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Thursday, May 31, 2007

An e-mail from one of my readers

Thanks for your reply, and it is Medford Oregon, Rogue Valley, you may have heard of us, we and four other counties recently declared a financial emergency and they closed the library system in April for good. Josephine County just closed their library system AND terminated all deputy patrols in the county, as well as emptying out all but 30 of the 140 county jail beds (these were not characters like Otis the drunk in Mayberry either; at least half were violent criminals that got county jail time rather than state prison as part of their plea deals) and they also fired all the deputy DA's and the DA's entire staff, he will effectively be doing no more prosecutions except for the must violent should a criminal actually be caught. Search and rescue functions will now be done only by "private donation." Curry County is so hard up they are planning to dissolve the county and glom onto Josephine County; how hard up do you have to be to want to join a county with no Sheriff's patrols nor DA staff? The Sheriff in Josephine County says if funds are not forthcoming by next March he will simply open the jail cells and shutter his office for good. Needless to say half the county employees have been pink-slipped and there is no more road repairs or park maintenance. They have been passing out over 600 concealed weapons permits a month since the population will now be fending for themselves in a region noted for drugs and drug related crime.

THAT is the reality in my America today; trillions and TRILLIONS in circulation rounding the globe daily and finding their way into the boardrooms of corporate "players," but the hoi poloi, we mere citizens are being left to just die in the sticks. I know that had I been one of the witnesses against any of the 110 newly freed criminals I would be VERY worried right now.

Oddly, we now have reached the point of income and net worth inequality where it is fair to say we have TWO societies, or classes, one is that which is represented by CNBC, an imperial never never land that has it's own blindingly bright new reality in which millionaire is nothing, you ain't nobody till you are a billionaire; and the rest of us who like in the 1930's are "forgotten." The ones that still get $900 a month to keep them out of poverty such as my mother had when she was alive on her SSI. These people that depend on the "middle" class as if we still had one (they are just the better off poor compared to the new UBERAMERICANOS) and government services to get by. The disparity between rich and the rest has become such a wide gulf that they are rapidly losing all incentive to do anything but to just survive.

As to GM peddling it's liabilities to the taxpayers, well if the taxpayers have a trillion or so to blow on a faux war in Iraq they can damned well pick up the tab for pensions and healthcare for GM workers, we agree that it is the only way GM will stay and American icon. The union will make concessions but not enough to save the company, they cannot. From my point of view any lessening of liability is an increase to assets, and the government has no business giving assets to a private corporation to benefit stockholders and corporate officers that are already GROSSLY overpaid for delivering one insane policy after the next.

We are on borrowed time Charlie. It is September 1929 all over again.

Why is common sense considered so radical?

Wednesday, May 30, 2007

Ok class let's review why GM is going bankrupt

Has anyone looked at their balance sheet lately???

Ok class. Let's review.

As of March 31st, they had cash of around $21 billion. They had receivables of around $10 billion. BUT they had accounts payable of $30 billion and accrued expenses of $34.5 billion. OUCH!!!!

They have some other current assets (inventories, equipment on lease) but when you add up all the current assets it's still over $5 billion LESS than the current liabilities.In addition, they have $33 billion in long-term debt, $49 billion in post-retirement benefits, and $11 billion in pension liabilities.

One of the only things this organization seems to have as a positive asset is deferred income taxes (a total of over $44 billion). But even with that, they still have a NEGATIVE SHAREHOLDER EQUITY of over $4 billion!!!!

GM has just issued a secured loan against one of their last unleveraged assets (their equity in GMAC). It may take a year. It may take two or three. But as far as I'm concerned they are already bankrupt. Just read their balance sheet, and weep.

GM has spent the last two decades selling anything that made money: Hughes, EDS, GMAC. Yet they have emerged from this sales process with even more debt.

Now all that remains is their car business which is losing market share and probably has further to fall.

Don't get me wrong. There are many positives to GM. It is expanding internationally, it benefits from a weak dollar, Bob Lutz is unleashing creative talent, and GM may achieve success in its negotiations with the UAW later this year.

However, all these positives are too little too late. This bureaucratic, old-school company has not moved fast enough, and now it cannot escape that juggernaut, that reality: its balance sheet.

On the negative side, GM faces more write-downs from Delphi, possible further restructuring costs and losses, and its expenses and payables coming due. Furthermore, there is increasing likelihood the U.S. economy could remain slow or even contract a little. This situation is likely to force GM to seek even more debt financing, but given that they are out of assets to secure, who will lend more money to this Frankenstein monster? I doubt any banks will step in.

Chrysler, which had some unsecured assets left, was essentially given away to Cerberus. GM, on the other hand, still has $17 billion in market cap at today's stock price of $30 a share. GM has had a nice bounce up, but it seems like a dead man's bounce. I doubt even private equity can save GM now.

Monday, May 28, 2007

Two options positions I have

I've decided to add some of my "positions" to my blog, instead of simply talking about macroeconomic trends and monetary policy. I'll probably start doing more and more posts like this one in the future.

For now, here's just a quick look at two positions I have (note, on this date GM is at $30.49 and DAL is at $18.76). Any thoughts (positive or negative) are greatly appreciated.

I have a lot of LEAP puts on GM and a lot of LEAP calls on DAL.

I think GM is going bankrupt, and the only thing that could save them would be private equity making a stupid bid, but interest rates likely to go up and with bank lenders becoming more cautious, I think the negatives of GM will start to emerge again. The other potential risk (if you're in puts) is that the UAW agrees to take the health care liabilities from GM, but frankly I don't think they'll do that without a big fight.

On DAL, they just came out of bankruptcy, which is basically like an IPO without any investment bank or any type of sales & marketing channel pumping up the stock. So you get to buy the stock at what the court thinks is a fair valuation. Only several weeks and months later does Wall Street start covering it again, and often times not for a while after that because the companies are well capitalized and they don't need any products nor services from Wall Street. Look at what happened to the stocks of United and Winn Dixie when they came out of bankruptcy. I'm wondering if DAL will have the same tick up, especially if the airline industry remains strong. The economy and fuel prices would seem to be the big risks here.

Tuesday, May 22, 2007

To my hedge fund friend

Here's what I wrote to my hedge fund friend who thinks that everything is hunky dorry. We'll see if he write me back:

Regarding inflation, if we are in a prolonged period in which commodity inflation should, has, and will outstrip core inflation, is core inflation really meaningful? The reason that everyone points to core inflation, I believe, is because of the experience in the 70s when labor inflation signaled the core of inflation. But aren't we in a different time, characterized by global labor forces and global commodity demand, when the real signal of core inflation is commodities, in my view then lagged by workforce inflation? Could it be that people are having trouble seeing a new paradigm, wherein the core of inflation is the inverse of our previsious experience? Those who rely on rear-view investing will miss this new paradigm and all its significance.

Those who benefit from leverage - hedge funds, banks, private equity, even the Fed and the government to some extent - will, undoubtedly, have an emotionally negative reaction to the above statements. Those who are open-minded and erudite might pause to think.

Wednesday, May 16, 2007

Let's be clear

- Consumer is overleveraged and hurting.
- Economy is slowing.
- Inflation is a threat, especially Ag & Energy inflation.
- There is some financial innoviation going on, but there is also a LOT of overleveraging and overlending.
- After the subprime scare, rating agencies are stepping up their game and becoming more strict.
- The LBO/Private Equity game is driving stocks higher.
- Earnings reports remain strong outside of stocks tied directly to consumers.
- Federal tax receipts are high and the deficit is declining.

What does this all mean?

As always, it's hard too tell. Certainly, there is a lot of yield chasing, and in the long term, I don't think it will pay off. As Buffett says, it's easier to get leverage than to get rid of it.

There is too much rearview-mirror investing going on here.

The future will be different than the immediate past.

My guess is that eventually (who knows when!) the LBO bubble will pop. Maybe the slowing economy will cause it to do so. Greenspan saying there is a 1 in 3 chance of a recession probably means he really believes there is a 2 in 3 chance. It would be irresponible for him to scare the markets, but he also wants to cover his ass.

If the economy slows, default rates will rise, which is scary given how tight spreads are and how much junk debt is being issued. But a lot of the debt is long term, so that should provide some cushion. The bigger threat is that of new lending being shut off, which is what is happening in the subprime market.

Personally, I think we're in the beginning stages of less liquidity and we should prepare as such, moving to higher quality names with longer maturities. I'm getting out of my more speculative bets and becoming more conservative. I'm happy to wait it out. My fear is the the Fed goes crazy with turning on the liquidity, which decreases the dollar's value and inflation, but it's hard to play both side of the fence.