Corporate debt really is much riskier than it was a few years ago. In order to take advantage of the cuts in the capital gains and dividend rates, companies are using debt to finance share buybacks and dividends.
So these increased spreads may be the market's way of saying that the rating companies are not downgrading corporate debt fast enough rather than a sign something is wrong with the market.
What I find interesting is this graph. It shows how today's problems are very different from the 2001 recession. Then, only A2/P2 non-financial spread increased, obviously due to the increase of the risk of default. Both AA financial and AA asset-backed were on par with AA non-financial. It means that the market believed in the ratings.
But in August 2007, not only A2/P2 spread increased, but also the AA asset backed one. Nevertheless, AA financial was still on par (with short bumps) with the AA non-financial until roughly the Bear Stearns fiasco. And now, it also trades with a premium. So we have the AA non-financial (good), the AA financial (bad) and the AA asset-backed (ugly). Well done rating companies. It's good to note that the AA non-financial is a minor fraction of the commercial paper market so most of the market is traded with a significant premium.
What I find also remarkable is that all of the papers yield real loss with 4.0% CPI. Thank you, Mr. Bernanke. Pensioners are likely thrilled by that.
In Talbot's case, what the banks are cutting off is higher up the food chain, LC debt secured by inventory. In fashion, inventory usually is considered pretty good collateral, no?
But not now for Talbots.
Talbots, a money-losing small-cap company, still has a stratospheric P/E ratio. It only becomes sane if you assume the company can turn around to profitability on a dime.
For a lot of small-caps, even secured credit is now obtainable only at very high costs. The financing deals are getting so screwy it's hard to know what the real costs of capital is, but for a company like Talbots it could be 15-20% interest equivalent.
Using discounted cashflow analysis to value companies, you would discount projected future earnings by this cost of capital. The higher the cost of capital is, the less the company is worth. On a DCF basis, Talbots is probably not worth more than half its current market cap of about $400 million.
It shows what a huge disconnect there is between small-cap debt markets and equity valuations. Talbots is already $600 million in debt.
Bankers may be questioning whether Talbots' major asset, inventory, is worth what is shown on the books ($350 million). But the stock market "knows" the inventory is golden and will be turned very soon.
If you sit in a major bank trading room and trade the fundamental cash and derivative products that drive the interbank fixed income trading world, which I've done for about 15 years now (including being on the hotseat during the Asian crisis), one gets the sinking feeling from watching a number of fundamental relationships absolutely break down over the past couple of days that the third wave is indeed about to arrive, and this one will be the tsunami. The level of complacency about the financial system reflected by the stock market of late really astounds me.
"CR, you have to stop hero-worshiping at the throne of Prof. K."
AlBNYC | 04.17.08 - 1:21 pm | #
what AlBNYC really meant was he doesn't like or doesn't agree with what the economist Paul Krugman has to say.
But rather than single out a position of Krugmans' and debating it with us, AlBNYC chooses to subtly insult CR by ACCUSING him of hero-worship before a throne.
this kind of name calling is reprehensible and disrespectful to CR who, by my estimation runs one of the best blogs to be found anywhere...fact based and where all intelligent arguments welcome.
AlBNYC, if you are a gentleman or a gentlewoman you should withdraw your comment against CR as a matter of honor.
Definitely a huge level of complacency. I'm expecting some thrifts to go down any day now (Downey and FirstFed in California are trading like their about to blowup).
CR- Usually waves come in sets. During a good swell you might have up several waves in a set. Most of the time there is one particulary large wave in the set. If you live in Port Au Prince, Riverside, Ca or Egypt you've been caught inside, broken your leash, lost your board and are trying not to drown. If your in the U.S. your paddling for your life- the problem is there are more waves coming and one of them is bigger than the rest. Cheers
"Workers at the GM plant were set to go on a strike of their own Thursday morning over local labor issues. But it was not clear if that strike would happen, since the GM workers might now be temporarily laid off and won't be able to walk off their jobs."
Relax, Turbo. No insult intended or delivered. I'm not that subtle and a strong supporter of this blog.
But, Krugman, like Roubini, who is often quoted here, is an ultra bear, and one with an open political bias. That merits some discount, in my eyes. No different that the neocon "goldilocks" economy nuts.
Talbots' inventory has been dished by fashionistas last few years - as too conservative/old ladyish. The store is aiming to change that image, but might not have the chance if it can't get financing.
This is no time for a retailer to have 2 problems at once. Easily fatal.
Trying to solve the financial industry's structural problems with more interest rate cuts would only worsen the situation by raising inflation, Dallas Federal Reserve Bank President Richard Fisher said on Thursday.
"I have maintained a strong reluctance to further general monetary accommodation," Fisher said in prepared remarks to the Chicago Council on Global Affairs.
Fisher has dissented against the last two Federal Open Market Committee decisions to lower benchmark lending rates.
He has argued in recent speeches that lower rates will not boost economic activity until the "pipes" of the U.S. financial system are totally flushed out.
"The answer ... is not to compound the bad by repeating the oft-prescribed remedy of inflating our way out of our predicament with a wing-and-a-prayer promise that it can always be reined in later," Fisher said.
The guy served as a consultant to Enron and was part of the Bush administration Council of Economic advisors. He is also an ardent support of globalization and "new economic models".
Turb's warning is exactly the same one I got this morning from a family member in Sweden. Finance Professionals on two continents see big trouble. Now!
There are transactions going though, but I'd honestly say volume is 30% of what it was at this time last year when markets were "normal."
The problem right now is that it's very difficult to fund most entities, and the relationships between cash and derivatives used to price a number of products have become so unstable that the markets are very close to freezing up. The velocity of money in the financial system is decelerating massively at the moment, and it can only be a matter of time now before the banks, hedge funds and main street businesses operating on the edge financial start to go under in waves.
I'd gone over to the mildly bullish camp for a while, but things really are deteriorating very rapidly again. The money market was the canary in the coal mine last year, and it's actually feeling worse now.
I believe the highest CP rating from Moody's & S&P is A-1+/P-1. AA refers to long-term ratings which are for obligations longer than a year. However I get your point. High quality CP is trading well inside of A-2/P-2 paper.
Then again, Moody's and S&P's ratings are only as good as how much are the issuer's are willing to pay them in potential fees.
I wouldn't get so bent up about Krugman. He's a good economist who also enjoys getting silly on his blog (to my delight).
Just now Krugman points to this article about CERN. Talks about a new particle accelerator that may accidentally create a black hole on earth, dooming us all, and the lawsuit directed at halting its operation. Great rhetorical descriptions: "it could spit out something called a 'strangelet' that could convert our planet to a shrunken dense lump of something called 'strange matter'." Really this is an excellent metaphor for all kinds of human mischief, from financial and to ecological.
"Relax... No insult intended or delivered. I'm not that subtle and a strong supporter of this blog."
mock turtle responds
i appreciate that. maybe i over-reacted, but, probably like you and others here i have a great respect for CR (AND Tanta) for what they have done here for all.
now i understand you feel that way too.
as for krugman...yeah he has been very bearish during these years of increasing deficit spending and concentration of wealth in the hands of the top 5% or less.
i appreciate some take issue with his politics, i respect differences of opinion.
i like to see the acquisition of wealth, and bet so does krugman...the idea being a highly successfull professional that makes millions of dollars a year, or an entreprenueaur that amasses billions, can be, and has been an engine of economic dynamism in our society.
Krugman would point out however, that something different is taking place recently. Rather than mostly rewarding excellence for creativity leading to productivity, the lions share of the wealth of our economic engine is being devoured by a small group, acquiring billions of dollars using mathematical and legal formulas that exploit inequities in our financial, and tax system.
new particle accelerator that may accidentally create a black hole on earth
I knew it, they already did it! That's where the keys to my office room went this morning!!
and mock, i do agree with you...the brains are going to efforts to game the system instead of producing something from the system. Not a good use of talent. The system, however, is now having its revenge.
Gary,
exactly, i agree.. JD Rockefeller, Andrew Mellon, Ford etc...these were tough, bare knuckles capitalists...not friends of the labor movement,but man they did build an empire of productivity.
now we seem to be compensating at the highest levels, managers who shuffle money in brilliant but often deceptive ways. what's that gonna get us as a nation?
Gary writes:
las, let us pray the physicists working on the CERN reactor are NOT the same ones who were buiding CDO quant models.
Actually, those who can't cut it making stranglets are encouraged to go work on wall street making cdos. Finally, if they do poorly on regular cdos, they are given synthetic cdos.
Other than the A2/P2 spread, is there public data that can add to the illustration of what you are seeing? Relationships between cash and derivatives seems to this neophyte a very dark corner of the finance world. Any light you can shine would be greatly appreciated.
Bank of America Corp. (BAC) is stopping private student lending, becoming the latest firm to do so as companies are bailing out of providing such loans, though the nation's largest bank said it will continue providing government-backed student loans
Tiny black holes are very different from galactic black holes. Galactic ones consume mass around them; tiny particle-sized ones rapidly spit out mass as they evaporate away.
Strangelets are in principle much more dangerous than tiny black holes; but luckily, they are hypothetical, not theoretical. That is, if a whole large collection of conditions were met, strangelets might be physically possible, and if they were, they would be very dangerous. However, the continued existence of the moon is pretty clear evidence that these conditions cannot be met in our universe. So strangelets aren't really possible, so they aren't really dangerous.
I normally respect what Theroxylander writes. Today, he says Harley Davidson (HOG) is the canary in the coalmine. When it's stock turns up, the market may be bottoming.
Maybe...
But I don't think he understands how HOG has changed. And maybe its stock won't turn up for a longtime.
HOG used to be a motorcycle company.
Over the past 3-4 years, it's become mainly a leveraged finance and investment company.
Why does a motorcycle company need to own $2.5 billion of its own finance receivables (notes on motorcycles)?
And why has it borrowed over $2 billion to finance (leverage) those investments? Why did it ener into swaps to convert fixed-rate debt into floating rate pegged to LIBOR? And what could the swaps end up costing?
HOG reported sharp weakening in its receivables portfolio in 2007. But what hit could its portfolio take if motorcycle owners start doing jingle mail in droves in 2008-09?
Could HOG become to motorcycles what CFC was to housing?
John Bogle said the biggest problem in America is that we let financial services dominate our economy.
Wouldn't it be something is the greatest motorcycle company in the world went down because it decided to become a leveraged finance/investment company?
hiker90 - the TED spread is the easiest indicator of pure financial duress to watch. Money markets don't get a lot of financial press, so it's hard to use them as an indicator. They've also predicted 10 of the last 5 financial crises, but things are certainly looking ominous again from where I sit.
Krugman would point out however, that something different is taking place recently. Rather than mostly rewarding excellence for creativity leading to productivity, the lions share of the wealth of our economic engine is being devoured by a small group, acquiring billions of dollars using mathematical and legal formulas that exploit inequities in our financial, and tax system.
Robert Reich railed against what he called "paper entrepeneurialism" some 25 years ago (in The Next American Frontier)
I was at a meeting last week where we were going over cost reduction ideas... the company I work for was making a proposal to our customer on the current status of the program... it was during question & answer that our customer suggested we propose solutions. We countered with:
"We can do that but almost every solution we can think of will require additional tooling outlays - would your management approve them?"
Their answer was "Yes, IF there was an acceptable return on that investment."
We asked them if they could give us guidance on what 'acceptable return' is and they said... "Considering the current lending environment we would need to see a payback in less than a year, to be certain it passed review... more like nine months".
WOW. I haven't seen hurdles that high since the 80s when I had a money market account paying me 18% a year.
This is from a company doing about $10 billion in revenue per year... the product is expected to be in the marketplace for 10 years or more and yet they still require >100% payback on any new investments.
Was it business optimization or incrementalized returns on capital? In hindsight it's fairly easy to see what cleaning out inefficiency has done couple with the expectation of ever increasing returns.
How safe are GMAC Demand Notes? They are similar to a money market fund, backed by GMAC. Currently paying 5%, but not insured. Also, 51% of GMAC was bought by Cerberus a couple years ago. Should I be worried? Would you move the money to a bank FDIC insured CD? Thanks.
Uno.
Wow.
Gonna' catch some gnarly waves, duuuude.
And away we go.
YouTube -
Just substitute "All of America" for "matt damon" with Sarah Silverman as understudy for BB
I just listened to an excellent interview with Kevin Phillips on the Diane Rehm show. Great and blunt interview. He really laid into Greenspan too.
I recommend it.
Don't waves come in groups of seven?
Corporate debt really is much riskier than it was a few years ago. In order to take advantage of the cuts in the capital gains and dividend rates, companies are using debt to finance share buybacks and dividends.
So these increased spreads may be the market's way of saying that the rating companies are not downgrading corporate debt fast enough rather than a sign something is wrong with the market.
What I find interesting is this graph. It shows how today's problems are very different from the 2001 recession. Then, only A2/P2 non-financial spread increased, obviously due to the increase of the risk of default. Both AA financial and AA asset-backed were on par with AA non-financial. It means that the market believed in the ratings.
But in August 2007, not only A2/P2 spread increased, but also the AA asset backed one. Nevertheless, AA financial was still on par (with short bumps) with the AA non-financial until roughly the Bear Stearns fiasco. And now, it also trades with a premium. So we have the AA non-financial (good), the AA financial (bad) and the AA asset-backed (ugly). Well done rating companies. It's good to note that the AA non-financial is a minor fraction
of the commercial paper market so most of the market is traded with a significant premium.
What I find also remarkable is that all of the papers yield real loss with 4.0% CPI. Thank you, Mr. Bernanke. Pensioners are likely thrilled by that.
Looks like an seismograph as the Big One is about to hit...
However, short-term treasury yields are rising.
CR, you have to stop hero-worshiping at the throne of Prof. K.
AlBNYC, they both high five each others' posts.
Krugman is a poser
Here's the link to today's NY Post story about Talbots.
TALBOTS TEETERING - NYPOST.com
CP is unsecured corporate debt.
In Talbot's case, what the banks are cutting off is higher up the food chain, LC debt secured by inventory. In fashion, inventory usually is considered pretty good collateral, no?
But not now for Talbots.
Talbots, a money-losing small-cap company, still has a stratospheric P/E ratio. It only becomes sane if you assume the company can turn around to profitability on a dime.
For a lot of small-caps, even secured credit is now obtainable only at very high costs. The financing deals are getting so screwy it's hard to know what the real costs of capital is, but for a company like Talbots it could be 15-20% interest equivalent.
Using discounted cashflow analysis to value companies, you would discount projected future earnings by this cost of capital. The higher the cost of capital is, the less the company is worth. On a DCF basis, Talbots is probably not worth more than half its current market cap of about $400 million.
It shows what a huge disconnect there is between small-cap debt markets and equity valuations. Talbots is already $600 million in debt.
Bankers may be questioning whether Talbots' major asset, inventory, is worth what is shown on the books ($350 million). But the stock market "knows" the inventory is golden and will be turned very soon.
Talbots common stockholders are bagholders.
If you sit in a major bank trading room and trade the fundamental cash and derivative products that drive the interbank fixed income trading world, which I've done for about 15 years now (including being on the hotseat during the Asian crisis), one gets the sinking feeling from watching a number of fundamental relationships absolutely break down over the past couple of days that the third wave is indeed about to arrive, and this one will be the tsunami. The level of complacency about the financial system reflected by the stock market of late really astounds me.
It ain't just here either:
Vacant Homes in U.K. Prove Speculator Nightmare as Losses Mount - Bloomberg.com
But the Fed or the government is just going to bail out all the big corps anyway, and Wall Street understands that now.
Thanks for your insights, Turbo!
Citi CEO Pandit to cut cost base by up to 20%: report
Citi cost cuts likely in info technology, operations: report
AlBNYC wrote:
"CR, you have to stop hero-worshiping at the throne of Prof. K."
AlBNYC | 04.17.08 - 1:21 pm | #
what AlBNYC really meant was he doesn't like or doesn't agree with what the economist Paul Krugman has to say.
But rather than single out a position of Krugmans' and debating it with us, AlBNYC chooses to subtly insult CR by ACCUSING him of hero-worship before a throne.
this kind of name calling is reprehensible and disrespectful to CR who, by my estimation runs one of the best blogs to be found anywhere...fact based and where all intelligent arguments welcome.
AlBNYC, if you are a gentleman or a gentlewoman you should withdraw your comment against CR as a matter of honor.
The cost cuts suggest that Citigroup may shed more jobs than the 25,000 analysts estimates
Citi CEO Pandit to cut cost base by up to 20%: report - MarketWatch
Turbo,
Definitely a huge level of complacency. I'm expecting some thrifts to go down any day now (Downey and FirstFed in California are trading like their about to blowup).
Talbots common stockholders are bagholders.
rich | 04.17.08 - 1:44 pm | #
Why do I picture a "baglady" in a well tailored suit?
CR- Usually waves come in sets. During a good swell you might have up several waves in a set. Most of the time there is one particulary large wave in the set. If you live in Port Au Prince, Riverside, Ca or Egypt you've been caught inside, broken your leash, lost your board and are trying not to drown. If your in the U.S. your paddling for your life- the problem is there are more waves coming and one of them is bigger than the rest. Cheers
"Workers at the GM plant were set to go on a strike of their own Thursday morning over local labor issues. But it was not clear if that strike would happen, since the GM workers might now be temporarily laid off and won't be able to walk off their jobs."
GM plant partially halts production due to strike
Relax, Turbo. No insult intended or delivered. I'm not that subtle and a strong supporter of this blog.
But, Krugman, like Roubini, who is often quoted here, is an ultra bear, and one with an open political bias. That merits some discount, in my eyes. No different that the neocon "goldilocks" economy nuts.
Talbots' inventory has been dished by fashionistas last few years - as too conservative/old ladyish. The store is aiming to change that image, but might not have the chance if it can't get financing.
This is no time for a retailer to have 2 problems at once. Easily fatal.
oops, meant Mock Turtle. No dis, Turbo.
"as a matter of honor"
for a minute there i thought mock was going to challenge AlBNYC to a duel.
So Turbo, is the market simply frozen, or are there transactions... at 50% volume?
Trying to solve the financial industry's structural problems with more interest rate cuts would only worsen the situation by raising inflation, Dallas Federal Reserve Bank President Richard Fisher said on Thursday.
"I have maintained a strong reluctance to further general monetary accommodation," Fisher said in prepared remarks to the Chicago Council on Global Affairs.
Fisher has dissented against the last two Federal Open Market Committee decisions to lower benchmark lending rates.
He has argued in recent speeches that lower rates will not boost economic activity until the "pipes" of the U.S. financial system are totally flushed out.
"The answer ... is not to compound the bad by repeating the oft-prescribed remedy of inflating our way out of our predicament with a wing-and-a-prayer promise that it can always be reined in later," Fisher said.
Don't inflate out of financial mess: Fed's Fisher
| Reuters
Watch what they do not what they say.
"Krugman ... is an ultra bear,"
I'd love to see you back this up.
The guy served as a consultant to Enron and was part of the Bush administration Council of Economic advisors. He is also an ardent support of globalization and "new economic models".
I have a feeling CR is going to be all right. "Sticks and stones may break my bones, but words can never hurt me."
Please Connect the following; Higher short term interest rates in the United States, Higher LIBOR rates, rising inflation flat equity prices.
Krugman is, and has been for a long time, been right about just about everything.
The fact that he's a progressive DEm really gets under the skin of the AlBKUDLOW's of the world.
Turb's warning is exactly the same one I got this morning from a family member in Sweden. Finance Professionals on two continents see big trouble. Now!
Turbo and Viewing:
Can you please be more specific. I am not familiar with the issue. Thanks.
The stock markets are a joke at this point. Who in their right mind sees a bargain in the broader market, i.e. in the S&P as a whole?
I wouldn't touch financials of any sort with a 10' pole, and would keep my distance from the rest of the market for now.
Or did we just see a lot of IRA buying by the ignorant? To wit, I dropped $4K in the IRA on Monday, and got around to picking a home for it today.
In my case it's a 3 month CD. To anyone who takes the advice of the bank's guy (eg the Smith Barney rep in the Ciiti branch) . . . look out!
But I suspect a lot of people will learn the hard way, after their tax savings and then some are quickly devoured by bad investment choices.
Turbo, what relationships are breaking down?
Barley,
There are transactions going though, but I'd honestly say volume is 30% of what it was at this time last year when markets were "normal."
The problem right now is that it's very difficult to fund most entities, and the relationships between cash and derivatives used to price a number of products have become so unstable that the markets are very close to freezing up. The velocity of money in the financial system is decelerating massively at the moment, and it can only be a matter of time now before the banks, hedge funds and main street businesses operating on the edge financial start to go under in waves.
I'd gone over to the mildly bullish camp for a while, but things really are deteriorating very rapidly again. The money market was the canary in the coal mine last year, and it's actually feeling worse now.
I believe the highest CP rating from Moody's & S&P is A-1+/P-1. AA refers to long-term ratings which are for obligations longer than a year. However I get your point. High quality CP is trading well inside of A-2/P-2 paper.
Then again, Moody's and S&P's ratings are only as good as how much are the issuer's are willing to pay them in potential fees.
Krugman is a poser
Anonymous | 04.17.08 - 1:42 pm | #
And you have also won the John Bates Clark award?
I wouldn't get so bent up about Krugman. He's a good economist who also enjoys getting silly on his blog (to my delight).
Just now Krugman points to this article about CERN. Talks about a new particle accelerator that may accidentally create a black hole on earth, dooming us all, and the lawsuit directed at halting its operation. Great rhetorical descriptions: "it could spit out something called a 'strangelet' that could convert our planet to a shrunken dense lump of something called 'strange matter'." Really this is an excellent metaphor for all kinds of human mischief, from financial and to ecological.
AlBNYC wrote:
"Relax... No insult intended or delivered. I'm not that subtle and a strong supporter of this blog."
mock turtle responds
i appreciate that. maybe i over-reacted, but, probably like you and others here i have a great respect for CR (AND Tanta) for what they have done here for all.
now i understand you feel that way too.
as for krugman...yeah he has been very bearish during these years of increasing deficit spending and concentration of wealth in the hands of the top 5% or less.
i appreciate some take issue with his politics, i respect differences of opinion.
i like to see the acquisition of wealth, and bet so does krugman...the idea being a highly successfull professional that makes millions of dollars a year, or an entreprenueaur that amasses billions, can be, and has been an engine of economic dynamism in our society.
Krugman would point out however, that something different is taking place recently. Rather than mostly rewarding excellence for creativity leading to productivity, the lions share of the wealth of our economic engine is being devoured by a small group, acquiring billions of dollars using mathematical and legal formulas that exploit inequities in our financial, and tax system.
Barley, Turbo's deacription was what I also had reported to me from Europe today. Freeze up was the term of art.
las, let us pray the physicists working on the CERN reactor are NOT the same ones who were buiding CDO quant models.
mock turtle @ 3:12
Yes! At least the robber barons of the last couple gilded ages actually built something.
These guys are a pack of free-riding parasites on the system.
20 trillion increase in notional
no problemo, amero.
new particle accelerator that may accidentally create a black hole on earth
I knew it, they already did it! That's where the keys to my office room went this morning!!
and mock, i do agree with you...the brains are going to efforts to game the system instead of producing something from the system. Not a good use of talent. The system, however, is now having its revenge.
Mock Turtle
Amen to that last sentiment, especially.
Peace.
Gary,
exactly, i agree.. JD Rockefeller, Andrew Mellon, Ford etc...these were tough, bare knuckles capitalists...not friends of the labor movement,but man they did build an empire of productivity.
now we seem to be compensating at the highest levels, managers who shuffle money in brilliant but often deceptive ways. what's that gonna get us as a nation?
lost
Gary writes:
las, let us pray the physicists working on the CERN reactor are NOT the same ones who were buiding CDO quant models.
Actually, those who can't cut it making stranglets are encouraged to go work on wall street making cdos. Finally, if they do poorly on regular cdos, they are given synthetic cdos.
Anybody else find it interesting that JPMorgan is raising cash at unfavourable rates?
Also, RBS has now joined the crowd of banks looking for a few billion.
Thanks for sharing. But... it's barely, not Barley
tomato...Tomahto
Turbo,
Other than the A2/P2 spread, is there public data that can add to the illustration of what you are seeing? Relationships between cash and derivatives seems to this neophyte a very dark corner of the finance world. Any light you can shine would be greatly appreciated.
Thanks,
las, let us pray the physicists working on the CERN reactor are NOT the same ones who were buiding CDO quant models.
I don't know. I'm thinking there's a market for a security that disappears without a trace on it's own, sucking in others with it
Bank of America Corp. (BAC) is stopping private student lending, becoming the latest firm to do so as companies are bailing out of providing such loans, though the nation's largest bank said it will continue providing government-backed student loans
Peak Educatio
Tiny black holes are very different from galactic black holes. Galactic ones consume mass around them; tiny particle-sized ones rapidly spit out mass as they evaporate away.
Strangelets are in principle much more dangerous than tiny black holes; but luckily, they are hypothetical, not theoretical. That is, if a whole large collection of conditions were met, strangelets might be physically possible, and if they were, they would be very dangerous. However, the continued existence of the moon is pretty clear evidence that these conditions cannot be met in our universe. So strangelets aren't really possible, so they aren't really dangerous.
OT
I normally respect what Theroxylander writes. Today, he says Harley Davidson (HOG) is the canary in the coalmine. When it's stock turns up, the market may be bottoming.
Maybe...
But I don't think he understands how HOG has changed. And maybe its stock won't turn up for a longtime.
HOG used to be a motorcycle company.
Over the past 3-4 years, it's become mainly a leveraged finance and investment company.
Why does a motorcycle company need to own $2.5 billion of its own finance receivables (notes on motorcycles)?
And why has it borrowed over $2 billion to finance (leverage) those investments? Why did it ener into swaps to convert fixed-rate debt into floating rate pegged to LIBOR? And what could the swaps end up costing?
HOG reported sharp weakening in its receivables portfolio in 2007. But what hit could its portfolio take if motorcycle owners start doing jingle mail in droves in 2008-09?
Could HOG become to motorcycles what CFC was to housing?
John Bogle said the biggest problem in America is that we let financial services dominate our economy.
Wouldn't it be something is the greatest motorcycle company in the world went down because it decided to become a leveraged finance/investment company?
hiker90 - the TED spread is the easiest indicator of pure financial duress to watch. Money markets don't get a lot of financial press, so it's hard to use them as an indicator. They've also predicted 10 of the last 5 financial crises, but things are certainly looking ominous again from where I sit.
ipodius, they're still working out the bugs on that one. So far, they've only been able to make the value disappear.
So strangelets aren't really possible, so they aren't really dangerous.
Damn, and i was going to use this for the next quarterly set of financials to the board....
You know they don't exist, and I know, but ask yourself this, ipodius: do you think the board knows?
Go for it and grab that bonus!
Third wave? Must be the 3rd or 4th inning of a 9 inning game. Shoot, at some stadiums, the wave would go around the park at least 6 or 7 times........
Krugman would point out however, that something different is taking place recently. Rather than mostly rewarding excellence for creativity leading to productivity, the lions share of the wealth of our economic engine is being devoured by a small group, acquiring billions of dollars using mathematical and legal formulas that exploit inequities in our financial, and tax system.
Robert Reich railed against what he called "paper entrepeneurialism" some 25 years ago (in The Next American Frontier)
So it's been a long time a-comin'....
Barely Barley. Works for me. Sorry.
My indicator of tight money?
I was at a meeting last week where we were going over cost reduction ideas... the company I work for was making a proposal to our customer on the current status of the program... it was during question & answer that our customer suggested we propose solutions. We countered with:
"We can do that but almost every solution we can think of will require additional tooling outlays - would your management approve them?"
Their answer was "Yes, IF there was an acceptable return on that investment."
We asked them if they could give us guidance on what 'acceptable return' is and they said... "Considering the current lending environment we would need to see a payback in less than a year, to be certain it passed review... more like nine months".
WOW. I haven't seen hurdles that high since the 80s when I had a money market account paying me 18% a year.
This is from a company doing about $10 billion in revenue per year... the product is expected to be in the marketplace for 10 years or more and yet they still require >100% payback on any new investments.
Now THATS what I call a credit squeeze.
Was it business optimization or incrementalized returns on capital? In hindsight it's fairly easy to see what cleaning out inefficiency has done couple with the expectation of ever increasing returns.
This turnip is dry.
Anonymous and AIBNYC are correct. Pay no attention to Krugman. He is SHRILL! and wrong about the bush administration since 2000.
and wrong about the bush administration since 2000.
Any examples you're specifically thinking of?
How safe are GMAC Demand Notes? They are similar to a money market fund, backed by GMAC. Currently paying 5%, but not insured. Also, 51% of GMAC was bought by Cerberus a couple years ago. Should I be worried? Would you move the money to a bank FDIC insured CD? Thanks.