“You’re ticked off about the bank bailouts. You think somebody–other than you and your fellow taxpayers–needs to pay. Let’s try to work out who that somebody ought to be. … Which leaves … the folks who loaned the banks money. The banks’ creditors have been the clearest beneficiaries of the bailouts–leaving them with the wherewithal to contribute. … But banks also borrow on wholesale markets, mainly by issuing bonds. About $2.6 trillion of bank funding in the US, 20% of the total, comes from such debt securities, according to the FDIC. … It may be too much to ask small depositors to monitor the risks at the banks where they out their money and pay for getting it wrong. But these bond buyers are pros. … If Citi’s $486 billion in wholesale debt were converted into common shares–admittedly a pretty extreme situation–the company’s balance-sheet woes would evaporate”, my emphasis, Justin Fox at Time, 23 March 2009.
Until bondholders have the right to inspect banks’ books, there is no meaningful way they can monitor the banks activities. However, I agree bondholders should have taken a haircut on their bonds as opposed to taxpayers bailing out the banks. Why would converting Citigroup’s $486 billion in debt into common stock be “a pretty extreme situation”? That’s what happens in bankruptcy courts every day.
March 31st, 2009
The median free cash flow for nonfinancial companies could sink by 50% during the next year, especially if the recession continues to choke revenue streams, a new report says.
Up until now, cash-flow margins — free cash flow measured as a percentage of revenue — have remained flat. But recessions have a way of eating away at that ratio, says Charles Mulford, director of the Georgia Tech Financial Analysis Lab and co-author of the study.
Mulford and two co-authors, graduate research assistants Sohel Surani and Jason Blake, analyzed the cash-flow trends of 20 nonfinancial industries, comprising 61 subindustries, for a series of rolling 12-month periods from the first quarter of 2000 through the third quarter of 2008. They plan to track the same indicators each quarter going forward.
The first report, which will be released next week, notes that after bottoming out below 2.5% during the 2001 recession, free cash margin “improved markedly” and has remained relatively stable, hovering above 4.5% since 2002. During the 12 months ended September 2008, the margin dipped slightly below 4.5% to the low end of its recent range. But the authors expect that the current recession will push the margin down to the 2001 recession level or lower — which could mean a 50% drop in free cash flow.
Free cash flow has no strings attached: it is the discretionary cash that companies can use, without disrupting operations, to pay dividends, buy back stock, retire debt, or invest in an acquisition. As a percentage of revenue, the free cash margin is essentially a cash-flow profit margin that indicates what percent of revenue is left for shareholders in the form of discretionary cash flow, the authors say.
The study looked at 3,429 companies, each with a current market capitalization of $50 million or more. Despite the authors’ prediction that the median free cash margin is set to drop precipitously, they saw an improving margin in seven industries for the 12 months ending September 2008 compared with the year before. The industries? Energy, transportation, media, retailing, food and staples retailing, pharmaceuticals/biotechnology/life sciences, and technology hardware and equipment.
The report highlights the pharmaceuticals/biotechnology/life sciences sector, noting that free cash flow grew in that sector by nearly 2 percentage points, from 7.4% to 9.15% for the 12 months ending September 2008. What’s more, four Standard and Poor’s 500 companies from the sector boasted particular improvement: Abbott Laboratories, Bristol-Myers Squibb, Eli Lilly, and Millipore Corp.
In the other industries examined, five companies held steady, while eight groups registered declines in free cash margins: materials, capital goods, automobiles and components, consumer durables and apparel, food/beverage/tobacco, household and personal products, telecommunications services, and utilities. Of those that declined, the materials group stood out, with an overall free cash margin decline to 2.42% for the 12 months ending September 2008, down from 3.68% for the same period the previous year — and down from nearly 4% during the 2001 recession.
The materials group includes the subcategories of chemicals, construction materials, containers and packaging, metals and mining, and paper and forest products. Three companies in that industry were highlighted in the report: AK Steel Holding, Alcoa, and Weyerhaeuser.
All industries, 2002-2008
Materials industry, 2002-2008
http://www.cfo.com/article.cfm/13396210/?f=rsspage
March 30th, 2009
A reassuring new story line is emanating from our leaders. I heard Representative Barney Frank, chair of the House Banking Committee, explain it. Then I read the same line in a Washington Post news story. That tells me people in high places are selling it. Dynamic capitalism, they explain, invents ways to create greater wealth, but sometimes it goes a little too far. Then government has to step in to correct things. This need typically occurs every generation or so, all in a day’s work. The Obama administration is proposing “sweeping” new regulatory laws so that capitalism can continue its good works.
The story makes disturbing current events sound practically normal. But what are the storytellers leaving out? They aren’t saying that this financial catastrophe was not merely an inevitable development of history but a man-made disaster. Greedheads on Wall Street did their part, but so did Washington. The reason we need new rules is that a generation of Democrats and Republicans systematically repealed or gutted the old ones–the regulatory controls enacted eighty years ago to remedy the last breakdown of capitalism (better known as the Great Depression).
The White House executed a nifty two-step this week to re-educate the public and deflect anger. On Tuesday Treasury Secretary Timothy Geithner relaunched the massive bailout of banking and finance. Knowing how unpopular this is with the people at large, Geithner followed on Thursday with his “sweeping” plans to re-regulate the bankers and financiers. Whenever official plans are called “sweeping,” it indicates that they really, really mean it this time.
Most Americans are not financial experts. It’s very difficult, nearly impossible, for normal mortals to sort through the dense policy talk and conflicting opinions to figure out if the rhetoric of reform is real. Confusion is widespread in the land. Most Americans want to believe this president is leading us out of the swamp, but how can they know? I say, trust your gut feelings. They are as reliable as the learned experts.
Many Americans want to believe because they think that returning to “normal” means their decimated 401(k) accounts might somehow recover the 30-40 percent that disappeared during the past year. If it takes monster bank bailouts to restore stock-market prices, let’s have bailouts. Good luck with that. The Dow has regained 21 percent in two weeks of rallies, but I remind friends that steep, short bursts in the stock market do not foretell the future of the economy. Banks may be relieved of their losses without changing the general economic outlook. After the crash of 1929, there were occasional stock rallies, followed by fierce bears. It took twenty-five years (until 1954) for the Dow to regain its old peak. Another way to assess the Obama plan for reform is ask: who likes it? The verdict was swift and sure after Geithner’s twin announcements. Wall Street likes it. The blueprint for regulatory reforms was applauded by the Securities Industry and Financial Markets Association; the American Insurance Association; and the Private Equity Council, the trade group for the major private funds that will get public money and backup insurance to buy the banking system’s rotten assets. This could be born-again patriotism. Or it could be the animal appetites of financiers smelling gorgeous opportunity for returns.
/http://www.thenation.com/doc/20090413/greider
March 30th, 2009
I have been in financial management specializing in the construction industry for over 20 years now and I am proud to be the Financial Controller for HUGH O’KANE ELECTRIC COMPANY, INC http://www.hokane.com/index.html and Lexent Metro Connect, LLC Lexent Metro Connect, LLC
I have decided to initiate a blog that addresses the complex financial, accounting and general business issues that confront our society. These issues vary in content and complexity but there has been no time in the past half century that has had a greater need for the identity of these issues and their clarification. This is a start.
Thank you,
Brian John Schuettler
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March 30th, 2009
