Tuesday, February 28, 2017

America's Print Media and Its Advertising Achilles Heel

During and after the 2016 election, we repeatedly hear from Donald Trump about how the mainstream media, particularly the New York Times, is failing.  Let's look at the numbers and see what is reality and what is myth.

The latest report available for the Times is the fourth quarter report for 2016 which also gives us full-year results.  Let's start with a summary of the fourth quarter 2016 results with fourth quarter 2015 results shown in brackets:

Total revenues - $439.7 million ($444.7 million)

Diluted earnings - $0.24 per share ($0.31 per share)

Adjusted earnings -$ 0.30 per share ($0.37 per share)

Operating profit - $55.6 million ($87.7 million)

Adjusted operating profit - $95.7 million ($117.7 million)

Net income on a per-share basis look particularly poor, dropping 25.8 percent from $0.31 per share in the same quarter of 2015 to $0.23 per share in Q4 2016. 

Let's look at the full year 2016 results with full year 2015 results shown in brackets:

Operating profit: $101.6 million ($136.6 million)

Adjusted operating profit - $240.9 million ($289 million)

Income from continuing operations - $0.19 per share ($0.38)

Net income - $0.18 per share ($0.38)

As you can see, on a year-over-year basis, net income looks particularly weak, falling 52.6 percent on an annual basis.

On a full-year basis, operating profits fell 25.6 percent and adjusted operating profits fell by 16.6 percent.  Interestingly, in Q4 2016, paid digital-only subscriptions rose by 45.9 percentage compared to Q4 2015, reaching 1.853 million.  Over the full year, the Times added 583,000 net digital-only subscriptions with digital-only subscription revenue rising by 17 percent to $232.8 million.  While the increased subscriber base is good news, unfortunately, most of the Times' revenue comes from advertising.  Total advertising revenue dropped from $638.7 million for the full-year 2015 to $580.7 million in full-year 2016, a significant drop of 9.1 percent.  In fact, in the fourth quarter of 2016, advertising revenue looked even worse with a drop of 9.7 percent on a year-over-year basis.  Print advertising revenue dropped by 16 percent on a year-over-year basis when compared to 2015 with digital advertising growing by only 11 percent on a year-over-year basis.  On a monthly basis, total advertising revenue was down 9 percent in October, 7 percent in November and 15 percent in December. 

Here is a table showing a summary of advertising revenues by category:


The weakness in advertising revenue is expected to continue with management postulating that total advertising revenues in the first quarter of 2017 expected to decrease in the high single digits compared to the first quarter of 2016.  On top of that, operating costs are also expected to increase in the mid- to high-single digits in Q1 2017 compared to the same quarter in 2016.

While the company definitely is not on life support, I'll let you make up your mind about The New York Times and its future, particularly given the weakness in its advertising revenue stream.  That said, I'd like to close this posting with a quote from Mark Thompson, President and CEO of The New York Times Company, from the Q4 earnings conference call:

"We are a smartphone-first, subscription-first global news provider, committed to delivering journalism worth paying for, and innovative premium advertising experiences equally worth paying for. In a world full of fake news, and low quality commodity digital ads, it’s a distinctive vision – and one which audiences and advertisers around the world responded to in 2016."




From their fourth quarter 2016 results, I would say that advertisers are somewhat less enthralled with the New York Times than Mr. Thompson would suggest, an issue that could continue to put downward pressure on the Times' profitability.

Monday, February 27, 2017

Countering ISIS Drones

A recent video released by the Islamic State entitled "Knights of the Departments" shows us one of the new tactics used by ISIS in its battle to defeat "the infidel forces".  While not as sophisticated as their Western counterparts, in this video, you will see how Islamic State fighters are using drones to attack their opposition.

Here is the video in its entirety.  Please go to the 32 minute mark to see ISIS' drones in action:


As well, if you go to the 8 minute mark, you will see that ISIS is also using its drones for surveillance and tracking suicide bombers as well as attacking their enemies.

The video shows us that the munitions used in ISIS' drone program are relatively small and free-falling rather than being steered toward their targets using lasers, both aspects reducing the effectiveness of this weapon.  That said, as their video shows, raining "death from the skies" still does seem to actually hit their targets.

How are the coalition forces in the battle against ISIS defending themselves against ISIS' drone program.  Here is the outline of a contract awarded by the U.S. Department of Defense showing how the United States Air Force is planning to counter ISIS' drones:

"ELTA North America Inc., Annapolis Junction, Maryland, has been awarded a $15,553,483 firm-fixed-price letter contract for counter-unmanned aerial systems. Contractor will provide the procurement, delivery, and training of 21 Man Portable Aerial Defense System kits. Production of the kits will be performed in Israel, and delivery/training to continental U.S. locations is expected to be complete by July 28, 2017.  This award is the result of a sole-source acquisition. Fiscal 2016 and 2017 research, development, test, and evaluation; and procurement funds in the amount of $7,621,207 are being obligated at the time of award. Air Force Life Cycle Management Center, Hanscom Air Force Base, Massachusetts, is the contracting activity (FA8730-17-C-0016)."

For your information, Man Portable Aerial Defence System kits or MANPADS are shoulder-fired missiles that are generally used to shoot down aircraft as shown here:


Here is a video of a MANPAD shooting down a drone with a Stinger missile:


ELTA North America Inc. is the U.S. subsidiary of of Israel Aerospace Industries (IAI), the largest government-owned aerospace company in Israel.  As shown on this video, IAI has developed a highly portable anti-drone system called "Drone Guard" which uses radar to detect, track and jam small drones as shown here:



It is interesting to see that, despite recent defeats, ISIS is still capable of waging what would be considered relatively sophisticated warfare.  One wonders how long it will be until ISIS has a drone system that can actively target its victims and evade detection by coalition forces.

Friday, February 24, 2017

The Unintended Consequences of Deporting Unauthorized Immigrants

Recent moves by the new Trump Administration to make almost all undocumented/unauthorized immigrants subject to deportation could have an unintended impact on the United States economy.  In this posting, I want to take a brief look at how many unauthorized immigrants there are living in the United States, what industries they work in and the economic impact of removing them all from American soil. 

According to a study by Pew Research, the number of unauthorized immigrants peaked at 12.2 million in 2007, falling back to the 2014 level of 11.1 as shown here:


This accounts for roughly 3.5 percent of the U.S. population, down from 4 percent in 2007.

Obviously, all of these unauthorized immigrants are not in the workforce.  Here is a graphic showing the estimated number of unauthorized immigrants in the U.S. labour force since 1995:


In 2014, approximately 5 percent of the total workforce consisted of unauthorized workers, down from 5.4 percent in 2007.  Interestingly, in 2014, about two-thirds of the unauthorized adult immigrants had been in the United States for at least ten years with only 14 percent living in the U.S. for five years or less.  As well, in 2014, unauthorized adult immigrants had been living in the United States for a median of 13.6 years.

Unauthorized immigrants tend to make up a higher share of the workforce in certain occupations as shown on this graphic:


Here is a detailed table showing the total size of the workforce for major occupation groups, breaking the total into the number of U.S.-born, lawful immigrants and unauthorized immigrants:


As you can see on the bottom part of the table, certain occupations have an over-representation of unauthorized immigrants compared to U.S.-born workers; only in construction and farming jobs do unauthorized immigrant workers outnumber lawful immigrant workers.  As well, unauthorized immigrants were over-represented in production jobs including manufacturing, food processing and textile manufacturing were they comprised 9 percent of the total workforce.

Now, let's look at the economic impact of unauthorized immigrants on the U.S. economy.  According to a study by the Center for American Progress, the average annual nationwide loss in GDP if all unauthorized workers were removed from the United States would be $434.4 billion.  Here is a table showing the financial losses by industry over both the short- and long-term:


Here is a table showing the reduction in GDP contribution for each industrial sector over both the short- and long-term:


The economic impact of a mass deportation of unauthorized immigrants would grow over time as shown here:


If all unauthorized immigrants were deported, over the period from 2017 to 2026, the cumulative reduction in GDP would total $4.749 trillion or 2.0 percent of GDP.

As we can see, there is going to be a significant economic impact to the complete removal of all unauthorized immigrants from the United States.  In addition to the reduction in the size of the economy, there will be a significant cost to both execute and enforce a policy that sees the removal of over 11 million individuals from the United States.  A 2016 study by Ben Gitis at the American Action Forum found that it would take at least 20 years to remove all unauthorized immigrants from the United States at a cost of between $400 billion and $600 billion.

Obviously, the issue of unauthorized immigrants is far more complex than it appears on the surface and the implementation of mass deportations could have significant unintended consequences on the U.S. economy.  With weak economic growth levels since the end of the Great Recession and mounting federal debt levels, Americans will have to carefully examine the pros and cons of removing all undocumented workers from American soil.

Thursday, February 23, 2017

Gold and Greenspan

In its recent edition of Gold Investor, the World Gold Council included a rather interesting missive from this man:


In case you've completely blocked him out of your memory, Alan Greenspan was one of the longest serving (?) Chairmen of the Federal Reserve Board, serving in that capacity from August 11th, 1987 to January 31st, 2006.  Before we look at his musings, let's look at what happened during his time at the helm of the world's most influential central bank.

During his tenure, here's what happened to the Federal Funds Rate:


The rate varied from a high of 9.85 percent in March 1989 and a low of 0.98 percent in December 2003.  Remember how low interest rates seemed at the time?

Here's what happened to the interest rate on ten-year Treasuries:


Ten-year Treasury yields hit a peak of 10.15 percent in October 1987 and fell to a low of 3.13 percent in June 2003.

Here's what happened to Money Zero Maturity or MZM (a measure of all of the liquid money supply within the U.S. economy) during Greenspan's tenure:


MZM grew from $2.008 trillion in August 1987 to $6.882 trillion in January 2006, an increase of 242.7 percent.

Here's what happened to the federal debt during Greenspan's tenure:


The federal debt grew from $2.432 trillion in the fourth quarter of 1987 to $8.371 trillion in the first quarter of 2006, an increase of 244.2 percent.

Here's what happened to mortgage debt during Greenspan's tenure:


Mortgage debt mushroomed from $1.829 trillion in the fourth quarter of 1987 to $9.206 trillion in the first quarter of 2006, an increase of 403.3 percent.

Lastly, here's what happened to consumer debt during Greenspan's tenure:


Consumer debt grew from $698.6 billion in the fourth quarter of 1987 to $2.386 trillion in the first quarter of 2006, an increase of 244.7 percent.

Now that we have all of that background, let's look at a few excerpts from his recent missive in the February 2017 edition of Gold Investor.  

When asked "As inflation pressures grow, do you anticipate a renewed interest in gold?", he answered:

"Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection.  I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counter- party signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and at currency depend on the credit worthiness of a counter- party. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC." (my bold)

When asked "...what role do you think gold should play in the new geopolitical environment?", after explaining a history of the failure of the previous gold standard, he answered:

"Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today we would not have reached the situation in which we now find ourselves. We cannot afford to spend on infrastructure in the way that we should. The US sorely needs it, and it would pay for itself eventually in the form of a better economic environment (infrastructure). But few of such benefits would be reflected in private cash ow to repay debt. Much such infrastructure would have to be funded with government debt. We are already in danger of seeing the ratio of federal debt to GDP edging toward triple digits. We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line." (my bold)

When asked "...what role does gold play as a reserve asset (for central banks)?", he responded:

"When I was Chair of the Federal Reserve I used to testify before US Congressman Ron Paul, who was a very strong advocate of gold. We had some interesting discussions.  I told him that US monetary policy tried to follow signals that a gold standard would have created. That is sound monetary policy even with a fiat currency. In that regard,  I told him that even if we had gone back to the gold standard, policy would not have changed all that much." (my bold)

Mr. Greenspan also notes that "...the very worst situation for a central banker is an unstable fiscal system, such as we are experiencing today."

Given the data that I showed you at the beginning of this posting, I would suggest that Mr. Greenspan's comment that his "...monetary policies followed the signals that a gold standard would have created..." is utter hogwash given that the supply of money as measured by Money Zero Maturity (MZM) expanded by nearly 250 percent over his tenure as Chair of the Federal Reserve.  It was this massive increase in the supply of money and Mr. Greenspan's ultra-low interest rate policies of the early and mid-2000s that led to the unsustainable growth in debt of all type, moves which laid the foundations for the Great Recession.


In closing, I have one question; I wonder if Mr. Greenspan was paid for his musings with fiat currency or gold?

Wednesday, February 22, 2017

The Role of Immigration in the Risk of Terrorism in America

With the new Trump Administration making very significant and controversial moves to limit the influx of people from seven Muslim-majority nations in the name of protecting the homeland, a study by the CATO Institute looks at the real risk of death from terrorism on United States soil and helps us put into perspective the "risk from abroad".

The authors of the study looked at the 41 year period from January 1, 1975 to December 31, 2015, a timeframe that includes the influx of Cuban and Vietnamese refugees which, given the current state of paranoia in Washington, would now be considered "high risk" immigrants.  The study identifies foreign-born terrorists who were either convicted of committing or planning a terrorist attack on U.S. soil and then links them with the visa that they were issued and the number of people that they murdered in their attacks.  It also includes terrorists who were discovered trying to enter the United States using forged immigration documents as well as asylum seekers.  The analysis excludes native-born American terrorists except where the information is used for comparative purposes.

The main source materials used includes:

1.) "Terrorism Since 9/11: The American cases" edited by John Mueller.

2.) Fordham University Centre on National Security's compilation of the trials for members of ISIS in the United States.

3.) The Congressional Research Service report from 2013 entitled "American Jihadist Terrorism: Combating a Complex Threat".

4.) The Global Terrorism Database maintained by the National Consortium for the Study of Terrorism  and Response to Terrorism at the University of Maryland.

5.) The RAND Database of Worldwide Terrorism Incidents covering the years from 1968 to 2009.

In addition, the authors used data supplied by the New American Foundation, Mother Jones, the Investigative Project on Terrorism and research by Dr. Charles Kurzman at the University of North Carolina as well as news stories, court documents and government reports.

Now, let's get to the data.  From 1975 to the end of 2015, we have the following statistics:

- over the forty-one year period, there were 154 foreign-born terrorists who committed acts of terrorism that led to death of American citizens in the United States.  Of these, 54 were lawful permanent residents, 34 were tourists,  20 were refugees, 10 were illegal immigrants, 9 were students, 4 were asylum seekers, 3 were from Visa Waiver Program nations and 1 was a K-1 fiancee visa.  The visas for 9 terrorists could not be determined.  As you can see from this data, only 6.5 percent of foreign-born terrorists were illegal immigrants over the 41 year period.

- over the forty-one year period, there were 3,024 people murdered by foreign-born terrorists with 98.6 percent of those being murdered on September 11, 2001.  There were two other spikes in deaths over the rest of the period with 6 people being killed in the 1993 World Trade Center bombing and a combined 19 people that were killed in 2015 in the Chattanooga shooting on July 16, 2015 (5 people) and the San Bernardino shooting on December 2, 2015 (14 people).

- over the forty-one year period, the annual chance that an American would be murdered in a terrorist attack by a foreign-born terrorist was 1 in 3,609,709. 

- over the forty-one year period, the annual chance that an American would be murdered in a terrorist attack committed by a refugee was 1 in 3.64 billion. 

- over the forty-one year period, of the 768,000 murders committed in the United States, 3,024 or 0.39 percent were committed by foreign-born terrorists. 

- over the forty-one year period, the U.S. murder rate declined from a high of 10.17 per 100,000 in 1980 to a low of 4.45 per 100,000 in 2015.  By comparison, the 1975 to 2015 murder rate by foreign-born terrorists averaged 0.026 per 100,000 with a high of 1.057 per 100,000 in 2001, thanks to 9/11.  In other words, from 1975 to 2015, the annual chance of being murdered in the United States was 252.9 times as great as the chance of dying in an attack committed by a foreign-born terrorist on U.S. soil.

Here is a table that summarizes the odds of dying in an attack by a foreign-born terrorist:


Here is a graph comparing the overall U.S. murder rate to the murder rate at the hands of foreign-born terrorists over the period from 1975 to 2015:


Interestingly, over the forty-one year period, there were 408 Americans killed by native-born terrorists with the largest number (168) being killed in a single incident in Oklahoma City in 1995.  In the post-9/11 period, 24 people were murdered on U.S. soil by a total of 5 foreign-born terrorists with 65 other foreign-born terrorists attempting to commit or actually committing acts of terrorism that did not result in fatalities.  During the same period, 80 people were killed by native-born American terrorists. 


Given that, since September 11, 2001 government frequently reminds us that the use of extraordinary measures are necessary to protect us from the foreign-born terrorist hordes that are trampling each other to gain access to American soil, it is interesting to see from this study that Americans run a far greater risk of death at the hands of one of their own than they do at the hands of someone born elsewhere, particularly since 9/11.  Governments have long used fear to control the masses, a methodology that has become well-honed by Washington over the past 15 years.