Bad Feeling Good Times

I've been reading some of Jim Jubak's writings and I appreciate his pieces for their deeper understand and broader look at how the world has been changing.

His piece, Why these good times feel so bad, gave me a lot to think about.

In particular what got my attention was the "The churn in employment,"

My Dad, to take an extreme example but one shared by many in his generation, worked for the same employer all his life, from his start at 17 as a sweeper on the factory floor to his retirement at 62 as a maintenance electrician. For him, except for his service in World War II, the churn didn't exist. It was something that happened to other guys. Until the last few years of his working life, when the company began to talk about shutting down the plant where he worked, as far as I can remember, he never worried about losing his job and having to find another one.

Contrast his experience with the churn experienced by the generation of workers born between 1957 and 1964. Unlike my Dad, born in 1917, these workers held an average of 10.5 jobs between the ages of 18 and 40, according to a study by the Bureau of Labor Statistics. In those 22 years of work, 21% of workers in the study, which ran through 2004, held 15 or more jobs. Only 15% held fewer than four jobs in that period.

Being a part of the born between 1957 and 1964 I can relate to the "job churn." On the surface the new reads that people change careers more often today and there is no insight into the unrest and lack of satisfaction in people's lives that are leading to these changes.

When I look back the truth is I'd have done better economically for myself if I'd stayed at my job as a waitress at White Spot that I got when I was 15 in 1977. Minimum wage for a 15-year-old was $2.60/hour and my rate of union pay was $3.92 and I got tips on top of it, making the wage about $6-7/hour, 30 years ago.

What 15-year-olds today can expect? In BC they get $6/hour for their first 500 hours of work, and then they go to $8/hour. With just 2% inflation $6/hour 20 years ago would be $10.87 today. If you look at what young people spend their money on, like university tuition, well, I remember paying $18/credit hour in 1980 and today it is $151.70, so 2% increase on $6/hour to 1980 would be $6.50 and to increase that buying so that young people have the same buying power to pay for post secondary education would give a wage of $54.73/hour.

I just saw Linda Blair's head in the "Exorcist" just twist around 3 times at the idea that my buying power as a 15-year-old waitress to improve my life's prospects was in the range of what, what an reasonably well paid engineer gets paid today.

When I worked in the restaurant industry tipping was not automatic and there was not the strong social expectation for tipping that exists today. My tips worked out to about 5% of total sales. I'd say a good 1/3rd of customers did not leave tips and it was rare to get a tip over 10%. I was doing about 20% better than my co-workers on tips. I was very good and if you were a regular customer of mine and I knew what you liked, well, I had your coffee poured and your order written before your seat hit the chair. I got tips out of customers known to never leave tips.

I don't know the base rate of pay at White Spot today, but a quick check of the menu and prices shows that the $2 hamburger platter now costs $10. So, I would suspect social pressure has increased tipping so that it is more like 10% of the sales and with 500% increase in prices, that would make tips come to $20-30/hour, and most certainly restaurant works are not claiming and paying taxes on 100% of their income like those of us with 100% of our income going through a payroll.

Waiting tables, politician and corporate executive or high level management are the few occupations that come to my mind that have exceeded reported inflation in terms of income growth over the past 30 years. A hamburger platter increased from $2 to $10 over 30 years is an average price increase of 5.5% per year. Just looking at the goods I sold, to be able to afford them as well as I could as a teenage worker I'd need to earn $30-35/hour. Had I stayed with my White Spot job I'd be making about $30-40/hour with tips and because of not paying full tax, my buying power would likely be that of a worker making $35-50/hour.

What did I do instead? I went a "better" job with a "future" in banking, which immediately paid less, but the promise was that there was supposed to be "opportunity." So much for opportunity when I just so happened to get into banking right before ATMs were invented and as the economy slipped into a recession. I lost work and I found it difficult finding new work. I won a job competition in which about 60 applications were made for a low entry level position and the pay was less than I had been making.

In two of my banking jobs I had alcoholic bosses. My view is that many of the limited jobs that were available were because the working conditions were disgusting and despite an exceptionally tight economy, they had enormous job turnover because of the unsavory working conditions.

The one small credit union I worked in with that abusive alcoholic boss had an annual turn over of more than 100% of the staff and I survived 18 months in the place, training new employees on average every three months, before I'd had enough run ins with with the alcoholic pig. And then I ended up a job with another alcoholic boss. During this period of what I see as enormous turmoil in the labour market both of these alcoholic men lost their jobs within a year of my moving on and to my knowledge neither returned to the workforce. One was about 60, but the other was only in his 30s and last I heard he was in his 50s and had not worked again. I perceive that many alcoholics were successfully integrated into the economy prior to the 1980s, but when the economy got tight, many were displaced, but not before they left an enormously sour taste in those that were employed below them.

I'd say the 80s brought in an era where good workers were overlook through no fault of their own and it was the end of the era of dead weight workers thriving. The news featured layoffs daily, and less experienced workers were pit against a glut of more experienced workers for not enough jobs to go around. The news featured the woes of the $50k per year 50-year-old workers being replaced with younger workers willing to work for $30k and the media bite was that "older workers are being discriminated against," when the truth was that wages for the work they had been performing had imploded. They'd have been working had they been willing to work for the same pay as younger workers.

What I know about my salary working in the banking industry, and having a window on everyone else's pay cheque, is that my wage relative to many occupations was low, with the exception of the retail industry. I was making about $7/hour in 1984 and union jobs paid about double. Some union jobs, like being a checkout clerk at Safeway, paid $17/hour.

I believe the extreme inequities in pay is what ultimately broke the union. Minimum wage was $5/hour at the time and you'd have had a line a mile long of workers, including me, willing to work for $10/hour.

And then, when I look at my mother passing away and the bank foreclosing on her home and eating all capital in her estate the inequity screams. The mortgage was $26,000, and the total payments came to around $300/month. Seriously, if I'd dropped out of high school and worked full-time with an income of $1000-1200/month and the ultra low tax environment of the day, I could have afforded the payments, and with a protected rising income due to tips, it would have simply gotten easier each year, and I had an extra bedroom I could have rented. Indeed, I could have afforded to make extra payments.

I just did a search on two bedroom apartment in Kitsilano, 30 years or older. The cheapest that came up is $449,000 for 717 sq ft. Assume I had that 25% down, the mortgage would be $337k and I'd need a qualifying income of $101,000. With 5% down I'd need a qualifying income of $129,000. Just where does one find a job with that kind of pay today? Beginning teachers start at about $42k, and that's with taking 6 years out of their working lives and taking on student loan debt that averages $40-50k.

I had an excellent grasp of math and budgeting as a teenager. Indeed, I was supporting myself at 17 and my first "major" life purchase wasn't a stereo or any of the things you associate with youth, but it was a washing machine. I'd calculated that it was costing me $10/week for taxi and washing machines at the laundromat and I could buy a washing machine for about $400. In less than a year it would be paid for with saving from having to take a taxi and paying the high prices charged to clean clothes.

When I go back an look at the "Churn in Employment," well, no wonder people people in my age group have been changing jobs. The rate of decline in buying power has been enormous, at least where I live.

And I went to university after having series of unsatisfactory jobs in the banking industry. I came out to triple the price of housing and no jobs. I had a friend who had a 2 year technical program that had made $36k in 78. Three years ago I applied for a job with greater qualifications and that was about the pay they wanted to start at. In 78' my friend's wage exceeded was about 150% of my mom's mortgage amount. Today that wage would be about 10% of the mortgage.

I feel like my generation just missed the boat. It is no wonder I see so many professionally educated in this age group in Vancouver no longer making ends meet.

But, you have to ask, will there ever be a boat for the younger generation?

How many violated "truths" can be counted here?

1) Waitressing is a dead end job. Just what is dead end? Seems to me having economic stability gives a heck of a lot more prospects then doing the "right" thing and going to university and giving up six year of income and finding absolutely zero prospects of even coming close to the same standard of living that being high school drop out would have given.

2) You always do better by getting an education. Sure, and today they come out with $40-50k of student loans and job prospects that leave them in a student loan debt ration comparable to the mortgage debt ratio of years prior. Our university educated come out with a rock to tread that is so big, they are truly lucky if they don't drown, and if you actually open your eyes, you'll see that a great many of them are in fact economically drowning. And here's the biggest joke going, the baby boom expect them to pay their pensions and health care. I can't wait to see that one play out.

Seriously, it is time the gross inequities in the distribution of wealth start to show a little equity. The only thing that can come out of this is a perilous resentment towards age, and if nothing is done to correct it will indeed be well earned, as will the consequences.

One thing I'd have to say that I am truly tired of hearing is how irresponsible younger groups are for not getting their act together and living with in their means. I'd like to see how well the judge and jury mouth pieces that never had to navigate the economic disaster facing youth would have done.

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Is Zinc Deleveraging?

An article, Shanghai Exchange More Than Doubles Zinc Price Limits, describes how the margins for zinc contract have been increased and how price controls have been relaxed, if my understanding of the article is correct.

To enter a contract you needed 5% down, but that changed on November 19th to 9% down and it is increasing to 14% on November 22. That is almost three times the margin requirement and three times the amount of money down.

The price control limited the change in any single day to 6% and that has been raised to 13%.

The changes to margin are enormous.

Frank Veneroso has maintained that metal prices increased beyond reasonable levels partly due to hedge funds buying metals without ever planning to take possession of metal. With a 5% margin requirement, they could tie up 20 times the deposit on any commodity trade. Increasing the margin dropped the leverage to 11 times and the final increase drops the leverage to 7 times. Essentially traders now require about 3 times the money to enter a contract. If hedge funds are indeed responsible for the huge increases in price, that leveraging has got to fall apart pretty quickly with such enormous increases to the margin.

Zinc exports from China increased by 47% during the first 10 months of this year, which really doesn't say much unless you have an idea of how much of the world zinc market they produce and how much they export. Data from the US Geological survey suggests that China produced about 25% of the world production, about 3 times what the US produces. This certainly suggests China is a big enough producers of zinc to be dramatically influencing the price down with such huge increases in exports.

The price declines will result in enormous downward pressure on zinc stocks I've previously followed.

When I looked at Zinifex in July the P/E was around 8.6. The metal values per ton of their Rosebury mine that they were mining was about $610/ton, but the reserves for future mining were a higher grade at about $800/ton. Having a higher grade coming up, and not an outrageous P/E to start gave Zinifex room for downward pressure from prices. The downward pressure on zinc prices have been enormous, however, at today's prices that higher grade reserve still has metal values of over $650/ton. The Century mine also had higher grade in reserves to be mined. Costs are in Australian dollars. The higher grades to be mined are protective, however, zinc prices have come down enough to be cautious with this one now.

I didn't care much for Tamberlane, Breakwater or Acadian. Tamberlane only had one deposit out of the 34 that had very nice revenue potential and that would only last 1-2 years and the other deposits were questionable. Breakwater's best mine had metal values of about $410/ton and those are now below $300/ton. The metal values in El Toqui are down to about $230/ton. El Mochito's values are down to about $275/ton and Myra Falls about $320/ton. Myra Falls is showing $1.10 per pound cash costs last quarter. With zinc below that the mine doesn't look very good at all. Toqui has $0.76 cash costs per payable zinc sold. The costs appear to have gone up enormously, from $0.39 per pound payable in 2005. There has been share dilution to bring the fully diluted count from about 395 million to 461 million. Acadian estimates 8 million pounds of zinc and 3.5 million pounds of lead. The costs are estimated to be $12 million. They estimated $13 million of revenue, but the price declines of just the past days brings that down to $12.3 million. At best that might give just under a penny per share for full year production. It might even run at a loss.

Hudbay minerals looked to be valued at about 2-3x the valuation of Blue Note when I looked at them together. Today Hudbay's earning look to me like they are heading to the 50c/share for a full year range, and that won't show up on the next quarter, but Q1 2008 would have earnings in the 10-13c/share range based on today's metal prices and exchange rates. Q4 already has some better metal prices rounded into the quarter. I saw some serious reasons to see earnings declines when I reported on this stock and they have shown up and further declines will likely happen.

Blue Note's metal values are down to about $315/ton. They have have not met 2007 production goals, and there has been more dilution. Production costs are supposed to be in the $66 million range. The gross revenue potential is still in the $190-200 million per year, but that up to 4c/share earning potential in a quarter is mostly likely gone. The numbers still look like it has the potential for 1-2c eps for their first full quarter of production, but the first full quarter of production is not likely until 2008 due to problems getting the zinc circuit functioning.

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Education Hit

As an educator reading about how school funds are being hit by SIV debt in supposedly "safe" investment pools saddens me.

As an educator I would not advise anyone to go into the profession today and I would encourage people to encourage their children to go into other professions that will enable them to have some kind of standard of living rather than an existence. My experience with education has been in Vancouver, a place hit with the highest cost of living in Canada and for teachers, the wages are not the lowest, however, the workload is 17% higher than Ontario and the wage is about 17% less than Ontario, effectively about 30-35% less per hour worked, and Ontario teachers are hardly well off.

For Canada, Vancouver has probably been hardest hit in education in terms of what is going to spread every where as government budgets get tighter. When you factor in the true cost of living, Vancouver teachers are the lowest paid in Canada. The US already grossly undervalues their children and teachers by the level of funding, more so than Canada. To me, education is the most important investment a country makes in their collective future, not just the children's future.

So, you end up with extreme education systems, like in Britain where public education is so poorly funded they have had a teaching shortage for 25 years. In Britain if you want to be a teacher you will not pay tuition at university, yet even with these incentives Britain has not been able to reverse their teaching shortage, and the consequence to their children in public education and the country's future is enormous. They have the highest teen pregnancy rate, the highest drug use, and the lowest literacy rates out of all "industrialized" countries in the world. The social problems I saw there left me in constant shock. Only 77% of their population completes school to what is a grade 10 level of education in Canada.

If you were starting a family in Britain you'd be immediately asked if you were saving for your unborn child's education. Your child would hardly have a chance of success in public education and public attitude is very much that only children of parents who pay for education deserve an education.

In Vancouver I know far too many teachers that do not make ends meet. I know far too many teachers that after 10 years in the profession have barely made a dent in their student loans, never mind managing to accumulate any kind of savings. The only teachers that actually have a standard of living and aren't merely surviving are the ones that managed to buy a home before the housing bubble, and when university education was reasonably funded. The division of teacher wealth in Canada as a profession has the greatest extremes in Vancouver. There are teachers coming to retirement age with not just one home, but two homes, yet those entering the profession will hardly be able to get their student loans under control, never mind achieving any kind of economic security.

Go into teaching in Greater Vancouver and if you get your own classroom straight out of doing your 6 years of university the starting salary is $42,840, and in your 11th year you will finally make the top salary of $67,362. Just paying the interest on your $40,000 student loan will cost about $4,000 per year (prime plus 5%). Chances are you will not get your own classroom for the first two years and your wage will average about $20-25k per year. So, go into education and at around age 35 you can expect to make about $67k per year. There is nothing that justifies the years it takes to get the top of the pay grid, however, if the job was a 40 hour per week job the pay might be justified. However, the job is about 60-80 hours per week for a beginning teacher and about 50 hours per week for an experienced teacher, at least for teachers of academics. Summers off are earned overtime. The workload increases have been manageable for experienced teachers, but they have utterly buried beginning teachers.

The average price for a house in Vancouver is a low of $446k in Maple Ridge, which is more than an hour drive in rush hour to Vancouver, to a high of $1,456k in West Vancouver. Burnaby, which is central to Greater Vancouver has an average house price of $711k. Even an apartment in Burnaby has an average price of $334k. In Vancouver one needs about $80k for a down payment on an apartment.

Governments are being squeezed more and more and education is not recognized as the future investment to enable people to look after themselves and perhaps be the single largest investment in the future to reduce the social demands on government. No, society cuts education to the point that teachers are overworked and can not make ends meet. The thing about teachers is when they feel empowered by giving extra hours to children and they get to watch children blossom, they do so. When the workload gets to the point that there aren't enough hours to meet their student's needs, or they are so overworked they don't have time to do the fun things they wanted to do with students, well teachers are human and they don't give free hours without feelings of accomplishment and appreciation. When it become hopeless, and they aren't making ends meet, well, they leave the profession. Historically in Canada about 40% have been leaving the profession in the first five years, and I suspect that rate will increase.

Britain broke the that critical point of a workload that gives some reward to teachers in that you know you are making a difference in children's lives. Britain's public education system is so grossly underfunded, the workload is so high and the outcomes are utterly hopeless and the result is that they can not keep teachers. I taught in Britain and my students that were leaving school that year did not know what a percent is, how to do multiplication, essentially their math literacy was at about a grade 2 level, and the way Britain divides students, well these were slightly below average students in the school, but a third of the students in that school had even less ability. So tell me, what kind of future does a country have when this is the state of their education system the abilities of their future adults?

There is a point when individuals must chose a profession based on the ability to look after themselves and as much as I believe in education, I no longer believe that teachers going into it today will be able to look after themselves. It is no longer a case that you could do better elsewhere, but the rewards of education make up for it, and you can still make a living. The dumping of excessive workload on teachers steals the rewards of teaching and leaves hopelessness in its place. Children need stability to develop to their full potential. When there is a revolving door of educators there is no stability in education for children and children become unmanageable faster than you would expect. Places that teachers still manage a standard of living, rather than an existence, are likely to disappear due to increasing economic pressure on the governments that fund education.

But back to the article I linked, these kinds of losses in education aren't just about money, they are about children's future and indeed our collective future. I can survive my pension being hit, but can we survive the hit on our collective future?

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Jones Soda Imploded

This "earnings" was a six cent loss. That implosion I mentioned was coming certainly looks like it is here.

It truly never ceases to amaze me how earnings can be such garbage for a company, yet the share price goes up...

So, Jones Soda was down after the last earnings report and then it went back up and now it looks like it is finally on it descent. I thought it was a $3-4 stock before it made decisions that destroyed earning potential and margins. Now I wonder if it will survive.

End of post

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The Pension Bet

An article I saw today was about the Yukon government investing $36.5 million in bonds that are now frozen and they might see some of this money returned over the next 10 years.

I am distressed over the Canadian government's "solution" to the short fall in the Canada Pension Plan. They have set up a system where taxpayers are paying more into the system right now than what is being paid out, and our CPP payroll deductions are indexed to be a percentage of the average wage in Canada.

This part of the plan does not distress me. What I'm betting on is the second part of this plan is going to be a disaster for Canadians. They are investing the extra money into the markets instead of paying down our debt, or at least that's my belief from what I've read on it and I believe it is about 5 years of pension money. They are thinking they will do better on the markets then paying back debt and do better for Canadians.

If you went to sleep for 20 years and saw what are markets looked like by comparison to when you went to sleep you'd be in an utter panic mode to sell everything and preserve the wealth, yet the almighty Canadian government has started taking our hard earned pension dollars putting them into that over valued mess. I don't see those dollars going anywhere but the toilet.

I'm just wondering how much asset backed bonds Canadians own. I was distressed the first time I read the plan, and that newspaper article just makes me wonder when we are going to be told how our government lost our tax pension dollars.

It is such a sad bet.

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Currency Contrast of Commodity Prices

I am Canadian and as such when I look at commodity prices I convert to Canadian dollars. Earlier in the year the conversion meant adding as much as 19% onto the US quoted price yet today it means take 7% off.

The change in currency valuation is enormous for the base metal industry. If you look at the mining industry from a world perspective, there are some mines in the US, and for those mines wages have effectively declined as the US dollar has lost value in comparison to other currencies. The US has gone from a high of 1.1875 on Feb. 7 of this year to a low of 0.9323 this past week. At its height earlier in the year the US dollar was “worth” 27% more relative to the Canadian dollar. A $30/hour US wage on Feb 7th was $35.62 Canadian and at the low, this week, it is $27.97 Canadian. Canadian wages have done the opposite. A $30/hour Canadian wage at the height of the US dollar was $25.26 US and now it is $32.18 US.

For US based mining companies wages are fairly fixed relative to the US quoted commodity price. Their might be union contracts that give them an increase, but when you do your back of the napkin calculation on a company using commodity prices you do not need to correct for costs due to currency changes for mines located in the US. That cannot be said for mines located in the rest of the world.

Given that the US dollar has lost ground with almost all other currencies, when the “costs” are converted to US dollars the increases will be staggering, as the wage conversion calculation above shows. I suspect many investors are not going to be prepared for what this does to the value of their investments. The full effect of these increased costs are not going to show up in the third quarter financial reports, although some will. For the third quarter the US dollar averaged around 1.05. As of this week it has declined a further 12%. Only a portion of those wage changes will show up in the next series of quarterly reports. Expect to see costs up in that 12% range for 4th quarter results being reported next January to March.

The margins, or earnings, on base metal stocks are affected by both the costs, which are in the currency of the country and the commodity prices, which are quoted in US dollars. The workers may not have gotten wages, but once the costs are converted to US dollars, they are simply up dramatically relative to the US dollar in most countries. This is not good for investors, especially investors in commodity stocks with high P/Es. In general, I suspect that chances are if a base metal stock has a P/E over about 6-12 right now, depending on other strengths/weakness of the company, it is going to correct downwards in the next year, indeed, if the LME warehouse stock levels continue to rise this estimate may be conservative because of metal price declines due to increasing supply.

The one year copper spot price shows three almost equal peaks in the spot price of about $3.70 US, in April, July and October. In Canadian dollars those “peaks” are about $4.25, $3.85 and $3.60. Today in Canadian the US price of $3.40 is about $3.16 Canadian. In Canadian dollars the price of copper was about 35% higher at its peak. In an earlier blog I looked at the Bingham Canyon mine. About 2/3rds of the revenue when straight to earnings for the period I looked at it. Because this mine is located in the US it is not going to see enormous wage increases, although it will probably see large energy costs increasing. However, this mine will still have exceptionally healthy earnings, although the margin may decline a little. This mine has lots of room that if it saw a 35% hair cut on revenues it is still highly profitable, with probably 40-50% of revenue making it to earnings. Contrast that to a mine with say 20% of revenue with strong prices going to earnings. At 35% hair cut in commodity prices means that the mine is now losing money.

I dislike nickel immensely, and here’s why. Nickel prices peaked in April at around $24/lb US. In Canadian that would be around $27.50, and there is a lot of nickel being mined in Canada. On Friday nickel closed at $14.35 US, which is now about $13.40 Canadian. Nickel peaked at a price over 100% higher. The good thing about nickel is the peak was a short-term spike and that utterly unsustainable price only got averaged into earnings for a very short period. The very, very bad thing about nickel is that a number of nickel stocks have priced in an earnings expectation based on a much higher nickel price than is realistic. The current price is already a strong nickel price and a wise investor would be evaluating their investment at $10-12/lb nickel. I believe to have priced a nickel stock with a high P/E with the outrageous nickel price of $21.65/lb, or $25 Canadian, as investors in FNX mining did in the first quarter will prove to be economic suicide.

In my May 30th post on FNX I pointed out many problems with investing in this company, and in the shorter term the price has gone higher than the roughly $35/share it was at then. But, short-term hype and speculation is not true valuation and this is the type of investment susceptible a wake-up-one-morning to 40-50% haircut. Going back to first quarter, earnings were $30 million (extrapolate to $120 million full year expectation) with an average price of $21.65 and an exchange rate of 1.17. Guidance was that earnings are supposed to decline by $9 million per $1 decline in nickel price, so expect $66 million decline from the contraction of nickel price. A 10% change in exchange will kill another $12.7 million in earnings, so expect another $32 million decline from exchange, or $98 million. That leaves about $22 million for full year earnings, or $5.5 million per quarter. Factoring in the roughly 70% increase in production expected, that would give about $9 million per quarter, or earnings of $36 million per year. Assuming share count has not increase, which is full year earnings of about $0.42/share, outrageously low for a $37 commodity stock. The earnings have gone 36c the first quarter, 40c the second quarter and 15c this past quarter, yet this quarter had record output. Earnings were 24c/share in Q3 the year before. Output increased by 50%, yet instead of a 50% increase in earnings to 36c, earning were 15c, an expectation decline of 58%. The average exchange rate was 1.04 for quarter 3. Now it is 0.93. That 15c/quarter extrapolated to a full year is 60c, but factor in that further currency decline and expect to see next quarter earnings of 10-12c.

Anyone doing a peer valuation of their nickel stock relative to FNX is seriously misleading himself or herself.
I expected the US dollar to decline relative to the Canadian dollar, but never in my wildest dreams would I have predicted 0.9323 this fast. I suspect there is not an analyst report out there that has factored in the drastic loss of revenues, or alternative drastic cost increases, due to the strong changes in valuation of the US dollar.

I don’t have time to look at the degree of change in other commodity prices right now, but my prediction is 100% US companies will perform better relative to companies with operations in other countries because they will only be dealing with how commodity prices affect their bottom line where as other companies will have the huge challenges of how the drastic decline in the US dollar affects either costs or revenues, depending on what currency they do their reporting in.

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