The Balance Sheet Future

Chicago Tea Party

Rick Santelli's passionate reporting on the President's mortgage bailout plan drew lots of attention this week.  Sanetlli is focusing the attention onto the bailout idea itself and its proping up of unqualified borrowers.  Robert Gibbs, the White House Press Secretary, strikes back at Santelli personally and looks unprofessional and unable to handle the crisitism from the press.  The whole video is quite amusing and Kudlow makes a solid point about the administration's handling of the press.

Friday Response with Kudlow Regarding Robert Gibbs:
Santelli's Manifesto

The original video clip:
"Shout Heard Round the World"

Auto Bailout Task Force Takes Time

This week the auto companies provided their long term restructuring and survival plans to the new Auto Bailout Task Force.  The task force co-chairs, Treasury Secretary Tim Geithner and White House economic adviser Larry Summers, two guys with whom I have little confidence in to do the right thing.

Fundamental Restructuring

The companies received a $17.4 billion bailout in December and have requested a combined $22 billion more in federal aid to survive. The bailout requires the Obama administration to determine by March 31 whether GM and Chrysler can be competitive and eligible for more government assistance.

The Treasury said members discussed financial and operational details of the companies, as well as efforts to bring unionized wages and benefits in line with those at non- union foreign car companies in the United States, and initiatives to produce more fuel efficient vehicles.

Geithner and Summers sought more analysis from members, as well as their initial restructuring recommendations due at the next meeting. The date was not disclosed.

Geithner and Summers don't have the experience to reform these companies and are likely to throw more money at these fundamentally impaired companies. Someone with industry experience and the independence to make the needed cuts and changes should be incharge.  Will Congress and the President realize that a bankruptcy restructuring is needed?  The market has spoken.

Market Value

GM fell 23 cents, or 12 percent, to $1.77 at 4:15 p.m. in New York Stock Exchange composite trading. The closing price was a 71-year low, according to Global Financial Data, underscoring investor skepticism that the largest U.S. automaker can be turned around.

The company’s market value slid to less than $1 billion in intraday trading before finishing the day at $1.08 billion. Five years earlier, the value was $27.2 billion.

Senate Banking Committee Chairman Christopher Dodd said he doesn’t want U.S. automakers to go through a prepackaged bankruptcy or “forced merger.”

“I don’t like that last option,” Dodd, a Connecticut Democrat, said of a forced GM-Chrysler merger in an interview on Bloomberg Television’s “Political Capital with Al Hunt” airing this weekend. “I’m fearful it might turn into just a liquidation; but if it can be done well, it may come to that.”

GM’s 8.375 percent bonds due in July 2033 slid 0.5 cent to 16 cents on the dollar, yielding 52.1 percent, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.

Let the market restructure these companies.  Let capital and resources flow towards more efficient manufacturers.  The labor force needs to find other jobs and be retrained to manufacture tomorrow's goods.  Hopefully the task forces realizes what must be done and has the will to make the
politically-difficult decision.

Governors Worry About Budgets

The $787 billion stimulus bill signed by President Obama will save many states from having to make spending cuts and raise taxes.  Most states' problems will not go away after the money from the stimulus package is spent.  States expanded services and extended generous pay packages to employees as they enjoyed the large tax revenues during the housing and credit boom over the past five years.  Now they are slowly cutting back on spending but are holding off on making the large necessary cutbacks to balance out the new realty of lower spending and thus lower revenue.  Congress and the President are enabling continued overspending at all government levels.

Economic Toll

The economic meltdown continues to take its toll: 43 U.S. states report the need for additional spending cuts or tax increases before their current budget years end, the Denver-based National Conference of State Legislatures reports. Thirty-four states face additional budget gaps as they prepare spending plans for the 2009-10 fiscal years.

“Almost on a daily basis, we’re hearing reports that revenues are coming in below forecasts,” said Corina Eckl, NCSL’s fiscal program director.

Adding to the problem are accelerating Medicare and Medicaid costs and infrastructure that has been neglected for decades and is forcing states to play a costly game of catch-up.

“We’ve got revenues that do not grow with inflation and we have expenses that do,” said Delaware Governor Jack Markell, a Democrat. “There’s no system in the world that can succeed with that kind of disconnect.”

The Delaware Governor is correct, no system that spends more than it collects can survive and proping up spending levels thru assistance from Washington.  Just as any business needs to cut spending immediately as their revenue projections change, so too does government.  Several Governors have realized the problem and are acting responsibily.

Offered Millions, Some Govs Just Say No

"We will not be accepting unemployment insurance money because it requires us to have a significant tax increase in the future," Barbour told ABC. "Most states like Mississippi do not allow people to get unemployment compensation unless they are willing and able to take a full-time job."

Democratic Rep. James Clyburn, from Sanford's own state of South Carolina, has said that if the governor stands in the way, the state legislature will go around him to get the money, thanks to a provision Clyburn inserted in the stimulus that allows them to do so.

I applaud South Carolina Gov. Mark Sanford and Gov. Haley Barbour of Mississippi for saying no to the stimulus money as it would mean a need for higher taxes in the future after the stimulus ends.  That Congress will force the money at the states is further cause for concern.  The sooner other politicians realize what Govs. Sanford and Barbour have the better.

Gold - No Liabilities Attached

Gold continued to outperform all asset classes as it crossed the $1,000 mark in today's trading.  As the only currency without any liabilities attached to it, gold continues to strike new highs in terms of the Euro, Pound, Rupee and other currencies. 

The run up in gold may be a fear trade or it may represent continued buying in the form of long term allocations out of paper currencies.

‘Fragile’ Financial Situation

“The financial situation remains extremely fragile and gold seems to be the only safe haven,” said Ron Goodis, retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. “Currencies are losing value and holders of currencies are losing confidence. Gold may break through $1,000 and not look back.”

As investors have poured money into haven assets, gold has gained even as the dollar has strengthened. The greenback is up 6.3 percent this year against a weighted basket of six major currencies including the euro and yen. Gold and the dollar historically have moved in opposite directions.

“People will soon realize the dollar is just as bad as other currencies,” said Mario Innecco, a futures broker at MF Global Ltd. in London.

Will the world lose its appetite for dollars?  If it were to occur it will surely take some time as the dollar is still seen as a flight to quality in many developing countries.  Gold and the US Dollar can both continue to perform as financial markets remain in termoil. 

“One camp of investors is buying gold because of fear the fiscal stimulus packages are insufficient to bring the economy out of recession,” said Peter Fertig, owner of Quantitative Commodity Research Ltd. in Hainburg, Germany. “The other camp fears the stimulus packages will lead to inflation.”

Inflation is not right around the corner.  Demand for all goods and services continues to decline and consumers across the country remain concerned, and rightly so, about the job market.  The monetary printing to come from the Obama administration's stimulus package and the bank and auto bailouts will not cause runaway inflation.  Credit is the key driver to inflation and both demand for and supply of credit are shrinking.  Until the growth of credit recovers hyperinflation concerns are overdone.

Getting Into Gold

Even without hyperinflation gold will perform.  If you are not in the gold trade and are looking to jump on board look for pullbacks in the gold miners with strong balance sheets and cash flow. 

Yamana Gold

Yamana Gold Inc., Canada's fourth-largest gold producer, may accelerate plans to double output by acquiring smaller rivals that are struggling to finance development of their mines.

"These unique times give us the opportunity to say, 'Can we get there more quickly'" CEO Peter Marrone said by telephone from Toronto, where the company is based. "That's the sweet spot for a company like ours."

After shunning acquisitions last year in favor of internal expansion, Mr. Marrone is now looking outward for bargains among mining companies with deposits in the Americas. The global credit freeze left some small mine developers and explorers without access to the cash they need to develop new mines or finance their operating costs.

Taking a look at Yamana's most recent balance sheet and a February company presentation shows the company with $410M in cash and undrawn credit.  With $350M in projected 2009 capex look for the company to fund acquistions and continuing mine development/expansion through additional equity and debt.  These announcements could cause a nice pullback in the stock and an opening for an entry point for a long position.

With everyone talking about gold it is due for a pullback and an opportunity to get long.

Disclosure: long GLD

Landlords Have To Take Every Drop

In a further sign of continuing consumer spending declines retailers are closing their stores early to cut costs.  Both Westfield and Simon Property Group announced cutback in hours at several shopping mall properties. 

Westfield to Cut U.S. Mall Hours to Help Retailers

Westfield Group, the world’s biggest shopping-center owner by market value, will cut operating hours at most of its 55 U.S. malls to help retailers trim expenses as the recession deepens.

Most of the malls will open 30 minutes later and close 30 minutes earlier Monday through Friday, and close an hour earlier on Sundays at about half the locations, according to Katy Dickey, a spokeswoman for Sydney-based Westfield. Hours will generally stay the same on Saturdays with the changes to take effect from March 1, Dickey said yesterday by telephone.

Best for these landlords to work with their tenants to help them survive.  Look for more action as retailers continue to struggle with falling traffic and spending.  Those who haven't realized the trouble they are in are getting wake-up calls from their tenants looking for rent reductions.  In their latest earnings release Advanced Auto Parts joins a growing list of companies that are renegotiating their leases with their landlords.

In addition, an unprecedented amount of retail store closings has provided the Company significant opportunities to improve its store portfolio. As a result, the Company intends to aggressively renegotiate rents and relocate or close existing stores to improve profitability.

Ending with a simpler take on the troubles landlords are facing, attorney Dale Willerton provides a great Zig Ziglar quote in a piece in the Financial Post:

As Zig Ziglar once told me, "Cows don't give milk - you've got to take every drop." The same philosophy applies to retail and commercial real estate.
Approximately eight out of 10 retailers we work with will receive a 20% to 40% rent reduction mid-term. For tenants who are two years into a five-year lease and get their rent cut back by this much, it can make the difference between staying in business or closing up shop.

Commercial real estate has long been talked about as the next trouble area for financial institutions and owners.  Most of the REIT stocks are nearing their previous lows - look for that support to be short lived as their upcoming cash flow troubles come to the surface.

Disclosure - short IYR

Welcome to The Balance Sheet Future

I started this blog to provide discussion and analysis over companies’ balance sheets.  If the current financial and economic crisis has taught us anything is that the focus on a company’s income statement is the past.  The balance sheet is the future.  I hope you enjoy the information discussed on this blog.  Please bear with me as things get up and running and provide your comments along the way.