Today, let’s put the conclusions of my first two blog posts of this year together. The second blog post discussed “Four ‘Uncomfortable’ Situations to Watch in Early 2011,’ (http://seekingalpha.com/article/244531-four-uncomfortable-situations-to-watch-in-early-2011). The basic point of this post is that there are four areas of the economy that bear watching because the situations that exist within these sectors are extremely fragile and could result in some kind of collapse in the future.
In my first blog of the year, “Economic Policy in the Decade of the Twenty-Tens: More of the Same” (http://seekingalpha.com/article/244325-economic-policy-in-the-decade-of-the-twenty-tens-more-of-the-same), I argued that the federal government will continue to follow the same economic policy philosophy that it has followed for the previous fifty years. I have called this a policy of “credit inflation.” The focus of this policy is to keep unemployment as low as possible for as long as possible over time. The consequence of this policy has been the massive growth of debt over this fifty-year period and the financial innovation that has accompanied the growth.
A consequence of the first situation is that there may be a substantial amount of distressed assets around that can be purchased very, very cheaply.
The consequence of the second situation is that the federal government will do all it can to keep the first situation from spiraling downward.
The opportunity? There will be a lot of assets available for sale at very cheap prices.
The means? There will be a lot of government money around that can be obtained very cheaply to acquire these assets!
We already see that the latter situation already exists. Yesterday I quoted Gillian Tett of the Financial Times reflecting on the easy monetary and fiscal policies of the last two years and the peace they have brought the financial markets: “While a sense of peace might have returned to parts of the financial system in the past two years, this has only been achieved by virtue of government aid - and rock-bottom interest rates.”
Will this continue?
Ben Bernanke, at the Fed, has begun the program of acquiring $900 billion in U. S. Treasury bonds to provide more liquidity to the financial system and keep long-term interest rates from rising. This is just a part of what I call the policy of “credit inflation.” The United States government is not going to let this recovery collapse if it can avoid it. Therefore, Bubble Ben will continue to throw more-and-more spaghetti against the wall (http://seekingalpha.com/article/233773-bernanke-s-next-round-of-spaghetti-tossing).
But, that will not be all if further problems are recorded in the four problem areas I mentioned in yesterday’s post. The areas I focused on yesterday were the sovereign debt problem in Europe, the fragility of state and local finances in the United States, problem loans in the commercial real estate area, and the solvency of many of the 7,800 or so commercial banks in the United States banking system that make up about one-third of all the banking assets in the country.
In terms of the sovereign debt problem in Europe, the European Central Bank (ECB) is already committed to buy billions of Euros worth of sovereign debt of European Union countries in order to stem the financial crisis on the continent. Also, we know from the statistics related to the financial meltdown of 2008 and 2009 that the United States central bank, the Federal Reserve System, has really become the central banker to the world.
Will these institutions, as well as the European Union, itself, not try to put a floor to the prices of sovereign debt?
And, what about the fiscal dilemma facing state and local governments in the United States?
The ground is already shifting. State governments are starting to write laws that will lessen the power of government labor unions…even in New York and New Jersey and other states that have been pro-labor for years. Furthermore, do you really think state governments and the federal government are going to let local governments just fail? Do you really think that the federal government is going to let state governments fail? (See “When States Default: 2011, Meet 1841,” http://professional.wsj.com/article/SB10001424052748704835504576060193029215716.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj.)
And, what about a collapse in the commercial real estate market? The reason that loans in this area have been buoyed up for so long is to buy time for the FDIC in dealing with smaller commercial banks who have a disproportionate amounts of these loans on their balance sheets.
Many of these banks are going to need to be closed in one way or another (3,000 as Elizabeth Warren warned) and the FDIC just cannot handle more than three to four closing a week at the present time. As this process continues, the Federal Reserve and the federal government cannot remove the liquidity now in the system and threaten higher interest rates and foreclosures on these distressed properties.
The bottom line is that a lot of “stuff” is going may be coming on the market in the next twelve months or so and the prices of these assets are going to be very attractive.
The downside risk?
The federal government is going to try and take away as much of this risk as possible. The “Greenspan Put” has now become the “Bernanke Put.”
The federal government will do all it can to maintain or improve the employment situation and it will do all it can to bailout sectors of the economy experiencing significant financial difficulties in order to prevent a double dip in the economy.
Thus, opportunities to purchase distressed assets may be plentiful in such a scenario. And, just remember, large banks and large corporations have billions and billions of dollars of cash on hand to purchase these assets. This is true for the United States, http://dealbook.nytimes.com/2011/01/03/confident-deal-makers-pulled-out-checkbooks-in-2010/?ref=business, and for Europe http://professional.wsj.com/article/SB10001424052748704111504576059450313071700.html?mod=ITP_moneyandinvesting_2&mg=reno-wsj. And, if they don’t have the cash on hand, they can just borrow it for next to nothing.
Wealthy individuals and developers are also moving in this area. The amount of activity picking up provides vivid support for the fact that distressed properties are already being scooped up, cheaply. It is likely, especially in real estate development to see a lot of distressed buying over the next year, but this will be "big bank" business because "smaller banks" don't usually do this kind of business and those that got into this kind of business have been burned, badly. Also, it will be business coming from hedge funds and private equity funds.
Showing posts with label distressed assets. Show all posts
Showing posts with label distressed assets. Show all posts
Tuesday, January 4, 2011
Thursday, October 14, 2010
Where the Action Is
Commercial banks aren’t lending. That we know.
But, there is action elsewhere and, I believe, that this behavior tells us a lot about how the recovery is working itself out…although it is not a recovery like the ones of the recent past.
There is a lot of money in the financial markets…in the shadow banking system…and worldwide.
Where is the action taking place?
Well, for one, in the bond market. We have major companies issuing bonds at ridiculously low interest rates. For example, Microsoft just completed a new bond deal. On September 23, 2010, Microsoft Corp., the world’s biggest software maker, sold $4.75 billion of bonds, “at some of the lowest rates in history for corporate debt.” The offering information stated that “Proceeds may be used to fund working capital, capital expenditures, stock buybacks and acquisitions.”
This follows Microsoft’s “first ever” debt issue which came in May 2009. An analyst noted at the time, “Redmond, Wash.-based Microsoft is sitting on $25 billion in cash, so the company doesn’t need the bond proceeds ‘unless they have something big in mind.’”
And, Microsoft is not the only major company taking advantage of the AAA bond market.
Then there is the “Junk Bond” market. The New York Times trumpets “Junk Bonds Are Back on Top.” (http://www.nytimes.com/2010/10/08/business/08bond.html?scp=1&sq=junk%20bonds%20are%20back%20on%20top&st=cse)
Jim Casey, “one of today’s junk-bond kings” and who runs the junk-bond business at JPMorgan Chase claims that “even those heady days of the 1980s” when Michael Milken ruled Wall Street and who Mr. Casey worked for at Drexel Burnham Lambert, “seem a little tame.”
So far this year, it is reported, that in the first nine months of this year corporations have raised $275 billion in this market worldwide, up from $163 billion in 2009.
“In high-yield, it’s undeniable that these are the best years that anyone has seen in their career.”
Whew!
It is estimated that “about 75 percent of the deals are aimed at refinancing, rather than taking on additional debt.” The risk profile of the companies has gone up!
And, who are big players helping to underwrite these deals? Let’s see, JPMorgan, Bank of American and Merrill Lynch and Citigroup…the top four!
Further action?
Well check out the private equity interests. They are raising capital in the billions. To do what? “Many banks are looking to sell large portfolios of commitments to private equity funds that they made during the credit bubble.” Banks are doing this because these “assets” are underwater and also because new higher capital requirements will make their “ownership” very expensive.
This just points to a whole host of private equity interests moving into the area of distressed assets. And, they are moving in aggressively. We read the article in the New York Times this morning about short-seller David Einhorn, the founder of Greenlight Capital. (See “A Bear Roars”, http://www.nytimes.com/2010/10/14/business/14views.html?ref=todayspaper.) One of the interesting insights relating to the work of Mr. Einhorn is the detail that Greenlight Capital put into its “due diligence” of the target.
The attention being focused on “distressed assets” today is not just a casual thing. Fund managers are aware of the risks they are under taking, just as they are aware of the potential returns that are available. As some have said, they are “taking care.”
One analyst remarked on the condition of the market: “We are seeing a steady river of deals” and “we expect this stream to carry on for some time.”
This is all part of the movement I reported on in “Corporations are Hoarding Cash and Keeping Their Powder Dry,” (http://seekingalpha.com/article/228507-corporations-are-hoarding-cash-and-keeping-their-powder-dry).
There seems to be a tremendous re-structuring of the economy taking place. I now believe that the re-structuring that is going on is beyond the power of the government to reverse. I believe that a similar re-structuring took place in the 1930s and 1940s, a re-structuring that the government, at that time, could not reverse. The 1950s represented the start of a “new era”.
The structure of the industrial base of the United States is dis-located with American industry using only 20% to 25% of its capacity. The structure of the work force is dis-located as 20% to 25% of the age-eligible workers in the United States are under-employed. And, the income/wealth distribution in the United States has become more and more skewed over the past fifty years.
These “dis-locations” will not be resolved by what corporate America seems to be doing now. Large companies, large banks, private equity funds, hedge funds, and other money sources are building up their cash reserves. They are looking, I believe, to buy assets, to buy “distressed companies” and so forth.
Imagine that Microsoft, a company that had never issued any debt in its history, has raised over $8.5 billion in new cash over the past 18 months or so while it is sitting on $25 billion in cash. Can you picture this money going to fund working capital and capital expenditures? I can’t but I can certainly see it going to fund stock “buybacks” (which raises its ability to purchase other companies) and to fund acquisitions.
Actions like this, however, will not result in higher levels of employment or greater investment in capital that would spur the economy along. If anything, a re-structuring, like the one I am writing about will have exactly the opposite effect.
Yet, this may be how the economy goes about recovering!
As I said above, I now believe that the re-structuring that is going on is beyond the power of the government to reverse. If this is true, neither a further quantitative easing on the part of the Federal Reserve System nor additional fiscal stimulus on the part of the federal government will do much in the way of achieving a more rapid economic recovery. If I am correct, the economic re-structuring will take place at its own speed. But, this will require a different response on the part of the government.
But, there is action elsewhere and, I believe, that this behavior tells us a lot about how the recovery is working itself out…although it is not a recovery like the ones of the recent past.
There is a lot of money in the financial markets…in the shadow banking system…and worldwide.
Where is the action taking place?
Well, for one, in the bond market. We have major companies issuing bonds at ridiculously low interest rates. For example, Microsoft just completed a new bond deal. On September 23, 2010, Microsoft Corp., the world’s biggest software maker, sold $4.75 billion of bonds, “at some of the lowest rates in history for corporate debt.” The offering information stated that “Proceeds may be used to fund working capital, capital expenditures, stock buybacks and acquisitions.”
This follows Microsoft’s “first ever” debt issue which came in May 2009. An analyst noted at the time, “Redmond, Wash.-based Microsoft is sitting on $25 billion in cash, so the company doesn’t need the bond proceeds ‘unless they have something big in mind.’”
And, Microsoft is not the only major company taking advantage of the AAA bond market.
Then there is the “Junk Bond” market. The New York Times trumpets “Junk Bonds Are Back on Top.” (http://www.nytimes.com/2010/10/08/business/08bond.html?scp=1&sq=junk%20bonds%20are%20back%20on%20top&st=cse)
Jim Casey, “one of today’s junk-bond kings” and who runs the junk-bond business at JPMorgan Chase claims that “even those heady days of the 1980s” when Michael Milken ruled Wall Street and who Mr. Casey worked for at Drexel Burnham Lambert, “seem a little tame.”
So far this year, it is reported, that in the first nine months of this year corporations have raised $275 billion in this market worldwide, up from $163 billion in 2009.
“In high-yield, it’s undeniable that these are the best years that anyone has seen in their career.”
Whew!
It is estimated that “about 75 percent of the deals are aimed at refinancing, rather than taking on additional debt.” The risk profile of the companies has gone up!
And, who are big players helping to underwrite these deals? Let’s see, JPMorgan, Bank of American and Merrill Lynch and Citigroup…the top four!
Further action?
Well check out the private equity interests. They are raising capital in the billions. To do what? “Many banks are looking to sell large portfolios of commitments to private equity funds that they made during the credit bubble.” Banks are doing this because these “assets” are underwater and also because new higher capital requirements will make their “ownership” very expensive.
This just points to a whole host of private equity interests moving into the area of distressed assets. And, they are moving in aggressively. We read the article in the New York Times this morning about short-seller David Einhorn, the founder of Greenlight Capital. (See “A Bear Roars”, http://www.nytimes.com/2010/10/14/business/14views.html?ref=todayspaper.) One of the interesting insights relating to the work of Mr. Einhorn is the detail that Greenlight Capital put into its “due diligence” of the target.
The attention being focused on “distressed assets” today is not just a casual thing. Fund managers are aware of the risks they are under taking, just as they are aware of the potential returns that are available. As some have said, they are “taking care.”
One analyst remarked on the condition of the market: “We are seeing a steady river of deals” and “we expect this stream to carry on for some time.”
This is all part of the movement I reported on in “Corporations are Hoarding Cash and Keeping Their Powder Dry,” (http://seekingalpha.com/article/228507-corporations-are-hoarding-cash-and-keeping-their-powder-dry).
There seems to be a tremendous re-structuring of the economy taking place. I now believe that the re-structuring that is going on is beyond the power of the government to reverse. I believe that a similar re-structuring took place in the 1930s and 1940s, a re-structuring that the government, at that time, could not reverse. The 1950s represented the start of a “new era”.
The structure of the industrial base of the United States is dis-located with American industry using only 20% to 25% of its capacity. The structure of the work force is dis-located as 20% to 25% of the age-eligible workers in the United States are under-employed. And, the income/wealth distribution in the United States has become more and more skewed over the past fifty years.
These “dis-locations” will not be resolved by what corporate America seems to be doing now. Large companies, large banks, private equity funds, hedge funds, and other money sources are building up their cash reserves. They are looking, I believe, to buy assets, to buy “distressed companies” and so forth.
Imagine that Microsoft, a company that had never issued any debt in its history, has raised over $8.5 billion in new cash over the past 18 months or so while it is sitting on $25 billion in cash. Can you picture this money going to fund working capital and capital expenditures? I can’t but I can certainly see it going to fund stock “buybacks” (which raises its ability to purchase other companies) and to fund acquisitions.
Actions like this, however, will not result in higher levels of employment or greater investment in capital that would spur the economy along. If anything, a re-structuring, like the one I am writing about will have exactly the opposite effect.
Yet, this may be how the economy goes about recovering!
As I said above, I now believe that the re-structuring that is going on is beyond the power of the government to reverse. If this is true, neither a further quantitative easing on the part of the Federal Reserve System nor additional fiscal stimulus on the part of the federal government will do much in the way of achieving a more rapid economic recovery. If I am correct, the economic re-structuring will take place at its own speed. But, this will require a different response on the part of the government.
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