Share the Wealth – May 22, 2018

Registered Investment Adviser Caleb Lawrence 

The major averages couldn’t hold their early gains and enter the final hour about even on little real news. Trump’s tough talk on trade is rapidly devolving into another exercise in mugging for the cameras as there is little tangible benefit to be seen so far.

The Richmond Fed regional index jumped 19 points in May on strength in new orders and employment, capital spending plans slipped for a second month.

As is well known, the previous financial crisis circa 2007-2009 was caused by reckless mortgage lending and particularly sub-prime lending that led to an unsustainable real estate price bubble, and an unprecedented boom for an industry predicated on unreasonable expectations. Fast forward to the present and the fracked oil and gas industry, or shale if you prefer. Is well on its way to its own debt fueled day of reckoning compliments of nearly a decade of negative free cash flow regardless of oil at $40 a barrel or $100, brought on by a need to drill ever more wells to sustain production in the face of rapidly declining existing production. It is actually fairly accurate at this point to describe the fracked energy business as a Ponzi scheme due to the very high existing debt levels and the proclivity of the major players to borrow more money to pay off existing debts as they still can’t make a profit. The math dictates that at some point fairly soon this entire industry will drown in debt. Just like the failure of real estate during the previous crisis. Let’s hope it doesn’t take the entire economy with it.

Share the Wealth – May 21, 2018

Registered Investment Adviser Caleb Lawrence 

The major averages enter the final hour with modest gains on little real news. The Chicago Fed National Activity Index increased to .34 in April, the 3-month moving average doubled to .46 indicating more moderate economic growth. This series covers about 85% of total economic activity and is quite broad based.

Credit card delinquencies remain relatively modest in total. As problems often start at the periphery and work their way back to the core, it’s worth noting that the smaller banks that chased less than prime borrowers aggressively with credit cards of late are now seeing delinquency rates exceeding that of the previous crisis after rates hit 5.9% in the first quarter. Charge off rates have also spiked since late 2016 to reach 8% last quarter, though they remain a little below the 8.78% crisis peak seen in 2009.

Another funny money metric comes to us today in the form of an analysis of last year’s IPO’s or Initial Public Offerings that showed some 80% had negative earnings right out of the gate. This has happened 4 times since 1998, twice just before the Dot-Com bust, once in 2014 with no negative consequences and of course last year. That said negative earnings IPO’s have run at a very high level in the post Dot-Com era in general, and especially in the 2013-2017 period.

Share the Wealth – May 18, 2018

Registered Investment Adviser Caleb Lawrence 

The major averages enter the final hour with small losses on little real news. Since Monday the Standard and Poors 500 Index is down 25 points or a little less than 1% while the NASDAQ has slipped 70 points or a little less than 1% as well.

The latest regional and state level employment data shows a number of regions losing momentum in April with respect to employment growth, notably the East North Central, Mid-Atlantic, East South Central and West North Central regions. The West South Central, Pacific and Mountain regions continue to show decent job growth. At the state level Texas +39,600, California +39,300, and Louisiana +9,200 created the most jobs.

Despite the endless parade of happy talk from the mainstream media about the 3.9% unemployment rate and how great the economy is. Study after study has shown that many Americans continue to struggle mightily. The latest is the ALICE Report from the United Way that shows some 51 million households, or 43% of the total, struggling to survive in the modern economy despite full time work. California, New Mexico and Hawaii have the largest share of struggling families, at 49% each, high housing costs and to a lesser extent taxes are the primary culprits in California. Low wages are of course another major factor and a recent report lays the blame on the Gig Economy once again after its shown that Uber drivers make just $9.21 hour after expenses, less than minimum wage. Per a recent study by the Economic Policy Institute. By implication of course is the fact that full time work does not provide enough income to live on in many cases, and I would think this goes a long way to explaining why so many have given up. As evidenced by the sharp decline in the labor force participation rate in the post crisis period, incidentally this is most of the reason the unemployment rate is so low. Further the record numbers of folks on disability and SNAP is also a reflection of the poor labor market, and I wouldn’t be surprised if there was a connection to record levels of student debt as people have to get by, one way or another.

Share the Wealth – May 17, 2018

Registered Investment Adviser Caleb Lawrence 

Volatile early trade sends the major averages into the final hour with small losses on little real news. Wells Fargo gets caught altering client data without permission, another month, another scandal, how they manage to remain in business is beyond me.

The Philadelphia Fed Regional Index surged 11.2 points in May to 34.4 on strength in new orders and employment. Price data remains high but was mixed for the month.

One of the hallmarks of the period just before the busts in 2000 and 2008 was the utterly irrational expectations and assumptions investors made with respect to valuations, assumed rates of return and what something was actually worth. WeWork, a privately held company that provides office space on a temporary sub-lease basis is a case in point. Fresh off a very oversubscribed junk bond offering, the company valued itself at an impressive 20 billion Dollars. In addition the company noted that it lost nearly a billion dollars last year. Holding some 14 million square feet of leased office space the company declared that a 60% occupancy rate represented break even. Which begs the question, how did we get to a 20 billion-dollar valuation. If the company owned all this space free and clear valuation would be about 7 billion. Yet the space is leased, and the company holds some 18 billion in debt. Just another example that leaves you scratching your head, while wondering how it’s supposed to work. Just like Uber, Tesla and a few other wildly popular Sillycon Valley Magic Unicorns, shades of 2000 all over again.

This is Caleb Lawrence Registered Investment Adviser Scotts Valley Drive and Willis Road in the Scotts Valley Plaza, Suite 202 or call me toll free at 888-RICH PIG / 888-742-4744.

You can catch me on the radio at noon each business day as well on California’s central coast. KPIG 107.5 FM in the Monterey Bay or KPYG 94.9 FM in San Luis Obispo.

Advisory services offered through Caleb Lawrence Registered Investment Adviser Inc.