Reggie Middleton's Boom Bust Blog site syndication http://boombustblog.com Sun, 07 Sep 2008 01:13:49 +0100 FeedCreator 1.7.2 http://boombustblog.com/images/M_images/joomla_rss.png http://boombustblog.com Reggie Middleton's Boom Bust Blog site syndication http://boombustblog.com/content/view/541/34/ Main Bank of China Is in Need of Capital By KEITH BRADSHER (http://topics.nytimes.com/top/reference/timestopics/people/b/keith_bradsher/index.html?inline=nyt-per) HONG KONG — China’s central bank is in a bind. It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae (http://topics.nytimes.com/top/news/business/companies/fannie_mae/index.html?inline=nyt-org) and Freddie Mac (http://topics.nytimes.com/top/news/business/companies/freddie_mac/index.html?inline=nyt-org). Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund (http://topics.nytimes.com/top/reference/timestopics/organizations/i/international_monetary_fund/index.html?inline=nyt-org). Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China. This is actually an interesting article and I urge you to read the rest (http://www.nytimes.com/2008/09/05/business/worldbusiness/05yuan.html?pagewanted=1&_r=2&ref=business) . As you know, I have been bearish on the Asian nations and the chickens are finally coming home to roost. See my China macro update (http://boombustblog.com/index.php?option=com_content&task=view&id=519&Itemid=34) . Reggie Middleton's Boom Bust Blog - MyBlog Fri, 05 Sep 2008 00:00:00 +0100 http://boombustblog.com/content/view/542/34/ From CNBC (http://www.cnbc.com/id/26547623) , that bastion of financial news stuffs: Pimco’s legendary bond investor drill down (http://boombustblog.com/index.php?option=com_content&task=view&id=398&Itemid=34), the forensic analysis (http://boombustblog.com/index.php?option=com_content&task=view&id=417&Itemid=34) and the Q2 highlights (http://boombustblog.com/index.php?option=com_content&task=view&id=472&Itemid=34). Reggie Middleton's Boom Bust Blog - MyBlog Fri, 05 Sep 2008 00:00:00 +0100 http://boombustblog.com/content/view/543/34/ This is my proprietary Z score analysis of USG Corp. I will be posting a summary and full forensic report on this company for subscribers very soon. The debt rating is a rough draft of my own proprietary system. It needs some work, but I included it anyway. USG Corp Z-score analysis - Interpretation of Z-score Above 2.99 Indicates financial soundness Between 1.81 and 2.99 Indicates warning signals - potential financial problems Below 1.81 Indicates serious financial trouble and a high probability of bankruptcy Debt Rating (Stand alone entity) 2005 2006 2007 2008E 2009E 2010E 2011E 2012E Working Capital / Total Assets 0.26 0.37 0.15 0.13 0.12 0.13 0.15 0.17 Retained Earnings / Total Assets (0.10) (0.06) (0.05) (0.08) (0.09) (0.07) (0.04) 0.00 EBIT (trailing 12 months) / Total Assets 0.12 0.18 0.04 (0.04) 0.00 0.05 0.07 0.08 Market Value of Equity / Book Value of Total Liabilities 0.36 1.09 1.74 1.16 1.06 1.03 1.01 0.98 Sales (trailing 12 months) / Total Assets 0.84 1.08 1.13 1.00 1.02 1.09 1.15 1.22 Z-score ( Standalone entity) 1.62 2.71 2.40 1.61 1.68 1.92 2.10 2.26 Debt rating D CCC CCC- D D CCC- CCC- CCC- Debt Rating (Stand alone entity) 4Q-06 1Q-07 2Q-07 3Q-07 4Q-07 1Q-08 2Q-08 3Q-08e 4Q-08e Working Capital / Total Assets 0.37 0.21 0.20 0.18 0.15 0.14 0.14 0.13 0.13 Retained Earnings / Total Assets (0.06) (0.06) (0.05) (0.04) (0.05) (0.06) (0.06) (0.07) (0.08) EBIT (trailing 12 months) / Total Assets 0.18 0.18 0.13 0.08 0.04 0.00 (0.03) (0.04) (0.04) MV of Equity / BV of Total Liabilities 1.29 1.80 1.89 1.46 1.53 1.44 1.10 1.04 1.06 Sales (trailing 12 months) / Total Assets 1.08 1.22 1.17 1.13 1.13 1.08 1.02 1.00 1.00 Z-score ( Standalone entity) 2.83 3.07 2.90 2.42 2.27 2.03 1.67 1.56 1.55 Debt rating CCC CCC CCC CCC- CCC- CCC- D D D Reggie Middleton's Boom Bust Blog - MyBlog Fri, 05 Sep 2008 00:00:00 +0100 http://boombustblog.com/content/view/544/34/ Heard on the street... This is unconfirmed, but word is that Ameribank should be one of the next banks to be siezed... the Feds sent out term sheets this week for deposit purchase. If anyone can confirm this, feel free to reach out to me. Reggie Middleton's Boom Bust Blog - MyBlog Fri, 05 Sep 2008 00:00:00 +0100 http://boombustblog.com/content/view/545/34/ From the Wall Street Journal (http://online.wsj.com/article/SB122066426856206115.html?mod=djemalert): Regulators shut down Silver State Bank, the latest in a series of bank failures and one that could ripple through the presidential campaign. Until recently, the son of Republican nominee Sen. McCain sat on Silver State's board and was a member of its three-person audit committee, which was responsible for overseeing the company's financial condition. Andrew McCain left the Henderson, Nev., bank July 26 after five months on the board, citing "personal reasons." He is Sen. McCain's adopted son from his first marriage. Reggie Middleton's Boom Bust Blog - MyBlog Fri, 05 Sep 2008 00:00:00 +0100 http://boombustblog.com/content/view/546/34/ Okay, it's time to light the fuse under the political stick of dynamite. Who do you favor in November and why? From war to economics, the two presidential candidates are as different as black and white (seriously, no pun intended). From the NY Times (http://www.nytimes.com/2008/08/31/business/31view.html?em=&adxnnl=1&adxnnlx=1220666469-NU4DLURhlmv/IYMr/1Hyog) : Many Americans know that there are characteristic policy differences between the two parties. But few are aware of two important facts about the post-World War II era, both of which are brilliantly delineated in a new book, “Unequal Democracy,” by Larry M. Bartels, a professor of political science at Princeton. Understanding them might help voters see what could be at stake, economically speaking, in November. I call the first fact the Great Partisan Growth Divide. Simply put, the United States economy has grown faster, on average, under Democratic presidents than under Republicans. The stark contrast between the whiz-bang Clinton years and the dreary Bush years is familiar because it is so recent. But while it is extreme, it is not atypical. Data for the whole period from 1948 to 2007, during which Republicans occupied the White House for 34 years and Democrats for 26, show average annual growth of real gross national product (http://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_economy/gross_national_product/index.html?inline=nyt-classifier) of 1.64 percent per capita under Republican presidents versus 2.78 percent under Democrats. That 1.14-point difference, if maintained for eight years, would yield 9.33 percent more income per person, which is a lot more than almost anyone can expect from a tax cut. Reggie Middleton's Boom Bust Blog - MyBlog Fri, 05 Sep 2008 00:00:00 +0100 http://boombustblog.com/content/view/537/34/ These are highlights from an email I received recently from a RE professional in California. I thought the readership would find it interesting: It seems like some banks are too swamped to even start the foreclosure process, according to this article in our local (North Carolina) paper: Housing: Banks waiting longer to foreclose http://www.nctimes.com/articles/2008/08/30/business/zad421415c27f7dbb882574b3007c50a5.txt (http://www.nctimes.com/articles/2008/08/30/business/zad421415c27f7dbb882574b3007c50a5.txt) I've been negotiating about 20 REO sales over the past week. I noticed a couple of things. 1. There is still a good amount of demand, or as I like to call it "ability"� to buy. I have had several of properties that had multiple good offers submitted on them. At least that helps us slow down the free fall. 2. Rents ratios are getting close to making sense. Still not right yet but close. Many of the condos in the toughest markets are being pushed down to basically the cost-per-door that they would have been if they were still part of a make-sense apartment building. 3. My daughter is attempting to buy in the San Fernando Valley area of Los Angeles and has had just brutal competition in the under $400,000 range. One house she looked at for $380,000 had been previously encumbered for over $600,000. 4. I spoke to 2 reporters this week and they were both sniffing out an angle on more of the higher end markets and homeowners that were now facing foreclosure or walking away from their houses. My REO research department that does Broker Price Opinions (BPO’s) confirmed that they are doing a lot more in the affluent area of San Diego County, places like La Jolla, Carmel Valley and Encinitas. One reporter was from a local source - Voice of San Diego, but the other was from Bloomberg!. 5. Fannie Mae is really pushing a financing program with PHH called Express Path Mortgage (aka Insta Close). On qualifying properties buyers can buy with 100% financing, no Mortgage Insurance. Just over 700 FICO's and combined debt-to-income of no more than 40% at competitive rates. Believe it or not, they will even let investors buy with 100% financing (on selected properties). My take on it is that they would rather churn a non-performing asset into a performing asset. 100% investor loans are not available in CA, FL, NV or AZ I found this article interesting about your local market, I don't think they interviewed you before writing it. New York Housing Shines for now http://money.cnn.com/2008/08/28/news/big.apple.fortune/index.htm? Reggie Middleton's Boom Bust Blog - MyBlog Thu, 04 Sep 2008 00:00:00 +0100 http://boombustblog.com/content/view/539/34/ Navistar’s results analysis: In 3Q2008, Navistar reported revenues increased 34% to $4.0 bn over $3.0 bn in 3Q2007 as increased contribution from military products and improved pricing helped the company to more than offset the weakness in traditional truck markets, engine parts and financial segment. Navistar’s U.S military sales increased significantly to $1.2 billion in 3Q2008 compared to just $59 million in 3Q2007 (over a 20x increase, a exasperatingly unbelievable pop that raises many questions) . As a result of higher military sales, Navistar’s largest customer exposure tilted from Ford (a company struggling with its own solvency issues that actually ended up on our short scan) previously to the U.S government in 3Q2008. The U.S. government contributed the largest proportion to company’s sales with 32% of revenues in 3Q2008 as against 3% in 3Q2007. Besides higher military sales, Navistar’s pricing improved substantially due to change in product mix and introduction of ProStar products. Navistar’s unit price in the truck segment increased 55% y-o-y while engine unit price increased 13.5% y-o-y leading to expansion of margins. Despite a 28% increase in cost of product sold, Navistar’s gross margins increased to 21.2% as against 17.9% in 3Q2007 while its operating margins increased to 6.6% in 3Q2008 versus a negative operating margin of 0.6% in 3Q2007. However despite improved pricing and increased contribution from military segment, Navistar’s traditional truck and engine segment continued to face challenges. In 3Q2008 shipments of school buses shipments and expansion markets cloaked a y-o-y volume decline of 16% and 4%, respectively while engine shipments excluding intercompany sales witnessed a decline of 68% in 3Q2008 over 3Q2007. Segment profit from the engine segment declined 92.3% to $5 mn in 3Q2008 from $65 mn in 3Q2007 while financial services reported a loss of $1 mn as against profit of $40 mn in 3Q2007. However higher profits from the truck segment at $357 mn in 3Q2008 against $7 mn in 3Q2007, helped Navistar to report profit before tax of $280 mn versus $5 mn in 3Q2007. Overall improved pricing and higher military sales resulted in Navistar’s net income to increase to $272 mn (or $3.68 per share) versus a loss of $4 mn (or $0.05 per share) in 3Q2007. As a result of record growth in 3Q2008, Navistar has raised its guidance for full year. Earlier in August 13, 2008 (just over two weeks ago) Navistar issued full year EPS guidance between $4.26 and $5.72. Reggie Middleton's Boom Bust Blog - MyBlog Thu, 04 Sep 2008 00:00:00 +0100 http://boombustblog.com/content/view/540/34/ Navistar came up with its 3Q2008 earnings release yesterday reporting net income of $272 mn as compared to a loss of $4 mn in 3Q2007. This was powered by improved pricing and higher contribution from military segment as contribution from military segment increased to $1.2 billion in 3Q2008 versus only $59 million in 3Q2007. Navistar�s earning came as a surprise to the investor community surpassing analyst and our EPS expectations of $1.42 and $0.93, respectively. Following its robust reported 3Q2008 earnings, Navistar raised its full year 2008 guidance nearly 50% or $2 per share to between $6.35 and $7.45. �It actually seems that the robust results left the company itself by surprise which had recently one month ago, in August 2008, had issued FY2008 EPS guidance between $4.26 and $5.72.� Navistar�s timing of muted guidance in August 2008 with only 1 month away from 3Q2008 results raises serious questions about the company management�s precision and confidence on their own numbers - or possibly something a little less benevolent. Since I don't want to jump to conclusions and to be as fair as possible we will wait for the conference call and do a little more digging. We have carried out variance analysis between our expected results and a summary of financial highlights for Navistar (please refer to the previous post � 3Q2008 result analysis).� The primary reason for difference between our expected earnings and Navistar�s earnings was due to higher than expected pricing improvement. We expected Navistar�s revenues to increase by 23% while the company reported revenue growth of 34%. This was primarily due to higher-than-expected improvement on the pricing front. Reggie Middleton's Boom Bust Blog - MyBlog Thu, 04 Sep 2008 00:00:00 +0100 http://boombustblog.com/content/view/534/34/ But it appears as of the traders have not thought this through: A partial answer to a question: http://www.emediaworld.com/press_release/release_detail.php?id=152954 (http://www.emediaworld.com/press_release/release_detail.php?id=152954) They are heavily encumbering their properties in an effort to dig out of this hole. A pertinent question would be the actual terms of this latest funding and how much the terms differ from the debt that it is refinancing (we all know the answer: much more expensive and more restrictive)? They still have significantly more debt to refinance this year, and the year is almost over. Where is the money coming from (exactly) and when is it the money coming? At what terms and how will those terms differ from the loans being refinanced? It appeared to be a rough ride this year in terms of funding. What is the game plan for refinancing debt in ’09 and ’10? Do you plan on encumbering even more properties than this year? Are you now accepting recourse in the terms of your new loans? What brought about that decision? How do you think it effects the value of your organization? Financing and foreclosure: At the end of 2007, GGP needed to get refinanced $2.62 bn of its total debt in 2008. However after six months in 2008, GGP debt due for refinance stood at $2.55 bn (as of June 30, 2008). Since GGP last reported results in June 2008, GGP had repaid only $391 mn of mortgage loans as per its September 5, 2008 press release ( or just 15% of the loan). With such slow progress towards refinancing, what is GGP's plan for financing the remainder $2.16 bn of its debt due in 2008? In addition to huge debt liabilities for 2008, the company has $3.3 bn, $4.5 bn, $8.3 bn and $46 bn debt due for repayment in 2009, 2010, 2011 and 2012, respectively. How is the company planning to refinance/repay these debt liabilities? Also looking at the current credit market conditions where financing is difficult, we would like to know if company has alternative plans to raise finance including that from sale or foreclosure of its properties. Reggie Middleton's Boom Bust Blog - MyBlog Wed, 03 Sep 2008 00:00:00 +0100