Wednesday, October 24, 2012

Let Me Destroy Two Myths In Media Today

Myth #1)  New home sales soared to highest since April 2010

The Government reported today that new home sales came in at a seasonally adjusted 389k vs. 385k expected.  Please note the emphasis on "seasonally adjusted."  The prior month's reported number was revised lower (of course) to 368k (seasonally adjusted) from 373k.  No one knows except the insiders at the Census Bureau how the seasonal adjustments are calculated.

HOWEVER, if you read through the press release from the Census Bureau, you find that the actual number of new homes that were "sold" in September was 31,000.   Huh?  I'm drawing on the work from in this LINK, which also links the CB report.  Of the 31k homes actually sold, only 11k were completed homes.  10k were not actually started yet and 10k were under construction.  As noted, the 31k is below the 35k from May 2012.

I'm going to one-up zerohedge's analysis by pointing out that currently the new home cancellation rate is running close to 20%.  You can get this number by skimming new homebuilder quarterly reports.  If this number stays consistent, of the 20k homes not completed, it is possible that 4k of those could cancel.  Which would then mean that the real monthly number for September would be 27,000 homes that were sold.  Including seasonality, that would put the likely run-rate well below 300,000 homes based on a thorough cleansing and analysis of September's headline report.

Myth #2)  Facebook had a great earnings report based on the growth in mobile active users

The headlines could not have been more full of hyperbole and embellishment.  Facebook's stock spiked over 20% and all the financial analysts/reporters were falling over themselves with delight.  CNN Money has a video titled "Facebook cashes in on 1 billion users." LOL.  Certainly insiders and Morgan Stanley (the IPO underwriter) cashed in big time on zombie investors.  That much is a true statement.

Here's the problem with the headline declarations:  when I go to the 8-k filing with FB's quarterly SEC earnings report, I can't figure out where the "cash earnings" are.  Maybe I need a visit to the eye doctor, but I was actually quite amused by what I saw with my own eyes in FB's 8-k:  LINK

If you parse through the reported financials, to begin with, there's not a lot of "color" from management about the operations.  Compare that to one of the recent big bank 8-k filings and you'll see what I mean.  This is an analytic red flag and it means to me that there's just not that much to talk about.

Second, if you click on the link and scroll down to the Statement of Cash Flows, you'll find that cash flow from operations declined from $565 million in Q3 2011 to $250 million in Q3 2012.  Cash flow from operations for the 1st nine months of the quarter declined from $1.039 billion in 2011 to $931 billion in 2012.  Notice anything there?  There was a deceleration in amount of cash flow generated in the third quarter of 2012.  This should not be happening with a "growth" business.

Finally, the media/Wall Street is shamelessly pimping FB's "active mobile user" base.  This totally reminds me of the "clicks and eyeballs" phrase from the internet bubble era.  Remember Henry Blodget getting on CNBC in front of a beaming Maria Bartiromo and promoting the new economics of page views?  ROFLMAO.   Here's the truth:  Mobile active users represented 60% of monthly active users in Q3.  However, the MAU category generated only 14% of ad revenues.  Someone please explain to me how that is bullish?   Am I hallucinating?  But hey, the company updated its Messenger for Android and iOS and made Facebook Camera available in 18 languages.  So the company has that going for it, which is nice...

I don't see how our system and financial markets can get any sillier than they are now, but I'm sure they will.  The reason FB stock is up so much today is that there's a massive short squeeze in the shares shorted.  I say this because the shares are extremely hard to borrow and the reality of the economics and cash flow underlying FB's business model does not come remotely close to representing the $50 billion market cap of the stock.  With the global economy starting to contract in a major way, the cash flow numbers for FB are not going to do what they need to do in order to justify even half of the current market cap.  And the housing market is not recovering...


  1. Asian economies turn to yuan
    A "renminbi bloc" has been formed in East Asia, as nations in the region abandon the US dollar and peg their currency to the Chinese yuan — a major signal of China's successful bid to internationalize its currency, a research report has said.

    The Peterson Institute for International Economics, or PIIE, said in its latest research that China has moved closer to its long-term goal for the renminbi to become a global reserve currency.

    Since the global financial crisis, the report said, more and more nations, especially emerging economies, see the yuan as the main reference currency when setting their exchange rate.

    And now seven out of 10 economies in the region — including South Korea, Indonesia, Malaysia, Singapore and Thailand — track the renminbi more closely than they do the US dollar. Only three economies in the group — Hong Kong, Vietnam, and Mongolia — still have currencies following the dollar more closely than the renminbi, said the report, posted on the institute's website.

    The South Korean won, for example, has appreciated in sync with the renminbi against the dollar since mid-2010.

  2. (Quinn in Littleton)

    Dave: Did you see this quote on CNBC today? I almost fell out of my chair when I read this crap! Yes Dave, the world is in for a big shock when the stinky brown stuff hits the fan! Q

    "The Bundesbank is, of course, quite right in its opinion of the value of the examinations. In reality, it does not matter one bit whether the Federal Reserve Bank of New York actually has the German central bank’s gold or whether the gold is pure. As long as the Fed says it is there, it is as good as there for all practical purposes to which it might be put. It can be sold, leased out, used as collateral, employed to extinguish liabilities and counted as bank capital just the same whether it exists or not."

  3. Great work again, Dave, as usual. You certainly know your stuff. Your well honed iconoclasm is a welcome relief/antidote to the Pravda-like BS being spewed 24/7 by governments at every level. Now when does that next boatload of Faceplant stock hit the market? November? Maybe I'll buy at less than $5/share. That's close enough to a 90% haircut for that piece-o-crap stock.

  4. $500,000 payout to charter principal sparks outrage, call for probe

    The principal of a failed Orange County charter school took home a check for more than $500,000 as the school closed down in June and is still being paid thousands of dollars a month to wrap up the school's affairs.

    The check for $519,453.36 in taxpayer money was cut to Kelly Young, principal of NorthStar High School, two days after the Orange County School Board accepted the school's plan to close in lieu of being shut down for poor performance.

    The payment, which was authorized by the charter school's independent board, appears to be legal.

    But Orange County School Board chairman Bill Sublette is outraged at the payout, calling it "a shameful abuse of public tax dollars" and "immoral."

    State Sen. David Simmons called for a thorough investigation. "There's no room for abuse by charter or traditional schools," Simmons said. "All it does is hurt children."

    Leftover money from a charter school that shuts down, minus grant and capital dollars, are supposed to go back to school districts upon closure.

    The district was unaware of the principal's pay because the school is not required to report it under Florida's charter school law. Earlier audits by an outside firm hired by NorthStar had noted the school had contracts that would require payouts to several employees, but no dollar figure was calculated.

    "The law is very clear that school boards cannot put limits or control how a charter school spends their money, including payouts like this" or salaries, said Sublette. He called the payment "immoral and unethical" and noted that it could have paid the salary of five district principals for a year.

    Because charter schools do not have to report their principals' salaries in Florida, it is unclear how many might have contracts or salaries similar to Young's.

    Charter schools are privately run public schools with fewer regulations than traditional public schools. Like all public schools in Florida, they get state money based on their student population.

    School boards must authorize charters – but have little oversight authority once they are opened. Expanding charter schools and school choice are priorities of Gov. Rick Scott and the Republican Legislature.

    But Sublette and other local school leaders across Florida have been calling for stricter regulations after a number of charter schools failed to provide even basic educational services to their students.

  5. Fuck it, I'm buying puts. They are a lot cheaper and easier to get your hands on. Plus I don't think the Bernanke put has any effect left... don't fight the Fed well...I can whip any gunfighter with a knife- when they run out of bullets.

    Keep up the good work Dave. I like seeing a little sanity amidst all the lies and cheerleading.

  6. We must stop protecting the rich from market forces

    The 'American' global economy punishes the poor while giving handouts to failing banks. It's time for some balance

    Gore Vidal, the recently demised American writer, once famously quipped that the US economic system is "free enterprise for the poor and socialism for the rich".

    Since the outbreak of the global financial crisis in 2008, not only has the US lived up to Vidal's caricature but the whole of the rich capitalist world has become more "American". The poor are increasingly exposed to market forces, with tougher conditions on the diminishing state protection they get, while the rich have unprecedented levels of protection from the state, with virtually no strings attached.

    The poor are told that their states are bankrupt because their previous governments splashed out on welfare payments for them.

    They – especially if they happen to be from the "lazy" eurozone periphery countries – are lectured that they have to pay for the "good times" they had with "other people's money" by working harder at lower wages and by accepting lower levels of welfare provision, with more stringent conditions.

    Of course, this narrative is completely misleading. The current budget deficits are mainly the outcomes of the fall in tax revenues caused by the financial crisis, rather than excessive social spending.

  7. Jim’s Mailbox

    Good morning Jim,

    I read your piece about the Gold Bank rumor of yesterday. The rumor is laughable!

    For my own edification, over the last week I have been asking social acquaintances if they own Gold in ANY way.

    I would suggest your readers try this little social experiment. It should set their minds at ease knowing how under owned Gold truly is as an asset.