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Help! There's Cinnabon in My Vodka

A new alcohol combines two successful consumer trends: Cinnabon-licensed products and flavored vodkas.

Two great tastes that go together. Chocolate and peanut butter. Taco Bell tacos and Doritos. And now, Cinnabons and… . vodka?


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Yes. This morning I had a chance to sample the combo.

I originally thought the pitch from Beam, the big spirits company, and Cinnabon would be about some gooey, unabashedly sweet cinnamon buns, smothered in hot icing, infused with alcohol. But it’s the other way around. The flavoring and essence of Cinnabon has been distilled into Beam’s Pinnacle Vodka.

The result is actually quite good. I had a Proustian moment when sniffing the liquor. The memories of a hundred business trips came roaring back as I recalled the unctuous Cinnabon aroma that wafts through airports. The sweetness cuts through the usual harshness of Vodka and leaves a cinnamon taste on the tongue. It’s even better when paired with some actual Cinnabons.

The collaboration between two large companies is the logical outgrowth of a few big trends. One is the rise of flavored vodkas, which are appealing, especially to younger (legal) drinkers. Pinnacle comes in 30 (!) flavors, including Cherry Lemonade, Cookie Dough, Pomegranate, Rainbow Sherbet, and Whipped (as in whipped cream). A second is the relentless expansion of Cinnabon, which has branched out from mall stands and airport kiosks to deals with Burger King and Taco Bell and to consumer packaged products. A third is the continued appeal of indulgence, even in this age of nutritional labeling and increasingly aggressive fat police.

The idea started with Beam. Sales of beer and soda are stagnant or declining. But sales of spirits have actually been growing nicely, as this study shows (PDF). That’s in part because outfits like Beam are rolling out new flavors and products to appeal to the desires of their customers. “People are very specific about what they desire. If they want blackberry, they won’t take blueberry,” said Bill Newlands, president for North America at Beam. Pinnacle is the leading flavored vodka brand in the U.S. And the parent company has enjoyed a nice run in the stock market, as shown by this two-year chart.

 Since customers already were taking up cookie dough-flavored vodka, it was natural to think of a Cinnabons-flavored version. “We had started to work on creating something in this zip code, and internally we said we need to have something that tastes like a Cinnabon,” said Newlands.

Help Wanted

Good Luck Getting Hired at Walmart

Despite pushback from the city council, Walmart will open its first two stores in D.C. next month. But getting a job there will prove difficult since the chain received 38 applications for each job opening.

Walmart is constantly in the news as a metaphor for what’s ailing America. On Monday, it was the news that employees had set up bins to collect food for needy employees at a store in Ohio. On Tuesday morning, we were presented with a Walmart-related news item that explains why the company can get away with paying so many so poorly.


A Walmart employee wears the company's customer service slogan on his jacket, March 16, 2005 in Bentonville, Arkansas, USA. (Gilles Mingasson/Getty)

Seeking growth in the low-end of the retail market that it has largely saturated, Walmart has been trying to push into cities. Urban areas, with their unions, liberal politicians, and generally high costs for real estate, insurance, and lack of parking, were not a natural fit for the company that started in rural Arkansas and grew by planting giant boxes in rural areas and exurbs. But Walmart in recent years has made tentative inroads into close-in suburbs and the city limits of Chicago, Los Angeles, and other large population centers.

Zoning boards and city councils often throw up obstacles to expansion. Walmart has no stores in the five boroughs of Manhattan. Earlier this year, in Washington, D.C., the City Council passed a law explicitly aimed at keeping Walmart out. City Council passed a law saying certain big box retailers would have to start pay at $12.50 an hour, 50 percent higher than the District’s $8.25 minimum wage. But in September, Washington, D.C. Mayor Vincent Gray vetoed the bill.

The veto paved the way for the opening of two stores, one on H Street just north of Union Station and the other on Georgia Avenue in northern D.C. early next month. And potential employees are enthused. As NBC’s Washington, D.C. affiliate reported “the stores will hire a combined 600 associates after combing through the more than 23,000 applications it received from potential employees.” That’s stunning. Walmart received 38 applications for every opening, making the odds of an applicant getting a job at Walmart far greater than getting into Harvard. And all this competition for positions that we know do not pay all that well.

What gives? This isn’t taking place in a low-wage broken-down mill town where unemployment is high and there are few options. The Washington, D.C., metro area has been a boom town for the last 12 years, fueled by a higher level of government spending, contracting, outsourcing, and a real estate boom. The city grows ever more upscale and yuppified by the day. Richard Florida, the prescient analyst of urban revival, has called the area “a boom town of the new economy.” The D.C. metroplex has six of the richest counties in America. The unemployment rate of the Washington-Alexandria-Arlington metro area in August was 5.4 percent, significantly below the national rate. The unemployment rate in the areas of Maryland adjacent to D.C. was 5.2 percent. In the past year, the D.C. metroplex has added 33,000 jobs, or 1.1 percent of the total.

But that hides a reality in this economy. The labor market is actually several labor markets in one. And some of those markets are doing quite poorly, even in booming areas with comparatively tight labor markets. We know, for example, that in October the unemployment rate for people with bachelor’s degrees (or more) was 3.8 percent, while the unemployment rate for those whose highest level of education was completing high school was 7.3 percent, and the rate for those who hadn’t completed high school was 10.9 percent. Put another way, people who haven’t completed high school are nearly three times more likely to be out of work than those who have completed college. And people who haven’t attended college are twice as likely to be out of work as those who have completed college. Among African-Americans, the unemployment rate is 13.2 percent, while the unemployment rate for whites is 6.2 percent.

Slack in the labor market—and the continuing weakness of unions—makes it very difficult for all but the most skilled workers to negotiate higher wages. And the intense competition for positions at the lower rungs of the labor market mean companies can have their pick of candidates while offering comparatively low wages. It’s good for Walmart that the company is finally making inroads into Washington. Perhaps the new stores will help boost the chain’s stagnant domestic sales. It’s good for the 600 new hires to have jobs at a stable company. And there’s more where that came from. Walmart said it hopes to open three more stores in D.C. in coming years, which will employ another 900 people. But the fact that the chances of getting a job at Walmart are far lower than the chances of getting into Georgetown Law School highlights a continuing problem.

Always Low Wages

Walmart’s Dumb Blame Game

Walmart continues to blame outside factors—the food stamps cut, the ACA, and the government shutdown—for dwindling sales. But the real reason for its troubles? Its own business model.

Wal-Mart touches more consumers than virtually any other company—140 million customers each week. The registers at its 4,135 U.S. stores ring up millions of transactions every day. Its sophisticated IT systems collect a wealth of information about the supply chain, the behavior of consumers, and real-time action in the consumer economy. And yet at some level, America’s largest retailer remains remarkably clueless about what is happening in the economy.

Wal Mart

Damian Dovarganes/AP

Even though the economy is growing, its sales aren’t. Strangely, fewer people are coming into Walmart’s stores. Traffic at stores open more than a year fell .4 percent in the third quarter from the year before, and as a result same-stores sales fell .3 percent. Yet the company doesn’t seem to know why. And the pronouncements it makes should lead observers to think twice about whether the company is missing the forest for all the trees.

Consider. If the government telegraphs that food stamps are going to be cut—and may be cut sharply in the future—you might expect the people who depend on them to start taking evasive action, perhaps by saving more and shopping less. Walmart cashes about 18 percent of food stamps in the U.S. Ergo, any cut would be bad news for the company. But as I noted, Bill Simon, president and chief executive of Walmart U.S., last month said (PDF) the cuts could actually work to the company’s benefit. Simon said that “when the benefits expanded, our market share actually went down.” (Translation: When people had more money to spend, they were more likely to go to places other than Walmart.) And so with customers who lose benefits becoming more price-sensitive—“in other words, everybody’s benefit is going to get cut, price will become more important. And when price is more important, we’re more relevant.” That reasoning was wrong, apparently. Last week, when Walmart announced disappointing quarterly sales, Simon said the coming fourth quarter could be tough because of “recent SNAP reductions.”

Another example of macro-cluelessness came in Monday’s Wall Street Journal. Businesses have been complaining about how the Affordable Care Act will affect their own operations from day one. Now some are saying it is already negatively impacting consumer behavior. Never mind that one of the first planks of the ACA to be implemented put money into the hands of consumers; some $504 million in rebates were sent out earlier this year. And never mind that the balance sheets of hundreds of thousands of poor people— the type of people who shop at Walmart—are being improved because of the expanded eligibility for Medicaid. Since October 1, in fact, states have signed up more than 400,000 people for Medicaid—which is to say, free healthcare. And never mind that none of the people who have signed up for insurance plans, many of which are subsidized, has to make a payment until December. And never mind, further, that the penalty for not signing up, which will be leveled at some point in 2014, starts at about $95 and can’t be higher than one percent of a person’s income. Walmart is convinced that the higher costs associated with the ACA are inhibiting the capacity of consumers to spend—even though it acknowledges there is no empirical evidence to support this contention. From the Journal article: “While it is not coming through in customer research, we do know that some of our customers are concerned about the impact of the Affordable Care Act,” Carol Schumacher, vice president of investor relations, told analysts on Thursday. “For many of our customers, having to afford health care and insurance may be another line item in their personal budget that they may not have had to cover previously.”

Finally, on Monday, the internet was aflame with outrage over an extremely telling anecdote from a single Walmart store. It seems that in an employee-only area in a store in Canton, Ohio, Walmart had set up bins to solicit food donations from Walmart workers to help feed… other Walmart workers. The Cleveland Plain Dealer has the depressing story here. A sign above the bins reads: “Please donate food items here, so Associates in Need can enjoy Thanksgiving Dinner.” Now, the article notes that this decision was taken at the store-level, and that Walmart has a series of policies and vehicles through which Walmart employees kick in funds for an employee assistance fund.

But this is insane. And it’s a great metaphor for what is happening in the U.S. economy.  “That captures Walmart right there,” Kate Bronfenbrenner, director of labor education research at Cornell University’s School of Industrial and Labor Relations, told The Plain Dealer. “Walmart is setting up bins because its employees don’t make enough to feed themselves and their families.”

This—not the food stamps cut, or the ACA, or the government shutdown—is the real reason for Walmart’s continuing sales struggles. Low-wage workers, four plus years into the recovery, aren’t getting paid enough to consume more. Employers large and small, while sitting on record amounts of cash and ringing up record amounts of profits, don’t feel compelled to share the bounty with employees. Labor share of national income is at a post-World War II low. This has real world implications. Walmart, of course, is the nation’s largest private-sector employer, with 1.4 million employees. Aside from accounting for a big chunk of overall retail employment, Walmart sets the benchmarks and norms for a large part of the service industry. The company’s sales are stagnating in part because it doesn’t pay its employees sufficient wages, and because many other companies follow suit. Yes, Washington may be playing a role in Walmart’s travails. But the real source of the problem is in Bentonville.

The Next Big Thing

Facebook Dissed By Snapchat

When Snapchat shot down Mark Zuckerberg’s billions this week, the markets got a clear picture of the perverse logic that now rules social media—and the problems that lie ahead.

The buzz of this week was that Snapchat, the pre-revenue/no-revenue instant-messaging craze, turned down a $3 billion buyout offer from Facebook.


The Daily Beast

Much of the commentary centered around the folly, or heroism, of Snapchat’s young founders Evan Spiegel, who is 23, and Bobby Murphy, now 25. Why should they take a lowball offer and go to work for someone else when an independent Snapchat might be worth $6 billion, or $12 billion, or $20 billion, in a few years? On the other hand, should the energy surrounding social media dissipate, should investors start demanding that companies have actual revenue and profits again, or should Snapchat be surpassed by the next new thing, the founders will look like chumps.

But the failed pickup effort says as much about Facebook—and the broader social media and technology industry—as it does about Snapchat.

The narrative that emerges is one in which the math team member tries, without success, to ask the cheerleader out. The New York Times noted that Zuckerberg “traveled to Venice, Calif., to meet with the company, according to Snapchat’s founders, instead of them visiting him at his headquarters in Northern California.”

It’s ironic. If the markets were a high school, Facebook’s balance sheet and market position would make it the 220-pound jock.

The idea that Facebook should be a supplicant to anybody is absurd. Investors love Facebook, and have given it a stock market value of $120 billion. The company’s stock trades at 126 times earnings, meaning that investors are very enthused about its growth prospects. And Facebook has been able to do what so many have failed to do: turn a profit on Internet advertising, while reaping lots of revenue from mobile. In its most recent quarter, sales rose 60 percent from the year earlier. Mobile advertising, a tough nut to crack , accounted for about half of the company’s ad revenue. Users like the company’s products. Facebook last quarter claimed 728 million active users, up 25 percent from the previous year. It’s growing rapidly off a very high base. This is the chart of Facebook’s performance as a public company.

But of course, this isn’t enough. In fact, it’s not nearly enough. Facebook doesn’t just want to be big, profitable, and growing. It wants—no, needs—to be perceived as popular. Mark Zuckerberg, the 29-year-old CEO and founder of Facebook, says the company is so beyond trying to run with the Winklevii. “People assume that we’re trying to be cool. That’s never been my goal—I’m like the least cool person there is,” he said in an interview with Atlantic magazine editor James Bennet this fall. At another point, he noted that “We’re almost 10 years old and we’re definitely not a niche thing at this point, so those angles on coolness are pretty done for us.” But the dude doth protest too much. Facebook needs to be seen as cool—as a cool place to work, and as a cool place to hang out.

Aced It

Yellen Sails in the Senate

While Obama crashed and burned over health care, his nominee to head the Fed sailed through her confirmation hearing. But will Janet Yellen be any different from her predecessor?

President Obama’s press conference on Thursday was something of a horror show. By contrast, the confirmation hearing of Janet Yellen, the president’s nominee to be the next Chair of the Federal Reserve, was more like something from the Rocky Horror Picture Show. The general theme of the three-hour session was Damn it, Janet. I love you!

Janet Yellen

Federal Reserve Board Chairman nominee Janet Yellen following her confirmation hearing on November 14, 2013 on Capitol Hill in Washington, D.C. (Alex Wong/Getty)

The Senate remains a remarkably politicized place. Tea Party rogues like Ted Cruz of Texas and Mike Lee of Utah are gumming up the works. Republicans are filibustering Obama judicial nominees. And a grand bargain on taxes and spending remains elusive as ever. But at the Yellen hearing, the members of the Senate Banking Committee signaled that they essentially accept the status quo. Several senators posed objections and concerns about the Fed’s quantitative easing policies, but few signaled discomfort with the prospect of the first woman nominated to head the central bank taking charge. And none indicated he or she would try to block a vote.

In her brief opening statement, Yellen signaled that she was essentially prepared to stay the course of keeping short-term interest rates low and creating new money to purchase bonds to keep long-term interest rates low. “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” she said.

Now, in recent years, the Fed’s expansive monetary policies have been extraordinarily divisive. Remember Texas Gov. Rick Perry’s comments that Ben Bernanke’s efforts to stimulate the economy could be construed as “treasonous”? The Republican Party has a large Situational Hard Money Caucus—a group that freaks out at the prospect of inflation when the Federal Reserve keeps interest rates low during a Democratic presidency, but didn’t blanch at low-interest rates during the Bush administration.

Yellen was present at the creation of quantitative easing, and is pledging to continue the policy until it works. But she didn’t get all that much flack about it. The objections to quantitative easing were generally pro forma and not particularly articulate. Sen. Mike Johanns of Nebraska acknowledged the struggles of the economy but bizarrely suggested the Fed should consider getting rid of all its holdings over a 24-month period. He didn’t explain why the dumping of $4 trillion in assets would help economic growth. Sen. Pat Toomey of Pennsylvania, who used to work at the Wall Street-oriented Club for Growth, complained that interest rates were too low for savers, but that Dodd-Frank and other regulations were raising costs for corporate borrowers. (Note: thanks to the Fed’s quantitative easing efforts, corporate borrowers are paying next to nothing to borrow. In May, IBM sold $1.2 billion in seven-year bonds at an interest rate of just 1.625 percent.) Sen. Richard Shelby of Alabama tried to catch Yellen in a gotcha. Republicans have tried for the last several years to make it seem as if quantitative easing is a tool of the hard left. When Yellen noted to Shelby that quantitative easing had been supported by conservative icon Milton Friedman, Shelby asked: “What about Keynes?” The response: “I don’t know that Keynes thought about that.”

Of course, there are grounds for skepticism of the Fed’s policy. We’re not sure how it all ends, and the benefits certainly aren’t trickling down to all sectors of the economy, as many senators noted. I never thought I’d see the day when a Republican Senator from a poor state with no income tax would lecture a Berkeley Professor about the failures of trickle-down economic policies. But that’s precisely what Sen. Bob Corker did in his question session.

For their part, Democrats seemed to want to talk about everything but quantitative easing and monetary policy. They expressed concern about unemployment and the behavior of big banks. A few lobbed softballs. Sen. Chuck Schumer of New York: “I think you’ll make a great chair, and your Brooklyn wisdom shines through.” But one of the toughest questioners was Sen. Elizabeth Warren, who (correctly) went right after Yellen and the Fed for being asleep at the regulatory switch during the credit bubble, and for generally being as enthusiastic about regulation as kids are about eating cauliflower. “Do you think the Fed’s lack of attention helped lead to the crash?” Warren asked.

Political Calculus

Obama’s Bull Market?

Stocks are booming, with the S&P and the Dow each near record highs. Does President Obama deserve the credit? The answer is: yes, but only some of it.

The Standard & Poor’s 500 stands about 1766, near a record high. The Dow Jones Industrial Average is at about 15,727, also near a record high. Since the lows of March 2009, both indices are up nearly 140 percent.

New York Stock Exchange

Traders work on the floor of the New York Stock Exchange on November 7, 2013 in New York City. (Andrew Burton/Getty)

Does President Obama deserve the credit? This was a question I was asked earlier this week on CNBC in a discussion with Reagan-era economist Art Laffer. The answer is: yes, but only some of it.

In general, I believe that efforts to pin stock market success (or failure) on political figures aren’t useful. That’s in part because much of the discussion, which is generally driven by those on the right side of the ideological spectrum, overlooks the historical record. Many market pundits hold as a foundational truth that bad things happen to markets and investors when Democrats control the White House and good things happen when Republicans run the show. They are, of course, wrong. Over the past century, markets have generally done better under Democratic presidents than under Republican ones. The worst crashes (1929, 1987, 2008) happened when Republicans were in office. And many of the greatest bull runs—the Nifty Fifty market of the 1960s, the boom of the 1990s, the current bull run—took place under Democrats. The dopes who dumped stocks in early 2009 fearful that President Obama would be bad for the stock market have missed one of history’s great rallies.

What’s more, policy and presidential rhetoric don’t really impact markets nearly as much as many analysts believe. The two administrations of George W. Bush, in theory, should have been a golden age for investors. Taxes on capital gains and dividends were slashed to very low levels, companies and financial institutions were lightly regulated, and labor unions were generally ignored. And yet the S&P 500 was about 35 percent lower on the day President Bush left office than on the day he entered office.

The historical rule tends to hold that presidents get credit for bad things that happen on their watch and for the good things that happen on their watch. But in the case of the stock market, I’d give Obama only a small percentage of the credit for the market boom— say 15 to 20 percent. The most important thing the Obama administration did for the economy—and for the markets—was to reverse the free fall of late 2008 and early 2009, stop the panic, and create the conditions for growth. The administration’s implementation and management of TARP and the auto and financial sector rescues, which began under the prior administration, were vital—and largely effective.

The stimulus passed in 2009, even though it was too small, added meaningfully to economic growth in 2009 and 2010. The economy began to expand in 2009. And even though it has been jolted and threatened by political actions—by Republican brinksmanship, by Obama’s inability to forestall crises, and by needless austerity—the U.S. economy has chugged along in low gear, adding more than 7 million jobs since early 2010. That’s not bad, but it’s not the kind of underlying growth that should lead the stock market to boom as it has.

So who else is responsible for the market boom? I’d give the Federal Reserve about 35-40 percent of the credit. Here’s why. The Fed, along with the Bush and Obama administrations, was an important actor in the bailouts. We tend to focus on TARP when looking back at the financial crises, but other, more obscure and underreported actions—the Fed’s guarantee of the commercial paper market, the Treasury’s guarantee of money-market funds, and the bailout of AIG—were just as important. Many of those were led by the Fed. And for the last several years, the Fed has attempted to goose the economy by keeping overnight interest rates at zero, and by purchasing bonds and mortgage-backed securities to push long-term rates down. These efforts at quantitative easing have helped stock markets in several intended and unintended ways. First, by pushing bond yields down to miniscule levels, the Fed has forced people seeking a return to plunge into riskier assets, like stocks. Second, the lower-rate environment has allowed many consumers to refinance mortgages and to gain access to lower-cost credit, which has freed up cash for other purchasers. That’s also good for stocks.


Wall Street’s Big-Wig Confusion

Wall Street’s biggest names took to the stage on Tuesday to discuss the markets and the health of the financial industry, but their outlooks were anything but consistent.

Markets are on a roll, with the Dow Jones Industrial Average at a record high. Interest rates are very low. Inflation is non-existent. The rich have never been richer. These are very good times indeed to be a big-shot financier.


Carlyle Group co-founder David Rubenstein participates in a discussion at the New York Times 2013 DealBook Conference in New York. (Larry Busacca/Getty)

And yet. The crown rests uneasily on the heads of the titans of finance. They’re concerned about America’s past and future, they’re worried about their status, and they’re looking in all sorts of unlikely places for bliss. That’s my takeaway from spending the day at the New York Times DealBook Conference.

“Gun to my head, I’m optimistic,” said Lloyd Blankfein, the chief executive officer of Goldman, Sachs, which is not exactly a ringing endorsement of the status quo. David Rubenstein, head of the Carlyle Group, spoke of opportunities his firm was finding in Africa, India, and China—not so much at home. Ray Dalio, the head honcho at Bridgewater, the massive hedge fund with the strange corporate culture, said we’re in an era of low returns in which stocks should rise about four percent a year while bonds could lose money.

“I’m actually very confused now,” said Larry Fink, chief executive officer of Blackrock, which controls a whopping $4 trillion in assets. Why? Even though stocks have rallied impressively this year, there is still a lot of money sitting on the sidelines. Which means “we could see this incredible upward draft in the marketplace,” he said. (Good!) Alternatively, “I could see a scenario where we have a 12 percent correction.” (Bad!)

Fink ran through a litany of concerns: China, Japan, “the nonsense in Washington,” the Federal Reserve.  Fink, a Democrat, generally defended the Obama administration’s outreach to the business community, citing the large number of meetings that business leaders have held with the president and other top officials. “I think they’re reaching out more than any White House in recent times” he said. Big bankers are also nervous, because, as Fink put it, “society is still angry at banks,” and because the financial penalties inflicted on them in recent years have been rather severe.

Some of the personalities causing uncertainty for big Wall Streeters were part of the conference. Like Dan Loeb, the activist investor who has been disrupting corporate boards—Yahoo!, Sony, Sotheby’s. Loeb, a yoga-practicing surfer and fitness nut, possesses the kind of certainty that eludes many of his elders. “I can’t think of a time in our experience where we misstepped,” he said. Loeb is of a breed of hedge fund investors who have a large amount of assets and a willingness and ability to use the media so that they can rattle the cages of even the largest blue-chip companies. At the conference, Loeb said he now has a position in Federal Express, the giant delivery service that is worth $43 billion.

Another source of angst took the stage after Loeb: Preet Bharara, the aggressive U.S. Attorney for the South District of New York, who has been pursuing and nailing insider traders and bankers. The audience didn’t applaud when he took the stage. (Many probably believed he would emerge from the side carrying a pike with the head of a banker.) Bharara is part of a new regulatory regime, which includes SEC Chairwoman Mary Jo White, that is taking many fewer prisoners in its quest for giant settlements and admissions of wrongdoing. But Bharara came across as mild-mannered and relatable. He won over the audience with charm, joking about his rich brother, Vinit Bharara, who sold to for $540 million. When asked by Peter Lattman of the New York Times what he would do after leaving government service, Bharara responded that he would : “walk the earth like Caine in Kung Fu,” and have “adventures.”


Tesla Survives a Fiery Crash

Weak earnings reports and a series of fire incidents finally brought down Tesla Motors’ stratospheric stock price, but somehow the company continues to defy the rules of the market.

It’s been a while since we’ve checked in on Tesla, the electric-car manufacturer that inspires love-hate reactions among investors and the public. The brainchild of serial entrepreneur Elon Musk, Tesla sells an expensive electric sports car.


A row of Tesla Model S electric sedans are displayed during a demonstration at Crissy Field in San Francisco, California on October 31, 2013. (Eric Risberg/AP)

The only thing as expensive as the Tesla Model S, which retails for about $60,000, is the company’s stock. Between October 2012 and October 2013, it rose from $31 to $190, up more than six-fold, giving the company a stock market valuation of $23 billion. That was about one-third the value of Ford and nearly one-half the value of General Motors, both of which sell about 100 times more cars than Tesla does.

To devotees of rationality in markets, Tesla was a thumb in the eye. The company is as much a triumph of electrical engineering, but also financial engineering. Tesla sales are subsidized by taxpayers in the form of hefty tax credits for green cars. The company also makes money by selling zero emission vehicle certificates to automakers who are required to produce such cars, but don’t, in certain states. In the second quarter (PDF), Tesla reaped $51 million, or 13 percent of its revenues, from such sales. In that quarter, which ended on June 30, the company sold about 2,000 cars a month and reported a relatively small ($30 million) loss.

Those results would hardly seem to warrant the massive ramp-up in the company’s stock price. Between August 7, when the company’s second-quarter sales were reported, and October 1, investors pushed the stock up nearly 50 percent. Elon Musk himself noted that investors might be getting a little ahead of themselves. On October 25, at the opening of a Tesla store in London, he noted that “the stock price that we have is more than we have any right to deserve.”

But investors ignored Musk, at least for another week or two. Then in the last few weeks, Tesla has crashed—figuratively and literally.

Last week, on November 5, it reported third-quarter earnings (PDF) The news was generally positive. Sales and production were up. But revenues from zero emission certificates fell sharply, from $51 million in the second quarter to $10 million in the third quarter. And the projection for future results was less strong than investor had expected.

The results helped spur a sharp decline in the company’s stock. Indeed, it was as if investors collectively woke up and realized they had been giving the company an insanely rich valuation.

Jobs Report

Bad News for U.S. Declinists

Thought the shutdown would tank the recovery? You were wrong—Friday’s jobs report was impressive. It turns out the government is losing its ability to inflict damage on the economy.

It’s been a bad 36 hours or so for American economic declinists. Twitter’s initial public offering demonstrated the ability of the American entrepreneurial engine to create an entity worth $20 billion essentially from scratch. Fannie Mae and Freddie Mac, the two mortgage-giant basket cases that were the ne plus ultra of the 2008 financial debacle, requiring an injection of $180 billion putatively irretrievable taxpayer funds, said Thursday they’d return to Treasury $8.6 billion and $30.4 billion, respectively, essentially making the taxpayers whole on the bailout, when they reported (PDF) quarterly profits (PDF). Meanwhile, it turns out that the economy chugged ahead in the summer. The Commerce Department reported Thursday that the economy grew at a 2.8 percent rate in the third quarter. On Friday, the same agency reported that personal income and savings both rose at impressive rates in September.

Job Fair in Florida

A job searcher holds an employment application as he attends the Choice Career Fair on November 7, 2013 in West Palm Beach, Florida. (Joe Raedle/Getty)

But the most impressive report was Friday morning’s jobs report, which gave us one of the first reads on how the economy preformed in October, a month in which the government shut down and a threat of default sandbagged demand and threw sand into the economic gears. And still it turned out the economy performed pretty well. In October, according to the Bureau of Labor Statistics, the U.S. added an impressive 204,000 payroll jobs.

The takeaway from this run of data is that the government is losing its ability to inflict damage on the U.S. economy. Yes, falling government spending and higher taxes are removing cash from the economy. Yes, the stupid sequester is unnecessarily throwing people out of work and tamping down demand. And, yes, the rolling Republican temper tantrums have acted as a malign force. But while these factors function as a powerful drag, they are not sufficiently powerful to overcome the momentum of the private sector, and of the recovering state and local government sectors.

Let’s look at the data. In August and September, private wages and salaries rose $34.8 billion and $18.8 billion, respectively. In the same months, government wages and salaries rose $2.3 billion and $8.8 billion, respectively. “Government wages were reduced by $7.3 billion in August and $7.7 billion in July due to furloughs that affected several federal government agencies,” the jobs report says. Translation: workers would have had much more money to spend if not for the furloughs, but the underlying trend of salary growth is intact—in both the private and public sectors.

Let’s look at this another way. In every quarterly GDP report, the Commerce Department describes how much each sector contributed to—or detracted from—overall growth. (See Page 6 of this release (PDF).) In the third quarter, as has been typical, the federal government, by reducing spending and investment, sapped the growth rate by 13 basis point, or .13 percent. That’s bad, but it represents an improvement from the first half of the year, when government spending cuts took a much larger bite out of growth. At the same time, however, state and local governments, whose finances have been on the mend, once again are contributing to growth. In the third quarter, their spending and investment added 17 basis points, or .17 percent, to the growth rate, which more than compensated for the federal decline.

As for employment, I noted early last month the many ways in which the shutdown could harm the economy and the jobs market. And the jobs report shows it definitely had an impact. In October, the labor force participation rate fell and the unemployment rate bumped up, in part because some 480,000 furloughed government employees were counted as “unemployed.” And yet the private sector largely shrugged off the pain. It turns out that the labor market was a little stronger than previously thought going into October. Each month when BLS reports results, it looks backs and revises the prior two months. On Friday, the August figure was revised from 193,000 to 238,000, while the September number was revised from 148,000 to 163,000. Put another way, BLS now says 60,000 more people were working at payroll jobs at the beginning of October than we previously thought. Add in the 204,000 jobs created in October, and the economy has added 635,000 payroll positions in the past three months. That’s solid.

To be sure, the government continued to exercise a malign influence on employment in October. I’ve long dubbed this expansion the “conservative recovery,” because the private sector has steadily added jobs since early 2010 while the public sector has steadily cut them, which doesn’t usually happen in an expansion. Since May 2010, the government sector has cut 1.12 million positions. But the government job-letting is coming to an end. In October, as might be expected, the federal government reduced its payrolls by 12,000. In the past year, the federal government has cut direct employment by 94,000, or 3.3 percent. But once again, state and local governments are doing better. In October, state and local government added a combined 4,000 jobs. In the past year, they’ve added a combined 68,000 positions. Modestly rising activity at the state and local level is counteracting, and almost entirely offsetting, the austerity-inducing actions of the federal government.


Why Twitter Is #Winning

The social network made a huge splash with its IPO today, rocketing above its initial share price. But will the stock go the way of Facebook and Yahoo!—or Webvan and

Twitter staged its initial public offering on Thursday morning. It raised $1.8 billion by selling 70 million shares at $26 a piece to investors. When trading finally opened at about 11:00 a.m., the first price was $45.10—a nice 73.5 percent pop. The company instantly was valued at about $31 billion.



The deal is a huge, ginormous, all-enveloping story, in large part due to what I’d call a double example of selection bias.

What do I mean? Well, first, journalists are obsessed with the offering in a way that many other people aren’t. Twitter is our medium. Many of us live in it, and we all feel we’ve done our part to build it. And so many usually skeptical scribes are shamelessly rooting for Twitter to succeed. Twitter lists have replaced RSS and email newsletters. Tweets and retweets are the currency of buzz. We boast about our number of followers the way people used to boast about cover stories or right-lead front-page articles. (You see, kids, in the 1990s there were these things called magazines and newspapers.) Pundit Niall Ferguson constructed a Twitter-based index that calculates relative prestige as the ratio of tweets to followers. (Mine is about 2.5:1.) Twitter helps drive traffic to articles, though not as much as you would think. Lots of people, including me, retweet articles and links without actually clicking on them.

It’s also the rare technology/finance story that many writers understand intuitively. Many of the companies that have staged initial public offerings recently are not ones that members of the media elite use or interact act with. As a result, journalists are often caught unawares when they pop. Who among the Davos/Acela/SXSW crowd has eaten at a Noodles & Co., or shopped at a Sprouts Market? We don’t invest in or work in oil and natural gas fields or buy Teslas. And a great deal of the terminology surrounding technology—software, hardware, virtualization, the cloud—don’t mean much to mainstream writers.

So, yes, it’s a big story…for us. But it may not be for everybody else. Take a look at Yahoo!’s home page. The Twitter IPO doesn’t even crack the top 10 trending stories. On the train this morning, which was filled with people who work in finance and other industries, nobody was talking about Twitter, or even looking at it on their tablets or smartphones. You’d be surprised by how many people out there—people who don’t work in marketing, communications, public relations, social media, entertainment, digital media, political campaigns—don’t use Twitter.

That’s the upside for any of global app company like Twitter. Take the number of current users and subtract it from the number of human beings on the planet: that’s the growth opportunity. And it could well come true. Facebook, after all, has about 800 million users. Lots of people were skeptical about its disastrous 2012 IPO, and the company has thrived, both as a business and a stock.

Watch how the world reacted to the Twitter IPO.

Grease Bomb

The Burger Wars Get Bigger

Burger King just introduced a new burger, the Big King. Clearly a direct competitor to McDonald’s Big Mac, the burger is a fat-laden sign that fast-food joints are getting desperate.

The Burger wars are heating up.

On Tuesday, Burger King introduced its latest menu offering: the Big King The alpha male product is bigger than the whopper and is a way of giving meat lovers what they want, while also giving a noogie to McDonald’s.

Burger King

Burger King's new "Big King" sandwich. (Burger King/AP)

It’s the most recent indication that the stakes for the nation’s largest burger chains seem to be rising at a time when the rewards are actually falling. Fast-food isn’t doing particularly well. The vast industry, which relies on low wages, low prices, and a low-quality dining experience just isn’t working the way it used to. During the recession and the recovery, fast-food more than held its own because of its sheer cheapness. People traded down from fast casual to quick service.

But as the economy has improved—with about 7 million new jobs since February 2010 and 51 months of growth —sales growth has faded. Americans are starting to eat out more, but they’re doing so at places other than traditional fast-food joints. They’re going to Chipotle, or flocking to new chains like Noodles & Co. People who crave beef patties have a growing array of quality burger joints to choose from. And there’s a phenomenon of burger chains that define themselves in opposition to the old school fast-food joints by paying higher wages.

The upshot is that U.S. sales for McDonald’s and Burger King, the Coke and Pepsi of fast food, are stagnating, much as sales of Coke and Pepsi are stagnating in the U.S., as Americans abjure sugar and chemical-laden fizzy drinks for water and more salubrious beverages.  At McDonald’s in the third quarter, U.S. same-store sales were up just .7 percent from the year before, and in the second quarter same-store sales were up just 1 percent from 2012. At Burger King, in the third-quarter, same-stores sales in the U.S. and Canada fell .3 percent and the company closed 13 restaurants, “due to continued softness in consumer spending and ongoing competitive headwinds.” In the second quarter, same-stores sales in the U.S. and Canada fell .5 percent.

To combat the malaise, fast food joints are pursuing a high-low strategy, or, as I prefer to dub it, the “Moms and Bros” strategy. They’re trying simultaneously to appeal to higher-end consumers who are concerned about nutrition and quality (Moms) while offering their core users who crave cheap, satisfying gut bombs (Bros) new reasons to come in.

So Taco Bell simultaneously aimed to recapture some of the business that had gone to Chipotle with its Cantina Bell line, created in partnership with celebrity chef Lorena Garcia, which features whole foods, a focus on beans and vegetables, and zesty, real flavors. At the same time, Taco Bell has rolled out the Doritos Locos Tacos and the Fiery Doritos Locos Tacos. An affront to nutritionists and foodies alike, the new innovations deliver the salty, greasy punch that power users of fast-food crave.

The hedge fund SAC Capital has agreed to pay an eye-popping fine to settle insider-trading charges—just the latest scalp for a tough new regime of Wall Street sheriffs.

It’s getting more expensive to be rich. Taxes on the wealthy went up on January 1, 2013. The price of the highest-end condos in New York is rising. Tuition at elite private schools is soaring. And, so, too, is the cost of settling thorny investment-related regulatory and legal matters—which, for many in the corporate and financial world, is a cost of doing business.

 SAC Capital Advisors

A sign is displayed in front of SAC Capital Advisors headquarters in Stamford, Conn., on July 25, 2013. (Seth Wenig/AP)

The latest billionaire to pay a hefty fine to get the government off his back is Steven A. Cohen, proprietor of the much-investigated SAC Capital. SAC in March agreed to pay a $616 million fine to settle Securities and Exchange Commission investigations into its trading practices, trumpeted as the largest-ever such fine. On Monday, SAC agreed to pay a record $1.2 billion to resolve insider-trading charges. Here’s the letter from U.S. Attorney Preet Bharara describing the settlement as “the largest financial penalty in history for insider trading offenses.” (The settlement is actually for $1.8 billion, but SAC Capital is getting a credit for the $616 million it already paid the SEC.)  This one is also “the largest financial penalty in history for insider trading offenses.”

SAC isn’t the only household name to pay an eye-popping fine. On Monday, Reuters reported that Johnson & Johnson will pay $2.2 billion to settle Justice Department charges that it engaged in abusive practices and paid kickbacks to market the drug Risperdal. Meanwhile, JPMorgan Chase has been a veritable fountain of cash for regulators over the last few years, paying billions of dollars in fines to settle an array of charges. Last month, the bank agreed to pay a ginormous $13 billion fine to settle (it hopes, once and for all) charges relating to the packaging of mortgages in the credit boom by JPMorgan Chase, and by two banks it had acquired—Bear, Stearns and Washington Mutual.

What’s behind these huge sums? A few factors.

First, five years after the Lehman Brothers collapse, regulators and prosecutors are eager to feed the public’s appetite for revenge. Millions of Americas lost their homes, tens of millions saw their 401(k)s get socked, but the reckless banks got bailed out, gorged on free money from the Federal Reserve, and then fought needed regulations. Few, if any, of the top dogs at major financial firms were prosecuted, or even held to account.

Second, there are new sheriffs in town. The swashbuckling efforts of Bharara, U.S. Attorney for the Southern District of New York, have landed him on the cover of Time. And in Washington, SEC Chairman Mary Jo White is encouraging her staff lawyers to get tough with Wall Street. A former U.S. Attorney for the Southern District of New York, White spent a decade at white-shoe firm Debevoise & Plimpton, where she did work for many financial firms, before joining the SEC last spring. White is a hard-nosed prosecutor who is eager to declare her independence from Wall Street, and to make a name for herself in the next few years.

In effect, White and Bharara are upending the cozy, hypocritical culture of settlements. Typically, rather than litigate against expensive powerhouse lawyers, regulators and prosecutors would eagerly strike deals. Companies and individuals would pay fines to settle charges, in which they would neither deny nor admit wrongdoing. And then they’d go about their business as if they had done nothing wrong.


Walmart’s Food Stamps Trouble

The retail giant is as dependent on SNAP benefits as the poorest Americans. Why new cuts will be a double whammy for Bentonville—and anyone with a mutual fund.

Walmart is about to teach everybody a lesson in how austerity can affect the consumer economy—and quick.


Spencer Platt/Getty

Food-stamp benefits are being cut starting today by about $5 billion this year, or about 5 percent. The number of people enrolled in the Supplemental Nutrition Assistance Program has exploded in the last several years, in part because the recession made a lot of Americans poorer, and hence eligible for the food stamps, and in part because the Obama administration expanded eligibility for the program in 2010.

Because wages have been stagnant even as the economy has been growing for more than five years, the number of users remains extraordinarily high—at about 47.6 million. (More than half of able-bodied SNAP recipients work in the year in which they receive benefits.) That’s below the peak of  47.8 million in December 2012, but it’s still extraordinarily high. With the expanded efforts expiring, there was no move in Congress to continue the largesse. In fact, Republicans in the House want to cut the program further.

That’s bad news for the families that rely on the program to put food on the table. It’s also bad news for the huge retailers who cater to the large number of people clustered on the lower rungs of America’s income scale, including the nation’s largest retailer, Walmart.

Here’s why. Critics tend to think of food stamps as a form of welfare. They are—for the people who get them, and for the stores at which they are spent. 

In Friday’s Wall Street Journal, Shelly Banjo and Annie Gasparro reported  “Walmart estimates it rakes in about 18 percent of total U.S. outlays on food stamps. That would mean it pulled in $14 billion of the $80 billion the USDA says was appropriated for food stamps in the year ended in September 2012.”

Think about that for a minute. Walmart accounts for about 10 percent of total U.S. sales but gets 18 percent of the nation’s food-stamp-related sales. That means it punches well above its weight compared with other retailers. Put another way, Walmart customers are far more likely than shoppers at other stores to finance their purchases with food stamps.

Chin Up

America is Not the Next Greece

The deficit shrunk dramatically in September—and that’s a piece of good news in otherwise bleak times.

It’s still the Golden Age of Deficit Reduction. Thanks to the government shutdown, the final tally for the government’s operations in September—the last month of the 2013 fiscal year—was delayed for three weeks. But on Wednesday, the Treasury Department finally its Monthly Statement for September (PDF). It confirmed the continuation of a trend. The national debt — the obligations we’ve accumulated over the past 200 years—is continuing to rise, and stands at about $17 trillion. But the annual deficit, the yearly gap between tax collections and spending, is shrinking. And fast.

Wall Street

A pedestrian walks past the New York Stock Exchange. (Jin Lee/AP)

In September, as is usually the case in the months in which the government collects quarterly income and corporate taxes, the federal government ran a surplus: $75 billion. As a result, the total deficit for fiscal 2013 came in at $680 billion, down 38 percent, or a whopping $409 billion from $1.089 trillion in fiscal 2012. That’s an epic amount of deficit reduction in a single year. And it comes on the heels of two successive years of reduced deficits. Since peaking at $1.4 trillion in fiscal 2009, the annual deficit has fallen by more than half.

Of course, this has all taken place in the absence of a grand bargain. In 2013, as in every other year, Democrats and Republicans failed to agree on a big plan to cut entitlements, rationalize the tax code, and get more cash from higher earners. And in 2014, they will likely fail to do so again. So long as Republicans maintain a majority in the House and a blocking minority in the Senate, there can be no grand bargain, despite what many Washington worthies would have us think.

So what explains the decline? Continued growth (however unsatisfying), higher taxes, and lower spending.

In fiscal 2013, revenue rose a healthy 13.2 percent. In September alone, it was up 15 percent from the year before. The increase is due in part to the expiration of the Social Security payroll tax holiday on January 1, 2013, in part to the expiration of the Bush-era tax cuts on some high earners, and in part to new taxes imposed on the income, dividends, and capital gains to fund the Affordable Care Act. But it also helps that the economy continues to grow and add jobs. Compared to a year ago, about two million more people are working, at slightly higher wages. That produces more income, and more taxes. Social insurance and retirement tax receipts rose $104 billion in fiscal 2013, up 18 percent. And even as they go to great lengths to avoid paying taxes, corporations have been ringing up more profits. In fiscal 2013, corporate income tax collections rose by 13 percent, or $32 billion. Growth continues to be the miracle deficit cure.

Democrats who argued that we could raise some taxes without imperiling the expansion or the market rally have been vindicated. Of course, revenues are only one side of the equation. You can’t balance budgets with tax increases alone. But there was good news on the spending front. And, here, Republicans can take some credit.

In fiscal 2013, federal government spending fell by 2.4 percent, or $84 billion. That’s a real, rare decline in government outflows. We can thank the Budget Control Act of 2011, which kept spending levels low, and the sequester, which, starting in March, cut tens of billions from the budgets of many agencies. Policy played a role, too. The winding down of the wars in Iraq and Afghanistan meant the Pentagon had to spend a lot less on its operations. In fiscal 2013, spending by the Defense Department fell $43 billion, or 6.6 percent. That accounted for about half the decline in total government spending.

We Still Got It

America’s Start-Up Silver Lining

People talk about the decline of U.S. influence. But go to Europe, and you’ll notice something quick: No other country has the chutzpah we do when it comes to starting new companies.

Vienna, the seat of the once-mighty Habsburg Empire, is a good place to contemplate the rise and fall of global powers. And just now, the talk of American decline is growing louder—Washington is dysfunctional, the wealth divide grows every day, our infrastructure is falling apart, and we can’t manage to provide basic health insurance to all our citizens. But, as was pounded home to me as I spent a day this week in the sprawling Hofburg Palace in the heart of Vienna, the U.S. still has at least one thing going for it: start-ups.



I came to Vienna to moderate an event at the 2013 Pioneers Conference, an annual start-up/tech conference in Vienna. It is the sort of event that happens pretty much every day in New York, San Francisco, and Los Angeles, but is a rare occasion in Euro-land.

I interviewed Phil Libin, chief executive officer of Silicon Valley-based Evernote, the cloud storage company that has risen from zero users to about 75 million in several years (many of whom are paying customers), with offices in several countries, multiple rounds of venture capital funding, and a reputed $1 billion valuation. Of course, Evernote is one in a dozen-odd stories that could have been featured in a marquee event at a global start-up conference: Facebook, Instagram, LinkedIn, Tumblr, Pinterest, Snapchat, Evernote, Tesla. Other key presenters included executives from Google, Microsoft, and start-ups like Pebble.

To be sure, there were plenty of European companies represented on the program—the U.K.-based music company Shazam, for example, and lots of small German and French companies. But there was a very conscious, earnest effort here to mimic the American start-up culture. The Pioneers Conference was boisterous. Several espresso-mobiles (a brilliant innovation) were set up to keep the crowd caffeinated. A hip-hop dance troupe from Graz performed at lunch time. Young people in casual dress swapped business cards and chatted boisterously. The events were conducted almost entirely in English. In short, this wasn’t your great, great grandfather’s Congress of Vienna.

Here’s the irony. When it comes to style, art, the high-life, and summer homes, the American elite looks to Europe. But when it comes to models for creating wealth, it is clear that ambitious Europeans look to America.

It shouldn’t be this way. After all, Europe has everything that is needed for a start-up culture: tech-y looking dudes with facial hair, bike-sharing programs, a highly educated workforce, cool cities, and money. But it’s missing the spark that turns intelligence into fortunes and products. One way to describe the difference is that continental Europe lacks (or suppresses) the mix of hubris, recklessness, competence, greed, and vision that enables start-ups to boom, again and again, in Europe. A more wonky way of putting it is that Europe doesn’t have the ecosystem of funders, engineers, serial entrepreneurs, professional service providers, and financial institutions that have turned America’s technology industry into a wealth-creation machine.

It’s true that some important physical infrastructure components are lacking. Pension funds and private endowments, which provide cash for venture capital, don’t really exist in Western Europe. In Europe, wealthy individuals tend to invest conservatively, rather than plow their fortunes, Bill Gates-like, into building new ones. When Ernst & Young ranked the 20 largest countries by the relative ease with which entrepreneurs could gain access to capital, the U.S. was at the top, and Germany was 14th.

About the Author

Author headshot

Daniel Gross

Daniel Gross is a columnist and global business editor at The Daily Beast.

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