The Market Ticker
Commentary on The Capital Markets

What is the difference between an armed band of thugs and the police?

The latter conform with the law, including the 1st, 2nd, 4th and 5th Amendments.

The former do not; they come with guns drawn, take what they want, and demand your silence -- not as a civil right in a court of law but as a demand that they make clear will be enforced with those very same guns.

One of these groups ought to be given deference and respect.  The other ought to obtain neither, nor be safe anywhere from justice and retribution both before the laws of civil society and, if that fails, the laws of provenance.

Such it was in 1776 when entreaties to the laws of civil society failed, forcing a retreat to the laws of provenance.  Such a retreat is never to be taken lightly, for it comes only when civil society no longer functionally exists, as occurred here in 1776 and has occurred in many other places both before and since -- in Nazi Germany, in Cambodia, in Venezuela, Russia and elsewhere.  History tells us that the retreat to provenance is the true "last stand", and frequently fails with the outcome being no better and sometimes worse than whatever you labored under before.

I do not claim to possess the wisdom to know whether such a time has arrived once again, for I am not convinced that civil society has indeed failed in its essential mission to protect the fundamental rights of all against abuse, including abuse by those who claim the mantle of government power.

But today we ought to contemplate long and hard exactly where that line is, and whether these usurpations, long being too numerous to list and which have to date gone unanswered in civil society and its alleged structure of laws despite being apparent rank violations of not only statutory and constitutional law but in addition the very principles of provenance and fundamental civil rights, have in fact crossed that line.

May God guide us in that examination and protect us from a foolhardy refusal of the civil authorities to punish those who engaged in all such conduct in accordance with standing statutory authority under 18 USC 242 and 42 USC 1983, never mind the 1st, 2nd, 4th and 5th Amendments to our Constitution, as the probable outcome of that refusal, should it continue and be amplified, leads to dark days ahead that nobody in their right mind wishes to bear witness to.

View this entry with comments (registration required to post)
 

Oh my....

New orders for manufactured durable goods in March increased $9.3 billion or 4.0 percent to $240.2 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 1.4 percent February decrease. Excluding transportation, new orders decreased 0.2 percent. Excluding defense, new orders increased 2.6 percent.

Transportation equipment, also up two of the last three months, drove the increase, $9.5 billion or 13.5 percent to $80.3 billion.

The entire increase was driven by transportation, including aircraft.

Pay very careful attention right here ladies and gentlemen because this is a quite-reliable leading recession indicator:

That's three months of negative new-order numbers sequentially in non-defense, non-aircraft.  Aircraft have to be excluded because their swings are utterly enormous; 30% swings (as with this month) or even 100%+ swings (as for defense aircraft and non-defense a couple of months ago) are quite common and trash any sort of comparisons that include them.

The only bright spot is a very material (10%) rise in computers and related products in both new orders and shipments this month.  That's a serious outlier but the three-month series of declining orders for both fabricated metals and machinery are extremely bad news.

In addition inventories are at the highest level since the initiation of this series in 1992; inventory builds add to GDP but if unsold wind up destroying corporate balance sheets when they have to be disposed of at fire sale prices or written off entirely.

In the context of the number of people calling for Nasdaq 10,000 (!) by 2016 this morning, a clean double from where it is today, I think it's quite safe to say that the macro and market environment looks disturbingly like late 1999 or the first few months of 2000.

The warning is a two-edged sword -- in 1999 it was evident that the economy was slowing and tech valuations were ridiculous.  Today those valuations are even more ridiculous (Amazon's stock is up $50, more than 10%, on deteriorating margins in their "cloud" business and the economy is slowing again) but in 1999 the Nasdaq doubled before it all blew up.

Be careful.

View this entry with comments (registration required to post)
 

Put a fork in her, she's...

smiley

Becker said his company went from "a worthless shell company overnight -- became this ...huge uranium mining deal."

And then soon after that, Becker said, "Bill Clinton got a huge donation, $31 million from Frank Guistra to his charitable foundation, followed by a pledge to donate $100 million more."

Oh boy..... I had heard $2.5 million, plus $300k in speaking fees.  $31 million?!

If this gets tagged on Billary it's over; she's going to be lucky to avoid an indictment.

President?  Good lord folks, even if you're a Democrat you better not support this level of apparent corruption!

View this entry with comments (registration required to post)
 

Earnings, earnings, what are those?

“Amazon Web Services is a $5 billion business and still growing fast — in fact it’s accelerating,” said Jeff Bezos, founder and CEO of Amazon.com.

So, a billion and a quarter a quarter.  Hmmm.... $22.7 billion in sales, so this is..... 5%ish?  Wow, man, this is why the stock was up $25 after hours and more this morning before the bell?  Really?

But that's not really the problem.  No, the problem is that margins are contracting for cloud services -- in fact, by a lot on an annual comparison basis!

Why?  Competition.

What's worse is that technology and content costs were up 40% over the same period last quarter.  Yes, sales expanded -- by 15%.  But the company is spending a lot more on back office and back end requirements -- at close to three times the rate sales are increasing.  Worse, G&A (administrative expenses) increased at a 30% annualized rate, which is double the increase in sales.  And fulfillment costs were higher too.

How is the company not down the drain?  That's simple: Cost of golds sold, which means they're squeezing suppliers hard.

How bad is the competitive pressure on AWS?  Their gross margin is now 17% -- it was 23% a year ago.

Prediction: It will be under 10% within two years; an effective commodity product.

Now the really bad news: Electronics and general merchandise (where profits are thin) continues to dominate.  What's worse is that media actually contracted internationally -- down 12%.

Media is the high-margin business for Amazon.

But the news gets worse.  Current assets were down 17%; better inventory control and accounts receivable contributed (and that's good) but cash on hand was off 30% (awful.)  The only good news is that current liabilities were also down, particularly accounts payable.

And it doesn't end there -- new capital lease obligations were up an astounding 89% year/over/year and their free cash flow less lease repayments and capital acquired under leases was negative.

I like the sales increases -- but for context with the AWS 17% margin let me clue you in on MCSNet's pretax operating margin (yes, all-in operating margin) when I ran the joint in the mid 1990s..... it was 42%.

At 17% you start thinking (hard!) about whether its worth being in the business, especially when you were in the mid-20s the year before.

At 10% one mistake, or one problem with the competitive marketplace (where you get severely undercut) buries you.

Naw, it's not a bubble @ $432/share smiley

View this entry with comments (registration required to post)
 

Read this carefully folks, because it does not apply only to farmers...

IT’S OFFICIAL: JOHN Deere and General Motors want to eviscerate the notion of ownership. Sure, we pay for their vehicles. But we don’t own them. Not according to their corporate lawyers, anyway.

In a particularly spectacular display of corporate delusion, John Deere—the world’s largest agricultural machinery maker —told the Copyright Office that farmers don’t own their tractors. Because computer code snakes through the DNA of modern tractors, farmers receive “an implied license for the life of the vehicle to operate the vehicle.”

It’s John Deere’s tractor, folks. You’re just driving it.

Oh really?

This is flatly wrong, and the corporate world and government needs to hear loudly and clearly: Cut this crap out or we will revoke the privilege of your existence.

And yes, it is a privilege.  Corporate existence is a legal fiction enabled by us.  So is government; all governments exist only because the people allow them to.

There is a general principle that we must enforce as citizens: If you buy a thing, no matter what it is, in a free exchange of funds for goods, you own it and may do with it as you wish -- period.  Attempts to prevent that must be dealt with by the authorities as theft and fraud, because they are.

If we demanded this and enforced it let's talk about what would change:

  • You wouldn't need medical insurance of any sort.  The cost of medical care would drop by 80% in an afternoon.  You could buy a course of treatment for Hepatitis C that someone else lawfully acquired in India for $900; today Gilead demands $80,000 for the same thing and gets it because it's a felony for you to acquire it from other than them, even when the person who wants to sell it to you got it legally (that is, they did not steal it.)

  • You wouldn't have to pay $300 for a car key.  Your house key can be duplicated for a couple of dollars at the corner hardware store.  So could you car key, right up until the manufacturers started chipping the keys and refusing to allow anyone other than dealers access to the software to program them.  This is allegedly for "anti-theft" reasons but whether you can prove you're the owner or not (say, by possessing the title and/or registration) they still refuse to give you the tools and security code to program the key.  This effective monopoly gives them the ability to charge 50 or even 100x the reasonable cost of the key with the chip embedded in it because you are forced to go back to them.

  • You could have your car repaired or enhanced without going to the dealer.  For some things today this is flatly impossible, and it's gotten much worse over the last 10 or so years.  There is no "security" issue here, simply secrecy for the purpose of screwing you by restricting competition.

  • You could use your smartphone on any network you wished.  This one you "sort of" won on already, but the manufacturers are trying to reverse that win.  You bought the phone, you own the phone, but a software lock prevents you from using it on any other than the network to which you originally attached it.  Who owns that device, once again?

  • Your medical costs would drop by 80% overnight, with essentially all chronic conditions being able to be paid for in medication or devices with cash for virtually everyone.  You would only need "insurance" for truly catastrophic events, but even those would drop in cost by that same 80%.  The entire reason to have "Obamacare" in the first place, say much less medical insurance for virtually everyone, would vanish like a fart in the wind.

What happens when this sort of software is embedded in your furance, for example?  If you think this is a fantasy you're wrong; this sort of software, protected by so-called "digital locks", is showing up in everything.  How long will it be before this is abused to lock you out of your own home or prevent you from heating it because of some alleged "violation" that the manufacturer conjures up, and how does that meet with the premise that you bought and  paid for said object?

Copyright law prevents copying, but the underlying assumption is that if you copy a thing it's for the purpose of distributing it to others.  That's because historically-speaking the two were inextricably intertwined; nobody made a copy of a book without the intent to give it to someone to read at the same they possessed it.

Today this is flatly not true; if I "copy" the software in my car into a computer for the purpose of changing it on my car I still have one operational copy of said software in use at a given time -- it's in my car.  Likewise, if I "copy" the software on my cellphone, washing machine, refrigerator, garage door opener or other device and change it, provided I use it only on a device that I lawfully acquired and own there ought to be nothing wrong with that.

This is where the law must be changed; the intent of the law is fine but the wording and rank abuse by companies like General Motors, John Deere and others must not stand.

Since these firms assert that we in fact didn't buy that which we paid for and which they sold to us I have two solutions -- either they cut that crap out or we must alter the law and force them to comply with the doctrine of "first sale" -- that once you have lawfully acquired a thing it is yours to do with as you wish -- period.

View this entry with comments (registration required to post)
 

Main Navigation
MUST-READ Selection:
Wake Up America

Full-Text Search & Archives
Archive Access
Legal Disclaimer

The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.

NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.

The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.

The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.

Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.