Posted on 05/12/2008 6:09:41 PM PDT by bruinbirdman
The avalanche of bankruptcies has begun. Six US companies of substance have defaulted on bonds over the past fortnight, against 17 for the whole of last year.
As a "non-believer" in the instant rebound story, I am not easily shocked by gloomy reports. But the latest note by Standard & Poor's -
The Bust After The Boom - gave me a fright.
The sick list is varied, though most for now are victims of the housing crash: Linens 'n Things, ($650m), Kimball Hill ($703m), Home Interiors ($310m), French Lick Resorts ($142m), Recycled Paper Greetings ($187m), and Tropicana Entertainment ($2.49bn).
As the Fed's latest loan survey makes clear, lenders have dropped the guillotine. With the usual delay, the poison is spreading from banks to the real world.
Diane Vazza, S&P's credit chief, says defaults are rising at almost twice the rate of past downturns. "Companies are heading into this recession with a much more toxic mix. Their margin for error is razor-thin," she said.
Two-thirds have a "speculative" rating, compared to 50pc before the dotcom bust, and 40pc in the early 1990s. The culprit is debt. "They ramped it up in the last 18 months of the credit boom. A lot of deals were funded that should not have been funded," she said.
Some 174 US companies are trading at "distress levels". Spreads on their bonds have rocketed above 1,000 basis points. This does not cover the carnage among smaller firms outside the rating universe.
The California city of Vallejo (117,000 inhabitants) has just made history by opting for Chapter 9 bankruptcy, the result of tax erosion from a 26pc fall in local house prices. Half Moon Bay may be next.
"This is the tip of the iceberg: everybody is going to line up for Chapter 9 in California," said John Moorlach, Orange County board chief.
US consumers are juggling plastic to put off their day of reckoning. The Fed survey said credit card debt had jumped 6.7pc in the first quarter to $957bn, or $6,000 per working American, despite usury rates near 20pc.
"My guess is that many Americans continue to run up massive credit card debt because they have little intention of paying it off," said Peter Schiff at Euro Pacific Capital. Quite.
Thankfully, the Fed's monetary blitz has averted a depression. Emergency lending under the "unusual and exigent circumstances" clause of the Fed Act - the nuclear Article 13 (3), unused since the 1930s - has put a floor under the banking system.
There will be no "reset Armaggedon" as rates vault on honey-trap mortgages. Drastic Fed cuts - to 2pc from 5.25pc in September - have conjured away that disaster, at least.
One dreads to think what would have happened if Fed liquidationists (Plosser, Hoenig, Fisher) had prevailed, as they did in 1930 - and still do in Euroland, where Germany's Axel Weber holds sway, and nobody of sense dares lead a mutiny.
Despite the rescue, US house prices are likely to fall 25pc from peak to trough (Lehman Brothers, Goldman Sachs). We are barely half done, yet 10m-12m households are in negative equity already.
The bears at Société Générale are going into Siberian hibernation, issuing an "Ice Age" alert. They have slashed exposure to global equities to a minimum 30pc for the first time ever.
Their weighting of super-safe "AAA" government bonds has been raised to a maximum 50pc. This is a bet on gruelling "Japanese" deflation. The bank expects equities to fall by 50pc to 75pc.
"Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios," said Albert Edward, SG's global strategist.
"We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating," he said.
Today's "bear rally" may live on into June. Don't count on it. Global bourses are no longer rising hand-in-hand with oil in exuberant celebration of liquidity relief (US, UK, and Canadian rate cuts).
Crude ceased to be a friend of equities when it reached around $110 a barrel. At last week's close of $126, it became an outright threat. The Bush rescue package - $800 in rebate cheques per household - has been rendered null and void by the latest spike. The average US home is now spending over 8pc of income on energy or fuel.
OPEC is playing with fire by refusing to pump more oil to offset rebel attacks in Nigeria. The cartel's output drop of 350,000 barrels a day in April is a hostile act at this point.
But there again, why should Middle Eastern states help America as long as the White House keeps filling the US petroleum reserve to prepare for war with Iran? Bush is playing with fire, too.
The oil spike will burn itself out. China has hit the buffers. With inflation at 8.5pc, it risks political turmoil. Moreover, it has repeated Japan's mistakes in the 1980s, building too many factories shipping too many goods at slender margins into a crumbling export market.
Lehman Brothers' Sun Mingchun says China will tip over in the second half of this year. "With so much latent overcapacity, an export-led slowdown could trigger a chain reaction which, in the worst case, could threaten the stability of [its] financial and economic system," he said.
Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way.
woe is us.
the earthans should jump off into a black hole.
That is why it is called a credit boom. Nothing new here.
Tax rebate checks are about to enter the system.
Looks like there may not be a US recession.
Names that are essential to a healthy economy. /s
wow, what did I do to my tagline?
I think I’ll keep it that way for a while...
Meanwhile, businesses that played it smart will come out stronger than before.
Interesting article. Thank you very much for posting it, as I never read the source otherwise...
Home Interiors never sold anything but overpriced plastic crap made in China anyway. It will not be missed.
The rate of collapse of "companies of substance" has been reduced.
I didn't read the rest of the article. Did the writer ever realize that he started off with good news?
These are merely normal symptoms of the disease known as A Debt Based Monetary System. The system is designed that way. but don’t worry your portion of the National Debt is still about $200,000 and climbing fast, another symptom of the disease (free credit money) . If only we had One Governor in The US with some balls, the system could be changed. The first STATE to start COINING MONEY, and Accept Federal Reserve Notes for Taxes Only will go down in History as returning our Country To Constitutionally Authorized Money.
at current face value of $50,a 1 ounce Gold Coin is about $800 and Silver ($1)about $17,imagine getting paid $50 in Legal Tender and paying $20 total Taxes in Federal Reserve Notes. After all that is what they were intended for, Nobody is Required to Accept Federal Reserve Notes. Only The Government is For TAXES.
article 1, section 8 US Constitution
“no State, shall make anything but, Gold and Silver Coin, A legal tender in payment of Debt”
Eyeamok
And it would seem that they have abandoned English for some wierd moon-language. Reminds me of the "FAQ" one might find on a piece of open source software.
With the price of oil way up, restocking costs went through the roof.
They'd already commited to sell everything on their shelves at a price below the cost of restocking.
That's a recipe guaranteed to create bankruptcy every time it's tried.
Your old fashioned businessman, the pre-DOT.COM type, knows that you must BUY LOW, SELL HIGH.
This caught my eye:
The California city of Vallejo (117,000 inhabitants) has just made history by opting for Chapter 9 bankruptcy, the result of tax erosion from a 26pc fall in local house prices.
Yeah, right. It's not a revenue problem, it's a spending problem.
From a local source: (http://www.minyanville.com/articles/index/a/15978)
"The city of Vallejo just fired one huge warning shot for a situation that is going to play out nationwide. Here are the issues.
City and state governments have negotiated salary arrangements that are not affordable. City and state governments have guaranteed pension benefits to teachers, fire fighters, police, and other city and state employees that cannot possibly be met. Taxpayers cannot possibly afford higher taxes to pay bloated pension benefits of government workers in sweetheart deals. "
before spreads spiked, they were probably on the “casual” side of an interest rate swap.
It says 6 in the past fortnight or 14 days, it doesn’t say 6 in the last 5 months.
Oh no. Mob run casinos don't pay their debts! Silly slips of paper don't sell for $3! Only 84 home good stores at the local mall are making a go of it! Whatever shall we do? The proletariat is sure to rise and slaughter the boobousie!!!
A monthly rate is a logical comparison given what the writer cranked into the piece, and I derived a monthly rate to make everything meaningful.
As the writer knew before he dipped his pen to create propaganda, you must have comparable rates to understanding the meaning.
They screwed up and now think a bankruptcy judge will let them off the hooks. State compensation laws will put those same employees at the head of the line as city hall and the police cars are put on the block.
Taxpayers should have bothered to examine the issues and vote responsibly. Instead, they let the schmooze idiots take over, and this is the mess you get when that happens.
They screwed up and now think a bankruptcy judge will let them off the hooks. State compensation laws will put those same employees at the head of the line as city hall and the police cars are put on the block.
Taxpayers should have bothered to examine the issues and vote responsibly. Instead, they let the schmooze idiots take over, and this is the mess you get when that happens.
In short, the government gets fired, the taxpayers pay, and the employees get paid.
May not be right, but that's how it's done.
Remember, the whole purpose of bankruptcy is to enable perfectly useful assets to receive more worthy owners.
Why bankruptcy was ever applied to municipal governments is a good question. It's crazy.
Another doom and gloom screed. I’ll pass.
"Razor's Edge" fan?
Well, sure. The thing is, the Telegraph looks at the Chapter 9 filing and says “oh boy! Look at that! PROOF that revenues have dropped, due to falling housing prices”.
You and I look at it and say “huh. spending problem. hope that works out for you guys.” Or words to that effect.
The glass of sour milk that is way less than half full gets passed from one MSM outfit to another.
huh?
`Twas brillig, and the slithy toves
Did gyre and gimble in the wabe:
All mimsy were the borogoves,
And the mome raths outgrabe.
or something along those lines.
Won’t argue against the general idea of comparable stats but 6 in 14 days is monthly rate of around 12.5, which is far higher than 1.4 so the writer’s point stands slightly.
Sell Euros (high), bring them home to greenbacks (low). Hmmm?
yitbos
What about this article makes you want to believe anything this writer says?
It’s one of those pieces where you wind up knowing less after reading it than before, excecpt that the writer is spinning a yarn for some reason.
Maybe the correct figure is 6 in the past 14 days. Maybe it’s 6 in the past month. Maybe it’s nothin of the sort.
The dude is clearly grinding an ax, so you would have to go off and do your own research to figure out where the truth lies...
Every one of those corporations mentioned have one thing in common: why did they exist in the first place?
I call this the “common sense business model” question. If a typical person looks at a company and is puzzled why there is such a big company for such a mediocre product or service, or one filled with competitors, it is a good indicator that the company really shouldn’t have become prosperous in the first place. It is a castle built on a foundation of clay.
Look at them:
Linens ‘n Things - a major corporation to sell bed linens? But you can buy that stuff in any dry goods store.
Kimball Hill - okay, this one was a homebuilder. That’s at least half legitimate. But homebuilders open and close all the time.
Home Interiors - Seriously, why? Can’t you get this stuff elsewhere?
French Lick Resorts - Just another casino company. Again, a dime a dozen.
Recycled Paper Greetings - Competing against Hallmark? Not my first choice.
Tropicana Entertainment - Just another casino company.
I hazard to guess that all of these companies also shared another thing in common. They all had speculative, high risk, high return equity. Aggressive growth funds probably loved them, because they were returning double digit growth for years.
I’ve been keeping up with the larger bankruptcies on tickerforum.org. It was 6 in less than a month at least so I know the author is probably correct. I don’t really care what the article says. I was just referring to the arguement that the author supposedly said 6 in 5 months when he clearly said 6 in a fortnight.
I wouldn't but The Telegraph in that category. However, among Telegraph reporters, Ambrose is a different sort.
Some will remember Ambrose Evans-Pritchard as the author of "The Secret Life of Bill Clinton (1997) which was published by conservative publishing firm Regnery Publishing."
These days, as the International Business Editor of The Telegraph, he is known as somewhat of a goldbug. About once a month he does uncover some good EUrotopia financial stuff.
yitbos
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."~~Ludwig von Mises
And that really seems to be pi$$ing off the media here in the US, and looks like in the UK as well. They so wanted to hang a recession albatross around the President's neck, and by transferrence, to that of the Republican nominee.
Sounds like an easy job:)
Once again the worlds of Utopia and Reality have a massive train wreck.
Surely with all the PC's and main frames the city of Vallejo uses to run its business can produce numbers that reflect outlays vs incomes on a monthly basis.
Hmmmm...council members too busy with 'Team Building' Retreats on the taxpayers dime to look at the balance sheets???
Yup, Chicom Chia Pet plastic junk is a good investment with flowers and illegal alien freebies.
A party that doesn't have any assets can't pay. Otherwise, you and your favorite pol just write a "work" contract promising to pay you $30 trillion a year for life, then he declares bankruptcy, and you own the world.
"Not the way it works".
Move all possible assets out of the way of the union shake-down. Dissolve the municipality, and start over. Just as I said.
Another symptom of poor math skills. LOL!
Poor math??
National Debt 59 trillion +
just under 300 people million in US.
Show me where my Math is wrong please, or are you a graduate from the public school system.
Eyeamok
http://www.freerepublic.com/focus/f-news/1638160/posts
Yes I include UNFUNDED LIABILITIES as Debt, to do otherwise would be dishonest, but hey lets not let facts get in the way of your feelings, I don’t usually engage in a battle of wits with unarmed people, but I will make an exception in your case.
Eyeamok
Yes.
National Debt 59 trillion +
Not even close.
or are you a graduate from the public school system.
I suspect you failed to graduate from the public school that gave you such poor math skills.
You included money that has not been borrowed? Where did you get that definition of debt?
to do otherwise would be dishonest, but hey lets not let facts get in the way of your feelings,
Your feelings aren't the same thing as facts.
I don’t usually engage in a battle of wits with unarmed people
Because you lose to them too. LOL!
This is still the Great Depression and has been since 1929.
gocha...thanks
It’s a real problem here, and the one thing this writer got right is that there will probably be more chapter 9 filings by California cities this year.
But it’s not a revenue problem. It’s spending spending spending...this time it’s the public employee unions (by the way, I’m a member of one, so I’m not trying to pick on them), next time it will be paying for services for, ahem, undocumented Americans and their kids.
But the only solution that you can discuss in polite company is raising taxes...
"Excuse me, but don't non-consumers of alcohol and tobacco also send their kids to public school?"
This is the gov that raids the DOT fund to hand out freebies to all the illegals, not to mention illegally 'borrowing' from the state employees' retirement (pension) fund too.
Easley is a useless POS lib slime...back in 2002, they raise taxes on NC taxpayers during a recession. Go figure.
NC transportation panel recommends bond
Easley promises blank check to fix probation problems
General Assembly returns to Raleigh
At the beginning of his term in 2000, under Sleazely, he slashed mental health funding and other programs to pay for the $800 million / year costs of illegals in our state.
I hope we soon stop this madness in NC.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.