A Chicago judge on Friday announced the appointment of a special prosecutor to investigate how local prosecutors handled the bogus hate crime allegations made by Jussie Smollett in January of this year, according to CNN. The move is expected to blow the case back open and again push it in into the national media spotlight.
Cook County Circuit Judge Michael Toomin announced his choice of US Attorney Dan K. Webb, which gives an independent and experienced trail attorney the time and resources necessary to examine why Cook County State Attorney Kim Foxx mysteriously dropped 16 disorderly conduct charges against Smollett after a lengthy Chicago police investigation that lasted several weeks and used significant amounts of resources.
Recall, when Smollett was let off the hook, Chicago’s mayor called it a “whitewash of justice”.
Webb now has the authority to file new charges, if necessary, following Smollett’s claims last January that he was the victim of a hate crime. Police later found out in February that Smollett had staged it.
Smollett was indicted on 16 felony counts as a result of staging the attack, but prosecutors stunned the world when they unexpectedly dropped all charges and let Smollett off the hook for the $10,000 in bail money he had already surrendered. Chicago police superintendent Eddie Johnson said that Smollett had paid two brothers $3,500 to stage the attack in order to bolster his career.
Webb’s resumé includes helping lead a massive investigation into corruption called Operation Greylord in the 1980s that resulted in more than 90 people, including lawyers, judges, police officers and court employees, facing corruption charges. Then, as a federal prosecutor, he successfully prosecuted retired Admiral John Poindexter for his involvement in the Iran-Contra scandal during the Reagan administration.
Sheila O’Brien, a retired Illinois appellate court judge who initiated the petition to appoint a special prosecutor in the case called Webb’s appointment a “great day for justice”.
“Now we have a special prosecutor who will take a look at the original case and decide if it is worthy of re-prosecution and also how the original case was handled by the state’s attorney’s office,” O’Brien said.
The judge said that of the 30 responses he received for a special prosecutor, 27 state’s attorneys said they had no interest in handling the case, one answered maybe and two answered yes. Jussie Smollett’s defense attorney objected to Webb’s appointment, but Judge Toomin responded by saying “it was my call”.
“His background, experience and qualifications make him an imminently understandable choice,” Toomin said of Webb.
Chicago police are standing by their investigation. Police spokesman Anthony Guglielmi said: “We stand firmly behind the work of our detectives, prosecutors and an independent grand jury who brought the initial criminal charges against Mr. Smollett.”
O’Brien concluded: “We have to always have the truth in any case. The public has to know that every case we have is handled fairly and according to the law. So we are going to be assured of that now.”
via ZeroHedge News https://ift.tt/2HpbidB Tyler Durden
Bill Smead, founder of Smead Capital Management, thinks that a generational change will give the US economy an unexpected boost. The renowned value investor spots opportunities in homebuilder stocks and blue chips like American Express, Disney and Home Depot.
* * *
Bill Smead, founder of Smead Capital Management
Millennials are perceived as the «lost generation». Born in 1981 to 1996, they have been rattled by the financial crisis and are drowning in debt, or so goes the common narrative. What’s more, their unconventional spending patterns are held responsible for the anemic growth perspectives of the US economy.
Bill Smead thinks that’s utter nonsense. The highly regarded founder of the Seattle based investment firm Smead Capital Management is convinced that millennials won’t do things differently than their parents and grandparents. In his view, the only real difference to previous generations is that today, more people graduate from college and therefore wait longer to start a family.
According to the experienced value investor this means that in the coming years the focus of investors «will turn from technology-oriented companies which can do exciting things in an anemic environment to main street, on the ground, real life economic activity which is driven by household formation.»
Against this backdrop, he bets on homebuilder stocks like NVR and Lennar as well as on blue chip names like Home Depot, Disney and American Express. In this extended interview with the Market, he also explains why he has trimmed down his stake in Berkshire Hathaway.
Mr. Smead, after last week’s turmoil stocks are on the rise again. What’s your take on the financial markets?
We’re in the crazy stage and if you are flirting with things which are benefiting from the crazy stage you are playing with fire. Maybe valuations are not quite as completely stupid as they were in early 2000. But that’s like saying “Bill Smead is handsome” because I’m comparing him to an Ogre. I’m not handsome, but compared to an Ogre I am.
What does this mean for the outlook at the stock market?
You have to understand that value is record cheap versus the market. I started in the investment business in 1980 and today, value is the cheapest to the S&P 500 in my entire forty years in the business; even cheaper than 1999/2000. There is complacency everywhere but value. That’s because cheap stocks have become volatile and no one wants to own volatile. No one wants to own cheap. That’s also why there is a huge premium on defensive stocks versus cyclicals.
How does an experienced value investor like you navigate this kind of environment?
Like any good business person, you need to have a vision of what you think the next five to ten years are going to look like. That’s because that vision is an important factor in your ability to produce returns above and beyond what the index is going to provide. The first way to understand what’s going to happen in the next five to ten years is to understand what is extremely popular now and why it’s extremely popular
So what is your conclusion?
What has been extremely popular in the United States is enjoying our economy relative to other economies in the world, even though the US economy was underperforming relative to the growth in past areas. In other words: accepting this more muted, less dynamic economic growth pattern and then investing accordingly. This meant looking for businesses which can do extremely well despite the anemic growth pattern. This mindset has dictated what the stock market has done pretty much for the last ten years: The price being paid for growth has risen and risen, and simultaneously interest rates have moved lower and lower justifying these high prices.
And what’s going to happen next?
Technology stocks did well in an environment dominated by 80+ millennials who were single and whose spending was dictated by choice rather than necessity. But the group of people who are currently 21 to 38 years old is 40% larger than the generation they are replacing in that age cohort. So when 40% more people get crammed into the 30 to 45 age group, a lot of economic activity on the main street level happens which wasn’t happening in the prior decade. This means that the focus of investment success could turn from technology-oriented companies which can do exciting things in an anemic environment to main street, on the ground, real life economic activity which is driven by household formation and soccer moms.
Why do you think soccer moms will have such an important role in the US economy?
The soccer moms of the baby boomer generation re-elected President Bill Clinton in 1996. 23 years later, it’s the children of these soccer moms who will drive the US economy. This new millennial generation of soccer moms will be driving multi passenger vehicles that handle car seats and a lot of junk. They will want to buy a house and get out of their apartment crammed in next to everybody else in the inner city. This means we have a lot of homes to build in the US, we will have a lot of kids apparel and shoes to buy and we have a lot of expenses based on necessity rather than on choice. That’s the vision that goes across the top of our portfolio.
Then again, in the US and around the world, the economy is weakening and may even go into recession.
Whatever economic slowdown we have in the United States is likely to be mild in nature because the force of the millennials is already hitting. For example, there is a noticeable and meaningful pick-up in home building in what we call the exurbs: the highly populated coastal areas an hour and a half away from the cities. What’s more, the cities that are not on the coasts which have affordable housing like Kansas City, Des Moines, Iowa, St. Louis or Albuquerque are all seeing a very high activity in home buying and building. Never forget: money always goes where it gets treated the best.
Is this the reason why the homebuilding company NVR is the largest position in your portfolio?
NVR caters to first- and second-time home buyers on the eastern seaboard. Our investment discipline is always governed by our eight criteria and NVR is a superior company in just about every way of measuring: solid balance sheet, high profit margins, high return on equity, shareholder friendliness and heavy insider ownership: The people who run the company own 9 or 10% of the business.
Where else do you spot investment opportunities against this background?
As the millennials age, certain spending patterns are going to develop. It’s going to be pretty obvious to everybody and then investors will start chasing these spending patterns: As you go down this list of patterns, it’s just a whole bunch of things that people who are 35 to 40 with two kids spend all their money on: Mortgage interest and charges is number one, followed by kids apparel, other apparel and services, shoes as well as vehicle finance charges. That’s the sweet spot in the United States for the next ten years and the stock market is completely unprepared for that.
How do you take advantage of this sweet spot?
For instance, American Express might be a better credit card company to own than Visa or Mastercard. That’s because American Express is a bank and can lend the money to their customers. Visa and Mastercard do not lend the money, they only process the transactions. This will be a huge advantage for American Express because they recur 9% interest on the spread if people choose to leave a loan balance outstanding. So the lending part of the business will become the most profitable part. In the past, the transaction part was the most favorable part since no one was borrowing the money. It was easy and there was no credit risk. But when 80+ million people come to borrow money and most of them are going to be creditworthy, you want to take that risk. That’s why we’re also overweight the big banks which issue credit cards: JPMorgan, Bank of America and Wells Fargo.
But aren’t many millennials already carrying a lot of debt?
The media hyped narrative that millennials are deeply in debt is an urban myth. True, they have more student debt than any generation before them and it’s not optimal that people graduate from college with a lot of student debt. But that’s because 65% of high school graduates in the United States go to college today. When I graduated from high school it was 25%. So keep in mind: the average college graduate in the US makes about $30’000 a year more than someone who doesn’t graduate from college. So to take out a student loan should turn out to be one heck of a great investment. Also, there is no evidence whatsoever that people who take out a college loan and get their degree buy houses and form households at any lower rate than previous generations. In fact, in some ways it teaches them that borrowing money for the right reasons is worthwhile.
On the other hand, most studies show that millennials have been hit hard by the financial crisis, are living longer with their parents and are slower when it comes to start a family.
Everyone thinks that millennials are not going to be as domestic, are not going to get married and don’t have kids. They’re not going to buy houses and they’re not going to do all the same things that other generations did because people think that technology has caused their attention spans to be too short to make babies. All that is total hogwash. Millennials are going to do the same things like other generations. They are just going to do it later in life because 60% of college graduates are women. They graduate from college and get a career established before they get married and have kids. So they are slower getting off to a start. But that’s ok, because they all are going to turn 35 to 45 and they are going to get the ball rolling down the hill.
Other large stakes in the Smead Value Fund are healthcare stocks like Amgen, Merck and Pfizer. What’s the bull case there?
Medicines have a very bright future. In the US, there are more than 70 million baby boomers who have just entered the key years when they massively scarf down enormous amounts of medicine on chronic illnesses to avoid the most expensive part of the US healthcare system: doctor visits, hospitals and ER visits. So we are enthusiastic about Merck and Pfizer and we are very positive about Amgen. Amgen sells a medicine that lowers your bad cholesterol and cuts the risk of heart attacks and strokes by 20 to 25%. That’s going to be a mega hot seller. I might have my doctor prescribe it to me even though I don’t have high bad cholesterol just so I can have the blood of a marathon runner.
You’re also invested in Home Depot and Disney. Where do you see value in these stocks, since they don’t look really cheap?
Disney and Home Depot are trading at 20 times earnings. In contrast, everybody in the growth category who can walk and talk and chew gum at the same time trades at 30 to 40 times earnings. That would be stocks like Nike, Visa, Mastercard, Costco and Starbucks. I can give you a long list of glam, mature growth stocks that trade at 30+ times earnings. So what is the difference between Home Depot, Disney and theses stocks? The answer is: It’s just psychology. There is no evidence whatsoever that these companies will perform better than Home Depot and Disney with the demographics we have the next 15 years.
Still, the share price of Disney just recently reached an all-time high. The same is true for Home Depot.
Let me tell you something: Warren Buffett says that he made the biggest mistake in his entire career with Disney. In 1965, Buffett bought 5% of the entire Disney corporation for $4 million. At that time, Disney was about a thirty-year-old company and a year later Buffett sold his stake at a 50% gain. Today, Disney has a $250 billion market cap. So 5% would be $12.5 billion – and I’m not even counting dividends. I bring this up because most people think that active managers would do better if they were smart about selling stuff after it runs up. I argue that the academic evidence for long stretches of time says just the opposite: The biggest mistake we all make is not holding our winners to a fault. In the bible love covers a multitude of sins. In the world of portfolio managers, ten baggers cover a multitude of 20 to 40% losers.
A year ago, Berkshire Hathaway was one of your largest positions. Today, the stock is not in the top ten holdings anymore. What happened?
We still own Berkshire Hathaway but we de-emphasized it quite a bit. That’s because Warren Buffett and Charlie Munger are getting way up there in years and I think that’s why they’re holding this massive stash of cash: If it was announced that Buffett or Munger went to the hospital there would be a drop in the stock price of Berkshire Hathaway immediately. So they have that heavy artillery there to be prepared and to do stock buybacks when it happens.
What’s more, Buffett has had some setbacks lately. For instance, Kraft Heinz, one of his largest investments, has lost around 70%. Has the “Sage of Omaha” lost his golden touch?
I don’t think so. But he has lost his willingness to offend people by saying what’s going on in the market. For example, he’s not going to say that AI and data analytics look like an overcooked goose because he’s buddies with Bezos and all the guys who are making the money from AI and the overcooked goose. He doesn’t want to die with enemies. He wants to die with everybody being his friend.
Is that the reason why Berkshire now owns a $1 billion position in Amazon and Apple has become Buffett’s largest position in the stock market?
Buffett has a position in Amazon because one of his underlings that he hired to pick stocks bought Amazon. Buffett had nothing to do with that. In the case of Apple, Buffett got interested in the stock because one of his underlings owned it and he concluded that it is a consumer brand not a company that sells electronic hardware. It switched his brain in a completely different direction and Apple became a company like Coca-Cola to him.
What’s your general take on FAANG stocks like Amazon, Netflix or Facebook?
If you owned these three stocks over the last twelve months, you lost money while the market has been going up. This is the first time you can say that in this bull market. So the goose which laid the golden eggs is already dying. It’s likely that we have been in a topping process on technology that really started a year ago. Just look at a chart of Amazon: For the third time, the stock has now failed to break through $2000. Meanwhile, Wall Street is successfully fleecing people by issuing shares of a bunch of exciting, young unproven companies of which probably 90% will fail ultimately. Still, people are the most excited about the things they have been excited about the prior eight to ten years. That’s the way it always happens. We like to refer to it as the beyond meat market. That’s one of the craziest stocks of them all.
So where do you spot real value these days?
Today, the oil and energy sector has the smallest weight in the S&P 500 in my career since 1980. The weight of the energy sector has ranged from the current 4.6% to a high of 16% in 2008, when oil peaked above $140 a barrel. Gasoline, motor oil and all that kind of stuff may have dropped 5% in the last four decades. But the United States still runs on gasoline.
Is that the reason why you recently added Schlumberger and Occidental Petroleum to your portfolio?
When the China mania was going on back in 2011/12, we wouldn’t have touched an oil company with a ten-foot pole. Today, our attraction to oil is a psychological thing that says: wait a second, the importance of these products and producing them compared to the market capitalization is completely out of line. It’s like buying American Express after they divorced Costco or buying Target when Amazon announced they’re going into the grocery store business. It’s comparatively easy.
via ZeroHedge News https://ift.tt/2NvFojw Tyler Durden
Many people theorized that the bail out “buy out” of Solar City, advocated for and led by Elon Musk, would eventually come back to bite Tesla. And now it looks as though we may be witnessing this first hand, not only in the collapse of Tesla’s solar business, but now in repeated allegations from a second multi-hundred billion dollar retailer claiming that Tesla’s solar panels ignited on their own.
Tesla solar energy systems reportedly went up in flames at an Amazon warehouse in Redlands, California last June and now Amazon has stated that it has no further plans to buy solar energy systems from Tesla, according to CNBC.
The news comes after Tuesday, when we reported that Walmart had suit Tesla over solar panels that ignited on their own and caused fires on top of 7 stores in recent years. As of right now, more than 240 Walmart stores have Tesla solar systems installed.
Walmart claimed that Tesla only inspected 29 of more than 240 sites with Tesla solar roofs on them up until the day of the lawsuit. However, on Thursday night, it looks as though Musk may have been doing damage control, as the two companies released a joint statement regarding the lawsuit:
“Walmart and Tesla look forward to addressing all issues and re-energizing Tesla solar installations at Walmart stores, once all parties are certain that all concerns have been addressed.”
“Together, we look forward to perusing our mutual goal of a sustainable energy future,” the statement continued. “Above all else, both companies want each and every system to operate reliably, efficiently, and safely.”
But now Tesla also has Amazon to appease – how many more concessions will they have to make?
And with Amazon joining the ranks of those coming forward about these obviously defective solar panels, it looks to serve as confirmation that there are likely many other defective systems installed nationwide. This is what caused short seller David Einhorn to call for Elon Musk’s resignation late in the week last week.
Tesla, as we noted yesterday, has been systematically covering up the problem – disclosing little, if any, details of it to shareholders while working behind the scenes to implement a secret cover-up to fix solar panels known as Project Titan.
“Project Titan” had the purpose of replacing faulty solar panel parts across the United States, according to Business Insider. The parts in question are connectors — Amphenol H4 connectors — and SolarEdge optimizers, two pieces of the panel that are responsible for regulating the flow of energy and heat.
The main job of these parts? Making sure that as much power goes through the panel as possible without overheating, which can then lead to – you guessed it – fire.
Tesla even confirmed that the cover up was taking place. A company spokesperson said: “A portion of SolarCity-installed modules and optimizers from various manufacturers were made with H4 connectors from Amphenol, a part that was commonly used across the industry at the time.”
As a reminder, Tesla is still in the middle of stockholder litigation over the acquisition of Solar City for $2.6 billion in 2016. These types of issues will likely serve to bolster the strength of that lawsuit.
Analyst Gordon Johnson from Vertical Group said:
“With Boeing, two 737 Max jets went down. Outside of those? There were probably thousands of 737 Max jet flights that took off and landed safely, but the fear of that potential caused Boeing to have to ground all of their jets. In my opinion, these solar rooftop fires create a potentially significant headwind for Tesla, and potentially serious legal liabilities.”
He estimates that liabilities could amount to between $250 million and $1 billion as a result of the entire debacle. Additionally, there will likely be an onslaught of new litigation involving Solar City that will join the now 700+ outstanding lawsuits Tesla is currently litigating.
Tulsi Gabbard is on the verge of being excluded from the next Democratic presidential debate on the basis of criteria that appear increasingly absurd…
Take, for instance, her poll standing in New Hampshire, which currently places Gabbard at 3.3% support, according to the RealClearPolitics average as of Aug. 20. One might suspect that such a figure would merit inclusion in the upcoming debates — especially considering she’s ahead of several candidates who have already been granted entry, including Cory Booker, Amy Klobuchar, Beto O’Rourke, and Andrew Yang.
But the Democratic National Committee has decreed that the polls constituting this average are not sufficiently “qualifying.”
What makes a poll “qualifying” in the eyes of the DNC?The answer is conspicuously inscrutable. Months ago, party chieftains issued a list of “approved sponsoring organizations/institutions” for polls that satisfy their criteria for debate admittance. Not appearing on that list is the Boston Globe, which sponsored a Suffolk University poll published Aug. 6 that placed Gabbard at 3%. The DNC had proclaimed that for admittance to the September and October debates, candidates must secure polling results of 2% or more in four separate “approved” polls — but a poll sponsored by the newspaper with the largest circulation in New Hampshire (the Globe recently surpassed the New Hampshire Union Leader there) does not count, per this cockamamie criteria. There has not been an officially qualifying poll in New Hampshire, Gabbard’s best state, in over a month.
The absurdity mounts.
A South Carolina poll published Aug. 14 by the Post and Courier placed Gabbard at 2%. One might have again vainly assumed that the newspaper with the largest circulation in a critical early primary state would be an “approved” sponsor per the dictates of the DNC, but it is not. Curious.
To recap:
Gabbard has polled at 2% or more in two polls sponsored by the two largest newspapers in two early primary states, but the DNC — through its mysteriously incoherent selection process — has determined that these surveys do not count toward her debate eligibility. Without these exclusions, Gabbard would have already qualified. She has polled at 2% or more in two polls officially deemed “qualifying,” and surpassed the 130,000 donor threshold on Aug. 2. While the latter metric would seem more indicative of “grassroots support” — a formerly obscure Hawaii congresswoman has managed to secure more than 160,000 individual contributions from all 50 states, according to the latest figures from her campaign — the DNC has declared that it will prioritize polling over donors. In polls with a sample size of just a few hundred people, this means excluding candidates based on what can literally amount to rounding errors: A poll that places a candidate at 1.4% could be considered non-qualifying, but a poll that places a candidate at 1.5% is considered qualifying. Pinning such massive decisions for the trajectory of a campaign on insignificant fractional differences seems wildly arbitrary.
Take also Gabbard’s performance in polls conducted by YouGov. One such poll published July 21, sponsored by CBS, placed Gabbard at 2% in New Hampshire and therefore counts toward her qualifying total. But Gabbard has polled at 2% or more in five additional YouGov polls — except those polls are sponsored by The Economist, not CBS. Needless to say, The Economist is not a “sponsoring organization,” per the whims of the DNC. It may be one of the most vaunted news organizations in the world, and YouGov may be a “qualified” polling firm in other contexts, but the DNC has chosen to exclude The Economist’s results for reasons that appear less and less defensible.
Then there’s the larger issue of how exactly the DNC is gauging grassroots enthusiasm, which was ostensibly supposed to be the principle governing the debate-qualifying process in the first place. Gabbard was the most Googled candidate twice in a row after each previous debate, which at a minimum should indicate that there is substantial interest in her campaign. It’s an imperfect metric — Google searches and other online criteria could be subject to manipulation — but then again, the other metrics are also noticeably imperfect. There is no reason why the DNC could not incorporate a range of factors in determining which candidates voters are entitled to hear from on a national stage. For what it’s worth, she also tends to generate anomalously large interest on YouTube and social media, having gained the second-most Twitter followers of any candidate after the most recent debate in July. Again, these are imperfect metrics, but the entire debate-qualifying process is based on imperfect metrics.
Gabbard has a unique foreign-policy-centric message that is distinct from every other candidate, and she has managed to convert a shoestring campaign operation into a sizable public profile. (She is currently in Indonesia on a two-week National Guard training mission, therefore missing a crucial juncture of the campaign.) Other candidates poised for exclusion might also have a reasonable claim to entry — Marianne Williamson passed the 130,000 donor threshold this week — but the most egregious case is clearly Gabbard.
If only out of self-interest, the DNC might want to ponder whether alienating her supporters is a tactically wise move, considering how deeply suspicious many already are of the DNC’s behind-the-scenes role — memories of a “rigged” primary in 2016 are still fresh.
In its December 2018 “framework” for the debates, the DNC declared: “Given the fluid nature of the presidential nominating process, the DNC will continuously assess the state of the race and make adjustments to this process as appropriate.”
Now would likely be an “appropriate” time for such a reassessment.
via ZeroHedge News https://ift.tt/325hS0H Tyler Durden
Larry Sloven has been building supply chains in Asia for the better part of his 30-year career. But in that entire time, he never encountered anything quite so challenging as the US-China trade war, and the adaptations that it forced his company – Capstone International, an HK-based subsidiary of Capstone Companies.
Sloven, the president of Capstone, said he primarily focuses on building supply chains in Southeast Asia. Sloven, who is 70, has spent half of his life connecting factories, sourcing raw materials, and dealing with logistics, mostly in Southern China. But now, with his Big Box store clients demanding supply chain reshuffles at the drop of a hat, Sloven explained how “[i]t is the hardest thing I’ve ever had to do in all my 30 years in the business.”
It was still early days when Sloven started looking at Thailand and other countries in the region to shift some assembly and sourcing of raw materials in early 2018. But a year passed swiftly, and by the spring of 2019, with trade talks seemingly stalled, Sloven, who grew up on Long Island, felt confident that he was prepared for anything.
Initially, the tariffs didn’t have much of an impact on the cost basis for Sloven’s supply chains. But as the summer of 2019 dragged on, and it became clear that the trade war wouldn’t be ending any time soon, Sloven started taking additional precautions, setting up back-up plans “just in case.”
After settling on a few factories in Thailand to handle assembly for new products, including a smart mirror that was still in development, Sloven started preparing ‘test runs’ to make sure the factories could ramp up production within a six-month timeframe.
He scheduled a series of pilot runs to test how well the Thai factory handled assembly. He also needed to prepare for audits of labor rights and environmental standards that U.S. retailers require.
He estimated that would take at least another six months.
“I’m going to start moving on a small scale because they’re not going to be able to just do it immediately,” Sloven said. “As much as they say, ‘Oh, I can do this right now’ – I’m not taking that chance.”
More investment in tooling and moulds was required, too, but the Thai companies agreed to bear the cost.
Regardless of what happened with the trade war, Sloven felt covered.
“You prepare for war,” he said. “You’re ready if you’re attacked.”
For its story, Reuters closely monitored Sloven and his business over the course of a year – a year that saw the trade war escalate in ways the financial press hadn’t anticipated.
As Sloven started breaking down the process of setting up new supply chains into smaller tasks, he quickly discovered that convincing some of the manufacturers in southern China with whom Sloven worked remained convinced that a trade deal would be struck, or at least that’s what they said.
For whatever reason, they refused to negotiate deals that would involving shipping more production and raw materials abroad.
With the help of his go-to trade attorney, Sloven eventually succeeded, but it took a lot of work.
Sloven also had work to do in China.
His suppliers in Shenzhen, Dongguan and Guangzhou were certain the trade conflict would blow over and were reluctant to negotiate deals that would send components and raw materials abroad for assembly.
But Sloven kept pressing ahead with the Thailand plan, concerned about the toll the trade war was taking in China.
In early April, Sloven invited Reuters to meet his trade lawyer, Sally Peng of Sandler, Travis & Rosenberg.
Peng described how Chinese factory floors were emptying out as workers were laid off. Few owners had the expertise or resources to automate or find new export markets, so most were riding it out, hoping for a trade deal. They were “losing money every day,” she said.
“They believe that eventually it will all come back,” Sloven said.
“I think within five years, it will all be gone,” Peng replied.
But by the time Capstone reported its 2018 results, the seriousness of the company’s situation had become readily apparent. Capstone’s CFO described the trade war as one of the greatest challenges the company had ever faced.
Then Trump hiked tariffs again in May, and everybody went nuts. One survey showed that the number of firms planning to move at least some production outside of China had climbed above 40%. Meanwhile, the Asian press kept up a steady patter of reports about company’s plans (most notably, companies that build components for Apple’s many products). Regular readers of ZH should be familiar with these.
It soon became apparent which regional rivals would benefit the most from Trump’s aggressive protectionism, and which might falter.
The same day Sloven met his lawyer, his bosses in Florida announced 2018 results that reflected the effects of the trade war. Net revenues came in at $12.8 million, down from $36.8 million in 2017. Net losses were $1 million, a swing from a $3.1 million profit.
“Capstone faced challenges in 2018 unlike any in its history,” chief financial officer Gerry McClinton said.
Meanwhile, development of the smart mirror was in full swing. The prototype was deemed a success at a Las Vegas electronics show in January, and a PR agency and a marketing company were hired to advertise the new product.
Then Trump hiked tariffs to 25% on May 10.
For Sloven – and many others – the urgency level bounced back up. That month, a survey by AmCham China and AmCham Shanghai showed the number of firms that had moved production or were considering doing so leaped above 40%.
Toward the end of Reuters’ reporting period, Sloven was feeling good about Capstone’s positioning. Raw materials were being sourced, assembly lines had been built.
The only thing left to do was make it through the labor audits typically favored by multinationals in the developed world, who wanted to minimize human rights abuses and any other undesirable features of their supply chain. Thailand doesn’t exactly have the best history with this.
Sloven ticked off a list of concerns, from shipping time, to ensuring products met the threshold to be considered ‘Made in Thailand’.
With his supply of components and raw materials secured, the next big step was the audits.
Thirty-five percent of the product had to be made in Thailand for the product to be considered Thai, and thus exempt from American tariffs.
A certificate from an independent auditor would prove that, but the auditing usually takes four to five weeks.
“I know what I have to do, but getting the information is mind-boggling. These are supply chain issues that everyone in the world is going to have to face,” Sloven said.
Logistics was another concern for Sloven. Shipping to the United States from Thailand takes 8-10 days longer than it does from China.
It took him a while to gather all the information he needed, but as of the end of August, Sloven said he felt prepared should the trade war drag on for years, as some have speculated might happen.
“There’s always going to be hiccups,” Sloven conceded. But he was prepared as he possibly could be, he said. And that at least gave him some peace of mind. And with the tailwind from a strong dollar making foreign goods cheaper, not every surprise has been a bad one.
via ZeroHedge News https://ift.tt/2HoVs2O Tyler Durden
As Austrians we are always looking for evidence to lead us to the next bubble. I think most of us are on high alert after a decade of easy money, stock price inflation, and ever decreasing bond yields. However, identifying the specific bubble sector(s) ahead of time is extremely difficult (unless you are Mark Thornton). This notwithstanding, one industry seems to me to display all of the signs that it is in the midst of an Austrian business cycle theory (ABCT) bubble.
That industry is whiskey (or whisky) production.
Let’s review what makes whiskey production especially susceptible to expansion during the credit fueled boom and therefore likely to undergo a violent contraction during the inevitable market correction.
Whiskey production can be one of the longest production processes in the entire economy. Planning whiskey production is extremely difficult, even if you assume a perfectly stable, hard money economy. Even moderate quality whiskies need to be planned years in advance. The youngest whiskey that can be legally labeled as bourbon must be barrel aged for at least 2 years, but most middle shelf bourbons are aged for 4, 6, or 8 years. Scotch whiskey has even stricter requirements; to be labeled Scotch the whiskey must be aged for a minimum of three years, but it is rare to find a moderately rated Scotch aged for less than 8 years. The most popular Scotches are aged 12, 14, and 16 years while the most luxurious whiskies are aged as long as 25 or even 50 years. Compound this with losing 2 percent of volume per year aged to the “angel’s share” and you are in a very difficult entrepreneurial situation. The entrepreneur has to accurately predict the demand for his product 12 years in the future so he can invest the correct amount of resources now in order to produce an adequate supply for that demand. The only chance one has to perform this economic calculation efficiently is to have accurate interest rates. Even a small distortion in the interest rate will have a dramatic effect on the profit/loss expectations for a product you are expecting to sell in 12 years.
Whiskey production may not be what comes to mind when reading the often referenced “capital goods industry.” Nevertheless, whiskey production is very dependent on highly specific capital goods and distilleries generally have a high level of vertical integration (often mandated to do so by government regulations). In some cases they harvest raw materials like peat from the distillery’s land (peat production probably warrants its own Austrian analysis), and they don’t sell the product until it is nearly in the customer’s hand decades later. This can be best illustrated with a brief summary of the whiskey production process.
The distiller-entrepreneur will first need to determine the recipe, this will determine the proportion of grain, corn, rye, or barley that must be acquired based on the predicted preferences of the customer years later. Once the ingredients are acquired malting begins where the barley (for example) is steeped in water on the malting floor to start the germination. This process involves monitoring the germination of the barley until the sugar content is within the target range. Once the barley is ready it is dried out in a kiln where peat is burned in order to add flavor and stop the germination. The malted barley is then ground down and water is added, this is referred to as the mash. It is then allowed to ferment into a beer like substance called the wash. The wash is subsequently transformed into whiskey by distilling it in copper pot stills. The distiller-entrepreneur then needs to decide how long to age this clear, harsh whiskey and in what type of cask. A popular combination would be an oak cask that was previously used to age sherry, aged for 12 years. During this 12 years the cask sits in an enormous dunnage warehouse. Once the maturation is complete, the whiskey is sent through a strict quality assurance program, bottled, labeled, and distributed all over the world. At this point the distiller has finally sold his product. So in short, the distillery needs peat harvesting equipment, malting floors, kilns, copper pot stills, thousands of casks, dunnage warehouses, land, and a lot of time.
The whiskey industry suffers from another disadvantage because of the specificity of the capital goods required. When the inevitable market adjustment occurs, the large amounts of capital that the company invested in during the boom is virtually impossible to liquidate because it has no other uses. This will make it very difficult for highly leveraged distilleries to stay afloat after the bust. Contrast that with a labor heavy industry like restaurants in which, economically speaking, labor rates are essentially a rent that can be scaled back immediately. Consider Diageo, the corporation that owns many popular whiskey brands, it has a market cap of around $96 billion, but only employs around 30,000 employees. On the other hand, Yum Brands, the owner of many large fast food businesses has a market cap of $35 billion and employs 90,000 employees. The restaurant business could potentially have an easier time scaling back operations — via cutting staff — when the contraction hits because they are not tied down to highly specific capital.
ABCT tells us that the major price fluctuations occur in the higher stages and leaves the lower stages relatively unaffected. However, empirical data and common experience tells us that luxury goods may be an exception. During the boom, the public’s time preference did not change, but they found more money in their pocket. This encouraged increased spending. During the 2000s boom, we found that this extra spending was directed largely toward luxury items, whether it be houses, cars, or vacations.
While the distiller-entrepreneur is planning the quantity of whiskey to supply, a major data point to consider is the current demand. In a sound economy the entrepreneur would see low interest rates and it would entice him to invest in higher production to be released in the future. Inherent in that signal is the knowledge that consumers are curbing consumption now to fund their increased spending in the future. Moreover, if the entrepreneur sees low interest rates while current consumption in his industry is booming despite the higher savings, this has a compounding effect on predictions for the future. In other words, if business is booming now while people are saving, imagine the height of demand for the whiskey in 12 years when consumers’ time preference shift toward consumption spending!
Unfortunately, in the current economy, over-investment (or malinvestment) is occurring now, squandering the resources that are expected to be available to fund the consumption in the future. During the contraction, when unemployment will rise, it stands to reason some of the first items to drop off a household’s budget will be discretionary luxury items, like $100 bottles of whiskey. This will cause the demand for whiskey to plummet at the same time the supply is exploding. This could spell disaster for the hundreds of new distilleries that have been started in the last decade.
Conclusion
Massive investment has entered this industry in response to rising prices. Unfortunately, solid economic theory is telling us that this investment is probably in error. However, I am not advocating any financial advice. I know for myself whiskey would be one of the last things to drop off my budget during hard times. It’s possible that distilleries can sell off a portion of their inventory to weather the storm. Or maybe this is a real industry boom; maybe whiskey has so engrained itself into modern culture that demand will never really drop off and all of this investment was undertaken with undistorted signals. If there is one thing that Austrian economics teaches us, it is that predictions are often futile. The dynamics of the market are based on each individual making thousands of decisions a day. Predicting the timing, location, or extent of future economic events will likely end up embarrassing in hindsight. I guess all we can do is wait and pour ourselves another dram.
via ZeroHedge News https://ift.tt/33ZgsXm Tyler Durden
Gun sellers are taking to Facebook’s Marketplace to broker sales, exploiting a loophole despite the sale of guns being specifically forbidden by Facebook policy, according to the Wall Street Journal. Facebook’s Marketplace feature was launched four years ago and has allowed more than 2 billion people to buy and sell secondhand items.
The trick being used by sellers is to list gun cases or gun boxes at inflated prices that indicate to those “in the know” that a gun is also being sold. This helps users evade Facebook‘s banned items policy. Buyers and sellers then communicate via private messages to discuss the details of the transaction.
For instance, one seller in North Carolina this month posted a photograph of a “gun case” that was being listed for $950. The case itself only has a retail cost of about $30. When the seller was interviewed, he indicated that he was actually trying to sell an AR-15, not just the case. He then privately shared a photograph of the rifle, laid out with more than 670 rounds of ammunition Dash and, of course, the case. He told the Wall Street Journal that he had more than 30 inquiries regarding the gun since he listed the case and had found an interested buyer last week, but a meeting scheduled with them fell through.
Naturally, these types of postings are going to raise fresh scrutiny about Facebook‘s ability to police its platform, especially as it helps to grow its Marketplace to try sell more advertisements. Facebook’s Marketplace remains a giant in online sales outlets, with “one in three people in the US visiting the site each month”.
Facebook has tried to tackle the issue of gun sales before. The company said in 2016 that it would ban the private sale of guns on its broader social media platform following users selling them in “groups”. Licensed gun sellers were allowed to keep their Facebook pages, but Facebook quickly had to issue apologies after launching its Marketplace – users almost immediately started listing guns and drugs for sale on the site.
A spokeswoman for the company said that it takes immediate action against people caught selling guns on the site and said that both humans and machines are being used to screen content.
The spokeswoman said: “Selling guns on Facebook is a clear violation of our policies. People buying and selling on Marketplace must comply with all local laws. The company’s enforcement of its policy will never be perfect, but we are always looking for ways to improve our policies and enforcement.”
Access to guns remains one of the biggest hot-button issues heading into the 2020 election, stoked by recent shootings in Dayton, Ohio and El Paso, Texas that killed 31 people. Federal law doesn’t require background checks for private sales of firearms, but many states do. Sales of firearms across state lines are supposed to be furnished through federally licensed gun dealers who have to undergo background checks themselves, but prosecution for violation of this law is rare.
This makes the internet a perfect place for those who are barred by federal and state restrictions from owning guns to garner access to them. The one on one transactions help make Facebook’s Marketplace a mainstream meeting place for buyers and sellers looking to make private deals.
David Chipman, senior policy adviser at the Giffords Law Center to Prevent Gun Violence, a gun-control group, said: “It’s another internet platform that allows prohibited people to acquire firearms with anonymity.”
Searches for the term “gun case” on the Marketplace earlier this month found dozens of overpriced cases across 10 cities in the US. The prices ranged from $300 to $2000 for products that normally don’t retail for more than $50. And a search for the term “gun case” in Atlanta resulted in three matches within 100 miles. From there, Facebook’s own algorithm suggested more gun case postings in its “You May Also Like” section.
In St. Louis, 19 of the first 24 products recommended by Facebook were overpriced gun cases.
One gun seller in Texas said that he had received 70 inquiries over a month about his posting of a case representing a Remington sniper rifle. He said it had been viewed 2000 times as of August 14. The case retails at about $270 and was listed for $4500. Another seller in Georgia that was offering a “empty lock box” priced at just $20 said in a private message he was selling a SIG Sauer semiautomatic pistol.
Rob Disner, a sound mixer in Atlanta, noticed the postings while searching for guitar cases.
“I probably saw dozens before asking, ‘Why is a plastic case $650?’ Now I see gun cases all the time.”
He said he notified Facebook of the posts, and about “half” were subsequently taken down.
via ZeroHedge News https://ift.tt/2Hqtnbj Tyler Durden
Every single dip was bought this week in anticipation of the Jay Powell speech and every technical signal was again ignored until it was too late when the triggers suddenly hit in the form of news headlines and tweets. I’ve called it a very dangerous market and Friday’s massive reversal again accentuates this point. In April in Combustion I outlined a technical case that I said should scare bulls and bears alike and this current toxic environments confirming that view and everybody needs to stay flexible and have an open mind. Nobody can afford to be stubborn in their views.
As I said on twitter on Friday:
Everyone has a trade plan until a tweet shreds their stops.
It’s a ridiculous trading environment to be in, but nevertheless it is the environment we have. Donald Trump’s twitter account is now the biggest market price discovery mechanism on the planet and he can jerk prices around anyway he likes. I presume he’s not trading his tweets, but if he were he could make a killing. Which trader wouldn’t love to have a twitter account with which to move global markets and face no consequences?
2019 has been all about multiple expansion on hope driven by cheap money to come again in the form of rate cuts and more QE programs and hope that this now ongoing trade war would come to a positive conclusion. Well, hope dies last and Friday’s sudden escalation in tariffs from both sides leaves currently little to hope for in terms of a near term resolution. In fact one could argue it’ll get worse first:
Trade war is now in the ego phase where nobody can afford to be seen backing down or lose face.
Which means it’ll get worse.
With a global economy already suffering from a slowdown is an accelerated trade war the trigger that will nudge the globe into a global recession?
The next few days and weeks may be key in answering this critical question and I submit nobody knows the answer to this question. Investors have been ignoring trade war headlines all year. After all the administration from the president on down have been insisting trade talks are going well, even this past week.
Wars don’t end on calm. Wars end when things get ugly and one side is forced to capitulate. We’ve just entered the ugly phase and if all hope is now reliant on central banks again bailing everyone out then listen to what they are saying. What are they saying? That they alone can’t do it. They are all asking for global fiscal coordination to deal with the next recession. I’ve raised my own questions about the efficacy of future rate cuts to bring about growth. Other than knee jerk reactions what do rate cuts actually offer? I submit not much. After all financial conditions are already the loosest in 25 years, frankly it’s absurd that the Fed is cutting rates here given the historicity:
Perhaps some journalist can actually grill Jay Powell on why in the world the Fed is cutting rates w/ the loosest financial conditions in decades.
In the past the Fed raised rates during loose conditions & cut rates once conditions tightened.
Not this lot. pic.twitter.com/8kAlYoo3xq
And, may I ask, what growth have negative rates produced for Europe? The answer lies in the recessionary threat in Germany, Italy and the UK: Nothing.
The best hope for economies may lie in more debt spending in the form of a global fiscal response. But how is that even realistic given the current political climate everywhere. The G7 this weekend can’t even agree on issuing a joint memo. The first time in 44 years. That’s the state of affairs and I venture to say if you can’t agree to a memo you can’t agree on a complex policy response.
N0, all central banks can do is delay the inevitable and may end up making things worse in the end by expanding the asset bubble.
As it stands markets are inside a consolidation range, similar to the fall of 2018:
And the 2019 up trend remains confirmed broken:
…which leaves the larger megaphone structure in potential play:
This week I outlined the technical case for $SPX 2126 as a potential target if the global recession case unfolds. But keep in mind sentiment is now so bad that any sign of backing down by either side in the trade war could also produce a massive relief rally at any moment and hence this headline driven market environment remains dangerous for both bulls and bears.
For the latest technical rundown and explanation of charts, please see this new video:
* * *
To get notified of future videos feel free to subscribe to our YouTube Channel. For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.
via ZeroHedge News https://ift.tt/2zhHrzh Tyler Durden
While everybody has been focused on new and emerging disasters at Tesla, like the company’s recent spontaneously combusting solar panel problem, coverup and ensuing lawsuits, it almost becomes easy to forget about the legacy disasters still taking place as a result of Tesla’s irresponsibility in the automobile industry.
Such was the case when yet another California driver was spotted seemingly fast asleep behind the wheel of a Tesla on I-5 near Santa Clarita on Saturday. The video captured shows the driver asleep before eventually waking back up and putting a hand on the wheel.
Clint Olivier, the driver who saw the Tesla said:
“He was completely out – sound asleep. My wife was on her phone on Instagram or something and I said get off your phone and record this!”
Olivier said he didn’t contact police because the driver woke up eventually and regained control of the car. The Tesla was said to not be moving erratically, but was still traveling 70 to 75 mph.
This isn’t the first incident like this out of California, either. In June, video broke of a driver who also appeared to be fast asleep in his Tesla Model 3 for 30 miles, as the vehicle flew down the 405 freeway.
A passenger alongside of the vehicle, Shawn Miladinovich, began taking video when he noticed that the driver was passed out, and that he had something “tied to the steering wheel” that the report assumes was used to trick Autopilot into thinking hands may have been on the wheel.
Miladinovich said: “I’d seen it on the news before, I just couldn’t believe I was actually seeing it.”
He said he first noticed the driver in Westminster, but saw him again about 30 miles later on his way from San Clemente to San Pedro.
“I realized he was fully sleeping. Eyes shut, hands nowhere near the steering wheel. If his little thing tied around that steering wheel fell off, and he was still sleeping, he would have slammed into somebody going 65 miles per hour,” Miladinovich said.
And so yet again, it seems as though Tesla’s claims that “Autopilot is intended for use with a fully attentive driver, who has their hands on the wheel and is prepared to take over at any time” continue to fall on deaf ears.
Perhaps the NHTSA may listen a little closer?
via ZeroHedge News https://ift.tt/2L6BhaR Tyler Durden
Why exactly doesn’t Illinois’ political establishment recognize that only drastic policy changes will reverse the population outflow crippling the state? That was the subject of our monthly Crain’s article. A new meme is afoot providing one answer, started by Richard Porter, a Chicago lawyer and GOP national committeeman.
First, a little science lesson. Throw a frog into boiling water and he’ll scramble out, but do they really stay put if you start with a comfortable temperature and gradually raise it until boiling?
Nope. Scientists have shown they’ll jump out as the water gets warmer. Researchers had to remove their brain to get them to stay as they raised the temperature, even though they remain functional enough to show discomfort.
In other words, only brainless frogs stay put as the temperature becomes deadly. That’s Porter’s point. The establishment expects you to be brainless frogs.
The establishment surely knows the real science, since they routinely call everybody else “science haters.” So, surely they don’t believe the mythical version and think everybody will stay if they just gradually raise taxes, incur more debt and ignore reforms.
They must know the real science, and are betting that everybody will stay because they’re brainless frogs. How else could Gov. J.B. Pritzker expect us to accept his explanation for the state’s population loss, now five years running. He says it’s stability Illinoisans want – the fiscal stability he says they will get from tax increases.
Chicago’s African Americans with lower incomes may be the most rational part of the exodus. Their flight accounts for almost all of Chicago’s population loss, as Crain’s, the Metropolitan Planning Council and many others have documented. Three-fourths of them left for other states, according to the council.
That’s smart. For the underprivileged, moving is a ticket to upward mobility. Moving is the simplest and wisest solution for many.
That may sound harsh, but research is proving it’s true. That research is detailed in a Vox articlethis month on families reliant on housing assistance. The economic consequences of moving to places with more opportunity could be massive, says one researcher the article quoted, who estimates that the lifetime benefit to a newborn child of moving from a low- to high-opportunity neighborhood is about $210,000 in additional income, or an 8.1 percent increase in lifetime earnings.
Seattle recently put that research to work by providing information and counseling encouraging housing voucher recipients to move to better places. It worked. “This is the largest effect I’ve ever seen in a social science intervention,” another researcher told Vox.
Statewide, however, all demographic groups are part of the exodus, and it’s costing us dearly. On that, see the detailed, three-part series just completed by my colleagues Ted and John, linked here, here and here.
Illinois’ collapse won’t be reversed unless it’s exodus is reversed. Nothing could be clearer. So far, it’s difficult to find a word from leading officeholders even acknowledging the problem.
via ZeroHedge News https://ift.tt/31XfY28 Tyler Durden
