Marginal cost – 6 Toros 6 Mon, 21 Nov 2022 14:09:13 +0000 en-US hourly 1 Marginal cost – 6 Toros 6 32 32 Have we mismeasured real estate inflation? Mon, 21 Nov 2022 14:09:13 +0000


The “unifying framework” followed by the United States Bureau of Labor Statistics in designing the consumer price index, according to the agency’s manual of methods, is to attempt to answer this question:

What is the cost, at market prices for that month, of reaching the standard of living actually achieved during the reference period?

So, yeah, it’s kind of weird that 24% of the latest CPI, America’s main measure of inflation, is not made up of market prices but of the “implied rent that homeowners would have to pay if they rented their home”.

This “equivalent owner’s rent” tends to blow the heads of non-economists, generating frequent criticism from investors and others. But there’s no sign he’s going anywhere. From 1953 to 1982, the BLS used a different measure based primarily on new home prices and monthly mortgage payments before abandoning it in the face of theoretical criticism from economists and practical concerns about the volatility it added to the CPI. . So, yes, the equivalent landlord’s rent is weird, but there doesn’t seem to be a better alternative.

However, there are currently some important questions about how the BLS measures the rent from which the equivalent landlord rent is derived. Contrary to popular belief, this is not done by asking landlords how much they think their home would be rented out. This question is in fact asked but serves to determine the weighting that the owner’s rent equivalent is given in the CPI (the 24% mentioned above). The monthly changes that determine the rate of inflation are estimated from changes in the rents of similar homes, and these changes in rents are measured by asking thousands of American renters how much they pay. (The 7.4% of the CPI corresponding to the actual rent is also measured by this survey.)

Does this really represent market prices? In other words, if you have a two-year lease or are a long-term tenant with a good relationship with your landlord, does the change (or lack thereof) in your rent accurately reflect what is going with the cost of housing? Probably not, argued economists Brent W. Ambrose and Jiro Yoshida of Pennsylvania State University and N. Edward Coulson of the University of California, Irvine in a series of papers, the first of which appears to have begun to circulating in 2012, and Adam Ozimek (now chief economist of the Economic Innovation Group, a Washington-based think tank) in a Temple University doctoral dissertation in 2013. Better to focus on new leases and measure that what Ozimek called “marginal rents”:

Marginal rents reflect market turns earlier and show a larger drop in rents after the housing bubble. Furthermore, marginal rents seem to predict overall inflation better than average rents.

The experience of the last two years has done much to reinforce this point of view. Zillow publishes a monthly Rent Index that measures changes in asking rents for apartments and houses (like Apartment List and CoreLogic, but I’m using Zillow here because it’s available in seasonally adjusted form), and it shows that inflation rents accelerates rapidly in the first eight months. from last year and decelerating since, while CPI housing inflation rose only slowly last year and has continued to rise this year.

Last month, the BLS released a working paper from two of its economists and two from the Federal Reserve Bank of Cleveland that more or less endorsed this approach. The authors assembled their own rent indexes from BLS rent microdata and found that “rent inflation for new tenants outpaces official BLS rent inflation by 4 quarters. With rent being the largest component of the consumer price index, this has implications for our understanding of headline inflation dynamics and the stance of monetary policy.

The most important of these implications would appear to be that the Federal Reserve’s policy-making committee lagged when it began raising interest rates in March – a year after rents on new leases were raised. started to explode – and could end up again late pivoting towards easing monetary policy long after rents started to fall.

Fed officials can, of course, see what’s happening with the private rent indexes, which CoreLogic came closest to moving in the New Tenants Index presented in the BLS paper. They can even check out the adjusted measure of the CPI less food and energy — known as the core CPI — that Harvard’s Jason Furman, chairman of President Barack Obama’s Council of Economic Advisers, has started compiling. monthly from the Apartment List and Zillow rent indexes and to publish them. on Twitter.

Still, you have to think that monetary policymakers would pay more attention if these measures were part of the official inflation statistics, and the October BLS paper seemed like a trial balloon for that. In his thesis, Ozimek made a case for changing the owner’s equivalent rent component of the CPI, but that seems very unlikely given the volatility it could add to the index. The CPI is used for many other purposes besides shaping monetary policy, including setting Social Security benefit levels and tax brackets, and in the early 1980s the need to prevent these adjustments inflation jumping too high was frequently cited as a reason to change the measure. from housing costs in CPI to the owner’s equivalent rent.

I originated the idea of ​​switching to a new rent metric by Princeton economist and former Fed Vice Chairman Alan Blinder, who wrote an influential paper in 1980 calling for the switch to equivalent landlord rent. “In most cases, making this change would be a terrible idea,” he replied via email. “It would reflect the prices paid by a small, unrepresentative minority. That said, if the BLS (or anyone) wants to create a leading indicator of inflation, using rents on new leases would make perfect sense. Furman also argued that “I don’t think they should combine this in the CPI itself, but provide it as a note line that people, especially monetary policy makers, can combine from the way they want with other CPI information.” It might therefore be better to present it as an alternative measure. But it would be great if the BLS could start doing that before the Fed makes another mistake.

More from Bloomberg Opinion:

• Getting inflation under control is only half the Fed’s battle: Conor Sen

• Your child who doesn’t pay rent is an inflation fighter: Karl Smith

• I can buy because the rent is just too high: Erin Lowry

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering business. Former editorial director of Harvard Business Review, he has written for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market”.

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]]> Compression: how long will the pain last? Sat, 19 Nov 2022 05:32:10 +0000

Rishi Sunak ushered in a new era of austerity, not just Osborne-style spending cuts, but also tax hikes. Its chancellor, Jeremy Hunt, says the plan is not just to balance the books but to control inflation, and so that will be the theme of the Sunak years: austerity 2.0.

Throughout the leadership campaign, Sunak repeatedly argued that persistently high deficits were no longer an option. Tough decisions lay ahead, he said, and claims to the contrary were “fairy tales.” Critics said it was a security-focused ‘treasury view’ and that Britain had ample room to borrow more. But Sunak was certain that the debt accumulated during the pandemic – not only by Britain but by countries around the world – guaranteed a wake-up call at some point. The call came when Liz Truss and Kwasi Kwarteng tried to keep the borrow and spend program going. Now Sunak and Hunt try to answer.

The solutions they come up with won’t be pretty. Britain appears to be entering a phase – under the Tories, no less – where taxes will continue to rise until growth trends improve. It’s not a sort of solution, because the first seldom leads to the second. Where will the growth come from? And is there an end in sight to misery?

It’s the missing piece of the puzzle that Sunak has yet to find, despite the urgency he makes. Hunt’s fall statement was accompanied by news that inflation hit 11.1% in the year to October, again beating forecasts. The Bank of England’s growth forecast extends to 2025, when it expects the UK to be the only major country whose economy has yet to recover to pre-levels. the pandemic. We’re not just looking at the worst growth rates in the G20 or Europe, but all over the developed world.

Truss defined his agenda as “grow, grow, grow”, while Sunak’s camp appears to embrace “tax, cut, wait”. There are strong arguments, as we learned during Truss’s short-lived premiership, for fiscal credibility to come first; tax cuts should only be given as a reward for getting the economy back in shape.

But the waiting period is going to be painful. The best paid will continue to contribute the most, with restrictions on pensions and tax rates monopolizing 47% of their income. But some workers earning much less will be worse off. A recent graduate earning £51,000 a year with outstanding student loans will pay a staggering marginal rate of 51%. It’s a big payday, no doubt – but many of those in London, for example, will pay up to half their after-tax income in rent.

Truss defined his agenda as “grow, grow, grow”, while Sunak’s camp appears to embrace “tax, cut, wait”.

Much of the fiscal pain will be caused by the “tax drag,” where workers are pushed into higher tax brackets that have not been adjusted for inflation. An additional 1.5 million workers can expect to find themselves in the 40% (or higher) tax bracket over the next three years, including teachers, nurses and police officers. In many cases, workers will pay more taxes while simultaneously taking a pay cut in real terms: the average worker will see their wages drop by 3%, because wage increases are below inflation. Another million part-timers – on £12,500 a year – will be dragged into paying income tax because of the frozen Personal Allowance threshold. Housekeepers, security guards, parents who work part-time to make ends meet, they too will be affected. Some of the Welfare at Work bonuses will allow someone on Universal Credit to keep just 45p of every extra pound they earn.

This is shocking because the ‘striving’ are supposed to be the core of conservative voters, but there is only a limited amount of tax the top 1% can expect to pay: they earn 13 % of all money paid in wages, but contribute 28% of all income taxes collected. If government spending increases, ordinary workers will pay. No political party – Conservatives or Labor – intends to squeeze everyone into every tax bracket; it is the consequence of having an increasingly interventionist state. The government machine is now 50% larger than it was under Tony Blair. Everyone has to pay more to keep moving forward.

Back when Sunak was at No 11, he asked: what kind of country does Britain want to be after Brexit? A country with less taxes and less spending, or a European-style social democracy with a tax burden similar to France and Germany? He preferred the former, but that was not his main point. He felt there was no honest debate about trade-offs; that under Boris Johnson the UK was drifting irresponsibly and irreversibly towards the model of big states, and if the Tories continued to make big spending promises, higher taxes would inevitably follow. Britain would, he believed, become a European big spender by default.

In order to avoid this drift, Sunak often tried to make the barrier between the requests for more money and the green light. “In my experience, he was always the one who stopped the most spending,” said a minister. “I respected that, but a lot of my colleagues didn’t.” This is one of Sunak’s biggest political problems right now, both with his fellow MPs and with the public. It’s not politically popular to turn down more money, especially when the country has been addicted to cheap money for so long.

Sunak may be able to start turning the tide of ever-higher taxes and ever-greater public pain

Sunak became known in some circles as the ‘undertaker’ of the summer leadership campaign as he showed up at hustings to deliver grim news about the health of public finances and the economy British. His diagnosis was one that many people, both inside and outside the Conservative Party, didn’t want to hear – not least because Sunak has a decent track record for predicting these things. He was one of the only politicians in the UK to prepare people for the possibility of inflation. His warnings about Truss’ economic plans were also quickly vindicated.

But the mission is no longer just about correcting the mistakes of the Truss era. If so, Sunak and the Chancellor would have a fairly easy job: their arrival in Downing Street quickly brought borrowing costs in the UK back to where they were before the mini-budget. What these 44 Days of Truss assured, however, was that the UK would be the first major country to be singled out by newly resurgent bond markets and to have to pay the price for the unaffordable spending promises that were made before and during the pandemic. .

Sunak suspected, when he reluctantly agreed to the repeated closures, that they would cause long-term economic damage. Privately, he admits he hadn’t anticipated that so many people, especially those over 50, wouldn’t return to work. While early retirement is a post-pandemic global trend, Britain is the only advanced economy in which levels of economic inactivity (i.e. people who are not working or looking for one pas) steadily increased even after the shutdowns ended.

It may not have been officially declared yet, but Britain is probably already in a recession – a recession made worse by the fact that a million people have left the labor force.

Earlier this week, new figures on the number of people receiving benefits were released, not via a press release, but on a password-protected government website. It turns out that the total number of applicants is 5.2 million. The depth of the problem in many UK cities is severe: Blackpool, Middlesbrough and Liverpool have unemployment rates for working-age adults of 24%, 22% and 20% respectively. Some of these people have long-term health problems, but not all of them. Considering job vacancies are at a near-record high nationwide — more than 1.2 million — it’s possible this recession will be very different from previous contractions. It’s not that people can’t find work, but that a flawed welfare system encourages many to stay at home.

The numbers are usually buried in Westminster and updated with a six-month lag. There is growing recognition in Sunak’s cabinet, however, that this government needs to address the issue of how to transform benefit claimants into good health and of working age – some of whom are estimated by Whitehall to cost the taxpayer £15,000 per year – into people who instead pay taxes themselves.

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Sunak has often lamented the lack of a civil service reform program under Johnson. In November 2020, he led an attempt to permanently roll back the “triple lockdown” of state pensions after the shutdowns. Now was the perfect time, he thought, to tackle the intergenerational injustice of pensions politics, especially given the sacrifices young people were making during Covid. Sunak managed to rally the cabinet members, but ultimately the plan fell through when Johnson crushed him.

Last December Sunak spoke out against the cult of the NHS at cabinet meetings, after it became clear that the additional billions pledged to the service this fall were not going to produce better outcomes for patients. He was disconcerted to learn that even after the cash increase, waiting lists were expected to grow from six million to more than nine million.

As prime minister, Sunak has the power to launch his own reform agenda, one that could eventually begin to turn the tide of ever higher taxes and ever greater public pain. But with the next election perhaps 18 months away, the question is whether he has the time – or the political capital.

“The lesson of the past few months is small steps,” said a government insider. “Politically, you can’t raise taxes and get the public finances in order alongside other major reforms. Not if the Conservative Party is going to be here in a few years. In other words, the economy is obvious, but politics is tricky.

“Will the cure be worse than the disease? This will determine Sunak’s legacy,” says a former minister. This is the bet that Sunak and Hunt have decided to make: finally facing the rising costs of all these promises will pay off in the medium term. But that assumes something that seems, at the moment, a bit of a stretch: that after such a tough fall statement, the Tories will be there for a middle ground.

I have a rally in China to sell you Tue, 15 Nov 2022 06:30:47 +0000

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China Rally

The Chinese economy and markets are suffering from the double burden of the zero Covid policy and a slow-moving real estate crisis triggered by official efforts to limit speculation and leverage in real estate. November brought official hints that the government might want to lighten both of these burdens. From the FT, last Friday:

China has eased coronavirus quarantine requirements for close contacts and international travelers, in the first marginal relaxation of Xi Jinping’s zero-Covid strategy since the policy was reaffirmed at the Communist Party Congress last month.

The State Council, China’s cabinet, reduced mandatory quarantine for close contacts of positive Covid-19 cases and overseas arrivals from seven days to five, while maintaining an additional three days of home isolation …

And yesterday :

China’s central bank will extend the year-end deadline for lenders to cap their ratio of loans to the real estate sector, one of the strongest measures Beijing has ever taken to relieve the pressure of the credit crunch that is rocking the sector. Chinese real estate.

. . . lenders now have an as-yet-undetermined deadline to cap the ratio of their outstanding home loans to total loans with big banks at 40%, and their outstanding mortgages to total loans at 32.5% .

Speculation about these moves was circulating even before the news arrived. Stock markets bought both the rumor and the fact:

Some sellside analysts were also enthusiastic, particularly on the real estate side. Here are some quotes from a Caixin story titled “Chinese Regulators Roll Out Property Rescue for Embattled Developers”:

“China’s housing bailout is finally here,” Societe Generale Group economists Yao Wei and Michelle Lam wrote in a note on Monday. “If implemented, the plan should significantly increase the chances for housing activity – both construction and sales – to find a bottom and start to recover soon”…

The measures represent “the most crucial pivot since Beijing dramatically tightened funding for the real estate sector,” economists at Nomura Holdings Inc. wrote in a note on Monday. They “demonstrate that Beijing is willing to undo most of its financial tightening measures, including the three red lines and two red lines introduced in late 2020,” they wrote.

The enthusiasm, both on the Covid side and on the property side, seems unwarranted.

Of course, there is a trade, and perhaps a good one, in the timing of any given gradual easing of regulations. But the structural issues that drive these regulations remain unchanged. From an extremely simple point of view, the problem on the medical side is that the Chinese Covid vaccines are not as good as the mRNA vaccines used in many other countries. On the real estate side, the problem is that the Chinese economy in general and the finances of Chinese households in particular depend enormously on real estate investment, an investment that no longer generates a barely acceptable level of return.

We therefore share the view of Andrew Batson and Ernan Cui of Gavekal Research, who wrote this on the relaxation of Covid rules:

The government’s preferred strategy is likely to continue to refine current techniques for eradicating local outbreaks while striving to develop better vaccines and treatments nationwide. Public health officials appear to envision the end goal as a combination of improved pharmaceuticals and other measures that will minimize both infections and deaths. This ideal is far from being realized: under current conditions, there would be millions of deaths among China’s vulnerable elderly population if the spread of the virus were not controlled.

It is unclear when better vaccines will become widely available in China. Meanwhile, as Batson pointed out in a note yesterday, the number of cases in China is actually rising quite rapidly. Even if national regulations ease slightly, local authorities will need to tighten restrictions to bring these numbers down. A boost to the economy from the easing of the zero-Covid policy seems a long way off.

The situation in real estate is less deadly but even less conducive to quick fixes. The only vaccine against bad real estate investing is financial pain. Falling asset prices, write-downs of balance sheets, reallocation of workers and capital to new sectors – all of this takes time, as the United States discovered in the years after 2008. The idea that the sector Chinese real estate will soon “bottom out and start to recover” sounds frankly bizarre.

Amazon joins cost cutters

Even mighty Amazon can’t escape the wave of tech layoffs:

Amazon plans to lay off about 10,000 people in corporate and tech jobs starting this week, people with knowledge of the matter said, in what would be the largest job cuts in the company’s history.

The cuts will focus on Amazon’s device organization, including voice assistant Alexa, as well as its retail and human resources division, said the people, who spoke on condition of anonymity. because they were not allowed to speak publicly.

Job cuts are inevitably compared to Meta’s last week, although the scale differs. Amazon is cutting 3% of its workforce, mostly in unprofitable divisions. In contrast, Meta lost 13% of its entire staff, but was careful to limit the cuts to its unprofitable Metaverse unit. Markets, after smiling at Meta’s layoff announcement last week, seemed less pleased with Amazon. The stock fell 2%. (That’s likely because the cost cuts were already priced in. The stock rose 12% last week after news of a cost revision.)

Until recently, Amazon has enjoyed breathtaking growth, recording 19% compound growth in revenue since 2017. Investors slapped a meaty multiple on the stock — nearly 90 times trailing earnings. But as we’ve noted before, this multiple is a bit misleading because the company has never placed a high priority on earnings, and its investors have played with that. The assumption has always been that at some point in the future, Amazon could dramatically increase its margins, if it wanted to or if investors demanded it. The big question is whether, now that the stock has returned all of its pandemic-era gains, that moment is coming.

Amazon’s web services business is highly profitable. The question is about retail. Amazon’s combined domestic and international retail arms have posted five consecutive quarters of operating losses. Sales went well. The real problem will be familiar to you: costs. Over the past few years, Amazon’s expenses have steadily increased as a proportion of revenue, a trend that has accelerated during the pandemic:

Line chart of Amazon cost categories as % of revenue showing getting expensive

Management pays attention to this. Here’s Amazon’s CFO on the company’s October earnings call (Andy Jassy, ​​like Jeff Bezos before him, doesn’t talk to hoi polloi investors):

Let’s go first to our [retail segments] we have generated more than $1 billion in operating cost improvements through better leverage of our fixed cost base and continued productivity improvements in our fulfillment and transportation networks. This represents a solid improvement in productivity quarter over quarter, but not as much as we had expected . . . We recognize that there are still many opportunities to continue to improve productivity and reduce costs across all of our networks . ..

We are working very hard to ensure that today’s profitability is not the new norm.

Amazon is looking to cut where it’s most inflated. Its Alexa unit is posting an annual operating loss of $5 billion, the Wall Street Journal reported. Halving would roughly cover Amazon’s losses in North American retail over the past year.

Although the company’s revenue continues to grow, in a recession, that’s not a sure thing. Advertising tends to lead the cycle and Google’s revenue has slowed while Meta’s is declining. If revenue growth stagnates or stalls, investor complaints will mount, as they have at Meta. Amazon still has time to prove that it can make a good profit. But the markets will eventually get tired of waiting. (Ethan Wu)

A good read

Oh, the youth.

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]]> Tough roster decisions await LAFC as it sorts through player contracts Sat, 12 Nov 2022 13:00:48 +0000

The eventual MLS Cup champion LAFC celebrates after their victory over Austin FC in the Western Conference final October 30 at Banc of California Stadium. (John McCoy/Associated Press)

John Thorrington hadn’t even finished washing the champagne out of his hair after celebrating last Saturday’s MLS Cup victory before the LAFC general manager was forced to focus on next season.

“We’re going to let this year’s accomplishments sink in, but that doesn’t make us any less ambitious,” said Thorrington, who built LAFC’s title-winning team. “In fact, the feeling of winning motivates us to do our best to repeat.”

It won’t be easy in a league where no team has won back-to-back titles in over a decade. But the first step towards that goal begins on Monday when Thorrington must decide which players will receive contract offers for next season and which players will have their contract options denied.

“I would like to keep this whole team together,” he said. “But with our constraints and our regulations, keeping the whole group and adding more is impossible. So we have to identify what we need and sometimes surgery is needed. Hopefully it’s marginal and nothing too intrusive. But time will tell.”

MLS has a salary cap and a number of other roster rules designed to induce parity. For general managers like Thorrington, the rules induce frustration and anxiety.

At least a dozen LAFC players saw their contracts expire after the MLS Cup final, although many of them had club options. Captain Carlos Vela, midfielder Ilie Sánchez and defender Giorgio Chiellini are all said to have signed until next season while winger Gareth Bale is signed until spring. These four deals will cost LAFC more than $5 million. The team also owes an additional $3.4 million in base salaries to designated players Denis Bouanga and Cristian Tello.

National team midfielder Kellyn Acosta ($1.1 million) and goaltender Maxime Crepeau ($275,000) are among those with contract options that Thorrington said he plans to take on. ‘exercise.

“For now, that’s the plan,” Thorrington said of Acosta. “Things can change, but he is under contract for next season.”

Thorrington said Crepeau, who left the field on a trolley after breaking his leg late in the MLS Cup final, underwent successful surgery but is expected to be out for at least the first few months of the season 2023.

Defender Ryan Hollingshead, who has had one career season, can enter free agency on Wednesday, and Sebastian Mendez, Franco Escobar and Sebastien Ibeagha are also reportedly out of contract. It will be difficult for Thorrington to sustain the team with a payroll approaching the $19 million spent by LAFC last season.

“It’s impossible to keep everyone and sometimes even hard to keep the core,” Thorrington said. “What I would say works to our advantage is that I think our players love playing here. And I think they know we’re treating them as best we can.

“But when we’ve kind of finished the celebrations and have those conversations, sometimes they’re difficult.”

Among those who could leave are midfielders José Cifuentes and Latif Blessing. Cifuentes, who is going to the World Cup with Ecuador, is still under contract, but LAFC and Cifuentes, 23, have started exploring transfer offers.

“There is significant interest from Europe in Cifu,” Thorrington said. “And as we have done regularly in the past, we are working closely with the agent and the player and interested clubs to see if there is the right solution for LAFC and for Cifu.”

LAFC has a contract option on Blessing, 25, a member of the original roster in 2018, but he has played 1,332 career minutes this season and says he misses his friends and family in Ghana.

In addition to Monday’s deadline for announcing contract decisions and the start of free agency on Wednesday, the back-to-school draft for players who are out of contract but not eligible for free agency will begin Thursday. LAFC could be active in much of that given the need for depth due to how many games it could play next year.

In addition to MLS’s 34-game regular season, which opens Feb. 25 against the Galaxy at the Rose Bowl, LAFC will play in the CONCACAF Champions League starting in March, the US Open Cup and the Coupe month-long leagues in mid-summer. This could force the team to play up to 57 games in less than 10 months if they return to the MLS Cup final.

But while Thorrington’s job description forces him to look to the future, he said he’s not quite ready to give up last week’s MLS Cup win just yet.

“The first MLS Cup, I think, was a bit like a monkey on our backs,” he said. “We didn’t shy away from our desire to win the MLS Cup, so to offer this to our supporters and only the players and staff for all that they poured into it, not just this year but for five years, was right. an incredible, incredible moment.”

Now the challenge becomes to do it again.

This story originally appeared in the Los Angeles Times.

Community Health Systems (CYH) Q3: downward operating trends continue Wed, 09 Nov 2022 08:10:00 +0000


Investment Summary

Following its third quarter numbers, I reiterated the thesis on Community Health Systems, Inc. (NYSE: CYH). As we continue to increase the quality spectrum at HB Insights, we are looking for selective opportunities to add tactical alpha, as well look for suitable longs and shorts in the process. CYH continues to assess a hold with declining operating margins and a lack of upside earnings going forward. See our previous analysis on CYH here.

12-Month CYH Price Trend: Substantial Decline from April FY22


Note: Daily bars, total price return (Data: Refinitiv EIkon)

CYH Q3 results reiterate previously described headwinds

In my previous outlook on CYH, there were several obvious factors that stood out as advancing red flags. From its latest numbers, we can add the theme of liquidity preservation. Quoting directly from the last report:

…[CYH] presents a number of potential headwinds while continuing to erode operational value on a quarterly basis. With little flesh to put on the skeleton here, we rate CYH neutral…until evidence arises to re-rate upwards.

As for the last trimester, there is little evidence to suggest otherwise. CYH had missed its numbers by admission in Q2 FY22 and the trends continued in the third quarter. It has reduced the downsides compared to the top and bottom consensus. Net operating income declined approximately 290 basis points year on year to $3.025 billion (“Billion”), resulting in an increase of approximately 165 basis points year on year operating expenses (“OpEx”).

As a result, the quarterly operating margin was compressed by 40% to $204 million, or 6.74% of revenue. Same-store revenue also tightened 230 basis points year-on-year, due to a 710 basis point decline in net income per entry. The reduction in revenue/intake stems from lower Covid-19 volumes. Additionally, Hurricane Ian caused a 33 basis point headwind to third quarter revenue. The impulse effect of the closures and associated costs resulted in an additional decline of 66 basis points in revenue.

A further contraction was seen in 2022 since the start of 2022, with cash from operations (“CFFO”) tightening to $291m, from $667m at the same time last year [excluding Medicare accelerated payments made in the first 9 months of FY21]. Thus, the non-GAAP EBITDA margin amounts to 9.4% and the net leverage [net debt/EBITDA] therefore increased to 7.3x. Alas, reduced cash revenue, lower net income growth and lower EPS are the main takeaways from CYH’s Q3.

These headwinds appear to have prompted CYH to tighten the liquidity taps. For example, total capital expenditure (“CapEx”) for the 9 months through Q3 FY22 tightened 14.9% to $284 million. [versus $334mm in FY21]. The decline reduced capital intensity requirements by about 235 basis points year-on-year, with quarterly invested capital falling from $10.94 billion to $10.7 billion. Ceteris paribus, this may or may not have capital intensity and ROI benefits for CYH in the future. As an additional cash preservation measure, management also extinguished $267 million of debt through an open market debt buyback program. There are now no debt maturities before FY26 for CYH.

A glimpse of what changed for CYH in Q3

There are several variables that should be noted in the CYH investment debate following its Q3 FY22 results:

  • CYH operational level figures aligned with general market trends observed this YTD in health care providers [equipment, services] sector. I’ve often compared the company’s inpatient/outpatient volume trends versus the national hospital [inpatient, outpatient, community, etc] The data. According to Kaufman Hall National Hospital’s latest flash report for October 2022, hospital operating margins are still in the red for the current year, coinciding with declining revenues across the board. . Additionally, there has been only a marginal decline in spending inflows since the start of the year, with trends continuing into the past month.
  • The Kaufman Hall report explicitly says “[w]Overall, spending pressures and declines in volume and revenue could force hospitals to make difficult decisions about what services they are able to safely provide to patients.” CYH has already taken such decisions by consolidating several markets that it does not foresee in the long term. return on investment. It has also tightened CapEx this year. I would say this should be looked at closely by investors, to gauge the capital intensity of the business going forward.
  • CYH also realized these compression factors at the margin [described earlier] and volume of patients. Volumes were down across the board despite a decline in outpatient visits towards the end of the quarter. However, admissions to the same store fell by 220 basis points year on year, with Covid-related patients accounting for just 5% of total admissions [vs 13% in Q3 FY21]. CYH’s focus on service line investments appears to be recognized, as same-store surgeries increased 5.3% year-on-year. Growth was strongest in orthopedics, spine and neuro interventions. Compared to FY19, CYH accounts for 101% of admissions and 99% of ED patient turnover FY19. That would be an impressive stat, except that the company’s revenue is down from fiscal 2019 quarterly averages of $3.2 billion at the same time.
  • CYH achieved a 500 basis point year-over-year increase in labor costs [avg. hourly employee rate], pushing the company to cut hours worked, reduce hospital days, and convert employees to contract labor. It does this while simultaneously reducing contract labor. Contract labor spend in Q3 FY22 was $100 million compared to $60 million in the prior year, but down from $150 million in Q2 FY22 and $190 million in Q1 FY22 . At the same time, internal hiring of registered nurses has increased by 12%, although there is no mention of the origin of the workforce and the guarantee this has in terms of efficiency and quality of service. Cost-cutting is a big shift in the dialogue this year and has been mainstream throughout the third quarter earnings call. From CEO, Tim Hingtgen:

Under additional expense reduction initiatives, I have already mentioned consolidation and service closure activities in a small number of markets, which will reduce expenses and investments where we simply do not expect a long-term return. term.

These were thoughtful and deliberate decisions and we were careful not to disrupt long-term growth potential while recognizing that in the current environment some operations are sometimes not sustainable given this dynamic. Our margin improvement program, now in its third year, also continues to deliver strong results and Kevin will provide more details in his remarks.”

Our internal forward estimates for CYH’s top-to-bottom lines are summarized in Appendix 1. We see a sharp drop in net earnings for FY22, with a recovery not until FY24. It is not unreasonable to see FCF convert back to $0.63 per share in FY24 [from $1.05/share this year] in my estimation, and combined with an increase in the cost of capital/discount rate, this reduces the future value of CYH’s cash flows in the future.

Exhibit 1. CYH forward estimates [quarterly, annual] in FY24


Data: HB Insights estimates

Evaluation and conclusion

After strong selling in FY22, stocks have been repriced sharply lower and are trading at just 1.6 times earnings. Consensus has CYH priced at 1.76x forward earnings. As shown in Figure 3, in the upside scenario, our Q4 EPS estimate of $0.51 would value CYH stock price at $5.53 or 11 times forward earnings, which represents a substantial upside from current market value and a large divergence from consensus. However, looking at annual loss per share estimates of ($2.25), the deal plays out. The question is really whether these multiples are justified and attractive [or not] and how much is already included.

As shown in Figure 2, taking our estimates for fiscal years 22 and 24 on face value, there appears to be a lack of upside earnings going forward, coupled with increased FCF conversion. This is consistent with CYH’s current trends of shrinking operating margins and reduced return on invested capital. Alas, it is difficult to predict a multiple expansion for CYH on these projections.

Exhibit 2. Forward estimates point to a lack of EPS upside coupled with a broadening of FCF conversion, casting doubt on multiple expansion


Data: HB Insights estimates

With that in mind, it then comes down to the cost and compensation that we accept in a position with CYH. As seen below, CYH’s TTM earnings yield is 10.75%. For our investment, there is an implied risk premium of 9.13% above the risk-free rate, while CYH’s fair cost of equity is also 10.75%.

In our base case, we see the company’s FY22 loss per share turn negative, we’re holding firm at $2.44 per share [from previous analysis]. In the upside case below, the price target indicates 88% upside potential, however, I don’t see that materializing with confidence once the company’s FY22 numbers are released. next year. The valuation in the bullish scenario, however, keeps me neutral at this point.

Exhibit 3. CYH Upside Case: Sequential earnings growth implies potential misvaluation of CYH stock price. However, FY22 revenue is likely to tell a different story. The question is how much is already charged.


Note: Q4 FY22 EPS estimate of $0.51. (Data and image: HB Insights estimates)

Net-net, I continue to rate CYH as an expectation after its Q3 numbers. The downside risk to earnings continued this quarter and management has been particularly active in reducing cash drains and pressures. With a likely further decline in earnings, I can’t help but assume that this will negatively impact CYH’s stock price. Looking ahead to the quarter, stocks could be undervalued at 11 times our FY22 fourth quarter EPS estimates, but looking to FY22 results, that appears to be offset. The question is to what extent the market has already priced this drop in advance. At this point, I’m not entirely sure, but there are still too many unanswered questions. Rate maintained, PT unchanged at $2.44.

Deposit rates could rise 105 bps due to 190 bps hike in repo rate: SBI report Mon, 31 Oct 2022 11:34:00 +0000

With a current and savings account (CASA) deposit share of 45% in the banking system, a 190 basis point (bp) increase in the repo rate could at best result in a 105 bp increase in rates deposit. Indeed, only 55% of term deposits would require rate adjustments, resulting in a less than complete adjustment of deposit rates to the repo rate, a report by the State Bank of India’s economic research department said on Monday ( SBI). .

“Any increase in the deposit rate beyond this will be a further increase,” the report said.

In the current round of monetary policy tightening, the six-member Monetary Policy Committee (MPC) raised the repo rate by 190 basis points. As a result, banks quickly revised their lending rates, which led to an increase in the marginal cost of the funds-based lending rate (MCLR) by 50 to 70 basis points and external lending linked to benchmarks. of 190 basis points. However, deposit rates have not kept pace with lending rates.

“The median SCB term deposit rate, which reflects prevailing card rates on new deposits, increased by 26 basis points between May and September 2022. The magnitude of the pass-through to retail deposit rates however, was higher for longer-term deposits. deadlines. Beyond September, there was a sharp increase in deposit rates,” the SBI report said.

In recent weeks, as liquidity in the banking system has tightened, banks have raised their deposit rates to gather sustainable cash to fund the strong demand for credit in the economy.

SBI raised its deposit rates by up to 80 basis points on certain maturities, effective October 22. IDBI Bank has also launched a special fixed deposit program offering 6.4% for 555 days. Other banks such as ICICI Bank, Kotak Mahindra Bank, HDFC Bank, Punjab National Bank and a few others have also raised their deposit rates over the past few weeks as competition for funds to finance credit growth escalates. was intensifying.

According to the report, RBI is pushing banks to raise their deposit rates to collect more deposits or collateral funds to finance credit growth and this could be one of the reasons for keeping liquidity in deficit mode for an extended period.

The system’s liquidity moderated in September due to the increase in outflows of withholding taxes and credit drawdowns. According to the report, the liquidity deficit in the banking system has remained at Rs 60,000 crore over the past four days.

According to the latest data from the RBI, bank credit in the economy is growing by 17.9%, a multi-year high, while deposits are growing by only 9.6%, heightening fears that the slow deposit growth becomes an impediment to loan growth in the future.

International Paper publishes its results for the third quarter of 2022 Fri, 28 Oct 2022 11:00:57 +0000 International Paper has released its financial results for the third quarter of 2022.

Net sales in 3Q 2022 were $5.402 billion, up slightly from $5.389 billion in 2Q 2022 and $4.914 billion in 3Q 2021. 3Q 2021. Revenue growth of 10% from year-on-year was based on strong price realization.

Net income (loss) attributable to International Paper in the third quarter was $951 million ($2.64 per diluted share), compared to $511 million ($1.38 per diluted share) in second quarter of 2022 and $864 million ($2.20 per diluted share) in the third quarter of 2022. 2021.

Net income for the third quarter of 2022 includes a net after-tax benefit of $563 million ($1.56 per diluted share) related to the settlement of the previously announced timber monetization restructuring tax case. Net income for the third quarter of 2021 includes a net after-tax gain of $350 million ($0.89 per diluted share) on the sale of our plant in Kwidzyn, Poland.

Cash provided by operations was $435 million, bringing the year-to-date to $1.4 billion.

“Our third quarter earnings were significantly impacted by the difficult macroeconomic environment,” said Mark Sutton, Chairman and Chief Executive Officer. “Lower consumer spending on goods and destocking of retail inventory led to lower demand for packaging, and we also experienced significantly higher energy and distribution costs. As we enter the fourth quarter, we see packaging demand stabilizing at these lower levels and input costs providing some relief; however, we also expect seasonally higher operating costs and for the year we expect to exceed our target of $225 million related to our Building a Better IP initiatives.

“Looking forward, while there is considerable geopolitical and macroeconomic uncertainty ahead of us, I am confident in our ability to navigate various environments,” Sutton added. “We have a great team and an extensive system of crushers and can plants that allow us to take care of our customers while optimizing our operations to reduce high marginal costs. We will also continue to invest in attractive cost reduction projects and accelerate our improvement initiatives to create value.”

6th consecutive fall: the rupee loses 0.53% against the US dollar – Markets Wed, 19 Oct 2022 06:00:09 +0000

The Pakistani rupee fell for the sixth consecutive session against the US dollar, and depreciated 0.53% in the interbank market on Tuesday.

According to the State Bank of Pakistan (SBP), the rupiah closed at 220.88 after depreciating Rs1.17 or 0.53%. The rupee has depreciated cumulatively by 3.09 rupees or 1.4% over the past six trading sessions.

On Tuesday, the rupee fell for the fifth consecutive session against the US dollar and closed at 219.71 after depreciating Re0.82 or 0.37%.

According to market experts, the weakness of the local currency is attributable to the decrease in reserves and the lack of confirmation of foreign inflows.

In an interview with BloombergFinance Minister Ishaq Dar said the rupee was “heavily undervalued”.

“It’s due to speculation – and some market players are responsible for that,” he added.

Globally, the dollar held near a 32-year high against the yen on Wednesday, while rallying from a two-week low against a basket of major peers as traders gauged improvement in the risk sentiment against the prospect of aggressive Federal Reserve rate hikes.

The dollar index – which measures the currency against six peers including the yen, the pound and the euro – rose slightly to 112.01, after falling to the lowest since October 6 at 111.76 day to day.

Oil prices, a key determinant of the currency peg, edged higher on Wednesday amid caution as bullish signals such as falling US crude inventories and a generally undersupplied market were countered by bearish factors. such as uncertain Chinese demand growth and lower gas prices.

Sri Lanka is betting on tax hikes; perceived downside risks than gains Mon, 17 Oct 2022 11:03:10 +0000

ECONOMYNEXT – Sharp income tax hikes in Sri Lanka are seen as a gamble with the corporate sector and individuals are set to be hit hard by the move as investable capital turns into current government spending.

The move could discourage and strangle investment, analysts say, though they see boosting tax revenues as well as cutting state spending as the main tools for reducing deficits and debt over the medium term.

The tax hikes come after Sri Lanka declared default on its sovereign debt in April this year. Sri Lanka ran out of reserves after authorities cut taxes and printed stimulus money for two years, ignoring repeated warnings about debt and external sustainability.

The new tax hikes will take the country beyond a pre-2019 tax system with higher corporate tax rates and higher marginal personal income tax rates, although the tax on the added value is back to 15%.

Spectacular creep of the support
The tax exemption threshold is 100,000 rupees per month, as before 2019, but the rupee is now worth around half its previous value, with the dollar collapsing from 182 to 360 against the US dollar in one case. spectacular slice drift.

The highest marginal rate is 36% compared to 24% in 2019.

Corporate taxes which were 28% have been increased to 30% under the new amendments. The 14% preferential rate for exports will no longer be available.

Former President Gotabaya Rajapaksa shortly after his election in 2019 reduced Value Added Tax (VAT) to 8% from 15%, along with several other tax cuts such as Pay As You Earn (PAYE) tax, withholding tax on interest, debit tax on banks and financial institutions and Nation Building Tax (NBT) on household goods.

However, analysts say some tax hikes are needed.

“If you make reforms, there must be a consensus with the people. If you go by force, it will backfire profusely,” economic analyst Umesh Moramudali told EconomyNext.

“In the big picture, everyone in general benefits. Without the tax increases, there will be no IMF finalization and we will not move to the recovery.

Moramudali further stated that without raising taxes, Sri Lanka will print more money or borrow more, which has more negative effects than higher tax rates in an economy.

“For the proper functioning of the economy, it’s a huge task,” he said.

“But in the absence (of tax), the situation is likely to be much worse,” he said, adding that political mistakes are the main reason for the country’s current situation.

While the public greeted the value-added tax hikes with little protest, income tax was pushed back sharply. People pay value added tax as they spend, but income taxes are levied on unspent money and must be paid in a lump sum.

State charge
Members of the public see a bloated civil service filled with unemployed graduates, and dozens of ministers and ministers of state wonder why they should pay taxes for an inefficient state.

However, the flip side is that when people pay income tax and feel it, they may become more aware of increased government spending, such as giving free jobs to jobless graduates and loss-making state enterprises in the future, according to some observers.

One of the issues that led to the current crisis, according to some critics, was “revenue-based fiscal consolidation”, an unusual strategy where expenditure-based consolidation (cutting costs), a necessary part of what commonly referred to as fiscal consolidation, has been abandoned.

As a result, expenditure relative to GDP has increased from 17% to around 20% of GDP from 2015 to present.

Trevor Mendis, an economic strategist, said people in Sri Lanka have insufficient incomes with rising cost of living, which is creating a burden on a certain sector of the economy, mainly for parents with sent children. abroad and the elderly.

“Long term, the tax base, tax records and tax rates need to be increased to support economic recovery,” Mendis said.

Sri Lanka’s government revenue to gross domestic product (GDP) fell to a record low of 8.7% in 2021, from more than 20% in the 1980s, according to official data.

“Kimbula Bunis”
The opposition claims that taxes are too high right now.

Opposition lawmaker and chairman of the Committee on Public Finances (COPF), Harsha De Silva, said the government should introduce affordable tax rates to make further reforms before people go down the drain. street.

“What the government is doing is like shoving a kimbula banis down the throats of the people, which is like choking and dying,” Silva said at a press briefing last week.

Others say that businesses also need a better environment to operate, and it is balancing itself out.

Murtaza Jaferjee, chairman of Colombo-based think tank Advocata, said incentives for private companies to generate profits are more important than paying taxes once profits are made.

“Government incentives should be focused on reducing regulatory hurdles and reducing the time it takes to complete projects and reducing upfront taxation,” Jaferjee told EconomyNext of the tax drop.

“While this discourages risk taking, the focus should be on expanding the country’s economy,” he said.

A problem with income tax is that the government takes away investable capital before the investment decision is made.

As a result, in countries with little or no income tax, such as in the GCC region and the Middle East and at one time in the Maldives where there was no income tax, l employment exceeds population by several times. Sri Lankans are looking for jobs in these countries.

Unlike turnover taxes, income taxes can be volatile and procyclical.

The proposal will go to parliament for a vote and it is unclear if any changes will be made given the critical state of state revenues.

President Wickremesinghe said wealth tax could also be on the way, another potential minefield where people could be forced to pay taxes on assets that don’t generate cash. (Colombo/October 13, 2022)

Gold and Silver Prices Today: Check Rates in Your City on October 15 Sat, 15 Oct 2022 06:56:36 +0000

Gold prices in India saw a marginal decline on October 15, 2022. According to the Goodreturns website, eight grams of 22-karat gold was worth 36,960 while the price of 24 karat gold rose to 40,320.

In the nation’s capital, the price of 22-karat gold was 46,350 per 10 g while that of 24-carat gold was at 50,500. In the financial capital of India, the price of 22k and 24k gold stood at 46,200 per 10g and 50,400 per 10g. In Chennai, the price of 22k and 24k gold stood at 46,900 per 10g and 51,160 per 10g.

The price of gold is determined by several factors, including the strength of the rupee against the US dollar. If the dollar is stronger, gold will be expensive. Gold prices also depend on economic growth and the international market.

With regard to silver, the price of one gram of precious metal costs 55.30 according to the Goodreturns website. The price of silver on Saturday was 2 less than Friday’s rate.

In Delhi, Mumbai, Kolkata and Bengaluru, the price of silver stood at 553 for 10g. In Chennai, 10 grams of silver cost 605.

Here are the gold and silver prices of major Indian cities on Saturday, October 15, 2022.

DELHI 46,350 553
Bombay 46,200 553
CALCULATED 46,200 553
BENGALERU 46,250 553
CHENNAI 46,900 605

The price of silver is determined by the price of the precious metal on the international market. It also depends on the movement of the Rupee against the US Dollar.