Autos, Buy Backs & LBOS
From Roger M. Kubarych Henry Kaufman Adjunct Senior Fellow for International Economics and Finance; Council on Foreign Relations.
Mr. Kubarych gives three reasons for "Why aren't US Businesses investing more?"
Kubarych Reason #3: "Private equity firms...have been acquiring and restructuring a growing number of public companies. In fact, a big portion of net equity withdrawal is directly related to public companies being taken private."
Said private equity firms have been borrowing funds to make these leveraged buyouts (LBO's). Said debt market has recently dried up due to rising risk premiums.
Kubarych Reason #2: "Net withdrawal of equity by non-financial corporations reached a record $600 billion in 2006, almost doubling the previous peak withdrawal of $363 billion in 2005.
By comparison, in 2002-2004, net withdrawals averaged just $70 billion a year. Most companies that buy back their stock finance their purchases from current earnings, but many use borrowed funds."
David Rosenberg, chief North America economist at Merrill Lynch: "Earnings growth is running at 6% and would be 19%."
The Nattering One muses... so, profits are already down 66%, and the worst is yet to come...
Again! That trick never works... David Rosenberg: Despite the improvement in the second quarter, the economy is "on a clearly weakening trend. The downturn in the housing market is going from bad to worse; of that there is no doubt."
Economists at Moody's Economy.com predicted Thursday that: "the housing downturn would extend into late next year and mortgage delinquencies, currently 2.9% of all mortgage debt, would peak at 3.6% next summer.
Home foreclosures on adjustable-rate sub-prime loans will hit 10% and 20% on such loans made late last year, when lending standards were particularly slack."
As reported yesterday: "the housing ATM spigot is shut, as consumers have taken about $400 billion less equity out of their homes than in the previous year."
Northern Trust economist Asha Bangalore: "The impressive pickup in economic growth in the second quarter is a temporary event.
The elimination of "equity withdrawal," which generated huge amounts of cash for Americans in recent years, "is the main reason for the weakness in consumer spending.
And there's little reason to believe this will change in the second half of 2007."
Kubarych Reason #1, Did you think we forgot? While most corporations are doing well, not all are making substantial profits.
And in one key sector — motor vehicles and parts — firms continue to make huge losses.
Operating losses of US auto and parts manufacturers came to $17.9 billion both last year and the year before. Almost all of the major parts makers are in bankruptcy.
We reported yesterday... General Motors sales fell 22%, Ford fell 19% and Chrysler 8%; even Toyota, a 7% decline.
From Minyanville:
Again! That trick never works... David Rosenberg: other months where auto sales were down double digits include:
a 12% year-over-year decline in Dec. 2000; a 10.8% decline in April 1990; a 10.8% decline in July 1981; and an 11.1% decline in Dec, 1979.
What do all of those months have in common? According to Rosenberg they were three months or less away from the official start of an economic downturn.
From Dr. Dave Altig at Macroblog:
"So you have your pick -- weak economic news, a broadening of housing market woes, a fading corporate debt market.
Or just choose all of the above and keep your fingers crossed that it's only a bad week and not a perfect storm."
The Nattering One muses... connecting the dots and making the full circle...
LBO market (stock market driver) dried up; leveraged borrowing for stock buybacks (another valuation driver) crimped;
so far, housing ATM spigot $400 Billion lite; consumer spending down, earnings growth 66% lite;
housing sector and market values (the main driver of the economy since 2000) in a downward spiral and far from bottom;
automotive going off a cliff and indicative of a coming economic downturn;
Question: What will happen to companies, bond holders, and markets...where stock buybacks and LBO's where purchased with borrowed funds...
if there is a further drop in earnings growth; the debt gets rerated and/or the debt can't be serviced?
Mr. Kubarych gives three reasons for "Why aren't US Businesses investing more?"
Kubarych Reason #3: "Private equity firms...have been acquiring and restructuring a growing number of public companies. In fact, a big portion of net equity withdrawal is directly related to public companies being taken private."
Said private equity firms have been borrowing funds to make these leveraged buyouts (LBO's). Said debt market has recently dried up due to rising risk premiums.
Kubarych Reason #2: "Net withdrawal of equity by non-financial corporations reached a record $600 billion in 2006, almost doubling the previous peak withdrawal of $363 billion in 2005.
By comparison, in 2002-2004, net withdrawals averaged just $70 billion a year. Most companies that buy back their stock finance their purchases from current earnings, but many use borrowed funds."
David Rosenberg, chief North America economist at Merrill Lynch: "Earnings growth is running at 6% and would be 19%."
The Nattering One muses... so, profits are already down 66%, and the worst is yet to come...
Again! That trick never works... David Rosenberg: Despite the improvement in the second quarter, the economy is "on a clearly weakening trend. The downturn in the housing market is going from bad to worse; of that there is no doubt."
Economists at Moody's Economy.com predicted Thursday that: "the housing downturn would extend into late next year and mortgage delinquencies, currently 2.9% of all mortgage debt, would peak at 3.6% next summer.
Home foreclosures on adjustable-rate sub-prime loans will hit 10% and 20% on such loans made late last year, when lending standards were particularly slack."
As reported yesterday: "the housing ATM spigot is shut, as consumers have taken about $400 billion less equity out of their homes than in the previous year."
Northern Trust economist Asha Bangalore: "The impressive pickup in economic growth in the second quarter is a temporary event.
The elimination of "equity withdrawal," which generated huge amounts of cash for Americans in recent years, "is the main reason for the weakness in consumer spending.
And there's little reason to believe this will change in the second half of 2007."
Kubarych Reason #1, Did you think we forgot? While most corporations are doing well, not all are making substantial profits.
And in one key sector — motor vehicles and parts — firms continue to make huge losses.
Operating losses of US auto and parts manufacturers came to $17.9 billion both last year and the year before. Almost all of the major parts makers are in bankruptcy.
We reported yesterday... General Motors sales fell 22%, Ford fell 19% and Chrysler 8%; even Toyota, a 7% decline.
From Minyanville:
Again! That trick never works... David Rosenberg: other months where auto sales were down double digits include:
a 12% year-over-year decline in Dec. 2000; a 10.8% decline in April 1990; a 10.8% decline in July 1981; and an 11.1% decline in Dec, 1979.
What do all of those months have in common? According to Rosenberg they were three months or less away from the official start of an economic downturn.
From Dr. Dave Altig at Macroblog:
"So you have your pick -- weak economic news, a broadening of housing market woes, a fading corporate debt market.
Or just choose all of the above and keep your fingers crossed that it's only a bad week and not a perfect storm."
The Nattering One muses... connecting the dots and making the full circle...
LBO market (stock market driver) dried up; leveraged borrowing for stock buybacks (another valuation driver) crimped;
so far, housing ATM spigot $400 Billion lite; consumer spending down, earnings growth 66% lite;
housing sector and market values (the main driver of the economy since 2000) in a downward spiral and far from bottom;
automotive going off a cliff and indicative of a coming economic downturn;
Question: What will happen to companies, bond holders, and markets...where stock buybacks and LBO's where purchased with borrowed funds...
if there is a further drop in earnings growth; the debt gets rerated and/or the debt can't be serviced?
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