By Peter Schiff: Two pieces of business news announced this week provide a convenient frame through which to view our dysfunctional and distorted economy. The first (which has attracted tremendous attention), is Facebook's blockbuster $19 billion acquisition of instant messaging provider WhatsApp. The second (which few have noticed) is the horrific earnings report issued by Texas-based retail chain Conn's. While these two developments don't seem to have much in common, together they shed some very unflattering light on where we stand economically.
Given the size and extravagance of the Facebook deal, it may go down as one of those transactions that define an era (think AOL and Time Warner). Facebook paid $19 billion for a company with just 55 employees, little name recognition, negligible revenues, and little prospects to earn much in the future. For the same money the company could have bought American Airlines and Dunkin' Donuts, and still have had $2 billion left over for R&D. Alternatively they could have used the money to lock in more than $1 billion in annual revenue through an acquisition of any one of the numerous large cap oil producing partnerships. Instead they chose a company that is in the business of giving away a valuable service for free. Come again?
Mark Zuckerberg, the owner of Facebook, is not your typical corporate CEO. Through a combination of technological smarts, timing, luck, and questionable business ethics, he became a billionaire before most of us bought our first cars. And in the years since social media became the buzzword of the business world, Wall Street has been falling over backward to funnel money into the hot sector. As a result, it may be that Zuckerberg looks at real money the way the rest of us look at Monopoly money. It also helps that a large portion of the acquisition is made with Facebook stock, which is also of dubious value.
But even given this highly distorted perspective, it's still hard to figure out why Facebook would pay the highest price ever paid for a company per employee - $345 million (more than four times the old record of $77 million per employee, set last year when Facebook bought Instagram). The popular talking point is that the WhatsApp has gained users (450 million) faster than any other social media site in history, faster even than Facebook itself. Based on its rate of growth, the $42 per user acquisition cost does not seem so outrageous. But WhatsApp gained its users by giving away a service (text messaging) for which cellular carriers charge up to $10 or $20 per month. It's very easy to get customers when you don't charge them, it's much harder to keep them when you do.
Boosters of the deal expect that WhatsApp will be able to charge customers after the initial 12-month free trial period ends (it now charges 99 cents per year after the first year). Based on this model, the firm had revenues of $20 million last year. But what happens if another provider comes in and offers it for free? After all, the technology does not seem to be that hard to replicate. Google has developed a similar application. More importantly, no one seems to be projecting what the cellular carriers may do to protect their texting cash cows.
WhatsApp gives away what AT&T and Verizon offer as an a la carte texting service. As these carriers continue to lose this business we can expect they will simply no longer offer texting as an a la carte option. Instead it will likely be bundled with voice and data at a price that recoups their lost profits. If texting comes free with cell service, a company giving it away will no longer have value. People will still need cellular service to send mobile texts, so unless Facebook acquires its own telecom provider, it can easily be sidelined from any revenue the service may generate.
Some say that texting revenue is unimportant, and that the real value comes from the new user base. But how many of the 450 million users it just acquired don't already have Facebook accounts? And besides, Facebook itself hasn't really figured out how to fully monetize the users it already has. In other words, it is very difficult to see how this mammoth investment will be profitable.
From my perspective, the transaction reflects the inflated nature of our financial bubble. The Fed has been pumping money into the financial sector through its continuous QE programs. The money has pushed up the value of speculative stocks, even while the real economy has stagnated. With few real investments to fund, the money is plowed right back into the speculative mill. We are simply witnessing a replay of the dot com bubble of the late 1990's. But this time it isn't different.
In another replay of that spectacular crash fourteen years ago, the appliance and furniture retailer Conn's has just showed the limits of a business built on vendor financing. In the late 1990's telecom equipment companies almost went bankrupt after selling gear to dot com start-ups on credit. For a while, these "sales" made growth and profits look great, but when the dot coms went bust, the equipment makers bled. Conn's makes its money by selling TVs and couches on credit to Americans who have difficulty scraping up funds for cash purchases. For a while, this approach can juice sales. Not surprisingly, Conn's stock soared more than 1500% between the beginning of 2011 and the end of 2013. These financing options are part of the reason why Conn's was able to keep up the appearance of health even while rivals like Best Buy faltered in 2013.
But if people stop paying, the losses mount. This is what is happening to Conn's. The low and middle-income American consumers that form the company's customer base just don't have the ability to pay off their debt. The disappointing repayment data in the earnings report sent the stock down 43% in one day.
In essence, Conn's customers are just stand-ins for the country at large. In just about every way imaginable, America has borrowed beyond its ability to repay. Meanwhile our foreign creditors continue to provide vendor financing so that we can buy what we can't really afford.
So thanks for the metaphors Wall Street. Too bad most economists can't read the tea-leaves.
Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.
Catch Peter's latest thoughts on the U.S. and International markets in the Euro Pacific Capital Winter 2014 Global Investor Newsletter!
After ending up one of the worst investments in 2013 (-28%), gold (NYSE: GLD) is starting out 2014 on the right foot. Gold is up $21.60, or 1.8%, to 1,223.90 in futures trading mid-day. However, with the Fed starting its QE taper this month, many questions remain about gold as an investment this year.
Weighing in to start the new year with the the long and short of gold investing is noted gold bull Peter Schiff.
THE LONG AND THE SHORT OF GOLD INVESTING
By Peter Schiff:
There are two types of gold investors: those trying to make money on short-term market timing and those looking for long-term asset preservation. It was the fear-driven trading of the former that helped gold break $1900 in 2011, and for good reason - stormy markets steer investors to safe havens.
But gold's fortune has shifted in the past two years, and finishing 2013 down 28% seems to have sealed its fate - at least in the eyes of the short-term speculators. In reality, the same forces that are stabilizing stocks and suppressing gold are also the fundamental reasons long-term investors have been buying gold since the turn of the new millennium. The so-called recovery we're now experiencing is just a lull in a storm that hasn't yet abated.
Losing Touch With Reality
From the fiscal cliff at the beginning of the year to the budget stalemate and government shutdown in the fall, the US was not exactly a model of financial stability in 2013. Yet with each of these stories, the markets shrugged off any large dips and went on to reach record high after record high. The stock market exceeded most expectations - the S&P and Dow rallied 29.6% and 26.5% respectively, with the volatility index staying remarkably low.
The official explanation for this market behavior is that the economy really is improving. A growing GDP and improving jobless rate are the leading economic indicators that support this conclusion.
However, the real reason behind 2013's stability in spite of mixed economic news was the extremely accommodating Federal Reserve policy. Markets have become hyper-aware of this Bernanke Put over the course of the year.
Compare the markets' taper tantrums earlier in the year to their reaction to the Fed's December announcement of "taper-lite."
In both June and August, with the mere talk of tapering, the S&P and Dow tumbled. The assumption was that when the Fed started tapering their Quantitative Easing (QE) program, interest rates would also start to rise. Overvalued stocks plunged in preparation for a higher interest rate environment.
However, this December, when the Fed set an official January date for tapering, these indices did not drop as they had before, but immediately jumped to new highs. Why the different reaction to essentially the same news?
Because the Fed's December announcement was not the same.
Normal No Longer Means Healthy
The key element of Bernanke's "taper-lite" was not the $10 billion-per-month cut to QE, but the explicit commitment to maintain low interest rates for the foreseeable future. Bernanke basically guaranteed the fed funds rate would remain near 0% for at least a couple more years.
This commitment to artificially suppressed interest rates ruins the charade that the economy is getting healthier. Why on earth does a healthy economy need the support of free money?
The short-term data may appear good on its face, but people are waking up to the bigger picture of this so-called recovery - namely that it isn't a recovery at all.
It's well-recognized now that most new jobs are low-wage, low-skilled placements. Often these are part-time or temporary retail or restaurant positions. This may be why both median income and the percentage of the population employed remain well below pre-crisis levels. The jobless rate has only improved because people have simply given up trying to find employment.
Meanwhile, the latest data from the Bureau of Economic Analysis shows that in the last months of 2013, personal spending rose more than personal income, while the savings rate dropped. In other words, we're back to digging the hole that caused the Panic of '08.
This is one of the longest and slowest recoveries the US has ever experienced, but the mantra of Wall Street maintains that all is well because the stock market is up. We're supposedly returning to normal.
The truth is that "normal" no longer means "healthy" when it comes to the economic stability of the United States. It really means that we are back to where we were prior to the Panic of '08.
Only a short-term mindset could ignore the parallels between our economy today and ten years ago. Heading into 2004, the headlines sounded almost identical to today's, with talk of an improving economy that still suffered from less-than-optimal employment numbers.
More importantly, it was in 2003 that Alan Greenspan cut the fed funds rate to 1% - the lowest it had been for more than 40 years.
We all know how that story ended. Most economists agree that the interest rate policy of Greenspan's Fed spurred the irresponsible lending practices and speculation that drove the US into a housing crash and then a financial meltdown.
Yet here we are again, with the fed funds rate at record low levels. Nothing has changed in ten years - the supposed recovery we're experiencing now is simply a product of this endless cheap money.
A Sober Analysis
In times like these, long-term gold investors feel like the designated drivers in the corner of a frat party. It might seem like we're missing the fun, but we must remember that we're playing a different game than the short-term speculators.
Our drunken friends have had some cheap thrills in 2013, but this stock market growth rests on an unstable foundation of artificial stimulus and cheap money. We are more interested in waking up without a hangover, a wrecked car, or worse. The longer interest rates remain suppressed, the crazier markets will behave when rates rise. And if Greenspan's one year at 1% rates helped trigger the crash we saw in '08, imagine imagine what three years and counting of Bernanke's/Yellen's 0% rates portends for the next crash.
Peter Schiff is Chairman of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices.
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By John Browne, Senior Economic Consultant to Euro Pacific Capital:
Ever since President Nixon broke the US dollar's last link to gold, the world has been set adrift on a sea of fiat currencies that have been increasingly debased, serving the interests of governments and financial elites. For the last five years, central banks have imposed near-zero rates of interest that have helped push up stock, bond, and real estate prices, but have made it nearly impossible for savers to receive meaningful returns on bank deposits.
To make matters worse, the apparatus of national security has turned financial transactions into a massive exercise in government surveillance. Under the camouflage of 'protective' measures, such as the USA PATRIOT Act, governments have invaded the privacy of citizens and compromised banking secrecy in an unprecedented and often unconstitutional manner. Despite huge potential transaction-cost reductions achievable through advances in digital technology, banks continue to charge exorbitant transaction fees while maintaining transfer delays that reflect a pre-digital age. In addition, bank regulators, led by the IMF, have shown a willingness, in the case of Cyprus, to make depositors liable for poor banking decisions. Many private citizens may naturally see the status quo as a deliberate policy to crush middle-class savers and pave the way for centralized socialism. Some have sought a way out.
Traditionally, investors have turned to precious metals such as gold to help protect and privately transfer their wealth. However, ever-increasing regulation, monitoring, and physical searches have eroded some of the key protections afforded by gold. Gold's weakness over the past 24 months has also spooked many former adherents. In such an environment, many have seen the recent arrival of digital crypto-currencies as the means to restore the monetary independence that has been co-opted by big governments. Currencies like the now-famous Bitcoin offer the potential for a store of value, low transaction costs, free movement, and anonymity. It's no wonder that Bitcoin has taken the world by storm. But all that glitters is not gold.
Wikipedia defines a crypto-currency as, "a peer-to-peer, decentralized, digital currency [or medium of exchange] whose implementation relies on the principles of cryptology to validate the transaction and the generation of the currency itself." In short, it is a virtual currency traded by private, unregulated internet exchanges. Despite the recent fame of Bitcoin, there are actually a number of other crypto-currencies that have been created in recent years. Names include Litecoin, Peercoin, Namecoin, and Primecoin. Bitcoin, established in 2009, is undoubtedly the most successful, and it became a breakout news story in 2013.
Bitcoin Pros & Cons
Bitcoin offers a few distinct advantages over conventional currencies: it allows almost instantaneous peer-to-peer transactions that completely avoid the expensive and cumbersome bank-run electronic payment systems, and it allows for fast international movement of funds outside foreign exchange controls.
Many investors are also betting that Bitcoin will offer a better store of value over time than serially printed fiat currencies. That's because the Bitcoin protocol automatically, and apparently irrevocably, limits the number of bitcoins that will be created to 21 million. In this sense, they are immeasurably more honest than US dollars. However, unlike US dollars, pounds sterling, or euros, bitcoins do not carry legal tender status, but rather rely on the network of merchants and individuals to continue to accept them as payment for goods and services.
Finally, by utilizing anonymous wallets, some users may think that crypto-currencies like Bitcoin offer increased financial privacy. I believe that this is largely an illusion. Governments have shown a great ability to crack any code no matter how well planned (just look at the British government's success against the Germans in the Second World War). I have full faith that the US Federal government can, over time, develop techniques to map all cyber transactions.
A Volatile Elephant in the Room
But it is Bitcoin's volatility that will likely be its immediate undoing. In recent months, as more speculators have moved into the market, prices have been unstable to say the least. On November 29th, Bitcoin reached $1,242 in Tokyo just as gold dipped to $1,240 an ounce. When those two values crossed, many began to speculate that Bitcoin had replaced gold as the premier alternative to fiat money. With relatively high transaction costs and delivery delays, precious metals are expensive to store and transport. In contrast, Bitcoin transactions are fast, cheap, and transnational. But little, if any, store of value is offered. That reality has been demonstrated in recent weeks as Bitcoin has dropped by some 50 percent in market value.
While crypto-currencies remain insulated from central bank manipulation, governments have thus far been tolerant, perhaps because their capability to track transactions is more advanced than Bitcoin believers admit.
Nevertheless, the advent of crypto-currencies represents the increasing popular demand for a currency insulated from political debasement and bank profiteering. Crypto-currencies represent a legitimate attempt by private citizens to reassert their sovereignty over such government actions. I appreciate the effort, and I believe it holds much promise. But for now, I will stay with the traditional store of value, gold.
John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.
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Southwest Airlines Co. (NYSE: LUV) announced that the Company flew 8.1 billion revenue passenger miles (RPMs) in November 2013, a 1.0 percent decrease from the 8.1 billion RPMs flown in November 2012. Available seat miles (ASMs) increased 0.8 percent to 10.3 billion from the November 2012 level of 10.2 billion. The November 2013 load factor was 78.6 percent, compared to 80.0 percent in November 2012. For November 2013, passenger revenue per ASM (PRASM) is estimated to have decreased approximately six percent, compared to November 2012. While November was significantly impacted by the shift in Thanksgiving holiday return travel, the benefit to December is expected to drive a dramatic year-over-year increase in December PRASM. For fourth quarter 2013, the Company currently estimates PRASM will increase approximately two percent, as compared to fourth quarter 2012.
For the first eleven months of 2013, the Company flew 95.4 billion RPMs, compared to 94.7 billion RPMs flown for the same period in 2012, an increase of 0.7 percent. Year-to-date ASMs increased 1.6 percent to 119.5 billion from 117.7 billion for the same period in 2012. The year-to-date load factor was 79.8 percent, compared to 80.5 percent for the same period in 2012.
Celldex Therapeutics, Inc. (Nasdaq: CLDX) today announced that it has launched a randomized study (METRIC) of Glembatumumab vedotin (CDX-011) in patients with metastatic triple negative breast cancers that over-express glycoprotein NMB (gpNMB). Glembatumumab vedotin is an antibody-drug conjugate that targets and binds to gpNMB, a specific protein that is expressed in breast cancer which promotes the migration, invasion and metastasis of the disease. It is also highly expressed in triple negative breast cancers where it is associated with increased risk of recurrence. Initial sites are now open to screen patients in the United States. Additional sites in the United States and in Canada and Australia will open in early 2014. The study is expected to include up to 100 sites and will enroll approximately 300 patients.
"In the Phase 2 EMERGE study, Glembatumumab vedotin elicited impressive response rates that correlated with a survival benefit for patients with metastatic breast cancer that also had high levels of gpNMB on the surface of their tumor cells," said Thomas Davis, M.D., Senior Vice President and Chief Medical Officer of Celldex. "Currently, patients with triple negative breast cancer have very limited treatment options and no targeted interventions. We believe gpNMB could be an important marker in breast cancer and that Glembatumumab vedotin holds significant potential as a possible targeted therapy for women facing this disease."
"Given the lack of treatment options available for women with triple negative breast cancer, we are gratified that we are able to conduct the METRIC study on an accelerated approval path and are committed to enrolling the study expeditiously," said Anthony Marucci, President and Chief Executive Officer of Celldex. "We also plan to further expand the clinical development program for Glembatumumab vedotin in 2014 by initiating additional studies in other cancers known to express gpNMB including melanoma and squamous cell lung cancer."
About the METRIC Study
The METRIC study is a pivotal, open-label, prospectively controlled, randomized study of Glembatumumab vedotin in patients with metastatic gpNMB-expressing triple-negative breast cancer. Eligible patients must have received no more than 1 prior line of chemotherapy for advanced disease and therapy must have included a taxane and anthracycline. Patients will be randomized (2:1) to receive Glembatumumab vedotin or capecitabine. Study treatment will continue until disease progression or intolerance with tumor assessments performed at six week intervals for six months and nine week intervals thereafter. The primary objective is to evaluate the anti-cancer activity of Glembatumumab vedotin as measured by the objective response rate (ORR) and duration of progression-free survival (PFS). The study is designed to enable Celldex to apply for registration with positive results for either endpoint. Secondary endpoints include duration of response, overall survival, safety and tolerability. The Company will also assess improvements in quality of life and/or cancer-related pain as exploratory endpoints.
Patients will be stratified as follows:
No prior chemotherapy for advanced disease vs. 1 prior line of chemotherapy for advanced disease
"Resistant" to anthracycline therapy (i.e., progression-free interval of ≤ 6 months after completing treatment) vs. "Exposed" to anthracycline therapy (i.e., progression-free interval of > 6 months after completing treatment)
Clinical Data Supporting Glembatumumab vedotin in Triple Negative Breast Cancer
In the Phase 2 EMERGE study, final data supported an overall survival benefit in specific sub-groups of breast cancer patients with tumors that over-express gpNMB. Treatment of patients with both triple negative breast cancer and over-expression of gpNMB showed a high overall response rate (ORR) of 33% (n=12) when treated with Glembatumumab vedotin. In comparison, no responses (n=4) were seen in patients with both triple negative breast cancer and over-expression of gpNMB with standard chemotherapies. In this same patient population, the median overall survival (OS) for patients treated with Glembatumumab vedotin was 10 months vs. 5.5 months (p= 0.003) and progression free survival (PFS) was 3 months for the Glembatumumab vedotin arm vs. 1.5 months for the control arm (p=0.008), respectively. The most common adverse event was rash.
About Glembatumumab vedotin
Glembatumumab vedotin (CDX-011) is a fully-human monoclonal antibody-drug conjugate (ADC) that targets glycoprotein NMB (gpNMB). gpNMB is a protein overexpressed by multiple tumor types, including breast cancer and melanoma. gpNMB has been shown to be associated with the ability of the cancer cell to invade and metastasize and to correlate with reduced time to progression and survival in breast cancer. The gpNMB-targeting antibody, CR011, is linked to a potent cytotoxic, monomethyl auristatin E (MMAE), using Seattle Genetics' proprietary technology. Glembatumumab vedotin is designed to be stable in the bloodstream, but to release MMAE upon internalization into gpNMB-expressing tumor cells, resulting in a targeted cell-killing effect. Glembatumumab vedotin is in development for the treatment of locally advanced or metastatic breast cancer—with an initial focus in triple negative disease. In May 2010, the U.S. Food and Drug Administration (FDA) granted Fast Track designation to Celldex's Glembatumumab vedotin for the treatment of advanced, refractory/resistant gpNMB-expressing breast cancer. Glembatumumab vedotin is also in development for the treatment of Stage III and IV melanoma.
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