Weak "spending among younger consumers," is what CEO Mike Jeffries blamed for the sales debacle that has beset his company. And a debacle it is. Net sales in the third quarter, ended November 2, fell 12%. Same-store sales plunged 14% in the US and 15% internationally. Only internet sales rose, up 11%. And it’s going to shut down its Gilly Hicks lingerie stores. So there would be "non-cash" charges – that is, cash expenses incurred years ago but parked on the balance sheet as an asset that has now decomposed: $90 - $100 million. Real cash money down the drain. For the fourth quarter, the company projects comparable sales to skid in the "low double digits" and sees "significant gross margin rate erosion." CEO Jeffries lamented “continued top-line challenges.” No kidding! He said they’d completed their “long-term strategic review” and that they “believe” that they “now” – finally! – have “a clear roadmap for sustainable growth....” By blaming “younger consumers” for the company’s sales misery, he added to the growing list of his culprits. In the second quarter, when US sales had plunged 8% – mostly covered up by international sales that had, unlike this quarter, soared 15% – he put women on his list of culprits. “Softness in the female business,” he called it. Even then, he fingered the young consumer: While “consumers in general” might be feeling better, he ventured – consumer confidence indices have been plummeting since then – “that’s not the case for the young consumer.” Turns out, the next generation of buyers isn’t buying. With implications for the industry. Stock is swooning, down over 6% at the moment, and down 35% from its 52-week high.
According to Interior Minister Hans-Peter Friedrich, a decision has been made; despite public pressure to do so, Germany would not offer asylum to Snowden. Reason: he isn't a victim of political persecution – regardless of how he phrased it in his letters to German politicians and in his “Manifest for the Truth,” published by the Spiegel on Sunday. But German authorities will make the pilgrimage to Moscow to take his testimony on the NSA spying scandal. Germany is a mercantilist state where exports are more important than anything else, and it runs a huge trade surplus with the US, and it isn't about to muck up that situation. And they know it. “Hardly any other country has profited so much from the transatlantic relationship as Germany has,” explained government spokesman Steffen Seibert. So now, after the enormous stink that bugging Chancellor Merkel's cellphone has stirred up in Europe, it’s time to do some fence-mending with the Obama Administration, which is on top of the priority list. To heck with Snowden. President Obama will present an intelligence-cooperation framework between the US and Germany in a few weeks, said Ronald Pofalla, Chief of Staff of the Chancellery and responsible for the coordination of the intelligence services. “This way I think we will be able to win back the trust that’s been lost,” he said. This is exactly how TP predicted it would wash out. Germany, when it comes to the sacrosanctity of exports, remains highly predictable. Read my take.... Nobel Peace Prize, Asylum for Snowden: Germans Turn Up Heat
Confirmation after confirmation has been trickling in that home prices are getting closer – and in some places, have exceeded – those of Housing Bubble I, which blew up seriously in 2007. Today it was CoreLogic that reported that in September, home prices soared 12% from a year ago, the fastest annual growth rate since the euphoric days of 2006, the peak of Housing Bubble I, just before it blew up. In red-hot Nevada, prices jumped 25%. Average home prices "in nearly half the states" are approaching their peaks during Housing Bubble I, the report pointed out. But this time, it's different: The run-up was triggered by mega-investors, such as REITs and private equity funds with access to nearly free money from the Fed, that piled in and gobbled up every available single-family home in certain markets, usually at foreclosure sales, crowding out real home buyers who would actually live in these homes. The plan was to rent them out, which turned out to be much harder than expected, and vacancy rates are astronomical. Now, they're trying to unload this stuff via IPOs, structured securities, and other shenanigans at peak valuations.
At first it was the Hankyu Hanshin Hotels chain that got tangled up in a food-mislabeling scandal last month, which it finally admitted, sort of. "An act of betrayal to our valued customers,” is what President Hiroshi Desaki called it on Oct. 28, when he announced his resignation. But... “we never had the intention to deceive them,” he explained. “We still believe that we did not disguise our menus, but customers have every right to think otherwise.” So it wasn't really a confession. A few days earlier, he’d insisted that the items had merely been “erroneously presented.” No willful deception here. An estimated 80,000 customers at the company’s restaurants had been served common and cheap items that had been labeled as more expensive items, going back years! So today’s revelation du jour came from the prestigious Takashimaya department store chain. It admitted that 62 food products sold at ten of its restaurants and prepared-food shops had been mislabeled, some going back nearly a decade. A big money-saver for the stores was sticking a "tiger prawn" (kuruma ebi) label on a lowly black tiger shrimp. And they did it even with traditional and auspicious foods served during New Year’s holiday. Another good one was a dish whose label said it was using filet of beef when in fact it was some block of meat substance kept together with filler. These revelations may now become a trend – and the confidence of already harried and less than exuberant Japanese consumers is likely to be further dented.
Fast Retailing, Asia's top apparel retailer, confessed that sales at its mainstay Uniqlo casual-wear stores in Japan – not elsewhere in the world – swooned 13.8% on a same store basis in October, from last year. They blamed the weather: "high temperatures" during the first half of the month, which hindered the sale of winter clothes and down jackets; and then typhoons at the end of the month. Neither is unusual in October, so it’s a bit hard to swallow. Shoppers simply stayed away. It was the first such decline in six months. And total sales, including online sales, which shouldn’t have been impacted by typhoons, dropped 11.4%. Clothing sales at other retailers should have experienced this October phenomenon as well – so we’ll keep an eye on it.
There has been an enormous wave of IPOs recently, leaving these companies with astronomical market capitalizations, though they have no idea how they're going to stop losing money. On Friday it was the Container Store, which doubled on its first day of trading to $36 a share. The company has been around for long time (since 1978), and still can't make any money. And now Twitter, according to a SEC filing today, jacked up its price range to $23 to $25 a share, from $17 to $20. The hype mongers are already setting price targets of up to $54 a share, based on, well, hype, because the company is losing money hand over fist and has no clue how to stop it. Nevertheless, it's being pushed with the full force of Wall Street. Signs that the smart money is selling while they still can, at the peak of the market. And the Fed is graciously helping out by continuing to pump up the asset bubbles for the time being.
The company announced that it would sell €955 million in new shares at €2.10 each in a complicated scheme through "preferential subscription rights" to existing holders of ordinary shares, which is illegal in the US. So the company disclosed that it would not make these "rights" available to holders of ordinary shares in the US. Purpose: to increase its capital, the company said. No kidding: two nearly dead cats, Alcatel and Lucent were joined in 2006 to make one live dog out of them, which didn’t work out too well, and the combined company has lost money ever since, and revenues have dropped, and there were six restructuring plans in seven years, and waves of worldwide layoffs, with the current wave axing 15,000 people, as the company gradually disappears, with bits and pieces being shut down or sold off. With no hope of ever making any money, the company needs to get some new blood from sources other than operations. Hence the sale of shares. And there will be new debt as well: It announced that it would sell €750 million in junk bonds and get a revolving credit facility of €500 million. In total, the company expects to extract €2.2 billion from investors. As in the past, inexplicably, whoever these investors are (pension funds, retirement systems, and funds that end up in the portfolios of unwitting people), they will likely fork over the money. “The company could disappear,” CEO Michel Combes told the French parliament a couple of weeks ago, accurately. But with new money to burn through, it gets to stick around a little longer. Here’s my take on that glorious outfit... Hype Collapses: Alcatel-Lucent “Could disappear,” Says CEO
Now Shinsei bank confessed extending numerous loans to, as it said, “anti-social forces” and opening up, you guessed it, numerous accounts for them. Japan’s third largest megabank Mizuho has been embroiled in a spreading scandal of lending the yakuza ¥200 million ($2 million), a paltry sum, really. So where are the large loans, the billions and trillions? The yakuza are big organizations with huge projects and ambitious goals. It seems no one is looking for those big loans. While the yakuza syndicates themselves are legal, doing business with them is no longer legal, though banks have done business with them ever since banks and yakuza have come into existence. Because the yakuza have got to bank somewhere.
Top Mizuho executives are busy admitting and apologizing, and they’re going to get grilled by the Lower House Financial Affairs Committee to add some political theater. A few days ago, the Financial Services Agency, the regulator that has dozed through this for years, announced it would also probe the other megabanks, Mitsubishi UFJ and Sumitomo Mitsui. Finance Minister Taro Aso is weighing in, and when Shinsei bank suddenly admitted it had lent to the “anti-social forces,” he praised the bank as "sensible," not the most powerful praise, but better than the “worst thing a bank can do” that he threw at Mizuho for covering up executive involvement.
Like Mizuho, Shinsei did it through a subsidiary to keep these loans in the dark. “Our internal controls were not strict enough,” explained Shinsei President Shigeki Toma. The bank has a spotted history. Its predecessor, Long-Term Credit Bank of Japan, collapsed after the bubble burst in 1989 and was nationalized in 1998. After attempts to merge it with other Japanese zombie banks had failed, the government sold it in 2000 to foreign investors led by Ripplewood Holdings, a first in Japanese banking history. The bank reopened its doors with new management as Shinsei bank – and probably
In September, the unemployment rate in the Eurozone hit an all-time record high of 12.2%, up from the originally reported rate of 12.0% in August (revised up today to 12.2%). The 28-member EU remained stuck at its record of 11.0%. The number of unemployed in the Eurozone jumped by 60,000 from August to a new record of 19.447 million people, up nearly 1 million from the already catastrophic level a year ago. The Eurozone deterioration accounted for almost all the increase (61,000) in the number of unemployed in the EU. Worst: Greece (27.6%) and Spain (26.6%). But consume these rates with moderation! Studies have shown that in Spain the underground economy is substantial. Many people are counted as unemployed and receive unemployment compensation though they have fulltime but undeclared jobs. It’s cheaper for employers; they don't have to pay the massive employment taxes. And it's a good deal for the workers; they get paid a lower but untaxed wage plus unemployment compensation. The state comes up short – hence, uncontrollable budget deficits. On the other end of the spectrum: Austria (4.9%) and Germany (5.2%). Again, enjoy with moderation. These rates are lower than the national rates, due to statistical adjustments that the EU uses to render the scenery prettier, perhaps. Here is what this fiasco looks like (top blue line = Eurozone; lower black line = EU):
Retail sales in September dropped 0.4% from August, seasonally adjusted, but edged up year over year a barely noticeable 0.2% adjusted for inflation. Food, beverages, tobacco dropped 1% year over year. A few things rose, such as cosmetics (+4.4%) and internet sales (+4.9%). This continues the long-term dreary retail environment in Germany. On an annual basis, adjusted for inflation, retail sales since 1994 have this sadly drooping zigzag shape, and when sales for 2013 are available, chances are, this won’t look much better (the index was reset in 2010 to 100).
German consumers have seen their spending power whittled down by real-wage declines and benefit cuts since the early 1990s, and they’re staggering under an enormous tax burden, while corporate taxes have been cut. This has made German industry more competitive, but in our world where consumerism reigns, Germans experienced two decades of retail quagmire alongside a powerful export boom. Traditionally a very conservative bunch, German consumers have started to fill in part of the hole by borrowing from the future, but even that hasn’t been enough.
So, the US Treasury, which apparently has nothing else to do, grabbed the opportunity to slam Germany today – rather than just slamming traditional targets China and Japan – for the very policies that produced the economic miracle of low consumption at home and massive exports and trade surpluses with the rest of the world. The report claimed that Germany’s mega trade surplus bleeds other Eurozone countries and the US. Which is interesting: the US economy isn't doing well, but rather than blaming the Fed for destroying it with QE and ZIRP, or Congress for piling up mountains of debt, the Treasury is blaming the next three largest economies in the world. It's easier that way.
The Financial Services Agency (FSA), Japan's financial regulator that has been sleeping peacefully through all this for years, announced that it would belatedly probe not only Mizuho, which is already deeply tangled up in the scandal that has been making headlines for a month, but also the other megabanks, Mitsubishi UFJ and Sumitomo Mitsui. Mizuho had extended the loans to the yakuza through an affiliate in a complicated scheme designed to hide them. Mizuho is apparently under police investigation. A panel investing the scandal issued a 100-page report that pointed out that "many officials and board members were aware of, or were in a position to be aware of, the issue." Mizuho, in its own report to regulators, claimed that 54 former and current executives had been involved and would be sanctioned and their pay may get docked for a few months. This includes Chairman Takashi Tsukamoto, who admitted having been in "a position to be aware of" the loans. Will anyone get fired? Maybe not. Apologies are flying, and officials are furiously trying to settle this and then put a layer of whitewash on it. On Monday, Finance Minister Taro Aso called the scheme a "huge problem." And the fact that Mizuho had at first lied about the accusations, claiming that its executives knew nothing about these loans, was "the worst thing a bank can do." Yesterday, he gently slapped the FSA and suggested that "we have to improve what we are supposed to be doing."
After the banks, and their massively rising profits, it's the Japanese brokerage firms that shine in the bright light of Abenomics. Much of the new money that the BOJ handed to the banks to create asset bubbles and water down the yen ended up in the stock market, stimulated trading, drove up stock valuations, and is creating asset bubbles. For the first half of the fiscal year (April through September), Nomura's profits jumped 22-fold from the same period last year to the highest level in 11 years. Profits at number two, Daiwa Securities, jumped 9-fold. It's always clear when central banks print money who wins the mostest the fastest, and it's never the real economy, which keeps lumbering along with its normal ups and downs as before.
BofA Merrill Lynch, which tracks the net buys of its clients on a weekly basis, said that retail investors were big net buyers of stocks last week, a continuation of their blind buying spree. Institutional investors, though net sellers year to date, ended up as net buyers last week, for the second week in a row. But hedge funds massively dumped stocks last week, so much so that all three client types combined were overall net sellers. Something is in the air, and hedge funds can smell it. The great rotation, from the smart money to retail investors.
Spending by households of two or more persons jumped by 3.7% in September from last year, adjusted for price changes. The sharpest increase in six months. In nominal terms – the difference being inflation of 1.5% – spending was up 5.2%. The biggest movers in real terms: clothing up 8%; education, which accounts for about 10% of total consumption expenditures, soared 37.5%. Here is the zigzag trend over the last three years (Statistics Bureau):
This trend was confirmed by retail sales that rose 3.1% in September from a year ago. The Japanese are spending, at least for the moment. As we have seen for months, they’re front-loading what they can as the despised consumption tax hike that had toppled the prior government will kick in on April 1. A sharp drop in spending of all kinds, including housing, is likely at around that time. It’s not like they haven’t been through this before! My take... Japan’s Frantic Redo Of An Artificial Boom Followed By A Bust
According to a "person familiar with the discussions" between the Fed and the banks, the Fed was trying to figure out just how much banks were exposed to mortgage REITs. So “in the spring they came into a lot of the banks and kind of did a deep dive in that topic,” the Financial Times reported. MREITs are highly leveraged, borrow overnight in the repo market at Fed-generated near-zero interest rates, and invest that free money in Mortgage Backed Securities. The problem: if mortgage interest rates rise, or if the repo market tightens up, these MREITs will be forced into a bout of selling, which is exactly what happened in May, June, and July when mortgage rates jumped, and forced selling by MREITs drove up mortgage rates even further – just like their frantic buying before then had lowered mortgage rates to ridiculously low levels.
MREITs are a growing part of the US shadow banking system. When they have to liquidate their holdings of MBS, of which the banks also held $1.3 trillion (as of end of March), they might take some banks down with them. How fast have they grown? Over the last three years, their holdings of MBS have nearly tripled to $460 billion. Fitch had warned about the issue at the end of June: "A repo funding disruption in which leveraged MBS investors need to liquidate some of their holdings could create negative knock-on effects for the $6.7 trillion agency MBS market more broadly." And banks would get hit.
The Fed's concerns about the repo market’s potential for systemic risk and the upheaval in the mortgage market apparently have put a lid on MREITs since then. “There is definitely interest in how to figure out the systemic relevance of mortgage REITs in the repo market and ascertain how, in a period of stress, withdrawal from the market might impact it – almost like money funds in September 2008,” another unnamed source “familiar with the discussions” told the FT. As always, the Fed “declined to comment." I have written about these MREITs before, including this.... Mother Of All Bubbles Pops, Mess Ensues
The People's Bank of China has been suggesting ever so slightly that it would be a tiny bit less loose with its money to put a lid on the property bubble and inflation that has suddenly started to surge. So it stubbornly refused to inject liquidity into the system during the last three sessions, and look what happened. Money rates spiked to the highest point since June, with the overnight repo rate, for example, hitting 7.5%. June was the last time the PBOC tried to put a lid on anything. It rattled markets, caused panicked traders to bid up rates into the stratosphere, and stocks came down hard. By the end of June, the PBOC couldn’t stand the heat anymore, and it changed course, and Governor Zhou Xiaochuan came out and uttered some soothing words about how it would "adjust overall liquidity" by resorting to "all sorts of instruments and measures," to “ensure the overall stability of the market." End of panic. This time it’s different? Friday has been the fourth day of this slight tightening. Speculators are nervous, and traders are heading for the exits. Since Tuesday, the Shanghai stock index has fallen 4.4%. That’s how totally dependent stock markets have become on every nuance displayed by central banks – nothing else really matters anymore. Stocks go up regardless, as long as central banks hand out cheap money.
The Japanese Statistics Bureau released two consumer price indices today: the preliminary index for Tokyo for October, and the final national index for September.
The Tokyo price index rose 0.1% in October, and is now up 0.6% for the 12-month period. Service prices have caught up with last year, and goods prices are 1.3% higher.
The nationwide index rose 0.3% in September and is now up 1.1% for the 12-month period. While service prices are up only 0.1% for the year, goods prices jumped a red-hot 1.2% for the month and are now 2.1% higher than last year.
Inflation is spreading. At this rate, Abenomics will have no problems meeting its "2% price stability" target, as it’s been called by inflation mongers to brainwash the Japanese into accepting the destruction of their money. What has not been happening: wage increases. Inflation without compensation! The same process that has been hollowing out the American middle class for years and has been pushing the lower classes deeper in the quagmire. Engineering that is one thing at which central banks excel.
Turkish Prime Minister Recep Tayyip Erdogan waded deeper into hot water by refusing to give in to US missile suppliers, their lobbyists in Washington, the White House, the Pentagon, European missile suppliers, and even Russian missile suppliers, and went on, rather than backing off, to defend the missile deal announced last month. That NATO member Turkey would buy $4 billion in advanced air defense missile systems from China Precision Machinery Import-Export (CPMIEC) didn't go down very well. The losers – American, Russian, and European manufacturers of competing systems – went on outright lobbying binges to scuttle the deal. They cited every reason in the book, from compatibility issues with the missile systems of other NATO members to CPMIEC’s being under US sanctions for its dealings with Iran, North Korea, and Syria. The White House had “serious concerns” when the deal was announced. How could a NATO member dare to buy a Chinese system?
Erdogan brushed off the pressure yesterday when he told reporters in Ankara that NATO members had routinely bought weapon systems from Russia. "For the moment, China is offering the best conditions," he said. Among these conditions: cost and a joint production agreement. The deal would be the first successful sale of high-tech weapons by a Chinese arms supplier to a NATO member. It would be a huge marketing coup for China – even if it doesn’t make money on the deal. It would help the world’s fifth largest arms supplier to sell its low-cost advanced systems worldwide. But the deal still wasn’t edged in stone. Talks with the Chinese are continuing, he said. He, his defense minister, and his army chief of staff would make a "final decision" sometime in the future, but didn’t give a date, perhaps leaving the door cracked open for big concessions from one of the acceptable countries.
It said it would lay off an additional 4,000 employees. Of them, 1,200 already received their notice. That's on top of the 9,000 axings announced during the third quarter. In total, 13,000 so far, all in the mortgage unit. The refi business, a total no-brainer for banks, has collapsed with stunning speed since May. Refis have ticked up recently as mortgage rates have dropped back a bit, but not enough, and purchase mortgage applications are stagnating compared to last year, leaving overall mortgage applications down 52%. Plus, the number of rotten mortgages on BoA’s books, given that it’s been five years since the financial crisis, is down and fewer people are required to deal with them. Number one mortgage lender Wells Fargo already announced over 6,200 layoffs in its mortgage division. JP Morgan and Citibank also announced thousands of layoffs. And the bloodletting doesn't appear to be over just yet.
Some time ago, Japan decided to change tack and stop discouraging potential visitors. It loosened up visa requirements for many Asian countries with the goal of attracting more tourists to take more of their money. Abenomics too has picked up on that theme. It has worked. The number of foreign visitors jumped 31.7% in September from last year to 867,000, the most for any September, said the Japan National Tourism Organization. Most of that increase came from Asian countries. But there are new concerns. The rate of growth of Korean visitors has taken a big hit due to a fish-import spat triggered by radioactive contamination of the Pacific near Fukushima. Koreans, who import a lot of fish, don’t want to eat TEPCO fish, apparently. The spat was carried out in the media this summer. With results. In the prior months this year, growth rates for Korean tourists ranged from 29% to 45%. In September: 12.9%. They numbered only 164,500, below 200,000 for the first time this year. The government is worried. It had counted on the surge of Korean tourists. They’re No. 1 and account for roughly 25% of the total. Without them, Japan might not reach its goal of 10 million visitors this year. It's going to be nip and tuck. Year to date, there have been 7.73 million visitors, up 25%. Taiwan is in second place for the year, behind Korea, but climbed to first place in September with 206,800 visitors, up 75%! Visitors from China are showing up again. They used to be No. 1, until the island imbroglio caused their numbers to plunge. But in June, they rediscovered Japan. And in September there were 156,300 Chinese visitors, up 28% from the depressed levels a year ago. By comparison, there were only 61,300 visitors from the US. And almost nobody from Europe. I mean, there were some, like 11,800 Germans and 15,800 Brits. Tourism in Japan has become an Asian affair.