DETROIT (Dec. 30, 2008) -- GMAC Financial Services will immediately resume auto financing for a broader spectrum of U.S. customers as a result of expanded access to funding as a bank holding company. The company will modify its credit criteria to include retail financing for customers with a credit bureau score of 621 or above, a significant expansion of credit compared to the 700 minimum score put in place two months ago.
GMAC's application to become a bank holding company was approved by the Federal Reserve Board of Governors on Dec. 24, 2008. The company also announced that it received an investment from the U.S. Treasury Department as part of the Troubled Assets Relief Program.
"The actions of the federal government to support GMAC are having an immediate and meaningful effect on our ability to provide credit to automotive customers," said GMAC President Bill Muir. "We will continue to employ responsible credit standards, but will be able to relax the constraints we put in place a few months ago due to the credit crisis. We will immediately put our renewed access to capital to use to facilitate the purchase of cars and trucks in the U.S."
At this time, GMAC will not finance higher risk transactions characterized by a credit bureau score of 620 or below. The company will utilize both GMAC Bank and funding from other sources to resume its traditional spectrum of prime-based credit, appropriately pricing for risk and requiring down payments where necessary.
"The majority of GMAC's auto financing has been in the prime arena," Muir said. "Therefore, opening access to credit for those with CB scores of 621 or better will allow us to return to more normal levels of financing volume, and should help in efforts to stabilize the U.S. auto industry."
GMAC's expanded financing policy and improved retail financing rates will apply to both new and certified used vehicles. Dealer wholesale financing remains a priority for GMAC, and is unchanged.
Wednesday, December 31, 2008
GMAC And Tarp
NEW YORK (Dec. 29, 2008) -- GMAC Financial Services today announced that it has sold $5.0 billion of GMAC's preferred membership interests and warrants to the U.S. Department of the Treasury as a participant in the Troubled Assets Relief Program established under the Emergency Economic Stabilization Act of 2008. The sale was completed today.
GMAC also announced that General Motors Corp. (GM) and an affiliate of Cerberus Capital Management contributed to GMAC the $750 million subordinated participations in the $3.5 billion senior secured credit facility, as amended, between GMAC and Residential Capital, LLC in exchange for new common equity of GMAC. In addition, GMAC announced that GM and an affiliate of Cerberus Capital Management entered into agreements to purchase $1.25 billion of new common equity. The U.S. Treasury and GM intend to enter into an agreement for the Treasury to fund GM's share of the new common equity.
GMAC also announced that the conditions to its previously announced separate private exchange offers and cash tender offers have been satisfied and that GMAC has accepted all of the validly tendered GMAC old notes and ResCap old notes. The GMAC offers and the ResCap offers are expected to settle promptly.
GMAC received approval of its bank holding company application from the U.S. Federal Reserve Board on Dec. 24, 2008. As a bank holding company, GMAC has improved access to funding to provide financing to consumers and businesses. In particular, the company intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles.
About GMAC Financial ServicesGMAC Financial Services is a global finance company operating in and servicing North America, South America, Europe and Asia-Pacific. GMAC specializes in automotive finance, real estate finance, insurance, commercial finance and online banking. As of Dec. 31, 2007, the organization had $248 billion in assets and serviced 15 million customers. Visit the GMAC media site at http://media.gmacfs.com/ for more information.
GMAC also announced that General Motors Corp. (GM) and an affiliate of Cerberus Capital Management contributed to GMAC the $750 million subordinated participations in the $3.5 billion senior secured credit facility, as amended, between GMAC and Residential Capital, LLC in exchange for new common equity of GMAC. In addition, GMAC announced that GM and an affiliate of Cerberus Capital Management entered into agreements to purchase $1.25 billion of new common equity. The U.S. Treasury and GM intend to enter into an agreement for the Treasury to fund GM's share of the new common equity.
GMAC also announced that the conditions to its previously announced separate private exchange offers and cash tender offers have been satisfied and that GMAC has accepted all of the validly tendered GMAC old notes and ResCap old notes. The GMAC offers and the ResCap offers are expected to settle promptly.
GMAC received approval of its bank holding company application from the U.S. Federal Reserve Board on Dec. 24, 2008. As a bank holding company, GMAC has improved access to funding to provide financing to consumers and businesses. In particular, the company intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles.
About GMAC Financial ServicesGMAC Financial Services is a global finance company operating in and servicing North America, South America, Europe and Asia-Pacific. GMAC specializes in automotive finance, real estate finance, insurance, commercial finance and online banking. As of Dec. 31, 2007, the organization had $248 billion in assets and serviced 15 million customers. Visit the GMAC media site at http://media.gmacfs.com/ for more information.
Tuesday, December 30, 2008
Yummy Chinese
Yum! is testing East Dawning, the company's Chinese quick-service restaurant brand to provide affordable, great-tasting, authentic Chinese food to the Chinese customer. The East Dawning menu is 100% Chinese and offers a wide range of options for all day parts including breakfast, lunch, dinner and snacks. Today there are 16 East Dawning test stores in China. (Q3 2008)
Yum Brands In China
Yum! China
The Yum! China Division (includes mainland China, Thailand and KFC Taiwan), based in Shanghai, has been reported separately since the beginning of 2005 due to its size, unique strength and importance.
Mainland China is Yum! Brands number one market for new company restaurant development worldwide. In 2007, operating profits for the China Division were more than $375 million and the company opened 471 new restaurants last year in mainland China. We expect to have more than 3,000 KFC, Pizza Hut, Pizza Hut Home Service and East Dawning restaurants in more than 500 cities in mainland China by the end of 2008. (Q3 2008)
Our strategy is to be the leader in every significant food service category in mainland China. KFC was the first quick-service restaurant chain to enter China in 1987, the first to bring franchising to China in 1992 and the first to open a drive-through in China in 2002. KFC continues to be the number one quick-service restaurant brand and the largest and fastest growing restaurant chain in mainland China today, with more than 2,300 restaurants in nearly 500 cities. Yum! opens nearly one new KFC every day in mainland China. (Q3 2008)
Pizza Hut was the first restaurant chain to introduce pizza and Western-style casual dining to China in 1990 and the first to introduce pizza delivery to China in 2001. Today Pizza Hut is the number one casual dining brand in mainland China with 400 Pizza Hut Casual Dining restaurants in nearly 100 cities and an additional 70 Pizza Hut Home Service delivery units. (Q3 2008)
Each of our brands has great momentum in China as we move into 2009 and continue our goal of at least 20,000 units over the long term in mainland China.
The Yum! China Division (includes mainland China, Thailand and KFC Taiwan), based in Shanghai, has been reported separately since the beginning of 2005 due to its size, unique strength and importance.
Mainland China is Yum! Brands number one market for new company restaurant development worldwide. In 2007, operating profits for the China Division were more than $375 million and the company opened 471 new restaurants last year in mainland China. We expect to have more than 3,000 KFC, Pizza Hut, Pizza Hut Home Service and East Dawning restaurants in more than 500 cities in mainland China by the end of 2008. (Q3 2008)
Our strategy is to be the leader in every significant food service category in mainland China. KFC was the first quick-service restaurant chain to enter China in 1987, the first to bring franchising to China in 1992 and the first to open a drive-through in China in 2002. KFC continues to be the number one quick-service restaurant brand and the largest and fastest growing restaurant chain in mainland China today, with more than 2,300 restaurants in nearly 500 cities. Yum! opens nearly one new KFC every day in mainland China. (Q3 2008)
Pizza Hut was the first restaurant chain to introduce pizza and Western-style casual dining to China in 1990 and the first to introduce pizza delivery to China in 2001. Today Pizza Hut is the number one casual dining brand in mainland China with 400 Pizza Hut Casual Dining restaurants in nearly 100 cities and an additional 70 Pizza Hut Home Service delivery units. (Q3 2008)
Each of our brands has great momentum in China as we move into 2009 and continue our goal of at least 20,000 units over the long term in mainland China.
Monday, December 29, 2008
HP, A Safe Haven
HP has become a more profitable and financially stable company under CEO Mark Hurd, who sees modest earnings growth through the next year. Better yet, the current slowdown may provide opportunities for HP to gain market share.
HEWLETT-PACKARD CHIEF MARK HURD doesn't offer any greater insights about the length or depth of this recession than the next guy. "This is not a strong market," he says. "We don't have any way of predicting whether this is a rebound.... It's going to take a period of time to build the fundamentals backup in the economy."
Buying EDS opens up opportunities and makes HP a tougher foe of IBM.
Even if his observations don't stray far from the conventional wisdom, Hurd distinguishes himself in a more important way: the ability to manage a huge technology company through hard times.
While other tech titans like Intel have been reforecasting downward, spreading more doom and gloom, Hurd projects that HP (ticker: HPQ) will have modest earnings growth through next year. The Street's consensus estimate puts Hewlett-Packard's 2009 profit at $9.46 billion, or $3.84 per share, for fiscal 2009, ending Oct. 31. That would be up from $8.3 billion or $3.62 a share, in the 2008 fiscal year.
The cost-conscious Hurd recently told Barron's that he is focused even more on profitability in this tough environment than he has been at other points in the business cycle. "I'm a lot more comfortable on the bottom line than I am on the top line, and I think we'll do well, relative to whatever market shows up, and that's probably the best I can do," he said in a recent interview at HP's Palo Alto, Calif., headquarters.
About a week before HP was slated to announce quarterly earnings last month, Hurd suspected that he had better news than his competitors, especially Dell (DELL), which was scheduled to announce its earnings four days before HP. With Hewlett shares at that time down 35% this year, to about 29, Hurd opted to preannounce a positive surprise to earnings, pushing his stock up about four points just afterward, even though future revenue (not including new sales from a major acquisition) looked "flattish." As it turned out, Dell's earnings met previously lowered estimates, though its revenue was disappointing to investors and its stock fell about 10%.
Hurd, who spent 25 years at National Cash Register, including a stint as CEO, sits atop one of the biggest information-technology companies in the world. It operates in three businesses: imaging and printing, which has long been a cash cow, accounting for about 25% of annual revenue; personal systems, which includes the personal-computer unit along with other consumer electronics and gadgets that generate roughly 36% of revenue; and technology solutions, which consists mostly of enterprise servers, storage, and business software and services, such as outsourcing, that also produce about 38% of revenue.
LESS THAN A DECADE AGO, HP was almost solely dependent on printer-ink supplies. Since Hurd's arrival in 2005, each of the business units has grown more profitable, giving the company financial balance and stability. Over the past four fiscal years, revenue has grown to $118.4 billion from $80 billion, while earnings per share have more than doubled.
HP Diversified Opportunities: Hewlett-Packard has a multitude of services and products aimed at both the consumer and corporate markets. About 60% of its revenue comes from abroad, another plus in tough times.
This emphasis on profits and diversity has helped HP earn a reputation as a top defensive tech play. In Hurd's nearly four-year reign, HP has met or exceeded every quarterly consensus target for earnings per share.
Recurring revenue of $40 billion a year helps HP qualify as a defensive play. This comes from items like ink supplies, outsourcing and corporate leasing, which account for about a third of total revenue. More important, those recurring sales will help to generate about half of the company's $9.46 billion-plus in estimated fiscal '09 earnings.
HP has the size and diversification -- in geography (about 60% of sales come from abroad), product lines and exposure to both consumer and enterprise markets -- that allow it to perform well during slow-to-no-growth economies, Barclays' Reitzes says. "That is part of the reason Mark has that confidence," Reitzes says.
On Nov. 18, HP surprised Wall Street with a preliminary announcement that its fourth-quarter earnings would beat analyst expectations. The company reported non-GAAP fiscal earnings of $1.03 a share, surpassing the Street's $1.00 estimate. Net revenue for the fiscal year was $118.4 billion, up 13% from the previous year.
"Those are real solid numbers," says money manager Chuck Jones of Atlantic Trust in San Francisco. Atlantic Trust has $15 billion under management, including a stake in HP.
Despite their reversal of fortune, on a forward earnings basis HP shares trade more cheaply than Dell's. HP trades for 8.18 times fiscal 2010 estimated earnings, versus Dell's 8.32 multiple for its Feb. 1, 2010, earnings. HP also seems a bargain compared to IBM (IBM), which trades at nine times expected 2009 earnings.
The multiple is particularly attractive, says Jones, when coupled with HP's strong cash generation, even during miserable economic times, driven by the reliable revenue streams.
HEWLETT-PACKARD HAS "limited downside and significant upside," Jones says. He thinks the shares could rally to the low-50s once signs of normalcy return to the stock market. As much as Hurd's acquisition of the Plano, Texas-based outsourcing outfit EDS helps fulfill his quest to build a "one-stop shop" for corporate digital-data needs like IBM's, there still is an important distinction between HP and Big Blue: the consumer market.
HP has the third-highest consumer revenue among computer-electronics outfits, following Apple (APPL) and printer-maker Lexmark (LXK), according to Bernstein Research hardware analyst Toni Sacconaghi. About 25% of HP's sales come from consumer products, compared with less than 1% at IBM, which exited printers and personal computers years ago to concentrate on corporate services.
Consequently, half-empty shopping malls have weighed heavily on HP shares, Sacconaghi says. But, considering that inkjet supplies account for about 98% of HP's consumer-driven profits, those fears are exaggerated. Ink sales should be "relatively immune to a slowdown," says Sacconaghi, who rates HP a Buy and expects the shares to reach 40.
Another interesting twist is that soft printer sales could actually mean higher overall margins, because printers lose money at retail. Sacconaghi foresees a drop in printer sales that would boost operating profits by $65 million, sufficient to compensate for a potential drop of nearly 2% in ink sales.
Long term, a decline in printers would hurt Hewlett-Packard. But Hurd says it's not a bad thing in the short term, especially as HP research shows people are keeping their printers longer. "We don't care if it's a new printer or an old printer doing the printing," he says.
Personal computers also are important contributors to HP's consumer-product line, kicking in about 10% of operating profits. After showing resilience in 2008, PC sales growth is expected to slow in 2009. The research firm IDC expects PC unit shipments industry wide to grow only 3.8% next year, compared with its earlier forecast of 13.7% growth. PC revenue is expected to fall about 5.3% in '09, compared with previous predictions of 4.5% growth, nearly a 10 percentage-point swing.
The biggest boost to profits and margins should come from EDS. This strategic addition is expected to allow HP to compete more aggressively with IBM for big corporate deals, and its integration couldn't be more timely. With operating margins in excess of 60% and long-term contracts stretching over three to five years, the EDS outsourcing business supplements recurring revenue while taking some of the pressure off inkjet-supply sales.
What's more, outsourcing is an enterprise-related, not a consumer business. Bernstein's Sacconaghi was concerned that some corporate clients would try to use change-in-control clauses in their contracts to bail on their outsourcing commitments, but Hurd says that hasn't been the case, except for a handful of customers who had disputes with EDS. "I can't think of any material customer exiting," Hurd says.
As CEO, Hurd consistently has met or beaten profit expectations.
Hurd has recruited the former CFO from his days running National Cash Register to help oversee the cost-cutting project. Pete Bocian, who had moved to Starbucks as CFO, was named chief administrative officer of HP in November, and will be based in Plano, near HP's EDS operations.
HP's other challenges include a weaker euro, which has a negative effect on revenue. Hurd urges investors to focus on profits. Margins, he says, would remain the same regardless of currency fluctuations. It is also possible the dollar will weaken again against the euro, in light of the Federal Reserve's dramatic interest-rate cuts.
Debt is also an issue. HP used commercial paper to finance its EDS acquisition, with the intention of extending its maturity later on. Given the capital markets' problems, that may now be tough to do. But Hurd counters that the company doesn't need to issue as much in bonds as initially thought, and the commercial-paper market remains open to issuers like HP, which recently completed a $2 billion bond offering.
Yet another potential problem is HP's large defined-benefit pension plan, which has been hard hit by the bear market in stocks. The company may have to kick in more money to maintain adequate funding. Bernstein's Sacconaghi says HP has built that risk into its planning, and any payments should be a "manageable" amount.
Given its strong financial position, the current slowdown could provide opportunities for HP to gain market share. "Now is the time to differentiate yourself with your customers," Hurd says. "It's not the easiest thing to do."
But it's something Hewlett-Packard -- and Hurd -- can do well.
HEWLETT-PACKARD CHIEF MARK HURD doesn't offer any greater insights about the length or depth of this recession than the next guy. "This is not a strong market," he says. "We don't have any way of predicting whether this is a rebound.... It's going to take a period of time to build the fundamentals backup in the economy."
Buying EDS opens up opportunities and makes HP a tougher foe of IBM.
Even if his observations don't stray far from the conventional wisdom, Hurd distinguishes himself in a more important way: the ability to manage a huge technology company through hard times.
While other tech titans like Intel have been reforecasting downward, spreading more doom and gloom, Hurd projects that HP (ticker: HPQ) will have modest earnings growth through next year. The Street's consensus estimate puts Hewlett-Packard's 2009 profit at $9.46 billion, or $3.84 per share, for fiscal 2009, ending Oct. 31. That would be up from $8.3 billion or $3.62 a share, in the 2008 fiscal year.
The cost-conscious Hurd recently told Barron's that he is focused even more on profitability in this tough environment than he has been at other points in the business cycle. "I'm a lot more comfortable on the bottom line than I am on the top line, and I think we'll do well, relative to whatever market shows up, and that's probably the best I can do," he said in a recent interview at HP's Palo Alto, Calif., headquarters.
About a week before HP was slated to announce quarterly earnings last month, Hurd suspected that he had better news than his competitors, especially Dell (DELL), which was scheduled to announce its earnings four days before HP. With Hewlett shares at that time down 35% this year, to about 29, Hurd opted to preannounce a positive surprise to earnings, pushing his stock up about four points just afterward, even though future revenue (not including new sales from a major acquisition) looked "flattish." As it turned out, Dell's earnings met previously lowered estimates, though its revenue was disappointing to investors and its stock fell about 10%.
Hurd, who spent 25 years at National Cash Register, including a stint as CEO, sits atop one of the biggest information-technology companies in the world. It operates in three businesses: imaging and printing, which has long been a cash cow, accounting for about 25% of annual revenue; personal systems, which includes the personal-computer unit along with other consumer electronics and gadgets that generate roughly 36% of revenue; and technology solutions, which consists mostly of enterprise servers, storage, and business software and services, such as outsourcing, that also produce about 38% of revenue.
LESS THAN A DECADE AGO, HP was almost solely dependent on printer-ink supplies. Since Hurd's arrival in 2005, each of the business units has grown more profitable, giving the company financial balance and stability. Over the past four fiscal years, revenue has grown to $118.4 billion from $80 billion, while earnings per share have more than doubled.
HP Diversified Opportunities: Hewlett-Packard has a multitude of services and products aimed at both the consumer and corporate markets. About 60% of its revenue comes from abroad, another plus in tough times.
This emphasis on profits and diversity has helped HP earn a reputation as a top defensive tech play. In Hurd's nearly four-year reign, HP has met or exceeded every quarterly consensus target for earnings per share.
Recurring revenue of $40 billion a year helps HP qualify as a defensive play. This comes from items like ink supplies, outsourcing and corporate leasing, which account for about a third of total revenue. More important, those recurring sales will help to generate about half of the company's $9.46 billion-plus in estimated fiscal '09 earnings.
HP has the size and diversification -- in geography (about 60% of sales come from abroad), product lines and exposure to both consumer and enterprise markets -- that allow it to perform well during slow-to-no-growth economies, Barclays' Reitzes says. "That is part of the reason Mark has that confidence," Reitzes says.
On Nov. 18, HP surprised Wall Street with a preliminary announcement that its fourth-quarter earnings would beat analyst expectations. The company reported non-GAAP fiscal earnings of $1.03 a share, surpassing the Street's $1.00 estimate. Net revenue for the fiscal year was $118.4 billion, up 13% from the previous year.
"Those are real solid numbers," says money manager Chuck Jones of Atlantic Trust in San Francisco. Atlantic Trust has $15 billion under management, including a stake in HP.
Despite their reversal of fortune, on a forward earnings basis HP shares trade more cheaply than Dell's. HP trades for 8.18 times fiscal 2010 estimated earnings, versus Dell's 8.32 multiple for its Feb. 1, 2010, earnings. HP also seems a bargain compared to IBM (IBM), which trades at nine times expected 2009 earnings.
The multiple is particularly attractive, says Jones, when coupled with HP's strong cash generation, even during miserable economic times, driven by the reliable revenue streams.
HEWLETT-PACKARD HAS "limited downside and significant upside," Jones says. He thinks the shares could rally to the low-50s once signs of normalcy return to the stock market. As much as Hurd's acquisition of the Plano, Texas-based outsourcing outfit EDS helps fulfill his quest to build a "one-stop shop" for corporate digital-data needs like IBM's, there still is an important distinction between HP and Big Blue: the consumer market.
HP has the third-highest consumer revenue among computer-electronics outfits, following Apple (APPL) and printer-maker Lexmark (LXK), according to Bernstein Research hardware analyst Toni Sacconaghi. About 25% of HP's sales come from consumer products, compared with less than 1% at IBM, which exited printers and personal computers years ago to concentrate on corporate services.
Consequently, half-empty shopping malls have weighed heavily on HP shares, Sacconaghi says. But, considering that inkjet supplies account for about 98% of HP's consumer-driven profits, those fears are exaggerated. Ink sales should be "relatively immune to a slowdown," says Sacconaghi, who rates HP a Buy and expects the shares to reach 40.
Another interesting twist is that soft printer sales could actually mean higher overall margins, because printers lose money at retail. Sacconaghi foresees a drop in printer sales that would boost operating profits by $65 million, sufficient to compensate for a potential drop of nearly 2% in ink sales.
Long term, a decline in printers would hurt Hewlett-Packard. But Hurd says it's not a bad thing in the short term, especially as HP research shows people are keeping their printers longer. "We don't care if it's a new printer or an old printer doing the printing," he says.
Personal computers also are important contributors to HP's consumer-product line, kicking in about 10% of operating profits. After showing resilience in 2008, PC sales growth is expected to slow in 2009. The research firm IDC expects PC unit shipments industry wide to grow only 3.8% next year, compared with its earlier forecast of 13.7% growth. PC revenue is expected to fall about 5.3% in '09, compared with previous predictions of 4.5% growth, nearly a 10 percentage-point swing.
The biggest boost to profits and margins should come from EDS. This strategic addition is expected to allow HP to compete more aggressively with IBM for big corporate deals, and its integration couldn't be more timely. With operating margins in excess of 60% and long-term contracts stretching over three to five years, the EDS outsourcing business supplements recurring revenue while taking some of the pressure off inkjet-supply sales.
What's more, outsourcing is an enterprise-related, not a consumer business. Bernstein's Sacconaghi was concerned that some corporate clients would try to use change-in-control clauses in their contracts to bail on their outsourcing commitments, but Hurd says that hasn't been the case, except for a handful of customers who had disputes with EDS. "I can't think of any material customer exiting," Hurd says.
As CEO, Hurd consistently has met or beaten profit expectations.
Hurd has recruited the former CFO from his days running National Cash Register to help oversee the cost-cutting project. Pete Bocian, who had moved to Starbucks as CFO, was named chief administrative officer of HP in November, and will be based in Plano, near HP's EDS operations.
HP's other challenges include a weaker euro, which has a negative effect on revenue. Hurd urges investors to focus on profits. Margins, he says, would remain the same regardless of currency fluctuations. It is also possible the dollar will weaken again against the euro, in light of the Federal Reserve's dramatic interest-rate cuts.
Debt is also an issue. HP used commercial paper to finance its EDS acquisition, with the intention of extending its maturity later on. Given the capital markets' problems, that may now be tough to do. But Hurd counters that the company doesn't need to issue as much in bonds as initially thought, and the commercial-paper market remains open to issuers like HP, which recently completed a $2 billion bond offering.
Yet another potential problem is HP's large defined-benefit pension plan, which has been hard hit by the bear market in stocks. The company may have to kick in more money to maintain adequate funding. Bernstein's Sacconaghi says HP has built that risk into its planning, and any payments should be a "manageable" amount.
Given its strong financial position, the current slowdown could provide opportunities for HP to gain market share. "Now is the time to differentiate yourself with your customers," Hurd says. "It's not the easiest thing to do."
But it's something Hewlett-Packard -- and Hurd -- can do well.
Stock Pick - Linn Energy
From Barrons
THE COLLAPSE IN NATURAL-GAS and oil markets has sent the price of Linn Energy plummeting in the past six months, from over $25 in June to below $12 last week.
Linn focuses on mature fields that have ample reserves, but no longer produce at the high levels that the majors prefer.
Linn, a modest-sized gas and oil driller, is structured as a master limited partnership, paying out some 60% to 70% of its quarterly cash flow to its shareholders in tax-advantaged distributions. The big fear among investors is that those payouts will soon wither as a result of weak energy prices.
And as if that weren't enough, Wall Street worries that frozen capital markets will keep Linn from following its growth-through-acquisition policy that in the past has permitted the partnership to boost quarterly cash flows and therefore unit distributions.
Such concerns seem amiss. For one thing, Linn (ticker: LINE) is an astute and disciplined hedger and, as such, was able to lock in favorable prices during this summer's energy-price bubble for its products going out three to four years. In fact, based on its third-quarter distribution of 63 cents per unit (or $2.52 annualized), the company is throwing off a current yield of more than 20%.
Citigroup analyst Richard Roy wrote in a recent report that this distribution level is "relatively secure" for at least the next two years or more, even if Linn makes no new acquisitions in the period. As a result, Roy has a one-year price target on Linn of 22, while John Kang of RBC Capital Markets sets an even higher target price of 27, more than double the current level.
LINN'S OPERATING PHILOSOPHY is a conservative one, emphasizing yield generation over flashy new discoveries. As such, the company concentrates its acquisition and drilling activity on mature fields that have ample reserves but no longer produce at the high levels favored by the majors or aggressive exploration outfits. "We're looking for bunt singles and not home runs," avers Michael Linn, chairman and CEO of the eponymous company, who grew up in Pittsburgh but now runs the company out of Houston. In a nod to his natal city, the colors on the Linn logo and on the cover of its annual report are Pittsburgh Steeler black and yellow.
The company's fields typically have 20-to-30-year lives and undergo slow annual production declines. They also afford ample opportunity to boost production through reworking old bore holes, pumping equipment, water-injection systems and lifts. The geology of the fields is such that Linn generally has a near 100% success rate when it drills. Some of the fields, like the Naval Reserve Unit in Oklahoma and Brea-Olinda near Los Angeles, have nearly a century or more of productive history.
Even in a steady state with no new acquisitions, CEO Linn claims that the company can keep its production levels, and therefore distributions, flat or gently rising through work-overs and drilling additional wells on its existing acreage. The company has identified 4,100 low-risk drilling locations on its properties with promise of boosting production. "That's about 15 years worth of drilling at our current pace, or 200 to 300 wells a year," he says. "We could keep our production going at current levels with just 150 new wells a year."
And the company is not without financial flexibility, even in today's severe credit crunch. It opportunistically sold off three different properties so far this year for a total of around $1 billion, taking advantage of the frenzy in oil and gas speculation this summer. A particularly hot item was Linn's Marcellus Shale acreage in Pennsylvania's Appalachian Basin, which Linn adjudged to be promising but too expensive for a company of its ilk to develop.
AS A RESULT OF THE SALES, LINN now has about $500 million of borrowing capacity under its credit facility. This is after taking into account a $100 million stock- repurchase plan that the company has instituted but not unleashed. The latter gives the company plenty of potential firepower with which to defend its stock price. The company says it will be able to cover all of its capital spending and unit distributions next year from internally generated cash flow.
Crucial to Linn's rich distributions and past growth has been its hedging programs. First off, the company generally hedges, or locks in profit margins, on a higher percentage of its future production than its competitors. It also hedges production for more years in the future than certain of its rivals.
This has stood Linn in good stead during the galvanic commodity price swings that saw natural- gas prices slide from $13 per million British thermal units this past summer to around $5.50 and crude oil dive from $147 a barrel to under $40 over the same span.
Linn doesn't speculate by timing the market. Yet it did much to protect future price realizations during the summer surge by cashing in some profitable derivative positions and moving up the price floor at which it can "put" its production to different counterparties. For example, the company moved its put exercise prices for 2009 and 2010 oil production up to $120 and $110 a barrel, respectively, from $72 previously.
It also boosted the floor prices for its natural-gas output, which accounts for about 60% of its total production. "We felt we should lock in the windfall prices being offered, and it turned out to be a wise decision in light of the subsequent price collapses," observes Linn's chief financial officer, Kolja Rockov.
Linn's current production levels are hedged 99% for next year, 107% for 2010, 101% for 2011 and 66% for 2012 -- far greater coverage than at most rivals.
The Bottom Line:
The limited partnership's shares, pounded in recent months, could roughly double over the next year if the lofty level of cash-flow distributions holds up.
The company uses futures markets and the commercial swap market to lock in set prices on forward sales for about 60% of its production. Put option purchases account for the bulk of the remaining hedges. The advantage of puts is that Linn can participate in any of the price action above the exercise price should the markets go wild, as they did earlier this year. Yet puts give the hedger a minimum should prices plunge, as they have lately.
As primarily a yield play for older investors, the company tries to be as plain and drab as "an old Chevrolet door handle," in the words of Michael Linn. And the company appears to have done a nice job of protecting its distribution levels. Given its current knockdown unit price, Linn seems poised to deliver some capital gains, too.
THE COLLAPSE IN NATURAL-GAS and oil markets has sent the price of Linn Energy plummeting in the past six months, from over $25 in June to below $12 last week.
Linn focuses on mature fields that have ample reserves, but no longer produce at the high levels that the majors prefer.
Linn, a modest-sized gas and oil driller, is structured as a master limited partnership, paying out some 60% to 70% of its quarterly cash flow to its shareholders in tax-advantaged distributions. The big fear among investors is that those payouts will soon wither as a result of weak energy prices.
And as if that weren't enough, Wall Street worries that frozen capital markets will keep Linn from following its growth-through-acquisition policy that in the past has permitted the partnership to boost quarterly cash flows and therefore unit distributions.
Such concerns seem amiss. For one thing, Linn (ticker: LINE) is an astute and disciplined hedger and, as such, was able to lock in favorable prices during this summer's energy-price bubble for its products going out three to four years. In fact, based on its third-quarter distribution of 63 cents per unit (or $2.52 annualized), the company is throwing off a current yield of more than 20%.
Citigroup analyst Richard Roy wrote in a recent report that this distribution level is "relatively secure" for at least the next two years or more, even if Linn makes no new acquisitions in the period. As a result, Roy has a one-year price target on Linn of 22, while John Kang of RBC Capital Markets sets an even higher target price of 27, more than double the current level.
LINN'S OPERATING PHILOSOPHY is a conservative one, emphasizing yield generation over flashy new discoveries. As such, the company concentrates its acquisition and drilling activity on mature fields that have ample reserves but no longer produce at the high levels favored by the majors or aggressive exploration outfits. "We're looking for bunt singles and not home runs," avers Michael Linn, chairman and CEO of the eponymous company, who grew up in Pittsburgh but now runs the company out of Houston. In a nod to his natal city, the colors on the Linn logo and on the cover of its annual report are Pittsburgh Steeler black and yellow.
The company's fields typically have 20-to-30-year lives and undergo slow annual production declines. They also afford ample opportunity to boost production through reworking old bore holes, pumping equipment, water-injection systems and lifts. The geology of the fields is such that Linn generally has a near 100% success rate when it drills. Some of the fields, like the Naval Reserve Unit in Oklahoma and Brea-Olinda near Los Angeles, have nearly a century or more of productive history.
Even in a steady state with no new acquisitions, CEO Linn claims that the company can keep its production levels, and therefore distributions, flat or gently rising through work-overs and drilling additional wells on its existing acreage. The company has identified 4,100 low-risk drilling locations on its properties with promise of boosting production. "That's about 15 years worth of drilling at our current pace, or 200 to 300 wells a year," he says. "We could keep our production going at current levels with just 150 new wells a year."
And the company is not without financial flexibility, even in today's severe credit crunch. It opportunistically sold off three different properties so far this year for a total of around $1 billion, taking advantage of the frenzy in oil and gas speculation this summer. A particularly hot item was Linn's Marcellus Shale acreage in Pennsylvania's Appalachian Basin, which Linn adjudged to be promising but too expensive for a company of its ilk to develop.
AS A RESULT OF THE SALES, LINN now has about $500 million of borrowing capacity under its credit facility. This is after taking into account a $100 million stock- repurchase plan that the company has instituted but not unleashed. The latter gives the company plenty of potential firepower with which to defend its stock price. The company says it will be able to cover all of its capital spending and unit distributions next year from internally generated cash flow.
Crucial to Linn's rich distributions and past growth has been its hedging programs. First off, the company generally hedges, or locks in profit margins, on a higher percentage of its future production than its competitors. It also hedges production for more years in the future than certain of its rivals.
This has stood Linn in good stead during the galvanic commodity price swings that saw natural- gas prices slide from $13 per million British thermal units this past summer to around $5.50 and crude oil dive from $147 a barrel to under $40 over the same span.
Linn doesn't speculate by timing the market. Yet it did much to protect future price realizations during the summer surge by cashing in some profitable derivative positions and moving up the price floor at which it can "put" its production to different counterparties. For example, the company moved its put exercise prices for 2009 and 2010 oil production up to $120 and $110 a barrel, respectively, from $72 previously.
It also boosted the floor prices for its natural-gas output, which accounts for about 60% of its total production. "We felt we should lock in the windfall prices being offered, and it turned out to be a wise decision in light of the subsequent price collapses," observes Linn's chief financial officer, Kolja Rockov.
Linn's current production levels are hedged 99% for next year, 107% for 2010, 101% for 2011 and 66% for 2012 -- far greater coverage than at most rivals.
The Bottom Line:
The limited partnership's shares, pounded in recent months, could roughly double over the next year if the lofty level of cash-flow distributions holds up.
The company uses futures markets and the commercial swap market to lock in set prices on forward sales for about 60% of its production. Put option purchases account for the bulk of the remaining hedges. The advantage of puts is that Linn can participate in any of the price action above the exercise price should the markets go wild, as they did earlier this year. Yet puts give the hedger a minimum should prices plunge, as they have lately.
As primarily a yield play for older investors, the company tries to be as plain and drab as "an old Chevrolet door handle," in the words of Michael Linn. And the company appears to have done a nice job of protecting its distribution levels. Given its current knockdown unit price, Linn seems poised to deliver some capital gains, too.
Tuesday, December 23, 2008
Dividends Are A Good Thing
From BusinessWeek
A modest, steady income from stocks such as Coca-Cola and McDonald's is enticing for those burned by growth stocks in the financial crisis.
During the long bull market, many individuals viewed dividends as a relic of their grandparents' generation—good for widows but of little value to serious investors seeking outsize returns. As growth stocks have lost their appeal amid the Wall Street meltdown, however, many investors are showing a new interest in safe stocks that pay a steady dividend. And as stock prices have tumbled, the relative yield paid out by large companies has risen: The dividend payout for companies in the Standard & Poor's 500-stock index is equal to 3.3% of the current price of these stocks—nearly twice the average payout at the end of 2007 and the highest dividend yield since 1990.
Even though President-elect Barack Obama has discussed raising the tax on dividend income for top earners, either to 20% or 25%, that won't dim their new allure. Some Wall Street pros think dividends could become a key measure by which many investors judge stocks. Investors "have a once-in-a-generation opportunity to buy quality blue-chip companies [and] lock in very satisfactory yields," says Marc Heilweil, president of Spectrum Advisory Services in Atlanta.
The good news for investors is that the relative returns from dividends haven't been this big in decades. Pros note that the average yield for the S&P 500 exceeds the current 2.2% yield on 10-year Treasuries—that hasn't happened since 1957. And money managers believe that while the payouts of banks and other troubled sectors risk being cut, many companies in the food, beverage, and health-care sectors have the cash flow to maintain their dividends. "In a lot of sectors, there is a buffer," says LPL Financial chief market strategist Jeffrey Kleintop. Some good bets include Coca-Cola (COK) and McDonald's (MCD).
What to buy? While many payouts look tempting, pouring money into stocks with suspiciously large dividends can be just as dangerous as chasing the latest Internet highflier. Indeed, some companies with hefty dividend yields backed into that position only after their stocks plunged. And the unwillingness of investors to dive back in to capture that yield suggests the smart money expects a dividend cut, or worse. "Sometimes the reason a company has a high dividend is that the fundamentals are rapidly deteriorating," says Scott Jones, a principal at Minneapolis asset manager Lowry Hill.
DANGEROUS RATIOS
That may be the case with many real estate investment trusts, or REITs, according to Paul Gray, a portfolio manager at Kensington Investment Group. REITs borrow to buy real estate, so the state of the credit markets is a key concern. "The lack of credit is going to hurt companies that have a lot of debt coming due," Gray says, citing General Growth Properties (GGP) as a REIT that was forced to suspend its dividend.
One way to determine if a company's dividend is sustainable is to calculate its "payout ratio," the percentage of net income that it pays out in dividends. If the ratio is too high—say, 70%—and earnings fall, a company has three choices: It can cut the dividend, raid its cash reserves, or dial back on crucial investments in its business.
3M (MMM), with a dividend yield of 3.6%, has no such risk. Heilweil notes that while it has cut jobs and profit expectations, its payout ratio is a mere 37%, and it is sitting on almost $3 billion in cash. The maker of all things sticky generated $3.1 billion in free cash flow in the past year. That gives it enough of a cushion to cover its $1.4 billion annual payout even if its earnings next year tumble by 3% to 12%, as 3M recently forecast.
Investors should also examine a company's cash position and its ability to generate steady profits during past downturns.
Paul Alan Davis, manager of the Schwab Dividend Equity Fund, uses proprietary financial screens to identify "big stable companies that have a lot of cash and are better able to withstand this slowdown." His holdings include Chevron and Procter & Gamble .
P&G is part of an elite group: The Standard & Poor's S&P 500 Dividend Aristocrats—52 large companies, including ExxonMobil (CVX) and Wal-Mart Stores (WMT), that have raised their dividends in each of the past 25 years, even during recessions. While there are no guarantees that every one of these outfits will maintain its streak through the current recession, many professionals believe the Aristocrats are less likely to cut their dividends in the hard times that may lie ahead. "An equity investor more than ever wants to own quality," says Don Taylor, a portfolio manager at Franklin Advisory Services. "You don't know how bad the economy is going to be, and for how long."
One Aristocrat at risk of being dethroned, however, is Gannett (GCI). The newspaper company, which saw its earnings plummet 32% last quarter and its credit rating trimmed by S&P, sports a dividend yield above 21%—a sign that the market believes Gannett's dividend is unsustainable.
Investors who want the income stream from dividends, but without doing the research, can avail themselves of the many income-oriented stock funds. One option recommended by the mutual fund watchers at Morningstar (MORN) is the Pioneer Equity Income fund, managed by John A. Carey since 1990. With a dividend yield of 3.7%, the four-star fund's current top holdings include H.J. Heinz (HNZ) and Dow Chemical (DOW)—companies that should pay dividends for years to come
A modest, steady income from stocks such as Coca-Cola and McDonald's is enticing for those burned by growth stocks in the financial crisis.
During the long bull market, many individuals viewed dividends as a relic of their grandparents' generation—good for widows but of little value to serious investors seeking outsize returns. As growth stocks have lost their appeal amid the Wall Street meltdown, however, many investors are showing a new interest in safe stocks that pay a steady dividend. And as stock prices have tumbled, the relative yield paid out by large companies has risen: The dividend payout for companies in the Standard & Poor's 500-stock index is equal to 3.3% of the current price of these stocks—nearly twice the average payout at the end of 2007 and the highest dividend yield since 1990.
Even though President-elect Barack Obama has discussed raising the tax on dividend income for top earners, either to 20% or 25%, that won't dim their new allure. Some Wall Street pros think dividends could become a key measure by which many investors judge stocks. Investors "have a once-in-a-generation opportunity to buy quality blue-chip companies [and] lock in very satisfactory yields," says Marc Heilweil, president of Spectrum Advisory Services in Atlanta.
The good news for investors is that the relative returns from dividends haven't been this big in decades. Pros note that the average yield for the S&P 500 exceeds the current 2.2% yield on 10-year Treasuries—that hasn't happened since 1957. And money managers believe that while the payouts of banks and other troubled sectors risk being cut, many companies in the food, beverage, and health-care sectors have the cash flow to maintain their dividends. "In a lot of sectors, there is a buffer," says LPL Financial chief market strategist Jeffrey Kleintop. Some good bets include Coca-Cola (COK) and McDonald's (MCD).
What to buy? While many payouts look tempting, pouring money into stocks with suspiciously large dividends can be just as dangerous as chasing the latest Internet highflier. Indeed, some companies with hefty dividend yields backed into that position only after their stocks plunged. And the unwillingness of investors to dive back in to capture that yield suggests the smart money expects a dividend cut, or worse. "Sometimes the reason a company has a high dividend is that the fundamentals are rapidly deteriorating," says Scott Jones, a principal at Minneapolis asset manager Lowry Hill.
DANGEROUS RATIOS
That may be the case with many real estate investment trusts, or REITs, according to Paul Gray, a portfolio manager at Kensington Investment Group. REITs borrow to buy real estate, so the state of the credit markets is a key concern. "The lack of credit is going to hurt companies that have a lot of debt coming due," Gray says, citing General Growth Properties (GGP) as a REIT that was forced to suspend its dividend.
One way to determine if a company's dividend is sustainable is to calculate its "payout ratio," the percentage of net income that it pays out in dividends. If the ratio is too high—say, 70%—and earnings fall, a company has three choices: It can cut the dividend, raid its cash reserves, or dial back on crucial investments in its business.
3M (MMM), with a dividend yield of 3.6%, has no such risk. Heilweil notes that while it has cut jobs and profit expectations, its payout ratio is a mere 37%, and it is sitting on almost $3 billion in cash. The maker of all things sticky generated $3.1 billion in free cash flow in the past year. That gives it enough of a cushion to cover its $1.4 billion annual payout even if its earnings next year tumble by 3% to 12%, as 3M recently forecast.
Investors should also examine a company's cash position and its ability to generate steady profits during past downturns.
Paul Alan Davis, manager of the Schwab Dividend Equity Fund, uses proprietary financial screens to identify "big stable companies that have a lot of cash and are better able to withstand this slowdown." His holdings include Chevron and Procter & Gamble .
P&G is part of an elite group: The Standard & Poor's S&P 500 Dividend Aristocrats—52 large companies, including ExxonMobil (CVX) and Wal-Mart Stores (WMT), that have raised their dividends in each of the past 25 years, even during recessions. While there are no guarantees that every one of these outfits will maintain its streak through the current recession, many professionals believe the Aristocrats are less likely to cut their dividends in the hard times that may lie ahead. "An equity investor more than ever wants to own quality," says Don Taylor, a portfolio manager at Franklin Advisory Services. "You don't know how bad the economy is going to be, and for how long."
One Aristocrat at risk of being dethroned, however, is Gannett (GCI). The newspaper company, which saw its earnings plummet 32% last quarter and its credit rating trimmed by S&P, sports a dividend yield above 21%—a sign that the market believes Gannett's dividend is unsustainable.
Investors who want the income stream from dividends, but without doing the research, can avail themselves of the many income-oriented stock funds. One option recommended by the mutual fund watchers at Morningstar (MORN) is the Pioneer Equity Income fund, managed by John A. Carey since 1990. With a dividend yield of 3.7%, the four-star fund's current top holdings include H.J. Heinz (HNZ) and Dow Chemical (DOW)—companies that should pay dividends for years to come
Merck Guidance For 2008-2010
Merck Provides 2009 Financial Guidance; Reaffirms Guidance for 2008 and 2010
>2008 Anticipated Non-GAAP EPS Range of $3.28 to $3.32, Excluding Certain Items; 2008 GAAP EPS Range of $3.45 to $3.55
>2009 Anticipated Non-GAAP EPS Range of $3.15 to $3.30, Excluding Certain Items; 2009 GAAP EPS Range of $2.95 to $3.17
>2009 Guidance Includes an Expected Foreign Exchange Impact of Negative 3 Percent on Revenue and a Negative 6 Percent Impact on EPS
>Merck Anticipates Compound Annual Non-GAAP Revenue Growth (Including 50 Percent of Joint Venture Revenue) of 2 to 4 Percent from 2005 to 2010; GAAP Compound Annual Revenue Growth of 1 to 3 Percent Expected
>Company Expects 2005 to 2010 Compound Annual Non-GAAP EPS Growth in Mid-to-High Single-Digits, Excluding Certain Items; GAAP EPS Compound Annual Growth Rate Expected to Increase by Double-Digits
Elements of Long-Term Guidance
The Company had previously provided guidance on the 2005 to 2010 time period. Merck anticipates non-GAAP revenues, including 50 percent of the revenues from our joint ventures, will have a compound annual growth rate of 2 to 4 percent from 2005 to 2010. Merck's GAAP reported sales, excluding 50 percent of the revenues from our joint ventures, are expected to have a compound annual growth rate of 1 to 3 percent from 2005 to 2010.
Non-GAAP EPS compound annual growth rate from 2005 to 2010 is expected to be in the mid-to-high single-digits, excluding certain items. Merck anticipates EPS compound annual growth rate on a GAAP basis to increase by double-digits over the same period. The non-GAAP EPS guidance excludes restructuring charges and net tax charges of $0.43 per share in 2005 and anticipated charges related to the 2008 restructuring program of $100 million to $400 million in 2010. For the purpose of the 2010 guidance, the Company is excluding any one-time gains that may result from AstraZeneca exercising its option with respect to AstraZeneca LP.
Merck anticipates capital expenditures of approximately $1.4 billion in 2008. Capital expenditures for 2009 are expected to be approximately $1.6 billion.
>2008 Anticipated Non-GAAP EPS Range of $3.28 to $3.32, Excluding Certain Items; 2008 GAAP EPS Range of $3.45 to $3.55
>2009 Anticipated Non-GAAP EPS Range of $3.15 to $3.30, Excluding Certain Items; 2009 GAAP EPS Range of $2.95 to $3.17
>2009 Guidance Includes an Expected Foreign Exchange Impact of Negative 3 Percent on Revenue and a Negative 6 Percent Impact on EPS
>Merck Anticipates Compound Annual Non-GAAP Revenue Growth (Including 50 Percent of Joint Venture Revenue) of 2 to 4 Percent from 2005 to 2010; GAAP Compound Annual Revenue Growth of 1 to 3 Percent Expected
>Company Expects 2005 to 2010 Compound Annual Non-GAAP EPS Growth in Mid-to-High Single-Digits, Excluding Certain Items; GAAP EPS Compound Annual Growth Rate Expected to Increase by Double-Digits
Elements of Long-Term Guidance
The Company had previously provided guidance on the 2005 to 2010 time period. Merck anticipates non-GAAP revenues, including 50 percent of the revenues from our joint ventures, will have a compound annual growth rate of 2 to 4 percent from 2005 to 2010. Merck's GAAP reported sales, excluding 50 percent of the revenues from our joint ventures, are expected to have a compound annual growth rate of 1 to 3 percent from 2005 to 2010.
Non-GAAP EPS compound annual growth rate from 2005 to 2010 is expected to be in the mid-to-high single-digits, excluding certain items. Merck anticipates EPS compound annual growth rate on a GAAP basis to increase by double-digits over the same period. The non-GAAP EPS guidance excludes restructuring charges and net tax charges of $0.43 per share in 2005 and anticipated charges related to the 2008 restructuring program of $100 million to $400 million in 2010. For the purpose of the 2010 guidance, the Company is excluding any one-time gains that may result from AstraZeneca exercising its option with respect to AstraZeneca LP.
Merck anticipates capital expenditures of approximately $1.4 billion in 2008. Capital expenditures for 2009 are expected to be approximately $1.6 billion.
Monday, December 22, 2008
GE Guidance For 2008-2009
December 16, 2008 06:12 PM Eastern Time
GE Provides Outlook for 2008 and 2009
2008 and 2009 Highlights (Continuing Operations)
GE Provides Outlook for 2008 and 2009
2008 and 2009 Highlights (Continuing Operations)
>Reconfirms December 2, 2008 earnings per share (EPS) outlook of $.50-.52 excluding charges ($.36-.42, including charges), and full-year 2008 EPS of $1.78-1.84
>Plans for 0-5% Industrial earnings growth and approximately $5 billion of financial services earnings in 2009
>Maintains annual dividend at $1.24 in 2009
>Eliminates quarterly EPS guidance but will provide full year operating framework
>Will continue to run Consumer & Industrial (C&I) as part of the portfolio
FAIRFIELD, Conn.--(BUSINESS WIRE)--GE (NYSE: GE) today reconfirmed December 2, 2008, fourth quarter EPS outlook of $.50-.52, excluding the previously announced $1.0-1.4 billion of charges ($.36-.42 including charges). The Company said it expects full-year 2008 EPS of $1.78-1.84 from $185 billion in revenue. GE Chairman and CEO Jeff Immelt provided this operational update at the Company's annual outlook meeting in New York.
“While 2008 has been a challenging year for the global economy and for many of our businesses, we still expect to earn over $18 billion and outperform the S&P 500 Industrials and Financials sectors,” Chairman and CEO Jeff Immelt said. “We expect the difficult market conditions to continue in 2009.
“We have taken a number of decisive actions to respond to the tough environment and position the Company for 2009 and beyond,” Immelt said. “Our industrial businesses have superior technology, multiple revenue streams, geographic diversity and substantial backlogs. In addition, we are aggressively reducing costs and improving cash generation. In 2009, we have set forth a framework of industrial businesses’ earnings growth of 0-5%. And we will continue to run our C&I business as part of the portfolio,” Immelt said.
“Our financial services businesses, while slowed by the current financial crisis, are strong, global, middle market franchises with a conservative originate-to-hold model backed by senior secured collateral. We expect financial services to earn approximately $5 billion in 2009.
“We are focused on our Company-wide initiatives of growing organic revenue, reducing costs and expanding margins. We expect our major equipment and services backlog to remain strong in 2009, and we will expand our industrial margins, which already compare favorably to our competitors,” Immelt said. “We are committed to investing in innovation and technology even in these challenging times. We will maintain our $1 billion investment in executive development and training, and we have allocated $6 billion for technology spend in 2009. Because of our long-term investment in clean energy and healthcare, GE is well positioned to support governments around the world as they invest in infrastructure. This morning we received an approximately $3 billion order for gas turbines in Iraq to support the reconstruction of their power generating capability.”
The GE Board of Directors today declared a quarterly dividend of $0.31 per outstanding share of its common stock, for a full-year total dividend of $1.24 in 2009, consistent with the 2008 dividend payment. GE has paid a dividend every year since 1899. The fourth quarter dividend is payable January 26, 2009, to shareowners of record at the close of business on December 29, 2008. The ex-dividend date is December 24, 2008.
The Company also announced that it will no longer provide specific quarterly EPS guidance. Instead, the Company will provide a full-year operating framework with detail in the industrial and financial businesses. The Company remains committed to high levels of disclosure and transparency, and will continue to report all of its quarterly segment details.
“We have multiple drivers of growth in a downturn, including services, infrastructure and strong margins,” Immelt said. “We are committed to our strategy of growing globally, driving innovation, developing partnerships and using our scale. We are confident that as the economy recovers, GE will return to its historical earnings growth rate.”
The GE Board of Directors today declared a quarterly dividend of $0.31 per outstanding share of its common stock, for a full-year total dividend of $1.24 in 2009, consistent with the 2008 dividend payment. GE has paid a dividend every year since 1899. The fourth quarter dividend is payable January 26, 2009, to shareowners of record at the close of business on December 29, 2008. The ex-dividend date is December 24, 2008.
The Company also announced that it will no longer provide specific quarterly EPS guidance. Instead, the Company will provide a full-year operating framework with detail in the industrial and financial businesses. The Company remains committed to high levels of disclosure and transparency, and will continue to report all of its quarterly segment details.
“We have multiple drivers of growth in a downturn, including services, infrastructure and strong margins,” Immelt said. “We are committed to our strategy of growing globally, driving innovation, developing partnerships and using our scale. We are confident that as the economy recovers, GE will return to its historical earnings growth rate.”
Whole Foods Given A Thumbs Up By Greenpeace
Farmed Seafood Standards Help Whole Foods Market to Stay on Top
AUSTIN, TX (December 10, 2008) – Whole Foods Market has again been named the nation’s number one retailer in seafood sustainability by Greenpeace. The newest Greenpeace report scoring retailers on the environmental responsibility of their seafood selections calls out Whole Foods Market’s new quality standards for aquaculture, (farmed seafood), which have made the Company a leader in the industry, as one of the factors in their higher score. “We are proud to be recognized for our efforts as we go to great lengths to ensure these products meet our high standards for quality, safety, environmental responsibility and culinary excellence,” said Margaret Wittenberg, Whole Foods Market’s global vice president of quality standards and public affairs. “We have done more than any other retailer when it comes to sourcing and promoting environmentally responsible, quality seafood, and we will continue to evaluate all species of seafood we sell to ensure we are doing our part to care for our planet and its tenants.” Whole Foods Market is now embarking on a process for further enhancing its quality standards for wild-caught species similar to its quality standards project for aquaculture, and will include creating sourcing guidelines for wild-capture fisheries not already certified by the Marine Stewardship Council. The Greenpeace report closed by saying, “Whole Foods Market is making significant strides in improving its seafood sustainability, and Greenpeace expects Whole Foods wild-caught Quality Standards will be as thorough as its Aquaculture Standards.”
Last Week's Summary
The Dow Jones Industrial Average finished the week down 51, or 0.6%, to 8579. The S&P 500 notched its third gain in four weeks and rose 8, or 0.9%, to 888 -- it is 18% above its Nov. 20 low but still 43% below its 2007 high. Technology and small stocks benefited more from the increased expectancy for growth, and the Nasdaq Composite Index rallied 24, or 1.5%, to 1564. It has gained 13% in four weeks. The Russell 2000 index of small stocks jumped 18, or 3.8%, to 486.
Thursday, December 18, 2008
Target Sales Down In November 2008
MINNEAPOLIS, Dec 04, 2008 (BUSINESS WIRE) --
Target Corporation (NYSE:TGT) today reported that its net retail sales for the four weeks ended November 29, 2008 decreased 6.1 percent to $5,605 million from $5,972 million for the four weeks ended December 1, 2007. On this same basis, November comparable-store sales declined 10.4 percent. Sales results were unfavorably impacted by the loss of seven post-Thanksgiving holiday shopping days compared to November 2007.
"November comparable store sales were below our planned range of minus 6 to minus 9 percent. Results from post-Thanksgiving holiday sales, particularly Friday, were stronger than the rest of the month, but were insufficient to offset earlier weakness," said Gregg Steinhafel, president and chief executive officer of Target Corporation. "Our sales results continue to reflect a particularly challenging environment and consumers remain very cautious and event-driven in their purchasing behavior."
Target Corporation (NYSE:TGT) today reported that its net retail sales for the four weeks ended November 29, 2008 decreased 6.1 percent to $5,605 million from $5,972 million for the four weeks ended December 1, 2007. On this same basis, November comparable-store sales declined 10.4 percent. Sales results were unfavorably impacted by the loss of seven post-Thanksgiving holiday shopping days compared to November 2007.
"November comparable store sales were below our planned range of minus 6 to minus 9 percent. Results from post-Thanksgiving holiday sales, particularly Friday, were stronger than the rest of the month, but were insufficient to offset earlier weakness," said Gregg Steinhafel, president and chief executive officer of Target Corporation. "Our sales results continue to reflect a particularly challenging environment and consumers remain very cautious and event-driven in their purchasing behavior."
Paychex 2nd Quarter 2009 Earnings
Paychex Reports Second Quarter Results
December 17, 2008 – Paychex, Inc. today announced net income of $140.2 million for the three months ended November 30, 2008, a 5% decrease from net income of $147.1 million for the same period last year. "Our revenue for the second quarter grew to $524.2 million, a 3% increase over $507.8 million for the same period last year. Operating income, net of certain items, for the second quarter increased 7%, and we continued to leverage expenses as operating income, net of certain items, as a percentage of service revenue improved well over 50 basis points compared to the same period last year," commented Jonathan J. Judge, President and Chief Executive Officer of Paychex.
Paychex Inc late Wednesday reported its fiscal second-quarter net income fell to $140.2 million, or 39 cents a share, from $147.1 million, or 40 cents a share, in the same quarter last year. Revenue increased to $524.2 million from $507.8 million a year earlier, said the payroll and human resources services company. Analysts surveyed by FactSet Research had forecast earnings of 40 cents a share on revenue of $530.4 million. The company also said it revised its fiscal 2009 outlook to reflect the current economic and financial conditions, and projected the economic weakness to continue through the remainder of the fiscal year. The company now expects revenue growth of 2% to 4% and net income decline of 7% to 5%
December 17, 2008 – Paychex, Inc. today announced net income of $140.2 million for the three months ended November 30, 2008, a 5% decrease from net income of $147.1 million for the same period last year. "Our revenue for the second quarter grew to $524.2 million, a 3% increase over $507.8 million for the same period last year. Operating income, net of certain items, for the second quarter increased 7%, and we continued to leverage expenses as operating income, net of certain items, as a percentage of service revenue improved well over 50 basis points compared to the same period last year," commented Jonathan J. Judge, President and Chief Executive Officer of Paychex.
Paychex Inc late Wednesday reported its fiscal second-quarter net income fell to $140.2 million, or 39 cents a share, from $147.1 million, or 40 cents a share, in the same quarter last year. Revenue increased to $524.2 million from $507.8 million a year earlier, said the payroll and human resources services company. Analysts surveyed by FactSet Research had forecast earnings of 40 cents a share on revenue of $530.4 million. The company also said it revised its fiscal 2009 outlook to reflect the current economic and financial conditions, and projected the economic weakness to continue through the remainder of the fiscal year. The company now expects revenue growth of 2% to 4% and net income decline of 7% to 5%
Martha Stewart and Pingg - It's A Good Thing
NEW YORK, /PRNewswire-FirstCall/ --
Martha Stewart Living Omnimedia, Inc. (NYSE: MSO) today announced an agreement to invest in, and enter a commercial agreement with, Pingg Corp. (www.pingg.com), an online event management site that offers stylish invitations and easy-to-use event planning tools. The move reflects MSLO's strategy to broaden its digital footprint.
Pingg was created by seasoned entrepreneurs Lorien Gabel and Matt Harrop, who together have founded, built and sold two successful technology startups. The site offers customizable invitations that can be delivered electronically, in print or shared on a social network. It also allows customers to easily personalize their event webpage and manage RSVPs, guest lists, reminders, last-minute changes and thank-you notes. Pingg.com launched in February 2008. Since then, approximately 2.5 million invitations have been sent through Pingg.com. Its business model combines both online advertising and paid services.
Wenda Harris Millard, President of Media and Co-CEO of MSLO, said: "Pingg has created a superb platform in an area where MSLO has tremendous brand equity: entertaining. Like our WeddingWire investment made earlier this year, Pingg illustrates our commitment to our digital business and our focus on growing our core franchises in new and exciting ways by providing tools and resources that enable our customers to carry out the inspiring ideas they expect from Martha Stewart. By bringing together MSLO's holiday and entertaining inspiration with Pingg's digital invitation and planning tools, we can provide a best-in-class experience for hosts and a growth opportunity for our company."
Through the commercial agreement, Pingg will offer its online invitation and event management tools on marthastewart.com. In addition, Pingg's main web property, www.pingg.com, will receive Martha Stewart Living Omnimedia content, which will include integrated links to drive traffic to marthastewart.com. Pingg has also designated MSLO as its exclusive national advertising sales force for the duration of the agreement.
"Securing MSLO, the pre-eminent name in entertaining, as a major investor is a great validation of our business and our technology," said Lorien Gabel, CEO and Co-Founder of Pingg. "We are excited by the potential of bringing our online tools to Martha's large, enthusiastic audience, and we're looking forward to our new partner's strategic insights as we build the company."
As part of MSLO's investment, VP of Strategy and Development Joseph Holland will join Pingg's board of directors.
Martha Stewart Living Omnimedia, Inc. (NYSE: MSO) today announced an agreement to invest in, and enter a commercial agreement with, Pingg Corp. (www.pingg.com), an online event management site that offers stylish invitations and easy-to-use event planning tools. The move reflects MSLO's strategy to broaden its digital footprint.
Pingg was created by seasoned entrepreneurs Lorien Gabel and Matt Harrop, who together have founded, built and sold two successful technology startups. The site offers customizable invitations that can be delivered electronically, in print or shared on a social network. It also allows customers to easily personalize their event webpage and manage RSVPs, guest lists, reminders, last-minute changes and thank-you notes. Pingg.com launched in February 2008. Since then, approximately 2.5 million invitations have been sent through Pingg.com. Its business model combines both online advertising and paid services.
Wenda Harris Millard, President of Media and Co-CEO of MSLO, said: "Pingg has created a superb platform in an area where MSLO has tremendous brand equity: entertaining. Like our WeddingWire investment made earlier this year, Pingg illustrates our commitment to our digital business and our focus on growing our core franchises in new and exciting ways by providing tools and resources that enable our customers to carry out the inspiring ideas they expect from Martha Stewart. By bringing together MSLO's holiday and entertaining inspiration with Pingg's digital invitation and planning tools, we can provide a best-in-class experience for hosts and a growth opportunity for our company."
Through the commercial agreement, Pingg will offer its online invitation and event management tools on marthastewart.com. In addition, Pingg's main web property, www.pingg.com, will receive Martha Stewart Living Omnimedia content, which will include integrated links to drive traffic to marthastewart.com. Pingg has also designated MSLO as its exclusive national advertising sales force for the duration of the agreement.
"Securing MSLO, the pre-eminent name in entertaining, as a major investor is a great validation of our business and our technology," said Lorien Gabel, CEO and Co-Founder of Pingg. "We are excited by the potential of bringing our online tools to Martha's large, enthusiastic audience, and we're looking forward to our new partner's strategic insights as we build the company."
As part of MSLO's investment, VP of Strategy and Development Joseph Holland will join Pingg's board of directors.
Wednesday, December 17, 2008
Hanesbrands Job Cuts
WINSTON-SALEM, N.C., Nov 18, 2008 (BUSINESS WIRE) -- Hanesbrands Inc. (NYSE: HBI) announced today that it is eliminating approximately 210 positions in management and corporate functions in order to reduce costs and navigate the challenging economic environment.
About half of the cutbacks are being made in the company's supply chain management organization and half in the corporate functions of customer management, finance, human resources, information technology and marketing.
"Given the significant economic uncertainty, we must manage our business conservatively, and we must tightly control costs," said Hanesbrands Chief Executive Officer Richard A. Noll. "With these actions, we are accelerating our ongoing functional consolidation and conducting additional streamlining. These are difficult but necessary actions that we must take to compete in today's market environment and emerge as a stronger company. We regret the job losses for our very talented employees and will do everything that we can to assist in their transition."
Employees affected by the actions will receive severance and outplacement benefits. Of the 210 positions, approximately 155 are located in Winston-Salem, 35 at various other U.S. locations, and 20 at international locations. The company has approximately 48,600 employees worldwide.
The company also announced today that it will close by year end its yarn production plant in China Grove, N.C., as a result of declining needs for higher-end ring-spun yarn used in certain underwear, sock and T-shirt products. The closure will affect 185 employees.
Hanesbrands expects to incur restructuring and related charges of approximately $14 million primarily in the fourth quarter for the plant and job-reduction actions, including severance costs and accelerated depreciation of fixed assets.
About half of the cutbacks are being made in the company's supply chain management organization and half in the corporate functions of customer management, finance, human resources, information technology and marketing.
"Given the significant economic uncertainty, we must manage our business conservatively, and we must tightly control costs," said Hanesbrands Chief Executive Officer Richard A. Noll. "With these actions, we are accelerating our ongoing functional consolidation and conducting additional streamlining. These are difficult but necessary actions that we must take to compete in today's market environment and emerge as a stronger company. We regret the job losses for our very talented employees and will do everything that we can to assist in their transition."
Employees affected by the actions will receive severance and outplacement benefits. Of the 210 positions, approximately 155 are located in Winston-Salem, 35 at various other U.S. locations, and 20 at international locations. The company has approximately 48,600 employees worldwide.
The company also announced today that it will close by year end its yarn production plant in China Grove, N.C., as a result of declining needs for higher-end ring-spun yarn used in certain underwear, sock and T-shirt products. The closure will affect 185 employees.
Hanesbrands expects to incur restructuring and related charges of approximately $14 million primarily in the fourth quarter for the plant and job-reduction actions, including severance costs and accelerated depreciation of fixed assets.
Exxon's Romania Expansion PLans
December 03, 2008 07:26 AM Eastern Time
ExxonMobil Expands Black Sea Presence with Romanian Agreement
Deepwater Neptun Block To Be Evaluated
ExxonMobil Expands Black Sea Presence with Romanian Agreement
Deepwater Neptun Block To Be Evaluated
IRVING, Texas--(BUSINESS WIRE1)--Exxon Mobil Corporation (NYSE:XOM) announced today its affiliate, ExxonMobil Exploration and Production Romania Limited, has signed an agreement with Petrom SA to help explore deepwater portions of the Neptun Block offshore Romania. The Petrom agreement is ExxonMobil’s second major exploration venture announced in the promising Black Sea in two weeks.
ExxonMobil and Petrom, the largest Romanian oil and gas company and a member of the OMV group, agreed to cooperate on a 3D seismic acquisition and evaluation program of the Neptun Block. Petrom will operate the initial work program. ExxonMobil will help fund the work program and provide expertise in evaluating the deepwater seismic data.
“We are pleased to assist Petrom in its Romanian offshore exploration program,” said Elwyn C. Griffiths, Vice President, Business Development, ExxonMobil Exploration Company. “ExxonMobil has considerable expertise in all facets of deepwater exploration and we see this as an opportunity to apply that experience in a new and promising region.”
ExxonMobil affiliates are currently exploring for hydrocarbons in deepwater locations around the world, including offshore Angola, Brazil, Canada, Greenland, Indonesia, Ireland, Libya, Madagascar, Nigeria, The Philippines and the United States.
“Petrom looks forward to working with ExxonMobil,” said Johann Pleininger, Petrom Executive Board Member for Exploration and Development. “This co-venture with ExxonMobil is an important step for Petrom to explore the hydrocarbon potential in the Black Sea.”
ExxonMobil pioneered the development of 3D seismic technology and other technologies for gathering and interpreting data to improve the success rate of deepwater oil and gas exploration efforts. ExxonMobil’s history in Romania dates back more than 100 years. Operations have included oil production and refining, and marketing of lubricants.
ExxonMobil and Petrom, the largest Romanian oil and gas company and a member of the OMV group, agreed to cooperate on a 3D seismic acquisition and evaluation program of the Neptun Block. Petrom will operate the initial work program. ExxonMobil will help fund the work program and provide expertise in evaluating the deepwater seismic data.
“We are pleased to assist Petrom in its Romanian offshore exploration program,” said Elwyn C. Griffiths, Vice President, Business Development, ExxonMobil Exploration Company. “ExxonMobil has considerable expertise in all facets of deepwater exploration and we see this as an opportunity to apply that experience in a new and promising region.”
ExxonMobil affiliates are currently exploring for hydrocarbons in deepwater locations around the world, including offshore Angola, Brazil, Canada, Greenland, Indonesia, Ireland, Libya, Madagascar, Nigeria, The Philippines and the United States.
“Petrom looks forward to working with ExxonMobil,” said Johann Pleininger, Petrom Executive Board Member for Exploration and Development. “This co-venture with ExxonMobil is an important step for Petrom to explore the hydrocarbon potential in the Black Sea.”
ExxonMobil pioneered the development of 3D seismic technology and other technologies for gathering and interpreting data to improve the success rate of deepwater oil and gas exploration efforts. ExxonMobil’s history in Romania dates back more than 100 years. Operations have included oil production and refining, and marketing of lubricants.
Tuesday, December 16, 2008
Stock Pick Of The Week - Pfizer???
In this dismal economy, it would surprise few people if Pfizer (PFE) were to announce job cuts or scale back its sales forecasts. Even so, some pros believe it's a timely buy because of its long-depressed stock price and rich pipeline of new drugsplus or minus—plus an attractive dividend yield of 7.7%. Pfizer is banking on 25 new products in Phase 3 late-stage trials, notes Wendell Perkins, chief investment officer at Optique Capital Management, which owns shares. Meanwhile, Pfizer's Lyrica, a pain remedy already on the market, is being tested for conditions such as epilepsy and anxiety disorder.
Another boon: the strong cash position of Pfizer, which has $26 billion on the balance sheet. In 2008, the company is expected to generate cash flow of $18 billion, enough to make the yearly dividend payments, fund capital expenditures of $1.9 billion, and still have some left over to buy back shares or another drug company, says Perkins.
Although the patent expirations on Lipitor and Viagra in 2012 and 2013 will probably hurt earnings, analyst Steven Lichtman of Banc of America Securities (BAC) is "focused on Pfizer's solid balance sheet" and its ability to offset the patent problem through acquisitions. He rates Pfizer a buy, with a 12-month target of 20. The stock, down from 24 a year ago, is now at 16.57. It hit 50 back in 2000. Lichtman sees profits of $2.38 a share in 2008, $2.47 in 2009, and $2.59 in 2010.
Gene Marcial
Another boon: the strong cash position of Pfizer, which has $26 billion on the balance sheet. In 2008, the company is expected to generate cash flow of $18 billion, enough to make the yearly dividend payments, fund capital expenditures of $1.9 billion, and still have some left over to buy back shares or another drug company, says Perkins.
Although the patent expirations on Lipitor and Viagra in 2012 and 2013 will probably hurt earnings, analyst Steven Lichtman of Banc of America Securities (BAC) is "focused on Pfizer's solid balance sheet" and its ability to offset the patent problem through acquisitions. He rates Pfizer a buy, with a 12-month target of 20. The stock, down from 24 a year ago, is now at 16.57. It hit 50 back in 2000. Lichtman sees profits of $2.38 a share in 2008, $2.47 in 2009, and $2.59 in 2010.
Gene Marcial
Fixing Detroit
From BusinessWeek
Going all the way back to FDR, the relationship between the auto industry and Washington has been a testy one. Detroit and the Feds have fought over everything from government support for labor unions in the 1930s to the imposition of fuel-economy regulations in the '70s. Now, Congress is proposing to appoint a so-called car czar who, in exchange for billions in aid, would impose Washington's will on Detroit.
President-elect Barack Obama put his finger on the potential peril when he said: "We don't want government to run companies. Generally, government hasn't done that very well." Congress, perhaps wisely, has not been specific about what Detroit should do to revive its fortunes. Under the proposed bill, the automakers would have to submit a restructuring plan by Mar. 15. The job of the car czar would be to make sure the plan went far enough. Most industry and management experts expect this person would play the heavy by gathering the various stakeholders—union, creditors, and management—and forcing them to make concessions.
There has been talk in some quarters, particularly the liberal wing of the Democratic Party, of forcing General Motors (GM), Ford Motor (F), and Chrysler to make more fuel-efficient cars. Industry experts point out that tough new regulations coming down the pike already impel them to do that. The main job of the car czar, they say, would be to impose on the companies a radical financial restructuring that gives them a shot at competing. "You have to force them to restructure, or they will be back asking for more money," warns Maryann N. Keller, an independent analyst who is still involved in the car business.
So if the czar's main role is to bang heads together, where to start? The main issue is slashing debt and health-care liabilities. Despite all the union givebacks in recent years, auto workers and retirees pay 5% of their health-care costs, vs. an average of 30% for the rest of Americans with coverage. Making auto workers and retirees shoulder more of that burden would greatly reduce GM's $47 billion in union health-care obligations. Bondholders almost certainly would have to take a serious haircut. Senator Bob Corker (R-Tenn.) has suggested they trade debt for equity at a 70% discount. That would cut GM's $63 billion debt—including the proposed government loans—by more than half.
Lessons from the Past
There are historical models to draw on. Chrysler cut half its debt in 1979 before getting a loan guarantee. GM, Ford, and Chrysler are asking for $34 billion from taxpayers and were expected to get only about half that in the proposed bailout. To get more money, the theory goes, they would have to become earnest about restructuring.
The government's intervention in the railroad industry offers another possible model. In 1976, the U.S. created Conrail from several bankrupt companies. A new CEO and an advisory board of industry veterans oversaw the whole operation. Congress had oversight but didn't delve too deeply into Conrail's affairs. Instead it set targets for profitability and technology upgrades. When the company still wasn't making money, Washington threatened to liquidate it if the union didn't make concessions. It did, and Conrail eventually became profitable.
In this charged environment, could the government impose its will without allowing politics to trump dispassionate business decisions? Much would depend the car czar's skills and temperament. A combination of industry knowledge and financial acumen would be paramount. Paul H. O'Neill, a former Treasury Secretary who sat on GM's board in the '90s, says that the car czar would need to convene an advisory board of finance pros and industry veterans. With his customary forthrightness, O'Neill adds: "There isn't anyone in government with a clue how to run an enterprise or reinvent one."
Going all the way back to FDR, the relationship between the auto industry and Washington has been a testy one. Detroit and the Feds have fought over everything from government support for labor unions in the 1930s to the imposition of fuel-economy regulations in the '70s. Now, Congress is proposing to appoint a so-called car czar who, in exchange for billions in aid, would impose Washington's will on Detroit.
President-elect Barack Obama put his finger on the potential peril when he said: "We don't want government to run companies. Generally, government hasn't done that very well." Congress, perhaps wisely, has not been specific about what Detroit should do to revive its fortunes. Under the proposed bill, the automakers would have to submit a restructuring plan by Mar. 15. The job of the car czar would be to make sure the plan went far enough. Most industry and management experts expect this person would play the heavy by gathering the various stakeholders—union, creditors, and management—and forcing them to make concessions.
There has been talk in some quarters, particularly the liberal wing of the Democratic Party, of forcing General Motors (GM), Ford Motor (F), and Chrysler to make more fuel-efficient cars. Industry experts point out that tough new regulations coming down the pike already impel them to do that. The main job of the car czar, they say, would be to impose on the companies a radical financial restructuring that gives them a shot at competing. "You have to force them to restructure, or they will be back asking for more money," warns Maryann N. Keller, an independent analyst who is still involved in the car business.
So if the czar's main role is to bang heads together, where to start? The main issue is slashing debt and health-care liabilities. Despite all the union givebacks in recent years, auto workers and retirees pay 5% of their health-care costs, vs. an average of 30% for the rest of Americans with coverage. Making auto workers and retirees shoulder more of that burden would greatly reduce GM's $47 billion in union health-care obligations. Bondholders almost certainly would have to take a serious haircut. Senator Bob Corker (R-Tenn.) has suggested they trade debt for equity at a 70% discount. That would cut GM's $63 billion debt—including the proposed government loans—by more than half.
Lessons from the Past
There are historical models to draw on. Chrysler cut half its debt in 1979 before getting a loan guarantee. GM, Ford, and Chrysler are asking for $34 billion from taxpayers and were expected to get only about half that in the proposed bailout. To get more money, the theory goes, they would have to become earnest about restructuring.
The government's intervention in the railroad industry offers another possible model. In 1976, the U.S. created Conrail from several bankrupt companies. A new CEO and an advisory board of industry veterans oversaw the whole operation. Congress had oversight but didn't delve too deeply into Conrail's affairs. Instead it set targets for profitability and technology upgrades. When the company still wasn't making money, Washington threatened to liquidate it if the union didn't make concessions. It did, and Conrail eventually became profitable.
In this charged environment, could the government impose its will without allowing politics to trump dispassionate business decisions? Much would depend the car czar's skills and temperament. A combination of industry knowledge and financial acumen would be paramount. Paul H. O'Neill, a former Treasury Secretary who sat on GM's board in the '90s, says that the car czar would need to convene an advisory board of finance pros and industry veterans. With his customary forthrightness, O'Neill adds: "There isn't anyone in government with a clue how to run an enterprise or reinvent one."
Costco 1st Quarter 2009 Earnings
Costco Wholesale Corporation Reports First Quarter Operating Results for Fiscal 2009
ISSAQUAH, WA, Dec 11, 2008 (MARKET WIRE via COMTEX News Network) --
Costco Wholesale Corporation (NASDAQ: COST) announced today its operating results for the first quarter (twelve weeks) of fiscal 2009, ended November 23, 2008.
Net sales for the first quarter of fiscal 2009 increased four percent to $16.04 billion from $15.47 billion during the first quarter of fiscal 2008. On a comparable warehouse basis, that is warehouses open at least one year, net sales increased one percent.
Net income for the first quarter of fiscal 2009 was $262.5 million, or $.60 per diluted share, compared to $262.0 million, or $.59 per diluted share, during the first quarter of fiscal 2008.
According to Richard Galanti, Chief Financial Officer of Costco, "First quarter 2009 results benefited from very strong gasoline profitability when compared to last year. Results were hurt by a slowdown in non-food discretionary sales and related reductions in margins associated with these sales, primarily in the latter half of the quarter. In addition, we incurred certain pretax charges of $34.2 million, or $.05 per share, related to the 'mark-to-market' adjustment of the cash surrender value of certain life insurance contracts ($28.4 million charge to SG&A Expense) and the impairment of corporate investments ($5.8 million charge to interest income). Finally, our first quarter earnings were negatively impacted by an estimated $22.7 million pretax, or $.03 per share, as a result of the significant strengthening during the quarter of the U.S. dollar, as compared to the Canada, United Kingdom, Korea and Mexico currencies."
Costco currently operates 550 warehouses, including 403 in the United States and Puerto Rico, 76 in Canada, 21 in the United Kingdom, six in Korea, five in Taiwan, eight in Japan and 31 in Mexico. The Company also operates Costco Online, an electronic commerce web site, at www.costco.com and at www.costco.ca in Canada.
ISSAQUAH, WA, Dec 11, 2008 (MARKET WIRE via COMTEX News Network) --
Costco Wholesale Corporation (NASDAQ: COST) announced today its operating results for the first quarter (twelve weeks) of fiscal 2009, ended November 23, 2008.
Net sales for the first quarter of fiscal 2009 increased four percent to $16.04 billion from $15.47 billion during the first quarter of fiscal 2008. On a comparable warehouse basis, that is warehouses open at least one year, net sales increased one percent.
Net income for the first quarter of fiscal 2009 was $262.5 million, or $.60 per diluted share, compared to $262.0 million, or $.59 per diluted share, during the first quarter of fiscal 2008.
According to Richard Galanti, Chief Financial Officer of Costco, "First quarter 2009 results benefited from very strong gasoline profitability when compared to last year. Results were hurt by a slowdown in non-food discretionary sales and related reductions in margins associated with these sales, primarily in the latter half of the quarter. In addition, we incurred certain pretax charges of $34.2 million, or $.05 per share, related to the 'mark-to-market' adjustment of the cash surrender value of certain life insurance contracts ($28.4 million charge to SG&A Expense) and the impairment of corporate investments ($5.8 million charge to interest income). Finally, our first quarter earnings were negatively impacted by an estimated $22.7 million pretax, or $.03 per share, as a result of the significant strengthening during the quarter of the U.S. dollar, as compared to the Canada, United Kingdom, Korea and Mexico currencies."
Costco currently operates 550 warehouses, including 403 in the United States and Puerto Rico, 76 in Canada, 21 in the United Kingdom, six in Korea, five in Taiwan, eight in Japan and 31 in Mexico. The Company also operates Costco Online, an electronic commerce web site, at www.costco.com and at www.costco.ca in Canada.
Saturday, December 13, 2008
Consumer Lines Of Credit - The Next Shoe To Drop
(Reuters) – The U.S. credit-card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.
The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.
"In other words, we expect available consumer liquidity in the form of credit-card lines to decline by 45 percent."
Bank of America Corp (BAC.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N) represent over half of the estimated U.S. card outstandings as of September 30, and each company has discussed reducing card exposure or slowing growth, Whitney said.
Closing millions of accounts, cutting credit lines and raising interest rates are just some of the moves credit card issuers are using to try to inoculate themselves from a tsunami of expected consumer defaults.
A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity, Whitney said.
Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.
"We are now beginning to see evidence of broad-based declines in overall consumer liquidity."
"Already, we have witnessed the entire mortgage market hit a wall, and we believe it will, for the first time ever, show actual shrinkage over the next few months," she wrote.
The credit card market will be 18 months behind the mortgage market and will begin to shrink by mid-2010, Whitney said.
Whitney also expects home prices to continue falling another 20 percent hurt by lower liquidity. They are down 23 percent from their peak, she said.
"In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices," Whitney wrote in a note dated November 30.
She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.
"Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," the analyst said.
Most of the solutions to the situation involve government intervention, and all of them require more dilutive capital to existing lenders, she said.
"Accordingly, we continue to be cautious on our outlook on US banks."
SUGGESTIONS
In a column in the Financial Times, Whitney suggested four adoptable changes to make a difference.
The first would be to re-regionalize lending, which has gone from "knowing your customer" or local lending, to relying on what have proven to be unreliable FICO credit scores and centralized underwriting, due to the nationwide consolidation since the early 1990s, she wrote in the column.
Expanding the Federal Deposit Insurance Corp's guarantee for bank debt will also help as the banks need to know they can access reasonably priced credit for an extended period to continue to extend new credit lines, she wrote in the column.
Whitney also advised delaying the introduction of new accounting rules, which would bring off-balance-sheet assets back on balance sheet, until 2011 or 2012, as the primary assets that will come back are credit card loans.
Whitney suggested amending the proposal on Unfair and Deceptive Lending Practices that is set to be adopted in 2010, saying restricting lenders' ability to reprice an unsecured loan will cause them to stop lending or to lend less.
The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.
"In other words, we expect available consumer liquidity in the form of credit-card lines to decline by 45 percent."
Bank of America Corp (BAC.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N) represent over half of the estimated U.S. card outstandings as of September 30, and each company has discussed reducing card exposure or slowing growth, Whitney said.
Closing millions of accounts, cutting credit lines and raising interest rates are just some of the moves credit card issuers are using to try to inoculate themselves from a tsunami of expected consumer defaults.
A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity, Whitney said.
Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.
"We are now beginning to see evidence of broad-based declines in overall consumer liquidity."
"Already, we have witnessed the entire mortgage market hit a wall, and we believe it will, for the first time ever, show actual shrinkage over the next few months," she wrote.
The credit card market will be 18 months behind the mortgage market and will begin to shrink by mid-2010, Whitney said.
Whitney also expects home prices to continue falling another 20 percent hurt by lower liquidity. They are down 23 percent from their peak, she said.
"In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices," Whitney wrote in a note dated November 30.
She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.
"Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," the analyst said.
Most of the solutions to the situation involve government intervention, and all of them require more dilutive capital to existing lenders, she said.
"Accordingly, we continue to be cautious on our outlook on US banks."
SUGGESTIONS
In a column in the Financial Times, Whitney suggested four adoptable changes to make a difference.
The first would be to re-regionalize lending, which has gone from "knowing your customer" or local lending, to relying on what have proven to be unreliable FICO credit scores and centralized underwriting, due to the nationwide consolidation since the early 1990s, she wrote in the column.
Expanding the Federal Deposit Insurance Corp's guarantee for bank debt will also help as the banks need to know they can access reasonably priced credit for an extended period to continue to extend new credit lines, she wrote in the column.
Whitney also advised delaying the introduction of new accounting rules, which would bring off-balance-sheet assets back on balance sheet, until 2011 or 2012, as the primary assets that will come back are credit card loans.
Whitney suggested amending the proposal on Unfair and Deceptive Lending Practices that is set to be adopted in 2010, saying restricting lenders' ability to reprice an unsecured loan will cause them to stop lending or to lend less.
Friday, December 12, 2008
The Housing Decline Continues
Why home values may take decades to recover Some see 2006 as 'lifetime' peak in prices
By Dennis Cauchon USA TODAY
More room to fall?
For every $100 spent on a house in 1950 the investment rose slightly through 2002, then soared to about $192 in 2006, adjusting for inflation. Then credit dried up, and the bust began.
Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the home is worth $80,000.
The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now worthless. His dream house will be foreclosed on next year.
"We're so far underwater it's not funny," says Wallick, 57, who had to return to his original home in Oregon to care for a sick family member and tend to his own medical problems. Wallick, one of the hardest-hit victims in one of the states hit hardest by the housing crisis, lost 60% of his home's value in three years.
His story is an extreme example, but home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can sink.
As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.
"We will never see these prices again in our lifetime, when you adjust for inflation," says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. "These were lifetime peaks."
The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era's over.
So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.
The price plunge has wiped out trillions of dollars in home equity and caused the worst financial crisis since the Great Depression. Susan Wachter, professor of real estate at the University of Pennsylvania, fears that foreclosures and tight credit could send home prices falling to the point that millions of families and thousands of banks are thrust into insolvency.
"Homes are different than other goods and services," she says. "The fragility of our banking system is tied to the value of homes."
Home values have fallen before — during the Great Depression and in Texas after a 1980s oil boom, for example — but those drops were a response to other economic forces. This time, the housing price collapse is the cause of the nation's broad economic troubles, not just an effect.
"If we have another 20% decline in prices, we'll need another bailout of banks similar to what we just did," Wachter says.
Other economists see a brighter picture in the long term. Wachovia economist Adam York expects home values to keep falling until 2010 but is optimistic they will recover.
"The one saving grace is the population is growing by 3 million people a year," he says. "They need to live somewhere. That means more roofs."
Until recently, homes were stable, unspectacular investments, not get-rich-quick schemes.
Nationally, the typical existing home was worth roughly the same in 2000 as it was in 1950, after adjusting for inflation, according to Yale University economist Robert Shiller.
Newly built homes generally were bigger and more expensive than older houses. As time passed, that meant Americans lived in larger, more valuable homes overall. But a house, once constructed, grew slowly in value. California in the 1970s, Texas in the 1980s and Florida on-and-off for a century were conspicuous exceptions to the rule.
Despite only modest increases in value, homes were smart investments. Owners lived in a house, then got their money back when they sold. That's a better deal than renting. Borrowers got tax breaks, too, and built equity that could be leveraged into bigger houses as their incomes grew.
From 2002 to 2006, houses went from being a tortoise to a hare in the investment world. Home sale profits and relaxed lending standards such as lower down payment requirements and adjustable-rate mortgages (ARMs) made it possible for buyers of all income levels to pay more for houses.
When the housing bubble began to deflate in 2006, history had a sobering lesson to teach. Home values had closely tracked three common-sense measures for many years:
•Income — Home values floated at about three times average household income from 1950 to 2000. In 2006, the average household income was $66,500. Under the traditional model, home prices should have been about $200,000. Instead, the typical home sold for $301,000.
•Rent — Homes traditionally have sold for about 20 times what it would cost to rent them for a year. In 2006, houses were selling for 32 times annual rent.
•Appreciation — Existing homes grew in value by less than 0.5% per year, after adjusting for inflation, from 1950 to 2000. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked with a 12.3% jump in 2005. Housing prices began to fall in the second quarter of 2006.
Inflation could help homes recapture their old prices, if not their value. But when inflation is factored in, home prices might not return to their 2006 peak for many years. Housing prices are meaningless if you don't adjust for inflation, says Schiff, the investment manager.
He points out that gold peaked in 1980 at $850 an ounce in response to inflation and the Iranian hostage crisis. It never recovered. Today, it sells for about $750 an ounce and would have to top $2,000 an ounce when adjusted for inflation to match its value in 1980.
"That's the nature of bubbles," Schiff says. "The price never comes back."
An extreme relaxation of lending standards inflated the housing bubble.
"Shoddy underwriting on mortgages" is the primary cause of the housing crisis, says York, the Wachovia economist. "People got caught off-guard by how bad it was."
Millions of home buyers — poor, rich and middle class — were approved to buy homes at prices that had been out-of-reach just a few years earlier. Lenders offered low introductory "teaser" rates on adjustable rate mortgages and approved borrowers based on artificially low mortgage payments, not the higher ones that took effect later.
What else changed:
•Optional payments on principal — In 2005, 29% of new mortgages allowed borrowers to pay interest only — not principal — or pay less than the interest due and add the cost to the principal. That was up from 1% in 2001, according to Credit Suisse, an investment bank.
• No verification of income — Half of mortgages generated in 2006 required no or minimal documentation of household income, reports Credit Suisse.
•Tiny down payments — In 1989, the average down payment for first-time home buyers was 10%, reports the National Association of Realtors. In 2007, it was 2%.
Low down payments and ARMs gave homeowners enormous financial leverage to pay high home prices. Leverage boosts buying power through debt, the same way a 100-pound woman uses a lever to jack up a 3,000-pound car.
Consider a couple with $20,000 cash. In 2006, they easily could get a 5% down mortgage to buy a $400,000 house. Today, a 10% down payment would limit the couple to a $200,000 house.
"Leverage matters a lot when you buy a house," says University of Wisconsin economist Morris Davis, an expert on housing prices and rents. "We're not going to go back to the days of only 20% (down payment) mortgages, but the days of putting nothing down are long gone."
Easy access to borrowed money reset all housing prices, even those paid by cautious borrowers. People of all income classes moved up a notch, Census Bureau housing data show.
The sale of new homes costing $750,000 or more quadrupled from 2002 to 2006. The construction of inexpensive homes costing $125,000 or less fell by two-thirds. The biggest boom was in the middle. Homes costing $200,000 to $300,000 became affordable to millions of families.
The failed titans of home lending — Countrywide Financial, IndyMac Bank and Washington Mutual — specialized in high-risk, highly leveraged loans.
"The price correction has been severe, rapid and probably permanent because lending standards have changed," says mortgage credit analyst Suzanne Mistretta, a senior director at Fitch Ratings, a bond rating company. "We are not going to see 2006 peak levels for a very, very long time."
This resilient home finance system should recover in a few years, some analysts say.
National Association of Realtors chief economist Lawrence Yun predicts home prices will keep falling in 2009 but could return to their 2006 peak in three years, not counting inflation.
He says the bubble largely was confined to four states — California, Nevada, Florida and Arizona. "People who bought at the peak in those states will need time for prices to recover, even up to five years," he says. Yun says people who buy now "have much less risk of price declines and a great possibility of price gains."
The danger of rapidly falling home prices is that — similar to the Depression — potential buyers and lenders will stay away, fueling even sharper price declines.
During the housing boom, buyers expected prices to rise, so they were quick to buy, borrow and pay a premium. As prices drop, home buyers wait for better deals. says economist Dean Baker of the liberal Center for Economic Policy Research in Washington, D.C.
Lenders want bigger down payments to protect against the falling value of collateral. Homeowners lose equity, so they can't buy other houses. "Price declines can be a self-reinforcing mechanism," Wachter says.
An out-of-control price collapse would have dire consequences, Baker says. Even the most conservative banks would find themselves carrying portfolios of toxic mortgage loans.
If housing prices don't stabilize at traditional levels, financial troubles could spread everywhere — to credit cards, car loans and commercial mortgages, Baker says. "The waves of bad debt will just keep coming," he says.
Baker and Wachter want the U.S. government to take aggressive steps to help homeowners, not just financial institutions. They support expanding programs that restructure troubled mortgages to prevent a flood of foreclosed homes from coming on the market and driving prices below their traditional level.
Rick Wallick is an example of how even cautious borrowers can be hurt by a price collapse. He made a 35% down payment on his house and got a 15-year, fixed-rate mortgage at 5.75%.
Arizona's real estate mess wiped him out anyway. Now that he's in Oregon, he's renting out his Arizona house at a loss and can't afford to keep two homes.
Wallick's Arizona house is surrounded by countless foreclosed homes and empty lots. He told his mortgage company that his December payment will be his last. "It may ruin my credit rating, but I can still buy food," he says.
Shelley McComb used a no-money-down, interest-only ARM to pay $199,000 in December 2006 for a new three-bedroom home near Birmingham, Ala. The house's assessed value briefly rose to $225,000.
Now, she needs to move to Atlanta where her husband got a promotion. The McCombs put their home up for sale in March. After getting no offers, they dropped their price to $179,000. They'd settle for $160,000.
Shelley McComb, 30, who manages a doggie day care center, says, "I wish we'd rented."
By Dennis Cauchon USA TODAY
More room to fall?
For every $100 spent on a house in 1950 the investment rose slightly through 2002, then soared to about $192 in 2006, adjusting for inflation. Then credit dried up, and the bust began.
Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the home is worth $80,000.
The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now worthless. His dream house will be foreclosed on next year.
"We're so far underwater it's not funny," says Wallick, 57, who had to return to his original home in Oregon to care for a sick family member and tend to his own medical problems. Wallick, one of the hardest-hit victims in one of the states hit hardest by the housing crisis, lost 60% of his home's value in three years.
His story is an extreme example, but home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can sink.
As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.
"We will never see these prices again in our lifetime, when you adjust for inflation," says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. "These were lifetime peaks."
The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era's over.
So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.
The price plunge has wiped out trillions of dollars in home equity and caused the worst financial crisis since the Great Depression. Susan Wachter, professor of real estate at the University of Pennsylvania, fears that foreclosures and tight credit could send home prices falling to the point that millions of families and thousands of banks are thrust into insolvency.
"Homes are different than other goods and services," she says. "The fragility of our banking system is tied to the value of homes."
Home values have fallen before — during the Great Depression and in Texas after a 1980s oil boom, for example — but those drops were a response to other economic forces. This time, the housing price collapse is the cause of the nation's broad economic troubles, not just an effect.
"If we have another 20% decline in prices, we'll need another bailout of banks similar to what we just did," Wachter says.
Other economists see a brighter picture in the long term. Wachovia economist Adam York expects home values to keep falling until 2010 but is optimistic they will recover.
"The one saving grace is the population is growing by 3 million people a year," he says. "They need to live somewhere. That means more roofs."
Until recently, homes were stable, unspectacular investments, not get-rich-quick schemes.
Nationally, the typical existing home was worth roughly the same in 2000 as it was in 1950, after adjusting for inflation, according to Yale University economist Robert Shiller.
Newly built homes generally were bigger and more expensive than older houses. As time passed, that meant Americans lived in larger, more valuable homes overall. But a house, once constructed, grew slowly in value. California in the 1970s, Texas in the 1980s and Florida on-and-off for a century were conspicuous exceptions to the rule.
Despite only modest increases in value, homes were smart investments. Owners lived in a house, then got their money back when they sold. That's a better deal than renting. Borrowers got tax breaks, too, and built equity that could be leveraged into bigger houses as their incomes grew.
From 2002 to 2006, houses went from being a tortoise to a hare in the investment world. Home sale profits and relaxed lending standards such as lower down payment requirements and adjustable-rate mortgages (ARMs) made it possible for buyers of all income levels to pay more for houses.
When the housing bubble began to deflate in 2006, history had a sobering lesson to teach. Home values had closely tracked three common-sense measures for many years:
•Income — Home values floated at about three times average household income from 1950 to 2000. In 2006, the average household income was $66,500. Under the traditional model, home prices should have been about $200,000. Instead, the typical home sold for $301,000.
•Rent — Homes traditionally have sold for about 20 times what it would cost to rent them for a year. In 2006, houses were selling for 32 times annual rent.
•Appreciation — Existing homes grew in value by less than 0.5% per year, after adjusting for inflation, from 1950 to 2000. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked with a 12.3% jump in 2005. Housing prices began to fall in the second quarter of 2006.
Inflation could help homes recapture their old prices, if not their value. But when inflation is factored in, home prices might not return to their 2006 peak for many years. Housing prices are meaningless if you don't adjust for inflation, says Schiff, the investment manager.
He points out that gold peaked in 1980 at $850 an ounce in response to inflation and the Iranian hostage crisis. It never recovered. Today, it sells for about $750 an ounce and would have to top $2,000 an ounce when adjusted for inflation to match its value in 1980.
"That's the nature of bubbles," Schiff says. "The price never comes back."
An extreme relaxation of lending standards inflated the housing bubble.
"Shoddy underwriting on mortgages" is the primary cause of the housing crisis, says York, the Wachovia economist. "People got caught off-guard by how bad it was."
Millions of home buyers — poor, rich and middle class — were approved to buy homes at prices that had been out-of-reach just a few years earlier. Lenders offered low introductory "teaser" rates on adjustable rate mortgages and approved borrowers based on artificially low mortgage payments, not the higher ones that took effect later.
What else changed:
•Optional payments on principal — In 2005, 29% of new mortgages allowed borrowers to pay interest only — not principal — or pay less than the interest due and add the cost to the principal. That was up from 1% in 2001, according to Credit Suisse, an investment bank.
• No verification of income — Half of mortgages generated in 2006 required no or minimal documentation of household income, reports Credit Suisse.
•Tiny down payments — In 1989, the average down payment for first-time home buyers was 10%, reports the National Association of Realtors. In 2007, it was 2%.
Low down payments and ARMs gave homeowners enormous financial leverage to pay high home prices. Leverage boosts buying power through debt, the same way a 100-pound woman uses a lever to jack up a 3,000-pound car.
Consider a couple with $20,000 cash. In 2006, they easily could get a 5% down mortgage to buy a $400,000 house. Today, a 10% down payment would limit the couple to a $200,000 house.
"Leverage matters a lot when you buy a house," says University of Wisconsin economist Morris Davis, an expert on housing prices and rents. "We're not going to go back to the days of only 20% (down payment) mortgages, but the days of putting nothing down are long gone."
Easy access to borrowed money reset all housing prices, even those paid by cautious borrowers. People of all income classes moved up a notch, Census Bureau housing data show.
The sale of new homes costing $750,000 or more quadrupled from 2002 to 2006. The construction of inexpensive homes costing $125,000 or less fell by two-thirds. The biggest boom was in the middle. Homes costing $200,000 to $300,000 became affordable to millions of families.
The failed titans of home lending — Countrywide Financial, IndyMac Bank and Washington Mutual — specialized in high-risk, highly leveraged loans.
"The price correction has been severe, rapid and probably permanent because lending standards have changed," says mortgage credit analyst Suzanne Mistretta, a senior director at Fitch Ratings, a bond rating company. "We are not going to see 2006 peak levels for a very, very long time."
This resilient home finance system should recover in a few years, some analysts say.
National Association of Realtors chief economist Lawrence Yun predicts home prices will keep falling in 2009 but could return to their 2006 peak in three years, not counting inflation.
He says the bubble largely was confined to four states — California, Nevada, Florida and Arizona. "People who bought at the peak in those states will need time for prices to recover, even up to five years," he says. Yun says people who buy now "have much less risk of price declines and a great possibility of price gains."
The danger of rapidly falling home prices is that — similar to the Depression — potential buyers and lenders will stay away, fueling even sharper price declines.
During the housing boom, buyers expected prices to rise, so they were quick to buy, borrow and pay a premium. As prices drop, home buyers wait for better deals. says economist Dean Baker of the liberal Center for Economic Policy Research in Washington, D.C.
Lenders want bigger down payments to protect against the falling value of collateral. Homeowners lose equity, so they can't buy other houses. "Price declines can be a self-reinforcing mechanism," Wachter says.
An out-of-control price collapse would have dire consequences, Baker says. Even the most conservative banks would find themselves carrying portfolios of toxic mortgage loans.
If housing prices don't stabilize at traditional levels, financial troubles could spread everywhere — to credit cards, car loans and commercial mortgages, Baker says. "The waves of bad debt will just keep coming," he says.
Baker and Wachter want the U.S. government to take aggressive steps to help homeowners, not just financial institutions. They support expanding programs that restructure troubled mortgages to prevent a flood of foreclosed homes from coming on the market and driving prices below their traditional level.
Rick Wallick is an example of how even cautious borrowers can be hurt by a price collapse. He made a 35% down payment on his house and got a 15-year, fixed-rate mortgage at 5.75%.
Arizona's real estate mess wiped him out anyway. Now that he's in Oregon, he's renting out his Arizona house at a loss and can't afford to keep two homes.
Wallick's Arizona house is surrounded by countless foreclosed homes and empty lots. He told his mortgage company that his December payment will be his last. "It may ruin my credit rating, but I can still buy food," he says.
Shelley McComb used a no-money-down, interest-only ARM to pay $199,000 in December 2006 for a new three-bedroom home near Birmingham, Ala. The house's assessed value briefly rose to $225,000.
Now, she needs to move to Atlanta where her husband got a promotion. The McCombs put their home up for sale in March. After getting no offers, they dropped their price to $179,000. They'd settle for $160,000.
Shelley McComb, 30, who manages a doggie day care center, says, "I wish we'd rented."
Mortgage Default Map December 2008
This map gives an a view of where the concentration of mortgage defaults originate.
Thursday, December 11, 2008
LabCorp and National Jewish Health Collaboration
National Jewish Health and LabCorp to Collaborate on Companion Diagnostics Opportunities
DENVER & BURLINGTON, N.C., Dec 10, 2008 (BUSINESS WIRE) --
National Jewish Health and Laboratory Corporation of America(R) Holdings (LabCorp(R)) (NYSE: LH) (LabCorp) have reached an agreement to collaborate in the development and commercialization of molecular diagnostic tests in support of personalized medicine. The collaboration combines National Jewish Health's strengths in molecular diagnostics and respiratory, immune, and related diseases with LabCorp's national leadership in personalized medicine and esoteric testing.
"National Jewish's Advanced Diagnostics Laboratory is the premiere esoteric lab in respiratory, immune, and related diseases," said Gary Smith, Ph.D., Executive Director of the Advanced Diagnostics Laboratory at National Jewish Health. "This important collaboration with LabCorp will allow us to provide specialized companion diagnostic tools to a much broader audience."
"This agreement further emphasizes LabCorp's focus on personalized medicine and companion diagnostics," said Dr. Andrew J. Conrad, LabCorp's Chief Scientist and Global Head of Clinical Trials. "LabCorp is pleased to collaborate with leading institutes, such as National Jewish Health, in order to offer the most advanced testing capabilities."
The parties have established a framework for the discovery, development, and commercialization of diagnostic tests. Financial terms of the agreement were not disclosed.
National Jewish Health is known worldwide for treatment of patients with respiratory, immune and related disorders, and for groundbreaking medical research. For 11 consecutive years, U.S. News & World Report has ranked National Jewish the No. 1 respiratory hospital in the nation. National Jewish Health's Advanced Diagnostics Laboratory is the nation's leading immunology reference lab, featuring a comprehensive menu of respiratory, molecular, and companion diagnostic tests. More information can be found by visiting www.nationaljewish.org.
About LabCorp(R)
Laboratory Corporation of America(R) Holdings, a S&P 500 company, is a pioneer in commercializing new diagnostic technologies and the first in its industry to embrace genomic testing. With annual revenues of $4.1 billion in 2007, over 26,000 employees nationwide, and more than 220,000 clients, LabCorp offers clinical assays ranging from routine blood analyses to HIV and genomic testing. LabCorp combines its expertise in innovative clinical testing technology with its Centers of Excellence: The Center for Molecular Biology and Pathology, National Genetics Institute, Inc., ViroMed Laboratories, Inc., The Center for Esoteric Testing, Litholink Corporation, DIANON Systems, Inc., US LABS, and Esoterix and its Colorado Coagulation, Endocrine Sciences, and Cytometry Associates laboratories. LabCorp conducts clinical trial testing through its Esoterix Clinical Trials Services division. LabCorp clients include physicians, government agencies, managed care organizations, hospitals, clinical labs, and pharmaceutical companies. To learn more about our organization, visit our Web site at: www.labcorp.com.
DENVER & BURLINGTON, N.C., Dec 10, 2008 (BUSINESS WIRE) --
National Jewish Health and Laboratory Corporation of America(R) Holdings (LabCorp(R)) (NYSE: LH) (LabCorp) have reached an agreement to collaborate in the development and commercialization of molecular diagnostic tests in support of personalized medicine. The collaboration combines National Jewish Health's strengths in molecular diagnostics and respiratory, immune, and related diseases with LabCorp's national leadership in personalized medicine and esoteric testing.
"National Jewish's Advanced Diagnostics Laboratory is the premiere esoteric lab in respiratory, immune, and related diseases," said Gary Smith, Ph.D., Executive Director of the Advanced Diagnostics Laboratory at National Jewish Health. "This important collaboration with LabCorp will allow us to provide specialized companion diagnostic tools to a much broader audience."
"This agreement further emphasizes LabCorp's focus on personalized medicine and companion diagnostics," said Dr. Andrew J. Conrad, LabCorp's Chief Scientist and Global Head of Clinical Trials. "LabCorp is pleased to collaborate with leading institutes, such as National Jewish Health, in order to offer the most advanced testing capabilities."
The parties have established a framework for the discovery, development, and commercialization of diagnostic tests. Financial terms of the agreement were not disclosed.
National Jewish Health is known worldwide for treatment of patients with respiratory, immune and related disorders, and for groundbreaking medical research. For 11 consecutive years, U.S. News & World Report has ranked National Jewish the No. 1 respiratory hospital in the nation. National Jewish Health's Advanced Diagnostics Laboratory is the nation's leading immunology reference lab, featuring a comprehensive menu of respiratory, molecular, and companion diagnostic tests. More information can be found by visiting www.nationaljewish.org.
About LabCorp(R)
Laboratory Corporation of America(R) Holdings, a S&P 500 company, is a pioneer in commercializing new diagnostic technologies and the first in its industry to embrace genomic testing. With annual revenues of $4.1 billion in 2007, over 26,000 employees nationwide, and more than 220,000 clients, LabCorp offers clinical assays ranging from routine blood analyses to HIV and genomic testing. LabCorp combines its expertise in innovative clinical testing technology with its Centers of Excellence: The Center for Molecular Biology and Pathology, National Genetics Institute, Inc., ViroMed Laboratories, Inc., The Center for Esoteric Testing, Litholink Corporation, DIANON Systems, Inc., US LABS, and Esoterix and its Colorado Coagulation, Endocrine Sciences, and Cytometry Associates laboratories. LabCorp conducts clinical trial testing through its Esoterix Clinical Trials Services division. LabCorp clients include physicians, government agencies, managed care organizations, hospitals, clinical labs, and pharmaceutical companies. To learn more about our organization, visit our Web site at: www.labcorp.com.
Unemployment Up Again
UNEMPLOYMENT INSURANCE WEEKLY CLAIMS REPORT
SEASONALLY ADJUSTED DATA
In the week ending Dec. 6, the advance figure for seasonally adjusted initial claims was 573,000, an increase of 58,000 from the previous week's revised figure of 515,000. The 4-week moving average was 540,500, an increase of 14,250 from the previous week's revised average of 526,250.
The advance seasonally adjusted insured unemployment rate was 3.3 percent for the week ending Nov. 29, an increase of 0.2 percentage point from the prior week's unrevised rate of 3.1 percent.
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 29 was 4,429,000, an increase of 338,000 from the preceding week's revised level of 4,091,000. The 4-week moving average was 4,133,500, an increase of 130,750 from the preceding week's revised average of 4,002,750.
SEASONALLY ADJUSTED DATA
In the week ending Dec. 6, the advance figure for seasonally adjusted initial claims was 573,000, an increase of 58,000 from the previous week's revised figure of 515,000. The 4-week moving average was 540,500, an increase of 14,250 from the previous week's revised average of 526,250.
The advance seasonally adjusted insured unemployment rate was 3.3 percent for the week ending Nov. 29, an increase of 0.2 percentage point from the prior week's unrevised rate of 3.1 percent.
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 29 was 4,429,000, an increase of 338,000 from the preceding week's revised level of 4,091,000. The 4-week moving average was 4,133,500, an increase of 130,750 from the preceding week's revised average of 4,002,750.
Johnson & Johnson Acquires Mentor
Johnson & Johnson Announces Definitive Agreement to Acquire Mentor Corporation
Mentor’s Aesthetic and Reconstructive Medical Products Complement Ethicon’s Industry-Leading Surgery Portfolio
New Brunswick, NJ and Santa Barbara, CA (December 1, 2008) - Johnson & Johnson (NYSE: JNJ) and Mentor Corporation (NYSE: MNT), a leading supplier of medical products for the global aesthetic market, today announced a definitive agreement whereby Mentor will be acquired for approximately $1.07 billion in a cash tender offer. Mentor is expected to operate as a stand-alone business unit reporting through ETHICON, Inc., a Johnson & Johnson company and leading provider of suture, mesh and other products for a wide range of surgical procedures.
Under the terms of the agreement, Johnson & Johnson will commence a tender offer to purchase all outstanding shares of Mentor at $31.00 per share. The tender offer is conditioned on the tender of a majority of the outstanding shares of Mentor’s common stock on a fully diluted basis. The closing is conditioned on clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and other customary closing conditions. The $1.12 billion estimated net value of the transaction is based on Mentor’s 34.6 million fully diluted shares outstanding, plus estimated net debt at time of closing. The boards of directors of Johnson & Johnson and Mentor have approved the transaction.
The acquisition of Mentor will provide ETHICON with an opportunity to strengthen its presence in aesthetic and reconstructive medicine and raise the standard for innovation and patient outcomes in this market worldwide. Alex Gorsky, Company Group Chairman for Johnson & Johnson with responsibility for the ETHICON business worldwide, said, "The addition of Mentor, a market-leader and one of the most respected companies in the aesthetic space, expands our capacity to provide physicians with products that can restore patients’ appearance, self-esteem and quality of life. ETHICON is a company that is committed to bringing evidence-based medicine and the highest standards of quality to the aesthetic and reconstructive medical device category. Mentor also shares that commitment to science, health and wellness.”
Josh Levine, President and Chief Executive Officer of Mentor, said, “ETHICON and Mentor share a common set of values in terms of commercial market leadership, the commitment to developing innovative, science based products, and unwavering service to physicians and patients. This transaction allows Mentor to expand our product portfolio and significantly grow our global reach. The opportunity to become part of ETHICON, one of the largest and most respected surgical companies in the world, will have a positive impact on our business and on all our key constituents.”
Upon closing, the transaction is expected to have a dilutive impact to Johnson & Johnson’s 2009 earnings per share of approximately $.03 - $.05. The transaction is expected to close in the first quarter of 2009.
Mentor’s Aesthetic and Reconstructive Medical Products Complement Ethicon’s Industry-Leading Surgery Portfolio
New Brunswick, NJ and Santa Barbara, CA (December 1, 2008) - Johnson & Johnson (NYSE: JNJ) and Mentor Corporation (NYSE: MNT), a leading supplier of medical products for the global aesthetic market, today announced a definitive agreement whereby Mentor will be acquired for approximately $1.07 billion in a cash tender offer. Mentor is expected to operate as a stand-alone business unit reporting through ETHICON, Inc., a Johnson & Johnson company and leading provider of suture, mesh and other products for a wide range of surgical procedures.
Under the terms of the agreement, Johnson & Johnson will commence a tender offer to purchase all outstanding shares of Mentor at $31.00 per share. The tender offer is conditioned on the tender of a majority of the outstanding shares of Mentor’s common stock on a fully diluted basis. The closing is conditioned on clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and other customary closing conditions. The $1.12 billion estimated net value of the transaction is based on Mentor’s 34.6 million fully diluted shares outstanding, plus estimated net debt at time of closing. The boards of directors of Johnson & Johnson and Mentor have approved the transaction.
The acquisition of Mentor will provide ETHICON with an opportunity to strengthen its presence in aesthetic and reconstructive medicine and raise the standard for innovation and patient outcomes in this market worldwide. Alex Gorsky, Company Group Chairman for Johnson & Johnson with responsibility for the ETHICON business worldwide, said, "The addition of Mentor, a market-leader and one of the most respected companies in the aesthetic space, expands our capacity to provide physicians with products that can restore patients’ appearance, self-esteem and quality of life. ETHICON is a company that is committed to bringing evidence-based medicine and the highest standards of quality to the aesthetic and reconstructive medical device category. Mentor also shares that commitment to science, health and wellness.”
Josh Levine, President and Chief Executive Officer of Mentor, said, “ETHICON and Mentor share a common set of values in terms of commercial market leadership, the commitment to developing innovative, science based products, and unwavering service to physicians and patients. This transaction allows Mentor to expand our product portfolio and significantly grow our global reach. The opportunity to become part of ETHICON, one of the largest and most respected surgical companies in the world, will have a positive impact on our business and on all our key constituents.”
Upon closing, the transaction is expected to have a dilutive impact to Johnson & Johnson’s 2009 earnings per share of approximately $.03 - $.05. The transaction is expected to close in the first quarter of 2009.
Boeing Announces 787 Dreamliner 1st Flight
Boeing Schedules 787 Dreamliner First Flight for Second Quarter 2009; First Delivery for First Quarter 2010
Schedule change driven by impact of Machinists' strike and fastener replacement work
Schedule change driven by impact of Machinists' strike and fastener replacement work
EVERETT, Wash., Dec. 11, 2008 -- Boeing [NYSE: BA] today announced an updated schedule for its all-new 787 Dreamliner program that moves the commercial jet's first flight into the second quarter of 2009 and first delivery into the first quarter of 2010. The new schedule reflects the impact of disruption caused by the recent Machinists' strike along with the requirement to replace certain fasteners in early production airplanes.
"Our industry team has made progress with structural testing, systems hardware qualification, and production, but we must adjust our schedule for these two unexpected disruptions," said Boeing Commercial Airplanes President and CEO Scott Carson.
Prior to the strike that halted much of the company's commercial airplane work from early September into November, the 787 was to make its first flight late in the fourth quarter of 2008. First delivery was slated for the third quarter of 2009.
"We're laser focused on what needs to be done to prepare for first flight," said Pat Shanahan, 787 program vice president. "We will overcome this set of circumstances as we have others in the past, and we understand clearly what needs to be done moving forward."
Included in the preparations for first flight, Shanahan said, are finalizing and incorporating remaining engineering changes and completing systems testing, qualifications and certification.
Boeing is evaluating the specific impact of this delay on customer delivery dates and will provide customers with updated schedules once completed. The company is also determining any financial impact from this schedule change and will incorporate that into updated financial and overall airplane delivery guidance that will be released at a later date.
Costco 1st Quarter 2009 Earnings
Costco Wholesale Corporation Reports First Quarter Operating Results for Fiscal 2009
ISSAQUAH, WA, Dec 11, 2008 (MARKET WIRE via COMTEX News Network) -- Costco Wholesale Corporation (NASDAQ: COST) announced today its operating results for the first quarter (twelve weeks) of fiscal 2009, ended November 23, 2008.
Net sales for the first quarter of fiscal 2009 increased four percent to $16.04 billion from $15.47 billion during the first quarter of fiscal 2008. On a comparable warehouse basis, that is warehouses open at least one year, net sales increased one percent.
Net income for the first quarter of fiscal 2009 was $262.5 million, or $.60 per diluted share (consensus $0.62), compared to $262.0 million, or $.59 per diluted share, during the first quarter of fiscal 2008.
According to Richard Galanti, Chief Financial Officer of Costco, "First quarter 2009 results benefited from very strong gasoline profitability when compared to last year. Results were hurt by a slowdown in non-food discretionary sales and related reductions in margins associated with these sales, primarily in the latter half of the quarter. In addition, we incurred certain pretax charges of $34.2 million, or $.05 per share, related to the 'mark-to-market' adjustment of the cash surrender value of certain life insurance contracts ($28.4 million charge to SG&A Expense) and the impairment of corporate investments ($5.8 million charge to interest income). Finally, our first quarter earnings were negatively impacted by an estimated $22.7 million pretax, or $.03 per share, as a result of the significant strengthening during the quarter of the U.S. dollar, as compared to the Canada, United Kingdom, Korea and Mexico currencies."
Costco currently operates 550 warehouses, including 403 in the United States and Puerto Rico, 76 in Canada, 21 in the United Kingdom, six in Korea, five in Taiwan, eight in Japan and 31 in Mexico. The Company also operates Costco Online, an electronic commerce web site, at www.costco.com and at www.costco.ca in Canada.
ISSAQUAH, WA, Dec 11, 2008 (MARKET WIRE via COMTEX News Network) -- Costco Wholesale Corporation (NASDAQ: COST) announced today its operating results for the first quarter (twelve weeks) of fiscal 2009, ended November 23, 2008.
Net sales for the first quarter of fiscal 2009 increased four percent to $16.04 billion from $15.47 billion during the first quarter of fiscal 2008. On a comparable warehouse basis, that is warehouses open at least one year, net sales increased one percent.
Net income for the first quarter of fiscal 2009 was $262.5 million, or $.60 per diluted share (consensus $0.62), compared to $262.0 million, or $.59 per diluted share, during the first quarter of fiscal 2008.
According to Richard Galanti, Chief Financial Officer of Costco, "First quarter 2009 results benefited from very strong gasoline profitability when compared to last year. Results were hurt by a slowdown in non-food discretionary sales and related reductions in margins associated with these sales, primarily in the latter half of the quarter. In addition, we incurred certain pretax charges of $34.2 million, or $.05 per share, related to the 'mark-to-market' adjustment of the cash surrender value of certain life insurance contracts ($28.4 million charge to SG&A Expense) and the impairment of corporate investments ($5.8 million charge to interest income). Finally, our first quarter earnings were negatively impacted by an estimated $22.7 million pretax, or $.03 per share, as a result of the significant strengthening during the quarter of the U.S. dollar, as compared to the Canada, United Kingdom, Korea and Mexico currencies."
Costco currently operates 550 warehouses, including 403 in the United States and Puerto Rico, 76 in Canada, 21 in the United Kingdom, six in Korea, five in Taiwan, eight in Japan and 31 in Mexico. The Company also operates Costco Online, an electronic commerce web site, at www.costco.com and at www.costco.ca in Canada.
Tuesday, December 9, 2008
McDonalds November 2008 Sales
OAK BROOK, IL – McDonald’s Corporation announced today that global comparable sales increased 7.7% in November. Systemwide sales for McDonald’s worldwide restaurants were up 1.9% for the month, or 9.6% in constant currencies. “McDonald’s continued strong performance reflects the benefits of our multidimensional approach,” said McDonald’s Chief Executive Officer, Jim Skinner. “Convenient locations, extended hours and quality food at an outstanding value are all reasons why people are choosing McDonald’s.”U.S. comparable sales increased 4.5% in November due to the strength of McDonald’s market-leading breakfast business, the popularity of the chicken line-up as well as everyday value throughout the menu.In Europe, November comparable sales rose 7.8% led by France, the U.K. and Russia. Locally relevant premium products and compelling value fueled the segment’s results.November comparable sales increased 13.2% in Asia/Pacific, Middle East and Africa due to strong sales growth in Japan, Australia and most other countries. Extended hours, breakfast and menu variety continue to deliver results.
Monday, December 1, 2008
More Shoes To Drop - Commercial Real Estate
By Matt Apuzzo
ASSOCIATED PRESS
WASHINGTON -- Black Friday's retail shoppers hunting for holiday bargains won't be enough to stave off what's likely to become the next economic crisis. Malls from Michigan to Georgia are entering foreclosure, commercial victims of the same events poisoning the housing market.
Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.
That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit.
"We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real-estate lawyer with Herrick Feinstein in New Jersey.
That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.
Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.
But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.
"It's a toxic drug and nobody knows how bad it's going to be," said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.
Unlike homeowners, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.
The retail outlook is particularly bad. Circuit City and Linens 'n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.
Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year, many property owners won't have the money.
Refinancing formerly was an option, but many properties are worth less than when they were purchased. And because investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.
California, New York, Texas and Florida -- states with a high concentration of mortgages in the securities market, according to Fitch -- are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.
The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won't write mortgages as long as investors won't purchase them.
"Credit markets have seized up," corporate securities lawyer Michael Gambro said. "People are not willing to take risks. They're not buying anything."
That drives down investments already on the books. Insurance company's stock prices are falling on fears that they have invested in too many commercial mortgages.
"The system has never been tested for a deep recession," said Ken Rosen, a real-estate hedge-fund manager and University of California at Berkeley professor of real-estate economics.
One hope was that the U.S. would use some of the $700 billion financial bailout to buy shaky investments from banks and insurance companies. That was the original plan. But Treasury Secretary Henry Paulson has issued a stunning turnabout, saying the U.S. no longer planned to buy troubled securities. For those watching the wave of commercial defaults about to crest, the announcement was poorly received.
"He's created havoc in the marketplace by changing the rules," Rosen said. "It was the stupidest statement on Earth."
ASSOCIATED PRESS
WASHINGTON -- Black Friday's retail shoppers hunting for holiday bargains won't be enough to stave off what's likely to become the next economic crisis. Malls from Michigan to Georgia are entering foreclosure, commercial victims of the same events poisoning the housing market.
Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.
That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit.
"We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real-estate lawyer with Herrick Feinstein in New Jersey.
That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.
Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.
But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.
"It's a toxic drug and nobody knows how bad it's going to be," said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.
Unlike homeowners, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.
The retail outlook is particularly bad. Circuit City and Linens 'n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.
Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year, many property owners won't have the money.
Refinancing formerly was an option, but many properties are worth less than when they were purchased. And because investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.
California, New York, Texas and Florida -- states with a high concentration of mortgages in the securities market, according to Fitch -- are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.
The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won't write mortgages as long as investors won't purchase them.
"Credit markets have seized up," corporate securities lawyer Michael Gambro said. "People are not willing to take risks. They're not buying anything."
That drives down investments already on the books. Insurance company's stock prices are falling on fears that they have invested in too many commercial mortgages.
"The system has never been tested for a deep recession," said Ken Rosen, a real-estate hedge-fund manager and University of California at Berkeley professor of real-estate economics.
One hope was that the U.S. would use some of the $700 billion financial bailout to buy shaky investments from banks and insurance companies. That was the original plan. But Treasury Secretary Henry Paulson has issued a stunning turnabout, saying the U.S. no longer planned to buy troubled securities. For those watching the wave of commercial defaults about to crest, the announcement was poorly received.
"He's created havoc in the marketplace by changing the rules," Rosen said. "It was the stupidest statement on Earth."
More Shoes To Drop - Consumer Credit/Lines Of Credit
(Reuters) – The U.S. credit card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.
The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.
"In other words, we expect available consumer liquidity in the form or credit-card lines to decline by 45 percent."
Bank of America Corp, Citigroup Inc and JPMorgan Chase & Co represent over half of the estimated U.S. card outstandings as of September 30, and each company has discussed reducing card exposure or slowing growth, Whitney said.
A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity, Whitney said.
Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.
"...We are now beginning to see evidence of broad-based declines in overall consumer liquidity."
"In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices," Whitney wrote in a note dated November 30.
She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.
"Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," the analyst said.
The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.
"In other words, we expect available consumer liquidity in the form or credit-card lines to decline by 45 percent."
Bank of America Corp, Citigroup Inc and JPMorgan Chase & Co represent over half of the estimated U.S. card outstandings as of September 30, and each company has discussed reducing card exposure or slowing growth, Whitney said.
A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity, Whitney said.
Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.
"...We are now beginning to see evidence of broad-based declines in overall consumer liquidity."
"In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices," Whitney wrote in a note dated November 30.
She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.
"Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," the analyst said.
Subscribe to:
Posts (Atom)
