Dancing around a default

Jul 29, 2014 21:51 UTC

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Argentina is down to the wire — the likelihood it will default tomorrow is extremely high. After missing a $539 million interest payment on its bonds on June 30 (previous coverage in the saga here and here), the country had a 30-day grace period to reach a settlement with its holdout creditors — mostly the hedge fund Elliott Management — in order to avoid default. The clock runs out on Wednesday.

While the federal judge presiding over the case between the sovereign nation and the fund has ordered the country’s representatives to sit down with Elliott continuously to try to hammer out a settlement agreement, they have so far not spent more than a few hours in negotiations. So what happens if the country defaults? The question is complicated, and there won’t be clear cut answers until a default actually happens (and, probably, lawsuits ensue). Here are some thoughts:

Felix Salmon says there could be a benefit to defaulting, since everyone knows that Argentina has the money to pay its exchange bondholders (those that did restructure debt from the 2001 default), it is just being help up on a legal technicality. By defaulting, “Argentina could stop making its coupon payments for a while, and use the money instead on desperately-needed projects back home.” And while default is generally a bad political move, all Argentine president Cristina Fernández de Kirchner has to do is point her finger at the U.S. judge who forced her hand.

The Financial Times reports that “economists broadly expect a recession in the country would deepen, inflation to rise and capital flight – possibly triggering a second devaluation of the peso this year.” Indeed, while default may not have as big of an effect on the country in international capital markets (which it has been locked out of for ages anyway), it almost certainly will be an issue for the domestic economy. In the event of a default, writes David Gaffen, “Argentines would likely increase their dollar holdings, and would put severe pressure on foreign reserves, which aren’t all that great to begin with. With inflation at about 30 percent, this isn’t a fun option.”

Then, there’s RUFO. One of the big reasons that Argentina has so far refused to negotiate is because of the Rights Upon Future Offers clause on the bonds that were exchanged during the restructuring. “The clause entitles them to the upside if Argentina ‘voluntarily’ makes a better offer to the creditors who stayed out (that’s NML [Capital] and co) before 31 December 2014,” writes Joseph Cotterill. This likely means that if Argentina settles with the holdouts before the end of the year, the exchange bondholders will also be entitled to more money, which Argentina simply cannot afford. Emerging market strategist Michael Roche told Bloomberg that investors think “the default will be cured after the RUFO clause expires, so the degree of panic isn’t great.”

The question is, what happens between tomorrow and December 31? Some exchange bondholders have submitted they are willing to waive RUFO clause rights. But whether that’s enough to get Argentina to settle is another question entirely. We’ll know soon enough. — Shane Ferro

On to today’s links:

JP Morgan’s trading revenue fell, so it’s cutting hundreds of back office employees – Bloomberg

Morgan Stanley junior bankers get 25 percent bigger salaries, smaller bonuses – Bloomberg

Sad Declines
20 percent poorer than it was in 1984: “Nostalgia is just about the only thing the middle class can still afford” – Matt O’Brien

Subtle Hints
The simplest idea for the TSA’s $15,000 “help us speed up airport lines” competition: get rid of the TSA – Jenna Kegel

Please Update Your Records
Your artisanal whiskey probably is not so much handcrafted as factory-made – The Daily Beast

Goldman Sachs says it’s Too Big To Sue for gender discrimination – Matthew Zeitlin

Giant American fridges waste money, pollute unnecessarily, and make you fat – Gawker

A third of consumers with credit files had debts in collections last year – Jonnelle Marte

Just because large retailers pay better than small ones doesn’t mean they pay well – Nick Bunker

Privatize Everything
“Citizens don’t have an automatic right to more than the water they require for mere ‘survival’” – The Guardian

The problem with universal basic income: the U.S. is bad “at replacing complexity with simplicity, and then leaving well enough alone” – The Conversable Economist

MORNING BID – Tango de la default

Jul 29, 2014 13:00 UTC

Red letter day for Argentina comes tomorrow, with the holdout investors and the South American nation coming down to the wire on a potential deal that would offer the holdouts something better than what everyone else agreed to in 2005 and 2010. Without getting into issues of vultures vs. violating debt agreements, the situation probably comes down to three scenarios.

First, Argentina defaults. One cannot underestimate this too much – Argentina has already defaulted before, and the stakes are nowhere near as high for the country as they were the first time. But it is still pretty darned damaging – it puts the country into another level of pariah with international capital markets (double secret probation, and here’s where we once again note that had John Vernon lived, he would have solved this whole mess), it causes even more capital flight from the country and worsens the outlook for the currency, which is already trading at a level much lousier than the going real rate.

The spot rate is about 8.1 pesos to the dollar – its two-decade chart looks like a double-black diamond ski run – while the black-market rate is more like 12 pesos to the dollar. Argentines would likely increase their dollar holdings, and would put severe pressure on foreign reserves, which aren’t all that great to begin with. With inflation at about 30 percent, this isn’t a fun option. As Hugh Bronstein noted in a June story, Argentina is also a big soybean exporter – third in the world – and farmers there plan on hoarding the product in case of a default. The cost of immediate soybean exports from Argentina is up 6.3 percent in the last week or so; similar Brazilian exports are up 5.3 percent, and on the Chicago Board of Trade, soybean futures have risen 4.7 percent.

The peso continues to weaken.

The peso continues to weaken.

The second option, and this one is even less likely, is that the holdouts blink in some way. The holdouts haven’t changed their position in some way, and as Dan Bases points out in a story today, their years-long pursuit of payment on similar obligations in Peru, and the fact that this has been going on for 12 years already, suggests they’ve got some serious staying power (nimble trading is great in some markets; in others, the more important characteristic is extreme stubbornness). It’s still unclear just what the holdouts stand to make out of this, but the $1.33 billion-plus-interest judgment in their favor has the Argentines saying that’s a 1,600 percent return, which isn’t a bad day at the office if it all works out.

The holdouts would also be likely to wait until January when certain clauses that would put Argentina on the hook for a lot more money from other undeclared holdouts and then perhaps any bondholders who did negotiate might want to come back and wrangle again and extend the process. Some legal experts say that this clause isn’t going to be triggered by Argentina being forced into paying the holdouts, but try telling the Argentines that. The only recent blow to the holdouts? The hanging judge in this whole thing, Thomas Griesa, allowed the nation to pay certain obligations (or rather, for Citigroup to pay certain obligations on the nation’s behalf) that would have potentially upset a settlement earlier in the year with Repsol – the holdouts argued against this as it cracks the door to other relief somewhere, though of course the odds are pretty thin.

The third scenario, which in some ways seems equally unlikely (we’re starting to think an asteroid will hit the Earth before any other real option), is that there’s some kind of negotiated agreement that allows the exchanged bondholders to say they’re not worried about additional restitution provided they can just get their scheduled coupon payments.

Then, everyone gets paid, there are no additional claims – per what Argentina wants to happen after December 31, 2015 – and the whole thing finally finishes – the hedge funds have their victory, Argentina can claim it didn’t put itself on the hook for any more money than what the judge forced them into paying, and it will all stop there. (And then of course Argentina can sell more bonds in two years or so, because bond markets have shorter memories than people think.)

Weeding out the prison population

Ben Walsh
Jul 28, 2014 22:13 UTC

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The New York Times’ editorial board – America’s barometer of what cautious, moderately liberal elites are supposed to think  – wants America’s war against weed to end. States, they say, should be allowed to make their own marijuana policies. And states already are: nearly three-quarters have reformed their marijuana laws to legalize all use, medical prescriptions, or cut the consequences of possession.

Reforming America’s marijuana laws, along with the rest of its war on drugs, seems like the just thing to do. Vox’s German Lopez writes that based on a study by the American Civil Liberties Union, “blacks were 3.73 times more likely to be arrested than whites for marijuana possession, with the black arrest rate at 716 per 100,000 and the white arrest rate at 192 per 100,000 in 2010.” Lopez shows that racism is endemic in the enforcement of drug laws, affecting everything from sentence lengths to the neighborhoods targeted by police SWAT teams.

The policing costs alone of enforcing the criminalization of marijuana are almost $8 billion annually. America spends a staggering $80 billion on prisons and jails each year: with just 5 percent of the world’s population, it has 25 percent of the world’s inmates (17 percent of all people in U.S. prisons are there for drug offenses. In federal prisons, the number is a jarring 50 percent.)

From 1978 and 2009, the U.S. prison population grew by 430 percent. It is impossible to understand what Emily Badger calls the “the meteoric, costly and unprecedented rise of incarceration in America” without looking at the nation’s drug policy. “Between 1980 and 2010,” she writes, “the incarceration rate for drug crimes increased tenfold.” (Recently, America’s prison population has fallen fractionally, largely thanks to state reforms.)

The economic impact of this is immense, and cannot be ameliorated by a change to marijuana laws alone. John Tierney wrote last year that “black men in their 20s and early 30s without a high school diploma… [are] more likely to be behind bars than to have a job.” Harvard sociologist Bruce Western told Tierney that “prison has become the new poverty trap… creating an enduring disadvantage at the very bottom of American society.”

If legalization becomes federal law, the U.S.’s ability to effectively undo massive human damage and economic inefficiency will come down, in large part, to the deeply glamorous task of regulating the market. Mark Kleiman thinks that “letting legalization unfold state by state, with the federal government a mostly helpless bystander, risks creating a monstrosity.” He’s against commercialized legalization, but regulation, with the tax revenue it generates, and the lobbyists it attracts, looks to be where things are headed. – Ben Walsh

On to today’s links:

Barack Obama, market timer in chief  - Business Insider

So Hot Right Now
“In a data-chic world, a chief economist is the new marketing must-have” - Lydia DePillis

When bad journalism becomes a joke: the origin of “whoa, if true” - The Daily Dot

Sovereign Debt Problems
Why Argentina’s credit spreads are going down while the probability of default is going up - Felix Salmon

The Coconut Water Wars: “Attempts at psychological point-scoring that could charitably be described as sophomoric” - NYT

New Normal
“The precariat: insecure, unorganised, taking on too much work for fear of famine, or frighteningly underemployed” - LRB

It’s unclear that cutting unemployment benefits in North Carolina cut unemployment -Justin Wolfers
And yet, North Carolina likely hurt people when it cut unemployment benefits - Jared Bernstein

MORNING BID – Herbalife and the options market

Jul 28, 2014 15:59 UTC

One of the market’s more well known short bets, Herbalife, reports earnings after the close on Monday. The company is most notable as the target of activist investor Bill Ackman, who has had plenty of choice words for the company and yet has not been able to make good on his short position just yet, despite his fervent belief it is defrauding investors and taking advantage of poor people.

That’s a hefty set of accusations for anyone to deal with, but the stock’s 25 percent one-day surge last week just after Ackman’s presentation turned into a big loser for folks who were betting on big declines by the end of last week.

Ackman, from what we’re aware of, has big positions in put options expiring in January – so it’s a long view he’s taken, and if he took it at the right time, it’s not necessarily a loser just yet. (The options rose in value for the first few months of this year, so it’s possible Ackman got out in time – given his presentations, though, he’s clearly got a position somewhere.)

If that’s the case, he’s currently losing money, and today’s earnings report – and subsequent activity – will be another test of his staying power. Now, he’s said he’s prepared to go to the ends of the earth for this short position, but there are limits to everything, and it’s worth looking at just what the bet is like right now.

There are huge, huge amounts of outstanding contracts in various put options expiring in January – about 220,000 contracts across a swathe of nine different strike prices, to say nothing of a bunch of other less popular strikes.

Most of these big positions are currently not profitable, and are actually worth less than what they’ve been worth over the last several months.

If Ackman did his buying in chunks, a good spot to examine is in the $50 put option contracts expiring in January – a bet the stock will fall below $50 by that time. There was a hell of a lot of volume in these options in January 2014 – on January 9, volume in the $50 strike contracts came to 25,000 contracts and on January 10 volume of 20,759 contracts.

On those days, the stock was trading around $81 a share, so if Ackman is behind these purchases, it means he thought that was an opportune time to buy those puts, which cost $7.25 and $7.45 on average that day, according to Thomson Reuters data.

If he doesn’t hold those options anymore, he may have sold them at a profit, but currently those options are a loser, and as long as the stock keeps rising, they will continue to erode in value.

Doing the math, it shakes out like this – at 25,000 contracts at $7.25 each (x 100 because each contract is 100 shares of stock), those would have cost $18.125 million. The other group would cost $15.465 million, for a total cost of about $33.6 million.

Right now, those options would be worth about $18.9 million, so that’s a 40 percent loss, and that’s just for the $50 strike, never mind all of the other strikes. This of course may not be his position, but whomever took these positions, be it one person or several, is not in a happy place.

What matters is this: Since the first day the $50 strikes expiring in January 2015 started trading (back in Oct 2013), this strike has never been worth less than it is now.

If he’s holding the options now that he bought at just about any time between Oct ’13 and now, he’s losing money. Of course, given these are options, he’s easily able to keep rolling down and buying another money and selling these, but eventually, if the stock doesn’t do what he wants, he’ll be losing a ton of money. He’s got a lot of money, but how much pain can he endure? That’s a real question.

Drill, baby, drill

Jul 25, 2014 21:41 UTC

North Dakota is in the middle of something the rest of the country can only dream of: an economic boom. The state has become a massive success story over the last five years, with unemployment at 2.6 percent and its population growing rapidly to fill demand for oil jobs. “The state’s modern history has been rewritten by the energy industry in just four short years,” writes Bloomberg’s Nicholas Kusnetz. But is it sustainable? Thanks to the shale boom, the state is currently producing as much oil in a month as it did in all of 2004, and production is growing at an exponential rate. That kind of growth can’t go on forever, says Fivethirtyeight’s Ben Casselman. Eventually it’s going to have to flatten out, and that has major implications for the economic stability of a state that has been very suddenly made rich (and just as suddenly dependent on this oil production).

Predictably, Katie Brown, at Energy In Depth (which is funded by the Independent Petroleum Association of America) says Casselman is wrong. It’s not just about recoverable oil, but about changing technology, she says. The U.S. Geological Surveyrecently doubled its estimate of the amount of recoverable oil in North Dakota, an estimate which is up 25-fold since 1995, according to Brown. Better technology is going to mean more oil, essentially. “It’s important not to get trapped by assumptions of static technology, especially in an industry like oil and gas, where innovators have proved over and over … that the recoverability of resources increases over time,” Brown writes.

Brown, of course, represents the industry. Ray Long is less enthusiastic. Responding to Brown and Casselman, he writes that while production could theoretically increase, “it’s important not to assume the inevitability of fairy tale future technology that doesn’t exist yet.” He also highlights what seems to be Casselman’s more important point: better technology has both increased the amount of oil available to extract in the Bakken and the drilling productivity in the region — but that can’t go on forever. “Companies prioritize drilling in the best parts of an oil field, then gradually shift their drilling to less productive areas. But because the Bakken is so new, no one really knows how those second-tier areas will perform.” This creates a treadmill-like situationwhere it’s not enough to simply add new wells for growth. Companies also have to find ways to offset decreasing productivity in in their older wells.

Tangentially, Joe Weisenthal tweeted an interesting chart today about the secondary effects the big U.S. energy boom is having on manufacturing: which is to say not much. The data comes from Tim Quinlan, an economist at Wells Fargo, who points out that energy-intensive manufacturing industries, which theoretically should have benefitted from new domestic shale supplies, are still performing below pre-crisis peaks. —Shane Ferro

On to today’s links:

You don’t love language if you love to police it - Stan Carey

“The NFL’s true attitude toward women has never been quite so apparent as it is now” -Amy Tennery
The NFL made a bad business decision when it decided to go easy on domestic violence - Mina Kimes

Ace Greenberg, the paper clip conservationist who oversaw the rise and collapse of Bear Stearns, dies at 86 - NYT

New Normal
People are corporations, too (sort of) - Catherine Rampell
“For the first time, acquisitions are more appealing than I.P.O.s.” - The New Yorker

Good Questions
Welfare reform “cut spending by cutting the rolls.” Do we want to do the same thing to food stamps? - Mike Konczal

Billionaire Whimsy
Remember: super-yacht buyers are job creators - NYT

Mildly Plausible Theories
Cynk didn’t fall 100% because too many people thought it would fall 100% - WSJ

Your Daily Outrage
A company loans money to U.S. soldiers and then sues them by the thousands -ProPublica

Paul Ryan’s plan would increase poverty and cut funding for anti-poverty programs -Robert Greenstein

A guide to Paul Ryan’s anti-poverty plan

Ben Walsh
Jul 24, 2014 21:42 UTC

Like Ronald Reagan, Paul Ryan thinks that we’ve lost the war on poverty. Ryan, the chairman of the House Budget Committee, released a draft anti-poverty plan today. About 45 million Americans are living in poverty — making less than $23,850 for a family of four — and Ryan’s proposal would “shift the federal government’s anti-poverty role largely to one of vetting state programs to distribute aid,” Reuters’ David Lawderreports. Benefits would be distributed by a single agency or charity group, and recipients would be required to set up and follow a contract to receive benefits.

James Pethokoukis pithily scores the approach as “Thomas Aquinas 1, Ayn Rand 0” — more caritas, and less ruthless, laissez faire libertarianism. Josh Barro says the plan is a huge change for Republican policy because it’s not a spending cut. Instead, “as drafted, it would not increase or decrease federal spending on anti-poverty programs.”Reihan Salam describes today’s proposals as “the most ambitious conservative anti-poverty agenda since the mid-1990s,” and argues that Ryan’s main objective is “combatting entrenched poverty” by offering a “a useful distinction between situational poverty, in which individuals fall on hard times” briefly, and “generational poverty.”Research shows more Americans are affected by the former, but Ryan argues policy does not sufficiently address the latter.

Jared Bernstein, a former White House economist, disagrees with Ryan’s assumption that U.S. anti-poverty programs are structurally flawed, arguing that there is nothing “fundamentally wrong with the safety net.” Government programs cut the poverty rate almost in half compared to the pure market outcome, he says. More than that, Bernstein highlights the point made by the Center of Budget and Policy Priorities’Robert Greenstein: the safety net is a great investment in the long-term outcomes of its beneficiaries and should not necessarily be tied to short-term requirements of a contract.

Annie Lowrey says that while “there’s a lot for liberals to like” in the proposal (see,reducing mass incarceration), it’s nonetheless paternalistic. Its central problem, she says, is the manner in which it structures aid as a contract:

This is condescending and wrongheaded. First, it presupposes that the poor somehow want to be poor… Second, it isolates the poor… Third, it threatens to punish the poorest and most unstable families for their poverty and instability… Fourth, it does not address the core problem of a lack of jobs — or the problem of a lack of jobs paying a living wage

Of course, this is just the reaction to a draft proposal of a pilot program. There will be a whole new set of analysis and reaction if Ryan is able to translate his ideas into actual legislation. — Ben Walsh

On to today’s links:

Half of America’s obese kids don’t know they’re obese - Wonkblog

The relationship between CEO pay and stock price is pretty much random - Bloomberg Businessweek

A history of autocorrect - Wired

The Chinese government may lift restrictions on property purchases - WSJ

The More You Know
Hong Kong is the ideal city for a spy - Global Times

The tally of financial crisis-related fines - WSJ

MORNING BID – Waiting on volatility

Jul 24, 2014 12:36 UTC

The day brings another run of earnings reports in what’s overall been a steady and admittedly staid earnings season – many of the high-fliers that investors counted on for volatile trading post-earnings haven’t delivered on that promise, an angle we’ll be exploring in more detail later in the day. Facebook went out with results that weren’t terrible or even all that amazing and shares meandered their way to a 2 percent gain in post-close trading Wednesday (it has since risen and is up 8 percent in premarket action Thursday, so that one has at least panned out for some). Shares of Gilead Sciences bucked the trend among more volatile biotechnology shares and really didn’t do all that much at all.

The big-cap stocks have been similarly unexciting, and the equity market gets a ton of them before and after on Thursday, including heavy equipment giant Caterpillar, the two car companies (Ford and General Motors). There’s also Post-It maker 3M, online retailer Amazon, payment processor Visa – another good consumer spending barometer, and the likes of PulteGroup and DR Horton, a pair of larger homebuilder stocks.

Headed into Wednesday evening’s results, the year-over-year earnings growth was 5.4 percent, or 7.1 percent when removing Citigroup, which had some seriously weird charges this quarter. That still makes things good for a high beat rate of 68.5 percent thus far, and overall companies are surprising by 2.4 percent per Thomson data (again, include Citi, and it’s a -0.2 percent result). So the overall foundation of earnings has generally been strong with few real surprises, helping keep a bit of a lid on volatility in general.

Looking at the names on the docket for today, there are a few that stand out in terms of bettors hoping for wild swings one way or another. Pandora Media looks like a candidate for some volatility, with options types banking on a 9.7 percent move in shares one way or another through Friday, while expectations for Amazon are for a more subdued 6 percent move. That’s relatively quiet for names of that type though Amazon has become something akin to the “old tech” names, with reduced volatility and high share repurchases than anything else.

Short Herbalife

Jul 23, 2014 22:09 UTC

The Herbalife saga continues. Yesterday, Bill Ackman made what he claimed would be the most important presentation of his career: a three-and-a-half-hour slideshow detailing how the company’s nutrition clubs prove it is a pyramid scheme. If you put “three-and-a-half hours” and “power point” together and guessed that many felt Ackman’s event failed to live up to the hype, you would be correct. David Gaffen spent most of the time during the presentation tracking the steady rise in Herbalife’s share price. At one point yesterday it was up 25 percent over where it had opened.

Herbalife’s statement on the presentation seized on this: “Once again, Bill Ackman has over-promised and under-delivered on his $1 billion bet against our company.” John Hempton at Bronte Capital (long a supporter on the Herbalife side) didn’t find Ackman that convincing. He says he too has done a lot of research on the company and its nutrition companies. “This is not a pyramid. There are plenty of real sales to real people … Its a lousy business but it is a business in which people have integrated their lives and their families,” he writes.

But there were plenty of people who were impressed with the substance of what Ackman presented. After the presentation, says Dan McCrum, “two of the biggest criticisms of the short case have been answered head on.” According to McCrum, Ackman did a good job of questioning whether Herbalife’s nutrition clubs are a part of its legitimate business (not just used to squeeze more money out of its distributors), and showing that using Herbalife’s system in this way is widespread.

Investor Whitney Tilson (who, to be fair, is also short Herbalife), says he came out of the presentation more confident — 12 percent more confident, to be precise. “I thought it was an outstanding presentation for regulators, because it gave them a roadmap for their investigations,” he told Stephen Foley. After giving the presentation a day to settle,Herb Greenberg finds Ackman’s presentation not only convincing, but “the kind of good you expect from someone who spent $50 million to fund the digging.”

The takeaway here is that most people’s just had their priors affirmed yesterday with regard to Herbalife. But maybe that was the point? Will Alden and Matt Goldstein atDealbook suggest that what Ackman might be looking for here is a lawsuit, which “would give his firm access to records at Herbalife that he might not otherwise be able to unearth.” This seems like the most logical explanation of Ackman’s behavior this week, says Matt Levine. Regulators can continue to ignore him — it would be somewhat embarrassing for them if Ackman turns out to be right. But “if Ackman and Herbalife end up in court, the court will just have to declare a winner. And allow lots of discovery.” — Shane Ferro

On to today’s links:

Making bank punishments arbitrary might make it harder for them to optimize doing bad things - Cathy O’Neil
Previously: why “we must deliberately set financial forest fires” at random - Steve Waldman

The death of the iPad - BI

Correlation Of The Day
The strange relationship between global warming denial and… speaking English - The Guardian

New Normal
Finance and politics are really boring - Annie Lowrey

Americans wouldn’t buy 1/3 pound burger because they thought quarter pounder had more beef - NYT Mag

70% of Twitter’s employees, and 79% of its leadership, are men - Circa

Gary Cohn wanted to let Charlie Gasparino know that if he can handle Charlie, he can handle a stiff drink - Charles Gasparino

Deutsche’s internal controls are part sensory deprivation chamber, part funhouse mirror - WSJ

“Smartphones don’t just increase the size of the internet by 2x or 3x, but more like 5x or 10x” - Benedict Evans

Financial Arcana
Dodd-Frank is finally paying off - Mike Konczal

Larry Summers on secular stagnation and the Ex-Im Bank - TNR
Why does Wall Street use a different kind of macroeconomic modeling than academia? - Noah Smith

Sovereign Debt Problems
A meeting with bondholders “had to be postponed, because the Argentineans said they could not get here in time” - Reuters

Revolving Door
Financial regulator named as the head of financial industry lobbying group - Reuters

The US Chamber of Commerce really doesn’t want money market reform to happen -Reuters

MORNING BID – The consumer outlook, out of earnings

Jul 23, 2014 12:44 UTC

The next several hours will bring a handful of important consumer names that may give investors some idea of the progress the consumer economy is making. This only works as a barometer to some degree. Sales at S&P 500 companies far outpace the growth of the overall economy, which in part explains why the market itself is doing as well as it is (we’re in the 1980s now on the S&P, so crank up the Def Leppard) and the rest of the economy is lagging behind.

And mass market consumer-facing names like McDonald’s and Coca-Cola disappointed investors with their results on Tuesday, so it will be interesting to see whether others, like Whirlpool – which has tended to buck the general trend – will fare a bit better with their results. (Whirlpool, for its part, cut its outlook amid weak results, but North American sales were up 4 percent excluding currency effects, so score that one on the positive side of the ledger.)

Another consumer name that would lend some credence to the idea that Container Store and Lumber Liquidators put forth – that the U.S. economy remains in a funk – would be Ethan Allen Interiors. The furniture retailer actually comes in as undervalued, per StarMine expectations for growth in the coming decade, and it, too, has managed to steadily increase profit margins.

The company’s valuations compare favorably with those of its competitors: A lower forward price-to-earnings ratio than the likes of Haverty Furniture, Laz-E-Boy, and Leggett & Platt – and while it’s not the biggest of bellwethers (it’s a $659 million company, putting it in the S&P small caps), it has a certain cachet that puts it squarely in the mass market luxury area.

Again, it’s not a perfect barometer, but if it’s doing well along with the cable companies, media names that supply premium content, it points to higher-end retailer outperformance (though nobody has told Harley-Davidson or Michael Kors, both high-end companies that have struggled). If it sinks, it validates the “we’re in a funk” thesis.

The S&P’s global luxury retail index has posted annualized returns of about 25.5 percent in the last five years, outdoing the overall retail index (averaging 25.1 percent annualized in the last five years) and the consumer staples stocks (+16.7 percent).

The auto companies come a day later – Ford and General Motors – but the two U.S. automaking giants are buried under a lot of issues involving recalls, particularly GM.

Notably June auto sales came in at their best levels in about eight years, with GM showing a 1 percent increase in sales while Ford sales were down 5 percent for the month, though still ahead of forecasts.
Either way, the overall level of sales suggested some strength in the second quarter, with the primary questions being how much those companies will be hit by further recall-linked issues.

Obamacare’s circuitous path

Ben Walsh
Jul 22, 2014 21:49 UTC

U.S. federal courts don’t agree on whether the federal government is allowed to subsidize health insurance costs. The final decision, which seems likely to be made by the Supreme Court, will have massive political, economic and human impact. Not only does healthcare make up 18% of U.S. GDP, but the idea that the federal government can subsidize insurance is a key to the Affordable Care Act and the health insurance of more than 5 million Americans.

Here’s what happened today: first, the District of Columbia Circuit ruled in Halbig v. Burwell that the subsidies Obamacare has been providing for health insurance in 36 states were illegal. According to the decision, states alone, not the federal government, can provide subsidized health insurance. The court’s reasoning is based on imprecise wording in the law and contains an even worse pizza metaphor. Only 16 states, including California, Massachusetts and New York, have set up markets without the federal government’s involvement. Then, Fourth Circuit, which covers a large portion of the Southeast U.S., came to the exact opposite conclusion in King v. Burwell, in part using a tangled pizza metaphor. Any changes in policy are on hold pending appeal of the D.C. Circuit’s decision by the government.

The affordability of Obamacare, for citizens and the government, is at stake here: premiums could rise by more than 76% if states do not create their own markets, depending on the size of the subsidy currently provided in each state. Generally, the poorer the state, the more premiums will rise. Not only would that mean some people who have already purchased health insurance could no longer afford it, it could make providing care to those who remain in the pool more expensive, as healthy people begin to drop their coverage. In healthcare wonk-speak, this is called a death spiral, and it is indeed as bad as it sounds: when only the sick have any incentive to buy insurance, only the sick are insured. That’s not a good business model.

Mike Konczal takes a look at the argument that Obamacare’s authors actually wantedfederally supported exchanges to be illegal precisely so that states would be coerced into setting up their own exchanges. The problem with that, Konczal says, is that no one let states know this was the intent. As Dr. Strangelove points out, “a doomsday machine only works if you tell others about it.” Based on its actions – the government is appealing the Halbig ruling – there is no evidence that the administration really wanted a doomsday machine. — Ben Walsh

CORRECTION: The pizza metaphor was made in a concurring decision from the Fourth Circuit supporting federally supported exchanges, not the D.C. Circuit decision striking them down.

On to today’s links:

Bill Ackman’s Herbalife presentation was… underwhelming - DealBook
It’s “a lousy business but it is a business in which people have integrated their lives and their families” - John Hempton
Herbalife’s pre-response to Ackman. “Spolier: [the company thinks] it is legitimate” -Dan McCrum

Classic Bess
Bill Ackman Hates The Hell Out Of Herbalife Because God Damnit He Loves America - Dealbreaker

On The Internet
weev: Profiling the internet’s best-known troll - Matter

Financial Arcana
Trading around Volcker: Banks are reducing hedges and holding more Treasuries - John Carney

Secular Declines
The decline of the full-time, middle-class American clergy - The Atlantic

Please Update Your Records
It’s easier to hire skilled workers if you pay them more - Rob Garver

Your Retirement Plans
The best and worst 401(k) plans - Bloomberg

The worst cliche online today: “All you need to know” - WaPo

So Hot Right Now
“It’s like gold, but better”: Investing in farmland income streams - DealBook

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