to $50 a barrel, where it sits now.

To recap:  $50, then $150, then $30, then $125, then $30, now $50.

Where to from here?

We know that supply remains relatively steady, with additions to output from the Middle East offsetting falls in US shale oil liftings caused by lower prices.  We also know that lower prices have stimulated consumption.

The past eight years have also shown us that crude can have exaggerated reactions to small shifts in supply and/or demand.  So, in one sense, no knows what the crude oil market will do next.

On the other hand, we can set some parameters.

–the first is psychological.  The oil price has fallen to $30 a barrel twice in the last eight years.  The first was in the depths of the worst recession since the Great Depression.  The second was during a period of general market craziness earlier this year (caused, I think, by algorithms run amok).  I think it’s a reasonable assumption that prices will have a difficult time getting that low again–and if they do that they won’t stay there for long.

–the second is physical, and is about shale oil.  Overall shale oil output in the US is now shrinking.  Firms still pumping out shale oil are of two types:  companies being forced by their banks to sell oil to repay loans; and companies whose costs are low enough that they’re making a reasonable profit at today’s prices.  Cash flow from the first group is by and large going to creditors, so this output will diminish as existing wells are tapped out.  That’s probably happening right now, since shale oil wells typically have very short lives. This means, I think, the question about when new supply comes to market–putting a cap on prices, and perhaps causing them to weaken–comes down to when healthy shale oil firms will uncap existing, non-producing wells, and/or begin to drill new ones in large enough amounts to reverse the current output shrinkage.

I’m guessing–and that’s all it is, a guess–the magic number is $60 a barrel.

My personal conclusion, therefore, is that the crude price may still have a gentle upward bias, but that most of the bounce up from $30 is behind us.

 

 

 

currency effects on US companies’ 1Q16 earnings

March 16, 2016 By in currency effects, Uncategorized Tags: , , , , , , 1 Comment

Over the past year or more, the international portion of the earnings results of US publicly traded companies has suffered from the strength of the US dollar.

Data dump:

-By and large, US products sold in foreign countries are priced in local currency.  When the dollar rises, the dollar value of foreign sales falls.  Speaking in the most general terms, firms can raise prices without damaging sales volumes only at the rate of local inflation, meaning that it can take quite a while for a US company to recoup a currency-driven loss through price increases.

-The rise in the dollar has come from two sources:

–the collapse of the currencies of emerging countries with unsound government finances and radically dependent on exports of natural resources like oil and base metals, and

–the greater strength of the US economy vs. trading partners like the EU and Japan.

-What appears on the income statement as a currency gain or loss is the result of a complex process with two components:  cash flows; and an adjustment of balance sheet asset values. There’s no easy way to figure out what the exact number will be.

-We do know, however, the very important fact that the dollar has been weakening against the euro and the yen for the past several months.  If the quarter were to end today, the euro would be 3.2% stronger vs. the dollar than at the end of 1Q15.  The yen is now 5% stronger than it was at the end of last March.  The Chinese renminbi is 5% weaker against the dollar than this time a year ago, but there’s much greater scope to raise prices in China.

My conclusion:  US companies with mainly and EU or Japanese assets/earnings will likely post modest foreign exchange gains during 1Q16 vs. large losses in 1Q15.

Hedging?  Many international  firms try, more or less successfully, to smooth their foreign earnings by hedging.  This activity is crucial for an exporter with long lead times, cosmetic for everyone else.  The key point, however, is that in my experience when hedging results in a gain, this is recognized in operating profit and companies say nothing.  When the hedging makes a loss, companies disclose the figure and argue that this is a non-recurring item.  For whatever reason, Wall Street usually ignores a loss of this type.

So, ex emerging markets, currency can be a significant positive surprise for internationally-oriented firms this quarter, instead of the earnings drag it has been in recent quarters.  My guess is that Wall Street hasn’t factored this likelihood into prices yet.

 

 

 

 

Shaping a Portfolio for 2016: summing things up

December 11, 2015 By in Shaping a Portfolio for 2016, Uncategorized Tags: , , , , 1 Comment

Today I’ll try to put numbers to my guesses about growth around the world next year.  I think the best way to do this is in two steps, first without trying to factor in what I think will be a negative influence from natural resources industries, and then making both economic and stock market adjustments for them in a second round of analysis.

the US

We’re likely to have trend growth in the US next year, meaning a total of +4% expansion, consisting of +2% real and + 2% inflation.  Because publicly traded companies are typically the best and the brightest, this will probably translate into +8% growth in earnings.

Let’s say that Fed interest rate rises have little net effect on growth and that the dollar has peaked (meaning that headwind is gone).  This may be a bit too optimistic.

I’m guessing that, unlike the past couple of years of aggressive share buybacks, we won’t companies retire more shares than to offset the issuance of new ones to employees through stock option plans. Therefore, 8% earnings growth will translate into +8% growth in earnings per share.

Given that half the earnings of the S&P 500 come from the US, this means the domestic contribution to S&P 500 earnings growth will be +4%.

the EU

The EU is maybe two years behind the US in recovery from recession.  But it has clearly turned the corner and will grow in 2016.  It also has the tailwind of substantial currency depreciation behind it, and the strength of Greater China and the US, major export customers.

Europe is also a substantial beneficiary of the fall in energy prices, although that plus is tempered a bit by the weakness of the euro against the dollar.

For all these reasons, the EU will likely enjoy above-trend growth next year.

Let’s say that the EU will expand by +2.5% real, with +1.5% inflation, for a total of +4%.  That probably also translates into +8% growth in profits for S&P subsidiaries located there, and a +8% advance in eps.

Given that 25% of the profits of the S&P 500 come from the EU, this means that region’s contribution to index earnings will be +2%.

emerging markets

Let’s separate emerging markets into Greater China and everyone else.  In broad strokes, the everyone else are natural resources producers, who are in recession and who will make a negative contribution to S&P 500 growth.  The question is how negative the situation will be.  -3%?

On the other hand, I think that mainland China and its direct sphere of economic influence will have a better 2016 than the consensus now expects.  Let’s say +6%.

If we figure that China and the rest are both roughly equal in size, this implies that emerging markets, which account for 25% of the profits of the S&P, will make a positive contribution to growth in earnings, but a negligible one.  Let’s say +0.5%.

the total

My back of the envelope analysis suggests that the growth in S&P 500 profits will come in at +6% – +7%.  next year.  Not a banner result, but still enough to nudge the index ahead.

the price earnings multiple

In what will be a period of rising interest rates, it seems that there can be no cogent argument for PE multiple expansion in 2016.  If anything, multiple contraction should be the order of the day.

On the other hand, the Fed’s intentions have been widely telegraphed for an extremely long time, so it’s equally hard to argue that the market hasn’t already factored into today’s prices a large portion of any negative effect.  In fact, it seems to me that the market PE already incorporates in it all the tightening the Fed is likely to do.  Nevertheless, there’s always someone who hasn’t gotten the memo, so there will be some negative effect, at least initially.

The most prudent assumption, I think, is that Fed tightening will make little difference to the PE.  The contrarian in me says the money-making stance to take is that the PE will rise once the market sees that Fed tightening will only occur very slowly.  But I’m not willing to take that risk.

a market of stocks

If I’m correct, 2016 will be a mildly positive year, where outperformance will come from astute stock selection rather than playing macro trends.

On Monday:  adjusting for natural resources, especially oil.

 

 

 

 

 

segmenting Millennials

November 25, 2015 By in economics, Millennials vs. Baby Boomers, Millennials vs. Boomers, Uncategorized Tags: , , , , , Leave a comment

I got an e-“book” from NPD, the retail data and analysis people, the other day that argues we as investors shouldn’t look at Millennials as a coherent group, but rather segment them by age ( I wrote “book” because it’s ten pages long).  Here’s what it says:

general

Millennials are an important demographic group in one sense because they’re the largest segment in the US by age, having recently passed the Baby Boom in size.  More important, they’re in the ascendant economically, while Boomers are gradually fading into retirement, with attendant lower incomes and weakening propensity to spend.  In addition, 13.8% of those 18 -29 are either unemployed or out of the workforce.  This suggests that this group will show better than average income–and spending–growth as Boomer retirement and economic expansion make more jobs available.

Millennials are projected to account for a third of total US retail spending within the next five years.

segmenting

NPD divides Millennials into younger (18 – 24) and older (25 -34).

Older Millennials:

74% white

40% married (44% have been married at least once)

40% have children

have more money

are less optimistic

favor Donald Trump.

 

Younger Millennials:

68% white

10% married (20% have been at least once)

10% have children

have less money (many are still in school)

are more optimistic

favor Bernie Sanders

 

Differing retail habits on Friday.