$10,000 for 11 Hamburgers

Tudo bom!

The Dow shot up 212 points, or 1.2% on Thursday. The biggest challenge is to figure out what to laugh at first. So many frauds. So much nonsense. So little time.

Last week, Zero Hedge reported that a bubble was inflating in the burger business. Shake Shack Inc. – which was taken public last week – was initially priced at between $14 and $16 a share. But a pre-IPO frenzy pushed the IPO price to $21 a share.

Then things got really silly …

 

Shake_Shack_burger_and_fries_14129412503-1024x678

Photo credit: Shake-Shack

 

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

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

Think of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) as a quasi-estimate of free cash flow. At an EBITDA multiple of 108, investors are willing to pay 108 times the free cash flow Shake Shack produces.

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

What’s so special about the Shake Shack’s burgers? We don’t know. But we suspect it has more to do with the heady flavor of the stock market than the taste of its fries.

 

SHAK15 minute chart of Shake-Shack (NYSE:SHAK) since IPO day. At the peak the free cash flow resulting from selling 11 SHAK hamburgers was valued at $10,000 by the “collective wisdom of millions of market participants”. This is less of a random event than it appears. It reflects the after-effects of the deluge of money created by the Fed, combined with the most lopsidedly bullish market sentiment imaginable. Judging from the progression of the echo bubble to this point, the single hamburger cash flow ratio will probably rise to 10 times that level, unless an asteroid hits the planet. Even then, the prospect of having to rebuild all those hamburger joints may still attract a princely multiple once the immediate asteroid impact-related concerns have been put to rest – click to enlarge.

 

Lies, Lies, Lies

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

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

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

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

 

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

And it’s a lie that has consequences, because the great American dream is to have a good job, and in recent years, America has failed to deliver that dream more than it has at any time in recent memory. A good job is an individual’s primary identity, their very self-worth, their dignity — it establishes the relationship they have with their friends, community and country. When we fail to deliver a good job that fits a citizen’s talents, training and experience, we are failing the great American dream.

Gallup defines a good job as 30+ hours per week for an organization that provides a regular paycheck. Right now, the U.S. is delivering at a staggeringly low rate of 44%, which is the number of full-time jobs as a percent of the adult population, 18 years and older. We need that to be 50% and a bare minimum of 10 million new, good jobs to replenish America’s middle class.

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

 

Gallup employment trendsEmployment trends according to Gallup’s surveys. Gallup considers 16% of the population as underemployed and 6.9% as unemployed. The payrolls/population ratio stands at 44% – click to enlarge.

 

Competitive Disadvantage

Why so few jobs? You probably thought the “renaissance” in US manufacturing was bringing an employment boost.

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

In a poll, it was revealed that even US manufacturers believed it – with 57% of them saying the “renaissance” was real. But guess what? The renaissance in US manufacturing… it’s counterfeit too.

The Globalist magazine reports:

 

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

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

 

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

And a stronger dollar doesn’t make those US costs go down; compared to the rest of the world, they go up. The US still has a competitive disadvantage in manufacturing, in other words. And it’s not likely to go away any time soon.

Tomorrow – even more quackery!

 

employees, manufacturingInitially, manufacturing employment stalled out and declined slightly mainly due to rising productivity. However, after the tech mania and real estate bubbles burst, successive liquidations of malinvested capital led to a fall off the cliff, to levels last seen in the 1940s – click to enlarge.

 

Charts by: StockCharts, St. Louis Federal Reserve Research, Gallup

 

The above article is taken from the Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 

 

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