Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | ||
| SPH2 Comdty | S&P Futures | 1218.5 | 12.2 | 1.01% |
| SX5E Index | Eurostoxx Index | 2238.6 | 32.680 | 1.48% |
| CL1 Comdty | Oil (WTI) | 95.54 | 0.590 | 0.62% |
| DXY Index | US Dollar Index (DXY) | 80.183 | -0.350 | -0.43% |
| USGG10YR Index | 10 Year Govt Bond Yield | 1.94% | 0.03% |
A slew of economic data was released this morning: PPI, Empire Manufacturing, Jobless claims, Industrial Production, and Capacity Utilization. The PPI (Producer Price Index) shows that inflation is a non-issue. Empire Manufacturing showed manufacturing in NY State has rebounded from the summer lows. Industrial Production was surprisingly low, and capacity utilization was flat. Philly Fed indicated strength as well. The best news was in initial jobless claims, which dropped to 366k, a post-recession low. Initial jobless numbers can be fluky this time of year, and we had a headfake earlier this year, but that said, it is encouraging and confirms other numbers that show the labor market may be picking itself up off the mat.
The kabuki dance over the temporary payroll tax cut extension continues. There have been leaks that Democrats are planning to drop their insistence on a permanent surtax on millionaires to pay for the tax cut, which is a nonstarter for Republicans. I’m sure both parties will manage to scrounge up some fake spending cuts in the couch and pass something so they can go home for the holidays.
Perennial Krugman critic Amity Schlaes lays into Krugman for his latest column, which seems to imply that raising the retirement age in Greece means that Kristallnacht is just around the corner. Schlaes points out how austerity in the face of recessions worked well in the past, citing the early 20s recession and Australia. She should also mention the Asian Tigers which went along the austerity route and compare it to Japan, which followed the Krugman prescription to the letter.
Chart: Initial Jobless Claims:
Filed under: Uncategorized |
All Things in Moderation 
"Perrenial Krugman critic Amity Schlaes lays into Krugman for his latest column, which seems to imply that raising the retirement age in Greece means that Kristallnacht is just around the corner."Small minds are simply unable to grasp the larger universal thinking that great men engage in every day! LOL
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Did this elsewhere, but I wouldn't want to leave it out here.Regarding Romney and Bain, here’s all you need to know about PE/LBO buyouts Every single one of them has five characteristics: 1) borrow as much money on the books of the acquired company as feasible 2) strip out whatever cash is available by converting the pension fund or selling off assets 3) pay the PE company a large fee for “managing” the acquired company 4) create a special dividend to pay the PE equity holders 5) dress up the balance sheet to either sell or IPO the acquired company as fast as market conditions permit (that‘s where the layoffs usually come in). Exactly none of these are in the long term interests of the company acquired, but that isn’t the point at all anyway. The longer a PE company holds an acquired one, the greater their chance of losing money on that investment. Restricting it to 5 years or under virtually guarantees a strong positive return.
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scott;John Carney has a piece about our discussion last week of how to account for the overnight lending in the big picture of the Fed bailout. He's always got interesting stuff, agree or disagree."The Size of the Bank Bailout: $29 Trillion" http://www.cnbc.com/id/45674390
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One thing I forgot, but could have included, is that there is almost always a Quisling in the top management of the acquired company who will greatly benefit from the buyout and who has been conducting private negotiations with the PE company all along.
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Hello? Is this thing turned on?
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John, I am but a naif in such matters of high finance. I mostly have little to do but sit back in awe of your analysis. Much appreciate your Romney/Bain analysis. I have not seen it so succinctly expressed anywhere else.Thank you much.
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THANX, JOHN. I GOT THE MEMO.As far as I am concerned, leveraged buyouts produce carnage and carrion, not expanded wealth.
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JohnI read a piece this morning that I don't know if I can find again from a group that began in the economics department at Amherst and the effort they are making to add long term and true trickle down benefits back into economic theory. I'm a real novice at some of this stuff but it seems that short term thinking is what got us into a lot of this mess.
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john,That is about as fine a summary of the PE/LBO process as I have ever read.As for Quislings, one of the most excruciating sales meetings I have ever seen was a CEO go into scatological detail of how he organized an LBO of the company he was working for at the time.
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lms:As a theorist, I suck. I'm much more Bismarckian in my preference for real world results over theory. After all, the first national forms of wrokmen's compensation and insurance in the whole world were introduced by him as a way to combat the influence of socialism. Who would make that association between the Iron Chancellor and progessive legislation?
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yello and others:TY
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IMO, LBOs are used to fix up underperforming companies. Private Equity firms aren't going to buy companies that are doing well – they can't afford the cash flow multiple. Private Equity firms generally have to buy companies at single digit multiples to cash flow in order to generate the IRRs to make the trade worthwhile. Healthy companies don't generally trade at single digit multiples to cash flow. Such low multiples typically mean the market believes the future of the company is short, or that it is being mismanaged. So in a lot of ways, by cutting jobs, they are merely accelerating the inevitable – either the company will slowly fade away, a private equity buyer will take them out or a competitor will. Either way, jobs are going to get cut. Look, as a risk arb guy who traded through the crisis, I have no love for P/E firms and their "a deal is a deal until it is unfavorable for me" mindset, but I do believe they perform a necessary role in the markets, if only because the threat of an LBO helps to keep management's eye on the ball.
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" Hello? Is this thing turned on?"I too like your succinct summary of the LBO. To a certain extent, it reminds me of an exit strategy for founders after an IPO.
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Brent,The metaphor which comes to mind is hyenas thinning the herd. The sick animal was bound to die, but that doesn't change the nature of the hyena.
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Brent, good point; there are multiple flavors of LBOs. Ylo's example sounds like an unscrupulous move where an insider is looking to cash out with a short term payout rather than build a company for the long haul. Some PE firms probably do intend to improve poorly run companies & flip them for a profit. Others strip mine for assets, leaving nothing behind.
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A contrarian idea that I just read which never occurred to me before. Some, who knows how small, of the sturm und drang in the markets may have been caused by the fall of Romney and the rise of Gingrich. Nobody could doubt that Romney is the street's favorite son candidate. To the extent that his fall from grace becomes permanent, it may have a measurable negative effect.
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john:Thanks for the link. I think his analogy to the guy at the bar is totally absurd and misrepresents the situation in many ways. If you want I can go into why, but for now… It is fair enough to point out the length of time that the fed facility was being utilized as a measure of the degree of problems faced by those accessing the facility. But it is wholly unreasonable and highly deceptive to gross up each day's borrowing into a gargantuan number to say "this is the total of assistance that the fed provided." That's just not accurate or meaningful in any way at all.Consider the following:Bank A knows that its problems will last at least 3 months, and so borrows $1 billion on a term basis for 3 months.Bank B isn't sure how long its problems will last, and is hopeful the situation will stabilize quickly, and so begins to borrow $1 billion on an o/n basis. Unfortunately their assessment is wrong, and they end up borrowing $1bn every day for 3 months.After 3 months, the crisis is over for both banks, and both cease to borrow funds. Now, despite the fact that both banks borrowed the exact same amount over the exact same time period, according to Carney's accounting, only $1 billion of assistance was provided to bank A, but $90 billion of assistance was provided to bank B. Obviously this is totally ridiculous accounting. I'm not sure why anyone would credit such an absurd way of looking at it.
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brent:I don't think we disagree. I think there are two views, one a "moral" one if you will, and the other an "amoral" one (not immoral). I believe that you would agree though, that the interests of the company longer term, and the interests of the PE acquirer are not in alignment, would you not?
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scott:So I got your juices flowing better than Red Bull I take it?
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john:So I got your juices flowing better than Red Bull I take it?Well, I did find Carney's analogy stupidly provacative. But you'll have to get up earlier than lms if you want to take credit for getting me going.
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My example is from the late 1980s and the CEO did an LBO to take over a poorly performing company for which he was an employee. He then proceeded to gobble up several other third string competitors in the same industry to try to get some synergy. He renamed the holding company after himself. He was probably the most self-aggrandizing egotist I have ever met in person.I have no idea what happened in the meantime but the company is still a distant third in the industry and is now owned by a Japanese conglomerate.
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@john, if the PE firms merely strip the carcass and leave it for dead, how do they exit? If they don't increase the cash flow, or don't fix it up so that the multiple increases, they can't sell it. They not only have the debt to service, they also have to cover the takeover premium they paid in the first place. I guess the way to analyze it is to look at the performance of re-IPO'd PE transactions. I would almost guarantee there have been multiple papers written on this subject, but I don't know of any offhand.
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Brent:expanding on my last point a bit, if I'm the PE guy looking to acquire you, MY profit will be based on the following1) the cost of the money (obviously)2) the management fee3) the special dividend4) the projected sale or IPO priceNowhere on that list is YOUR actual profit an issue for me, except as it relates to the sale price.Did I overstate or misstate anything?
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Regarding the "multiple increases", doesn't the simple act of going private do that in some way by changing the share count, or is that too simple a view even for this type forum?BTW, that's why I hold the view of some that share buybacks are a losing proposition for longer term shareholders. Dressing up in elegant clothes, without changing the basic fundamentals.
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"except as it relates to the sale price" is the key. The IRR on these deals is highly dependent on the exit price, the same way a DCF model is almost completely driven by the terminal value. If they don't fix up the company, the exit multiple will be the same (or lower) than the price they paid, since IPO investors will evaluate the company based on the trading multiples of the comps, not the takeover value. My point is that I don't think it is so easy to fool IPO investors, at least not with mature industries, which are the milieu for PE funds.
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@ john – you can affect PE ratios by screwing around with the share count, but these sorts of deals are generally done on an EV / EBITDA basis or EV / FCF basis. It is hard to manipulate those ratios.
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Ah EBITDA, the last refuge of a scoundrel. LOL
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DCF, man if we're going to start talking about discounted cash flow, then it's be you, me, and that picture of the dog from yesterday here by ourselves!(and scott too)
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yeah, i was afraid I was getting too "inside baseball-y"
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as for the ability to fool IPO investors, well it depends on whether they are the ones selling on the first day, or buying!
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DCF…not a lot of discounting in this rate environment.
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yellojkt: He was probably the most self-aggrandizing egotist I have ever met in person.I've had that experience with that sort of person. Working for such folks makes me tremendously appreciate working in the public sector, at least with the folks I do. It's a much more rewarding work environment. 😉
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Throughout my life there have always been imaginative risk takers who specialize in financial wizardry to make huge amounts of money. We've had junk bonds, leveraged buyouts, asset stripping, derivatives, Ponzi schemes, multiple collateralization of assets, extensive use of others' money, and so on.It seems that when one scheme comes a-cropper, a lot of the item's on john's excellent list get regrouped and repackaged into the next wave.
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Brent called the payroll tax cut fight kabuki theater and I just want to post my complete agreement. There is no reason for a payroll tax cut that makes any economic sense whatsoever. Politics. Theater. Garbage. Wasted effort by our elected ones. Posturing. Nada.I do hope they extend the UC. That is a basic countercyclical, and does make fiscal sense. They probably will never get to it while they posture about a 2% tax cut that makes SS ever more like a general welfare program.
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Also, I agree with Scott's criticism of the practice of aggregating a revolving loan.
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SEC is said to be considering an appeal of Rakoff's denial of the $285M settlement with Citibank.QB and Ashot – would not that appeal be limited to abuse of discretion grounds, assuming no hanky panky?If so, wouldn't that appeal be merely for the purpose of pressuring Rakoff to reconsider, and do we see the "upside" here for that?
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Eugene Volokh reminds us that this is BILL OF RIGHTS DAY!
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"as for the ability to fool IPO investors, well it depends on whether they are the ones selling on the first day, or buying!"I can't see daytraders on the Yahoo Message boards getting all excited about names like Burlington Coat Factory, Jo-Ann Stores, or Del Monte Foods. Plus, Steve Schwartzman isn't going to leave a dime on the table – these are probably going to break IPO price on the first day.
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yeah, i was afraid I was getting too "inside baseball-y"Ya think? It keeps me going with busy work though looking up acronyms.And ScottGlad to see that after 2 1/2 years I still have that effect on you………:)MarkI agree re the tax cut……….stupid and political. Extending unemployment benefits, even if we begin the tapering off, is much more important IMO.
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brent:or the mother of all scams, Chrysler!
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You'll always have an effect on me, lms.
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Mark, I honestly don't know what the standard of review would be for an appeal of Rakoff's denial of the settlement and a little googling didn't get me an answer. If I had to guess, I would think it would be abuse of discretion.
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" It seems that when one scheme comes a-cropper, a lot of the item's on john's excellent list get regrouped and repackaged into the next wave."The trick is in catching the next wave early. A pet theory is that the mortgage debacle was partially fueled by the dot.com bust & 911 attacks that nudged people towards nesting & 'safe' investments. What's the next investment fad going to be?
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Farmland
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brent I've seen that too.
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A "where we are now, and how we got here" on the possible government shutdown:http://www.cnbc.com/id/45683527
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I also wanted to say that I appreciate the "inside baseball" talk even if I don't always, or even frequently, understand it.
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Ok, then let's talk about the bid to cover ratio, and get Scott in here too, or my current favorite, the TED spread!
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LIBOR / OIS
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Farmland is reportedly expensive here, but supposedly supported by low interest rates & high commodity prices.
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I'll see you and call, PEG ratio
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Sorry for the levity, but I'm currently shorting gold, and the thinness of the air up here has it's effect.
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kurtosis
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I don't mind all the jargon and acronyms, but make sure you get your WENUS reports in on time.
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LIBOR/OIS…widening, widening, widening.1yr FF/libor was at 21 bps in Jan. Dropped to as low as 16 in about May. Now…..55 bps. Will keep widening until Europe solves its problems or blows up. LIBOR appeared to stop rising last week, but resumed its steady slog upwards this week. Interestingly, the DEC eurodollar contract which expires on Monday is trading at 9943, implying a LIBOR of 57 bps. Current LIBOR is 55.9 bps. It's going up .5 bps a day. Heavy demand for borrowing dollars.2yr TED is at 47.5 bps, after hitting a low of 20 bps back in April. Of course, this will essentially mirror the FF/Libor spread.30 year swap spreads continue to trade negative, for the third straight year. Currently at -28, although it hit a low of about -43 earlier this year. Hasn't been positive since January '09. A very interesting phenomenon, this negative swap spread, essentially allowing 30yr treasuries to be asset swapped at libor plus…unheard of prior to 2008. This is a function not only of market demand to receive on swaps (pension funds, insurance companies), but also, I think, the fact that the market has started to price in term credit risk on US debt, whereas a collateralized swap has essentially no credit risk. US Treasuries are no longer considered to be a risk free investment. Putting on a 30yr spread position is a fantastic carry trade, provided you can manage the potential mark-to-market swings as it dips up and down between -20 and -45.How's that for some inside baseball?
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OUCH! Scott, it's not the jargon, but the facts that got me.
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john:Looks like LIBOR is being targetted to get to around 75 bps. The front JUN eurodollar contract is traind at 9927.5, and the red jun is at 9926. So almost no movement priced in from June 2012 to June 2013. Of course, after that, it rises significantly, given that the Fed's promise of lwo rates is only until 2013. But between now and Jun, basically a 20bp rise is priced in.
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BTW:If you hear that the ECB has suddenly shifted overnight to a concerted easing in coordination with the Fed, OR that Iran is closing the Straits of Hormuz, then send donations to your favorite charity in lieu of flowers because I will be wiped out faster than the Tim Pawlenty Presidential Campaign Store!
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I wouldn't worry too much about concerted easing, but the Straights of Hormuz….
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The Straits are a big concern, Iran being Iran.Scott, I actually followed your 1:51 PM.Can you quantify how much of the differential is based on factoring in risk on Treasuries?I think I would bet on Treasuries, if this were likened to gambling.
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Mark:It is gambling, in fact Scott and I have gone back and forth over when is the best time to begin shorting Treasuries. Europe keeps making them the best house in a bad neighborhood, but they can't stay at 60 year lows forever.
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Gambling, then – thanks.Also, thanks ashot for responding to my concern that an appeal of Rakoff's rejection of the settlement seemed an odd strategy.I hope QB can give us a procedural view that we have not explored.
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Mark:Since you're almost next door, how soon before the Bivens actions start against Arpaio?
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Scott, I actually followed your 1:51 PM.You guys are just showing off now………….;)
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lms:Do a cut and paste wiping out every sentence that has an actual number in it, and leaving the rest. It will make perfect sense then. The analysis works stand alone, absent the quotes.
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Mark:Can you quantify how much of the differential is based on factoring in risk on Treasuries?Unfortuantely no. It's pretty much impossible (at least as far as I have been able to tell) to identify how much of the negative spread is caused by swap demand and how much is caused by priced in risk. But I agree with you that betting on the treasuries (in terms of credit exposure) is a good bet. That's why asset swapping the treasuries at libor plus, basically paying the swap spread, is such a good trade.You can buy the T-notes and finance them through a daily repo at about 10-15 bps cost, versus receiving LIBOR on the swap at what is now 55 bps. In addition you receive the 30yr yield on the bond versus paying the fixed rate on the swap, which is, as I said, 28 bps lower. So the carry on this trade at current libor and repo levels is over 60 bps. That will change, of course, if LIBOR drops or repo costs rise. And you have the MTM risk of the spread going more negative. But given that it is at extreme lows historically, if you discount the potential credit risk on US government debt, it looks like a great trade.
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John – "Bivens" actions are for fed officials. The lawsuits against Arpaio under our civil rights laws have been piling up and some have already settled for six figures.
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Mark, yes I know. I thought that the "embattled" AG's office might think is was a good time to start taking attention off Fast and Furious in that part of the country.
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Scott:Ah bond traders, can't live with 'em, can't talk to 'em either!
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mark:Never mind, I took my eye off the ball and forgot what office Arpaio heldmini strokes!
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"It is gambling, in fact Scott and I have gone back and forth over when is the best time to begin shorting Treasuries. Europe keeps making them the best house in a bad neighborhood, but they can't stay at 60 year lows forever. "I thought the same thing about JGBs in 1997. Actually did short them. Never wrong, just early (still)
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Brent:Never wrong, just early (still) Hah, that's good. And that is what we have to worry about…becoming the United States of Japan.
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brent:last time I shorted gold, I got out at a nice profit after a conversation with Scott. Just in time too.It may be true about being early, but it's always possible to be late!
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VIX still a puzzle. The number doesn't make sense unless investors are selling puts in unexpected amountsI should drive a bus for a living.
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"I should drive a bus for a living. "these days, its probably more fun
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