There's still time left for President Obama to watch "The Wolf of Wall Street." The Martin Scorsese epic (I use the word based on the average time of the movie) focuses on the penny stock impresario, Jordan Belfort, whose short but amazing run is the stuff of legends (at least it is now). Of course, this is a Hollywood movie so there are the obligatory knocks on Wall Street, like the line from an old street vet: "we don't make anything on Wall Street." That's not the part of the movie President Obama should be concerned with, in part because he already believes it, and secondly because it's a million miles from the truth.
In the movie, Belfort (played by Leonardo DiCaprio) goes to work for a penny stock firm based out of a large auto garage on Long Island. He becomes an instant hit by pitching a crappy company's stock over the phone, using skills learned at a white shoe firm on The Street. The place erupted as he made the company sound like a true up-and-comer, something anyone from a true novice to a seasoned investor would like to take a shot at putting this in their portfolio. That was the seminal moment when the nascent penny stock industry moved from pitching stocks to plumbers, to selling stocks to millionaires.
President Obama is probably going to try to talk up the good parts of the economy with smoke and mirrors, and the selective use of statistics. But the Commander in Chief is also going to describe an unfair nation in crisis. He will hint at a nation on the edge, because successful people are rewarded too much and unsuccessful people are not rewarded. In essence, the speech will once again attempt to "fundamentally change" America from a nation that's zoomed to the top, via intense competition, and massive reward for any winner from any background, nationality or race.
Moreover, he will paint a future America that is the exact opposite of what Belfort did. He will take the greatest nation in the world with the most incredible economic machine, and make it sound like a small widget shop in a tin-roof building ready to collapse. We'll hear how mean-spirited it is that a high school dropout with three children isn't paid more, because the CEO makes a lot of money (in the process, it will be hinted the company should also be responsible for subsequent children born to this woman). In some ways, the irony is that less than 3% of Americans work at the federal minimum wage. In the meantime, millions of skilled jobs are going begging.
It's time to talk up the greatest that there is and to continue to be the United States of America.
From King to Pauper to King?
Burger King has always suffered from being the also-ran in the burger wars, but in recent years, its plight became even worse. The company has embarked on a comeback, but the fact is that it continues to struggle in the United States.
Against this backdrop there are those that argue that the company could pay its workers $15.00, and that it wouldn't impact overall hiring, growth strategies, or the bottom line.
The people have never bothered to read the company's income statement.
In the September 2013 quarter, the company-owned expenses as a percentage of total revenues didn't leave a lot of money, considering taxes, renovations, and having some cash in the bank.
These business trends speak to a reality ignored by shakedown artists. Business conditions in America are awful. For most large corporations, recent improvement in fortunes comes from outside the United States, and Burger King is no exception.
President Obama might think profits earned in Sri Lanka, belong to the guy making fries in Lansing Michigan, instead of the company and its shareholders, but he's wrong.
President Obama and anyone else that thinks the focus should be on a higher minimum wage, rather than on higher educational standards and higher personal standards is lying to the nation, and is setting the nation up for a fall. We have to get away from the victimization of America, and discuss each individual's role in being a warrior for the nation.
We have to get away from the notion of a country, where individual effort is subordinate to a government controlled outcome based on an obsession with fairness, that's measured by how many the wrongs of yester-year are reversed. We have to stop suggesting, that somehow people be paid beyond what the free market can produce, because it's the right thing to do.
They call it economic justice.
I call it economic insanity.
The focus on a higher minimum wage has been a topic for the black community for several election cycles, and now it's blanketing the entire nation. This isn't how to bring out the greatness of the people; it's about anger and encouraging mediocrity with artificial economic rewards.
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"The Wolf of Wall Street" was to be an indictment against individual excess, Wall Street and capitalism, but it unwittingly spoke of people from the wrong side of the tracks finding a way to play with the elitist big boys. Moreover, it pointed to the unbridled energy that can be created when people control their own destiny, and aren't wards of the state. The woman with three kids that got off welfare is now a successful clothing designer. There are ways to unleash this kind of energy in America at-large, and it's not by bad-mouthing low margin businesses for not overpaying its low-skilled workers.
Talk about the greatness of America, Mr. President...just once sell the nation in a way that makes everyone want to buy in, that makes everyone want to reach for the brass ring, and that makes everyone believe the future is unlimited.
The stock market took it on the chin Friday, with its first 300-point drubbing since June 20, 2013. It was the culmination of the worst week in years as several issues popped up; one after the other, but the biggest was a problem not even on most radar screens. Growing pangs and missteps in emerging markets came to a boil last week. Blaming Fed tapering was the reason of the day, but I think BlackRock's Larry Fink got it right when he said that, that was an excuse, and that the true culprit is bad policy. These policies had already slowed growth and have hampered the equity markets in these nations for the last couple of years.
India has an inflation problem, but rejected the expansion of big box retailers that would have put into place distribution centers and competition, that could have reversed sky high prices on things like onions. India's new top central banker has taken the tough route, which is smart, although it could make near term sledding rough.
Turkey has been in turmoil since last year and this year another scandal threatens to topple the current government. Argentina has been a basket case for years, with corruption and arrogance, that promises to make borrowing expensive and governing almost impossible. Still, few were prepared for emerging countries to experience a currency crisis. I've watched the mistakes and written about them, but didn't suspect a volcanic eruption all of a sudden.
Is this the Black Swan?
I don't think this is the unpredictable event everyone predicted, but nobody predicted. Yet, when I hear currency crisis, I'm immediately reminded of two events that seemed to come out of left field, and certainly caused global turmoil in a short period of time:
* The Mexican Peso Crisis of 1994
* The Asian Crisis 1997 sparked by the collapse of the Thai Baht
In both cases, a decline in foreign reserves or no foreign reserves, coupled with heavy debt loads and currencies artificially pegged to the dollar sparked uncontrollable panic. Easy money policies masked certain problems in emerging markets, including bad polices that Fink referenced. These nations need their currencies to remain cheap, otherwise debt servicing will become more expensive and inflation will make life more expensive. This equals less purchasing power, which directly impacts US companies that have feasted on global expansion. Whether this is a flash in the pan remains to be seen. Major currency crisis in the past, ultimately needed international intervention, but not before serious damage was done.
After refusing to make a stand for the Baht in June 1997, Thailand saw its economy go into a tailspin, with its stock market down more than 75% over the next twelve months. But intervention and a bailout, coupled with real banking reforms helped the nation come back by 2001. By 2003, the IMF was repaid four-years ahead of schedule, and the Baht recovered against the dollar. The harrowing tale is a reminder of just how connected the world is. Considering I had never heard of the Baht, until then and that it could have been the microscopic domino, that eventually knocked them all over is still halting.
I think circumstances are different this time and most nations hit by contagion fears last week, have mechanisms to ease or stop the pain, but the question is; does the political wherewithal exist?
In the meantime, back at home only 64% of companies have beaten earnings consensus this round, and only 60% on Thursday and Friday. Anyone that was itching to sell had enough reasons to do so, while would-be buyers understood the wisdom of waiting on the sidelines. I've been looking for a pullback for some time. There were a couple of periods when we asked subscribers to move into cash; more than 20% last year and the same early last week. There is an emotional side to a sell-off that makes everything else irrelevant in the near term.
But as investors, the idea is to buy, not sell great stocks when they move lower, especially unless the fundamentals have really changed. For now most have not.
Caterpillar Q4 Beats
Caterpillar (CAT) is seeing a good boost in the premarket by approximately 7% (although we do note it had sank approximately 6% last week), following a nice beat on Q4 earnings which is a relief to see after what was a very tough 2013 overall. They beat consensus by $0.26 on the bottom line at $1.54 per share, with revenue down 10% to $14.4 billion versus $13.6 billion consensus. A 10% sales decline is still a little discouraging, but it marks an improvement over the 18% drop in Q3. The primary source of weakness continues to be mining where sales were down 48%; it remains a challenging industry where not only has actual mining activity been slow, but there is still a glut of unused equipment. Management sees a further 10% decrease in mining sales in 2014.
But beyond mining Caterpillar is looking solid, and in fact in reaction to the mining woes the company has implemented a number of cost controls including shutting down factories and reducing its workforce by 6.8% during the year. Beyond that, manufacturing costs have been managed, and gross margin was even able to increase by 80 basis points despite the loss of those higher-margin mining sales. Construction, the company's largest segment, was up 20% and while it did benefit from cycling over a big dealer inventory reduction in 4Q12, rising end demand was apparent particularly in Latin America, Asia and North America. Speaking of Asia, Chinese revenue was up more than 20% in 2013.
While mining certainly remains a concern, it's a problem that's been well known for some time now. The important thing is Q4 appears to be the point at which total revenue declines softened and cost management really gained a foothold. It's a recovery in the works and if mining can eventually get sparked back to life even better.