Saturday, January 3, 2015

Weekly Indicators for December 29 - January 2 at

  - by New Deal democrat

My Weekly Indicator post is up at

The differing trends in the US as compared to internationally are continuing as of year end 2014.

Civeo: Not Really A Value Play

     Before reading any further: this is just my opinion.  I'm not asking anyone to buy or sell this security.  Do your own research and come to your own conclusions.

     Over at Seeking Alpha, Connor Gannon has a very interesting article up about a company called Civeo, which is currently trading at a very deep discount to its book value.  Mr. Gannon is using standard Graham and Dodd valuation; total assets minus total liabilities equals book value which he then divides by the number of shares outstanding.  However, he goes a few steps further in his analysis by completely discounting goodwill and intangible assets to arrive at a more realistic valuation.  Personally, I have a strong dislike for goodwill; until you actually put a company on the market and allow suitors to deeply analyze a company, goodwill is at best a highly hypothetical value.  And doing the same for intangible assets is also prudent.   

     By my back-of-the-envelope numbers, the company has a per share book value of $11.47 (I'm using standard assets-liabilities with no adjustments) with the stock currently trading a bit under $4.  Even with some serious adjustments to the balance sheet assets to account for the distressed nature of this particular industry (for example, lowering the value of AR and inventory to account for potential "fire sale" valuations), I think it's safe to say we really do have a classic situation with the stock trading below book value. 

     However, by looking deeper into the situation, I would have to respectfully disagree with Mr. Gannon on the potential of this company.  First, what exactly does the company do?  According to their latest 10-Q:

We are one of North America’s and Australia’s largest integrated providers of accommodations services for people working in remote locations. Our scalable modular facilities provide long-term and temporary work force accommodations where traditional infrastructure is insufficient, inaccessible or not cost effective. Once facilities are deployed in the field, we also provide catering and food services, housekeeping, laundry, facility management, water and wastewater treatment, power generation, communications and redeployment logistics. Our accommodations support workforces in the Canadian oil sands and in a variety of oil and natural gas drilling, mining and related natural resource applications as well as disaster relief efforts, primarily in Canada, Australia and the United States. We operate in three principal reportable business segments – Canadian, Australian and U.S.

Let's place their business into the oil field development timeline.  The oil field is first developed which in turn attracts oil field workers, leading to a need for Civeo's services.  Conversely, when the oil companies cut back on expenses, Civeo is one of the first companies to be negatively impacted.  Or, they are one of the last companies on the way up to be brought in and one of the first to be hurt when the situation turns negative. 

     This timeline creates a big problem for the company because it compresses the time during which they can exploit a market.  Rather then being present for the entire development process, the company is only able to earn a return for a smaller sliver of time.  And, in the event of a price collapse like that which has already occurred, the company is hurt that much faster.

     They also face a second problem that is geographic (again from the 10-Q):

Our business is predominantly located in northern Alberta, Canada and Queensland, Australia, and we derive most of our business from resource companies who are developing and producing oil sands and met coal resources and, to a lesser extent, other hydrocarbon and mineral resources. More than three-fourths of our revenue is generated by our large-scale lodge and village facilities.

Canada has some of the most expensive oil field development real estate in the oil world.  Consider this chart from the Econbrowser website:

The oil sands of Canada have a roughly $74/bbl breakeven point for development.  Oil closed at $52.81 on Friday.   That does not bode well for CVEO's current operations.  And, we've already seen a fair amount of budget cut announcements from oil companies as highlighted in this Reuter's article.

     Mr. Gannon's article highlights an often unspoken truth about "value investing."  In the modern market environment when there is a wealth of information available to all investors, finding a company that is actually trading below its book value is a very rare event.  In fact, it usually only occurs when there is either a fundamental problem with the company or an entire industry is going through a difficult period like the current situation in the oil market.  It is the latter situation that has lead to CVEO's weak price.   And, as Mr. Gannon correctly points out, the stock is trading far below its book value.  But, given the company's position in the oil field development timeline and its reliance on one of the most expensive oil fields to develop for company revenue, I don't think this is a good time to take a long position.

Friday, January 2, 2015

Big Thanks to Invictus At BP

Invictus over at the BP blog has given us a very nice shout out.  I wanted to thank him for that and also mention that NDD and I blog regularly over at the blog.

Potential International Economic Flashpoints For 2015


The EU


The #1 graph to watch in 2015: the unemployment rate and wage growth

 - by New Deal democrat

This is the final installment of my series showing the 5 economic relationships I expect to pay the most attention to in 2015.  So far, here is the list:
But the number one relationship on my list has to do with whether we will actually start to see real wage growth.

Since both the long and short leading indicators have continued to trend higher, I expect the economy to continue to grow throughout 2015.  And that means that the most important of the 4 big coincident indicators - namely, jobs - should also continue to be positive.

That means that the most important question for 2015 will be, does job growth finally translate into significantly improving wages?  Since I have previously shown that the unemployment rate is a pretty good leading indicator for nominal wage growth, that means in turn that the graph of the unemployment rate (blue) and nominal wage growth (red) is the graph to watch in 2015:

In this expansion, as in past expansions, wage growth YoY has started to improve when the unemployment rate falls below 7.5% +/- 1%.  The next graph is the same data as the first, but norms the data at "0" at the current unemployment rate of 5.8% and 2.0% nominal wage growth:

In the past 3 expansions, when the unemployment rate improved to 5.8%, nominal wage growth was 3.0%, 2.6%, and 2.1% YoY.  As the unemployment rate continued to improve thereafter, so did wage growth. Specifically, wage growth improved by +0.5% when the unemployment rate fell by another -0.4%, -0.2%, and -0.6%. Right now, nominal average hourly wages have grown 2.2% YoY.  In this expansion, the unemployment rate has fallen on average -0.2% every 3 months. It is reasonable to surmise that by the end of June, we will have an unemployment rate of about 5.4% and YoY wage growth of about 2.7%.

One note of caution.  Here is the close-up of the unemployment rate vs. nominal YoY wage growth for the past two years:

Nominal wage growth appears to have stalled in 2014, and even declined slightly in the last several months. There have been several such moves in the past, especially in the first half of the 1995, but typically actual declines in nominal wage growth have been short-lived.  Needless to say, I expect the trend to re-assert itself in the coming few months, and it will be a problem for my model if it doesn't.

I expect the unemployment rate and its components to fall in 2015.  Will that finally translate into wage growth.  That's the #1 relationship I expect to be paying attention to.

Whither US house prices?

 - by New Deal democrat

I have a new article up at

I previously updated my analysis of US house sales through November.  With the release of the Case Shiller indexes, I can now update my analysis of prices as well.

Thursday, January 1, 2015

5 graphs for 2015: #2, not in the labor force, but want a job now

 - by New Deal democrat

This is a continuation of my series on economic relationships I'll be paying particular attention to in 2015.  Here are the first three posts:
Number 2 is straightforward, especially since I have been highlighting it all through 2014.

Some people are so discouraged that they completely stop looking for work.  But if it were available, they say, they would like a job now.  The Census Bureau measures this in the Household jobs Survey every month, under series NILFWJN.

Even in the best of times, about 4.5 million people told the Census Bureau they fit this category. But in and after the 2008-09 recession, this number boomed to over 7 million.  It started to decline, but when Congress cut off extended unemployment benefits at the end of 2013, it rose again, and 1 million more people fit that description now compared with a year ago:

To get down to 4.5 million, 2 million of these people would need to find work.  That's about 1.3% of the labor force.  This is about twice the number of involuntary part-timers I wrote about yesterday.

I certainly hope that this number improves as the economy continues to grow.  That's the expectation, anyway, and I will continue to watch this number closely in 2015.

Wednesday, December 31, 2014

5 graphs for 2015: #3, part time workers for economic reasons

This is a continuation of my series describing 5 economic relationships I'll be paying particular attention to in 2015.  Here are the previous posts:
That the economic expansion will continue seems like an easy call.  That there will continue to be job growth each month comes with that territory.

But there are still too many workers, or potential workers, who aren't participating.  One measure of their stress is the level of part-time workers for economic reasons as a share of the civilian labor force.  Here's that graph going back 50 years:

Note that the 1982 recession created just as many involuntary part time workers as did the 2008-09 recession.  Note also that it took almost a decade to get close to a more "normal" relationship.

The level of involuntary part time employment affects the official unemployment rate. If there were as few involuntary part-timers as a share of the labor force as there were in 1989, given the number of hours of work available in the economy, about 0.5% of other part time workers would be out of work completely.  So without involuntary part-time employment, our current unemployment rate would be about 6.3% rather than 5.8%.

If the economy continues to grow in 2015 - and I expect it will - then the unemployment rate should decrease, and so should the percentage of involuntary part-time workers.  But by how much?  That's what I'll be watching.

Marking my 2014 forecast to market: I plead the polar vortex

 - by New Deal democrat

In my forecast for 2014 one year ago, I called for continued growth, but "A year of deceleration": 
In conclusion, unless we expect deflation (and right now I don't), there is every reason to view the long leading indicators, under either method, as being in agreement that the economic expansion will continue through the end of 2014.   
On the other hand, the deceleration of most of the indicators, and also the deceleration of the WLI, cause me to believe that the second half will be considerably weaker than the first half....  But ... I look for continued positive readings in employment, wages, industrial production, and GDP through the year.
My forecast for continued growth this past year was certainly borne out.  Both the short and long leading indicators one year ago were positive, and correctly forecasted continued growth -- with one obvious exception!  Thank you, Polar Vortex! - with an assist from the BEA in estimating the impact of Obamacare on health care spending.

Thanks to that same Polar Vortex, instead of "deceleration," the 3rd quarter was the third best quarter since turn of the Millennium 15 years ago, and the combined 2nd and 3rd quarters have only been exceeded one time - in late 2003 - during that period (at the moment, the Atlanta Fed's "GDPnow" function is forecasting about 3% growth in Q4):

In short, as we all know, the economy did a total faceplant in the first quarter, due mainly to the infamous "polar vortex" - the worst winter in over a decade in most of the US - and secondarily by the BEA's attempt to estimate the impact of Obamacare on health care spending.

Obviously "deceleration" was out the window after a first quarter performance like that. So I plead the Polar vortex in my defense.

Next, let's look at the same GDP data as in the first graph, but YoY:

Now the first three quarters of 2014 don't look like much of a change at all from 2013.  Smoothed over a year, the Q1 debacle basically offset the Q2 and Q3 fireworks.  But that still isn't deceleration.  That's because there was a second major trend at work as well, and it is a trend that I expect to continue to (positively) affect the economy in 2015. That, dear reader, is our old friend government spending.

Here is a graph of spending on health care services (blue) and government expenditures at all levels (red):

I saw a Doomer piece claiming that the government cooked the books as to health care expenditures in order to show great numbers in Q3 vs. Q1. Aside from being political nonsense (if you are going to cook the books, why make them look worse before the election, and only better after???), the above graph shows that health care expenses simply returned to their prior range of growth. The real, impactful change over the last year has been government spending.

Here is real GDP growth as reported (blue) vs. real GDP growth minus government spending (green):

Here is the same data measured YoY:

In short, take away government spending, and we DID have deceleration in 2014 compared with 2013, even ignoring the outlier first quarter.

Here is the breakdown of government spending between Federal (red) and state and local (blue):

Both levels of government have helped, but easily the Federal level was the biggest change,and the biggest contributor.

Finally, let's add in private residential spending (housing) to the above graph:

What happened in 2014, aside from a rebound from the first quarter Polar vortex faceplant, was that government spending completely offset the sharp deceleration in spending on housing.  This will continue to be important in 2015.

Tuesday, December 30, 2014

5 graphs for 2015: #4, the price of oil vs. gdp

  - by New Deal democrat

This is a continuation of my series of economic relationships I'll be paying particular attention to in 2015.  Yesterday was #5: mortgage refinancing

Relationship #4 is about whether the a new, lower range of gas prices remains for awhile.  The importance of oil and gas prices is easy to understand, given their recent collapse.  Lower prices put more money in consumers' pockets.  Conversely, when gas prices rise to a certain level of income, consumers feel pinched - and pinch the economy. 

In 2011 - 2014, gas prices remained quite high as a share of income, constricting the economy like a choke collar whenever it seemed poised to attain escape velocity.

Two similar metrics to measure the overall impact of gas prices are (1) the price of gas as a share of GDP, and (2) the price of gas as a share of disposable income.Here is the price of gas as a share of GDP compared with quarterly GDP growth: 

Generally, the closer the "oil choke collar" comes to engaging, the less the GDP growth.

In the past 10 years, whenever there has been a steep decline in the price of gas, it has bounced by about $0.25 to $0.30 off its winter low quickly, and risen on average about $1.00/gallon to its summer highs, as shown in the following graph from GasBuddy:

As I write this, gas costs about $2.25/gallon.  If that were the low, I would expect a quick bounce to about $2.50, and then a springtime increase to a peak of about $3.25/gallon.

All else remaining equal, if the price of gas remains in a lower overall range in 2015, we should see an acceleration of GDP growth, and with it, more jobs.

Will 2015 Be A Break Out Year For Micro-Caps?

Above is a chart that shows the relationship between microcaps and the SPYs.  It's current valuation is very low in comparison to the last 7 years.  That, of course, does not mean this sector is ready to rally; the relationship languished in a sideways pattern for all of 2012.  But, this does show an undervalued sector.

Monday, December 29, 2014

Starbucks is Still One Heck Of A Growth Play

     First, a caveat.  This analysis is my opinion.  I'm not soliciting bids for nor sales against this security.  Also, do your own research to verify my findings.  Put more bluntly: rely on this at your peril.

Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 65 countries. Formed in 1985, Starbucks Corporation’s common stock trades on the NASDAQ Global Select Market ("NASDAQ") under the symbol "SBUX." We purchase and roast high-quality coffees that we sell, along with handcrafted coffee, tea and other beverages and a variety of fresh food items, through company-operated stores. We also sell a variety of coffee and tea products and license our trademarks through other channels such as licensed stores, grocery and national foodservice accounts. In addition to our flagship Starbucks Coffee brand, we also sell goods and services under the following brands: Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange and Ethos

If you don't know about Starbuck then you obviously haven't left your house in the last 20 years, because in the U.S. at least, their coffee shops are literally everywhere.  And, as they note above, they have a very strong international presence.

Technical Analysis

The weekly chart shows two distinct trends, with the first being a rally that lasted for most of 2013, taking the stock from the lower 40s to the lower 80s.  However, for 2014, the stock made little upward progress, trading in a slightly upward sloping channel who's high (84.20) was only 3.3%above the 2013 peak of 81.15.  The weekly chart did offer several technical entry points over the year when prices traded around the 50 week EMA.  These entry points would have been appropriate for new purchasers or for other long-term investors to increase their positions if they thought growth was continuing.  However, it is probably best to consider 2014 a year-long consolidation of the previous year's rally.

The daily chart (obviously) shows more detail of last year's price action where we see several trends. 

1.) A slight upward sloping trend line connecting the lows of mid-April and mid-October.
2.) An price arc that last from mid-May to mid-October, which took the stock as high as 80, but then sent it back to the lower 70s. 
3.) A second rally that lasted until near year-end.

The reason for the stock's overall stall is it's expensive by most valuation measures.  It's PE is 30 and its P/B is 11.66.  From a valuation perspective, about the only good metric is the PEG ratio which is 1.68.  While not perfect, it does give us a bit of price elasticity.

Now, let's take a look at the company's financials.

Starbucks Balance Sheet

Starbucks has a strong balance sheet, with a current ratio fluctuating between 1.02 and 1.9 for the last few years.  Their overall cash level has fluctuated between $1.8 and $2 billion for the last four years.  They have increased their debt levels to a bit over $2 billion, but their interest coverage ratio is 50, so they've very secure by this metric.  Their inventory turnover ratio has increased from 5.2 to 6.2 over the last few years, but their receivables TO has decreased from 30-27 over the same period.  The only real drawback to their balance sheet is that while revenue has been increasing 10%-11% over the last few years, their receivables increased 25% and then 15% between 2012-2013 and 2013-2014.  The pace of increase was 12% from 2013-2014, which is more in line.  Finally, their book value (assets minus liabilities) has increased from $3.6 billion in 2009 to $5.2 billion in 2024.

Starbucks Income Statement

Despite their size. Starbucks is a growth machine, with top line revenue growth of 9%-13% since the end of the recession.  Their gross margin has decreased a bit from 43%-41%, but their operating margin has increased from 14% to 18% over the last few years.  And their net margin is between 8%-12% over the last few years.  They have decreased their cash conversion cycle from 51-44 days over the last two years as well.  These are the kind of numbers that make for a very predictable situation.

Starbucks Cash Flow

For four of the last five years, SBUX has had positive free cash flow fluctuating between $894 million and $1.7 billion.  In 2014, they had a $2.6 billion liability charge related to an arbitration award granted to Kraft.  According to the most recent 10-K, "This charge included $2,227.5 million in damages and $556.6 million in estimated interest and attorneys' fees."  Aside from the Kraft litigation, SBUX's cash flow is more than adequate to fund property investment, as these expenses have been between 25% and 48% of cash flow from operations.  This gives the company tremendous financing flexibility.  

Conclusion on Financial Statements

SBUX is in a very strong financial position.  They have more then enough cash flow to fund expansion in property.  Their margins are strong with little meaningful fluctuation and revenue growth is strong.  The balance sheet has ample liquidity and the decrease in the cash conversion cycle indicates management is on the ball.

Where Will Growth Come From?

China, pure and simple.  According to their latest 10-K, they have 544 licensed and 823 company owned stores in China as of the end of September, 2013.  Compare those numbers to 4,659 and 7,303 (for a total of 11,962) in the US.  While China has a lower standard of living than the US, and therefore couldn't handle the same number of stores, it's highly conceivable China could open up to 4,500-5000 stores total (about 3,000 more than their current number) and not seriously cannibalize existing sales. 
There are other regions that could also have additional stores.  For example, they only have 434 licensed stores in Mexico, 89 company stores in Brazil and 152 in Germany.  Simply put, there is ample room for international growth for the foreseeable future, largely based on international expansion.

While it may sound cliché to argue that international growth will drive the bottom line, this is one situation where that is more than possible.  Considering their stores require little capital to open -- especially compared to other eateries -- and that the company can open numbers locations, it seems more than obvious that international operations will more than supply growth.
So, yes, I like Starbucks as a company.  (I should confess that I really don't like their coffee).  Now, the question becomes about where to buy.  First, let's get this out of the way: you're not going to buy this at a PE of 4 or when the stock is trading at some level below book value.  That's just not going to happen.  
Over the last year, the upper 60s and lower 70s have been the stock's low points.  In an ideal world, I'd like to wait for those prices to occur again before buying.  However, the chart above also shows that the lower 80s -- should prices move through those levels -- would represent a breakout.  Yes, those levels do represent an expensive company.  But, as I noted above, this stock may be worth it at those levels.


5 graphs for 2015: #5, mortgage refinancing

  - by New Deal democrat

As we start a new year, I thought I would give you a short list of things to watch for in 2015.

Here's number 5:  interest rates and refinancing

Interest rates are always important. They can be thought of as the ultimate driver of the economy.  Essentially they are telling us how much it costs to use money.  

Since 1982, no recession has occurred unless interest rates have failed to make new lows for at least 3 years. With wages generally stagnant, asset appreciation (stocks, housing) or the refinancing of debt at lower interest rates have driven much of the increase in consumption. Interest rates last made new lows in the summer of 2012, nearly 3 years ago.

To watch this, the most on-point graph is that of mortgage rates and refinancing activity, published weekly by Mortgage News Daily.  Here's what it looks like now:

As you can see, refinancing abruptly stopped when interest rates went up in summer 2013.  In the last few weeks, it has shown signs of a pulse again.

If interest rates continue to go down, refinancing should pick up again, as should the housing market. If interest rates back up, refinancing will stay dead, and the housing recovery will continue to stall.  And we'll be in the "red zone," with increased chance of a recession in 2016.

Gallup economic confidence turns positive

 - by New Deal democrat

Last week I reported that CNN's survey of consumer confidence turned positive for the first time since before the Great Recession.

Gallup's daily economic confidence index has now also turned positive, also for the first time since the Great Recession:

The rise in confidence on this survey has been dramatic just in the last 3 weeks.  Since there is evidence that lower income households are particularly benefitted by lower gas prices, it looks like the shattering of the Oil choke collar is having a big effect on Main Street.