What?!?, Defaults, Deflation, Schiff,
– Proof that no business idea is really that crazy
– Just keep rising
– If you hated Act 1, Act 2 ought to really scare you
– ‘Bout time more folks are figuring this out
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Einhorn had a rough year but the letter is a very honest one, not filled the usual BS some through to excuse away performance..
Visit MarketFolly to download the letter
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So, it is official, the Fed is out of bullets and is throwing stones.
The decision:
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.
OK, so what does it all mean? The Fed is limited to what it can do and has resigned itself to sitting back and waiting things out. Lower rates (essentially zero) have not spurred lending or much economic activity and they are possibly about to purchase to worst assets on bank’s books. The Fed now has a 2 trillion dollar balance sheet and that looks to grow. Now, growing it with quality assets is one thing, but to grow it now with banks junk, well, that isn’t good.
The big banks, JP Morgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citi (C) has received their TARP funds and will most likely not want more. This means the strings Congress want to impose on them to force lending will be toothless.
So now the Fed is forced to buy Treasuries to expand the money supply. What they will do then is add to the bubble already existing in them. The collapse of that bubble will cause interest rates to spike (that’s really bad in a recession). Since the Fed is already essentially at zero, it can do nothing to stop the rise, except, buy huge amounts of Treasuries and maintain the bubble itself.
See where this goes? The Treasury will issue bills the Fed will buy while the Fed is buying the toxic assets on banks books…….yeah….this will end well, no problem..
Disclosure (“none” means no position):Long WFC, nonw
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Some very interesting information on natural gas (UNG) use and the weather this winter.
Disclosure (“none” means no position):None
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As of 1/20/2009. To fully understand what a disaster this will be , go to page 12 line 6. It is clear the protectionist trade policy failures of the Great Depression have not been learned. The video is the Senate “Mark -Up” of the bill.
American Recovery and Investment Act
Senate “Mark-Up”
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This will probably go down as a brilliant buy down the road.
Linens ‘n Things, the home goods retailer which shut its doors late last year, may live on as a brand name after two investment groups agreed to purchase the retailer’s name and logos for about $1 million.
At a bankruptcy auction earlier this month, Hilco Consumer Capital and Gordon Brothers Brands, won the rights to the company’s intellectual property, including software, technology and marketing material, according to a Hilco spokesman. The deal was expected to close on Monday, the spokesman said.
Hilco Merchant Services and Gordon Brothers Retail Partners were members of a group of six liquidators that ran the going-out-of business sales at the home goods retailer last year.
Hoping to cash in on consumer attachment to forlorn brands, in the past few years liquidator groups have bought up trademarks of bankrupt companies like gadget seller The Sharper Image, and furniture retailer Bombay Co.
Since Hilco bought The Sharper Image brand at a bankruptcy auction in May, it has signed licensing deals for heated blankets, iPod cases and health gadgets — all of which are sold emblazoned with The Sharper Image logo.
Linens ‘n Things, once the no. 2 U.S. home goods chain after Bed Bath & Beyond Inc (BBBY) was bought out for $1.3 billion by Leon Black’s buyout firm Apollo Management in 2006.
The company filed for bankruptcy protection in May, citing a drop in consumer spending. It had operated 589 stores in North America at the end of 2007, but liquidated late last year after it was unable to find a buyer.
Linens went under not because they had no customers, but because when the economy slowed, they could not get enough to service the crushing debt load. Had they never been bought out, one could argue, and probably be accurate in saying they would still be around.
The buyers have a respected and liked name and a whole bunch of real cheap real estate out there owned by desperate landlords……a nice combination..
Disclosure (“none” means no position): none
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Dykstra, Oil fields, Cuba, Hedge funds, A Rant
– Before anyone out there listens to a single word fron “Nails”…. read Adam
– Replacing what is being lost
– Are we there?
– FUNNY
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This is whom people compare GE (GE) to. If they are doing fine, ummm, Jeff, what the problem?
Siemens (From the FT):
Siemens (SI) beat analysts’ estimates and appeared to have outshone its rivals when it announced on Tuesday a sharp rise in quarterly operating profit and reaffirmed its forecast for 2009.
For the first quarter of fiscal 2009, which ended in December, Europe’s largest engineering group saw an 8 per cent decline in orders compared to the same period in the previous year. However, Peter Löscher, Siemens’ chief executive, said that in the absence of major order cancellations or price erosion, the group would adhere to its full-year forecast.
“We got off to an excellent start this fiscal year,” he said.
The market was cheered by Siemens’ announcement, which came on the heels of a string of bad news from main competitors such as General Electric and Philips, which both reported disappointing quarterly figures in recent days. The news also coincided with an unexpected rise in German business confidence.
Siemens shares were up as much as 5.2 per cent on Tuesday against a fairly flat European market. The German conglomerate said total sectors profit – which excluded one-off events – climbed 20 per cent year-on-year to more than €2bn.
Order income fell by 8 per cent to €22.2bn, mainly hit by a double-digit drop in the more cyclical industry sector. Siemens, which makes everything from nuclear power plants and train carriages to hearing aids and light bulbs, said it was still aiming to post a total sector profit of €8.0bn-8.5bn this year.
Markets were stunned in November when Mr Löscher reaffirmed this profit goal amid a sharp downturn of the global economy. Most analysts forecast an operating profit well below Siemens’ own target.
Contrast this to the train wreck that was GE’s most recent quarter.
Fourth-quarter 2008 earnings from continuing operations of $3.9 billion, or $.37 per share before preferred dividend, or $.36 per share attributable to common shareowners. Results included $1.5 billion of after-tax restructuring and other charges, including increased reserves in current environment, which are above the Company’s original plan and the restructuring will lower costs for 2009 and beyond.
For the year, revenue was $183 billion, up 6%, and earnings were $18.1 billion, down 19%. This was the third highest earnings year in GE history.
“In a very tough environment, we delivered fourth quarter business results in line with expectations we provided in December,” Chairman and CEO Jeff Immelt said. “We grew Infrastructure and Media by 3% in the quarter and 10% for the year. Energy Infrastructure led the way in the quarter with 11% segment profit growth driven by continued global demand. Technology Infrastructure grew earnings by 1%, led by 21% growth in Aviation. NBC Universal segment profits declined 6% in fourth quarter as strong cable earnings were offset by declines in the local stations.
“Capital Finance earned $1 billion in the quarter and $8.6 billion for the year,” Immelt said. “We had several negative impacts to earnings in the quarter including increased loss reserves, negative marks and impairments. These charges, along with global benefits, generated a tax credit that more than offset our pre-tax loss. We also originated $48 billion of new assets in the quarter at solid margins.
Immelt recently has hia AAA rating backed and the market sold off GE shares. Translation? “We still do not believe ratings agencies”. He says the dividend is safe “for 2009”. Ok, we’ll see.
Siemens is immelts real problem. If they can do it, why can’t he?
Disclosure (“none” means no position):Long GE, none
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No other words to describe it other than “totally unacceptable”.
First watch the video of Dow Chemical (DOW) CEO Andrew Liveris:
So, what to think.
First:
Mr. Liveris, the market is not telling you the dividend is too high, the market is telling you we are in a very mean global recession. You make the building blocks for almost anything sold in the global economy. Because of that, the market is saying they expect your earnings to suffer, greatly. The market is telling you that the reason to invest in your stock now is the dividend of which you have said “this CEO will not cut the dividend”. Remember Dow’s 96 years of uninterrupted and uncut dividends? If I do the math that takes us back to the 1929-1935 years which were far worse than anything we face today. This why the news of the action has had no effect on the stock today.
Second:
Rohm & Haas (ROH). Yes we all expect it to get done also, the only people who want it done more than you are the Rohm & Haas shareholders. Without your bid, their $78 offer becomes a $30 stock. Trust me, they want this….bad. Tell them “go sit down and wait your turn”, they will.
Third:
Things will get better, take a breath. Walk away for a few days, go to an island and clear your head. You have not slept much obviously from the video and need a fresh outlook. Oil (USO) prices will rise significantly in the second half this year and currently tentative Arab nations will have renewed and stronger desires to diversify their revenue streams, and will have the cash to do so. You offer them that opportunity.
Fourth (here is the solution part):
You cannot cut the dividend and ever have the trust of shareholders ever again. You can’t. You swore up and down all fall it would not happen, so it can’t. I understand economic conditions have changed but using that excuse simply means you and your management team were not prepared, still bad. How can you do it and still save face? Put it in arrears for current shareholders.
This would take Board approval (you are the Chairman) but it could be done. Simply put, for shareholders of “x” date, the current dividend level is maintained but 50% of it will be paid in arrears 1 year from now. The current rate for new shareholders after “x” date is 50% lower. This will stabilize the shareholder base as current shareholder are not likely to sell and forgo the 50% in arrears. If it means anything, I wouldn’t.
No you can’t just cut it now say you will raise it next year, if you cut it now, we will not believe you and we already now dividend increases come much slower than reductions do.
I know the details are more complicated than that but it could be done. This gives you the financial flexibility you need now and while not destroying shareholder trust in you.
Disclosure (“none” means no position): Long DOW, Long OIL
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Dumb is Smart?, iPhone sales. Obama’s speech, MSM
– As crazy as it sounds….yes..
– Does any of this sound familiar?
– Did any of it sound, like, you heard it before?
– Great commentary on the MSM’s role in all crisis and their lack of accountability in it.
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Made layout changes to the blog as I thought it was getting stale looking ands there were still complaints from IE (internet explorer) users that it was not showing properly…
Hopefully this is better, as always, please email or comment and requests or problems..
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Some thoughts on today’s Dow Chemical (DOW) and Rohm & Haas (ROH) news.
The Dow Chemical Company (NYSE:DOW) confirms it has informed Rohm and Haas that Dow will not close the proposed acquisition on or before January 27, 2009.
Dow has determined that recent material developments have created unacceptable uncertainties on the funding and economics of the combined enterprise. This assessment is based on several macro-economic factors such as the continued crisis in global financial and credit markets combined with the dramatic and stunning failure of Petrochemicals Industries Company of Kuwait (PIC) to fulfill its obligation to complete the formation of the K-Dow joint venture in late December 2008.
“Our long term strategy remains unchanged and the proposed acquisition of Rohm and Haas is consistent with this strategy,” said Andrew N. Liveris, Chairman and CEO. Since Dow learned in late December of PIC’s failure to close the K-Dow transaction, Dow has been aggressively engaged on multiple paths seeking ways to enable the Rohm and Haas transaction. Dow remains interested in discussions to find a solution to complete the acquisition of Rohm and Haas, but recent events have made closing untenable at this time.
“Dow Chemical has a long history of resiliency in responding to changing market conditions, and that resiliency continues,” said Liveris, “but the world has changed significantly and we still do not see the bottom of this unprecedented demand destruction which only accelerated through the fourth quarter and brought December operating rates to historic lows. The Company’s commitment to remain financially strong is part of the DNA of this 112-year old company.”
Dow previously announced a series of wide-ranging actions to address global economic conditions and is accelerating those actions based on continued deteriorating demand. “We are well-prepared to take the appropriate steps to ensure we retain our options and financial flexibility to see our way through what we anticipate will be an extremely challenging year,”
said Liveris.
Rohm and Haas Company (NYSE: ROH) announced today that it has been advised by The Dow Chemical Company that Dow does not intend to close the pending acquisition of Rohm and Haas on or before Tuesday, January 27, 2009. Rohm and Haas and Dow have received all required approvals for the closing and the merger agreement requires that Dow close by such date.
Rohm and Haas stated that it intends to pursue all available alternatives to protect its shareholders’ interests.
What does it all mean in the end? Nothing really. The deal will still get done, just not now. The deal in in Dow’s best interest and even a 10% price reduction is more money than Rohm shareholders are going to see for the rest of this decade so they will want it done. If the Haas family really wants to protect shareholders (being the largest, lets assume they do), they will work to get the deal done. It just comes down to financing.
By delaying the deal, Dow is also setting up a damages claim against Kuwait for their upcoming litigation.
Now that oil (USO) prices are creeping back to $50 a barrel from $30, Kuwait may be rethinking its decision to pull out, simultaneously ruining its international reputation and come crawling back. Dow will have other bidders for some or all of the commodity business’s it wants to sell, again, just a matter of time.
Liveris promised to keep the balance sheet at Dow in tact and this move is doing just that. Now if you are trading the deal this news may be awful, but id you are a long term Dow shareholder enjoying a 10% dividend, this is good news.
Yes I know the merger agreement is rather “iron clad” as folks like to say for dramatic effect but lets be honest, by the time anything winds its way through court, this will all be settled anyway. Both side are simply posturing, and both side need the deal to get done…
It will, eventually and it will be done in a way that does not pout the company in a perilous position.
Disclosure (“none” means no position):Long Dow, Long Oil (DXO, not USO), none
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Here is what to buy if Geithner’s “Obama believes China is manipulating its currency” statement causes tensions..
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This is a great interview. I love these guys who do hedge their statements and are brutally honest with their thoughts.
Pt. 1
Pt 2
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Barney Frank, Mexico, Oil Myth, Sherwin Williams, Adam’s Options
– Was the headline really necessary? “Barney Frank Goes to Bat for Lender, and It Gets an Infusion“
– So, is it the Arabs or Canadians we help the most?
– Gets reimbursed from Rhode Island ….finally
– Thank you for the mention
Disclosure (“none” means no position):
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