2009, Tobacco, Coal, Dollar
– Bad news
– In the cross hairs
– A dollar ETF
Disclosure (“none” means no position):
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Thursday’s Links
Category: Articles
This is a great presentation..
Disclosure (“none” means no position):Long DXO, DBO
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Eric Bolling: "Oil Should be $75 to $80"
Watch the following video…
So, how to play it? the tickers are (USO), (DBO) and the double return (up or down) is the (DXO).
Right now, I find it hard to be investing in stocks. Financials are out, consumer discretionary will get hit and until we know what the stimulus is, jumping into infrastructure blindly is real risky.
So, that leaves certain commodities and I think the most value here is in oil..
Disclosure (“none” means no position):Long DBO, DXO
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ADP Employment Graph… $$
For those visually inclined………scary..
Disclosure (“none” means no position):
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Wilbur Ross to Buy Bank
Anyone have any thoughts on which one?
Billionaire investor Wilbur Ross, known for his investments in distressed companies in the steel, automotive industries, said it is only a matter of time before his firm acquires a bank.
“We will end up with a bank, there is no doubt about that,” Ross, the chairman and CEO of WL Ross & Co., said in an interview Tuesday.
Ross, a major player in the private equity industry, said that his plans to purchase a depository institution were delayed last year after the government moved to inject capital into the nation’s banking system as part of a broader effort to halt the financial crisis.
He estimated that the rescue package delayed his investment anywhere between six to twelve months, and suggested that his firm might look to buy a commercial bank or thrift institution.
Ross made a string of investments across the financial services sector last year, including the purchase of H&R Block’s (HRB) subprime mortgage servicing unit last spring for $1.3 billion and the acquisition of bankrupt American Home Mortgage Investment Corp.
But some of those bets have backfired. Last February he plowed $250 million into the bond insurer Assured Guaranty (AGO) at around $21 a share. The company’s market value has been nearly cut in half since then.
Still, acquiring sources of deposits has become a top priority for banks and other financial institutions in the past few months since credit has gotten harder to come by as a result of the ongoing crisis. Private equity investors like Ross have also expressed a desire to buy banks as well.
“What is important is to get access to a stable, low-cost source of funding,” Ross said. “That is what we are interested in.”
Faced with a quickly rising tide of bank failures, banking regulators have relaxed restrictions about who can buy a depository institution in the hopes of coaxing outside investors to take part in the bidding.
Last Friday, a group of private investment firms, including buyout shop J.C. Flowers & Co and hedge fund Paulson & Co., struck a deal with the Federal Deposit Insurance Corp. to buy failed mortgage lender IndyMac for $13.9 billion.
As part of the deal, the buyers will take responsibility for the first 20% of losses, and the FDIC will cover the majority of additional losses.
Last week’s IndyMac announcement is particularly noteworthy since there have only been a few investments made in banks by private equity firms and other distressed investors in recent months — and many of those deals have quickly soured.
Most notably, private equity firm TPG made a disastrous investment in Washington Mutual (WM), the savings and loan that collapsed in September. It was the largest bank failure in history. WaMu was subsequently sold to JPMorgan Chase (JPM).
But Ross said it would make more sense if private equity firms are allowed to take full ownership of a bank instead of just a small stake.
“Private equity is not passive. We are not minority investors. We are control investors. That is the whole theory of private equity – adding value through better management,” he said.
Disclosure (“none” means no position):None
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ADP Predicts 600K Plus Job Losses
The worst estimate yet…
The breakdown is as follows:
Small businesses= -281,000
Medium businesses= -321,000
Large businesses = -91,000
BY SECTOR
Goods-producing sector= -220,000
Service-providing sector= -473,000
As ADP stated: Beginning this month, the ADP Report will incorporate methodological improvements intended to improve the correspondence between the nonfarm private employment estimates shown in the ADP Report and estimates published in the Bureau of Labor Statistics’ Employment Situation Report.
Now, with job losses surging and another body blow to housing coming as the option-arm fiasco comes home to roost, one has to seriously wonder how those who think the second half of 2009 will show growth honestly come to that conclusion. American’s have proven to be smarter than Congress through this as they took the first stimulus checks and either saved it or paid off debt. There is no reason to expect they will do anything different with another one.
It is the right thing to do with the money even though it hurts the overall economy for now. Too bad…
American’s are thinking about their personal balance sheet, when that is healthy, all will be well again. The problem is that will take a while..
Disclosure (“none” means no position):
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Book Reviews: 3 John Rubino Books
So, I was asked to review “Clean Money: Picking Winners in Green Tech Boom”. Whenever I get asked to review a book that tells me what stocks to pick, my BS antenna goes way up. So, I asked for all the authors books so I could review his last predictions. Your gonna want to read this.
First up was:
“How to Profit From The Coming Real Estate Bust”, written in 2003.
Had you read this one in 2003 when it was released, you would have been introduced to little letters like, CDS, GSE’s, CDO, RMBS, CDS and the like. You would have been told that Fannie and Freddie were perpetuating an unsustainable cycle of lending in the sub-prime market. You would have been told that home equity was at generational lows and that any drop in prices would lead to massive foreclosures as new mortgage products reset and buyers would be able to afford the new payments nor would they be able to sell the homes since the mortgages were upside down.
One of the best parts was were Rubino assembled a slew of headlines from 2002-2003 telling us the housing market was in a “new paradigm” and that there were new rules in housing (always a sign we are in a bubble).
You would have been told of the problem with the CDO market and how it was giving banks a false sense of security and that a fall in the housing market would have consequences in the hundreds of billions of dollars.
This is one of those book that reading after the fact you sit there and say “well yeah..we know that”. But in 2002-2003, most folk didn’t. I’ll admit, I did not think the gains we were seeing in housing prices then could continue but did not see the current “crash” we are seeing.
So, what to do about it then? Here is a group of stocks Rubino suggested shorting in 2003 for those who believe him that housing was going to crater.
Citigroup (C)
Ambac (ABK)
Capital One (COF)
Lennar (LEN)
Fannie Mae (FNM)
So, how did those 5 do since 2003? Down 84%, 97%, 48%, 82% and 98%. Not a bad return???
Here is the book:
Next up was:
“The Collapse of the dollar and How to Profit from It”
I suggest the paperback version because it was updated in Nov. 2007. Rubino here does a nice job going into the history of currencies and gold without drowning the reader in a mind numbing history lesson. He keep the history relevant to his point.
Rubino argue that Fed actions are slowly rendering the dollar nearly worthless and as it happens, inflation will rear it head in a savage way and gold wil be the commodity people pile into.
He gives several way to invest in gold from ETF’s for the commodity itself (GLD), (IAU) to both miners and way to buy gold directly. Again ,based on results form when the book was originally released in 2004 show Rubino was dead on as gold staged a huge rally up 84% since then.
Rubino also introduces the readers to the “Fear index. No, it is not the VIX we all hear about today. It is an index that gives us a value of US Gov’t holdings of golds per dollar bill. For instance, a value of 2% means that 2% of the value of a dollar bill is backed in gold. 2% is a notable number as that is roughly what the value is today. The last “buy signal” for gold was had in May 2002, the signal is still positive for gold today and recent Treasury and Fed action have continued to devalue the dollar.
A neat way to buy gold direct (no recommendation here, have not investigated it fully yet) is “Gold Money“. It is in essence a savings / checking account that buys gold as you deposit funds into it. The value of the account rises and falls with the value of gold .
Again Rubio in Nov. 2007 gives the readers a portfolio of stock to short for 2009. The List?
Lehman Brothers (LEH)
Bear Sterns (BSC)
Fannie Mae (FMN)
Freddie Mac (FRE)
Citigroup (C)
Wachovia (WB)
Merrill Lynch (MER)
Goldman Sachs (GS)
Bank of America (BAC)
There were a few other but suffice it to say none of the stocks he recommended shorting are up in 2008. Now, admittedly most stocks are down in 2008 but in the list above, most are down in excess of 70% and several no longer exist.
Here is the book:
Finally “Clean Money: Picking Winners in the Clean Tech Boom”
The book begins with a primer on oil and gas (limited, dirty and expensive) and then moves onto renewable fuels and energy sources.
Rubino details for the first half of the book all renewable fuels, the technology that goes into them and the progress that has been made and is being made in making them economical and more efficient. It is not an “all renewables are great” thesis as he does steer the readers aways from certain areas.
This part of the book is extremely informative and detailed yet is written in a way that all readers can understand and grasp the points he is making. There is a tendency in these types of books to let the science run away with the discussion but Rubino thankfully avoids this.
The second half of the book goes into the possible investments that one could make from part one. He gives companies for every category both domestic and foreign as well as mutual funds that specifically invest in the area.
The only aspect that left me wanting for more was a more detailed investment thesis. In his first two books, Rubino was very specific about how he would invest based on his ideas. Here, he is very general and does not give specific guidance. That very well may be a function of the field and its infancy making a definitive selection difficult to do accurately. Still, after his results in the prior two book, a reader would be wanting more detail.
But, for the information provided in part one alone, the book is worth a read…
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Wednesday’s Links
Schloss, New World, Oil, Auto’s
– A great pick Schloss would like
– 2009
– Everything you want to know
– Have sales bottomed?
Disclosure (“none” means no position):
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First, I’m a fan of Mr. Matthews but too be honest he really over reached on this one and what gets me the most is it is a bit dishonest..
First here is his post…
Headline of the Day: “We’re Firing 5,000 Workers So We Can Make a Stupid Acquisition”
Tuesday, January 6, 2008: Dow Chemical admitted today that roughly 5,000 workers are being laid off in order to help pay the cost of acquiring Rohm & Haas at a price that makes no economic sense…
Actually, we made that up. Dow Chemical admits no such thing.
The company, which in July agreed to buy specialty chemical maker Rohm & Haas at a pre-Credit Crisis valuation of $15.4 billion—more than Dow’s current $14 billion market value—recently received a shock when Kuwait exercised economic prudence by backing out of a $9 billion joint venture that no longer made sense, thus depriving Dow of money to pay for Rohm & Haas.
So today, Dow released a whopper of a rationalization for not excercising its own economic prudence, in the form of a press release that begins as follows:
The Dow Chemical Company (NYSE:DOW) today announced a wide range of legal, operational and financial actions that will keep the Company on track to fulfill the transformational corporate strategy Dow has pursued since 2005.
Dow’s strategy will continue to involve aggressive steps to establish Dow as a high-performance, earnings growth company organized around a strong portfolio of joint ventures and market-facing performance business divisions. Central to Dow’s strategy is its commitment to retain a strong investment grade rating and to maximize shareholder return.
If that last sentence is suppposed to bear any semblance to reality, how is it possible that Dow continues to pursue the acquisition of a chemical company at a pre-Credit Crisis price which even Wall Street’s Finest consider to be as much as, oh, a third too rich?
Well, one way is layoffs, as today’s press release trumpets:
Since the onset of the global financial crisis in September 2008, Dow has taken aggressive actions to reduce capital spending, working capital and operating expenses. With further weakening in the global economy, Dow announced a restructuring in December which will reduce the Company’s workforce by approximately 11 percent, close facilities in high-cost locations and divest several non-strategic businesses. “We undertake actions like these with a very clear outcome in mind — to preserve our financial flexibility and improve our financial performance.
In the final paragraph of the release, labeled “About Dow,” the company claims 46,000 employees worldwide.
So the real headline should be more like, “We’re Firing 5,000 Workers So We Can Make a Stupid Acquisition.”
Why can’t they just say it?
Well, maybe because it is not true in any aspect? I’ll not go into the arguments for or against the Rohm & Hass (ROH) deal but just deal with the erroneous claims above..
Here is the December 5th press release Mathews references. Note the date? December 5th. Kuwait pulled out of the JV on December 27th (that comes after the 5th) meaning the decision to lay off workers at money losing locations and sell other businesses has nothing to do with the Kuwait decision.
Further, Dow said in the release “The Company also expects to complete several divestitures within the next 2 years, which will result in a reduction of approximately 2,000 positions. As a result of the restructuring plan, the global workforce reduction and the divestitures, approximately 5,000 jobs will be eliminated across several functions, geographies and businesses.”
So 2,000 of the 5,000 are not even losing their jobs, as the businesses are for sale. They may even still end up working for a new JV Dow will be involved in, who knows? In short, they’ll be on someone else’s payroll, just not Dow’s.
Why the closings? Again, from the 8-k
– Due to the recent, severe economic downturn, a decision was made to shut down a number of facilities, including the following:
* Chlor-alkali manufacturing facility in Oyster Creek, Texas
* Styrene and styrene derivative manufacturing facilities in Freeport, Texas; Pittsburg, California; Terneuzen, The Netherlands; and Varennes, Quebec, Canada
* Facilities that manufacture NORDELTM hydrocarbon rubber in Seadrift, Texas, and TYRINTM chlorinated polyethylene in Plaquemine, Louisiana
With manufacturing firms the world over cutting back production, it would have been irresponsible for Dow to keep these facilities open as prices and demand plummet for the products they make and they become unprofitable.
“Why is Dow going forward with the deal” Matthews asks? Because ROH actually accepted a lower price from DOW in the auction for itself in return for a purchase agreement that gives Dow virtually no ability to cancel the sale save for regulatory objections. It is called a binding contract.
As for the “paying for the acquisition” claim. A cursory glance at the 8-K says “the Company will record a charge of $300 million to $400 million in the fourth quarter of 2008 for severance costs associated with the restructuring plan and the workforce reduction, and curtailment costs associated with Dow’s defined benefit plans.”……followed by this “Once fully implemented, these actions are expected to result in $700 million in annual operating cost savings by 2010.”
So, can anyone do the math for me? How does a charge of $400 million now, followed by saving maybe $700 million by the end of next year finance a $15.4 billion deal by the end of this week?
Anyone?
Bueller? Bueller?
Disclosure (“none” means no position):Long DOW, Sold ROH Jan. $50 puts this morning
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Did New Cars Sales Bottom in November?
Read the following article….
Yes, car sales look terrible for December. But that’s if you compare sales to the same month a year ago. The market has changed so much from then that I would argue you can’t get an accurate read on what’s going on right now, if you’re only measuring today’s sales against 12 months ago. A better gauge is a running average over the last 6 months. Car sales are in a terrible state, but the bottom may actually have been reached in November. In fact, sales were up by nearly 150,000 units or nearly 20% in December vs. November.
January could be better. GM and Chrysler received the first installments on their bridge loans, which instilled some level of confidence in the market. GMAC received TARP money which will help stabilize quite a number of dealers. GM immediately began offering low interest loans and resuming national television advertising.
That’s not to say the market is on a rebound. But it may well be that we hit the low point two months ago and are starting to inch up
So, for my investment in AutoNation (AN) and Berkshire’s (BRK.A) Warren Buffett’s in CarMax (KMX) this means the 10,000 year flood may have crested and may be receding. What is left? Over a thousand fewer dealers, pent up demand and and TARP backed loans from the automakers.
Of course it is early to tell if this is a one month anomaly or a trend but this is certain, it is the first sign of good news in some time.
AutoNation CEO Mike Jackson will update investors at the end of the month when earnings are released. Expect earnings to be dismal, what is important is what he says about the current environment and what he sees going forward..
Disclosure (“none” means no position):Long AN, None
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I hope people are not surprised by this. The question here is not about the court case, but of how much damage Kuwait wants done to its reputation in the international community as a potential business partner.
On December 31, 2008, Dow Chemical (DOW) received official written notice from Petrochemical Industries Company (PIC) of Kuwait that the closing must be postponed because the Kuwaiti Supreme Petroleum Council withdrew its earlier approval of the transaction. As a result, Dow has said it will seek to enforce its rights under the terms of the various agreements and the JVFA executed by Dow and PIC since the joint venture partnership was first announced in December 2007.
“We were shocked by this news, and this was completely unexpected given the approvals already received and the behavior, actions and words from our partners. We have over 1,500 documents prepared for closing for what we believed to be Day 1 of K-Dow Petrochemicals on January 2,” said Liveris. “Pursuing legal options is not a decision we take lightly, especially because of the longstanding partnerships we have established in Kuwait over the past decade, but PIC is in breach of contract, and we must take action to protect the interests of our company and our shareholders.”
Beyond K-Dow: New Partnerships, New Opportunities
Although Dow is prepared to close K-Dow immediately if PIC does indeed cure the breach of contract, the Company has already been approached by other interested parties about joint venturing with Dow for the basic plastics businesses. As a result, Dow has also announced it will establish a formal process to secure a joint venture partner to accomplish the goals of its asset light strategy. The core businesses involved in the K-Dow joint venture include strong Dow franchise businesses, among them the largest and strongest producer of polyethylene in the world. Polyethylene is the world’s largest thermoplastic and for the last several decades has grown well above global GDP.
“Prior to signing the definitive agreement with our Kuwaiti partners about the K-Dow joint venture, we had other options and partners to consider,” Liveris said. “Some of these discussions were active as recently as November, and we have already been contacted by other interested parties and have begun discussions. This can be done on an accelerated timeline due to the considerable groundwork that has already been established in anticipation of the K-Dow joint venture.”
Dow believes that the identification of an alternative joint venture partner for Dow’s basic plastics business combined with the acceleration of planned divestitures and several additional divestments that are consistent with the Company’s strategy will yield proceeds greater than the funds Dow expected to receive in connection with the K-Dow joint venture.
Now it was just three weeks ago Dow and Kuwait finalized the JV and set up shop in Michigan. It was a done deal and Dow’s action are about that.
When the Kuwait action was first announced I said: “Kuwait needs to look past today. This was the first mega scale JV in the country and based on current actions, may be the last for a while. Let’s not forget Dow currently has JV’s in Saudi Arabia, Russia, South America and China proceeding without delay or problems. The Saudi deal at Ras Tanura is nearing first stage completion. Does anyone really think Dow CEO Andrew Liveris has not picked up the phone and called them or even Dubia to inquire about another partnership?”
Today’s statement confirm’s Dow is talking to other potential partners. Who called who first is irrelevant. Dow has options.
Prediction? What Dow’s wants is the $2.5b breakup fee from Kuwait. It will then created a JV with another partner at a lower price than the $7.5b Kuwait was going to pay Dow. The new parnter gets a great deal, Dow gets its money and at the same time sticks its finger in the eye of the Kuwaities.
OR
Kuwait realizes they are doing more damage to themselves than any present deal could do, wants to avoid the discovery process in court (or Dow making public the 1500 pages of communications it has with them) that would lay bare their deception to the world and capitulates on the deal, perhaps restructuring it not for a lower prices but delaying some payments to the JV.
This is a game of chicken now and unfortunately for Kuwait, Dow has an out in another partner. Can Kuwait really afford to let the chance to get these assets go? They can’t.
Disclosure (“none” means no position):Long DOW
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Tuesday’s Links
SPR, Ford, Dow, NetFlix
– Fill It
– 4 Reason to own it
– This is really cool
Disclosure (“none” means no position):
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Monday, Bloody Monday at Borders $$
Ron Marchall has the experience, that cannot be argued. What I have not found yet are the ties to Bill Ackman and Pershing. This must be the reason for the delay in the Pershing financing agreement.
Borders Group (BGP) today announced several management changes–including the appointment of a new Chief Executive Officer–to more aggressively drive a turnaround of the company within today’s challenging economy. Effective today, Ron Marshall, who most recently was Principal of Wildridge Capital Management, a private equity firm he founded approximately three years ago, has been appointed President and Chief Executive Officer and will serve as a Director. Marshall, 54, replaces George Jones who served in that same capacity since July 2006.
Marshall brings more than three decades of financial and retail experience to Borders Group. Prior to founding Wildridge Capital, he was Chief Executive Officer for eight years with Nash Finch Company, a $5 billion food distribution and retail organization, where Marshall was responsible for a turnaround that included the quadrupling of earnings over a six-year period as well as a 40% improvement in EBITDA over the same period. Marshall earlier helped drive a turnaround of $4 billion supermarket retailer Pathmark Stores, Inc., where he served as Executive Vice President and Chief Financial Officer from 1994 to 1998. Preceding that, Marshall served in senior management positions in a variety of retail companies including Dart Group Corporation’s Crown Books division and Barnes & Noble college bookstores.
“Progress has been made by Borders Group over recent quarters within the challenging economy to reduce debt, improve cash flow, cut expenses, enhance inventory productivity and improve margins, but it is imperative that the company more aggressively attack these initiatives to address its long-term future,” said Borders Group Board of Directors Chairman Larry Pollock. “We are confident that Ron Marshall, with his strong financial and turnaround expertise, vast retail experience and specific bookstore background, is the right choice to lead a new management team and boldly take these efforts to the next level.”
“Borders is a powerful brand with millions of loyal customers who love to shop in the stores,” said Marshall. “These are tremendous assets that can be built upon once the balance sheet is strengthened and the company is on more solid financial footing. I’ve led turnarounds at other retail organizations and look forward to leading a new management team at Borders to drive profitability and help ensure lasting success for this great name in retail.”
In accordance with New York Stock Exchange rules, Borders Group reported that it will issue to Marshall by Feb. 1, 2009 an employee inducement award consisting of options to purchase 1.8 million shares of the company’s common stock. The options vest in installments over the three-year period following Marshall’s start date. Marshall will also be issued 200,000 options at the same time with similar terms as those of the employee inducement award in accordance with the existing company shareholder-approved long-term incentive program. A full description of terms will be contained within a Form 8-K disclosure the company intends to file this week.
Other Management Changes
In addition to Marshall’s appointment as Chief Executive Officer, other management changes were announced. Mark Bierley has been named Chief Financial Officer and Executive Vice President, Finance. He replaces Ed Wilhelm, who joined Borders Group in 1994 and held the Chief Financial Officer position for the past eight years. Wilhelm will stay on with the company for a transition period. Bierley has more than 20 years of financial and accounting experience and has been with Borders Group since 1996. He has progressed through a variety of management positions within the company, including inventory and financial posts, and most recently served as Senior Vice President, Finance.
Anne Kubek has been appointed Executive Vice President, Merchandising and Marketing. In that position, she replaces Rob Gruen, who is leaving Borders Group after approximately two years. Kubek has been with the company since 1990, beginning her career as an assistant manager of the Borders store in Rockville, Maryland, and progressing through a series of management positions within the store organization. She came to the corporate office in 1996 and over the years has served as Vice President, Field Human Resources; Vice President, Book Merchandising; Vice President, Borders Store Operations and most recently as Senior Vice President, Borders Stores, a post she has held since 2005.
Additionally, Dan Smith has been named to the new position of Chief Administrative Officer. Smith, who has been with Borders Group since 1995 in a variety of leadership roles, including his most recent position as Executive Vice President, Human Resources, retains his current responsibilities, but also takes on leadership of the company’s information technology group, which is headed by Chief Information Officer Susan Harwood, who remains with the company.
“The Board is pleased to bring forth the considerable talents of individuals with strong track records, well-rounded experience and tremendous industry knowledge within Borders Group to contribute in even more significant ways to the company under the leadership of Ron Marshall,” Pollock added. “This is a great team with outstanding skills. We are confident that they will keep the company moving on the right path toward what can ultimately be a strong long-term future.”
Sales Results-Holiday 2008
Borders Group also released its sales results for the nine-week holiday period ended Jan. 3, 2009. Total consolidated sales were $868.8 million, an 11.7% decline compared to the same period last year. Within the Borders superstore segment, total sales for the holiday period were $652.6 million, which is a 13.6% decrease compared to 2007. Comparable store sales at Borders superstores declined by 14.4% compared to the same period a year ago. On a same-store sales basis, the book category at Borders declined by 11.0% for the period. Borders.com sales for the nine-week holiday period were $20.3 million. Overall, holiday sales started slow and improved during the latter part of the season.
Within the Waldenbooks Specialty Retail segment, total sales for the holiday period were $161.7 million, a 16.4% decrease compared to the same period one year ago. Comparable store sales for Waldenbooks declined by 8.0% compared to holiday 2007.
Total International segment sales were $34.3 million for the period, a 1.4% decrease compared to the same period a year ago. Comparable store sales at Paperchase stores in the U.K. decreased by 6.5% for the holiday period year over year.
“While our recent holiday sales results reflected the difficult retail environment and additional challenges within specific categories of our business, the company’s sales performance and cash generation were within the range of our internal financial plans for the holiday period,” said Borders Group Chief Financial Officer Mark Bierley. “We continue to aggressively implement the range of initiatives that we launched in mid-2008, which have allowed us to reduce expenses and improve working capital to drive improved cash flow and debt reduction.”
Is this a desperation move? Don’t think so. I think it is more of a “Jones took us as far as he could” and now someone else is needed to complete the transition. George Jones did a good job digging the company out of the hole his predecessor left him.
Marshall brings fresh eyes to the situation and a background from PE that inevitably will bring some creative solutions that the company needs to navigate the current credit markets.
Not selling, holding pat…
Disclosure (“none” means no position):Long BGP
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In his own words…
We are clearly in a serious recession, and more aggressive action is needed to turn things around. The federal government initially underestimated the scale of the mortgage and housing crises and later panicked into an ever-changing series of ad hoc measures that at best dealt with some of the effects of the original crises. But homeowners have now lost $5 trillion, and 12 million families have mortgages in excess of the value of their homes. Therefore the economy will not stabilize until mortgages are adjusted down to the value of homes, with affordable payment schedules, and until new mortgages become available across the home-price spectrum. Till then, the poverty effect of falling house prices and unemployment moving up toward 7% will hold consumer spending back from its former 70% contribution to our economy.
I’m optimistic about the choices that President-elect Obama has made for his economic team, and I’ve got some suggestions for what they should do. Hopefully the new Treasury Secretary, Tim Geithner, will incentivize lenders to restructure mortgages by guaranteeing half of the reduced principal amount and sharing among the government, homeowners, and lenders any subsequent appreciation. Lenders would gain liquidity by selling the Treasury-guaranteed portion of the loan, and government would receive annual insurance premiums to further protect it against loss. That would cost taxpayers nothing now and probably little or nothing in the future.
Addressing unemployment is paramount. Detroit needs government support in order to implement independently verified concessions from all stakeholders – not just labor – which are sufficiently large to permit profitable operations even if auto sales remain as low as 11 million cars per year. A pre-negotiated bankruptcy may be necessary in order to implement the restructuring, but both the industry and the economy are too fragile to withstand the domino effect that a free-fall bankruptcy would have on a car company, its dealers, and its suppliers.
In addition, to avoid reversal of the 242,000 jobs created by state and local governments in the past 12 months, Washington should provide or guarantee funding for sorely needed infrastructure projects that would create immediate construction jobs and meaningful amounts of permanent jobs.
If President Obama promptly and decisively resolves these problems, whether or not he adopts my recommendations, and restores public confidence, he can end the recession by early 2010. If not, the economy will languish for a long time. Given the economic uncertainty, investors who are too worried to buy equities might consider tax-exempt bonds with yields around 6%, equivalent to almost 10% before federal, state, and local taxes. Investors who want to hedge the risk that federal deficits might lead to longer-term inflation and drive up interest rates, causing these bonds to decline, might buy some TIPS, or Treasury inflation-protected securities, as well. TIPS are U.S. Treasury bonds whose principal amount varies with consumer price indexes to provide holders with a rate of return in constant dollars. TIPS prices currently imply near-term deflation, and that means that they would appreciate in value if inflation comes back.
At my firm, we’ve been starting to invest in some distressed financial companies. That seems as if it will work out reasonably well, because they’re very, very cheap. The financial services sector is kind of where the problems started, and it’s probably going to need to be fixed in order for the problems to be resolved. We see opportunities there.
Disclosure (“none” means no position):
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Reuters Reports:
Hedge fund Pershing Square Capital Management, one of General Growth Properties Inc’s GGP.N biggest shareholders, is betting the No. 2 U.S. mall owner will file for bankruptcy — and equity investors will end up big winners, a person familiar with the firm’s thinking said.
Pershing Square declined to comment. General Growth, whose top properties include Fashion Show in Las Vegas and Faneuil Hall in Boston, declined to comment.
Bankruptcy usually leaves stock investors with plenty of nothing, but General Growth is an unusual case. It has almost $30 billion of assets on its books, and just about $27 billion of debt.
But most of the company’s real estate assets are recorded on its books at their historical value, and many were bought years ago, meaning their value now is likely substantially higher. The company’s problems are not with its assets, but with refinancing maturing debt in frozen markets.
Historically, companies whose assets are worth much more than their liabilities have gone through bankruptcy in a way that leaves shareholders intact, which is what Pershing Square is banking on, the person familiar with the firm’s thinking said.
It continues
General Growth is not the first company to \find itself in this bind. Amerco Inc (UHAL.O), parent of moving truck rental company U-Haul International Inc, filed for bankruptcy in 2003 after a dispute with its former auditor and multiple accounting restatements left it unable to refinance debt.
The company listed $1.04 billion of assets and $884 million of liabilities in its bankruptcy filing, and had considerably more assets off its balance sheet as well. Its shares tripled during bankruptcy, and rose more than fourfold after it emerged from bankruptcy in 2004.
Pershing Square sees parallels between Amerco and General Growth. The founding families of both companies own substantial blocks of stock, giving them a real incentive to refrain from diluting shareholders’ stakes during bankruptcy.
And General Growth is still generating more than enough cash flow to service its debt and meet other day-to-day obligations, just as Amerco was. Pershing Square views General Growth as having trouble refinancing its debt due to broader difficulties in the commercial mortgage market in the weeks after Lehman’s Chapter 11 filing.
It all makes much more sense now. It is also the most likely reason Citi (C) balked at restructuring GGP dent even though they own 5.3 of the shares. They, like Pershing probably perceive more value during and post bankruptcy that without..
Disclosure (“none” means no position):None
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