Category Archives: Business

On Closer Inspection, Debt of Bankrupt Spanish Construction Firm Grows Four-Fold, by Don Quijones

You often don’t know how indebted a struggling company is until it files for bankruptcy and creditors come crawling out of the woodwork. From Don Quijones at wolfstreet.com:

Spain appears to have a brand-new Abengoa — the imploded energy giant whose fabulous accounting tricks pushed creditors into a black hole — on its hands: Isolux was until recently a fairly large privately owned infrastructure company with operations spanning the globe.

When the group declared bankruptcy last July, its cash flow in Spain was barely enough to cover a month’s operating costs. The group had a a total workforce of 3,884 and 119 infrastructure projects under development of which 39 were still operational and the remaining 90 had been halted.

The company tried to reduce its debt addiction through agreements with investment funds but they fell through. It also made two attempts to go public, in Brazil and Spain. Both failed.

The bankruptcy proceedings affected seven subsidiaries. At the time, the company stated that it owed €405 million to suppliers, that its total financial debt — including those companies not included under the Spanish Insolvency Act filing — was €1.3 billion, of which €557 million was associated with project financing, and that the total deficit on the group’s balance sheet was about €800 million.

Turns out, according to the bankruptcy receivers, the shortfall is actually €3.8 billion — four-and-a-half times the company’s original estimate — and the group’s total debt, at €5.7 billion, is over €4 billion more than the amount stated by the company 10 months ago.

This amount does not include the group’s dual or contingent liabilities. The receiver’s report concludes that the current situation will probably culminate in the liquidation of the entire group.

How did all this come to pass? According to the receiver’s report, the collapse of the real estate bubble in Spain and the drastic reduction in public work tenders during the crisis led Isolux to massively expand its international operations, as many large Spanish companies did in the aftermath of the housing bubble collapse.

To continue reading: On Closer Inspection, Debt of Bankrupt Spanish Construction Firm Grows Four-Fold

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Our Approaching Winter of Discontent, by Charles Hugh Smith

Don’t wait to batten down the hatches until the storm is at the front door, especially when the storm is inevitable. From Charles Hugh Smith at oftwominds.com:

The tragedy is so few act when the collapse is predictably inevitable, but not yet manifesting in daily life.
That chill you feel in the financial weather presages an unprecedented–and for most people, unexpectedly severe–winter of discontent. Rather than sugarcoat what’s coming, let’s speak plainly for a change: none of the promises that have been made to you will be kept.
This includes explicit promises to provide income security and healthcare entitlements, etc., and implicit promises that don’t need to be stated: a currency that holds its value, high-functioning public infrastructure, etc.
Nearly “free” (to you) healthcare: no.
Generous public pensions: no.
Social Security with an equivalent purchasing power to the checks issued today: no.
As for the implicit promises:
A national currency that holds its value into the future: no.
High-functioning public infrastructure: maybe in a few places, but not something to be taken for granted everywhere.
A working democracy in which common citizens can affect change even if the power structure defends a dysfunctional and corrupt status quo: no.
A higher education system that prepares its graduates for secure jobs in the real-world economy: on average, no.
Cheap, abundant fossil fuels and electricity: during recessionary head-fakes, yes; but as a permanent entitlement: no.
High returns on conventional capital (the kind created and distributed by central banks): no.
A government that can borrow endless trillions of dollars with no impact on interest rates or the real economy: no.
Pay raises that keep up with real-world inflation: no.
Ever-rising corporate profits: no.
You get the idea: the status quo will be unable to keep the myriad promises made to the public, implicitly and explicitly. The reason is not difficult to understand:
Governments jealously protect their right to create currency (“money”) out of thin air. This is known as seigniorage. Technically, it’s the profit earned by issuing “money” with a market value above the cost of production. For example, if a $100 bill costs 10 cents to produce, the central state’s seigniorage is $99.90.

The Last Redoubt? by Eric Peters

The little known story about how government regulation brought America the SUV. From Eric Peters at theburningplatform.com:

Some of you may remember station wagons.

Before SUVs and crossovers – before minivans – station wagons were the family car of choice for millions of American families. They were as everywhere as SUVs and crossovers are today. As minivans were, before SUVs and crossovers supplanted them.

Wagons were natural things, created as the result of market demand for them. They were in demand because they could comfortably carry more than five people and a bunch of stuff in the back plus pull a trailer, if the need was there. Such attributes appeal to families, to people who have kids and often have to cart around other people’s kids, too.

The big wagons were based on the big sedans that were dominant at the time – the time being the ’60s and ‘70s.

This was the time before government got into the business of dictating to the car industry how many miles-per-gallon cars would have to deliver in order to avoid being fined for noncompliance. When cars were designed to meet buyer – rather than government – demands

 When that reversed, the car business hit the equivalent of a patch of black ice and skidded in a different – and unplanned – direction. Station wagons disappeared almost overnight, because the large sedans they were based on had been fatwa’dout of existence by fuel economy mandatory minimums which made them too expensive to build, due to the “gas guzzler” taxes heaped on them.

But – at the time – there was an end-run.

Pick-up trucks were not yet subject to the fatwas – which only applied to passenger cars. It occurred to someone at one of the car companies – it was Ford that hit paydirt first – that pick-ups share the same basic attributes which made large sedans – and the station wagons spun off from them – so popular with the market. The were big and had lots of room inside. They had big engines.

And they were rear-wheel-drive.

Exactly like the big sedans and wagons extincted by fatwa. Just with a bed out back, open to the elements.

Well, how about we enclose that bed? Lay down some carpet, bolt seats to the floor? Add extra doors?

To continue reading: The Last Redoubt?

Infrastructure Plan Is Dominated by Profits for Wall Street, by Leonard Hyman and Bill Tilles

Trump’s infrastructure plan is more concerned with its financing than what will actually be built. From Leonard Hyman and Bill Tilles at wolfstreet.com:

Private equity tail wagging the public infrastructure dog?

About two years, we came across an article discussing infrastructure in a relatively obscure engineering journal. The authors of the piece were Wilbur Ross, now Commerce Secretary in the Trump cabinet, and Peter Navarro, a Trump economic advisor.

What struck us about the piece, supposedly elaborating their infrastructure plan, was that there was really nothing in particular that they wanted to build – nothing that would excite the imagination: no space race, or federal highway initiative, and heaven forbid certainly no new deal.

Thinking about it in accounting terms, the asset side of their infrastructure balance sheet was a compete blank. But the liability side of the ledger was the real focus of the Ross/Navarro exercise. They provided an answer to a question that almost no one was asking: How much leverage can one get away with and still control a federal infrastructure project? Their answer was 6-to-1.

On Monday, the White House released its long awaited “Legislative Outline for Rebuilding Infrastructure in America.” It boils down to this: The federal government claims it can facilitate a $1.5-trillion program with only $200 billion of federal money. That’s a leverage ratio of 7.5-to-1. That’s it.

And they still can’t be bothered in the text to name even one actual project they care about.

But the leverage – the debt, that is – is supposed to come from state and local sources, which are not exactly flush with cash. The states could have financed many of these projects if they had wanted to by charging tolls. The document released by the White House is anything but clear on how private investors would horn in on the goodies so to speak.

But it looks as if private investors could collect incentives for their own projects and do all sorts of lease deals with the governments that financed the projects. We would expect investment firms of every stripe to be interested. Terms this generous are seldom on offer.

To continue reading: Infrastructure Plan Is Dominated by Profits for Wall Street

Retail Sales, Inflation Add Fuel to Fed’s Rate-Hike Trajectory, Treasuries Dive as Yields Surge, by Wolf Richter

The world was short Treasuries and the world was rewarded with stronger than expected stats on inflation and retail sales that sent bond prices down and yields up. 

But something funny happened on the way to the headlines.

In describing the retail-sales data released today, words like “slumps” and “declines” kept cropping up in the headlines. This referred to the seasonally adjusted month-over-month data, so the percentage change from December retail sales (peak holiday selling season) to January retail sales (peak merchandise-return season). This comparison is only possible with gigantic seasonal adjustments that try to smooth away the holiday selling peak and the post-holiday hangover in a way that, hopefully, the index ticks up a bit from December to January.

In today’s reading, this change in seasonally adjusted total retail sales – includes food services and drinking places such as restaurants and bars – ticked down 0.3% from December to January, triggering the “slumps” and “declines” in the headlines. But this figure is only as good as the seasonal adjustments. Here is what the month-over-month percentage change of total retail sales looks like not seasonally adjusted:

Not seasonally adjusted, total retail sales plunged 21% from December to January, but they plunged between 19% and 23% in prior Januaries. Hence the gigantic seasonal adjustments needed to smoothen out this wildly gyrating seasonal data.

But on a not-seasonally-adjusted basis, the year-over-year growth in total retail sales was a healthy 5.1% in January, compared to January 2017, in the same range of the year-over-year changes in prior months and at the higher end of the spectrum since 2012:

There was only tepid growth in the bar-and-restaurant business, with sales of food services up only 1.8% year-over-year. Excluding food services, retail sales jumped 5.6% year-over-year not seasonally adjusted:

To continue reading: Retail Sales, Inflation Add Fuel to Fed’s Rate-Hike Trajectory, Treasuries Dive as Yields Surge

BREAKING: Gravity Works, by Robert Gore

Are you ready for the inevitable?

Why did the stock market fall? The usual suspects are finding all sorts of “causes.” How about this one: when everyone is on the same side of the boat, driven by hope and greed or fear and loathing, the boat capsizes, no matter the economic “fundamentals” or political climate.

Since 2009 the world’s central bank’s have blown up their balance sheets and much of that newly created fiat debt found a home in equity and bond markets and cryptocurrencies. With few interruptions, most asset prices have rallied ever since.

Virtually every stock market sentiment and positioning indicator has, like the stock market itself, gone from new extreme to new extreme for months. Numerous commentators, including SLL, have been warning for months, even years. Pick a valuation measure and stocks, even after the last two weeks, are at peak valuations rivaled only by 1929, 2000, and 2007.

The only mystery was when they would give way. If they are now in fact giving way, then there’s no mystery about how bad it’s going to get. Very bad.

With the world more indebted than it’s ever been on both an absolute basis and relative to the world’s productive capacity, economies and markets are extremely sensitive to interest rates. The Treasury debt market has been the dark cloud on the horizon since short-term bill rates made their low in mid-2015. The Fed followed, as it almost always does, raising the federal funds rate target (from zero) for the first time in seven years December 2015.

That markets lead, not follow the Fed, is an inconvenient truth for the legions of commentators and analysts who routinely assert the Fed controls interest rates. It shoots a hole in a lot of theories and models. (For substantiation that the Fed follows the market, see The Socionomic Theory of Finance, Chapter 3, Robert Prechter.)

The ten-year note made its high in July 2016 and has been trending irregularly lower—and interest rates irregularly higher—since. Higher interest rates raise the cost of leveraged speculation, production, and consumption. Yet, leveraged speculators in the stock market only seem to have noticed rising yields the past couple of weeks.

Given that the government will be borrowing close to $1 trillion this year, yields are still absurdly low. Markets have been conditioned by interest rate suppression, negative yields, governmental debt monetization, QEs, central bank puts, and central banker public pronouncements to think absurdly low yields are forever. A competing hypothesis is that it’s not nice to fool Mother Nature or markets, and after nine years of this nonsense, when they blow they’re really going to blow. SLL endorses the competing hypothesis.

Small coteries of central banking bureaucrats can’t regulate or control multi-trillion dollar, yen, yuan, and euro economies and financial markets. Super-volcanic financial eruptions will expose other truths as well. Watch as rising interest rates and crashing equity markets and economies reveal central, core truths: governments are bereft of real resources, are desperate to acquire same, and will be inconceivably—by today’s standards—rapacious in doing so. That’s quite a statement, because even today they’re pretty damn larcenous.

A generalized crash will also clarify the central conflict of our time: government and it’s string-pullers, minions, beneficiaries, and cheerleaders versus everybody else. Such a characterization suggests a deepening of today’s polarization. Unfortunately, as order breaks down, it will be everybody else versus everybody else, too. Good-bye polarization, hello atomization.

And order will break down. Government always and everywhere rule by force, fraud, and intimidation, but force, fraud, and intimidation need to be paid, preferably in something that can be exchanged for groceries or shoes for the kids. History suggests that the government and central bank will depreciate (speaking of fraud) their fiat debt instruments—Federal Reserve Notes, US Treasury debt, and central bank credit balances—to their marginal cost of production, or zero.

When governments are bankrupt, their praetorians forage—a nice word for theft and extortion. They’ll be competing with hordes of foraging civilians, many of whom will be armed. In such a scenario, one identifiable group has a fighting chance, and it will involve fighting and lots of it. That, of course, is the group who have either been preparing for such a scenario for years or have the skill set and mental fortitude necessary to adapt to it. Much scorned, this group may get the last laugh, but it will be a grim one.

They overwhelmingly supported Trump. It will be a disappointment, but not a surprise, that one man is unable to reverse a collapse long in the making. However, their support for Trump indicates ideological cohesion, which will be absent from the rest of the population.

Take away the undeserved from the undeserving and you get a tantrum. Steal the earned from those who earned it and you get righteous rage. One’s a firecracker, the other a volcano. The game has been to impress upon the useful a moral obligation to support the useless, but the volcano’s about to blow, burying that obscene morality in lava and ash. Given the staggering levels of accumulated debt and promises, the useful know their talents, skills, hard work, productivity and futures have been mortgaged for the useless. This is the salient and intractable social division. No reconciliation is possible between the useful and those who believe themselves entitled to their enslavement.

The Useful and the Useless,” SLL, 3/23/17

When the government implodes, those on the receiving end of its largess are going to be united by only two things: their outrage and their inability to do anything about it. They’ll have all the solidarity of cannibals trying to eat one another.

Against that backdrop will be the group who wants to provide for itself…and knows how to do so. Individualism, self-sufficiency, and a love of freedom and inviolable liberties are not dead in America, but those who support them have been driven underground. They’ll stay underground come the collapse—advertising abilities and provisions will be an invitation to brutalization, robbery and murder—but they’ll fend off the rampaging hordes, survive, and reemerge.

Do they have to reemerge, can’t they just emerge to set things right without all the collapse and carnage? Unfortunately not. For those pinning their hopes on political education and action, what are the chances of convincing the half of the country that’s riding the government gravy train to hop off to prevent insolvency and ruin? The question answers itself. They’ll have to be pushed off.

Trump’s election was a cry of protest, and he’s ruffled some feathers. However, eight years of around-the-clock, 24/7 presidential effort couldn’t undo decades of ruinous policies, many of which Trump has actually embraced: out of control spending, deficits, debt, and empire.  Trump will be battling falling equity markets, rising interest rates, and swamp vermin.

Things have to get much worse before they can get better, but just as nothing goes up forever, nothing goes down forever. Collapse’s silver lining may be that it offers a chance for freedom and inviolable liberties to finally emerge from underground.

In the meantime, Doug “Uncola” Lynn’s recent article on The Burning Platform, “BABY STEPS: You’ve Been Woke. Now Exit the Matrix.” is an excellent wake up call and has a lot of useful information and links to other sources about preparing for the inevitable. Nobody is going to be 100 percent prepared, but there’s no excuse for being 0 percent prepared.

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What the Headlines about Tesla, Snap, and Twitter “Earnings” Should Have Said, by Wolf Richter

Truth is the first casualty of war and earnings reports. From Wolf Richter at wolfstreet.com:

How can the media be so gullible – and pliable? I don’t know either.

When Snap reported “earnings” this week – in quotes because it was its biggest loss ever – media headlines were euphoric, from TechCrunch(“Snap shares skyrocket on first earnings beat with revived user growth”) to The Wall Street Journal (“Snap Climbs Back Above IPO Price After ‘Shocker’ Earnings”).

The theory was that Snap had reported “better-than-expected earnings.” Thanks to these headlines, over February 7 and 8, Snap shares skyrocketed 48% to $20.75, though they have fallen off somewhat since then.

So here are some modest suggestions as to what the headlines should have been, based on Snap’s “earnings” report:

Snap losses surge 106% to $350 million in Q4, and 570% to $3.4 billion for the year, the most ever.

Snap lost more money than it generates in revenues; what is it doing with all this money?

Snap burned $820 million in cash in 2017, but still sits on $2 billion from investors and can keep going at this cash-burn rate through 2019, so no problem.

Snap Q4 loss soars to $350 million, on $286 million in revenues. Stop and think about that for a moment.

Losses are ballooning faster than revenues, and from a larger base, which is the road to financial perdition, but no problem for analysts.

Twitter also reported earnings this week, and the media headlines showered it with love, from The New York Times (“Twitter Has Good News for Once: Its First Quarterly Profit”) to CNBC (“Twitter rockets more than 20 percent after the company reports first-ever net profit”).

Twitter’s shares jumped 27% on the announcement, after they’d already soared 60% over the past year on takeover hype that never materializes but keeps getting trotted out time and again to pump up shares. Since the spike following the earnings announcement, shares have declined 10%.

So here are some suggestions for headlines to describe Twitter’s situation:

Twitter 2017 revenues shrink 3.4%, Q4 revenues inch up 2%, as company embarks on Cost-Cutting as strategy

Twitter makes $91 million in Q4 profit after gutting R&D and sales and marketing expenses, which might explain revenue stagnation. But still loses $457 million for the year.

Twitter cuts $68 million from R&D and $71 million from sales and marketing expenses in Q4, trying to shrink itself to growth. Good luck.

Even the ceaseless promos from President Trump and the media circus around his Twitter actions fail to boost Twitter’s revenues.

No other company has ever gotten this much constant and free promo from any White House, but Twitter still can’t make it work.

To continue reading: What the Headlines about Tesla, Snap, and Twitter “Earnings” Should Have Said