The Shell Game?

Business Cycle Watch:  So Citi is talking to KKR about putting together a fund to buy LBO loans.  In other words, lend KKR [4:1?] leverage so they can afford to pay an inflated price for the debt that sits on Citi’s books.  Take a smaller-than-expected loss on the LBO loans and trade it for a par loan to the new vehicle.  I quote:

However, one issue that some investors and regulators are watching carefully is whether any sales of loans will be "true" transactions, at genuine market prices – or will be conducted at artificial rates, as part of a bigger commercial transaction, to flatter bank balance sheets.

Another issue is whether the banks will be tempted to create new off-balance sheet vehicles to hold troubled assets. One banker denied the new special purpose funds could be considered off-balance sheet vehicles. "This is not an off-balance sheet technique. It is about raising a fund – something we do all the time – to buy these assets definitively…"

It’ll work as long as the First Data deal et al work out ok.  In the end, the "liquidity" that everyone has talked about is still in the market (our capital account surplus from abroad, aka "the savings glut"), its just that one of its prime transmission mechanisms, the CLO market, is temporarily shut down.  Since the capital account surplus vastly exceeds our governement deficit, the money still needs to find a home.

It should be noted that the trade deficit, and with it the capital account surplus, is shrinking.  If it closes, so does the liquidity window.

Newspapers – online vs. print ads

Long term trend watch:  Barry Ritholz at the Big Picture discusses whether the WSJ should make its archives accessable for free.  What really caught my eye was this chart…


Yowza.  It looks like the crossover point (online exceeds print ads) is still pretty far into the future.  Now that 50% of households have broadband penetration the trend should accelerate (online up, print down) but overall top-line growth probably won’t return until well into next decade.  It will be interesting to see how some of these recent newspaper acquistions (excluding the WSJ deal, which is cut from a different strategic cloth) do financially.  My guess is "not well".

$100-a-barrel oil to be the new normal

Long-term Trend Watch:  CIBC economist Jeff Rubin predicts $100-a-barrel oil to become the new normal.  The article doesn’t mention Peak Oil by name, but the analysis is the same.  Oil production from traditional sources like Mexico, Kuwait and Russia are declining.  Candadian tar sands oil might temporarily fill the gap, but the long term trend in production is down.  Nuclear and biofuels will be needed to fill the gap.

I have read Hubbert’s Peak by Kenneth Deffeyes about the Peak Oil theory and find the argument pretty compelling.  Read more and decide for yourself.  In the meantime, its a good personal hedge to own some oil stocks.

Bill Gross: Fed Funds to 3.75% or lower

Business Cycle Watch:  Bill Gross at PIMCO thinks the Fed Funds rate needs to get to 3.75% or below to be neutral for consumers and moderate the housing crunch.  He acknowledges, however, that the global economy complicates the job of central bankers and that such a level of rates would be stimulative for the business sector.

In my mind that is OK.  Now that the government sector in the US is running at a basic balance, fiscal policy is now neutral.  The political climate does not indicate that the government will increase fiscal stimulus anytime soon.  The decline in the dollar is stimulative to exports and the profits of multinationals, but the dollar is now bumping along the bottom of its historical range and policy makers are reluctant to force it lower.  Households in the US have been running a deficit, but the end of the housing boom is leading to a retrenchment and a rising savings rate.  The one sector of the economy that has leeway to move to a more stimulative posture is the business sector, which has been running a surplus (more cash flow than investment) for most of this decade.  An increase in business investment would be just what the doctor ordered.

Rackspace buys

Technology Watch:  Rackspace buys  I am a believer in the opportunity for hosters to sell SaaS services.  Email is a natural upsell for them.  Working at an SMB myself, it seems perfectly logical to outsource email/ Exchange rather than maintain our own server (that seems to be constantly running out of space and operating slowly).  I was also impressed to see that Rackspace is running at north of $80MM per quarter in revenue with 61% organic growth.  Gaudy.