Frank Beckman talks with Tom Lauria, bankruptcy attorney at White & Case, who represents a group of lenders that object to the Chrysler sale.
Folks, this is rather sobering news for both contract law and for debt holders in any industry that may fall into a perilous condition. If the Federal government can arbitrarily step in and reallocate the capital structure of a company, then the current set up of any company is meaningless.
Disclosure (“none” means no position):
Talking about my recent entry into USO options and the reason I’m, avoiding DXO (for now)
More Video on Wall St. Media
Disclosure (“none” means no position):Long USO (through options), none
John Bogle, founder and retired CEO of The Vanguard Group, assess governance practices at public corporations and how they affect the underlying value of a firm’s equity.
He also discusses if the “free market” has corroded “moral character” and how the recent structural changes in the character of the financial and capital institutions have contributed to the current financial crisis.
Disclosure (“none” means no position):
Have you ever had a relative/pets in the hospital with a serious illness? Initially it looks like the situation is dire and then for whatever reason the rapid descent they were in seems to relent? Has a doctor in that situation ever told you “they are getting better”? Me either..
Thus is the current economic condition. After successive -6% quarterly GDP figures, estimates are for -2% to -4% in Q2. This is being taken by some to mean the economy is “getting better”. No, it isn’t. It just is not “worsening as fast”. Q1 GDP of -6.1% means it was 6.1% worse than Q4 2008. A drop of anything in Q2 means Q2 was worse than Q1 and the decline continues. Any negative number means the economy is still contracting (worsening). Measuring it isn’t like earnings that are compared for like periods year to year. GDP is a rolling, continuous number.
Think about it like this. It is like having three heart attacks today and only two tomorrow, would the doctor say tomorrow “you are getting better”? Of course not. You still sick and there is still a very large problem.
Now there are those who will say I see the glass half empty. My retort would be that the glass has a leak, just because the water is leaking out more slowly, does not mean it is filling (the analogy is the leaking is the contracting economy and the filling is growth). The half empty argument is one to be had when we approach 0% GDP or only marginally negative.
What is more likely to me is that we are approaching a period of prolonged economic malaise. Very little if any growth, and this is important, from already severely reduced levels. While sitting here is better than a continued decline, I’m not sure is warrants the single best two months performance in the history of the US stock market.
Put in perspective. 40% of this market run up has been due to the performance of financial stocks. These are companies that without Federal aid or adjusted accounting rules would have reported far different results. That does not qualify for “getting better” in my book.
Now, I hope I am wrong. I am not “short” (although I own a tiny bit of SH to take the bite out of any large decline) and talking my book. Just giving reasons I am more hesitant that most to be putting fresh money to work is anything other than commodities or deep value stuff.
Are there some positive signs out there? Sure. I would counter that after the free fall we had at the end of 2008, any economic activity is wonderful news. That still does not equate to “recovery”. I think we may need to get used to the fact that we may be entering a period of a “new normal”. Whether that is good or bad is another debate, I think it may be inevitable.
With that being said, I’m not sure the market recognizes that yet…
Disclosure (“none” means no position):
Here we go again….
First, read this post for some reasoning
Some additional thoughts:
1- If successive quarters of -6% US GDP and a global recession cannot get oil to stay below $45 – $50, I’m not sure what can
2- The world IS NOT a more peaceful place
3- Supply
Looked like world supply is cratering, Mexico continues to run out faster than anyone expected and Canada’s tar sands are not profitable with oil at these levels.
As I said before I am not doing the DXO again for a longer term play. It is a “double” ETF which is great for trading BUT, bad for holding. The reason is that 2% of a drop > 2% of a rise. So, even the actual oil bounces around for 6 months, the DXO will lose ground to it.
So what then?
USO. It tracks the crude market.
Here is the catch. I am still anticipating a market sell off and money is not in infinite supply. So, while I want to go long USO I do not want to tie up larger sums in case we get a sell-off and bargains abound. Dilema? No.
This morning I bought Jan. 2011 $35 calls in the USO (symbol OLL AI). At the $35 price is equates to roughly $58 crude which I am rather certain will be easily lapped by 2011. By doing it this way is cost $1100 to control today, $6000 of USO, and keep money free for other uses.
It also frees me to use DXO for a short term play on occasion, which is really what it is meant for. I think I may find myself picking some up before the Obama/Netenyahu meeting later this month. I think the rhetoric coming out of that might drive oil market a bit erratic.
I think this is going to be a wild ride….
Disclosure (“none” means no position): Long USO through options, none
Dow did a fantastic job in Q1 managing the business and then dropped what I consider a bombshell on investors..
First the news (projections were for a $.20 LOSS):
· Earnings were $0.03 per share, or $0.12 per share excluding certain items(1), as cost control actions and price/volume management mitigated the effects from the worst global recession in decades.
· Agricultural Sciences set quarterly records for both sales and EBIT(2). Sales for the segment increased 10 percent on a year-over-year basis, reflecting a 10 percent increase in volume.
· Purchased feedstock and energy costs were down 49 percent compared with the same quarter last year, contributing to a 20 percent decline in selling prices, with the majority of the decline in the Basics segments.
· EBIT excluding certain items improved sequentially, with the largest percentage improvement coming from the Performance segments, above and beyond the seasonality of Agricultural Sciences.
· Rapid actions to reduce operating costs in the quarter resulted in a decrease in spending of $270 million year over year and sequentially. Capital spending was down 35 percent in the quarter, in line with the Company’s pre-acquisition 2009 capital spending commitment of $1.1 billion.
Here are the presentation slides:
Dow Q1 Earnings Slides
CEO Andrew Liveris:
“There are some signs that the pace of global economic decline is moderating. The broad diversity of Dow’s product mix enables us to have better visibility on true market demand, especially in parts of the world, such as in China, where domestic stimulus programs are beginning to take hold.
“Having said that, it’s prudent to expect that 2009 will still be a recessionary year globally, and we are not counting on material improvements in economic conditions in the near term. We remain focused on managing what is in our control, namely reducing costs and capital spending, delivering on our action plan to de-leverage our balance sheet, and smoothly and successfully integrating Rohm and Haas into the new Dow. These actions are paramount to our long-term strategy to transform Dow into an earnings-growth company.”
The bombshell? DowAgro Sciences may be sold or divested in an IPO. This is unacceptable under any circumstances. Dow Ag, as CEO Andrew Liveris told me is the crown jewel of the company.
Q1 would have experienced a large loss were it not for Dow AG. It is the only segment of the company growing (11 straight quarters) and still has a blockbuster product, Smartstax coming online either late next year or next. In other words, the best for Dow Ag is still to come.
The options given were and IPO, or a outright sale. Either option is a slap in the face to investors who have stuck by the company through its recent turmoil. As previously twittered, recently I purchased large amounts of Dow at $6.80 and again at $9 share (current price $15) despite the uncertainty surrounding the company at the time.
Why?
Dow Ag. At those share prices I was paying for Dow AG, and getting the rest of the company for free (Basic Chemicals, Specialty Chemicals, and Rohm and Haas)…..for FREE. I can’t say I would have made the decision were Dow Ag NOT part of Dow at the time.
Any decision to sell Dow Ag without extreme consideration for existing shareholders I cannot back or accept. Agrcultural products are going to be valuable for decades as the world population grows, farmable land remains fixed and biofuels take more of a center stage. That means the future earnings power for Dow Ag may just possibly dwarf most other areas of their business. Just look at the last two quarters, the worlds economy by any measurement fell off a cliff yet Dow Ag increased earnings double digits, not through cost cutting, but through volume gains (sales).
Results like that have a value that cannot be captured in the current environment buy a potential buyer.
For three years Dow has professed to want to change the earnings profile to a more stable/specialty focused one. Dow Ag fits perfectly into that. The retention of Basic businesses and the sale of Dow Ag runs counter to everything that has been portrayed as a goal.
The IPO/Sale plans say this: Dow is going to trade Dow Ag for Rohm and Hass. Since the proceeds are going to be used to pay of the Rohm purchase, at its most basic level, that is the deal for shareholders. I think if anyone is being honest, Dow Ag has more value that Rohm in terms of growth.
Sell anything else…..anything
Perhaps a partial IPO of Dow Ag? After speaking with people familiar with Dow’s plans, they have insinuated that is a realistic option. That would surely raise the necessary funds to cover the bridge loan due in a year. Still a repugnant thought….
Am I selling? No. The loss of Dow Ag would hurt greatly long term but short term would provide a boost as it would remove debt issues from the company. Shares would rally and provide those looking to exit much higher prices than current.
Part of the reasoning on the call was that “it is an Ag business with a commodity multiple” (because it is part of Dow Chemical) and that selling it would provide shareholders with the multiple return. Well, if that is the concern, spin it to us and let us realized the multiple expansion of it AND participate in the future growth. Dow could keep even 50% of it recognize the new multiple in the increase in the asset value. I would wager that if 50% were spun to shareholders to trade publicly, the 50% left at Dow would be worth what the whole is today.
However, the reverse of that is true also. As Dow Ag grows and commodity businesses are sold off, Dow Chemical becomes a Chemical company with more of a AG multiple. Long term, this is the direction I want.
The total loss of Dow Ag would most likely mean the loss of me as a shareholder and would, based on last years statements cause those shareholders left to most likely doubt anything coming out of HQ for years to come…rightly so..
Liveris said on the call today a decision will be made “30,60 or 90 days”. We’ll see…
Disclosure (“none” means no position):Long Dow
Talkoing to Douglas about News Corp (NWS)
Disclosure (“none” means no position):None
Sears, “Who’s Who of Bloggers”, Capitalism, March
– Hiring
– Thank you for the inclusion
– It is scary there is even debate as to if this is best
– Spending and Income down……for those wondering..this is bad
Disclosure (“none” means no position):
The Hudson Union Society debates the issue with the Yale Political Union. There are some funny lines here.
My opinion? Wal-Mart is and always has been great for America. I find the “against” arguments here to be pretty weak.
Disclosure (“none” means no position):Long WMT
David Winters of Wintergreen Advisors (WGRNX) take Consolidated Tomoka Land Holdings (CTO) to the woodshed.
This is simply brilliant analysis (unless you are management).
Winters David-Wintergreen vs Consolidated Tomoka Land 4-24-2009
Disclosure (“none” means no position):None
Mortgages, “Wall St”, Ray Kroc, Independence
– Latest plan, this one for seconds
– The sequel is coming….finally
– What makes America great
– 6 Banks fail test
– Is it possible?
Disclosure (“none” means no position):
Here is the latest. Talking Starbucks (SBUX)/Mcdonalds (MCD), Iran/Israel, Oil, GDP
View more investing video at Wall St. Media
Disclosure (“none” means no position):Long MCD, none
I did not know they were reporting today when I wrote this. Glad to see management helped cement my points..
Starbucks late today reported fiscal second-quarter net income fell 77% to $25 million, or 3 cents a share, due to charges to close stores. A year ago, Starbucks earned $108.7 million, or 15 cents a share. Sales fell to $2.3 billion from $2.5 billion. Excluding charges, Starbucks said it made 16 cents a share. Analysts had expected Starbucks to earn 16 cents a share on sales of $2.38 billion, according to FactSet Research.
BUT
Starbucks said that its cost savings plans were ahead of schedule as it reduced expenses by $120 million during the period.
So, explain this?
While the company triumphs its cutting, total expenses only dropped 2% to $2.32 billion which included $152 million in restructuring fees. Not going to get it done
What really matters? Customer are not going in.
US comparable store sales were down 8% for the quarter.
Sad…..and it was avoidable…
Disclosure (“none” means no position):
Please read paraghraph 4. Can anyone tell me how this happened when we just passed over $1 trillion is “stimulus” packages?
GROSS DOMESTIC PRODUCT: FIRST QUARTER 2009 (ADVANCE)
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 6.1 percent in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent.
The Bureau emphasized that the first-quarter “advance” estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The first- quarter “preliminary” estimates, based on more comprehensive data, will be released on May 29, 2009.
The decrease in real GDP in the first quarter primarily reflected negative contributions from exports, private inventory investment, equipment and software, nonresidential structures, and residential fixed investment that were partly offset by a positive contribution from personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, decreased.
The slightly smaller decrease in real GDP in the first quarter than in the fourth reflected an upturn in PCE for durable and nondurable goods and a larger decrease in imports that were mostly offset by larger decreases in private inventory investment and in nonresidential structures and a downturn in federal government spending.
Motor vehicle output subtracted 1.36 percentage points from the first-quarter change in real GDP after subtracting 2.01 percentage points from the fourth-quarter change. Final sales of computers added 0.05 percentage point to the first-quarter change in real GDP after subtracting 0.02 percentage point from the fourth-quarter change.
Wasn’t this stimulus supposed to be for “shovel ready” projects? Clearly that was not the case.
Here is further breakdown of Gov’t spending both Federal and Local (comps are to Q4 2008):
Real federal government consumption expenditures and gross investment decreased 4.0 percent in the first quarter, in contrast to an increase of 7.0 percent in the fourth. Real state and local government consumption expenditures and gross investment decreased 3.9 percent, compared with a decrease of 2.0 percent.
This gives huge merit to those who made the arguments as this package was being passed that this stimulus was not “Keynesian” even by the most liberal definition of it. For, if it was, we would not have seen decreases in spending.
Now we have to wait until revisions (ought not mater much) and then Q2 numbers. If there is not a significant jump (ought to be a record amount to match the size of the “stimulus”) in government spending in Q2, those who thought this was a good idea got hosed….big time.
Disclosure (“none” means no position):
Hat tip reader Chris for alerting me to this. Can you imagine Coke (KO) saying is was shifting its focus to the Sprite brand OR Anheuser-Busch (AHBI) saying that Busch Beer was going to be its focus this year? If not, then read this:
From Yahoo Finance
Starbucks Corp. is hoping its Seattle’s Best Coffee chain will be its growth engine during the recession.
Even as Starbucks shutters hundreds of namesake locations, cuts jobs and shaves other costs, it is seeking franchisees to open new cafes and kiosks of Seattle’s Best Coffee nationwide.
Since Starbucks took over the chain in 2003, most new Seattle’s Best Coffee cafes have opened inside Borders (BGP) bookstores and kept a relatively low profile. Many consumers don’t know there’s a connection: Seattle’s Best Coffee’s logo is red, Starbucks’ is green, and there is no mention of Starbucks inside Seattle’s Best Coffee stores.
Not only could opening more franchised cafes help Starbucks — which reports its second-quarter earnings Wednesday — expand without increasing its operating costs. Promoting Seattle’s Best Coffee also could help Starbucks pursue two distinct streams of the coffee market simultaneously.
Seattle’s Best Coffee’s food, including ice cream and hot sandwiches, targets a broader market than the pastries and sandwiches and high-end juices and protein drinks at most Starbucks. And its much milder beans have been available since January in more than 2,800 Subway restaurants.
“It gives them an opportunity to reach out to a different audience,” analyst Darren Tristano of Technomic Inc., a food industry consulting firm, said of the plan to open more Seattle’s Best Coffees.
Starbucks says the slightly lower prices and milder taste of Seattle’s Best Coffee make it an especially viable vehicle for growth now, though the company declined to say how many new stores it hopes to open or where.
“We believe that the Seattle’s Best Coffee brand can play a unique role in helping capture a larger share of the coffee segment by providing options and a variety to a broader spectrum of customers,” Starbucks Chief Executive Howard Schultz said in January when he announced the plan.
Relying on growth from Seattle’s Best while at the same time closing thousands of Starbucks location is the closest thing you’ll ever see to an admission from Schultz that the Starbucks brand has been catastrophically mismanaged to the point it is now a negative.
Offering breakfast sandwiches did not work. Promotion that offer discounted drinks failed. Spending millions on new coffee machines? Nope. Bringing back Howard Schultz? Fail. “Gold cards” for frequent customers? Nada.
On a side note. Did anyone think the promotions were really going to work? Remember? “buy a coffee in the morning, save the receipt and come back between 2:17 and 2:28 and get a $2 something”. Of course I am being sarcastic but the reality of the promotion was not much different.
The result? Management has finally thrown in the towel and decided to go with the secondary brand. This is not a slap at Seattle’s best, I think they do a fine job at what they do. This is a slap at management that is forced to do one at the expense of the other.
The Starbucks brand has been so possibly irreparably harmed that folks in Seattle are slowly moving the company is a different direction. Sad.
For investors, if you think there has been a fundamental change in consumer behavior and “cheap is chic” then do not expect any rebound or significant improvement anytime soon…
Disclosure (“none” means no position):