Middle Class Destruction – Business Owners Take Heed

I’m forecasting a secular decline in the demand for goods and services in the U.S. based on the destruction of what once was a thriving middle class in America.  Recent evidence supports this including downward revisions to Q1 GDP from 2.5% to 1.8% and then finally 1.1%.  And those are the stated numbers provided by your government which are prone to optimism.  The reality is likely much worse as I’ve seen reports from respected economic analysts suggesting that we have been in a recession, i.e. no economic growth, since 2005.

The Federal Reserve in its Federal Open Market Committee statement earlier this week downgraded the strength of the economy by changing just one word in its 500 word statement from its last report.  The word ‘modest’ was used to describe the Fed’s view of economic growth replacing the prior term ‘moderate’.  Economic trends are worsening and business owners had better take heed!

The prominent middle class and economic engine of the U.S. has struggled to maintain its living standard since the 1960’s.  Where once the male was the sole bread winner and had the ability to buy a home, two cars, take a couple of nice vacations a year, send his kids to a Division 1 college and also save for retirement, that once reality has now become a fantasy.  Ravaged by the inflation of the 1970’s, wives entered the workforce and the dual family income was necessary just to keep pace.

Now faced with the full implementation of Obamacare, a massive and significant shift is taking place in the U.S. labor market which will finally break what remains of America’s economic backbone, the middle class.  Full time employment is giving way to Part time jobs.  Try and make ends meet on that.  In 2013, of the 953,000 jobs that have been created, only 23% or 222,000 have been full time jobs.  77%, or 731,000 have been part-time jobs.

Since President Obama, so called champion of the middle class, took office in January 2009 through the end of July 2013, Manufacturing jobs have fallen by 581,000 while lower paying Waiter and Bartender jobs have risen by 880,000.  The wrinkle here is that most of the Manufacturing jobs lost were full time position with benefits while the Waiter and Bartender jobs are part time and offer no benefits at all.  With the stock market at all-time highs, some rightfully ask if things are getting better?  For the year 2013, 24,000 Manufacturing jobs have indeed been added and 246,500 Waiters and Bartenders.  That remains a troubling 10:1 ratio of lower quality jobs.>

President Obama recently spoke at a new Amazon ‘Fulfillment Center’ opening in Tennessee where 5,000 jobs (low-paying) are being created.  What he did not detail is that the consequence of these new ‘warehouse’ jobs is the estimated loss of 25,000 retail jobs at traditional brick and mortar stores such as TJX, The Gap, Best Buy, Sears etc.

A record number, nearly 40%, of young adults 18 to 30 now live with their parents and the percentage is rising quickly.  A record number of Americans are on food stamps and welfare.  The largest employer in the U.S. is Wal-Mart.  The second largest employer in the U.S. is Kelly Services – a temporary employment agency.  One of every four American workers that do have full time employment has a job that pays $10 or less per hour.  One of every 10 jobs in America is a temporary job.  According to a recent survey, 76% of all Americans live from paycheck to paycheck with no savings.  Per statistics from Social Security, 40% of all workers in America make less than $20,000 a year.  Needless to say, many who are earning a paycheck are no longer receiving any form of medical and dental benefits and if they are, they find they share an ever greater share of the benefit expense, further compromising their discretionary income, if any.

The end result will be that those fewer fortunate folks with full time jobs and benefits will see tax increases and bear the burden of the expanding lower income America.  The middle class who once represented some 80% of American families will continue to decline and dare I say it, but growing frustrations and tensions may lead to an escalation in class warfare among Americans.  As a business owner, are you prepared?

If you’d like additional clarity into the future of our economy and how it impacts your business, your specific equity holdings, the financial or housing markets please contact me at Christine Meder’s Accounting Advisory Services mederchristine1526@gmail.com or tweet me at @christinemeder1.  I’m offering a free 30 minute consultation through the end of August.  #unrbrand

Finger on the Pulse of Residential Housing Demand – Mortgage Applications

Housing prices will not rise without demand from buyers.  While a growing number of residential homes are being purchased for cash via institutional investors and wealthy foreign buyers (China/Asia) most homes still require mortgage financing to complete the purchase transaction with the seller.  As such, the number of new mortgage applications is a very good indicator of demand for residential housing.  Get the ‘paddles’ ready, the residential housing market needs resuscitation.

Per the chart below courtesy of Bloomberg, the three month rate of change in Mortgage Applications reflects the fastest decline in applications since June of 2009.  On an absolute basis, mortgage applications are at their lowest level in two years.

Absent resurgence in demand for housing and mortgage loans to fund the purchases, price declines in residential real estate are likely.  As in my recent blog ‘Home, sweet… or not so sweet, home’ (https://christinemederaccountingadvisory.wordpress.com/2013/07/27/home-sweet-or-not-so-sweet-home/) I reiterate my view that housing prices are peaking and heading lower and am recommending that my clients act accordingly.  Are you prepared to see the value of your property return to the lows experience in the last five years?  Expect the unexpected.

If you’d like additional clarity into your specific equity holdings and the financial or housing markets in general, please contact me at Christine Meder’s Accounting Advisory Services mederchristine1526@gmail.com or tweet me at @christinemeder1.  I’m offering a free 30 minute consultation through the end of August.  #unrbrand

If Homeownership is the American Dream… This is a Nightmare!

I find it contrary that the business/political spinsters are hyping a housing recovery in the name of improving consumer sentiment in hopes of a self-fulfilling prophecy when in fact the individual home ownership rate is now the lowest since 1995 and within a bit more than a percentage point of 33 year lows.

Why hasn’t homeownership increased during the supportive low interest rate environment of the past few years?  Stubborn unemployment, under-employment and concerns over job loss (which may require relocation to find another job) are a major factor.  Another major hurdle in recent years is the requirement of a minimum 20% down payment in order to obtain a loan.  Few have the necessary cash for the required down payment or if they have the cash, they aren’t willing to part with it in a time of economic uncertainty by tying it up in a home which lacks the investment attribute of liquidity.

The conclusion is that while recent economic releases may show increases in consumer confidence and sentiment off a low base, consumer balance sheet‘s and income statements remain a wreck.  Actions speak louder than works and the rising demand for rental housing at the expense of home ownership demonstrates that the American Dream of home ownership is either undesirable or unattainable.

If you’d like additional clarity into your specific equity holdings and the financial or housing markets in general, please contact me at Christine Meder’s Accounting Advisory Services mederchristine1526@gmail.com or tweet me at @christinemeder1.  I’m offering a free 30 minute consultation through the end of August.  #unrbrand

America is the greatest country in the world… or is it?

I often hear that America is the greatest country in the world from feel good politicians, spin-doctors and on the 4^th of July but the fact is that the U.S. doesn’t even rank among the Top 10 countries to live in around the world according to a recent Newsweek article.  Perhaps if we hear it often enough we’ll be less resistant to our next round of tax increases?  Among notable countries, Australia ranks 4^th and Canada 8^th. 

Continuing my string of recent blogs on the longer term decline in consumer sentiment, let’s take a look at the trends in personal income growth.  President Reagan famously asked during a debate with then President Jimmy Carter, “Are you better off today than you were four years ago?”  Looking at the chart below, the answer is clearly no; not for four years, not 10 or even 50.  Wages are declining on a year over year basis since 2008 and despite efforts by the Federal Reserve to mend the economy and with the stock market at new record highs, the average soul on main street is suffering.  Wages are in a deflationary spiral which makes servicing consumer debt all that more difficult.

Are you earning more now than you did five years ago?  If you are, count yourself lucky.  If home prices turn lower later this year and throughout 2014 and with no improvement in personal incomes, the future holds little optimism for personal balance sheets and America will fall further from its current number 11 ranking among the greatest countries in the world in which to live.  Can you say ‘put another shrimp on the barbie’?

If you find my market insights beneficial and would like assistance with your accounting and investment activities, please contact me, Christine Meder at Christine Meder’s Accounting Advisory Services.  My email is mederchristine1526@gmail.com and you can tweet me at @christinemeder1.  I’m offering a free 30 minute consultation through the end of August.  #unrbrand

Home, sweet… or not so sweet, home.

I’ve commented in recent blogs about the threat rising interest rates pose to the economy.  In my last blog ‘Happier with less?’  https://christinemederaccountingadvisory.wordpress.com/2013/07/26/happier-with-less/ I point out that the housing sector is primarily responsible for the improvement in Consumer Confidence.  The recent earnings release from residential homebuilder D.R. Horton (DHI) confirms that one of the few bright spots in the economy is quickly fading.

In their Q2 earnings release DHI’s CEO commented that homebuyers are ‘shocked and disturbed’ by the rate jump, that DHI is disappointed that rates have risen so violently and that traffic count has slowed since rates rose.  The S&P Homebuilding Index is off 9% from its May highs since interest rates began rising making it among the worst performing sectors in the stock market recently.  Stocks are a good indicator of conditions six months down the road and this price action doesn’t bode well for residential real estate.  

With no meaningful improvement in employment or household income, rising interest rates will surely lead to a decline in real estate prices.  As seen below, there is generally a six month lag time from when interest rates begin rising until housing turns lower.  That means that by year end, housing prices should begin their trend lower in earnest.  2014 should be a horrible year for residential real estate.  If your business depends on real estate it is time to be preparing for the worst.  If the recent uptrend in prices  has lifted the value of your home to breakeven or slightly above cost, I reiterate my recommendation to put your home up for sale in what is left of the summer selling season and get the heck out of Dodge.

 

Are you seeing signs of real estate prices faltering in your neighborhood yet?

If you find my market insights beneficial and would like assistance with your accounting and investment activities, please contact me, Christine Meder at Christine Meder’s Accounting Advisory Services.  My email is mederchristine1526@gmail.com and you can tweet me at @christinemeder1.  I’m offering a free 30 minute consultation through the end of August.  #unrbrand

Happier with less?

The University of Michigan releases a monthly economic statistic measuring U.S. Consumer Confidence.  In the face of rising interest rates, rising fuel prices, higher mortgage rates and expectations for inflation to increase, Consumer Confidence is at a 5 year high.  With unemployment and under-employment remaining at near record high levels, job creation stagnant and GDP forecasts for the balance of the year being revised downward, what is the cause for this optimism?

It is true that the stock market is trading at record highs, but the equity averages have been trading in their own world and many don’t view them reflecting economic reality.  Most business executives are calling for a slowdown in economic activity in the second half of the year.

Much of the improvement in sentiment is being generated by stabilization and in some markets improvement in the residential real estate market.  A home is the greatest asset on most consumers’ balance sheets and improvement in the value of their home on a year over year basis is making them feel better.  Rising mortgage rates however may once again pull the rug out from under home buyers who have rushed into the market the past few years.

As you can see from the chart below courtesy of zerohedge.com, Consumer Confidence has been in a long term decline since 2000 and we may be peaking albeit at a lower level.  So while some are exuberant relative to the depressed levels seen in recent years, we should keep things in context.  Current readings are really no better than worst of times experienced from 2002 to 2007.  Are you feeling better off than you were in 2000?

If you find my market insights beneficial and would like assistance with your accounting and investment activities, please contact me, Christine Meder at Christine Meder’s Accounting Advisory Services.  My email is mederchristine1526@gmail.com and you can tweet me at @christinemeder1.  I’m offering a free 30 minute consultation through the month of August.  #unrbrand

Batten down the hatches!

Global business confidence is waning.  Q113 GDP in the U.S. was revised downward below 2% and projections for Q213 have fallen as low as 0.3% (Morgan Stanley economist).  The following graph reflects the net expected change in global business activity over the next 12 months i.e. future business expectations.  Lending by U.S. commercial banks is declining sharply.  This contraction in loan demand is not good for business.

The global trends in business activity, while still net positive, are clearly in a state of decline.  Note in particular the year over year declines from 2011 to 2012 and now 2013.  I’m suggested to my business owner and manager clients that they should be budgeting for weaker, not stronger growth in the years ahead.  This recommendation specifically relates to new business investment and capital spending.  The stock market which is hitting new highs weekly has detached itself from economic reality.  For those considering the sale of a business, I would make haste and strike while the iron is hot.

U.S. firms dealing in international markets will be especially challenged as a competitive devaluation is occurring in the foreign exchange markets.  To protect or mitigate their home-land export economies, one country after the next is devaluing their currency in an effort to make their export prices all that more attractive in the global marketplace.  The most recent case is point is Japan where the Yen has been devalued from 78 Yen to the U.S. dollar last October to over 100 today.  That’s well over a 25% devaluation in effect making U.S. goods imported into the Japanese market, over 25% more expensive absent any foreign exchange trading adjustments.

During the global depression of the 1930’s, competitive currency devaluation led to isolation where countries no longer traded with one another.  This led to another and more protracted leg down in that depression.  Do you think history will repeat itself?

If you find my market insights beneficial and would like assistance with your accounting and investment activities, please contact me, Christine Meder at Christine Meder’s Accounting Advisory Services.  My email is mederchristine1526@gmail.com and you can tweet me at @christinemeder1.  I’m offering a free 30 minute consultation during the month of July.  #unrbrand

Know the flow

Many investors are often baffled when the equity markets should do ‘this’ and do ‘that’ instead.  We have such a stock market today with the S&P and Dow notching new all-time highs last week.  I’ve had many investors ask me why stocks keep rising?  That’s a great question in light of the following headwinds which traditionally equate to lower, not higher, stock prices:

• Q213 Revenue misses at many large S&P companies including IBM, Microsoft, Intel, General Electric, Coca-Cola, Google, Yahoo and eBay
• Crude oil is at an 18-month high over $108 per barrel
• There is a significant decline in GDP forecasts for Q213 to as low as 0.3% from 1.8% in Q1
• Interest rate trends have reversed and are now heading higher with the 10 year Treasury yield at 2.50%

As an accountant, I’m trained to follow ‘flows’.  There are cash flows and how revenues flow through the income statement to become earnings.  In equity markets I watch the money flow into mutual funds.  Fund managers are paid to invest money as it comes in.  They are not generally market timers.  If they get more money to invest, there will be increasing demand for equities and they will trade higher.  If the pool of equities is stable or even declining due to corporate stock buyback programs and demand from investors increases, the laws of supply and demand dictate that stocks will trade higher, regardless of the fundamentals.  This is the case now.  Look at the chart below which reflects a sharp and steady flow of money into Developed Market Equities (red line):

 

Money is flowing into US equities at the fastest rate since June, 2008 and the pace is accelerating.  While this is serving to stretch valuations and some pundits feel it is risky to invest at these lofty levels, I take reassurance in following the fund flows.  While I agree the risk to further upside in share prices is increasing, as long as there is a ‘greater fool’ looking to push prices higher, I suggest we enjoy the ride until the music stops and we all scramble to find a proverbial chair and leave the market.  Enjoy the gains to be had while others who don’t follow fund flows remain confounded and on the sidelines.

 If you find my market insights beneficial and would like assistance with your accounting and investment activities, please contact me, Christine Meder at Christine Meder’s Accounting Advisory Services.  My email is mederchristine1526@gmail.com and you can tweet me at @christinemeder1.  I’m offering a free 30 minute consultation during the month of July.  #unrbrand

People matter – Accounting for Population

Today the city of Detroit filed for the largest city bankruptcy in the history of the U.S. listing $18 billion in debt it cannot pay.  A picture is worth a 1,000 words.  The following graph is courtesy of zerohedge.com:

In analyzing Annual Reports and financial statements for clients, I focus on many intangibles which many traditional analysts overlook.  One such key metric is headcount or the number of people employed by a given firm.  As a past manager in a larger corporate environment where I was closely involved in the budgeting process, I know first-hand how difficult it is to justify the addition of headcount as ‘labor’ is the highest operation cost in many organizations.

I’ve found that rising headcount in conjunction with rising revenue a very good indicator of continued growth in corporate profits.  In particular, the rate of change in payroll in the context of the rate of change in other accounting metrics is key.  If for example, the growth rate in employment ebbs while rosy projections emanate from the executive suite; that can be a warning sign.  Actions speak louder than words and I view growth in headcount a positive leading indicator.

Now consider Detroit.  Population metrics for a given city can be used to project a city’s financial health as well.  As fewer and fewer residents are available to support the fixed cost of government, services decline which serve to accelerate the decline in population.  They say it takes over 50 minutes for understaffed Detroit police to respond to a call.  Do you know the population trend for your city?

If you find my insights beneficial and would like assistance with your accounting and investment activities, please contact me, Christine Meder at Christine Meder’s Accounting Advisory Services.  My email is mederchristine1526@gmail.com and you can tweet me at @christinemeder1.  I’m offering a free 30 minute consultation during the month of July.  #unrbrand

Yum! Brands, Inc. – Another earnings beat? Not so tasty.

Yum! Brands (YUM), known for its KFC, Pizza Hut and Taco Bell franchises, reported Q213 Adjusted EPS of $0.56 after the market close today, July 10, 2013.  That was reported as a 2 cent beat vs. analyst earnings expectations of $0.54.  As with Alcoa on Monday, YUM shares moved higher in after-hours trading on the news.

Is this a stock that should be trading 16% higher now at $73 than it was a year ago when it was $63 based on these metrics reported today?

Q213 Revenue $2.90 billion -9.4% vs. Q212 $3.20 billion

Q213 Operating Profit ex-franchising $358 million -22.2% vs. Q212 $460 million

Q213 EBIT Margin 12.5% -13.8% vs. Q212 14.5%

Decidedly no, YUM shares should be trading below and not above year ago levels.  Further YUM relied on earnings gimmickry by accruing less for taxes, at a 22.1% tax rate vs. 23.9% last year, to slightly beat their estimate this quarter.  As mentioned in my blog yesterday ‘View quarterly earnings in the context of consensus estimate trends’ (https://christinemederaccountingadvisory.wordpress.com/wp-admin/post.php?post=94&action=edit) knowing the trend in analyst earnings estimates is critically important.  As seen below, Q213 YUM estimates are the lowest they have been in four years at $0.54 down from $0.80 late last year yet YUM shares are twice as high in the low $70’s now as they were at $35 back in 2009.

I view YUM shares as a risky investment at current prices.  If you find these equity insights beneficial and would like assistance with your accounting and investment activities, please contact me, Christine Meder at Christine Meder’s Accounting Advisory Services.  My email is mederchristine1526@gmail.com and you can tweet me at @christinemeder1.  I’m offering a free 30 minute consultation during the month of July.  #unrbrand