Daily Archives: March 2, 2008

Financial Crisis May Not Have Found Bottom

Every morning traders wake up and hope that the financial services disaster has ended and that housing has reach a nadir.

Better go back to bed. According to a study put together by four of the nation’s leading economists the worst is still ahead.

According to Reuters:

"The depth of the crisis hasn’t been hit yet if a new study by several prominent economists is correct concluding that unless financial markets can quickly recapitalize, banks are likely to cut back their lending to consumers and businesses by nearly $1 trillion. That will slash economic growth by more than a percentage point over the next 12 months, said the study by David Greenlaw of Morgan Stanley, Jan Hatzius of Goldman Sachs, Anil Kashyap of the University of Chicago, and Hyun Song Shin of Princeton University."

Douglas A. McIntyre

Posted on: March 2, 2008 – 5:09 pm in Economy

Air Force Tankers: The Case Against Northrop (NOC) And EADS

The theater which is congressional politics would have missed an entire act if the porcine members who are re-elected for their ability to bring home the bacon to their districts had not raised a great cry of "foul" when the military passed over Boeing (NYSE: BA) for the contract to build $35 billion worth of tankers. To make matters worse the eventual value of the deal could move to $100 billion and one of the big winners was French company EADS.

According to Reuters "The Congressional delegation from the Seattle area said they were "outraged." Kansas Republican Rep. Todd Tiahrt vowed to seek a review of the decision "at the highest levels of the Pentagon and Congress" in hopes of reversing it." Another member of the House was even more pointed– "We should have an American tanker built by an American company with American workers. I cannot believe we would create French jobs in place of Kansas jobs."

Members who cannot keep employment high in their districts and are viewed as being soft on the French, a nation which has been throwing spit-balls at US foreign policy for several years, are both un-American and un-electable. Being paid to live in Washington and sup with lobbyists is a privilege reserved for those who can close deals for their districts and keep jobs at home.

The first flaw in this argument that Boeing should have gotten the contract because it is an American company resides in the truth that all of the companies in the bidding were multinationals. EADS will be doing much of its work on the tankers in Alabama. GE (NYSE: GE) will be supplying $5 billion in engines for the planes. If Boeing had gotten the contract the odds are near 100% that many of the components of the tankers would have come from suppliers outside the US.

The Air Force will be dragged before Congress to justify its decision of giving a large military contract to a consortium of companies which includes one based in France. It should be a good way for representatives from states which will not get some of the plumb jobs because Boeing lost out to preen for the cameras. They can object to what they cannot fix.

Perhaps Northrop Grumman (NYSE: NOC) and EADS got the business because they were the lowest bidder. But, why should that matter?

Douglas A. McIntyre

Posted on: March 2, 2008 – 1:33 pm in Aerospace, , ,

Where Does Private Equity Invest Next? (C)(MER)(BX)(S)(MOT)

The business press has had its ear to the rail, and it has heard that more capital is headed toward private equity funds. Some of this money may be invested by the huge sovereign funds which have tens of billions of dollars in wealth, much of its created by the rising price of oil.

Most of the well-known private equity firms are in the process of raising new capital at levels of more than $10 billion each. According to the FT "The funds are being raised even though the chaos in the debt markets has derailed the traditional private equity strategy of buying companies with a modest slice of equity and loads of debt."

What can Blackstone (NYSE:BX), Apollo, Bain, and their peers be telling institutional pools of money about how they can use their new investments? Valuations may have come down, but the risk of buying almost any company has gone up. An economic slowdown may not spare most sectors.

One investment path that private equity might take is refinancing high debt at fairly healthy companies with bonds which have a lower coupon. Barron’s published a list of firms which might be candidates for a turnaround, if they could get better interest rates on their borrowing. Libbey (NYSE: LBY), FelCor (NYSE:FCH), and Gray Television (NYSE: GTN) made that list. If the private equity operators can get warrants for stock at current prices as part of these transactions, the benefit of lower interest rates should help move shares up and put those warrants well into the money.

Another route for private equity is putting capital into companies which have gotten one round of financing recently and may need another because of deteriorating markets. Merrill Lynch (NYSE: MER), Citigroup, (NYSE: C), and several other large financial institutions have taken capita from sovereign funds. This first tranche should cover most of their needs, but if additional losses force them to raise more capital, terms may get very attractive. The most at-risk money has probably already gone in and auditors have probably picked through and forced disclosure of the most vexing problems at big banks and brokerages.

The old stand-by of straight buy-outs is still around, especially as a falling stock market has brought some shares way down. There is a point where even companies like Sprint (NYSE: S) and Motorola (NYSE: MOT) will have values so low that the amount of risk in taking them private or buying them and breaking them up will actually make reasonable financial sense.

All of this means that private equity firms will move into a position of being "bottom feeders". It does not carry the cache of purchasing companies at at 20% premium during the peak of the market. But, it will have to do.

Douglas A. McIntyre 

Posted on: March 2, 2008 – 11:40 am in Private Equity, , , , , , , ,

Starbucks (SBUX): Any Benefit From Re-Training?

The staff at most of the Starbucks (NYSE: SBUX) recently went though a few hours for training. The nationwide program was designed to make the people working in the stores do a better job of serving customers that way that founder Howard Schultz thinks they should be served. If a customer is unhappy with a drink. he can simply ask to have it made again. What more could people want?

Investors would think that the action of closing so many stores and putting so much effort into improving service would show results immediately. These results might not last, but they would be a sign that management and employees both want to help the company’s results through better customer service.

A visit to a Starbucks in Mt. Kisco, New York indicates that no one was paying attention during the training day. The store was dirty. A cigarette butt at one door. A snow shovel against the new coffee makers on sale. Floors that had not been swept recently. The service area for getting milk and napkins in disarray.

Perhaps Starbucks workers should be paid based on the stock price. That might get their attention.

Douglas A. McIntyre

Posted on: March 2, 2008 – 11:06 am in Food,

This week on Stockhouse February 25 – 29

The Dow and the TSX have had a volatile week, spending most of it up on commodities and news of big buybacks

Wall Street began a downward turn Thursday that continued with heavy selling on Friday, as investors were faced with lower-than-expected earnings, worries about unemployment claims, and the prospect of more bank failures. The TSX struggled to maintain a weekly high brought on by big gains in commodities, energy, and financials.

Read More »

Posted on: March 2, 2008 – 10:57 am in Uncategorized

GM (GM): The Little Problem Of Delphi

Delphi, the former parts operation of GE (NYSE:GM) wants out of Chapter 11. It had a $6.1 billion exit package, but the credit markets have crushed that. Now GM is faced with having to throw Delphi a rope.

What can be done? According to Reuters "GM’s latest offer: $2.25 billion that had been scheduled to be paid out to the automaker in cash can instead be converted into debt for Delphi."

With troubles at its North American operations growing due to a slowing domestic market, GM hardly needs more trouble. It’s GMAC business, now majority owned by Cerberus, is also in trouble due to real estate lending buy the company.

GM’s problems now run across three fronts and that is at least two too many.

Douglas A. McIntyre

Posted on: March 2, 2008 – 7:53 am in Mergers and Buy Outs,

Military Tanker Award May Have Served US Interests (GE)(BA)(NOC)

A number of politicians and other patriots were worried that the US military awarding of a contract to build tankers may not have been good for US industry. The contract went to American firm Northrop Grumman (NYSE:NOC) and EADS, the French-based owner of Airbus.

Boeing (NYSE:BA), the predicted winner, was left out in the cold.

Some of these concerns miss a critical point. GE (NYSE:GE) will get an order for almost 400 jet engines as part of the larger contract. That is worth about $5 billion.

Douglas A. McIntyre

Posted on: March 2, 2008 – 6:59 am in Aerospace, , ,