Well, I was thinking about this subject yesterday. In AZ the governor just signed a law that requires businesses to verify legal resident and right to work status. First offense a fine. Second 10 days suspension of business license. After that worse. That might suggest illegals will be on the street, uncounted, and replaced by legals thereby showing job gains where there really are none... not to mention wage inflation.
It seems that I've been blocked from making posts on Russ Winter's site, so I'm going to post a response here hoping some of his readers will see it:
Hmmmm... I've noticed some of my comments regarding FCBs and interest rates have been "terminated".
Hopefully this is unintentional or a mistake on my part. I try to make sensible, non-inflammatory arguments (I hope) simply for the sake of understanding what's happening in the markets and the economy. I certainly don't delude myself into thinking that my own analysis is little more than amateur speculation.
But sometimes I get the feeling that there's a cult developing around the notion that FCBs control US interest rates. It's the same feeling I got back when I was arguing with housing bulls in 2005.
Maybe the FCB theory is correct. I don't know, which is why I discuss it.
However, in my opinion it would be petty and intellectually shameful to intentionally censor any counter-arguments, such as Japan, that cast doubt on the theory.
Hopefully this is a mistake on my part.
I really like this site and agree with most of the opinions expressed here.
The ISM factory series show a pattern pretty consistent with the factory inventory correction, which now appears to be done (for a while, anyhow). There was a half-year period of, on average, weak readings, followed by a recent sharp pickup. That improvement is not isolated to the auto sector, so it isn't just Detriot getting reading for a strike. The non-factory ISM series was soft only late in Q1 and (maybe) early in Q2, and has since picked up strongly. Looks like the non-factory index may have begun to respond to the factory slowdown, just in time for the end of the inventory correction and subsequent bounce.
We'll have to see whether rebuilding vehicle inventories in the past couple of months hass really been such a good idea, but for now, things are picking up on the production side.
What was your basic theory around why the FCB's don't control US interest rates? I, for one, would love to hear the counter-argument. It's actually amazing that the "FCB controlling US interest rates" has become the herd opinion (?!) as this theory would have been highly contrary (if not revolutionary) a short time ago. Has something changed? I am one of those who believe the FCB's are in control of US interest rates and could easily make our rates go to %15 overnight if they wanted to.
BTW, I seriously doubt Russ would censor you, as I've never seen Russ censor anybody that wasn't a blatant troll or for profanity, etc. And you are very thoughtful and have great insight, so this is obviously some kind of a server problem.
We'll have to see whether rebuilding vehicle inventories in the past couple of months hass really been such a good idea, but for now, things are picking up on the production side.
We're getting a real taste of what credit-fueled overproduction means with housing.
Hopefully this doesn't spread to other goods and services.
What was your basic theory around why the FCB's don't control US interest rates? I, for one, would love to hear the counter-argument.
I simply point to the fact that Japan has long rates of 2.5% despite having twice the national debt burden that we do. This is because they monetize their debt and devalue their currency to "artificially" depress interest rates.
So long as the carry traders expect short rates to stay low, they will depress long rates since they are insensitive to inflation; they only worry about rate increases.
Sure FCBs could dump their treasuries and drive up rates, but the carry traders would swoop in and drive them right back down if they expected short rates to stay low (the asset carnge from a treasury dump would almost guarantee this IMO).
Again, this is just a theory, but one I think it's worth discussing.
Of the top five industries, only the financial sector cut more jobs in the first half compared with the same period last year.
"The financial sector is clearly affected by the significant housing slowdown and subsequent collapse in the subprime lending market," said John Challenger, CEO of the employment firm, in statement. Cuts in the financial sector doubled in June to 9,800 compared with May and were up 131% in the first six months of the year to 64,825.
A question. Do you think the rating agencies should stand pat in the face of a significantly changing balance sheet? The actions Home Depot is taking are, they believe, in the best interests of shareholders, but stock buybacks and dividend increases (or heck, paying dividends at all)run counter to the interests of bondholders.
"Sure FCBs could dump their treasuries and drive up rates, but the carry traders would swoop in and drive them right back down"
My theory is that the FCB's COULD drive US rates through the ceiling very easily if they wanted to. In other words: If the BOJ decided to stop being the patsy for the US, they could dramatically raise their short term rates AND dump boatloads of our treasuries, thus causing US rates to skyrocket. And this isn't mutually-assured destruction as some have suggested. Its pretty clear at this point that the Yen carry is doing a lot of harm to Japan's economy as critical investment capital flees the country, and Japan's growth would likely accelerate if they raised rates and started protecting the Yen.
Probably a more likely scenario to Japan ending its lap-dog role is China dumping treasuries (or just not buying any more) and putting pressure on Japan to let the Yen rise. This would still cause much higher durable goods inflation in the US and much higher interest rates.
It doesn't sound like we are that far off in the thinking, to be honest.
Home Depot is just trying to boost their EPS with stock buybacks so they look like they are still making money. Lots of companies have been doing this. It is like eating your own leg.
A little off topic....In a previous string regarding Q2 estimated PCE of 1.5%, was that a nominal figure? Also, what are your thoughts on overall inventory build for Q2?
Nonsense. The Board has decided that they don't have enough good places (read growth or acquisitions) to use the funds so they are returning it to shareholders in a tax efficient manner. If this is "chewing off your leg" then HD must have been born with five or six of them.
My theory is that the FCB's COULD drive US rates through the ceiling very easily if they wanted to. In other words: If the BOJ decided to stop being the patsy for the US, they could dramatically raise their short term rates AND dump boatloads of our treasuries, thus causing US rates to skyrocket.
I agree that this could happen. But the Fed could simply respond by buying these tresuries to drive rates back down as Japan does now. But I think the carry traders would do much of the work for them.
This is more of a redistribution shock, but I think Japan demonstrates that with the monetary system we have the Fed has ultimate control over interest rates. I think the real question is whether this monetary system is viable in the long term. Will these currencies collapse, or will these policies lead to some cataclysmic financial crisis and thus be abandoned?
Banker, HD's doing what the HBs were doing last year - buying back stock at inflated prices to support the stock short term so the execs can SELL SHARES. A better use of the money would be to pay down debt rather than see the cash infusion evaporate over the next year as was the case with the homies. The homies can't play that game any more.
This is more of a redistribution shock, but I think Japan demonstrates that with the monetary system we have the Fed has ultimate control over interest rates. I think the real question is whether this monetary system is viable in the long term. Will these currencies collapse, or will these policies lead to some cataclysmic financial crisis and thus be abandoned?
Japan is a nation of savers and a economy based on exports,very different then the USA not to mention the extremely political connections between the BOJ and the ruling political parties.
These are elements which I am sure you are well aware of I wonder if the USA took on the same financial model as Japan and our dollar value was rated similiar to Japan what that might mean to our financial health?
Banker, ask the HBs' longs if the buybacks helped them. The HBs debt went from investment grade to junk after the buybacks, but the execs sure managed to get their $$$$$ before that happened. Now they are up against a wall when they need to refi out of their short term paper. So yes, protecting their investment grade rating does more in the long term when business prospects look grim.
Of course the buybacks helped. If you were long an HB, would you prefer having that cash in your pocket to invest in something else or not? In those cases it was hardly the buybacks that drove the downgrades it was the terrible operating situation. Compare that to the language S&P used in discussing HD "Despite still-sizable free cash flow generation
Doesn't sound like an operational issue, now does it?
I've heard the ADP figures try to insert a similar birth/death model type of adjustment, similar to the BLS figure, as it leaps from its strictly sampled data to then becoming an extrapolation of the entire US population. Can anyone confirm this? If so, then these figures like the BLS aren't worth the paper they're published on.
Compare that to the language S&P used in discussing HD "Despite still-sizable free cash flow generation - Banker
Finish the paragraph:
"Despite still-sizable free cash flow generation, given management's new financial policy, we expect most or all of free cash flow will be used to repurchase shares and pay dividends," S&P said in a statement.
Sounds like maybe S&P is concerned about future operations even if Banker isn't... Heck I'd worry too if I owned their debt. Eat up the reserves & then find yourself in a slowdown & they really will be eating their legs... maybe not enough leg there to pay off the loans & operate.
And what's wrong with letting the stock price fall - makes for a good entry point. If HD's future is so bright it'll bounce back. On the other hand if they don't think they have a bright future, maybe paying off the 'owners' makes sense... if you were an owner... Not if you were a creditor.
You must be "super-anon". Your comment was posted and responded to by several (including Russ, Lee Adler and myself).
IMO the Fed definitely does not ultimately control interest rates. However, the FCBs are not in control either, although they certainly are a major influence.
The USA's biggest problem is its huge dependence on everything imported. Any attempt to force rates down will lead to rampant domestic price inflation, and the carry trade won't have any effect on that. In a manner of speaking, it's already happening.
Banker,
Could you expand on the statement suggesting the buyback is preferable to paying down debt?
The stock looks a bit rich vs last 52 weeks. Are you saying it's better to keep the existing bonds because a new issue might have a higher interest rate (not to mention origination costs)?
Thanks,
You are imagining something. S&P nowhere in that article expresses concerns about future free cash flow generation of HD. They simply rightly see amplified credit risk from more leveraging of the balance sheet thatn they expected a few months ago.Just so we're clear, HD is levered roughly 2x cash flow and less than 50% debt to total tangible capitalization. That is hardly imprudent.
What's wrong with letting a stock price fall? How much time you got? 1) The management /Board work for present shareholders, not possible future ones seeking an entry point 2) Tougher to do acquisitions 3) easier to get taken over 4)less reliable access to the capital markets.
Banker, I think you lack a necessary healthy dose of skepticism. These buyback ploys always result in exec cash-in events and leave companies short on cash when it's needed most, during the already unfolding downturn. Shareholders get the shaft as do the bondholders
What I am saying is that if HD buys back their debt, the most return on that money they are offering to their shareholders is wherever it is trading, call it 5-7% (I don't know exactly where HD bonds trade). Now, most every investor I know believes they can earn more that that on cash they have available for investing. So if you are an HD shareholder, which would you prefer, a 5-7% return by them buying back debt or an opportunity to invest in something you believe can earn more?
Thanks for your commentary on mental state but you are simply incorrect. Microsoft, for example has been doing things like this for years and I haven't seen a disaster. So much for "always." As for a coming downturn, if you believed that, would you rather have that stock with cash on the balance sheet? Or that cash in your pocket? Hmmm?
I'd also suggest that you examine the actual financials in each situation to see just how much leverage is likely to be added and the company's ability to service that. Again, HD is 2x cash flow and less than 50% debt/total tangible capitalization. Thse numbers don't seem like a stretch to me even if 100% of free cash is used to buy back shares going forward.
Got it (I think). The conservative skeptic in me would be happy with a paydown or even a cash dividend (along with the lock-in of income at current dividend rates), but of course there's merit to holding a bigger piece of pie from lower OS shares).
But, that's why I count the beans, not grow them.
Banker, In many cases execs have stock-price-performance based incentives and options that become get freed up to SELL at some combination of dates and price. Take that money that may or may not actually be there in cash - A LOT OF BUYBACKS ARE FINANCED USING EVEN MORE DEBT - and use it to pull in some overpriced shares so the in-jeopardy EPS numbers can be met. That satisfies executive compensation and the stock takes a hit over the next 6 months so those shares bought back are worth substantially less. Sound familiar? Look at almost every HB's history and you'll see this very scenario. HD is pretty well linked in terms of business conditions and prospects to the HBs.
I think the idea is that ADP doesn't need the plug because it loses a contract when a firm dies, adds a contract when a firm gets around to letting somebody else cut the payroll checks. That could have changed, but I am not aware of it. I also hope it isn't true, because it would mean ADP becomes more an effort to just hit the BLs number and less an effort to provide real information about hiring.
AC,
When you say Japan has twice the "national debt" the US has, how are you defining "national debt"?
I have to agree with banker on this one. If you believe in yourself, then buying back stock in these cheap money times is a decent use of cash in a slowing business environment.
However, as a result, HD's cost of money just got higher, but they don't need to borrow money right now. And if we housing bears are correct, they won't need to borrow money for several years.
Now there are those out here who do not believe in HD. In that case, we should not own their stock. There are probably some out here who are even short HD and may get subjected to a short squeeze as a result of this buyback. And while I am short several stocks, I have little sympathy for myself or others who get caught in a bad short trade.
Robert, Also consider the tax. It might be better to take the income while the tax rates are so low on capital gains and dividends. 15% max. 5% on a 15% marginal taxpayer.
Robert, without actually looking at their current borrowings, I would have to guess that they have a lot of short term debt that needs to be re-financed, all the time, so they are risking future margins. If the FED drops rates soon they might not suffer. Otherwise...
If I were a long and had a choice between a special dividend, assuming they are drowning in cash like Microsoft, or a stock buyback, I would prefer the dividend. Paying off debt would be higher on the list...
ADP must use some model as their basis to extrapolate to the larger population. They use a large sample, yes, granted, but they then apply the result to the entire population. I don't see how contracts are the proxy for small business creation/destruction as it would be replicated since it's already picked up in their sample data.
You are imagining something. S&P nowhere in that article expresses concerns about future free cash flow generation of HD.
LOL.
See the paragraph again.
I don't know how ELSE one would interpret that except as money budgeted for dividends & stock buy backs meaning they potentially won't have enough money for debt service... therefor in S&P's opinion, earning a downgrade of HD debt...
If I owned HD I'd be selling into that buyback as fast as I could. Same thing if I owned their debt - sell, sell, sell.
What's wrong with letting a stock price fall? How much time you got? 1) The management /Board work for present shareholders, not possible future ones seeking an entry point
Current stockholders add to positions too you know - I do that all the time with companies I like but only at prices that make sense.
2) Tougher to do acquisitions
Not if you have cash. Cash is better than stock options any day. Plus if they need to then they can do both (cash & stock).
3) easier to get taken over
Very true - that would be a problem, given PE activity, a very legit problem. That alone might explain mgmt 'motivation'... not stockholder benefits.
4)less reliable access to the capital markets.
Won't need as much access to capital if you have cash. If they are worried about cost of capital - buy down existing debt & boost their credit ratings. Then when they need capital - it will be plenty cheap.
Robert, Who says '06 FCF will hold up in '07 or '08?
It's not like they'll need to build a lot of new stores or expand, at least in the USA, but there's nothing wrong with a rainy day fund. Especially when the forecast is for a storm to last another year...
As for a coming downturn, if you believed that, would you rather have that stock with cash on the balance sheet? Or that cash in your pocket? Hmmm?
A better question:
If I were intending to REMAIN a stockholder of HD... would I want the cash to remain on the books or buy down debt at HD OR would I rather see it in the pockets of others who sold HD and are no longer stockholders?
It depends on what I intended to do. IF I was a stockholder and the company was emptying the coffers to buy back stock... I'd try to be one of the guys getting some of that money (i.e. sell into that buy back).
Is that good for me? Probably. Is it good for the other stockholders & the company as a whole? Probably not.
IMO the Fed definitely does not ultimately control interest rates. However, the FCBs are not in control either, although they certainly are a major influence.
ac - My personal opinion is that tj's got it pretty much right. I don't think anyone believes the FCBs completely control the game... but they are very large & determined market players. No other market players currently want to get out in front of them...
Back in the day Soros et. al. could take down a pegged currency & FCB pretty easily & make a good buck. Like what happened in 1997 with the Thai Baht.
But with every FCB & their sister holding huge reserves & reserves are growing, not shrinking... its problematic to be the first to step out and bet against say the PBoC (RMB) or BoJ JPY)... who has a trillion or two to lose in such a bet? The FCBs do.
And it is really unclear how much loss the FCBs will be willing to sustain to preserve their pegs & export competitiveness. I mean China has something like $1.2T and Japan almost $2T... whose going to be first to step out in front of that?
I think everyone knows the private markets are big enough to take these guys down IF the private markets could make a buck doing so... they just aren't organized well enough to do it... especially considering the private market would probably fracture (split) - half betting with FCBs and half betting against.
It is going to take some kind of major 'paradigm' shift to reel the FCBs back in. I'm sure it will happen someday, somehow - just don't know when or how.
major 'paradigm' shift to reel the FCBs back in Setzer says that the lesser developed nations except China are holding a peg to China. Setzer says China is holding a peg to the US$. DC on Setzer's comment board (basically) says China is holding a peg to the Yen. There is a history between China and Japan.
Anyway, the paradigm shift is when Japan and/or China can no longer afford to hold the peg. Could be a while.
The conservative skeptic in me would be happy with a paydown or even a cash dividend (along with the lock-in of income at current dividend rates), but of course there's merit to holding a bigger piece of pie from lower OS shares).
Especially when it doesn't require payingtaxes.
Fly,
I don't know how ELSE one would interpret that except as money budgeted for dividends & stock buy backs meaning they potentially won't have enough money for debt service... therefor in S&P's opinion, earning a downgrade of HD debt...
You are mixing up the GENERATION of free cash flow with the its subsequent uses. The former is an operational issue, the latter is a financial choie.
If I were intending to REMAIN a stockholder of HD... would I want the cash to remain on the books or buy down debt at HD OR would I rather see it in the pockets of others who sold HD and are no longer stockholders?
The choice itself has value, investors can decide. The following is responses to your responses to my numbered answers (I hope that is clear)
1) what would you rather have, a stock that bounces around so you can buy on dips or one that is more or less continually increasing in value? What would you prefer your management created?
2) Stock (not options) stock is a superior acquisition vehilce to cash in many cases for a simple reason. It can create non-taxable events, far superior from a shareholder perspective.
3) in this issue managment behavior is generally aligned with shareholder interests, aren't they?
4) Troubled stocks generally have more of an access issue to all markets, but I take your point on this one.
You are mixing up the GENERATION of free cash flow with the its subsequent uses.
I'm reading what they say HD is doing (diverting cash to stock buy backs) and what S&P did as a result of that (downgrade HD debt). Not much else to infer from that eh?
Why would you, or anyone, prefer a dividend that you had to pay taxes on, to a buyback that you don't have to participate in or pay taxes on? The balance sheet impact for the company is identical.
You claimed that S&P had expressed concern about HD's free cash flow generation (which in simple terms would be defined as EBITDA-interest-cap ex). They specifically didn't. The entirety of their position (at least as stated in the article) is that it is the APPLICATION of the free cash that is there issue.
Banker, I view stock buybacks as a gimmick for short term gain with suspect timing that seems to mysteriously coincide with exec option sales. That or a trick to make EPS numbers work at the expense of balance sheets to bouy shareprices short term used in to compensate for otherwise solid performance.
"Despite still-sizable free cash flow generation, given management's new financial policy, we expect most or all of free cash flow will be used to repurchase shares and pay dividends,"
The story is pretty clear - S&P states they expect HD to buy back stock from cash & so S&P downgrades HD debt three notches. Spin or rationalize all you want... but that is what happened.
I think S&P called it correctly with the downgrade - but that is my personal opinion - whether you agree or disagree.
Compare that to the language S&P used in discussing HD "Despite still-sizable free cash flow generation
Doesn't sound like an operational issue, now does it?
Banker
I was at a Home Depot yesterday (July 4) mid-afternoon here in the Bay Area. Huge store, it was dead, dead, dead. I don't think there were 15 customers in the whole store. But what stunned me more was that I saw at least 20 employees. Down every aisle, 2 at appliances, 2 at countertops, several out front cleaning the dying plants. I've never seen that many HD employees ever. But the customers were nowhere.
Bottom line. They were not cash-flow positive yesterday. And the same shopping trip led me to a different mall area, and the crowds were thick (*but not as thick as Memorial Day, when I was at the same places...Nordstrom Rack was a zoo, though. The line there was offensive.)
I guess no one needs anything at Home Depot these days.
Well, we got our garage door spring, so they sold at least $11 yesterday. That should help.
Banker, I think you lack a necessary healthy dose of skepticism.
A skeptectomy is performed on all banking and brokering recruits, once they pass the background check. (And the background check requires no past history of questioning authorities, especially government statistics.)
Keeping it as simple as I can. I have no issue with the downgrades, none. You claimed S&P was worried about free cash flow generation. They obviously aren't. Look at it this way, without the new financial cholices being made by the board, no downgrades. Get it? The downgrade is NOT function of operating issues.
You claimed S&P was worried about free cash flow generation. They obviously aren't
dryfly shakes head, feeling pity for banker
Banker, S&P puts it in print... says HD buys back stock FROM CASH, so S&P down grades HD debt... Maybe you think S&P so unimpressed with HD they downgrade them even with out the 'change'? I think not.
Free cash GENERATION is a matter of the success of operations (EBITDA-cap ex is a good shorthand measure, notice it is independent of capital structure). It stops being measured when the cash is generated and is not influenced (at least in the near term) by how that cash is used. S&P has not said thay have any concern for that. The we get to step two. Uses of the generated cash. This is S&P's concern. The balance sheet is being leveraged by the buying back of stock and the issuing of dividends rather than the cash accumulating on the balance sheet. That does not have anyhting to do with the operations generating cash.
Again and for the last time, my head hurts and my dogs are looking at me funny, S&P has expressed no concern for the operations of HD to produce free cash.
Well, I was thinking about this subject yesterday. In AZ the governor just signed a law that requires businesses to verify legal resident and right to work status. First offense a fine. Second 10 days suspension of business license. After that worse. That might suggest illegals will be on the street, uncounted, and replaced by legals thereby showing job gains where there really are none... not to mention wage inflation.
Fourteen of 18 industries were growing in June, led by construction, real estate and entertainment. No industry was contracting
It really is different this time.
It seems that I've been blocked from making posts on Russ Winter's site, so I'm going to post a response here hoping some of his readers will see it:
Hmmmm... I've noticed some of my comments regarding FCBs and interest rates have been "terminated".
Hopefully this is unintentional or a mistake on my part. I try to make sensible, non-inflammatory arguments (I hope) simply for the sake of understanding what's happening in the markets and the economy. I certainly don't delude myself into thinking that my own analysis is little more than amateur speculation.
But sometimes I get the feeling that there's a cult developing around the notion that FCBs control US interest rates. It's the same feeling I got back when I was arguing with housing bulls in 2005.
Maybe the FCB theory is correct. I don't know, which is why I discuss it.
However, in my opinion it would be petty and intellectually shameful to intentionally censor any counter-arguments, such as Japan, that cast doubt on the theory.
Hopefully this is a mistake on my part.
I really like this site and agree with most of the opinions expressed here.
Fourteen of 18 industries were growing in June, led by construction, real estate and entertainment. No industry was contracting
It really is different this time.
No, from what I've read this seems to fit the "model" quite well (with the exception of the magnitude of easy credit):
Business outpaces consumption capacity and then suddenly pulls back in a belated reaction that we call a "recession".
The ISM factory series show a pattern pretty consistent with the factory inventory correction, which now appears to be done (for a while, anyhow). There was a half-year period of, on average, weak readings, followed by a recent sharp pickup. That improvement is not isolated to the auto sector, so it isn't just Detriot getting reading for a strike. The non-factory ISM series was soft only late in Q1 and (maybe) early in Q2, and has since picked up strongly. Looks like the non-factory index may have begun to respond to the factory slowdown, just in time for the end of the inventory correction and subsequent bounce.
We'll have to see whether rebuilding vehicle inventories in the past couple of months hass really been such a good idea, but for now, things are picking up on the production side.
ac,
What was your basic theory around why the FCB's don't control US interest rates? I, for one, would love to hear the counter-argument. It's actually amazing that the "FCB controlling US interest rates" has become the herd opinion (?!) as this theory would have been highly contrary (if not revolutionary) a short time ago. Has something changed? I am one of those who believe the FCB's are in control of US interest rates and could easily make our rates go to %15 overnight if they wanted to.
BTW, I seriously doubt Russ would censor you, as I've never seen Russ censor anybody that wasn't a blatant troll or for profanity, etc. And you are very thoughtful and have great insight, so this is obviously some kind of a server problem.
We'll have to see whether rebuilding vehicle inventories in the past couple of months hass really been such a good idea, but for now, things are picking up on the production side.
We're getting a real taste of what credit-fueled overproduction means with housing.
Hopefully this doesn't spread to other goods and services.
Alas, I'm not so hopeful.
is is about time:
AG investigating credit agencies role in subprime losses - Jul. 5, 2007
!!!
What was your basic theory around why the FCB's don't control US interest rates? I, for one, would love to hear the counter-argument.
I simply point to the fact that Japan has long rates of 2.5% despite having twice the national debt burden that we do. This is because they monetize their debt and devalue their currency to "artificially" depress interest rates.
So long as the carry traders expect short rates to stay low, they will depress long rates since they are insensitive to inflation; they only worry about rate increases.
Sure FCBs could dump their treasuries and drive up rates, but the carry traders would swoop in and drive them right back down if they expected short rates to stay low (the asset carnge from a treasury dump would almost guarantee this IMO).
Again, this is just a theory, but one I think it's worth discussing.
http://www.marketwatch.com/news/story/layoff-plans-fall-22-june/story.aspx?guid={9A54C413-C8B6-41E8-AC45-E823D8DCC79F}&dist=
Of the top five industries, only the financial sector cut more jobs in the first half compared with the same period last year.
"The financial sector is clearly affected by the significant housing slowdown and subsequent collapse in the subprime lending market," said John Challenger, CEO of the employment firm, in statement. Cuts in the financial sector doubled in June to 9,800 compared with May and were up 131% in the first six months of the year to 64,825.
ISM figures don't seem to support this, no?
bonds: S&P cuts Home Depot's rating three notches
| Reuters
Yal,
A question. Do you think the rating agencies should stand pat in the face of a significantly changing balance sheet? The actions Home Depot is taking are, they believe, in the best interests of shareholders, but stock buybacks and dividend increases (or heck, paying dividends at all)run counter to the interests of bondholders.
"Sure FCBs could dump their treasuries and drive up rates, but the carry traders would swoop in and drive them right back down"
My theory is that the FCB's COULD drive US rates through the ceiling very easily if they wanted to. In other words: If the BOJ decided to stop being the patsy for the US, they could dramatically raise their short term rates AND dump boatloads of our treasuries, thus causing US rates to skyrocket. And this isn't mutually-assured destruction as some have suggested. Its pretty clear at this point that the Yen carry is doing a lot of harm to Japan's economy as critical investment capital flees the country, and Japan's growth would likely accelerate if they raised rates and started protecting the Yen.
Probably a more likely scenario to Japan ending its lap-dog role is China dumping treasuries (or just not buying any more) and putting pressure on Japan to let the Yen rise. This would still cause much higher durable goods inflation in the US and much higher interest rates.
It doesn't sound like we are that far off in the thinking, to be honest.
Home Depot is just trying to boost their EPS with stock buybacks so they look like they are still making money. Lots of companies have been doing this. It is like eating your own leg.
CR,
A little off topic....In a previous string regarding Q2 estimated PCE of 1.5%, was that a nominal figure? Also, what are your thoughts on overall inventory build for Q2?
Thanks
Truth,
Nonsense. The Board has decided that they don't have enough good places (read growth or acquisitions) to use the funds so they are returning it to shareholders in a tax efficient manner. If this is "chewing off your leg" then HD must have been born with five or six of them.
My theory is that the FCB's COULD drive US rates through the ceiling very easily if they wanted to. In other words: If the BOJ decided to stop being the patsy for the US, they could dramatically raise their short term rates AND dump boatloads of our treasuries, thus causing US rates to skyrocket.
I agree that this could happen. But the Fed could simply respond by buying these tresuries to drive rates back down as Japan does now. But I think the carry traders would do much of the work for them.
This is more of a redistribution shock, but I think Japan demonstrates that with the monetary system we have the Fed has ultimate control over interest rates. I think the real question is whether this monetary system is viable in the long term. Will these currencies collapse, or will these policies lead to some cataclysmic financial crisis and thus be abandoned?
Banker, HD's doing what the HBs were doing last year - buying back stock at inflated prices to support the stock short term so the execs can SELL SHARES. A better use of the money would be to pay down debt rather than see the cash infusion evaporate over the next year as was the case with the homies. The homies can't play that game any more.
Barely,
A better use of the money would be to earn 7-8% by paying down debt? Really? For an investment grade company?
This is more of a redistribution shock, but I think Japan demonstrates that with the monetary system we have the Fed has ultimate control over interest rates. I think the real question is whether this monetary system is viable in the long term. Will these currencies collapse, or will these policies lead to some cataclysmic financial crisis and thus be abandoned?
Japan is a nation of savers and a economy based on exports,very different then the USA not to mention the extremely political connections between the BOJ and the ruling political parties.
These are elements which I am sure you are well aware of I wonder if the USA took on the same financial model as Japan and our dollar value was rated similiar to Japan what that might mean to our financial health?
Banker, ask the HBs' longs if the buybacks helped them. The HBs debt went from investment grade to junk after the buybacks, but the execs sure managed to get their $$$$$ before that happened. Now they are up against a wall when they need to refi out of their short term paper. So yes, protecting their investment grade rating does more in the long term when business prospects look grim.
Barely,
Of course the buybacks helped. If you were long an HB, would you prefer having that cash in your pocket to invest in something else or not? In those cases it was hardly the buybacks that drove the downgrades it was the terrible operating situation. Compare that to the language S&P used in discussing HD "Despite still-sizable free cash flow generation
Doesn't sound like an operational issue, now does it?
I've heard the ADP figures try to insert a similar birth/death model type of adjustment, similar to the BLS figure, as it leaps from its strictly sampled data to then becoming an extrapolation of the entire US population. Can anyone confirm this? If so, then these figures like the BLS aren't worth the paper they're published on.
Compare that to the language S&P used in discussing HD "Despite still-sizable free cash flow generation - Banker
Finish the paragraph:
"Despite still-sizable free cash flow generation, given management's new financial policy, we expect most or all of free cash flow will be used to repurchase shares and pay dividends," S&P said in a statement.
Sounds like maybe S&P is concerned about future operations even if Banker isn't... Heck I'd worry too if I owned their debt. Eat up the reserves & then find yourself in a slowdown & they really will be eating their legs... maybe not enough leg there to pay off the loans & operate.
And what's wrong with letting the stock price fall - makes for a good entry point. If HD's future is so bright it'll bounce back. On the other hand if they don't think they have a bright future, maybe paying off the 'owners' makes sense... if you were an owner... Not if you were a creditor.
ac,
You must be "super-anon". Your comment was posted and responded to by several (including Russ, Lee Adler and myself).
IMO the Fed definitely does not ultimately control interest rates. However, the FCBs are not in control either, although they certainly are a major influence.
The USA's biggest problem is its huge dependence on everything imported. Any attempt to force rates down will lead to rampant domestic price inflation, and the carry trade won't have any effect on that. In a manner of speaking, it's already happening.
Banker,
Could you expand on the statement suggesting the buyback is preferable to paying down debt?
The stock looks a bit rich vs last 52 weeks. Are you saying it's better to keep the existing bonds because a new issue might have a higher interest rate (not to mention origination costs)?
Thanks,
Dryfly,
You are imagining something. S&P nowhere in that article expresses concerns about future free cash flow generation of HD. They simply rightly see amplified credit risk from more leveraging of the balance sheet thatn they expected a few months ago.Just so we're clear, HD is levered roughly 2x cash flow and less than 50% debt to total tangible capitalization. That is hardly imprudent.
What's wrong with letting a stock price fall? How much time you got? 1) The management /Board work for present shareholders, not possible future ones seeking an entry point 2) Tougher to do acquisitions 3) easier to get taken over 4)less reliable access to the capital markets.
Banker, I think you lack a necessary healthy dose of skepticism. These buyback ploys always result in exec cash-in events and leave companies short on cash when it's needed most, during the already unfolding downturn. Shareholders get the shaft as do the bondholders
Llama,
What I am saying is that if HD buys back their debt, the most return on that money they are offering to their shareholders is wherever it is trading, call it 5-7% (I don't know exactly where HD bonds trade). Now, most every investor I know believes they can earn more that that on cash they have available for investing. So if you are an HD shareholder, which would you prefer, a 5-7% return by them buying back debt or an opportunity to invest in something you believe can earn more?
Barely,
Thanks for your commentary on mental state but you are simply incorrect. Microsoft, for example has been doing things like this for years and I haven't seen a disaster. So much for "always." As for a coming downturn, if you believed that, would you rather have that stock with cash on the balance sheet? Or that cash in your pocket? Hmmm?
I'd also suggest that you examine the actual financials in each situation to see just how much leverage is likely to be added and the company's ability to service that. Again, HD is 2x cash flow and less than 50% debt/total tangible capitalization. Thse numbers don't seem like a stretch to me even if 100% of free cash is used to buy back shares going forward.
BTW,
I'm off for a couple of hours, will check back later for any follow up. Thanks!
Got it (I think). The conservative skeptic in me would be happy with a paydown or even a cash dividend (along with the lock-in of income at current dividend rates), but of course there's merit to holding a bigger piece of pie from lower OS shares).
But, that's why I count the beans, not grow them.
Banker, In many cases execs have stock-price-performance based incentives and options that become get freed up to SELL at some combination of dates and price. Take that money that may or may not actually be there in cash - A LOT OF BUYBACKS ARE FINANCED USING EVEN MORE DEBT - and use it to pull in some overpriced shares so the in-jeopardy EPS numbers can be met. That satisfies executive compensation and the stock takes a hit over the next 6 months so those shares bought back are worth substantially less. Sound familiar? Look at almost every HB's history and you'll see this very scenario. HD is pretty well linked in terms of business conditions and prospects to the HBs.
Stuart,
I think the idea is that ADP doesn't need the plug because it loses a contract when a firm dies, adds a contract when a firm gets around to letting somebody else cut the payroll checks. That could have changed, but I am not aware of it. I also hope it isn't true, because it would mean ADP becomes more an effort to just hit the BLs number and less an effort to provide real information about hiring.
AC,
When you say Japan has twice the "national debt" the US has, how are you defining "national debt"?
re: HD Stock buyback.
I have to agree with banker on this one. If you believe in yourself, then buying back stock in these cheap money times is a decent use of cash in a slowing business environment.
However, as a result, HD's cost of money just got higher, but they don't need to borrow money right now. And if we housing bears are correct, they won't need to borrow money for several years.
Now there are those out here who do not believe in HD. In that case, we should not own their stock. There are probably some out here who are even short HD and may get subjected to a short squeeze as a result of this buyback. And while I am short several stocks, I have little sympathy for myself or others who get caught in a bad short trade.
Robert, Also consider the tax. It might be better to take the income while the tax rates are so low on capital gains and dividends. 15% max. 5% on a 15% marginal taxpayer.
Robert, without actually looking at their current borrowings, I would have to guess that they have a lot of short term debt that needs to be re-financed, all the time, so they are risking future margins. If the FED drops rates soon they might not suffer. Otherwise...
If I were a long and had a choice between a special dividend, assuming they are drowning in cash like Microsoft, or a stock buyback, I would prefer the dividend. Paying off debt would be higher on the list...
ADP must use some model as their basis to extrapolate to the larger population. They use a large sample, yes, granted, but they then apply the result to the entire population. I don't see how contracts are the proxy for small business creation/destruction as it would be replicated since it's already picked up in their sample data.
You are imagining something. S&P nowhere in that article expresses concerns about future free cash flow generation of HD.
LOL.
See the paragraph again.
I don't know how ELSE one would interpret that except as money budgeted for dividends & stock buy backs meaning they potentially won't have enough money for debt service... therefor in S&P's opinion, earning a downgrade of HD debt...
If I owned HD I'd be selling into that buyback as fast as I could. Same thing if I owned their debt - sell, sell, sell.
I would have to guess that they have a lot of short term debt that needs to be re-financed.
Not bad: roughly $5 bn in 08/09 verses free cash flow of $7.6 bn in 06. 2/3 long term due after 2011.
What's wrong with letting a stock price fall? How much time you got? 1) The management /Board work for present shareholders, not possible future ones seeking an entry point
Current stockholders add to positions too you know - I do that all the time with companies I like but only at prices that make sense.
2) Tougher to do acquisitions
Not if you have cash. Cash is better than stock options any day. Plus if they need to then they can do both (cash & stock).
3) easier to get taken over
Very true - that would be a problem, given PE activity, a very legit problem. That alone might explain mgmt 'motivation'... not stockholder benefits.
4)less reliable access to the capital markets.
Won't need as much access to capital if you have cash. If they are worried about cost of capital - buy down existing debt & boost their credit ratings. Then when they need capital - it will be plenty cheap.
AC,
When you say Japan has twice the "national debt" the US has, how are you defining "national debt"?
k harris, I was referring to this:
List of countries by public debt - Wikipedia, the free encyclopedia
Robert, Who says '06 FCF will hold up in '07 or '08?
It's not like they'll need to build a lot of new stores or expand, at least in the USA, but there's nothing wrong with a rainy day fund. Especially when the forecast is for a storm to last another year...
As for a coming downturn, if you believed that, would you rather have that stock with cash on the balance sheet? Or that cash in your pocket? Hmmm?
A better question:
If I were intending to REMAIN a stockholder of HD... would I want the cash to remain on the books or buy down debt at HD OR would I rather see it in the pockets of others who sold HD and are no longer stockholders?
It depends on what I intended to do. IF I was a stockholder and the company was emptying the coffers to buy back stock... I'd try to be one of the guys getting some of that money (i.e. sell into that buy back).
Is that good for me? Probably. Is it good for the other stockholders & the company as a whole? Probably not.
nothing wrong with a rainy day fund
That's what I call my HELOC.
IMO the Fed definitely does not ultimately control interest rates. However, the FCBs are not in control either, although they certainly are a major influence.
ac - My personal opinion is that tj's got it pretty much right. I don't think anyone believes the FCBs completely control the game... but they are very large & determined market players. No other market players currently want to get out in front of them...
Back in the day Soros et. al. could take down a pegged currency & FCB pretty easily & make a good buck. Like what happened in 1997 with the Thai Baht.
But with every FCB & their sister holding huge reserves & reserves are growing, not shrinking... its problematic to be the first to step out and bet against say the PBoC (RMB) or BoJ JPY)... who has a trillion or two to lose in such a bet? The FCBs do.
And it is really unclear how much loss the FCBs will be willing to sustain to preserve their pegs & export competitiveness. I mean China has something like $1.2T and Japan almost $2T... whose going to be first to step out in front of that?
I think everyone knows the private markets are big enough to take these guys down IF the private markets could make a buck doing so... they just aren't organized well enough to do it... especially considering the private market would probably fracture (split) - half betting with FCBs and half betting against.
It is going to take some kind of major 'paradigm' shift to reel the FCBs back in. I'm sure it will happen someday, somehow - just don't know when or how.
major 'paradigm' shift to reel the FCBs back in Setzer says that the lesser developed nations except China are holding a peg to China. Setzer says China is holding a peg to the US$. DC on Setzer's comment board (basically) says China is holding a peg to the Yen. There is a history between China and Japan.
Anyway, the paradigm shift is when Japan and/or China can no longer afford to hold the peg. Could be a while.
Llama,
The conservative skeptic in me would be happy with a paydown or even a cash dividend (along with the lock-in of income at current dividend rates), but of course there's merit to holding a bigger piece of pie from lower OS shares).
Especially when it doesn't require payingtaxes.
Fly,
I don't know how ELSE one would interpret that except as money budgeted for dividends & stock buy backs meaning they potentially won't have enough money for debt service... therefor in S&P's opinion, earning a downgrade of HD debt...
You are mixing up the GENERATION of free cash flow with the its subsequent uses. The former is an operational issue, the latter is a financial choie.
If I were intending to REMAIN a stockholder of HD... would I want the cash to remain on the books or buy down debt at HD OR would I rather see it in the pockets of others who sold HD and are no longer stockholders?
The choice itself has value, investors can decide. The following is responses to your responses to my numbered answers (I hope that is clear)
1) what would you rather have, a stock that bounces around so you can buy on dips or one that is more or less continually increasing in value? What would you prefer your management created?
2) Stock (not options) stock is a superior acquisition vehilce to cash in many cases for a simple reason. It can create non-taxable events, far superior from a shareholder perspective.
3) in this issue managment behavior is generally aligned with shareholder interests, aren't they?
4) Troubled stocks generally have more of an access issue to all markets, but I take your point on this one.
You are mixing up the GENERATION of free cash flow with the its subsequent uses.
I'm reading what they say HD is doing (diverting cash to stock buy backs) and what S&P did as a result of that (downgrade HD debt). Not much else to infer from that eh?
Barely,
Why would you, or anyone, prefer a dividend that you had to pay taxes on, to a buyback that you don't have to participate in or pay taxes on? The balance sheet impact for the company is identical.
I think you got it right Rob't. Somebody's gonna blink - China, Japan, somebody - then the paradigm shifts AND BIG TIME.
BTW - I read Setser everyday too - a must read if you're just a mouse in the stall among big clumsy horses.
Fly,
You claimed that S&P had expressed concern about HD's free cash flow generation (which in simple terms would be defined as EBITDA-interest-cap ex). They specifically didn't. The entirety of their position (at least as stated in the article) is that it is the APPLICATION of the free cash that is there issue.
Banker, I view stock buybacks as a gimmick for short term gain with suspect timing that seems to mysteriously coincide with exec option sales. That or a trick to make EPS numbers work at the expense of balance sheets to bouy shareprices short term used in to compensate for otherwise solid performance.
Banker,
Did S&P downgrade HD debt three notches or not?
Did S&P say or not say the following?
"Despite still-sizable free cash flow generation, given management's new financial policy, we expect most or all of free cash flow will be used to repurchase shares and pay dividends,"
The story is pretty clear - S&P states they expect HD to buy back stock from cash & so S&P downgrades HD debt three notches. Spin or rationalize all you want... but that is what happened.
I think S&P called it correctly with the downgrade - but that is my personal opinion - whether you agree or disagree.
Compare that to the language S&P used in discussing HD "Despite still-sizable free cash flow generation
Doesn't sound like an operational issue, now does it?
Banker
I was at a Home Depot yesterday (July 4) mid-afternoon here in the Bay Area. Huge store, it was dead, dead, dead. I don't think there were 15 customers in the whole store. But what stunned me more was that I saw at least 20 employees. Down every aisle, 2 at appliances, 2 at countertops, several out front cleaning the dying plants. I've never seen that many HD employees ever. But the customers were nowhere.
Bottom line. They were not cash-flow positive yesterday. And the same shopping trip led me to a different mall area, and the crowds were thick (*but not as thick as Memorial Day, when I was at the same places...Nordstrom Rack was a zoo, though. The line there was offensive.)
I guess no one needs anything at Home Depot these days.
Well, we got our garage door spring, so they sold at least $11 yesterday. That should help.
dryfly on HD: And what's wrong with letting the stock price fall
Because it is still in the DJI, and our criminal Treasury secretary won't allow that.
Banker, I think you lack a necessary healthy dose of skepticism.
A skeptectomy is performed on all banking and brokering recruits, once they pass the background check. (And the background check requires no past history of questioning authorities, especially government statistics.)
Microsoft, for example has been doing things like this for years and I haven't seen a disaster.
Oh, banker, I see you've hit rock bottom. Now that you've pulled out the Microsoft example, I believe you're at the end of your rope.
When the broker shills pull out the Microsoft example, run, don't walk, to your nearest toilet, as the vomit will flow forth shortly.
Using anomalies as examples is a true sign of desperation. Even worse when those anomalies are irreproducible monopolies.
Fly,
Keeping it as simple as I can. I have no issue with the downgrades, none. You claimed S&P was worried about free cash flow generation. They obviously aren't. Look at it this way, without the new financial cholices being made by the board, no downgrades. Get it? The downgrade is NOT function of operating issues.
You claimed S&P was worried about free cash flow generation. They obviously aren't
dryfly shakes head, feeling pity for banker
Banker, S&P puts it in print... says HD buys back stock FROM CASH, so S&P down grades HD debt... Maybe you think S&P so unimpressed with HD they downgrade them even with out the 'change'? I think not.
OK, FLY, last try.
Free cash GENERATION is a matter of the success of operations (EBITDA-cap ex is a good shorthand measure, notice it is independent of capital structure). It stops being measured when the cash is generated and is not influenced (at least in the near term) by how that cash is used. S&P has not said thay have any concern for that. The we get to step two. Uses of the generated cash. This is S&P's concern. The balance sheet is being leveraged by the buying back of stock and the issuing of dividends rather than the cash accumulating on the balance sheet. That does not have anyhting to do with the operations generating cash.
Again and for the last time, my head hurts and my dogs are looking at me funny, S&P has expressed no concern for the operations of HD to produce free cash.