Columnist Lee Schafer provides short takes on economic incentives and choices, business strategy and performance, market moves, what business leaders are saying and doing and other topics that pique his interest.

Labor Participation is Up - For a Month, Anyway

Posted by: Lee Schafer Updated: February 7, 2014 - 11:53 AM

One of the most interesting parts of Friday’s job report, beyond the headline of just 113,000 new jobs, is news that the labor force participation rate "edged up to 63.0 percent” and the employment-population ratio increased by 0.2 percentage point to 58.8 percent.

If this is the start of a new trend of greater labor force participation, it would be viewed by economists and policymakers as a really good thing.

There isn’t any particularly good reason, however, to think that the trend of lower labor force participation is reversing.

A Congressional Budget Office report earlier in the week projected that the labor force participation rate would decline to 60.8% by 2024. Also this week, the same office put out a report on the budget with an updated forecast of the impact of the Affordable Care Act on workforce participation, which was viewed by gleeful ACA critics as sharply negative, and that was the report that got all the attention during the week.

The CBO forecasts labor force participation to reach 60.8 percent in a decade, quite a drop from the current 63 percent. And as recently as the early 2000s the labor force participation rate was above 67 percent.

As the report states, “Employment at the end of 2013 was about 6 million jobs short of where it would be if the unemployment rate had returned to its prerecession level and if the participation rate had risen to the level it would have attained without the current cyclical weakness.”

The CBO attributed about half of the decline since 2007 to what economists call “inevitable withdrawal from the labor force,” or when someone gets older and elects to retire.  Think about baby boomers making their exit, a trend that will accelerate in the next decade.

The rest of the change it attributed to continued weakness in the labor market coming out of the past recession, including what it called “unusual aspects of the slow recovery that led workers to become discouraged and permanently drop out.” 

In its look ahead, the CBO cited many more boomers aging out of the workforce as a big factor in declining overall labor force participation, but it also thanks the cyclical weakness in the labor market as a result of the recession and slow recovery will last “throughout the decade.”

Labor force participation is important for a couple of reasons, not least of which is slower economic growth. Having productive people making things and providing service (and spending their good compensation), is sort of what drives economic growth.

But think also of the human tragedy of productive people of working age just giving up and staying at home. Six million workers is a lot of people who could be a whole lot more productive.

Housing price forecast through 2022 all over the map, but Twin Cities looking good.

Posted by: Lee Schafer Updated: January 24, 2014 - 12:02 PM

One of the most interesting findings in a new study by the Massachusetts Institute of Technology’s housing economist is just how much variation there will be in housing prices among major Metro areas.   

The report, released Friday by a team that included MIT's well-known housing economist William Wheaton, takes a look ahead at housing supply and other factors to arrive at a 2022 metro-wide price index. And because of the boom in the middle of the last decade in housing prices, this study uses prices from the boom year of 2007 as one of its starting points.

As the report concluded, “in current dollars, some [metro areas] will still not recover to recent peak (2007) house price levels by 2022, while others should exceed it by as much as 70 percent.”

In fact, in some of the 70 areas in the study,  housing prices will not get back to 2007 peaks even in nominal dollars by 2022. In the Las Vegas market, it’s not going to even be close. But because I work in Minneapolis and not Las Vegas, I had to scroll to the back of the paper to see a forecast for the Twin Cities.

According to Wheaton and his colleagues, housing prices will be up about 18 percent in constant dollars, compared to prices in 2007. Because we all pay our mortgages in nominal dollars, not inflation-adjusted dollars, it was interesting to note that in nominal dollars prices will be up 54 percent.

The Twin Cities market is one of the better ones, along with Denver and a few others. How this team of economists arrived at these forecasted values I frankly don’t really understand, but I do foresee a home equity line of credit in many Twin Cities consumers’ futures. 

Best Buy Margin Compression Leads to One Unhappy Conclusion

Posted by: Lee Schafer Updated: January 21, 2014 - 2:26 PM

No one with access to Google Finance could have missed the news from Best Buy Co. last week, news bad enough to leave the stock price down by about 35 percent from its high close last week.

The company said comparable store sales in the U.S. were down in the nine-week holiday selling season about 0.9 percent from the year-earlier period, which wasn’t great, but what crushed the stock was talk of a far skinnier gross margin due to aggressive price discounting.

When business people talk about “margins” they usually mean gross margin, the ratio of gross profit to revenue, with gross profit being the money left over from the sale after subtracting just the cost of the product. For a retailer the cost includes what it paid to the supplier for a product as well as some costs for overhead such as freight and warehousing.

The gross profit pot of money is what pays all of the other bills, the sales expense and well as the general and administrative expenses that come from just being in business. In its most recent reported quarter, Best Buy’s gross profit dollars came to just less than $2.2 billion, or 23.2 percent of revenue.

The sales, general and administrative expenses came to a little over $2 billion, or about 21.9 percent of revenue.

Based on what Best Buy said last week, analysts in the investment committee now expect Best Buy’s gross margin to decline significantly in the company’s fourth quarter, which still has a couple of weeks left to go, to about 19 percent.

In a research note, the analyst Aram Rubinson of Wolfe Research pointed out that the gross margin for Best Buy is now in the neighborhood of the gross margin of its principal competitor, reported a gross margin of 26.7 percent in 2012, but he adjusts his estimate for the impact of’s third-party marketplace and its web services business, getting to the figure of about 19 percent.   

He expects and Best Buy to have a comparable gross margin going forward, arguing “this is not temporary.”  

The higher total sales of the holiday selling season compared to the third quarter should help the sales, general and administrative expenses of Best Buy to be lower as a percentage of revenue than they were in the third quarter, but the fundamental problem here is pretty easy to see.

If the gross profit margin is 20 percent and the sales, general and administrative expenses equal 20 percent of revenue, then that means the operating income line will be zero.

And if the gross profit margin is something that Best Buy has difficulty controlling, with the apparent need to aggressively reduce selling prices to defend market share against and all others, then management’s attention has to focus on what it can control.  That means ratcheting down the sales, general and administrative expenses.

It has no choice.

There are ways to get sales, general and administrative expenses down without cutting employees, but only so much that can be cut from the travel and consulting budgets.  It looks like it could be a very painful year at Best Buy Co.

Goldman's upgrade another reason why Target stock is holding up

Posted by: Lee Schafer Updated: January 10, 2014 - 2:44 PM

Well before the trading in the equity market opened on Friday morning, Goldman, Sachs & Co. analyst Matthew Fassler upgraded Target Corp. stock to a “buy.”

Also before the market opened, but well after Fassler acted, Target announced that its giant customer data security breach was far worse than previously thought, its fiscal fourth quarter comparable store sales decline was worse than thought and its earnings in Canada were worse than thought.

And, of course, it’s earnings per share for the fourth quarter were going to be worse than thought.

I’m sure Fassler didn’t have a great start to his Friday workday, once the Target release was out, but Fassler doesn’t look particularly bad even considering Target’s terrible news. And he may prove to be correct in his thesis on the stock.

Fassler based his optimistic view on an expectation that comparable-store sales will turn around in 2014, Target’s operations in Canada will improve dramatically and that Target’s e-commerce progress will continue.

The costs of cleaning up the data breach, whatever they are, will not be much of a factor in forward earnings estimates or valuation. He did expect that the cash outlay would use up some of the capital allocated to buying back stock.

He certainly was planning on the fourth quarter looking weak: his report cut estimates for the last fiscal quarter to below management’s fourth-quarter guidance and the consensus of other analysts who follow Target.

Later in the morning, after Target’s news release was out, Fassler wrote that his estimates and target price for the stock would have to be updated to reflect what Target had just announced.

“That said,” he wrote, “it does not derail the notion that the firm suffered from a virtually unique bad fiscal 2014 – still ongoing – with the potential to recover across the board.”

Fassler is in the minority by turning bullish on Target’s stock, but he deserves credit for making a call. To upgrade the morning after the company reports a big comparable store sales gain is hardly gutsy and adds far less value.

For those surprised that Target’s stock continues to trade above $60 per share, having Goldman on the street with this kind of report is one reason why. And it's one more example of how the investment community has come to mostly regard 2013 as just Target’s very bad year.

Target's investors mostly shrug off data breach

Posted by: Lee Schafer Updated: December 27, 2013 - 3:07 PM

A quick scan of investment research this week confirmed what I suspected -- the massive theft of customer data from Target Corp. that’s been called the gravest crisis in the company’s history has been largely shrugged off by the investment community.

Investors appear to be treating Target’s as more or less the kind of thing that can happen to any major retailer, much like an occasional hailstorm for Minnesota corn farmers.

There have been other losses of customer data at retailers such as the The TJX Companies, Inc. and DSW, Inc. While painful in the short run those incidents appeared to have had little long-term impact on the business.

It’s mostly seen as a massive headache for Target’s managers when they already had plenty of other things to work on.

Only one of the major securities firms following Target appears to have brought down its earnings estimate for the fourth quarter, when Faye Landes of Cowen and Co. put out a note on Christmas eve morning that reduced her estimate for the fourth quarter from $1.52 in earnings per share to an estimate of $1.40 per share. She dropped her estimate of comparable store sales a bit as well.

The company has not updated it’s guidance for the quarter to account for the data breach, but Landes wrote that the publicity surrounding the data breach couldn’t have helped store traffic any in the last few shopping days before Christmas, and her reduction in Q4 estimates was a common sense response.

A couple of other analysts wrote recently that the one thing that's a little different in the case of Target is that the company has its customer loyalty program tied to its own branded credit and debit cards, called REDcards. So the hackers victimized some of Target’s best customers.

But this data theft would only be a significant story for investors if fallout from it would be enough to bring down estimates of earnings and sales growth for 2014 and 2015. As it stands right now, the thinking appears to be that the damage will be largely contained in this year’s fourth quarter.

It’s worth noting that even if the data breach is perceived as more hassle than substantive problem, it’s still not that easy to find analysts who are enthusiastically recommending the stock or who saw the dip in share price after the news broke as a wonderful buying opportunity. Landes said it's wiser to steer clear of Target's stock. 

Target still has all of the same challenges it had before the theft. Its expansion into Canada is still a work in progress, and the company has yet to show it can end a recent streak of quarters with declining customer traffic in U.S. stores.

Another (Weird) Week in the Bitcoin Craze

Posted by: Lee Schafer Updated: December 13, 2013 - 1:36 PM

It’s been a particularly interesting week for Bitcoin, the popular virtual currency that is stateless and anonymous, and thus nearly perfect for all sorts of “commerce” on the Internet that people don’t want to run through a PayPal account.

First, even by the standards in Bitcoin trading it was a wild ride this past week, with one Bitcoin trading in a range of $340 to $1,240 just this last week. Those prone to airsickness probably shouldn’t hold any Bitcoin.

Then, the Norwegian government became just the latest to declare that a Bitcoin isn’t money.

The European Banking Authority ended the week by issuing what was effectively a blanket warning, citing the wild fluctuations in price, the danger that the so-called digital wallet could get hacked and the complete absence of legal protections for users.

It’s not even clear that if an owner gets all of his Bitcoins stolen that there would be any way to show that a crime had been committed.

Fidelity Investments, the big mutual fund company, also took steps this week to block investments out of clients’ IRAs into a Bitcoin investment trust.

For Bitcoin enthusiasts, these are the pronouncements of people who just don’t understand. The appeal of Bitcoin is that it’s stateless, anonymous, and beyond the reach of mutual fund managers, regulators and central bankers, who back in 2008 didn’t impress anyone with their competence, anyway.

So the Bitcoin craze continues, with even a firm in Sweden opening this past week what it called the world’s first Bitcoin automated teller machine.

Many enthusiasts gathered earlier in the week in Las Vegas for a conference called “Inside Bitcoins: The Future of Virtual Currency.”  One reporter who attended said it had to feel of an old-time religion revival meeting.

There were whoops and shout-outs when one of the speakers said that Bitcoin was going to be the single biggest category for 2014 venture capital investment.

The venture firm Andreessen Horowitz punctuated that point this past week with news that it had led a $25 million Series B investment in San Francisco-based Coinbase, which is thought to be the largest-ever venture investment in a Bitcoin-related company. 

My view continues to be that new forms of payment systems will evolve and become broadly accepted, but that Bitcoin is today mostly a pseudo-asset that has somehow captured the fancy of speculators. And like most speculative fads, this speculation will abruptly end one day with plenty of speculators painfully impaled on their Bitcoin wallets.

Perhaps what was most striking about coverage of the conference in Vegas was the simple observation of a USA Today reporter that the audience consisted almost exclusively of men.

Women, it seems, are once again proving that they are shrewder financial managers than the guys.



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