GNP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 10

[faded glory]

Guys, just to tell you. And this is wild speculation on my part....I think Martha Stewart is going to make a move on Kmart. Hell...its like the only think Kmart sells anyway! Btw, I doubt we will see the end of Kmart.

[DanS]

Colon: I'm afraid that article requires a subscription. There is zero chance of me buying a subscription to The Economist.

[faded glory]

Ya I remember 5 years ago Kmart was in the dumps like this. I am so glad I bought 17 shares a stock when they were selling at 4.00$ a piece. I got like 700% return when it rose back up. It was my first investment actuallly.


Big for Jimmy Rogers who recommended it on CNBC.


Btw, who is a Jimmy Roger fan!?



me....me..

[Roland]

Krida comes in several forms, but essentially it means acting to the detriment of your creditors by creating or worsening an insolvency by various stupid moves (wasting assets, taking gambles, cooking the books...). Guess we can rename it "enron".

Can be done negligently or on purpose. So if Mr Lay had been operating here, he might join a former bank CEO who got the maximum 10 years for "fraudulent Krida".

[faded glory]

Me thinks Ken lay will be spending time behind bars like Michael Milkin.

[Colon™]

Dan, sorry, I though you didn’t need a cookie to access the link. I’ve copied it to a txt file and attached it to this post. (you may have read similar assessments elsewhere though)

[DanS]

Colon: that text file looks like garbage to me (no reflection on the article, but perhaps the source ). If you could cut-and-paste three or four pertinent paragraphs, I think I could form an opinion.

[Colon™]

I'll copy it here in its entirity, I hope nobody minds.


Kmart in trouble

Blue Light blues

Jan 17th 2002 | NEW YORK
From The Economist print edition

The perils of trying to out-Wal-Mart Wal-Mart

THE latest special offer available at Kmart seems to be its own shares. These fell to a 36-year low this week, leaving the second-largest American discount chain, which sold goods worth $37 billion last year, balancing borrowings of $4.7 billion on a market capitalisation of a mere $784m. No wonder the rating agencies have rushed to downgrade Kmart's debt deep into junk territory. The retailer is talking to its banks about drawing down its remaining, dwindling, credit lines amid rumours of an imminent Chapter 11 bankruptcy filing.

Kmart has been struggling to restructure itself for the best part of a decade, in response to the success of competitors such as Target and Wal-Mart, the industry leader. However, it is the most recent reorganisation under Chuck Conaway, its chief executive, that has landed the company in its current mess. Mr Conaway, who arrived with great fanfare from CVS, a drug-store chain, 20 months ago, has worked hard to overhaul inventory management. But he has also allowed Kmart to get caught between two contradictory pricing strategies.

The company has traditionally specialised in promotional retailing: using newspaper supplements and advertising circulars to tout loss-leaders, such as its famous “Blue Light” specials, in order to draw in the crowds. Although this worked well for years, it also put a strain on merchandising and distribution systems, because orders for particular items came in sudden waves. (This explains why Kmart's shelves are fully stocked only 86% of the time, compared with almost all the time at Wal-Mart.) Promotions also forced costs up at Kmart's suppliers, as they could not reliably predict manufacturing runs. This meant that Kmart could never consistently better Wal-Mart's prices.

Mr Conaway has tried to wean the company away from this strategy. Rashly, however, Kmart cut its ad circulars too sharply in the second half of last year, losing customers in droves. At the same time, it cut prices on 38,000 items and promoted them with expensive television spots, again under the Blue Light tag. But this did not chime with younger shoppers who had no memory of the original campaign.

Worse, even though shoppers did not respond, Wal-Mart did. It used its greater efficiency and economies of scale to fight back on pricing. The outcome was a 1% drop in Kmart's same-store sales in December, and an 8% increase for Wal-Mart.

Under the circumstances, a Chapter 11 filing looks increasingly appealing. This would give Kmart some respite from its bankers and suppliers. Most importantly, it would make it easier for the company to wriggle out of leases on poorly performing stores and warehouses. Kmart admits to having some 250 “opportunity stores” (translation: lame ducks) among its 2,100-strong chain. Analysts think that the number of closures might have to be higher than that.

The result might be a healthier, if much smaller, Kmart with a shot at becoming profitable once more. But it will take all of Mr Conaway's skills—and a lot of understanding from his bankers—to stop the lights at Kmart, including the blue ones, being switched off for good.

[DanS]

I'm not going to contest the facts in the article, but do note that the author hedges his bets on what the cost structure of KMart is and think that this is where the analysis gets vague.

The only place where KMart didn't stand a chance wrt cost structure was in scale. Walmart is about 5x the size of KMart, which gives them a lot of muscle. But Target does fine at the same scale as KMart, so you would think it possible for KMart to have a competitive cost structure. Indeed, reports were that the cost structure was becoming very competitive.

In the end, it came down to customers not coming in the door when by all rights they should have. Perhaps it was the mix of store locations. Perhaps advertising. Perhaps it was just that KMart is passe. I don't know.

[DanS]

A good overview of where we stand on the economy.

http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3GVQS5SWC&live=true

I really liked the arguments he makes on profits as %-age of GDP figures, etc.

The big wildcard here is the consumer. Tough to say where he'll go, but over the past couple of months has been an excellent moderating factor.

[Roland]

Originally posted by DanS
The big wildcard here is the consumer. Tough to say where he'll go, but over the past couple of months has been an excellent moderating factor.

Yes. Down. Exactly for that reason, though for years, not just months.

[Adam Smith]

Is Tyco the next Enron?

Back in September (IIRC) I dumped a fund which had Tyco as its largest holding (6.5%). I did this for reasons other than just Tyco specifically ie, the fund was continuing to buy into tech stocks - not what I wanted for a primary holding. Tyco was up 50 percent sept - dec, and down 50 percent since early dec. Since I don't know how much stock the fund held when, it seems impossible for me to figure out the effect of Tyco on the fund price. Any way to find this out?

[Colon™]

curious about Tyco as well...

I’ve read that Tyco intends to split up into 4 companies and after hearing that I wondered several things, firstly whether they’ll float a minority stake of each company, with the remainder owned by a common holding company, and secondly, why the sudden reversal while they used to show every intention to become the second GE? Is the timing of the change of tack coincidence?

[Roland]

Tyco may have some accounting issues, but overall it's maybe just a lot of debt with little synergies - maybe they'll try and park a good junk of it (as far as the accounting can be stretched) in one of the new comps and let it go belly-up.

I'd still be much more fascinated with GE Capital....

Dan:

If you want to continue doing the Freud, please.... here's my reply, moved it here:

"Consider your recent fondness for the term "crony capitalism". Now, I think this is a downright silly notion to attach to the US."

Well it wasn't my idea, exactly...

http://www.nytimes.com/2002/01/15/opinion/15KRUG.html

Or this (though not strictly US):

http://www.prudentbear.com/Comm%20Archive/markcomm/i012202.htm

Enron had been protecting its flanks on the tax front for years by almost literally buying and bribing the entire U.S. government for favorable legislative treatment.

And that's a quote, too:

http://www.msnbc.com/news/691234.asp

I think it has little to do with "tactile feel", but rather with the concepts one uses in approaching this. It's a catchphrase - you are right that this is less about cronies than it is about special interests.

"If you think politicians are going to protect your capital unduly (from the courts, from competitors, from the market, from yourself), you've got another thing coming!"

It is broader - Greenspan won't protect friend X, but the special interest group "leveraged speculator" or "liquidity provider". Tort reform republican style will cater to the special interest of "exposed large corporations", or so. You call it politics, I call it corruption. Don't you think that many Americans with a less rosy view than yours see it the same way ? Should I make a poll to see who of the USAers here considers crony capitalism as a reasonable catchphrase ?

And about Bush - I'm just having a lot of fun watching him. "His" foreign policy is hardly first rate, but quite good, overall - but do you think it is his handwriting ? His merit on this is to let his team work. On the domestic agenda, you had (esp pre-sept 11th) vicious attacks from your fellow americans on anything from the tax cut to the religious charity thing - so vicious that on one point, I even defended Bush against n.c.! Your rosy assessment of Bush may be based on a lack of tactile feel on your side, capital guy! (What's the US equivalent of "Wasserschädel"? )

[Roland]

Hmm.. would take the full Krugman article.... ah well, why not...

Four years ago, as Asia struggled with an economic crisis, many observers blamed "crony capitalism." Wealthy businessmen in Asia didn't bother to tell investors the truth about their assets, their liabilities or their profits; the aura of invincibility that came from their political connections was enough. Only when a financial crisis came along did people take a hard look at their businesses, which promptly collapsed.

Does this sound familiar?

On the face of it, the sudden political storm over Enron is puzzling. After all, the Bush administration didn't save the company from bankruptcy. But then why did the administration dissemble so long about its contacts with Enron? Why did George W. Bush make the absurd claim that Enron's C.E.O., Kenneth Lay, opposed him in his first run for governor, and that the two men got to know each other only after that race? And why does the press act as if there may be a major scandal brewing?

Because the administration fears, and the press suspects, that the latest revelations in the Enron affair will raise the lid on crony capitalism, American style.

Cronyism is hardly novel in America; the Clinton administration took us to the edge of a trade war on behalf of Chiquita bananas, a major campaign contributor. But the Bush administration, with its sense of entitlement, seems unconcerned by even the most blatant conflicts of interest — like the plan of Marc Racicot, the new chairman of the Republican National Committee, to continue drawing a seven-figure salary as a lobbyist. (He now says he won't lobby — but he will still receive that salary.)

The real questions about Enron's relationship with the administration involve what happened before the energy trader hit the skids. That's when Mr. Lay allegedly told the head of the Federal Energy Regulatory Commission that he should be more cooperative if he wanted to keep his job. (He wasn't, and he didn't.) And it's when Enron helped **** Cheney devise an energy plan that certainly looks as if it was written by and for the companies that advised his task force. Mr. Cheney, in clear defiance of the law, has refused to release any information about his task force's deliberations; what is he hiding?

And while Enron has imploded, other energy companies retain the administration's ear. Just days before the latest Enron revelations, the administration signaled its intention to weaken pollution rules on power plants; late last week it announced its decision to proceed with a controversial plan to store radioactive waste in Nevada. Each of these decisions was worth billions to companies with very strong connections to Mr. Bush. CBSMarketWatch.com declared, in its story about the nuclear waste decision, that "one group of major energy-business political donors just hit the jackpot."

Notice the source of that quote. In recent months, while political reporters have been busy waving the flag, business reporters have taken the lead in telling us what's really going on. And they seem disgusted by what they see. It was CBSMarketWatch's executive editor, not some whining political commentator, who warned that "a small group of business leaders exert enormous clout over Bush and his team in getting the rules changed to their benefit."

And the business magazine Red Herring has published the biggest exposé to date of the secretive Carlyle Group, an investment company whose story sounds like the plot of a bad TV series. Carlyle specializes in buying down-and-out defense contractors, then reselling them when their fortunes miraculously improve after they receive new government business. Among the company's employees is former President George H. W. Bush. Among the group's investors, until late October, was the bin Laden family of Saudi Arabia.

Another administration would have regarded the elder Bush's role at Carlyle as unseemly; this administration apparently does not. And Defense Secretary Donald Rumsfeld recently gave his old college wrestling partner Frank Carlucci, head of Carlyle, a very nice gift: Mr. Rumsfeld decided to proceed with the much-criticized Crusader artillery system, which even the Pentagon wanted to cancel. The result was another turnaround for a Carlyle-owned company.

Sad to say, none of this is clearly illegal — it just stinks to high heaven. That's why the Bush administration will try to keep the Enron story narrowly focused on one company during its death throes. Just remember that the real story is much bigger.

What's your problem with that ? Wallstreet et al love to hype America as the free market example - when the government is very active. So "crony capitalism" is a similarly catchy phrase. And your disagreements with me are not related to american-nonamerican, but to political views.