Could 2012 Surprise to the Upside?

Posted on January 22, 2012

In January we are trained to predict the likely course of the coming year and more often than not we get it wrong. This year virtually everyone has had the same prediction: “We’ll muddle along at around 2.5% growth unless something really bad happens and then all bets are off.” The outliers tend to focus on the possibility that we are heading for a recession based in part on the negative call from the Economic Cycle Research Institute (ECRI). Yet some of the economic data is not cooperating with the doomsayers and our observations in the real world are that business for many of our clients is not all that bad and is in fact improving.

What if the pessimists are wrong and 2012 turns out to be a far more positive year for the economy than many are predicting? While the jury is still out, the data continues to improve in terms of employment and consumer spending.

Credit to Hale Stewart who recently published this and a number of other charts supportive of a positive economic case on Seeking Alpha. What’s the chance he could turn out to be right? Ignoring for the moment all the could go wrongs, what’s the case for a far stronger 2012 than is currently being predicted?

1. Everyone wants things to get better. This is not trivial. After four years of depression, everyone longs for the good old days. 2012 is predicted to be the best year since 2007 for the travel industry. What happens if Americans who have been accumulating dry powder for the past four years suddenly loosen their purse strings?

2. The Fed is committed to a massive and continuing program of monetizing the massive deficits the federal government continues to run. As we wrote recently, this has created a huge overhang of … read the rest

Time for Transparency on Bailing Out the Banks’ Bondholders

Posted on April 20, 2009

This morning the New York Times reported that the Treasury is planning to convert TARP holdings of preferred stock into common equity at a number of banks. As we previously raised, the real issue is whether and why the Treasury is committed to protect the bondholders of the big banks. There is a great deal of capital in the banking system in the form of unsecured debt.  In a normal world, when a company goes broke, some or all of the debtholders’ interests will ultimately be converted to equity capital either in bankruptcy or in an out of court restructure.  The current issue of The Institutional Risk Analyst makes a very interesting proposal for conversion of Citibank debt into equity, which would address the capitalization issue once and for all.  It’s time the Treasury explains in clear English why they are electing to further commit taxpayer funds to bailing out the big banks’ bondholders.

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Categories: Bailouts, Bankruptcy, Banks, Business Survival, Distress, Economics, Junior Capital

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We’re Seven Months into the Great Mess. What’s Going to Happen Next?

Posted on April 14, 2009

Seven months ago (Monday September 15, 2008) we learned of the failure of Lehman Brothers and soon thereafter the sale of Merrill Lynch and the bailout of AIG.  These events were the culmination of a series of market shocks that had started with the demise of the sub-prime loan market, had accelerated with the collapse of the leveraged loan market starting in August 2007 and had included the takeover of Bear Stearns in March 2008.  But September 15, 2008 is the current era’s equivalent of 1929’s Black Monday.

Since September we have witnessed dramatic governmental actions designed to prevent the current crisis from descending into a downward spiral reminiscent of the 1930s.  For the moment, the stock market seems to be giving these actions (as well as our charismatic new President) a vote of confidence.  We’re also hearing from some of our clients that their operations improved in March and that they are more optimistic about their businesses looking toward the summer.  Another “green shoot” is the middle market M&A market, where I spend much of my time.  The M&A market has definitely improved since the first of the year and indications are that it will remain reasonably strong for a while, at least for profitable companies in favored industries such as government contracting, IT services and health care.

So what is the economic scorecard to date and what can we expect to see going forward?

1)    The World economy is in the midst of the first major global recession of the postwar era.  Global trade has been collapsed for many of the major exporters, particularly China, Japan and Germany.


While there have been some recent hints that the rate of decline is slowing (the second derivative of negative growth) or even bouncing a little, world trade is still an area of significant concern.  … read the rest

Beware the Ides of March

Posted on March 1, 2009

We won’t be seeing bloody togas on the Senate steps, but there will be great pain and destruction in the American business community.  There’s an annual ritual which starts in March and generally goes through sometime in April, in which tens of thousands of private companies, the heart blood of the American economy, deliver their annual audits and reviewed financial statements to their banks.  For many the results will not be pretty.

In the fourth quarter of 2008, firms throughout the manufacturing, retail and distribution economy, and likely in a number of other sectors as well, were hit by a strong downdraft precipitated by the credit crunch of September and October.   Many of these companies sustained a precipitous drop-off in revenues and resulting operating losses for the quarter.  Others may have seen a dramatic decline in the value of their inventories, particularly if they were in industries dependent on volatile commodities or imported raw materials.  The bottom line is that many companies will report a loss for the fourth quarter and a substantial number for the full year 2008 as well.

Contrary to current opinion, banks don’t like to take losses and will do everything in their power to avoid doing so.  Until now banks have been relatively lenient with their commercial borrowers other than in industries related to residential construction, where the reality of losses is too obvious to be ignored.  Unfortunately for their borrowers, however, banks are subject to strict accounting rules and answer to regulatory supervisors that demand that action be taken to head off potential loan losses.  Delivery of the 2008 annual audits and reviewed financial statements will make the potential for problems all too obvious.

Partially in response to the CRA (Community Reinvestment Act), within the last ten years many banks began to apply credit scoring and other “objective” … read the rest

SURVIVOR- Main Street America’s New Reality Show

Posted on November 13, 2008

Shading Denote Recession

Shading Denotes Recession

By now we know the story all too well. Sixteen strangers debark onto a jungle island and are told they must work together to survive. While they pretend they’re on the same team, from the start they scheme to position themselves to outlast the other contestants, because at the end of the day they know there will only be one SURVIVOR.

Every business leader in America (and the World for that matter) is anxious to understand the impact of the financial crisis on their own business and personal prospects. How bad is it going to be? Does the crash present new opportunities? What should I do now? And yes, “What must I do to survive?”

Based on conversations with our clients and with financial and strategic investors, many are choosing to “hunker down” and ride out the storm. For some firms this may be an appropriate course. Yet to make such a decision without a realistic evaluation of your firm’s financial survivability in light of the new circumstances would be shortsighted at best. Unless you have capital reserves sufficient to weather a very protracted (perhaps eighteen months or more) and severe downturn, your business could be at grave risk. And if you depend on leverage, this calculation must also take into account the potential impact of reduced loan availability and dramatically higher loan pricing, which may well come sooner than you expect.

What We Know

The U. S. economy is in the midst of what will likely be the worst recession in the postwar era. It appears that the decline is rapidly spreading around the world and that we may well experience a serious global recession that will dramatically affect even the (until now) rapidly developing economies of Asia and Latin America as well as the developed world. The effects of … read the rest

Bailing out the Mainframe

Posted on November 12, 2008

Picture the scene. It’s late 1992. The U.S. is still recovering from a severe recession and financial crisis. But there’s trouble on Main Street. One of the nation’s most venerable industries is in shambles. Upstarts from Silicon Valley created a new technology that is rapidly overwhelming the mainframe computer business, one of the great success stories of postwar America. And now low cost competitors from Asia are rapidly destroying the competitiveness of the U. S. chip manufacturers.

As a new administration is preparing to bring historical change to Washington, hordes of blue suited, white shirted IBMers descend on Washington to demand a bailout for their critically important industry. Joining the chorus are congressional leaders from New York State, fearful that high paying jobs are about to be lost. The nation is galvanized as Congress passes and the new President signs the Computer Industry Relief Act of 1993.

Well of course we know that this never happened. Instead, Lou Gerstner and his team transformed IBM from a hardware manufacturer to one of the world’s leading IT services providers. Intel remade the chip industry, replacing dumb chips with very smart ones, creating an explosive personal computing industry. Sure some of the old mainframe and mini-computer companies are no longer around and those that are look nothing like the ones their previous selves. But the industry that emerged is far larger, more profitable and provides many more jobs that the mainframe manufacturers ever dreamed of.

The federal government is going to provide some form of support for the auto industry. There are too many jobs at stake and frankly the patient (the U. S. Economy) is too weak to risk any more systemic shocks. In today’s New York Times, Thomas Friedman has written a great tell-it-like-it-is article outlining a realistic plan for a federally funded bailout that … read the rest

Categories: Bailouts, Bankruptcy, Economics

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In For a Penny, In for a Pound

Posted on November 10, 2008

AIG announced today a deal with the Federal Reserve that will have the effect of increasing the Fed’s bailout financing to AIG from $85 Billion to in excess of $167 Billion (and most likely counting).  Any seasoned distressed company investor knows that the first new money put into any failing company is likely to be lost unless the investor is prepared to follow the initial investment with a lot more (sometimes referred to as “good money after bad”).  More than one wag has described this phenomenon as “the second mouse gets the cheese”.

The other big economic news of the day revolved around the proposed bailout of General Motors.  Clearly something is likely to happen here with three million jobs at stake and a lot of political power in play with the United Auto Workers.  Given the inevitable, wouldn’t it make more sense if the money comes in as part of a pre-packaged Chaper 11 which cleans up the company’s balance sheet before the money comes in?

I’ve never seen a successful turnaround that keeps the old, failed management on board to steer the sinking ship.  Perhaps it would make more sense to put together an ownership group that includes some Japanese auto manufacturing skill as well as some of the best business  minds in America.  Toyota, Honda, et. al. clearly know something about running a successful auto plant and they are not afraid of investing in the United States.  And Steve Jobs seems pretty successful at creating a consumer products company.  Let’s harness the best we’ve got to create real change in this vital industry, not subsidize the failures of the past.

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