Hostess Shrugged

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The Daily Reckoning | Saturday, November 17, 2012 Hostess Shrugged: The end of an American icon, Readers weigh-in on the future of American manufacturing, Plus, all this week’s reckonings archived for your gluttonous enjoyment... --------------------------------------------------------------- Don’t Smoke It... Swallow it! Major athletes, doctors and scientists are swearing by its miraculous healing power... Mounting clinical evidence suggests it could help keep debilitating pain and disease away... And right now, some fearless investors are seeking their fortune in it... What is it? And how could it add 20 years to your life? Click here now to find out. Joel Bowman, checking in today from Buenos Aires... Joel Bowman When a company peddling sugar-infused cream rolls to the most obese population on the planet goes broke, you know market conditions have broken down. Yesterday, Hostess Brands Inc., the company responsible for such delightful dietary abominations as Twinkies, Ding Dongs, Devil Dogs, Ring Dings, Suzy Q’s and, of course, Drake’s Coffee Cakes, filed a motion for bankruptcy. Sorry Newman...“No Cake For You!” Too bad. It seems Colorado and Washington states just couldn’t legalize marijuana fast enough to bolster demand lines for the financially-addled junk food outfit. The Hostess announcement might have caused a wave of relief for clogged arteries and strained, double-wide diner stools around the country, but it also means 18,000 now-former workers added to the nation’s growing un- and under-employed lists. The move will also involve the closure of 33 bakeries, 565 distribution centers, approximately 5,500 delivery routes and 570 bakery outlet stores throughout the United States. Ouchie! In a cruel, though not-unusual, twist of fate, many of those 18,000 workers were involved in the very strikes that ultimately crippled the company. Double ouchie! The Ho Ho’s purveyors closed up shop after a weeklong standoff with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM). Yes, such a thing actually exists. A statement released by the company read: The Board of Directors authorized the wind down of Hostess Brands to preserve and maximize the value of the estate after one of the Company's largest unions, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM), initiated a nationwide strike that crippled the Company's ability to produce and deliver products at multiple facilities. “We simply do not have the financial resources to survive an ongoing national strike,” warned Gregory F. Rayburn, chief executive officer, on Wednesday. “Therefore, if sufficient employees do not return to work by 5 p.m., EST, on Thursday to restore normal operations, we will be forced to immediately move to liquidate the entire company, which will result in the loss of nearly 18,000 jobs.” Not good enough, retorted the unionists. “Hostess Brands is making a mockery of the labor relations system that has been in place for nearly 100 years,” union president, Frank Hurt, said in a statement earlier this week. “Our members are not just striking for themselves, but for all unionized workers across North America who are covered by collective bargaining agreements.” When workers didn’t return to man the mixers, Hostess shuttered shop...causing a flurry of #HostessShrugged hashtags to light up the Twittersphere. BCTGM, which represents more than 80,000 industry workers, argued that the company’s policies would send its members back to workplace standards of the 1950s...back when people earned a 1950s wage and benefits package for performing a 1950s job...like quality control management on the Zingers and Sno Balls production line. So just how hard done by were the browbeaten proletariats manning the Twinkie timers? The mean hourly wage for the designation of “bakeries and tortilla manufacturers” was $12.57 in 2011, according to the Bureau of Labor Statistics. Workers manning the Hostess picket lines this week were earning roughly 35% more than the national average. “The union’s demands had plagued Hostess for years, forcing — through the legalized monopolization of labor supply — wages that the market wouldn’t bear,” writes Bob Confer in a column for The New American. “The striking line workers were paid healthy salaries, $16 to $18 per hour. In a low-profit, low-selling-price business such as baked goods, those wages aren’t sustainable, especially considering that baking and distribution involve a lot of manpower.” “Hostess was looking for wage concessions of only eight percent,” continued Confer. “Even after the cuts, Hostess still would have been paying their workers handsomely, 24 percent more than the industry norm. Mind you, this one-year cut would have been followed by guaranteed wage increases of three percent in each of the three years that followed, capped off by one percent in the fourth year. So, the pain would have been only temporary and cancelled out in just three years.” Apparently, BCTGM had confused the relationship between employer and employee. It is a privilege to work for a company, not a right. Pension plans, medical coverage and other bells and whistles are not something automatically owing to each and every person capable of holding up a sign demanding such things. To the extent that these modern day luxuries are offered at all, they are offered at the behest of the company’s owners and/or management. There will, no doubt, be complaints about the “greedy capitalists” who took advantage of the poor, helpless worker class. And, to be sure, insiders did award themselves some rather hefty raises when it became obvious the company had no viable economic future. (The CEO was gifted a somewhat tasteless 300% raise after the company filed its first bankruptcy suit earlier this year.) But if the capitalists are so greedy, so profiteering, why stay and toil for them? If workers are unhappy, if they feel themselves poorly treated, they are free to leave and seek other employment at any time. They are also free to “down spatulas” and to collectively bargain...just as they are free to strike themselves out of a job. The truth is that, without “greedy capitalists,” unions of the world wouldn’t ever have a Hostess to kill. So, our congratulations go to the aptly-named, Mr. Hurt. Now you and your comrades-in-arms can feast on 100% of the Cup Cakes that Hostess will never make. The Daily Reckoning Presents The Student Loan Time Bomb Dan Amoss A hidden time bomb ticks away inside the government budget: Within a handful of years, US taxpayers will be on the hook for over $100 billion in student loan defaults. “More than one in 10 borrowers defaulted on their federal student loans, intensifying concern about a generation hobbled by $1 trillion in debt and the role of colleges in jacking up costs,” Just last Friday, the US Department of Education released new data on student loan defaults. In short: The hissing sounds coming from the student loan bubble are getting louder. I doubt it’s a coincidence the Department of Education chose last Friday (when attentions had shifted to the weekend) to release new three-year cohort default rate data for federal student loans. The three-year cohort default rate is defined as follows: the percentage of borrowers who enter repayment on certain loans during a particular federal fiscal year (Oct. 1-Sept. 30) and default or meet other specified conditions prior to the end of the second following fiscal year. The default rate is horrendous, and it’s only going to get worse. These are uncollateralized loans, so losses given default will be orders of magnitude higher than losses on subprime mortgages; in subprime, losses were mitigated by the value of housing collateral. “More than one in 10 borrowers defaulted on their federal student loans, intensifying concern about a generation hobbled by $1 trillion in debt and the role of colleges in jacking up costs,” a Bloomberg story notes. The story continues: “The default rate, for the first three years that students are required to make payments, was 13.4%, with for-profit colleges reporting the worst results, the US Education Department said today. “The Education Department has revamped the way it reports student loan defaults, which the government said had reached the highest level in 14 years. Previously, the agency reported the rate only for the first two years payments are required. Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates appear low.” This 13.4% figure will surely go higher. The post-2008 surge in student loan volume won’t season and start defaulting until after the Class of 2013 graduates. Then we will see the real fireworks. This crisis will finally capture the public’s attention. What are the investing implications of these defaults-in-waiting? An obvious conclusion is to avoid owning the for-profit education stocks, no matter how cheap they may appear. Education stocks including Apollo Group (APOL) and ITT Educational Services (ESI) probably face a surge in legal and regulatory risk once the enormous scale of student loan defaults comes to public attention next year. In fact, even after they’ve suffered large declines, the for-profit education stocks are starting to look like attractive short sales. Regards, Dan Amoss, for The Daily Reckoning Grab Your Share Of Big Oil’s Paycheck... Pictured below is a map many Americans have never seen. That’s a shame, because today it holds one of the best profit opportunities the market has to offer. Big oil knows this map well — heck, it’s one of the reasons they always seem to turn a profit! Today, thanks to a little-known loophole, you could start grabbing your share. Click the map to find out how... ALSO THIS WEEK in The Daily Reckoning... The Revival of American Manufacturing: An Update By Chris Mayer You know those little throwaway plastic red cups that you see at parties? You can buy a case of 288 of these Solo red plastic cups for about $36. I’ll do the math for you: That’s about 12.5 cents per cup. It’s a cheap, low-end item. Made in China, right? Nope. Made in the USA. Lemmings in Wonderland By Joel Bowman “If I had a world of my own,” declared Alice, Lewis Carroll’s red pill-popping protagonist while wandering around her author’s Wonderland, “everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?” A Better Way Than “Buy and Hold” By Jonas Elmerraji In the late 1950s, John Bogle changed the investing world. Bogle became the chief advocate for index investing, a strategy based around the idea that investors should stop trying to pick individual stocks, quit buying mutual funds, and just buy the big stock indexes. Gold’s Buyable Bounce By Greg Guenthner Your reasons for owning gold don’t matter to me right now. It could be that you want to protect yourself from the declining dollar. Or perhaps you believe foreign demand will increase prices. Readers of these pages will have plenty of ammo for a bullish gold argument at hand. The Daily Reckoning Video of the Week Bart Chilton on Silver Manipulation In this clip from RT’s Capital Account, Lauren Lyster talks with CFTC Commissioner Bart Chilton about manipulation in the price of silver. Only 62 People Know Exactly Why These 4 Companies Could Change the World Now you’re No. 63 “on the inside” — and you’re on the verge of raking in lasting wealth. This could go down in history as the story of our era. Click here for all the details. The Weekly Endnote... And now, it’s over to a few readers for some thoughts, on the future of US manufacturing... First up, reckoner Ron J. observes... I’m a buyer for a large farm store operation, and I noticed about a year ago that inexpensive items that used to be made in China, naturally, were now being made in the US. Mostly it was simple items that did not require a lot of handiwork. Molded plastic birdfeeders, or two-piece tools. The trend has been continuing. At the time, I asked the birdfeeder company why he was moving some of his production back here. The answer was that the one thing American workers are very good at is machine assisted production. We know how create and run machines that crank out quantity efficiently. The hassles of working with agents and long lead times, dealing with ocean shipping, and getting stuff through Customs, then transporting it all to a central warehouse to be trans-shipped to the retailer makes no sense when the production can be done locally, just in time, with simple truck transport directly to the customer. Sure, the labor is more expensive...but labor is only a part of the total expense package. I fully expect to be buying more ‘Made in USA’ items in the future...if our current administration doesn’t put a stranglehold on business development with additional taxes and regulations. So what might nourish a continuation of that trend? Reckoner Jim R. suggests... It seems to me that offshore jobs would come rushing back into this country with the passage of the Fair Tax. (Go to fairtax.org) The legislation has been introduced in the congress, but gets zero attention from the media (HR@25 and S#13). The attendant elimination of the IRS and a lot of other taxes would cause a boom in this country. Finally, Reckoner Steve D. observes that... Yup, many manufacturers may be returning to the US but I don’t see much mention of the unions willing to bust that effort. Hostess Twinkies come to mind here. A core staple of sugar freaks everywhere will no longer get Twinkies and if they do, they probably will be made elsewhere. Hostess should have moved to a right to work state a long time ago. DR: Interesting subject. Can the US manufacturing sector get back on its feet? Or has the world changed in so fundamental a way as to make that impossible? Moreover, will there even be a nation-based manufacturing model in the future...or will that role fall to international companies competing across borders for market share? Feel free to email any thoughts you have on the matter to the address below and... ..enjoy your weekend. 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