from ITM Trading:
by Wolf Richter, Wolf Street
PE firms win again. Stiffed creditors not amused in bankruptcy court.
Nearly every retail chain caught up in the brick & mortar meltdown is an LBO queen – acquired in a leveraged buyout by a private equity firm either during the LBO boom before the Financial Crisis or in the years of ultra-cheap money following it. During a leveraged buyout, the PE firm uses little of its own capital. Much of the money needed to buy the retailer comes from debt the retailer itself has to issue to fund the buyout, which leaves the retailer highly leveraged.
The PE firm then makes the retailer issue even more junk bonds or leveraged loans to fund a special dividend back to the PE firm. Come hell or high water, the PE firm has extracted its money.
Then the PE firm charges the retailer hefty management fees on an ongoing basis.
This form of asset stripping removes cash from the retailer and leaves it struggling under a load of debt. It works wonderfully until it doesn’t – until booming online sales started eating their lunch, sending these overleveraged retailers, one after the other, into bankruptcy court, where creditors learn what it means to end up holding the bag. But they’re not amused, as we now see. But first the numbers…
Since 2010, retail chains owned by PE firms have issued $91 billion in junk bonds and leveraged loans just to raise the money for the special dividends paid to their PE owners, according to data by LCD of S&P Global Market Intelligence, cited by the Wall Street Journal. This does not include debt piled on retailers during the LBO itself. And it does not include drug stores and food retailers – such as PE-firm-owned Safeway-Albertsons, caught up in the middle of the meltdown.
The chart shows how the asset stripping business boomed until 2015, when the brick-and-mortar meltdown set in (2017 issuance through June):
The PE firms get the cash. The retailer gets the debt. By the time the retailer goes bankrupt, the PE firms already got their money out. Creditors – usually institutional investors plowing in other people’s money – are left fighting over scraps…
Payless Inc., the shoe retailer with 22,000 employees and 4,000 stores in 30 countries, filed for Chapter 11 bankruptcy on April 4. In the filing, it said it plans to cut its debt in half, stiffing creditors for the rest. In 2012, Payless was acquired in a leveraged buyout by PE firms Golden Gate Capital and Blum Capital Partners. Less than five years from LBO to bankruptcy.
by David Haggith, The Great Recession Blog:
You may be worried my prediction that a recession will start sometime this summer is not looking too good. So was I after first-quarter corporate earnings started coming in better than what economists expected. Except that barely “beating expectations” is kind of pathetic when expectations are dumbed down as far as they were.
(Note that I have also stated each time I repeat this prediction that we won’t know until half a year beyond summer whether or not it happened, because initial GDP reports are often revised down after the next quarter (perhaps in order to make the next quarter look better quarter on quarter) as facts come in more clearly and because no recession is officially declared until a month after two full quarters have seen total GDP decline — not a decline in the growth rate, but an actual drop in GDP.)
by Pater Tenebrarum, Acting Man:
Repeating Patterns and Positioning
A noteworthy confluence of patterns in gold and gold stocks is in evidence this year. At the close of trading on December 26, the HUI Index has given a (tentative) buy signal by completing a unique chart pattern, which is why we decided to briefly discuss the situation. As usual, things are not as straightforward and simple as they would ideally be, but there is always an element of uncertainty – one has to accept that as a given. Let us look at a chart illustrating one of said patterns:
This chart shows the gold price, the weekly net hedger position in gold futures (the inverse of the net speculative position), with the Fed’s December rate hikes in 2015, 2016 and 2017 highlighted by red vertical lines. Keep in mind that the December 2015 hike was the start of the current rate hike campaign. In the weeks leading up to it, the gold market was in the grip of a bearish hysteria, just as it approached a major lateral support level. Nearly every day Bloomberg, Reuters and other mainstream financial media published articles by “experts” no-one had ever heard of before (or since!), along with reports from analysts working for various well-known investment banks, all of whom stridently insisted that the beginning rate hike cycle was going to be the most bearish thing that could possibly befall the gold market, and that a further collapse in prices was nearly certain to coincide with it. Not surprisingly, the exact opposite has happened. You were definitely not surprised if you were reading this blog at the time – see for instance “Gold and the Federal Funds Rate”. As we pointed out therein: “[The] guessers at SocGen might actually have improved their statistical odds a bit if they had said “now that the Fed is hiking rates, gold prices should rise”. As noted in the chart annotation, in all three years gold prices declined into a December low, seemingly driven by fear of the coming rate hike and then proceeded to rally in a typical “buy the news” scenario. The declines tended to lower net speculative long positions to levels conducive to a renewed advance. So far the gold price lows coinciding with these rate hikes are increasing by approximately $100 per year. We expect this uptrend to accelerate noticeably once the rate hike campaign is unceremoniously thrown overboard. ETA: sometime next year, the precise timing depends on when the asset bubble peaks and reverses – the clock is ticking on that – click to enlarge.
Naturally, there is no guarantee that the December low will once again result in a playable multi-week (or even better) rally this year, but so far things look actually good for that idea. Here is a chart showing the moves in the HUI index and gold prices over the past 2 years and 7 months (i.e., including the drawn-out bottoming period from July 2015 to January 2016).
Read More @ Acting-Man.com
by Gary Christianson, Miles Franklin:
Christopher Whalen wrote “Trump is Right to Blow Up the Fed.” He stated:
“Anybody who cares to read the 1978 Humphrey Hawkins law will know that the Fed is directed by Congress to seek full employment and then zero inflation. Not 2 percent, but zero. Yet going back a decade or more, the Fed, led by luminaries such as Janet Yellen and Ben Bernanke, has advanced a policy of actively embracing inflation.”