A Bubble in Burgers?

Posted by Bill Bonner & Chris Hunter - Diary of a Rogue Economist

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Bill-BonnerThe Dow shot up 212 points, or 1.2%, yesterday. Gold was flat. 

The biggest challenge is to figure out what to laugh at first. So many frauds. So much nonsense. So little time. 

Last week, Zero Hedge reported that a bubble was inflating in the burger business. 

Shake Shack Inc. – which was taken public last week – was initially priced at between $14 and $16 a share. But a pre-IPO frenzy pushed the IPO price to $21 a share. 

Then things got really silly… 

On its first day of trading… for no apparent reason other than that investors had taken leave of their senses… the share price jumped to a peak of $52.50 – a 150% increase. 

Shake Shack is a milkshake and hamburger joint. According to Zero Hedge, the company’s “EBITDA multiple” – a more sophisticated version of the price-to-earnings ratio – is 108. 

Think of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) as a quasi-estimate of free cash flow. 

At an EBITDA multiple of 108, investors are willing to pay 108 times the free cash flow Shake Shack produces. 

The Double ShackBurger sells for $7.99. So to put it another way, a $10,000 investment gives you the equivalent, in cash-flow terms, of about 11 hamburgers. Maybe they’ll give you fries with that. 

What’s so special about the Shake Shack’s burgers? 

We don’t know. But we suspect it has more to do with the heady flavor of the stock market than the taste of its fries.

Lies, Lies, Lies

According to Bloomberg, from March 2009 through June 2014, the S&P 500 has risen 4.7% a quarter – about five times faster than US GDP. That’s the biggest gap since at least 1947.

One company can increase earnings even in a stagnant economy. But when stock prices rise – which are supposed to reflect earnings growth – in aggregate more than GDP, you have to ask: Where is the money coming from? 

We can tell you – from QE money and accounting shenanigans. 

The numbers are embellished by “adjustments” that hide real costs. Report the figures according to GAAP (Generally Accepted Accounting Principles) standards, and earnings for the last quarter were 5% lower than those a year ago.

Today’s 5.6% official jobless rate is a “Big Lie” too, according to the CEO of Gallup, Jim Clifton:

There’s no other way to say this. The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.

I hear all the time that “unemployment is greatly reduced, but the people aren’t feeling it.” When the media, talking heads, the White House and Wall Street start reporting the truth – the percent of Americans in good jobs; jobs that are full time and real – then we will quit wondering why Americans aren’t “feeling” something that doesn’t remotely reflect the reality in their lives. And we will also quit wondering what hollowed out the middle class.

Based on demographic trends, I suggest the real unemployment rate after weeding out disability fraud, forced retirement, kids hiding out in school for lack of a job, and those who are not counted as unemployed simply because they gave up looking is more like 9% than 7%.

Competitive Disadvantage

Why so few jobs?

You probably thought the “renaissance” in US manufacturing was bringing an employment boost. 

Foreign labor costs were rising, according to the storyline, even in China. US labor costs have gone down. And with all that cheap oil and gasoline so handy, US factories were about to kick butt. 

In a poll, it was revealed that even US manufacturers believed it – with 57% of them saying the “renaissance” was real.

But guess what? The renaissance in US manufacturing… it’s counterfeit too. TheGlobalist magazine reports:

At the end of 2013, there were still 2 million fewer manufacturing jobs and 15,000 fewer manufacturing establishments than in 2007, the year before the Great Recession, and inflation-adjusted manufacturing output (value-added) was still 3.2% below 2007 levels.

Although the US manufacturing sector has grown since 2010, resulting in 520,000 new jobs and 2.4% real value-added growth, almost all of this growth has been cyclical in nature, driven by just a few industries that contracted sharply during the recession.

When the worldwide price of oil went down, it went down for the Chinese too. Despite rising wages in China, labor costs there are still only about one-eighth of those in the US. 

And a stronger dollar doesn’t make those US costs go down; compared to the rest of the world, they go up.

The US still has a competitive disadvantage in manufacturing, in other words. And it’s not likely to go away any time soon.

Tomorrow – even more quackery!



Market Insight:

It’s Not Just Burger Companies That Are Pricey

By Chris Hunter, Editor-in-Chief, Bonner & Partners

It’s not just burger companies that are expensive these days… 

The so-called q ratio for the US stock market is at its second highest reading going back to 1900. 

The q ratio – developed by late Yale and Harvard economics professor and Nobel laureate James Tobin – is one of the simplest valuation tools out there. 

Tobin reckoned the combined market value of companies listed on the stock market should be roughly equal to the replacement cost of their combined assets. 

If the cost of replacing companies’ assets was lower than their market capitalization – a q ratio of 0-1 – it implied the stock market was undervalued. 

If the cost of replacing companies’ assets was higher than their market capitalization – a q ratio of more than 1 – it implied the stock market was overvalued. 

Over the long run, the average q ratio for the US stock market has been 0.68… meaning investors have been willing to pay, on average, slightly more than the replacement costs of companies’ assets to own shares. 

But the current q ratio is 1.11 – 63% above its long-term average… and higher than at any point in history bar the tech bubble in the late 1990s and early 2000s.

Does this mean the US stock market is about to crash?

The q ratio isn’t a market-timing indicator. Extremes can last many years, as was the case in the 1990s.

But investors would have been well served buying US stocks at lows in the q ratio – in the early 1920s, early 1930s, early 1950s and early 1980s – than at peaks in the late 1920s, late 1960s and late 1990s.

The troughs all preceded bull runs. Each peak preceded a major bear market…

Will “this time be different”?

That’s certainly the line mainstream market pundits are feeding mom-and-pop investors.

At Bonner & Partners we’re not so sure….