Business as Usual
…..Fewer quits. Small biz optimism fades. Oil glut continues. Grain glut continues. New York offers free tuition and details. Retail death spiral. Fly the friendly skies of United. More on the Wells Fargo report.
Financial Review by Sinclair Noe for 04-11-2017
DOW – 6 = 20,651
SPX – 3 = 2353
NAS – 14 = 5866
RUT + 9 = 1376
10 Y – .06 = 2.30%
OIL – .03 = 53.37
GOLD + 19.60 = 1275.00
The Labor Department’s JOLT survey, or Job Openings and Labor Turnover, shows job openings rose 2.1 percent in February to a seasonally adjusted 5.7 million. While more employers are seeking workers, hiring fell 2 percent compared to January to 5.3 million. Job openings have increased 3.2 percent over the past 12 months. More than 2.5 million people quit their jobs in February, but that was a sharp 19.6 percent decline from January. More people quitting their job is a positive sign because workers typically only quit one job when they have another job, or are optimistic they can find one. And the reason workers change jobs is typically motivated by better pay. So, this is where optimism meets reality.
The National Federation of Independent Business said its monthly sentiment gauge fell 0.6 point to 104.7. Small business optimism declined as sales expectations and earnings came back to earth after a post-election surge. In March, some warning signs appeared. The uncertainty index rose to 93, its second-highest reading on record. “More small business owners are having a difficult time anticipating the factors that affect their businesses, especially government policy,” noted Bill Dunkelberg, the groups’ chief economist. But pessimism was widespread in March. Of 10 survey components, only three notched an increase. Owners say they’re still struggling to find qualified labor: 85% report few or no qualified applicants for open positions. More survey respondents said finding qualified workers was their single biggest business problem — more than those citing weak sales. Economic expectations remain “very elevated,” with 46% expecting better conditions six months from now.
OPEC states cut oil output in March by more than they pledged under supply curbs and Saudi Arabia has told OPEC officials it wants to continue output cuts for an additional six months. Those cuts are being matched by US production. US crude inventories have touched record highs at the storage hub of Cushing, Oklahoma, and in the Gulf Coast in recent weeks.
World stockpiles of corn and wheat are at record highs. From Iowa to China, years of bumper crops and low prices have overwhelmed storage capacity for basic foodstuffs. Global stocks of corn, wheat, rice and soybeans combined will hit a record 671 million tons going into the next harvest – the third straight year of historically high surplus, according to the Department of Agriculture. In the United States, farmers facing a fourth straight year of declining incomes and rising debts are hanging on to grain in the hope of higher prices later. They may be waiting a long time. The overflow in the United States has prompted a rush for temporary storage. The USDA has approved permits for more than 1.2 billion bushels of temporary and emergency grain storage – such as tarp-covered piles and open-air mounds. That’s a record amount, according to the USDA. The USDA forecasts net farm income will fall 8.7 percent this year to $62.3 billion – the lowest level since 2009.
New York lawmakers have approved a plan to make attending public colleges and universities free for students from middle-class families. New York is the first state to offer free four-year tuition. Previously, Tennessee and Oregon created programs that made community college tuition-free. Altogether, the program is expected to cost New York $163 million and is expected to benefit roughly 940,000 families; although it might require a college degree to understand the details. The New York plan, nicknamed the Excelsior Scholarship, will be phased in over three years: Families earning up to $100,000 a year will qualify in 2017, families making up to $110,000 per year can participate in 2018 and families with income up to $125,000 can take part in the program in 2019. Students must first apply for, and use, other money like federal Pell Grants, before turning to the scholarship. By zeroing out tuition, low-income students won’t be able to use their other scholarship and grant money to cover living expenses. Books, fees, food, housing and incidentals aren’t covered by this scholarship, so students without family support must work or borrow. The Excelsior Scholarship is good for two years for a two-year program like an associate’s degree, or four years for a four-year program. Only about one-third of students earn a degree in 4 years or less. There will be deferments for graduate school and “extreme hardship.” The plan also requires students to work in New York state for at least two years after they receive an associate’s degree, or four years post-bachelor’s. If they leave, the full grant retroactively becomes a loan. This is how New York taxpayers will be repaid for their investment in a more educated workforce.
It’s only April, and nine retailers have already filed for bankruptcy since the start of the year — as many as all of last year. Annual retail bankruptcies peaked at a total of 20 in 2008 — a level that the US could reach by September if the current rate of filings continues. Payless ShoeSource, hhgregg, The Limited, RadioShack, BCBG, Wet Seal, Gormans, Eastern Outfitters, and Gander Mountain are among the retailers that have filed for bankruptcy so far this year, and most are closing hundreds of stores as a result. On top of those closures, retailers that are staying in business — at least for now — are shutting down a record number of stores. More than 3,500 stores are expected to close over the next several months.
Traditional retailers with large fleets of physical stores have been hit the hardest. Visits to shopping malls have been declining for years with the rise of e-commerce and titanic shifts in how shoppers spend their money. Visits declined by 50% between 2010 and 2013. Malls across the country are struggling to stay open as stores close in droves. But it’s getting increasingly more difficult to find replacements for lost tenants.
By now you’ve seen the video of the United Airlines passenger dragged off the plane. This is a case study that will be re-lived in textbooks for years; an example of how not to do it. United Airlines CEO Oscar Munoz today released another statement regarding the violent removal of a fare-paying passenger from one of his airline’s flights over the weekend. After two poorly received releases on Monday, Munoz has finally apologized to the customer. The tone of Munoz’s latest statement is a departure from his first, which apologized only for having to “re-accommodate” certain passengers. Yea, I remember watching Mike Tyson re-accommodate his opponents in the ring, but I never saw it on an airplane. In a later letter, Munoz reaffirmed his support for his employees; their work just got much more difficult. And the apology would have resonated better if it had come out before United shares lost close to $1 billion in value intraday (shares closed down 1.1%, a loss of about $250 million). The incident is not all that surprising; rather it seems like a sign of the times.
Yesterday, we talked about the Wells Fargo report on its fake accounts scandal; which included $75 million in clawbacks from 2 key executives who were earlier fired. The chairman of the board was also making the media rounds trying to persuade skeptical newscasters that having Stumpf retain 3/4 of the pay he’d earned when the abuses were underway was adequate. The New York Times depicted the report as “scathing”. In fact, it is a carefully crafted document to dump all responsibility on Stumpf and Toldstedt, both of whom clearly are culpable, and shield the board and the new CEO. Anyone who knows much about banking will see clear footprints that the board ignored basic risk management failures and poor governance structures. The report describes the glaring risk management failures. But the report tries to normalize them as being unfortunate features of how Wells did business that worked out badly rather than glaringly obvious control failures where not only top executives but ultimately the Board is responsible. Even worse, the report proves the board’s negligence by indicating it had noticed a major deficiency, that control functions were reporting to unit/profit center managers like Tolstedt, in 2013, yet was leisurely about addressing it. Keep in mind that is exactly the same kind of deficient structure that led to the JP Morgan London Whale scandal. It is a basic risk management failure to have control staff report to profit center managers.
The fact that the total hard dollar customer losses were small despite the brazenness and scale of the fraud was the big reason the former CEO thought he could brazen this out. And given that sanctimonious Wells had taken vastly more from customers via foreclosure abuses, this lackadasical effort might have otherwise seem reasonable. After all, the traditional check on this kind of nickel and dime grifting, class action lawsuits, have become almost as rare as the dodo bird thanks to the successful efforts of Corporate America to cut them back. Several prosecutors are supposedly still looking into further action but don’t expect much. Whistleblower retaliation claims and other types of wrongful termination suits could be affected to add up to more serious payouts, and even more important, continued media focus on Wells’ bad conduct. Wells is not out of the woods, but sadly it is more likely to suffer the drip, drip, drip of individual cases than a prosecution or even a nice juicy civil suit against Stumpf or board members derelict in their duties. And that is the problem – airlines can beat a passenger senseless and drag him like a slab of meat off the plane; banks can lie, steal and cheat – and in an extreme example, someone gets fired, they lose their multimillion dollar bonus, and that is that. Nothing much more. Business as usual.