Tag: news

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The fundamentals of demographics, stagnant household income and an overbuilt retail sector eroded by eCommerce support only one conclusion: commercial real estate in the U.S. will implode as retail sales and profits weaken.

In the early stages of the sub-prime mortgage crisis it was widely believed that US commercial real estate (CRE) would manage to dodge the bullets. In the end CRE was found to be as vulnerable as anything else.

© 2014 Real Capital Analytics, Inc. All rights reserved. Source: Real Capital Analytics and Moody’s Investors Service. www.rcanalytics.com Used by permission.

These three graphs of relative prices show that in CRE the “core” is doing better than the “periphery”. The gap in relative price performance of major metro CRE over smaller cities and towns has approximately doubled from where it was in 2008.

And as with residential real estate, some CRE sub-sectors and cities are obtaining far greater benefit from bailout, stimulus and quantitative easing programs than other areas:

© 2014 Real Capital Analytics, Inc. All rights reserved. Source: Real Capital Analytics and Moody’s Investors Service. www.rcanalytics.com Used by permission.

Commercial real estate has a more complex structure than residential real estate. There is greater specialization in function. For instance strip shopping centers and indoor malls are generally not exchangeable with warehouse facilities.

We can simplify this a bit by classifying CRE by consumer sector and function. Industrial real estate will not be considered in detail. Current industrial construction spending is near a record high. But the value of current industrial CRE can still be depressed due to existing plant obsolescence and rapid shifts in activity location.

This leaves us to consider consumer retail and consumer service CRE.

Consumer Retail Spending & Retail CRE

The value of commercial real estate is driven by the revenues and profits earned by the businesses occupying CRE. This relationship is similar to the relationship between residential real estate prices and average household income.

The Two Drivers of Consumer Spending: Population Size and Average Household Income:

These two parameters show continuously increasing population size and declining average household incomes. The subsequent data shows this is resulting in a small increase in total consumer spending and also large shifts in spending patterns.

Real inflation adjusted total retail spending has increased slightly over its peak in 2007.

Essentially all of this increase has occurred in food spending. (A smaller portion has gone into clothing). And this is the only reasonable expectation given the twin conditions of an increasing total population and a declining average income per consumer. We can also note that “food” is a minuscule part of eCommerce. The retail food trade occurs almost entirely in neighborhood groceries, markets and convenience stores. The other non-food retail sectors are flat to declining. But within these sectors there is a large zero-sum game being played out between eCommerce and local bricks ‘n mortar stores:

The Rise of eCommerce

Since 2008 eCommerce retail sales have nearly doubled. But as we just saw, the entire increase in total consumer spending since 2008 is accounted for by the increased food sales which occur at local markets. “eCommerce” is therefore taking sales away from other local retail sectors. And the biggest single loser is:

Local Retail Department Stores

This macroeconomic data is well-supported by the current financials of both Sears and JC Penney. Sears’ trailing twelve month (ttm) earnings per share are – $14.11. This loss will increase once Sears reports its fourth quarter earnings at the end of February, 2014. Sears is widely expected to lose one billion dollars in 2014. J.C. Penney meanwhile is currently reporting ttm losses of -$7.32 per share.

One or both of these chains will be in bankruptcy by 2015 even if the current “recovery” continues. And outright liquidation of one or both companies is at least as likely as reorganization. There is little reason to believe either of these companies would be more viable following mere debt reduction.

The third major department store chain is Macy’s, which is still reporting profits. Oddly enough Macy’s management celebrated their 2013 holiday season by announcing 2,500 permanent layoffs from their local retail department stores. This was paired with a mid-December announcement of an increase of 1,500 employees in a new eCommerce fulfillment center in Oklahoma.

In these circumstances it is unsurprising that retail CRE prices are showing weak recovery.

© 2014 Real Capital Analytics, Inc. All rights reserved. Source: Real Capital Analytics and Moody’s Investors Service. www.rcanalytics.com Used by permission.

The Coming Implosion of the Regional Indoor Shopping Mall
(and adjacent strip shopping centers)

There are approximately 1,100 indoor shopping malls in the USA. Sears has about 2,000 stores. JC Penney’s has almost exactly 1,100 stores. There are very few malls that don’t have at least one of these chains. The vast majority of malls have both as major anchor stores. Macy’s is typically the third major anchor now. A regional department store chain or two round out the large anchor stores.

A virtual stroll down the typical mall concourse will reveal plenty of other money losing chain retailers with names like Radio Shack et al. Adjacent strip shopping centers
This should not be surprising. The regional indoor mall is a middle class income institution. It grew up with the post-WWII rise in average incomes. As middle class incomes now disappear so are the former favorite shopping venues of the middle class.

Every time a mall store closes shoppers lose another reason to go to the mall. “Dead mall” syndrome will soon afflict most of this sector.

In addition to decaying tenant revenues the mall owning Real Estate Investment Trusts are dangerously overleveraged with low-cost to free ZIRP and QE funding. Now that the Federal Reserve is tapering QE their financing costs will be rising as commercial balloon mortgages come due and have to be rolled over. And since the typical commercial mall mortgage does carry a large balloon payment at the end they have to be refinanced. Assuming honest loan underwriting a higher risk premium will also be attached due to the deteriorating retail fundamentals of the tenants.

General Growth Properties (GGP) is probably in the best condition. This is because GGP just exited a Chapter 11 reorganization in 2010. It was placed into involuntary bankruptcy in 2009 by two mortgagors holding matured recourse balloon mortgages. GGP was understandably unable to refinance these balloons in the spring of 2009.

This entire sector will collapse when the next recession appears.

And since history hasn’t ended, the next recession will appear at some point. It may be appearing already. At the beginning of October, 2013 the analyst consensus for retail profit growth for the strongest October – December holiday quarter was 5.5%. At the beginning of the reporting cycle in January expectations were down to 0.5% profit growth. That is a 90% reduction in analyst expectations in just three months.

Barring a turnaround, many retail chains still reporting profits will be reporting quarter-on-quarter profit declines in April. And by the end of the third quarter more will start reporting outright losses.

Part 3 will examine the other major part of local consumer oriented CRE. These are consumer services like neighborhood banking, investment, insurance and other services. Experience to date demonstrates that in the next few years the internet, expert software systems and robotics/automation will eliminate 50% and more of the jobs formerly associated with these businesses. These same trends will also shift most of the surviving positions away from the traditional storefront strip center and local office park locations.

via Zero Hedge http://ift.tt/KtvCuy Tyler Durden

Many analysts believe that the precious metal is DEAD due to its having fallen from a record high of $1900 per ounce to roughly $1200 per ounce today (a 36% drop).

 

 

However, this price movement, while dramatic, is quite inline with how commodities trade. Gold has already posted one drop of 28% (in 2008) during its bull market, before more than doubling in price. This latest drop is not much larger.

 

Moreover, a 36% drop in prices is nothing in comparison to what happened during that last great bull market in Gold back in the 1970s. At that time, Gold staged a collapse of nearly 50%. But after this collapse, it began its next leg up, exploding 750% higher from August ’76 to January 1980.

 

With that in mind, I believe the next leg up in Gold could very well be the BIG one. Indeed, based on the US Federal Reserve’s money printing alone Gold should be at $1800 per ounce today.

 

Since the Crash hit in 2008, the price of Gold has been very closely correlated to the Fed’s balance sheet expansion. Put another way, the more money the Fed printed, the higher the price of Gold went.

 

Gold did become overextended relative to the Fed’s balance sheet in 2011 when it entered a bubble with Silver.  However, with the Fed now printing some $85 billion per month, the precious metal is now significantly undervalued relative to the Fed’s balance sheet.

 

Indeed, for Gold to even realign based on the Fed’s actions, it would need to be north of $1,800. That’s a full 30% higher than where it trades today (see below).

 

 

 

 

For a FREE report outlining how to buy Gold at $273, swing by:

http://ift.tt/1cNOxuw

 

Best Regards

Graham Summers

 

 

via Zero Hedge http://ift.tt/KtvBXv Phoenix Capital Research

Before the “shale revolution” many considered that the biggest gating factor for US economic growth is access to cheap, abundant energy abroad – indeed, US foreign policy around the world and especially in oil rich regions was largely dictated by the simple prerogative of acquiring and securing oil exposure from “friendly” regimes. And while domestic US crude production has soared in recent years, making US reliance on foreign sources a secondary issue (yes, the US is still a major net importer of crude) at least as long as the existing stores of oil at domestic shale sites are not depleted, marginal energy watchers have shifted their attention elsewhere, namely China.

Recall that as we reported in October, a historic event took place late in the year, when China (with 6.3MMbpd) officially surpassed the US (at 6.24MMbpd) as the world’s largest importer of oil. China’s reliance on imports is likely only to grow: “In 2011, China imported approximately 58 percent of its oil; conservative estimates project that China will import almost two-thirds of its oil by 2015 and three-quarters by 2030.”

Which means that the question that most were focused on before, i.e., where the US gets its oil, and what is the US energy strategy, refocuses to China.

We have some answers.

The graphic below summarizes all the known Chinese energy import transit routes.

Some additional color from the 2013 Annual Report to Congress on all key developments relating to China:

China’s Energy Strategy

 

China’s engagement, investment, and foreign construction related to energy continue to grow. China has constructed or invested in energy projects in more than 50 countries, spanning nearly every continent. This ambitious investment in energy assets is driven primarily by two factors. First, China is increasingly dependent upon imported energy to sustain its economy. A net oil exporter until 1993, China remains suspicious of international energy markets. Second, energy projects present a viable option for investing China’s vast foreign currency holdings.

 

In addition to ensuring reliable energy sources, Beijing hopes to diversify producers and transport options. Although energy independence is no longer realistic for China, given population growth and increasing per capita energy consumption, Beijing still seeks to maintain a supply chain that is less susceptible to external disruption.

 

In 2011, China imported approximately 58 percent of its oil; conservative estimates project that China will import almost two-thirds of its oil by 2015 and three-quarters by 2030. Beijing looks primarily to the Persian Gulf, Africa, and Russia/Central Asia to satisfy its growing demand, with imported oil accounting for approximately 11 percent of China’s total energy consumption.

 

A second goal of Beijing’s foreign energy strategy is to alleviate China’s heavy dependence on SLOCs, particularly the South China Sea and the Strait of Malacca. In 2011, approximately 85 percent of China’s oil imports transited the South China Sea and the Strait of Malacca. Separate crude oil pipelines from Russia and Kazakhstan to China illustrate efforts to increase overland supply. A pipeline that would bypass the Strait of Malacca by transporting crude oil from Kyuakpya, Burma to Kunming, China is currently under construction with an estimated completion time of late 2013 or early 2014. The crude oil for this pipeline will be supplied by Saudi Arabia and other Middle Eastern and African countries.

 

Given China’s growing energy demand, new pipelines will only slightly alleviate China’s maritime dependency on either the Strait of Malacca or the Strait of Hormuz. Despite China’s efforts, the sheer volume of oil and liquefied natural gas that is imported to China from the Middle East and Africa will make strategic SLOCs increasingly important to Beijing.

 

In 2011, China imported 14.3 billion cubic meters (bcm) of natural gas, or 46 percent of all of its natural gas imports, from Turkmenistan to China by pipeline via Kazakhstan and Uzbekistan. This pipeline is designed to carry 40 bcm per year with plans to expand it to 60 bcm. Another natural gas pipeline designed to deliver 12 bcm per year of Burmese-produced gas is under construction and estimated for completion in late 2013 or early 2014. This pipeline parallels the crude oil pipeline across Burma. Beijing is negotiating with Moscow for two pipelines that could supply China with up to 69 bcm of gas per year; discussions have stalled over pricing differences.

As for China’s Top Crude suppliers as of 2011:

Finally, from a previous Zero Hedge post on this topic, here is why China’s increasing reliance on Crude imports means that the ascent of the Petroyuan is assured, and why by implication the days of the Petrodollar may be numbered: an outcome which the US will hardly be pleased with.

So what does this shift in oil imports mean?

More than anything else, it is a sign that China will increasingly depend on global markets to satisfy its ever-growing oil demand. This necessitates further engagement with the international system to protect its interests, encouraging a fuller integration with the current liberal order. This will have effects on both China’s approach to its currency and its diplomatic demeanour.  

Derek Scissors wrote last week that this shift might usher in a world where oil is priced in RMB as opposed to solely in USD. This transition could only occur, however, if the RMB was made fully convertible and Beijing steps back from its current policy of exchange rate manipulation. Earlier this year, HSBC predicted that the RMB would be fully convertible by 2017, a reality that is surely hastened by its position as the single largest purchaser of foreign oil. A fully convertible RMB would be a “key step in pushing it as a reserve currency and enhancing its use in global trade, said Sacha Tihanyi, a strategist at Scotia Capital.

On the diplomatic side, while the United States is unlikely to withdraw from its role as defender of global oil production or guarantor of shipping routes, an increasing reliance on foreign oil will push Beijing toward a more engaged role within the international community. It is likely that we will see a change in Beijing’s approach to international intervention and future participation in multilateral counterterrorism initiatives—anything to ensure global stability. In the future, anything that destabilizes the oil market will increasingly harm China more than the United States. While Beijing views this increased import reliance as a strategic weakness, it a boon for those hoping to see Beijing grow into its role as a global leader.

Bottom line: as Chinese oil imports grow, Beijing will become increasingly reliant on the current market-oriented global system—this is nothing but good news for those that enjoy the status quo.

via Zero Hedge http://ift.tt/1mlQuQ5 Tyler Durden

Interesting article by Pam Martens about a missing David Bird, a WSJ reporter covering energy, and the US oil market he has been writing about. While is no evidence yet suggesting a connection between his work and his disappearance, NBC reported that “the family believes that his coverage of OPEC may be related to his disappearance.” 

Martins wonders about his continual reporting on an imbalance in oil supply in the US market caused by overproduction of shale oil in the face of slacking demand.

 

 

David Bird, Wall Street Journal Reporter, Goes Missing After Reporting for Three Months on Oil Glut in U.S.

By Pam Martens: January 20, 2014

David Bird, a reporter who covers energy markets for the Wall Street Journal, has been missing for nine days. Bird, who has worked for the parent of the Wall Street Journal, Dow Jones, for more than 20 years, left his Long Hill, New Jersey home on the afternoon of Saturday, January 11, telling his wife he was going for a walk. Despite a continuous search by hundreds of volunteers and law enforcement officials, Bird has not been located.

Bird is 55 years old, approximately 6’1, and was last seen wearing a red jacket with yellow zippers according to officials. He and his wife, Nancy, have two children, ages 12 and 15. Anyone with information is asked to contact the Long Hill Police at (908) 647-1800.

According to a report in the Wall Street Journal, Bird is a liver-transplant recipient and is required to take medication twice a day. He did not take his medication with him when he left for the walk.

NBC reported that sources close to the family said one of his credit cards was used in Mexico last Wednesday. Other media outlets have been unable to confirm that report. In the same news story, NBC reported that “the family believes that his coverage of OPEC may be related to his disappearance.”

However, a careful review by Wall Street On Parade of the articles Bird has written for the Wall Street Journal since last October, shows that what he was regularly reporting on was a supply imbalance caused by overproduction of shale oil in the U.S. in the face of slacking demand.

On October 21, Bird wrote that “U.S. crude-oil futures Monday settled 1.6% lower, dropping to less than $100 a barrel for the first time since July on rising inventories and weak refiner demand. Prices dropped as the Energy Information Administration [EIA] reported U.S. crude-oil stocks rose for a fourth straight week, to the highest level since late June…The sluggish demand from refiners allows crude stocks to climb four-million barrels in the week ended Oct. 11, the EIA said in a report that was delayed from last week due to the government shutdown. That is the latest piece of a four-week build of 18.9 million barrels in stocks that has put pressure on prices, as refiners have lowered crude-oil processing runs by 1.26 million barrels a day since mid September…”

Read the whole article here. 

via Zero Hedge http://ift.tt/1kRduuR ilene

This morning's apparent U-turn in US-Iran relations – when the US demanded the UN rescind Iran's invite to the Syrian peace conference having somewhat instigated their invitation in the first place – is a little confusing for some. However, as OilPrice's Joao Peixe points out, reports are emerging that Iran and Russia are in talks about a potential $1.5 billion oil-for-goods swap that is sure to upset the powers that be in Washington.

 

Submitted by Joao Peixe via OilPrice.com,

Reports are emerging that Iran and Russia are in talks about a potential $1.5 billion oil-for-goods swap that could boost Iranian oil exports, prompting harsh responses from Washington, which says such a deal could trigger new US sanctions.

 

So far, talks are progressing to the point that Russia could purchase up to 500,000 barrels a day of Iranian oil in exchange for Russian equipment and goods, according to Reuters.

 

"We are concerned about these reports and Secretary (of State John) Kerry directly expressed this concern with (Russian) Foreign Minister (Sergei) Lavrov…  If the reports are true, such a deal would raise serious concerns as it would be inconsistent with the terms of the P5+1 agreement with Iran and could potentially trigger US sanctions," Caitlin Hayden, spokeswoman for the White House National Security Council, told Reuters.

 

Russian purchases of 500,000 bpd of Iranian crude would lift Iran's oil exports by 50% and infuse the struggling economy with some $1.5 billion a month, some sources say.

 

Since sanctions were slapped on Iran in July 2012, exports have fallen by half and Iran is losing up to $5 billion per moth is revenues.

 

In the meantime, a nuclear agreement reached in November with Iran and world powers is in the process of being finalized, and the news of the potential Russian-Iranian oil swap deal plays to the hands of Iran hawks in Washington who are keen to seen the November agreement collapse.

 

The November agreement is a six-month deal to lift some trade sanctions if Tehran curtailed its nuclear program. Technical talks on the agreement began last week.

Under the terms of the tentative November nuclear agreement, Iran will be allowed to export only 1 million barrels of oil per day.

 

In mid-December, Iranian oil officials indicated that they hoped to resume previous production and export levels and would hold talks with international companies to that end.

 

This announcement sparked an immediate reaction from US Congress, which has threatened oil companies with “severe financial penalties” if they resume business with Iran “prematurely” following the six-month agreement reached in Geneva.

 

There are plenty of figures in Congress—Republican and Democratic alike—who are opposed to the deal. The key “Iran hawk” in US Congress, South Carolina Republican Lindsey Graham, has described the deal as “so far away from what the end game should look like”, which should be to “stop enrichment”.

 

The opposition in this case believes any talk between Tehran and Western oil companies is premature because they are convinced that we won’t see a comprehensive resolution after the six-month period, and that sanctions will be laid on stronger than ever before.

Yet again, it would seem, Iran is another proxy pissing match between the US and Russia… and remember, nothing lasts forever...

via Zero Hedge http://ift.tt/1e84oni Tyler Durden

Apparently fully content with the state of the economy, America’s foreign affairs in pristine shape requiring none of the president’s attention, and no golf course left untouched, Obama reverted to more important things over the weekend. Like the relative merits of pot and booze.

 

 

CNN summarized it as follows: “Marijuana, which is still placed in the same category as heroin, ecstasy and psychedelic mushrooms by the federal government, is no more dangerous than alcohol, President Barack Obama said in an interview published Sunday. Speaking to New Yorker editor David Remnick, Obama said he still viewed pot smoking negatively – but that on the whole, the drug wasn’t the social ill that it’s been viewed as in the past.”

“As has been well documented, I smoked pot as a kid, and I view it as a bad habit and a vice, not very different from the cigarettes that I smoked as a young person up through a big chunk of my adult life. I don’t think it is more dangerous than alcohol,” Obama told the weekly magazine.

 

The president said pot was actually less dangerous than alcohol “in terms of its impact on the individual consumer.”

So, when it comes to the annals of presidential soundbites, FDR has “The only thing we have to fear is fear itself”,  Teddy Roosevelt has “Speak softly and carry a big stick”, JFK has “Ask not what your country can do for you – ask what you can do for your country”, Harry Truman is in there with “The buck stops here”, Ronald Reagan has “The nine most terrifying words in the English language are, ‘I’m from the government ans I’m here to help”, and now Obama entered the history books with “I don’t think pot is more dangerous than alcohol.“

But why read about it: here is a cartoon made by the Taiwanese animators which in 75 seconds tells you all you need to know, not the least of which is why America has fully succeeded in becoming the laughing stock of the world.

via Zero Hedge http://ift.tt/KyO83V Tyler Durden

Despite record levels of unemployment across Europe (most specifically among the youth), record high (and surging) levels of loan delinquencies, and collapsing credit creation, the leaders of the EU continue to peddle their own brand of dis-information and willful blindness. While UKIP's Nigel Farage tongue-lashings are normally enough, EU's Barroso this morning unleashed the following:

• *EU'S BARROSO SAYS ECONOMIC GROWTH 'SLOWLY RETURNING'
• *EU'S BARROSO SAYS EU AT TURNING POINT IN CRISIS

However, as the following chart of earnings estimated for European firms shows, there is absolutely none, zero, nada sign on a 'turning point' and, as we have noted previously, unless the EUR weakens significantly, Europe will rapidly dip back into recession once again.

 

Via Goldman Sachs:

While being a strong year for equity returns, 2013 has been poor on the earnings side. Consensus now expects 2013 earnings to shrink by 3.5% and the level of earnings has been revised down by close to 15% YTD. Looking at actual earnings rather than consensus expectations, with the exception of the second quarter of 2013, earnings seasons have been poor through 2013.

Spot the "Turning point" in that chart…

and still think the collapse in EM is not a problem… (Companies exposed to emerging markets saw markedly more negative sales surprise than the overall market. 39 companies from our EM exposure basket reported sales in 3Q. Out of these 39 companies, 25 missed estimates by more than 2% while only 2 beat estimates by more than 2%.)

Unless the EUR weakens significantly, Europe's major export growth markets will continue to weigh the region back into recession.

The strength of the Euro, notably against EM currencies was frequently mentioned in 3Q by companies missing estimates.

 

Of course, Barroso's lies should not be a total surprise from Europe (as we noted here) and of course the final admission of guilt by Jean-Claude Juncker:

Asked whether such deliberate misinformation would undermine the market’s confidence in future euro-zone pronouncements, Mr. Schuller, lamenting that the market had practically no confidence in pronouncements already, said “not at all.”

 

When Mr. Juncker, or European Central Bank President Jean-Claude Trichet, or French Finance Minister Christine Lagarde says something to the markets, Mr. Schuller said, “nobody seems to believe it.”

 

Mr. Juncker has voiced support for the practice of lying before.

 

The Web site EUobserver has video of Mr. Juncker, at a conference on economic governance in April, expounding on the practice and reasons for lying in financial and economic communications.

 

On the tape, Mr. Juncker says he has “had to lie” and, speaking about touchy economic topics, “When it becomes serious, uopu have to lie.

via Zero Hedge http://ift.tt/1aEYIxx Tyler Durden

Despite record levels of unemployment across Europe (most specifically among the youth), record high (and surging) levels of loan delinquencies, and collapsing credit creation, the leaders of the EU continue to peddle their own brand of dis-information and willful blindness. While UKIP's Nigel Farage tongue-lashings are normally enough, EU's Barroso this morning unleashed the following:

• *EU'S BARROSO SAYS ECONOMIC GROWTH 'SLOWLY RETURNING'
• *EU'S BARROSO SAYS EU AT TURNING POINT IN CRISIS

However, as the following chart of earnings estimated for European firms shows, there is absolutely none, zero, nada sign on a 'turning point' and, as we have noted previously, unless the EUR weakens significantly, Europe will rapidly dip back into recession once again.

 

Via Goldman Sachs:

While being a strong year for equity returns, 2013 has been poor on the earnings side. Consensus now expects 2013 earnings to shrink by 3.5% and the level of earnings has been revised down by close to 15% YTD. Looking at actual earnings rather than consensus expectations, with the exception of the second quarter of 2013, earnings seasons have been poor through 2013.

Spot the "Turning point" in that chart…

and still think the collapse in EM is not a problem… (Companies exposed to emerging markets saw markedly more negative sales surprise than the overall market. 39 companies from our EM exposure basket reported sales in 3Q. Out of these 39 companies, 25 missed estimates by more than 2% while only 2 beat estimates by more than 2%.)

Unless the EUR weakens significantly, Europe's major export growth markets will continue to weigh the region back into recession.

The strength of the Euro, notably against EM currencies was frequently mentioned in 3Q by companies missing estimates.

 

Of course, Barroso's lies should not be a total surprise from Europe (as we noted here) and of course the final admission of guilt by Jean-Claude Juncker:

Asked whether such deliberate misinformation would undermine the market’s confidence in future euro-zone pronouncements, Mr. Schuller, lamenting that the market had practically no confidence in pronouncements already, said “not at all.”

 

When Mr. Juncker, or European Central Bank President Jean-Claude Trichet, or French Finance Minister Christine Lagarde says something to the markets, Mr. Schuller said, “nobody seems to believe it.”

 

Mr. Juncker has voiced support for the practice of lying before.

 

The Web site EUobserver has video of Mr. Juncker, at a conference on economic governance in April, expounding on the practice and reasons for lying in financial and economic communications.

 

On the tape, Mr. Juncker says he has “had to lie” and, speaking about touchy economic topics, “When it becomes serious, uopu have to lie.

via Zero Hedge http://ift.tt/1aEYIxx Tyler Durden

Wolf Richter   http://ift.tt/NCxwUy   http://ift.tt/Wz5XCn

Tech isn’t exactly booming, as we’ve seen from numerous revenue and earnings debacles. Most recently, Intel’s: revenues were down 1% from 2012 and 2.4% from 2011. Net income was down 13% from 2012 and 25% from 2011. Looking forward, they’d be flat, CEO Brian Krzanich warned. In 2013, the PC industry just saw its worst decline in shipments ever.

Dell and HP announced big layoffs. Other tech companies too are “realigning” their workforce. And after rumors started spinning out of control on Friday, Intel confirmed that it too would axe 5% of its workforce of about 105,000 “to align our resources to meet the needs of our business.” Revelations of how the NSA has compromised products and services of US tech companies caused orders to collapse in China, Russia, and other countries, where orders were supposed to grow at big double-digit rates. It left IBM, Cisco, and brethren with a mess on their hands [read…. Costs Of NSA Scandal To Bleed US Tech For Years].

But that hasn’t kept valuations of tech startups from being pushed into the stratosphere. Turns out, it’s relatively easy these days. By the stroke of a pen and $250 million, an elite club decided amongst each other that the “valuation” of on-line storage provider Dropbox was close to $10 billion.

BlackRock, the world’s largest money manager with $4.3 trillion in assets, is leading the deal, according to unnamed sources of the Wall Street Journal. The elite club includes “previous backers,” and they included Goldman Sachs, Sequoia Capital, Index Ventures, and Accel Partner. In 2011, Dropbox had raised $250 million from these previous backers. The deal valued it at $4 billion. With the above stroke of a pen, the value of their investments has jumped 150%. With that same stroke of the pen, they also jacked up the future valuations of all other IPOs, and many more billions will be made – just like Twitter’s IPO helped jack up Dropbox’s valuation.  

Unlike certain other highfliers, like Pinterest, which raised $225 million last year in a deal that valued it at $3.8 billion though it hasn’t even figured out how to generate revenues, Dropbox has measurable revenues. Not a lot – about what a large Ford dealership might rake in, without the profits. Growth has been dramatic: In 2010, it had $12 million in revenues; in 2011, $46 million; in 2012, $116 million, and in 2013, more than $200 million, according to these unnamed sources. It has 200 million users, as co-founder and CEO Drew Houston claimed in November, up by a factor of 10 over the last three years.

But growth is slowing. So it has been trying to refocus. Instead of only going after consumers, it’s trying to reel in corporate customers with its cloud storage services. Everyone and his dog is in this business, including Microsoft, IBM, Google, Amazon, and another furiously hyped startup, Box, which has a $2 billion valuation and is planning to sell its inflated shares to the public this year.

Dropbox calls its cloud services “safe and secure.” But in April, it was widely reported that it wasn’t hard to hack into the service and then use it as a vector to deliver malware to a corporate network that could wreak all sorts of havoc and pilfer the digital crown jewels. Many corporate customers have now blacklisted Dropbox.

Unperturbed, the members of the elite club decided out of the blue that it had a $10 billion valuation, printing an instant billionaire (Drew Houston) and a lot of multi-millionaires. All for just $250 million. For BlackRock, it was petty cash.

But inflating Dropbox’s valuation to $10 billion manipulates the entire IPO market that depends on buzz and hype and folly to rationalize these ridiculous valuations. Unnamed sources “leaking” these valuations to the media are part of it. It balloons the valuations of other startups. It creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are irrelevant, and where custom-fabricated metrics are used to sell these shares to the public – mostly mutual funds that bury them in your portfolio.

Even the SEC, which hardly ever warns about anything, warned about these newfangled metrics that are designed, as Chair Mary Jo White said, “to illustrate the size and growth” of these outfits that lack outmoded metrics, such as revenues and profits. She and her staff were particularly concerned that “the true meaning of the metric (or more importantly the link from metric to income and eventual profitability) may not be clear or even identified.”

So Dropbox’s 200 million users? A cute metric, sure. “It sounds good,” to use White’s words. But it says nothing about revenues and “eventual profitability.” In fact, “the connection may not necessarily be there.” Investors are supposed to be impressed and hand over their money. It’s all part of the IPO buzz and hype that characterize a “healthy” IPO market.

“Healthy” for whom? Goldman and other members of that elite club.

The purpose is to rationalize to the public that this deal is worth buying so that they will pile in and drive up the value even further. It makes the IPO market look “healthy.” Hopefully, the exuberance will last until the original investors get to dump their shares, take their hard-earned money, and move on. A similar wealth transfer takes place when a corporation prints a truckload of its shares to buy the startup, at the expense of existing shareholders. Happens all the time.

There will be a few successes out of the hundreds of IPOs spilling out of a “healthy” IPO market, and they’ll be held up forever to whet your appetite. The rest will languish in mutual funds and retirement accounts, where they eat into people’s wealth and hopes. Many of them will become penny stocks.

It isn’t often that the public is this blind to these machinations. It only happens during times of stock market exuberance, when nothing can go wrong, when stocks can only go up, and when high prices only justify even higher prices. When it all goes to heck, as it periodically does, the window of the “healthy” IPO market closes. At that point, IPOs receive actual scrutiny, buzz and hype fall on deaf ears, rationality reigns, and hardly any IPOs make it out of the gate. Those are the long years between stock market bubbles.

Corporate earnings growth slowed to almost zero, as did growth in capital expenditures, cash-flow, and sales, and corporations hold more debt than they did in 2009, wrote Societe Generale’s exasperated Global Quantitative Research team. “Thank goodness equities went up in 2013, otherwise it might have been a rather depressing year.” Read…. The Corporate Malaise That The Stock Market Is Furiously Ignoring (for now)

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