A blog about business and economics.

April 16 2014 3:11 PM

The Upside of Double Down

KFC has found its McRib.

The chicken chain, which has become a bit of an afterthought in the great race to innovate the next bizarro fast food delight (here’s looking at you, waffle taco), is planning to bring back its Double Down sandwich for a limited time starting April 21, according to USA Today. Sandwich is of course a loose term here. The Double Down, in case you’ve forgotten, consists of two pieces of fried or grilled poultry with a layer of bacon, cheese, and special sauce between them. There’s no bread, but it’s all wrapped up so it can be eaten by hand. It’s basically half-assed chicken cordon bleu for diners who have trouble with forks. 

I compare the Double Down to the McRib because they’re now both officially fast food events—culinary oddities that cause a commotion by periodically sweeping, comet-like, through menus. That said, they may actually serve slightly different business functions. Writing for the Awl in 2011, Willy Staley made a great speculative case that the McRib was essentially a commodities play. McDonald’s consistently brought it to market during the fall, when the price of pork was at a low. As pork got more expensive, it would disappear again from whence it came. (Which is to say, cold storage.) Meanwhile, at least according to a quick search of Google Trends, the buzz it generates doesn’t seem to affect the overall frequency of searches for McDonald’s.

Bringing back the Double Down, on the other hand, strikes me as a pure PR play. It’s debut in 2010 led to a brief media sensation—Sam Sifton, the New York Times’ dining critic at the time, pronounced it “a disgusting meal, a must-to-avoid”—and its initial sales convinced KFC parent company Yum! Brands to keep it on menus indefinitely. Eventually, it slowly drifted off menus. But returning to Google Trends, it seems that when commotion over the Double Down peaked, the overall attention paid to KFC popped as well. 

And right now, KFC could probably use all the attention it can get. Chick-Fil-A recently usurped its throne as the king of American chicken chains.* And while Yum’s annual report doesn’t break out Taco Bell, Pizza Hut, and KFC, Yum’s U.S. same-store sales across all brands were flat in 2013.

So heck, why not bring back a greasy fascination? Look, I’m already writing about it. And you're reading! If it’s a publicity stunt, it’s already working at least a little.

*Correction, April 16, 2014: This post originally misspelled the name of fast food chain Chick-Fil-A.

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April 16 2014 11:42 AM

Another Father of Bitcoin?

More than a month has passed since Newsweek opened the conspiracy floodgates with a cover story claiming that bitcoin’s founder was an unassuming, Toyota Corolla–driving, model-train-loving man in California named Dorian Satoshi Nakamoto. One of the pieces of circumstantial evidence was that the punctuation and “other format quirks” in the original bitcoin proposal were “consistent with how Dorian S. Nakamoto writes.” After the report broke, Nakamoto issued a statement to “unconditionally deny” Newsweek’s story and his involvement in bitcoin.

Now, researchers from a British university have run their own comprehensive forensic linguistics analysis and ID’d a new candidate as the digital currency’s “probable creator”: blogger and former George Washington University law professor Nick Szabo.

The “Project Bitcoin” study examined linguistic similarities between the bitcoin paper and hundreds of documents written by 11 other individuals rumored to be its author, including Nakamoto. Jack Grieve, a lecturer in forensic linguistics at Aston University and the leader of the study, said in a statement that the “number of linguistic similarities between Szabo’s writing and the Bitcoin paper is uncanny”:

Our study adds to the weight of evidence pointing towards Nick Szabo. The case looks pretty clear-cut. Szabo is an expert in law, finance, cryptography and computer science. He created “bit gold”, a precursor to Bitcoin, and was looking for collaborators in 2008. Did Nick Szabo create Bitcoin? We’re not sure, but we think he probably wrote the paper so it’s certainly worth a closer look.

The hedging in that statement makes pretty clear that the researchers have learned the lesson of the Newsweek debacle, carefully avoiding claims of a smoking gun. A spokesman for Aston University said the report has not been peer reviewed and is not set to be in the near future. Szabo did not respond immediately to a request for comment.

The Aston University release goes on to detail the correlations between Szabo’s writing and the text of the bitcoin paper:

The results showed that of the eleven Szabo is by far the closest match, with a large number of distinctive linguistic traits appearing in both the Bitcoin paper and Szabo’s blogs and other writings. This includes the use of: the phrases “chain of…”, “trusted third parties”, “for our purposes”, “need for…”, “still”, “of course”, “as long as”, “such as” and “only” numerous times, contractions, commas before ‘and’ and ‘but’, hyphenation, ‘-ly’ adverbs, the pronouns ‘we’ and ‘our’ in papers by a single author; fragmented sentences following colons and reflexive (-self) pronouns.

And here’s one last point: The study notes that the bitcoin paper was drafted using LaTeX, an open-source document preparation system. Szabo, they add with a hint of conclusiveness, uses LaTeX for all his publications, too.

April 15 2014 6:03 PM

Meat and Produce Prices Lead Surge in Food Costs

Keep a close eye on your grocery bill, because food prices are climbing. Tuesday’s release of the March Consumer Price Index showed that food costs rose 0.4 percent for the second consecutive month. Over the past year, grocery costs have increased 1.4 percent.

Breaking this down a little more, meats, poultry, fish, and eggs posted the biggest price jump in March at 1.2 percent, while dairy prices added 1 percent. Fresh fruits shot up 3.1 percent and fresh vegetables declined 1.6 percent, with the overall fruits and vegetables index gaining 0.9 percent. You can see the recent leap grocery food prices (“food at home”) have made compared with the overall CPI in this chart:

screen_shot_20140415_at_5.27.39_pm

Chart from IHS Global Insight.

Chris Christopher, an economist at IHS Global Insight, said the upward trend in food prices is “somewhat worrisome” because it means consumers will be spending proportionately more of their income on trips to the grocery. That leaves less pocket money for other discretionary spending, which isn’t great for the economy.

As most avid carnivores are probably aware, meat prices have risen faster than almost every other food group for some time now. A deadly pig virus has limited the pork supply, and the domestic cattle herd is the smallest since 1951, according to Bloomberg. Feed prices for farmers also threaten to move higher, in part because of the conflict in Ukraine, a major exporter of corn and wheat.

On the produce side of things, prolonged drought and a long, cold winter have blighted fruits and vegetables. Even cereals and bakery products have gotten a tad more expensive, with prices inching up 0.2 percent in March.

While hikes in food costs are never ideal, Christopher worries that this one is coming at a particularly inopportune moment, especially for low-income families. The U.S. food stamp program, SNAP, suffered huge across-the-board cuts last November, and another round of reductions is underway in some states.

In better news for grocery-goers, the food-pricing surge may taper off soon. IHS Global Insight expects costs to increase through the second quarter of 2014, but then more or less plateau for the rest of the year.

April 15 2014 3:19 PM

Small Private Colleges Are in Deep Trouble (as They Should Be)

These are agonizing times for small, private colleges. Enrollment is falling. Debts are rising. Tuition is high as it can go. And since the financial crisis, schools have been shuttering more often than normal.

Now, Moody’s Investor Service, which analyzes the credit worthiness of more than 500 public and private nonprofit colleges, is delivering this grim prognosis for the future.

“What we’re concerned about is the death spiral—this continuing downward momentum for some institutions,” analyst Susan Fitzgerald tells Bloomberg. “We will see more closures than in the past.”

And that, I will add, might be a very good thing.

Small private colleges aren’t necessarily nefarious institutions, but they’re not exactly the heroes of higher education either. For the moment, forget about elite schools Amherst or Wesleyan (they’re doing fine, anyway). Instead, consider places like Ashland University in Ohio, which Moody's has called a default risk. These institutions often cater to iffy students and produce mediocre graduation rates. But because they don’t have much in the way of endowments, they tend to charge high tuition, and leave undergraduates saddled with debts that simply might not be worthwhile. When all the aid is factored in, attending Ashland still costs $21,000 a year, according to the Department of Education. Meanwhile, only 59 percent graduate after six years. And so, according to Payscale, it offers one of the lowest returns on investment of any college in the country.

That might have been sustainable in a pre-Great Recession world. But as Moody’s has found, the business model of asking middling students to pay exorbitant prices for an education they might not finish is beginning to creak and fail. In part, that’s because many schools have larded themselves with debt in order to finance dubiously worthwhile expansions. But now that their enrollment rolls and tuition revenues are dwindling, their finances are fraying. In 2013, Moody’s downgraded its credit ratings on 36 schools and raised it on only nine. A study by Vanderbilt found that the rate of school closures doubled from about five annually before the crash to about 10 annually after it.

bloomberg_college_debt_downgrades

Bloomberg

The Vanderbilt study is especially instructive because it shows the particular types of schools that have run into the worst financial strife. Again, they tend to be very small, with 1,000 students or under, and are often religiously affiliated. The majority of private nonprofit colleges, meanwhile, don’t really seem to be in too deep trouble. Overall, the sector’s enrollment has actually increased over the last few years. And while Bain has suggested that as much of a third of all colleges are on a financially “unsustainable” path, its metrics were a bit questionable (among other schools, it seemed to suggest Harvard and Cornell were in trouble. I assure you, they’re not).

What we’re witnessing right now, then, is a small brush fire, clearing out some of the unhealthier institutions in higher ed. It will be wrenching for the schools and the people who work for them. But hopefully, it will also inspire some better ways of doing business. A few colleges, like Ashland, have already responded by slashing their sticker prices. In practice, that often just means they’re handing out smaller aid packages, while charging about the same amount as always, but it’s a step in the right direction. If the demise of a few schools can make the rest of higher ed a bit healthier, then let the death spiral whirl.

April 15 2014 3:00 PM

Luxury Apartments Push Out More Affordable Housing

New York isn't the only place where the rent is too damn high. Median rent prices have now crossed a basic affordability threshold for middle-income families in 90 cities across the U.S., the New York Times reports.

Rent and utilities are traditionally considered affordable when they consume 30 percent or less of a household's income. But in 90 cities nationwide, median rent alone—so not even including utilities—exceeds 30 percent of the median gross income. And according to the Times that could keep getting worse:

Nationally, half of all renters are now spending more than 30 percent of their income on housing, according to a comprehensive Harvard study, up from 38 percent of renters in 2000. In December, Housing Secretary Shaun Donovan declared “the worst rental affordability crisis that this country has ever known.”
Apartment vacancy rates have dropped so low that forecasters at Capital Economics, a research firm, said rents could rise, on average, as much as 4 percent this year, compared with 2.8 percent last year. But rents are rising faster than that in many cities even as overall inflation is running at little more than 1 percent annually.

The least affordable city is Los Angeles, where median rent now makes up 47 percent of median income. Next is Miami, where that figure is 43.2 percent, and then College Station, Texas. San Francisco ranks sixth and New York comes in 10th. One in four renter households in the U.S. earns below 30 percent of their area's median income, according to a recent report from the National Low Income Housing Coalition.

In addition to tormenting renters, these high prices could be putting a damper on the economy. More money heading to rent and utilities means less left over for people to spend on goods and services. The sharp uptick in rents has also happened alongside a decline in funding for affordable housing.

The problem, as the Times puts it, is that as the demand for apartments has climbed, the market has catered mainly to high earners. So while we have a surplus of luxury condos lining the beaches of Miami, there's not too much left for your typical renter.

April 15 2014 12:10 PM

The Rich Are Paying More Taxes: The Horror! The Horror!

This year, America’s richest households are expected to pay their highest federal tax rates since the Clinton administration. For that, we can thank the partial expiration of the Bush tax cuts, and the new taxes that were tucked into Obamacare.

One could call this a minor victory for the notion of progressive government. Alternatively, one could take it as an opportunity to fret over the plight of the country’s top earners, which is the route the Wall Street Journal seems to have taken in an extraordinarily misleading article titled “Top Earners Feel the Bite of Tax Increases.” Wealthy taxpayers are feeling “sticker shock,” it declares. “That, in turn, is rekindling a debate over a question likely to smolder for a long time: How much more could—or should—taxes go up on the well-to-do?”

There is nothing wrong with having that debate—most liberals, I think, welcome it. There is something very wrong, however, with how the Journal presents America’s shifting tax burden, which it traces in the graph below. The chart is supposed to tell us that the entire top 20 percent of households—the group shown in red, which includes “couples with two children making more than $150,000,” as writer John McKinnon puts it—is now responsible for paying a vastly larger share of all federal taxes than it was at the start of the Reagan era. It’s not just the ultra-rich who are doing the heavy lifting. It’s the upper-middle class, too.

wsj_shifting_burdens

Wall Street Journal

That is only true if you lump together the top 1 percent with the next 19 percent of taxpayers. Break them apart (as I’ve done below, using the same data sets as the Journal), and it’s clear that the only cohort responsible for a notably larger share of the country’s tax bill is the top 1 percent. (The graph includes a break where it shifts from Congressional Budget Office data, which ends in 2010, to figures from the nonpartisan Tax Policy Center).

taxes_top_20_percent

If you only look at federal income tax liability—so no payroll taxes or corporate taxes—then the entire top 10 percent has seen its share of the burden grow quite a bit. But that brings us to the bigger point: Income inequality is rising. And as long as we have progressive taxation, that means the rich will naturally pay a larger share of the tax tab. The Journal, to its credit, acknowledges this. What it fails to point out is that, according to both the Congressional Budget Office and Tax Policy Center, only one group is paying a higher average tax rate than it did during the Bush era. Again, that’s the top 1 percent.

If you’re going to mourn for the rich, don't pretend as if you're mourning for anyone else. 

April 15 2014 9:46 AM

Encrypted Pages May Get Better Search Results From Google

Google might have a new and genius plan for improving Web security. According to a report in the Wall Street Journal, the search-engine giant is toying with giving a boost to encrypted pages in its search results to encourage websites to be more secure and make it harder to spy on users.

Google is proving just how seriously it takes security, especially after revelations about National Security Agency snooping rankled users. Last month, Google announced that it would use HTTPS encrypted connections whenever users logged onto Gmail and keep all emails encrypted as they moved between Google's servers and data centers.

Reassuring users about security habits has been something of a fad lately, with Google outlining its protocol in responding to government data request through an animated video and Microsoft posting an explainer on its own practices in a post unfortunately titled, "We're listening." Cloud storage services also jumped on the bandwagon with a proposal to hand Box's encryption keys to its customers.

If Google did incorporate encryption into its search metrics, it would be a powerful incentive for websites to up their security standards and a boon for users. But, as the Journal points out, that also assumes that encryption consistently works. And as the now-infamous "Heartbleed" bug in OpenSSL abruptly reminded Internet users last week, that's not always the case.

April 14 2014 4:59 PM

Don’t Stress. It’s Not the End of the World for Biotech Stocks.

If you’ve been following the markets, then you’ll know that the last few weeks have been ugly ones for biotech stocks. The Nasdaq Biotechnology Index has shed 17.8 percent since March 18, dragged down by losses in big names like Gilead Sciences, Alexion Pharmaceuticals, and Biogen Idec. On April 4, investors pulled $372 million from the biggest biotech-focused exchange traded fund—its worst ever redemptions.

In spite of all that, this isn’t necessarily the bio-pharmapocalypse.

“The biotech sector got a little bit ahead of itself and we’re now in a period of extended—and I mean weeks, months, not eternal—profit-taking or consolidation,” says Ted Tenthoff, managing director and senior biotechnology research analyst at Piper Jaffray.

To put the current sell-off in perspective, biotech indexes soared more than 200 percent over the past five years. Their gains easily doubled those seen by the broader market in the same period, and lately investors had started questioning how long that momentum could last. “We’ve had, frankly, an astounding move higher,” Tenthoff says.

With all that upward movement, the biotech sector was long overdue for a pullback. And that’s what we’re seeing now. Investors are selling and profit-taking to consolidate their positions, which in turn drives down the market. But once that’s finished, the sector might have plenty more room to run.

Tenthoff argues that we’re in a “golden age” of biotech for three main reasons:

  1. Big-cap biotech stocks like Gilead, Alexion, and Biogen are among the fastest growing companies period. If you’re a big-cap growth fund manager, you can’t ignore biotech right now.
  2. The sector is seeing an “unprecedented” level of productivity in terms of new drug approvals and late-stage projects.
  3. Big pharmaceutical and biotech companies have “mountains of cash” sitting on their balance sheets.

“I still think we’re in the middle innings of a multi-year biotech bull market,” he says. “This is a painful but necessary pause as we consolidate our recent gains before we move higher.”

It’s interesting to note that the recent sell-off has not been due entirely to losses in biotech, but more broadly part of a risk-off investing shift from “growth” to “value.” Companies with growth stocks are expected to show above-average growth in revenues, earnings, or cash flow, while value stocks are ones investors think the market is overlooking.

In a Monday report, Morgan Stanley’s U.S. equity researchers observed that, historically, value stocks tend to keep doing well following strong value rallies (like the one we’ve had lately) and growth stocks won’t necessarily bounce right back. “The expectation that many investors we talked to last week have—of a growth rebound following a run-up in value stocks—is not borne out by history,” they write.

In the aftermath of “extreme value rallies,” Morgan Stanley finds that energy and staples outperform, while technology and telecom underperform. Health care, which includes biotech, falls somewhere on the lower-middle end of the spectrum.

screen_shot_20140414_at_4.20.31_pm

Morgan Stanley has trimmed its exposure to technology stocks by 2 percent, but continues to place a huge overweight on health care and pharmaceuticals like Bristol-Myers Squibb. That should probably be somewhat reassuring—they’re not jumping out of biotech yet, either.

April 14 2014 3:41 PM

The Sleazy PR Campaign to Prevent the IRS From Making Your Taxes Simpler

Theoretically, it should be far easier for Americans with simple finances to file their tax returns. Instead of making tax filers putz around W-2s and tax prep software, the IRS could electronically prepopulate their paperwork with the information it already receives from banks and employers, and tell filers how much they owe. If the final figure looked about right, you’d have the option to file. As Matt Yglesias wrote here last year, the whole process could be a five-minute snap.

Theoretically. But for years now, Intuit, the maker of TurboTax, has fought tooth and nail to prevent automatic tax filing from becoming a reality, lobbying against bipartisan legislation to introduce it with the help of a powerful tech industry trade group and conservative anti-taxers like Grover Norquist. Intuit and its competitors in online tax prep don’t want the government cutting its market share. The tax-crusaders want to ensure that paying the government remains as much of a painful, resentment-generating slog as ever. And thus a potent alliance has been born.

Today, ProPublica, which published a great report on this subject last tax season, explains that the Computer & Communications Industry Association, which counts Intuit as a member, has been sponsoring an astroturf campaign to convince Congress that easyfiling would end up hurting the poor. A public relations firm working on the trade group’s behalf has been luring unsuspecting spokespeople to join its cause—reaching out to them without mentioning any lobbying ties.

Here’s how ProPublica sums up one example:

One letter-writer, Richard Smith, the president of the NAACP Delaware State Conference, was approached by a longtime acquaintance with information about how return-free filing would take dollars out of poor people's pockets. Smith felt so strongly he fired off a letter to Sen. Tom Carper, D-Del., and encouraged other local NAACP leaders to do the same.
Smith said the acquaintance, Anne Farley, told him that if return-free filing was adopted, the government would stop offering free tax filing help to low-income communities. (In fact, none of the bills on return-free filing propose that.)
When ProPublica told Smith that Farley is also a registered lobbyist, he said he was now questioning the information she gave him.
"We may have to retract so far based on my research," Smith said. "I didn't question her."

There’s a reasonable argument against easy tax filing and an unreasonable argument. As you might be able to guess from the underhanded tactics, this seems to be an example of the latter.

The unreasonable argument is that the IRS can’t be trusted to fairly fill out most Americans’ tax forms while also enforcing compliance. Moreover, they say, the poor would be most likely to be victimized, since they have the fewest resources to challenge a bum return. This is nonsense for a few reasons. First, nobody is suggesting that taxpayers be forced to accept the IRS’s calculations. If someone looked at their refund and thought it was bizarrely small, they could go ahead and file their taxes as normal. Nor, as ProPublica notes, is anybody suggesting that we eliminate free tax prep services for low-income Americans. And most importantly, the IRS already receives all of this information. It would simply be transcribing the data it otherwise might use to audit you. As some advocates have written, it’s “scrivener’s work.”

The reasonable argument against e-filing is that such a system wouldn’t be ideal for Americans with complicated taxes. Countries that already have automatic filing, such as Denmark, Sweden, and Spain, have much simpler tax codes, they note. Meanwhile, small businesses might also have to spend extra money getting payroll information to the IRS on a tighter schedule so the government could pre-populate everybody’s paperwork. But there are probably enough Americans who simply input some W-2s and take a standard deduction without adding on any complicated breaks to make the system worth it. Some studies have suggested the system could work for somewhere around 40 percent of taxpayers, saving them time and money.

Of course, e-filing wouldn’t instantly turn everyone’s taxes into a snap. There would still be state returns to deal with, and if we’ve learned anything from health care reform, it sometimes takes the government a while to get a website up and working.

But, in the end, it doesn’t speak well for an argument if you have to trick a mouthpiece into making it for you.

April 14 2014 1:18 PM

Big Twitter Shareholders Won’t Sell Stock

In what could be a vote of confidence for the market, Twitter’s biggest shareholders aren’t planning to jump ship at their earliest chance.

Twitter co-founders Jack Dorsey and Evan Williams, along with chief executive Richard Costolo, all intend to hang onto their shares of Twitter stock when the customary post-IPO lock-up period expires on May 5, the company said in a securities filing on Monday. Together, the three own nearly 15 percent of the company.

The New York Times reports that Twitter’s largest shareholder, money management firm Rizvi Traverse Management, also intends to hold onto its stock come May. Benchmark Capital plans to maintain its 5.4 percent stake, and JP Morgan Asset Management, Twitter’s third largest shareholder, will keep its 8.4 percent holdings.

Shares of Twitter are currently trading around $40, roughly 54 percent more than their IPO price of $26. That said, the stock remains sharply off the all-time high of $74.73 it hit in late December. In the last month alone, Twitter’s stock has tumbled 20 percent.

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