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2017-02-03 11:16 by Karl Denninger
in Earnings , 304 references
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Let's do Amazon first, all quarter compared against comparable.

Product sales up 15%, net-net.  However, cost of fulfillment was up 25.8%, or damn close to double the product sales increase.  smiley

G&A expense was up 83.9%, or damn close to a double on a cash basis. smiley

AWS (their "jewel") had a 47% sales increase.  Nice.  And operating expenses were up slightly less, 41.5%.  Ok, as far as it goes -- sales going up faster than operating expenses is good, all things being equal.

The problem is that last year, same quarter, AWS sales were up 69.4% and operating expenses were up 46% for that segment.  In other words last year they were providing great improvement in operating efficiency in that segment of the business but that improvement has now dropped to nearly zero.  If any of "operating expense" for AWS is actually recorded in G&A -- and it might be, as there's some flexibility there in how you categorize these items and the G&A growth is explosive compared against last year then in fact the AWS "expansion" is now denting earnings power rather than adding to it.

My money is on exactly that sort of financial game having been played, by the way, because if that was to get into the market the stock would get cut in half in an afternoon.

Remember, AWS is less than 10% of the firm's business.  The day that segment turns from a cash cow to a cash sink is the day the stock is valued as a 1% margin retail delivery corridor and the stock price falls by 50% -- and that's conservative.

There is no rational explanation for an 80% G&A cost increase given the firm's underlying growth rate.  That's not an increase in-line with operating results it's an outrageous spike and I smell financial shenanigans -- legal, almost-certainly, but still shenanigans in the form of cost-hiding and my guess, given the price cuts in AWS services is that that's where the shift came from to try to hide that costs are now increasing faster than revenues, which if true now means that AWS is a net negative to the firm.

I've expected this and in fact previous trends showed that it was coming.  This always happens in highly-competitive service businesses; you eventually reach the point where competition compresses margins and the place where it shows up first is that costs rise faster than sales.  Eventually your margin advantage over others comes down to your execution quality but before you get there your competitors hammer the hell out of you because some of them will be able to drive margins into the 10% area -- and even if you're twice as successful as they are that caps your operating margin off around 20%.

Amazon's stock price assumes this will not happen to them with AWS; if it does they're overvalued by at least 50%.  The problem is that it not only will happen we now have hard evidence that IS happening and I believe they're trying to hide it in their G&A number.

Now let's look at some other uglies.  Media growth rate was down in 2016 in the quarter, as was general merchandise.  It was up somewhat internationally.  Meh, in short -- Amazon is no longer growing AWS explosively; they are being severely pressured by competitors, being forced to drop prices, and expense ratios are going the wrong way in a big hurry.

Now Facesucker.

Facesucker has one big problem -- America is saturated and the rest of the world contributes basically nothing on a per-user basis to their operating revenue.

If you recall I previously noted that the ad volume was way up this last quarter in terms of what I have seen.  Well, that showed up in ARPU.  The problem is that it drove me off the platform.  It may have driven others off too.  Yet since it did so in December and January that means it did not show up in MAUs -- which were pretty flat in America.  Will it remain that way?  Good question.

But the bigger issue here is that the company is out of runway in terms of being able to cram things down people's throats nor grow the user base as it's saturated, and the rest of the world has no ARPU to contribute that matters.  Again, the firm's stock is priced for continued exponential expansion but the numbers say that has ended.

In short both of these firms are seeing what always happens to rapid adoption firms -- you eventually saturate the market.  In addition both firms have stock prices that reflect a forward expectation that trees will grow to beyond the orbit of Mars, which is never true.

There is some justification for this sort of price expansion when a company is very young and the potential for this sort of expansion extends out several years.  However, as soon as the saturation point appears to be within reach then that price expansion should stop.

Sadly it almost-never does, and the result is usually a price "correction" that is utterly enormous when the market gets its arms around the fact that basic arithmetic precludes indefinite exponential expansion.

In other words when the CNBC crooners, "sell side" investment folks and similar have their collective set of crack pipes shoved down their mouths by the intrusion of reality.

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2017-02-03 08:08 by Karl Denninger
in Employment , 320 references
[Comments enabled]  

Wow, man, +227,000 employment screams the Bureau of Lies and Scams.

Uh huh.  Sure.

Ok, ok, the ADP report was strong too.  But if there's something to take from this report and the market's reaction (which was a bit muted) it's short everything.  The folks over in the Treasury pits didn't seem to have trouble deciphering it, incidentally, as the /ZN was bid hard on the release.

Why?

Well, let's look at a few things.

Look at the right side of that chart.  That's January, and the nice blue dashed line is (very) negative.  Now to be fair this is common in January and in fact the surprise would be if you didn't get a negative unadjusted household survey print.

But the unadjusted number this time around was pretty nasty.  Negative 1.271 million nasty, to be precise.  The last two years were -666 and -638, respectively.  The last similar negative number to this one in a January was in 2013, which was -1.4m.

That drops the 12-month running rate to +1,490,000 jobs, from 2,095,000 -- a big drop and the first time it's been under 2m since October of 2015, and that was only for one month.

368,000 came back into the labor force.  That's positive -- but (obviously) they didn't all find jobs.

And the net-net run rate for jobs and new entrants into the workforce was -195,000 on a 12-month rolling basis.

What happened there?

Remember that this is the annual adjustment month -- and magically, about 660,000 assumed labor-force entrants over the last 12 months disappeared when the labor force entrant rate was normed back against the annual census adjustment.

That, by the way, is unusual -- the work-force number is usually adjusted upward, and typically quite a lot.  Last year it was a bit over 400,000, the year prior about 700,000.  It's very uncommon for it to take a large negative adjustment; the last one was in 2011, and it was only about 100k.

What's that all mean?  Employment:population, the determining factor as to the health of the labor market, was down 4 ticks to 59.2%.  This followed last month's 3-tick decrease.  A drop in this indicator in January is common but if it's followed up with another one next month that would not be good at all.

The internals are interesting.  Everyone lost ground on employment:population, but not unexpectedly in distribution.  Seasonal firing (from stores, etc) dented young people and women more than older and men, which is the usual seasonal pattern -- unless you're black, in which case you actually gained on employment:population!  So much for "a bunch of Trump racists will fire every black person in America"; they in fact did the opposite.

Oh, and as for U-6?  It went up a lot -- by a full percent, to 10.1 from 9.1 last month.  Oops.

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There's a polemic going around that the "reform" we need with H1b visas, which are issued to "smart people" from other nations, is to greatly increase their numbers.

That is a damned lie.

The H1b allegedly allows employers to fill jobs that there are no Americans to fill with a given set of skills.  It's a goal that is on the surface good for the economy because the more innovation we have the more America advances, and if the gatekeeping factor on a particular innovation is that there are no Americans able to do a given set of work then allowing someone to come in from elsewhere to do it is a net positive -- that person does a job otherwise unfilled, pays taxes, and contributes to America.

The problem with the current H1b program is that it in fact does none of the above.

The program allegedly requires that an employer must perform a diligent search for an American to do a given job before it can be filled by a foreigner, and that H1b employees cannot displace American workers.  But there are exemptions to those two rules when it comes to having to prove compliance, and they're ugly for American jobs:

  • An immigrant with a Masters Degree is exempt OR

  • An immigrant paid $60,000 or more is exempt.

Here's the problem with such exemptions: $60,000 is a spitting wage in places like Silicon Valley.  It's not much above the median family income nationally, which is outrageous when you think about it -- especially in high-cost locales such as Silicon Valley, New York or Washington DC.  Further, someone with a Masters Degree is exempt irrespective of wage.

Now let's look at the educational situation in the United States.

First, grants and scholarships are almost exclusively limited to undergrad degrees.  That is, all post-grad degree work is for all intents and purposes not available on scholarship.  A Masters typically requires at least 2 years of study beyond the Bachelors all of which the student must find a way to fund.  For nearly everyone this means loans since the cost of said study can easily total $40,000 a year.

In 1989, when the exemption level was set, the cost of college at a private, four-year institution was approximately $22,000 a year in 2016 dollars.  Today that figure stands at more than $45,000 or more than a double.  The same is true for public, four year colleges -- it too has doubled in cost during that time.

This is in inflation-adjusted money which means that's the actual cost increase beyond the rate of inflation.

Allegedly H1b visa sponsors must show that they are not "displacing" American workers or attempting to lower their cost of labor -- that is, they have a real need for the immigrant taking the position and that no Americans are available to do the job.

But the exemption level makes this alleged 'protection' laughable, and leads to situations like that at Disney where IT workers were forced to train their replacement H1b Visa employees in order to obtain a severance package.  This sort of thing would be blatantly illegal except for that exemption level, at which the employer is exempt from having to show they did not displace an American citizen (which it is clear, in the case of Disney, did actually happen.)

Another thing that happens frequently is that the alleged "job requirements" the H1b employee is "expected to fill" is laughably fraudulent.  For example, if you wished to hire me and I was an H1b immigrant you could advertise for a person who programs in "C", embedded Postgres, Fortran-66 and Z-80 assembler, and also writes FreeBSD kernel and device-driver code.  The odds of a recent US University graduate being able to do all these things approach zero; in particular the Z-80 processor was a common device used in computers built in the 1970s and early 1980s!  But if you wanted to hire me, specifically, and I was a foreign national, that would be a really cute way to make sure that "there are no Americans who can do the job."  These sorts of "tailored" job requirements in the IT industry, used as justification for H1b visa applications, is extremely common -- I've seen hundreds of "job listings" with requirements that make exactly no sense on any objective basis and thus are almost-certainly written to fit a specific person that the company wishes to fill on an H1b -- at a much lower salary.  This needs to be designated a felony criminal offense with both ruinous (e.g. $1 million/occurrence) fines and decade-long prison times.  These outrageously fraudulent "requirement lists" are trivially easy to both detect and prove, if anyone cares to do so.

Finally there are "jobshops" that provide contract workers to various employers that have effectively no protection whatsoever.  These shops provide an important service in that they make possible the short-term employment of people for various purposes without the risk of reassignment of what would otherwise be 1099 arrangements retroactively.  These arrangements serve an important role because true 1099 compliance for individuals is somewhat difficult and when you're only working for one person at a time there is a significant risk of being reassigned retroactively by the IRS to the employer.  Such a risk damages the market for short-term engagements in technical fields and the "jobshop" mitigates that by hiring the person and performing the compliance functions; the client is billed on a commercial contract where the job shop takes the risk of non-compliance actions; the employee is typically paid on an hourly or weekly wage.  This is fine but it's very easy for these job shops to hire a bunch of H1b people under the existing rules and effectively screw Americans out of entry-level and short-term work they could -- and would -- do.

The use of H1b employees where no true competition exists, that is, to hire true geniuses in their field, is arguably very good for America.  But its abuse to bring in cheap immigrant labor and destroy the value of domestic STEM degrees is another matter entirely.  Executives and firms that do the latter ought to be imprisoned and their firms destroyed as they are intentionally destroying the value of educational paths that our children have been routinely told is the path to a good middle-class or better lifestyle.

Indeed, as a direct consequence of these abuses I can not recommend to any teen today that they go into a STEM field, particularly a computer-related field.  The odds of them being screwed either right up front or a few years down the road exactly as has occurred dozens of times in the United States, including, it is alleged, at Disney is enormous and there is effectively no means of defense available to mitigate the risk.

The bottom line is that the only justification for H1b visas at the present time is to radically drive down wages in the marketplace by importing cheap labor.  H1b visas particularly disadvantage American technology workers and graduates, especially those with moderate skill levels, despite alleged protections in the law to prevent that very thing from happening.

Fixing this problem and ending H1b abuse permanently is not terribly difficult.

First, the exemption level must be dramatically raised.  It was inadequate in 1989 to prevent the displacement of American workers and is laughably so now, given the ridiculous escalation in college cost.  Said wage must also be indexed automatically to prevailing wages so there is no further requirement for Congressional intervention.  This abuse has grossly expanded in the last 20+ years as a direct result of Congressional malfeasance and "lobbying", better known as bribery, by high-tech firms.

Second, the Masters exemption must be entirely removed.  There should be no exemption for formal education if the goal is to actually employ geniuses.  While many in this class have advanced degrees a degree of any sort is neither necessary nor evidence of being a genius!  There are many examples through history of people who were unquestionably geniuses yet had no formal higher education at all and more than a few who never finished High School.  Thomas Edison anyone?  This also will destroy the ability to use educational cost arbitrage across national boundaries to bring in foreigners.

Finally, the rampant and outrageous abuse of this program by "outsourcing" jobshops must be ended by eliminating the ability of firms to use H1bs for any sort of contract worker that is to be assigned and re-billed to a client.  Any such use of H1b employees must be absolutely barred.

Zoe Lofgren of California has written such a bill. On first blush it looks to hit all the important points.  You can bet there will be much screaming from Silly Valley and elsewhere but the simple reality is that if you are truly using H1bs to bring in "the best of the best" then you won't object to paying them $130,000 a year or more, nor will you try to argue that if someone has a Masters they're exempt and "no American can compete for that job."

Those who speak against reforming this widely abused program that screws Americans by the tens of thousands a year out of good-paying tech jobs must be shunned and to the extent they run firms in the high tech space consumers must boycott and trash their firms as their actions are unAmerican and seek to intentionally replace Americans with cheaper foreign labor.

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It seems some of you folks think that Trump "somehow" said he was going to help you with drug costs (a component of medical care, but only about 15% of the problem.)

In fact there are some bloggers out there who are trying to find something "good" in the "news conference" yesterday on that point, and the meeting with the pharma folks.

Then of course there's the fact that Trump made a Supreme Court nominee announcement yesterday, completely blacking out any further debate or discussion over the pharma meeting, sending Trump's supporters into a frenzy of knob-slobbering while his opponents immediately went into a full-on temper-tantrum meltdown -- including Senators who had voted for him to be confirmed to the Court of Appeals about 10 years prior.  (I note for the record that such was done on a voice vote -- there were in fact zero Senators opposed to him in 2006 and as such no roll call was necessary!)

If you think the timing of these events was coincidence your IQ is smaller than my shoe size; distracting people from something important with an event that the announcer knows will steal all the oxygen out of the news cycle is a time-honored act by all political animals, and Trump is no different in that regard.

But just in case you missed the real news of the day here is what Bloomberg reported yesterday on the pharma meeting:

Drug company executives were also heartened by Trump’s promises of lower taxes, quicker regulatory approval, and help defending them against foreign countries that are able to charge less because American consumers pay more.

Got it?

Pfizer almost-immediately said they were not going to alter their pricing model or intentions as well, confirming this statement and got no pushback from Trump on same.

Pfizer's stock yesterday? Up. (They did announce earnings yesterday, which may muddle this for them.)

Merck?  Up.

Valeant? Up.

Roche? Way up.  (They have earnings this morning, so there may have been a leak.)

Novartis? Up.

Celgene? Up.

Detecting a pattern here yet?

I remind you that actually addressing these issues requires no new laws as 15 USC Chapter 1 is perfectly adequate, and that McCarran-Ferguson was attempted to be used to defend price collusion between pharmacies, drug companies and insurance firms in the 1970s, went to the US Supreme Court and the insurance and drug companies lost.

Held: The Pharmacy Agreements are not the "business of insurance" within the meaning of § 2(b). Pp. 440 U. S. 211-233.

(a) Section 2(b) exempts the "business of insurance," not the "business of insurers." Pp. 440 U. S. 210-211.

(b) A primary element of an insurance contract is the underwriting or spreading of risk, SEC v. Variable Annuity Life Ins. Co., 359 U. S. 65, but that element is not involved in the Pharmacy Agreements, which are merely arrangements for the purchase of goods and services by Blue Shield, enabling it to effect cost savings. Pp. 440 U. S. 211-215.

Being a United States Supreme Court decision that case is entitled to stare decisis, the principle in the law that what is decided, is decided.  In other words Mccarran-Ferguson, a law which does exempt insurance companies from most anti-trust regulation provided they are regulated by the states, does not extend to an "arrangement" for purchase of goods and services by said insurers.

THIS ISSUE WAS DECIDED IN OUR COURTS MORE THAN 30 YEARS AGO AND YET TRUMP HAS NOT SHOWN ONE INDICATION THAT HE INTENDS TO ENFORCE THE LAW IN THIS REGARD, JUST AS BARACK OBAMA REFUSED TO, BUSH REFUSED TO, CLINTON REFUSED TO AND BUSH BEFORE HIM REFUSED TO.

IF YOU WISH TO CLAIM THAT SUBSEQUENT LAW HAS PROVIDED RELIEF FROM THIS RULING TO MAKE THE ACTS OF THESE PARTIES LAWFUL THEN SHOW ME EXACTLY WHERE IT IS AND WHEN IT WAS PASSED.

Until you do your mandate and that of the mainstream press is in fact to show me and the rest of the nation where the first mandate of the Executive -- to enforce the law -- is occurring or even being contemplated when it comes to the financial raperoom that is our current US medical and pharmaceutical system -- a system that was challenged, went to the Supreme Court and was ruled unlawful as the claimed exemption does not exist.

You can't, I argue, because it is my considered position that no such evidence exists.

To those who are currently believing Trump is going to 'help' when it comes to medical care, Obamacare and the rapejob that is being done to you when it comes to the issue of cost of medical care in the United States let me point out that if you don't get your mouth off Trump's schwantz right now you're going to quickly discover that all you did was put spit on it so he and all the fine executives at Merck, Pfizer, Roache, Novartis, Celgene, hospital administrators, diagnostic centers, doctor's offices and others can shove it further up your ass.

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2017-01-31 17:10 by Karl Denninger
in Editorial , 496 references
[Comments enabled]  

You don't need to be someone's "friend" to see all the nonsense that they spew on Facebook or Twitter.

You just need to be a friend of a friend if on Facebook, or be mentioned on Twitter -- and it comes up on your "timeline" (Newsfeed, etc.)

So here's how you turn these social media monstrosities, which make their money by selling your eyeballs -- that is, you -- against them.

You know all those posts you see from people that you believe are insane?  Let's say you're a Trump fan and see someone bashing him.

Save his name to a local file and whatever he makes public (e.g. where he is, who he works for, screenshot his profile picture, etc.)  You can even save the data to your cellphone's contact list under some category (like "jackass") for easy reference and confirmation later on when you are out and about.

See him later somewhere?  Don't hire him.  Don't do business with him.  Don't buy in a store if you walk in and he's the clerk.  Walk out if he's behind the bar you walk into.  Just don't associate.

This is not illegal nor is it against the rules of these social networks.

You're not "data mining" them for resale or redistribution and you are fully within your rights to use whatever information another user voluntarily discloses in public to you for any lawful purpose.

Not only is "he's a jackass" not a protected class avoiding people you think are *******s is a perfectly-lawful purpose.

The best part of doing this is that it returns such "social networks" to being something that is of value to you instead of you being of value to them.  It's even better if you mark all your posts "friends/followers only" or don't post to them at all.

As a nice side effect not only do you get value from the "social network" instead of the other way around if any material percentage of people were to do this -- even a small percentage -- it would trash their ability to sell "universal reach" and thus their market value because the entire premise on which they sell "eyeballs" would go up in smoke since the only people who would see someone's posts are their pre-existing "friends."

The cherry on top of it is that the more-promoted and better-known the "thing" or "person" is that generates the idiocy the more-effective this is as the list of jackasses to add to your list will be extremely large! 

Finally there is exactly nothing the social media companies can do about it or even detect that you're doing it.

I'm doing it and have been for quite a while.

And I've got quite the database at this point...... smiley

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