Monday, May 25, 2015

Clinton, Business and Oxymorons

To concurrently think of a politician and business is tough. But to think that Hillary Clinton is somehow a business guru is plain impossible. Now that you don't have to take my word for it. On May 21st, Hillary's handlers wrote an Influencer post for the LinkedIn audience. The topic? Business.
picture of Hillary Clinton in front of local small business owners.
Is she thinking about what advice to give you or
how to destroy you and your business?
Let alone the fact that LinkedIn Influencer posts are reserved for those with authority on a given subject; Hillary's own account of her expertise were her experience as a daughter of a once business person. Nonetheless, no one was impressed by the fact that this was her only Influencer post ever.
In a nutshell, Hillary and her team somehow think that using the platitude-ridden shallow-message style commonly deployed by her and Obama would be effective with an educated audience. Well, based on the comments, their calculations seriously failed. Aside from the many hardcore feminists, the left faithful or those who simply felt sympathy for the attempt, most saw the post for what it was: a failed attempt at voter pandering. 
But why not let you decide for yourself. Here is a transcript of what she wrote. Then, you will get a chance to read my comments to her main points. Yes, I am being a little picky. While I would allow a new manager to get away with similar comments. I have little patience with those who have access to the best minds in the world yet opt to instead make a half-hearted attempt. In essence, I feel their message is "here is what you want to hear but which I just don't care about". In my opinion, this is totally unacceptable.

When I was growing up, my father owned a small business. And when I say small, I mean small: It was my father and an occasional day laborer. My mother, brothers, and I would help do the silkscreen printing on the drapery fabrics he sold. We were an all-hands-on-deck operation, guided by my father’s belief that if you worked hard and did what you were supposed to do, opportunities would be there for you. 
Despite generations of progress on so many other fronts, it’s still too hard to get a business started today. Hard work is no longer enough to guarantee opportunity. Credit is too tough to come by. Too many regulatory and licensing requirements are uneven and uncertain.
And yet, as I travel around the country, I hear signs of optimism. Just yesterday, I sat down with a group of small business owners at Bike Tech in Cedar Falls, Iowa. I met a young man named Brad Magg. He started his first catering business at 15 with a loan from a local bank — they were willing to take a chance on a very young entrepreneur after years of watching him sell baked goods while in elementary school. At 20, Brad decided he wanted to start a restaurant — just as the owner of the local ice cream shop, Goldie's, was getting ready to retire. He bought the business from Goldie herself (and liked the name so much he kept it). Like many business owners, Brad struggled to make ends meet during the Great Recession, so he sought help from a Small Business Administration program in his town. With support and sheer determination, he was able to save his business. Today Goldie's Ice Cream Shoppe has grown from one and a half employees to almost 30.
That’s the spirit that got Americans through the Great Recession. And as we come back from the crisis, potential new business owners and entrepreneurs from Silicon Valley to Des Moines to Brooklyn are ready to seize the moment. All they need are policies that help them get ahead instead of holding them back.
That’s why I want to be a small business president. Throughout this campaign, I’ll be proposing specific ways to help jump-start small business, including:
1. Cutting the red tape that holds back small businesses and entrepreneurs. 
It should not take longer to start a business in the U.S. than it does in Canada, Korea, or France. 
2. Expanding access to capital.
Small business owners need access to financing and credit to build, grow, expand, and hire. Lending has recovered since the crisis, but it’s still hard for new firms to get credit. A Federal Reserve Survey found that the current market is especially hard for the smallest firms and startups. And despite the fact that millions more women have opened businesses and become their own boss in recent years, they're still starting out with about half the financial capital as their male counterparts.
3. Providing tax relief and tax simplification for small business.
The smallest businesses, with one to five employees, spend 150 hours and $1,100 per employee on federal tax compliance. That’s more than 20 times higher than the average for far larger firms. We’ve got to fix that. 
4. Expanding access to new markets.
Every American small business should be able to tap new markets — whether they are across their city, across their state, or around the world. Some American businesses are already doing this through new platforms, such as Etsy and Ebay.
The early lessons I learned about hard work and entrepreneurship have stuck with me all my life — a sentence my father would be thrilled to read. In the weeks and months to come, I want to have more conversations with people on the frontlines — people like Brad in Iowa, who have seen firsthand what’s working and what isn’t. Then, we need to build their experiences into our policies —because small businesses are the backbone of our economy, and they have as much to teach us as ever.

And now my reply:

"1. Cutting the red tape that holds back small businesses and entrepreneurs" 
I love the idea of less government. It is well documented that a few smart central managers will never outperform us all. Yes, I am talking about the many studies about the wisdom of crowds. Despite whatever your friend Barry says about the fact that business owners are simply the recipients of hand-me-downs from society, I ask for no more Nanny-state please. Business owners can fend for themselves if government gets out of the way. Just remember that before there was big business in this country, small business was pervasive despite the dog-eat-dog environment of the era. Anything is better than the predatory redistributionist government that we now have; which punishes small business. Just think of it, tax collections have accelerated at the same time that business profits have collapsed. And of course I am talking about business in general and not just about the financially engineered P&L's of the Blue-chips. For further insight Ms. Clinton, just check the St. Louis Fed's website. It's all transparently there.

"2. Expanding access to capital" 
image of a male's empty pocket
When big government crowds out small business
If only you understood that it is big government that's crowding small businesses out of capital markets by its unsustainable borrowing. Yes, I know that this comment is esoteric and that it may go over the head of many, but government and its many so called brilliant advisers should know better. Despite of where the Fed may fix interest rates at, risk aversion has made it impossible for small businesses to borrow at reasonable rates. For all intents and purposes, small businesses have been kicked out of capital markets since the recession ended. And considering that capital is always needed to fuel small business growth and that all marginal employment growth is 100% levered to small business innovation driven growth, it is not surprising that employment has been stagnant, in spite of the book-cooking taking place around headline data. Just look below the headline, Ms. Clinton, and you will see the facts elegantly connect. If big government stops living beyond its means, it will borrow less. Capital will then be available for long term capital investment, the kind used by small business. But don't just take my word. Besides looking at the St. Louis Fed's website, I suggest you review all recent public presentations by Greenspan. It seems that now that he has been out of government for a few years he has totally reformed. He is starting to make sense again.

"3. Providing tax relief and tax simplification for small business" 
Tell that to your friend Barry. We already knew it.

"4. Expanding access to new markets"
Image of long line of dissatisfy customers
Ms. Clinton misses the whole point
about small business.
Ms. Clinton, no doubt that you miss the whole point about small business. By definition, small business structures are not sophisticated or large enough to viably sustain operations that are excessively diversified. Focus is always the better advice for small business. There are just not enough bodies around the office to handle customers with diverging needs. And if you think that a business can become large by setting up an eBay account, just ask the many who have tried to see how difficult it is to profitably serve every little picky request by customers who hold you hostage to your public ranking. No, small business reach new markets not by fiat, which is clearly the only way you know, but through innovation. It is their innovative approach to unsolved needs that allows small business owners to serve diverse customers. Different customers are all bonded together by their common need. Thus, a small group of one can build a viable business before she has to worry about HR and the many business regulatory needs. To help us all, I ask that you and the rest of Washington stop getting in the way of small business. Clearly the relevant concepts elude you all.  

Saturday, March 14, 2015

Capital Misallocation DuJour

Let's polish your financial and accounting skills. What price would you put on the stock of the following Fort Lauderdale based company? 
Their Investor Relations web site reads as follows (minus a few crossed-out words to keep the suspense going):

Photo of person marking the words Marketing and others on a transparent board."The Xxxxxxx, Inc. is an American entrepreneurial “emerging growth” company with a brand and xxxx that is widely followed throughout the nation. We believe that xxxxxxx is the “new xxxxx”.  The Xxxxxxx is a fast growing, early mover in the xxxxxxx industry. Management believes that we are one of the most followed xxxxxxx on Facebook, and we believe we are the only known xxxxxxx verified by Twitter.
Many quality xxxxxxxxxxx go into every xxxxxxxx we make which is what we believe elevates our xxxxxxxxxx above the rest and why people line up in front of our xxxxxx sometimes for over an hour to get one of our xxxxxxxxx creations. Our goal is to make people happy with our xxxx.
Our xxxxxxx have received numerous accolades, including being listed as one of the best xxxxxxxxxx in the country."

composite image of the Twitter bird and their check mark
Don't let their "Management believes" and "we believe" statements throw you off. Clearly, both were made by the same person (natural or legal). Let's remember that the speed of growth associated with start-ups often results in simple message mistakes like this one. Now that you can call me old fashion, but I am not sure of the bragging value from being "verified" by Twitter.
And in case you doubt it, the company is real. It's even publicly traded. Their latest 10Q shows revenue at just over $995K, That's "K" as in Thousands.
COGS show at over $920K, and Total Operating Expenses at $959K.
Like with any other up-and-coming company, their 18 million shares-outstanding trade with some volatility. The recent market correction pushed this company's stock down by 29%.
composite image of NBA game between Lakers and Suns
Key assets are deployed in LA and Phoenix
Their key assets are deployed in two important metropolitan areas: Los Angeles, CA and Phoenix, AZ.
As for their balance sheet, liabilities equate to 280% of their assets; thus leaving them with a stockholder's deficit rather than the usual equity. Translation, their founders either blew up all their money or have no skin in the game. Both are bad, if you wonder.
But the market is nonetheless quite confident. That much is evidenced by their rich valuation. How rich, you ask? Well, have you guessed how much capitalization do they deserve?
Say you give up.
Wall street has valued their shares-outstanding at a whopping $71,000,000; which is down from their recent valuation in excess of $100,000,000.
What? These guys are insolvent and losing money by the boat load. Why would anyone give them more funds? Their negative Cash Flows from Operations amount to about 250% of their revenues. Are investors off their tree?
But wait, something important must be missing among all these facts. Why else would financial experts dish out such rich valuation for what amounts to garbage, right?
Let's see, their President / interim CFO has an MBA from the University of Miami. Meanwhile, the CEO has an undergraduate from Jarvis Christian College. Could their pedigree be the reason for so much market good faith?
If you haven't taken a look at the company's name by clicking on the 10Q link above, let me share that the special product they tout is a cheese sandwich... Well, a "gourmet" cheese sandwich. So their main assets deployed are food trucks. To be exact, we are talking about four (4) food trucks.
Not an image of a military-spec food truck with anti-ballistic features and vertical jet liftoff capabilities
Is it possible that each of these trucks will deliver value in excess of $17 Million?
I thought long and hard and continue to be convinced that the trucks must be special. Certainly a mission critical project like theirs calls for military-spec vehicles with anti-ballistic features and vertical jet liftoff capabilities...
... and it goes without saying that the cheese used in their splendid sandwiches must carry self-propelled cancer-fighting nano-agents...
... all features that are highly valued by beer guzzling fairground attendees in LA and Phoenix.
At this moment, I feel the need to clarify that I hope no one has been hurt by my sarcasm.
... drum roll please...
The name of the company is The Grilled Cheese Truck, Inc. I think that it vividly illustrates the orgasmic nature of the Wall Street party that is taking place right now; thanks to the keg sponsors at the Federal Reserve. 
Two days ago, I proposed that the presently inflated stock market valuations were not a sign of economic health. 
Even the best marketing guys I know can't come up with this much fluff-ware.
Financial bubbles anyone?

The Melty Buzz illustration from The Grilled Cheese Truck's website.

Friday, March 13, 2015

Artificial or Else - Questionable US Recovery

They claim the recovery is solid. Just look at the stock market, they say.
picture of CNBC's Senior Economics Reporter Steve Liesman
CNBC's Steve Liesman
Economists like CNBC's Steve Liesman and investment peddlers everywhere insist that the seemingly unstoppable stock market climb is a sign that all is rosy within the US economy. After all, they say, isn't the stock market a price-discovery mechanism intended to value all information about the economy instantaneously?
Well, yes and no. The stock market, like any other market, acts as a pricing tool. Where things go bad is that it is now being distorted by the massive gravitational presence of the Federal Reserve's balance sheet. Never before in history did a single entity monetization so much. Never before did markets have to deal with such a large distortion. Let's take a close look at a sector that I feel disproves their allegations.
image of chart from Saint Louis, MO Federal Reserve showing a decline in Retail Sales at Department Stores compared to an increasing US population
Department Store Sales collapse.
Meanwhile, the buying population increases.
Visiting the Federal Reserve's own website, one can easily see that retail sales at department stores across the nation have collapsed. Things are so bad that I will suggest you take pictures of all the anchor stores next time you visit the mall. In no time, your images of formerly well known dinosaurs will appreciate in value.
But not all is bad of course. Noise is never so simple to clean. The fact remains that a continuously growing US population has made the size of the buying market larger; thus helping grow total US retail sales. Yet, all benefits from such market growth seem to have completely missed department stores across the nation. Just look at the Fed's chart above; department store revenue has fallen to scary levels. As a result, there's even talk about how these players are failing to entice new buyers as they continue to lose old ones.
But don't say I didn't warn you. While my forecast for the beginning of 2015 was a little lower than where things are now, I had told you in my article back in July, 2013 that Department Store sales would continue to plummet. Well, they did.
stock price chart comparison of Dillard's, Macy's and Nordstrom.
Stock valuations of Dillard's, Macy's and Nordstrom
continue to push higher despite horrible retail performance
Surprisingly, though, none of these terrible facts is reflected in their stock valuations. As things have turned worse, stock prices of companies like Macy's, Dillard's and Nordstrom continue to increase; just as if revenue performance was stellar.
So, how is this possible? Isn't bad sales data supposed to push stock prices lower?
While we all know that the stock market can behave irrationally in the short term, we still trust that long term price performance correlates with fundamental health. But as it should now be clear, we are witnessing an anomaly.The expected poor stock price is conspicuously missing. Current valuations rather reflect boom times.
Thanks to the disruptive effect of the Federal Reserve's Balance Sheet, department stores are being rewarded for carrying a poor business model that sports an upcoming expiration date.
The Fed's massive money printing has created the ideal environment for capital misallocation. So the story repeats: excess money is put in the wrong hands and... boom, a bubble pops. Let's hope that shrapnel doesn't hurt innocent people this time around.
If you still believe that the market is really serving as proof of a healthy US economy, don't worry; I have a couple of other posts that will destroy your thesis. Until then, enjoy the volatility.