A stream of bad news, a strong recession signal

A stream of bad news have hit in few days confirming several similar reports from the last month. The illusion of growth is disappearing fast and without continuation of the QE by the Fed, recession is now guaranteed for the Q4 in US and in few new countries in the euro area.

The Chicago PMI plunged from 67.6 to 56.6. Expectations were at 62. Three months of declines now with total of 14.6 points.

NEW ORDERS and PRODUCTION posted their largest declines in several years, but remained positive;

INVENTORIES accelerated buildup;

Breadth of EMPLOYMENT expansion softened but remained strong.

Case Shiller drop accelerates. Housing firmly contracting again.

Data through March 2011, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels.

Euro area retail sales drop in May, especially in Italy.

European retail sales contracted in May to the lowest level since October 2010, driven by a “sharp drop” in Italy, Markit Economics said.

A gauge of euro-area retail sales fell to 48.8 from 52.2 in April, London-based Markit Economics said today in a statement. The index is based on a survey of more than 1,000 executives and a reading above 50 indicates month-on-month expansion.

Meanwhile SNAP hits new record. The Fed’s wealth effect is sure working well for the poor. Only 44.6 million people need assistance to buy food.

All these bad news together with further confirmation that Nokia is a slow-motion bankruptcy probably made the Finnish department of economic affairs inform the masses that economic growth will continue and unemployment will decrease steadily in the next year.

Talouskasvu jatkuu kohtuullisen hyvänä, työllisyys kohenee, työvoimaosuudet nousevat taantumaa edeltäneelle tasolle ja työttömyysaste laskee 7 prosenttiin. Näin todetaan TEM:n lyhyen aikavälin talous- ja työmarkkinaennusteessa, jossa tarkastellaan lähiajan kehitystä talouden, työvoiman kysynnän, työvoiman tarjonnan, työttömyystilanteen sekä työvoiman saatavuuden osalta. Tarkasteluajanjaksona ovat vuodet 2011-2012.

Nokia comes in contact with reality, stock plunges

Nokia today issued a profit warning for the current quarter and the rest of year saying operations will probably be around break-even.

- Nokia now expects Devices & Services net sales to be substantially below its previously expected range of EUR 6.1 billion to EUR 6.6 billion for the second quarter 2011. This update is primarily due to lower than previously expected average selling prices and mobile device volumes.
- Nokia now expects Devices & Services non-IFRS operating margin to be substantially below its previously expected range of 6% to 9% for the second quarter 2011. This update is primarily due to lower than previously expected net sales. While visibility is very limited, Nokia’s current view is that second quarter 2011 Devices & Services non-IFRS operating margin could be around breakeven.

Translation: E7 and N8 sales are poor, IFRS net income will show a loss and we have no idea what is going to happen towards the end of the year. I am not surprised at all by the weak sales of the high end; why would anyone commit to a dying platform over buying Galaxy S II, HTC Sensation, iPhone 4 or any of the other high-end phones?

You might recall that my initial take on Nokia’s Q1 was decidedly more negative than that of the so called analysts. Then, I continued to rail against them when Elop announced his plans to reorganize the company here. What worries me is that the first thing they state as means to avert crisis is to invest more into Symbian. This is not going to end well and the drop in the share price gives good indication. It plunged on massive volume and there wasn’t even an attempt to buy the dip.

Nokia stock closed at €4.75 in Helsinki trading, down 17,53 per cent from yesterday’s closing price. Nokia is now worth around 17.8 billion euros. Equity per share is approximately 3.8 euros, so markets do not see much value in Nokia’s operations and I agree with them.

Back when Nokia was trading at 12€ the last time, I not only sold my shares at a nice profit, but also made the call that I would not buy Nokia before it was trading at 5€ or below. Perhaps I should have actually traded that call. Nonetheless, the news that have come out since have pushed my estimate of Nokia’s fair value downwards. I just don’t see value in Nokia anymore.

Symbian’s long tail

Remember the picture above. The very long tail of Symbian that will produce 150 million in sales over the next couple of years. Yeah, it’s not going to happen. You would think that at Nokia there would be someone that understands that when you announce the imminent death of an entire technology platform in a rapidly evolving industry where the platform itself has become the critical competitive factor, your sales are going to tank. Be it one way or the another, it took an actual steep sales drop to convince Nokia execs of that very fact.


A month ago Nokia announced its restructuring plan including outsourcing Symbian workforce to Accenture and reducing personnel by additional 4000. They also said they would decrease their Devices & Services non-IFRS operating costs by 1 billion euros by 2013 compared to 2010. The plan itself had few big problems, but given that it took less than 2 months for the shit to hit the fan for Nokia, I am now expecting additional restructuring program to be announced before the end of the year possibly in a panic atmosphere, but that really depends on what happens with the market shares of Symbian and especially WP7.

Market shares dropping

I discussed the market share development among smartphones here. Essentially, Symbian’s market share is plunging and they are about to jump on board with a platform that has 1 per cent market share and with a company that has 3.5 per cent market share. WP7 did not catch on despite the rather successful roll-out of several phones internationally with a new exiting OS that garnered positive reviews on many fronts, and this is becoming a problem for Nokia. This is what I wrote in April:

Expect the market share to continue to drop. Now, this is not a big issue for Microsoft, but to Nokia its probably crucial. If Microsoft does not deliver in the next 12-18 months it might be time for Nokia to drop smartphones and concentrate on cost leadership with some Meego initiatives on the side.

1.6 million sold devices in the first quarter and most likely less this quarter looks really bad. If this trend continues Nokia might be holding some emergency meetings in few months. To their benefit Nokia is strongly capitalized so it has time and resources to reinvent itself.

Losing contract with Microsoft

Between the time Elop came to Nokia and the announcement of the definitive agreement between the companies that Nokia would use WP platform on its smartphones, there was quite a bit speculation. I held the position that Nokia’s negotiation power was vast and they were at good position to create a partnership contract that would shift a lot of value from Microsoft to Nokia and I still hold that view. This is because WP7 would have died off completely if Nokia would have gone ahead with Android.

The details of the agreement are not public, but it is known that Nokia will pay license fees just like HTC and MS will use some of the Navteq assets in its offering. This was and still is a losing contract for Nokia. Nokia should have at least demanded the following:

  • WP platform as a crucial element in MS overall strategy
  • WP representation in company executive board
  • Guaranteed significant marketing support from MS
  • Guaranteed annual major software releases for the next 10 years
  • Short-term exclusivity to new software releases
What Nokia should do now
  • Further concentrate the R&D function geographically and on projects that are actually related to smartphones.
  • Shutdown production in Finland, there is no reason to give huge advantage to competitors on this point as no one cares were the products are made
  • Fire Esko Aho and Jorma Ollila and get rid of the idea that one should hire idiots so that one can look relatively better. Ollila already tried this by driving Alahuhta to Kone and picking Kallasvuo as CEO.
  • Spin-off Nokia-Siemens
  • Start developing something that will positively differentiate the products from other WP handsets as I don’t think the brand will do it anymore.
  • To be honest, its down to hope at this point.

Presenting fiscal prudence by Republican and Democratic administrations

Now that US has reached and in fact breached the debt ceiling (by stealing public pensions), we have the leading Republicans demanding spending cuts to the tune of trillions over a period of 10 years or so (not even close to adequate cuts) and then we have president Obama assuring the masses that he will bring the deficits under control but he just cannot do it now. We have also heard that the raise in the debt ceiling must be matched with equal spending cuts, but it does not seem to be a problem when the Obama administration simply ignores the law. All this is just theatrics designed to keep the people locked into their battle stations ready to vote R instead of D and D instead R only to realize and soon forget that nothing actually changed.

Obama is not going to bring the deficit under control. Why the hell would he do that? He needs the money to buy him self the office for another 4 years. Instead he will promise to do something once elected because most people are completely incapable of realizing what is in front of their eyes and the rest just think that R would be worse because R is this and that. Moreover, the R side of things is pressuring Obama on deficits and spending to score political points, because they know Obama will not sign budget cuts and that he cannot explain to the public the real reason there is not going to be any cuts. The illusion is kept intact and the other part of the population cheer the “deficit hawks” for reasons that will never materialize. The R party has no intention of cutting spending – why would they? It is in the interests of the party to create a larger government, but it is not likely that we even get that far since Obama will have his second term simply because it is easier to gut the social security with him as the front man. The R party will just have few leading candidates whose mission will be to attack and marginalize Ron Paul.

On the subject of fiscal prudence, here is what the last five administrations have achieved:

The chart shows the total public debt outstanding since the start of the first Clinton administration in 1993. The overall picture already tells everything you need to know about the actual willingness of R and D to cut spending for the US government to live within its means, but let’s break it down a bit.

The change in total public debt outstanding during the presidential term

  • Clinton, 1st: 27.6 per cent or $1,149 billion
  • Clinton, 2nd: 7.7 per cent or $412 billion
  • Bush, 1st: 32.5 per cent or $1,863 billion
  • Bush, 2nd: 40 per cent or $3,037 billion
  • Obama, 1st, to date: 35 per cent or $3,713 billion
For those thinking either that Obama will bring the deficit under control or that Republicans will really cut spending, please be serious. The budget cuts will come when there simply is not any more money left to spend, not a moment sooner.

The situation in Spain and misguided protests

The situation in Spain seems to be getting a lot worse with the protests getting larger and police resorting to outright criminal acts against the people. Moreover, the threat of a bailout and a severe austerity package is out there but so far the yields on government debt and CDS spreads have remained stable. The reason for this is that Spain’s public debt is only at 60 per cent of GDP and deficit for last year was at 9 per cent. Ireland, Greece and Portugal were far worse. However, even the official U3 unemployment is at 21.3 per cent and the close to 50 per cent youth unemployment is driving ever larger protests. If we would actually live in the CNBC green shoots fantasyland, I would say Spain will not see the fate of the other PIGS countries but escalation of the Greece situation and ever-worsening economic data together with the already catastrophic unemployment might be enough to make investors start raising bets against Spain.

Spain’s economic deterioration has been driven by few key factors: the misguided policies of the socialist government, huge property bubble and the subsequent collapse and the green economy scam. Even the socialist government eventually admitted that the green economy scheme was a total failure costing a lot more jobs than it created with other harmful effects at all levels of the economy. It was not that hard to predict either. There is simply no way that taking something that is clearly uneconomic, forcing it everywhere and then taxing productive parts of the economy with conviction with all of this handled by a corrupt socialist government can lead to a good outcome. Unfortunately, the results can now be seen on the streets:

There is something ominous about these protest we have seen flare up in the MENA region and especially in Europe, in Greece, Spain, Ireland and Portugal. And this ties in with something that I am truly afraid of, namely people using pent up anger and targeting it based on misguided beliefs and wrong information.

These protests are only to a very small extent about correcting the actual causes of the depression that is still ongoing and more about give me a high paying job now and punish every one who is well off mentality. These people are not protesting IMF for highjacking their national sovereignty, but the fact that they might get smaller social security checks every month. They are not protesting the big government that has failed on them, but they are actually demanding even more regulation and government intervention.

With youth unemployment somewhere around 45 per cent, it is no wonder that these protests are happening and I am not condemning them. It is just that as long as these protests are driven by something else than real opposition to collectivism and crime, the results will be just as real as with “change you can believe in”.

I have seen this in Finland countless of times; people protesting government corruption by demanding that we the people give more power to the government or people protesting heavily regulated “free” markets for causing the recession by demanding that government should have more power to distort “free” markets.

Finnish economy update

For the previous month’s update, see here.

On 24th of May the Statistics Finland released the unemployment report for the month of April and the unemployment came in at 8.2 per cent. This was 1.1 percentage points lower than a year ago and last month. 222 000 were unemployed as opposed to 248 000 last year at the same time. Youth unemployment was 23.5 per cent. The employment rate rose to 68.2 per cent. This is a clear positive report and it seems that the March report was a slight outlier.

The inflation figures for April were released earlier and came in at 3.2 per cent, easing a bit from last month’s 3.3 per cent.

In April, consumer prices were pushed up most from the year before by increases in the prices of food and non-alcoholic beverages, liquid fuels and electricity. Increases in the prices of owner-occupied dwellings and real estate as well as rent increases also had an impact on inflation. Inflation was held back most in April by fallen prices of consumer electronics and fresh vegetables from the year before.

Consumer confidence figure dropped to 15.4 from 17.8. It is still above long-term average, but the trend appears to be downward. If the improvement in the unemployment situation continues, one would expect to see the trend reverse soon although I am personally not expecting any improvement on that front. The biggest drops in consumers’ views came from favorability of the time to buy durable goods and take loans, which dropped to 8.8 from 20.1 and to 6.7 from 13.3, respectively. Especially the durable goods figure is concerning because even the outlook is said to be very poor and we have already seen some significant drops in durable goods figures around Europe and US.


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