Wednesday, June 11, 2014 Zeb's Vue

Good Morning America, How Are You?

I'm sore this morning, and I did not want to get up.  This was due to digging up the irrigation manifolds for my underground irrigation system.  Outside of trading, working on my underground sprinkler is what I accomplished.  I have to go to the big city (3 hours away) to get parts today.

Have a great day.  Enjoy your food, wine and your family. 

Small Business Outlook

Scary thought: Each and every single day (including holidays and weekends) the USA spends $200 Million more than they take in. 

As a small business owner, there are many things that concern me about the current monetary policy of the USA (and Europe).  Federal, State and Local debt certainly is on the forefront.  The difficulty finding a loan for CAPEX is very concerning for our business and many of the small businesses around us.   Irrespective of government news, the cost of goods we purchase is going up, and we are unable to pass along those costs, because when we do, our sales immediately go down. 

Economic cycles affect small business in significant ways.  Often large international companies can spread economic risk over many countries, but small business (real small business that have revenues less than $10 million per year) rarely (if ever) can do that.  Therefore, we are impacted immediately by the business cycle of the country we do business in - the USA in our case.

The National Federation of Independent Business provides reports that are useful in planning.  They just released their small business survey where Small Business Owner confidence is rising.  It is now at the highest level since 2007.  (There are many confidence indicators that are at the same or above levels of 2007, and that usually means we nearing a downturn.)  The current level is often associated with the onset of recession.

NFIB notes this, however:

The four components most closely related to GDP and employment growth (job openings, job creation plans, inventory and capital spending plans) collectively fell 1 point in May. So the entire gain in optimism was driven by soft components (sales expectations and business conditions). If these translate into more spending and hiring, growth will get a boost. However, this 'optimism' has not translated into more debt financed spending."

We own a retail hardware and second hand store (among computer business, investment newsletter, and organic gardening).  From the retail perspective, my thoughts align with the above paragraph, and we expect (and are showing) an increase in sales, but absolutely no relief in rising profits as inflation is now substantial in the purchasing of goods to replace inventories.

The economy is now entering into its sixth year of recovery.  That is a very long time indeed.  The media, politicians, and even the Federal Reserve seem to be blind to the reality of economic cycles.  Economic recoveries are finite, and they do not continue forever.  In addition, the underpinnings of this recovery is far different (as far as I can study) than any other USA (or global) recovery in history, as it is driven, it appears, by unfathomable DEBT.

Where the reader can observe what small business really think is in the plans for capital expenditures.  If small businesses were convinced that the economy in the USA was improving over the longer term, would they not increase capital expenditure plans rather than as the report shows, decreasing them? 

It appears that small businesses (including our own) are not adding inventory or making capital expenditures in hope our sales increase. 

Also the Democrats (and especially President Obama) preach about jobs.  But everything that party does is a disincentive to creating jobs where small business can hire.  What do I mean?  Obamacare and mandatory insurance is a disincentive.  Instead of creating jobs and long-term employment, I along with most small business owners, are using part-time workers.  Mandatory wage boosts are detrimental to small business.  Small business cannot pass along the increase in the cost of wages as a company like Carl Jrs. can.  Mr. Puzder (CEO of CKE Restaurants) explains it well in http://online.wsj.com/articles/andrew-puzder-why-young-people-cant-find-work-1402355248 this WSJ article. 

There are people desperate for jobs in our rural area, but no one is hiring.  Even Kinross mines are laying off people.  Yet, our area is heading into tourist season, and small businesses should be adding temporary help.  They are not, and there is very few jobs available for high school students.  (By the way the Federal and State laws make it nearly impossible to hire anyone under 18. Mostly this is perception rather than anything bad will happen when one hires a 16 year old, but there are so many rules if said 16 year gets hurt or sick that small business can't and won't take the risk.) 

NFIB report shows the reality verses the expectation.  Three months ago, small business owner's expectation for hiring was to increase employment at the 5% range.  The actual increase in employment as reported by respondents was -1% (that is a minus).  While expectation should be a leading forecaster, it has not been so during the whole recovery. 

Sales in the NFIB reports are facing similar divergence between expectations and actual sales.  Since actual sales are down and since revenue is what ultimately drives expansion, it follows that when owners are asked "is this a good time to expand", the large majority of respondents remain negative.

The view has not change much since the recovery of the "Great Recession" started.  Which leads one to have another indication that this recovery is driven by something else entirely than past recession recoveries were driven.

Summary: 

• 1.   The stock market just keeps going up.  Overnight trading was down in Europe, but it is anybodies guess what the USA stock market will do.
• 2.   Credit markets and junk bond prices are confirming the market's move higher.
• 3.   Improvement in credit markets should support the current bull makret.
• 4.   Everyday there is more indications that a short term top will occur, and a heart stopping drop could occur.  I would stress "could", because it seems more likely (unless some significant news from central banks changes) a consolidation phase is about to take place.
• 5.   We are observing (if we look) is that the largest sectors of the market are catching up with the DOW.  We can see when looking at the time that the consumer discretionary and technology sectors had the fewest companies above the 50/100/200 day MVA, with the health care and financial sectors not too far behind. The consumer discretionary, technology, and health care sectors make up 45% of the S&P 1500 and throw in the weak financial sector with a 17% weight and you are talking 62% of the market that had horrible breadth.  Currently, the S&P 500 is showing a completely different picture as the biggests sectors now show the strongest short and intermediate term companies above their MVA.  Utilities are still lagging, however.