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.
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