1-2 Knockout

Happy Hour

Alright people, this week sucked:  crappy weather, poor trading, and a couple of hangovers have left me wanting a drink...or 8.

So what? Anal_yst and I will be at Bar 119 (15th st. and Irving) starting around 6:30.  Come on over and be a part of it.  Free jaeger bombs for anyone who finds us inside. (email us at onetwoknockout at gmail . com)

Ratings & Review

Appeal	Decor	Service	Cost
16	9	15	$8

“Rockers and bikers” rub shoulders with “college” kids psyched for shows at The Fillmore at this Union Square “dive” where “cheap and grungy” vibes plus “great tunes” equal a “good time all around”; then again, it’s “kind of a hole” and “snarky pool mavens” seem to corner the table on cue.

Carl Icahn Has Brass Cajones

Earlier today, Carl Icahn sent a letter to the Yahoo! Board of Directors which said, in effect, "You are now my bitch". 

To summarize, Icahn called the Board a bunch of incompetent dreamers who "completely botched" (his words, not mine) the Microsoft deal to protect their own asses, and, in doing so, took part in a massive breach of fiduciary duty, much to the detriment of shareholders. 

Its about damn time someone (other than crazy person Steve Ballmer) called Jerry Yang et. al. out on their smug B.S.  Read the letter in the SEC filing, its a shining example of how clearly and succinctly tell a BOD that they suck, hard.

This Week in "Huh?": Claires Stores and S&P

The following is a press release from Standard & Poor's (highlights are mine):

  NEW YORK (Standard & Poor's) May 15, 2008--Standard & Poor's Rating Services
said today that Pembroke Pines, Fla.-based Claire's Stores Inc.'s
(B-/Negative/--) election to pay in kind (PIK) all interest due on Dec. 1,
2008, for the $350 million 9.625%/10.375% senior toggle notes due 2015 will not
have an immediate effect on the company's ratings or outlook. Claire's is a
specialty retailer of value-priced jewelry and fashion accessories for
preteens, teenagers, and young adults.
  Standard & Poor's views the decision to elect to use the PIK feature on the
notes rather than pay cash interest as indicative of ongoing performance
difficulties at the company. Claire's has performed well below expectations
over the past year, and we anticipate operations will continue to deteriorate
over the near term given the challenging economic conditions and significant
decline in consumer spending. We will continue to monitor the rating as
additional information becomes available.

HUH?????

So let me get this straight: S&P readily admits the Company is slowly hemorrhaging itself into the depths of oblivion by utilizing the PIK-toggle feature on their debt, thus paying interest in, wait for it, more debt. S&P - in their infinite wisdom - then makes the surprise move of... doing nothing!  HUH????  Am I the only one who's stumped here?  Is it a full moon?  Are pigs flying?  WTF? (...He said in his best Lewis Black impression)

I realize it doesn't take much to get S&P to give you decent rating ("oh, you paid for a rating, score!  What would you like?"), but if blatantly admitting the company is going to hell doesn't warrant at least a single freaking notch downward revision, wtf does???

Observations From My Semi-Annual Trip to the Mall, Part Deux

As I mentioned in the previous article, Observations From My Semi-Annual Trip to the Mall, Garden State Plaza is one of the most "luxury-oriented" malls in the Country, and hence probably not a great representation of what the retail picture looks like for most Americans. Thus, I ventured out to one of my absolute least-favorite places on earth (not as bad as the Port Authority, but worse than the DMV), Willowbrook Mall in Wayne, NJ.  It is with great pleasure that I now present to you, in absolutely no particular order, my observations from the mall:

• As evidenced from the store listing we'd expect patrons at this mall to - on average - represent a lower socio-economic bracket than at Garden State Plaza.  It doesn't take a rocket scientist to realize that shoppers at this mall are more ethnically and racially diverse than those at Garden State Plaza.  Additionally, as evident from the dress/appearance/behavior of many mall patrons, it seems evident that on average, shoppers here look to be less socio-economically well-off than those at the mall I visited last week. 
• Related to the previous point is the fact that this mall does not have as many upscale stores as did the mall I visited last week.  Of course this leads us to the classic 'chicken or the egg' question - that is, do more affordable stores (on average) draw a less well-off socio-economic clientele, or does the prevalence of said shoppers result in more discount retailers moving in?  Unfortunately, the answer to this question is beyond the initial point of this post (whatever that point may be?), so I'll leave it to you to ponder.
• I meandered into Lord & Taylor (a store I consider to be an also-ran to the likes of Neiman Marcus and Nordstrom, even despite recent restructuring efforts), and, confirming this preconceived notion, I noticed that I was but one out of maybe a handful (literally, maybe 5 at most) shoppers on the entire top level, which measures roughly 65,000 square feet, just to give you an idea of density.  Also, insofar as a store can be judged valuable  based on the quality of their bathrooms, Lord & Taylor gets a AAA rating; the same sort of AAA rating S&P gave to a bunch of 'high-quality' CDOs, that is.
• Getting back to my 1st point, (well, really completely unrelated to my 1st point), I noticed that people at this mall were either pretty good looking, or complete mutants; no "normal distribution" here, no sir.  I find myself alternating between what would likely be considered inappropriate staring in most States, and cringing in horror.  I digress...
• Apparently I'm a glutton for punishment, and yet again I decide to go into The Gap, and as an astute commenter pointed out to the last article (possibly on Dealbreaker), their "fashions" are laughable, at best and downright painful at worst.  As far as I can tell they haven't refreshed their lineup (at least on the Men's side) for the better part of a decade.  Can someone please tell me how Dan Loeb, Chapman, or someone of their ilk hasn't torn this company a new you-know-what yet?  Seems like an easy target if ever there was one.  Although on second thought, I suspect the heavy insider-ownership is a bit of a deterrent, but the ambitious activist wouldn't even need to bring in McKinsey to come up with a new strategy.  Really, I'll save them the trouble, free of charge:  Don't sell ugly, boring, poorly-made crap.  Wasn't that easy?
• Mens shoes are really fugly.  What is it with this Cody Willard-esque, pre-distressed, pointy-toed garbage? 
• As if it weren't entirely obvious already, I notice at least 2 or 3 different stores that stock generic versions of Crox, which sell for significantly cheaper than the Brand-name product.  Does this company still actually do any business to rationalize a $900 Million market cap?  I estimate this probability to be somewhere in the range of {0, none}.
• Finally, I fight my way through the unwashed (or so it smells) masses to my main target: Aeropostale.  Last week they put up "impressive" same-store sales (y/y) numbers in the ~25% range, but I was extremely skeptical as to how these results would trickle-down to the bottom line.  Well, lets just say if my store visit was any indication, their margins aren't exactly going to be expanding this year.  "Men's" style t-shirts were - if memory serves - 2 for $20, with similar discounts throughout the store.  Average age of shoppers seemed to be around 14-15, although I saw some freak outliers at both ends of the spectrum which really scared the hell out of me. (As an aside, if you are 35+ you should NOT be shopping - no matter how great your body is - at the same store as 12-year olds.  End of story.)

In all, I want to get some things across that I've been able to glean from these slightly-less-than-pleasant journeys to the mall.

First, even some higher-priced, luxury stores seem to be heavily discounting merchandise to drive sales.  This trend is even more pronounced as you move down the luxury/price ladder.  While this merchandising strategy may serve to keep same-store sales afloat and maintain inventory turns, the inevitable margin erosion will eventually come back to  bite the retailers when they can least afford it.

Second, who shops at department stores anymore?  Sure, sometimes Nordstroms or Macys to get some basic items like ties or the occasional pair of jeans, but can they really continue to rationalize such the expenditures to maintain, stock, and staff (etc) such large stores?  And that is to say nothing of the proprietary merchandising operations many still support.  It has been a long time in coming, but I feel that the death of many big department stores is upon us now, more than ever (Sorry NRDC Equity Partners).

Thirdly, I've noticed over the past few years that retailers seem to be especially inept at utilizing modern ERP systems, especially when it comes to inventory planning.  Depending on when during the re-stocking cycle you visit a particular store, it is - to varying degrees - painfully obvious retailers are not effectively utilizing their POS (Point of Sale) data to better plan and manage their production and supply chains.  In 2000-freaking-8, it is not difficult to gather, analyze, and furthermore utilize sales data to garner information on, say, the distribution of various styles by size.  Proof of this ineptitude can be seen everywhere;  pick your favorite store and go through some racks (department stores are especially bad offenders here) and just eyeball the sizes.  Inevitably, (at least on the male side) the distribution will skew left, that is, theres countless XL's, XXL's, etc, and relatively few mediums.  This also explains why much of the inventory at discounters such as TJ Max, Century 21, etc. happen to be freak-giant-sized.  I'm sure someone at McKinsey or Accenture has taken a closer look at this apparent phenomenon, but the proof is in the pudding.  Unless my MIS101 professor was lying back in the Undergrad days, retailers have plenty of room for improvement here.

In conclusion, malls suck, but I hope at least one or two of you have taken something useful away from my (mis)adventures. 

Disclosure: Anal_yst is short Aeropostale, more-so now that he's actually visited the stores.  1-2 Knockout is totally cool with (most) Mutants.

The Walk of Shame

One of our many random interests here at 1-2 Knockout is following trends in Advertising and Marketing, especially insofar as they allow us to observe broader trends affecting modern society.  In that vein, I'd like to share with you a commercial that begs to be talked about. 

Touche to the 'folks at Omnicom's BBDO for producing arguably the most honest commercial I've seen in years.  Frankly, I'm surprised Pepsico got behind such an aggressive - and blatantly suggestive - commercial for Amp, but it seems pretty clear that in the ultra-crowded Energy Drink market, being bold (read: sex) sells.  Write that down.

As far as I can tell, this commercial debuted only in the past week or so, and only on select channels at certain times (e.g. during Comedy Central's Colbert Report).  I'd imagine if this ad were to air during an episode of American Idol or some other family-oriented show (and really, what else could bring the family together like Paula Abdul's drug & alcohol-fueled antics?), it'd generate a fair share of controversy.  Of course, that may in-fact be a part of Pepsi's marketing plan, because the only thing that sells better than sex, is controversial sex.  Or something.

Presented without further comment for your viewing pleasure:

Hangover Friday

In celebration of Hangover Friday I posit this: What would you do to Trish Regan, Becky Quick, Erin Burnett, or Rebecca Jarvis?  Pick your favorite and tell a "story" in the comments.  Financial euphemisms will be rewarded.  Snide, masochistic comments expected. 

I mean, it is Friday.

Chrysler Guaranteed Gas Program Not as Insane as Previously Thought

I've been doing some more research on Chrysler, LLC's "Let's Refuel America" plan, which as we mentioned earlier this week, locks anyone who buys a new eligible car into 3 years worth of gas at $2.99/gallon.  I haven't been able to confirm this with the company yet, but it appears that Chrysler is not giving customers a pre-paid gas card based off the mileage of the particular vehicle, but essentially subsidizing the difference customers pay at the pump from any prices (at participating stations, of course) over that $2.99/gallon price.

As our friend Stupid Equity Guy pointed out the other day, given our assumptions of direct subsidies to customers, the program reeked of desperation and looked like it could possibly inflict severe harm to the Company.  Taken in this new light, however it seems that Chrysler, with prudent hedging, could come out relatively unscathed from this experiment.  Of course as we've seen with Airlines and countless others who tried to hedge their fuel exposure, this is a task far easier said than done.

Further reducing potential losses and ill-effects from the Program, it is only set to last until June, 2, 2008 - less than a month away.  Given that Chryslers, Dodges, etc aren't exactly flying off the lots these days, their total outlay shouldn't put too much pressure on the bottom line over this short period.

At least, thats how it may appear at first glance.  The truth, however, paints an entirely different picture (click for larger version, or see the file which you can play around with, Download) chrysler_gas_expenses.xls

In our low-end estimate with gas prices at $3.50/gallon, Chrysler is on the hook for about $100 Million.  At the opposite, high end of the spectrum with gas prices at $4.50/gallon, Chrysler's liability (given the other assumptions in the spreadsheet, realistic or not is another story) over the 3-year life of the program jumps to over $300 Million!

For a company in the midst of an aggressive restructuring, these are not numbers to sneeze at.  Obviously some of our assumptions may be either too aggressive, or not aggressive enough, but with Chrysler being privately-held our access to information is limited.  Regardless, it is painfully clear that an aggressive promotion - open for only one month - may end up costing the Company dearly.  One last point is that the fine-print of the promotion does contain the phrase "...up to 3 years...", which indicates that Chrysler (under pressure from Cerberus) reserves some legal rights to cut their losses if expenses stemming from this promotion start to materially affect the Company's liquidity position or ability to fund its operations.

While we maintain faith in the discipline of Cerberus, we still remain skeptical - especially in light of this information - that the PE firm will be able to turn around this ailing American Icon.

Insider Trading is Good

Over at Knowledge Problem Michael Giberson discusses the effects of insider trading restrictions and their efficacy in general.  He links to a range of articles, notably a summarization of arguments against anti-insider trading, and then reflects upon Chris Dillow's "adverse selection problem" created by allowing insiders to trade their knowledge.

"Imagine an oil company's geologist knows he is about to discover a big oil deposit. Before announcing his finding, he and his friends buy the company's stock at a low price. The gains from his discovery therefore accrue to him, rather than to shareholders. If shareholders fear this will happen, they'll under-invest in oil companies, with the result that we'll get too little investment in resource discovery. Efficiency requires that the property right in oil discoveries lie with shareholders, not employees."

I think Dillow's adverse selection problem is seriously flawed though.  He--for some reason--contends (assumes) that there are no shareholders before the geologist makes his investment.  With this absurd assumption in place then, yes, all benefits to the discovery are transferred to the geologist and not investors. 

His argument that, "before announcing his finding, he and his friends buy the company's stock at a low price. The gains from his discovery therefore accrue to him, rather than to shareholders" is particularly faulty:

A) Someone owns the shares before the geologist buys them, and he probably didn't buy ALL the shares of the company (if he did then someone else would probably put the company in play and learn about his material information in DD).  Therefore the profits of his discovery accrue to him AND to the shareholders.  He does not profit at other shareholders' expense, he profited with them--thus aligning their interests further and reducing principal agent problems.

B) The announcement has to be made at some point--at which time medium-long term owners of the stock will profit during its gap up.  When price discovery is opaque there is no mechanism to gradually increase the price alerting potential buyers to enter the market (econ 101 people).  If the price increases gradually, as the geologist buys up shares with his insider knowledge, then other market participants are able to judge this information via the stock's price.  There is not the binary gap up and MORE people, not fewer are able to profit: those who bought shares sensing the introduction of new information to the market; AND those who sold their shares at prices between the pre-discovery price and announcement.  This gradual price discovery helps all.  Either he is big enough to move the stock everyone wins, or he isn't and it still doesnt matter that he traded.  If you (or the firm) disagree, you could either a) limit his trades, or b) pay him less because of his ability to exploit insider knowledge.

C) Volatility tends to be the enemy of efficient capital movement (e.g. today's inability to value securitized assets).  With increased uncertainty comes a higher risk premium for capital formation.  The aforementioned "gap up" is a volatile movement in the valuation of the company, and thus unattractive to most (not all) investors.  This would lead to an adverse implementation of Dillow's "adverse selection" problem.  With smother price moves, and more transparency in price discovery people are able to better predict future volatility and invest capital.

Many will undoubtedly chastise me for the counter example: what happens in the event where insiders know of bad information and dump their shares all while maintaining a glossy veneer to the public/shareholders?  Well, obviously, the exact same thing will happen.  The price will be depressed gradually--C level insiders also have to report sales, and no employees can short their own stock--alerting people to problems ahead.  It's the exact same thing as insider buying.  Would you rather an information flow, where the price decreases and you have the OPTION of selling, or, again, a binary gap down?  It's not like the current rules don't enable the selling of shares and keeping a glossy vaneer (*cough* Enron *cough*), so it would be better to see potentially troubling information built into the stock before it's too late.

All things considered, I can see moral arguments against insider trading, but I have yet to have anyone show me a compelling economic argument against it.   

Collegiate Subsidies

About a year ago Thomas Sowell posited "If the government gave every citizen $5,000 to buy a new car we would expect the price of cars to increase by a comensurate amount.  Why has no one drawn the same conclusion from our two most heavily subsidized industries: Healthcare and Higher Education."  Well, now we can add two other subsidy-based inflation bubbles to the mix: housing and commodities.  The fact remains that subsidies are merely wealth transfers, and usually do more harm than good (I wonder if anyone's done a study on college as a Giffen good).

In that vain Andrew Gillen and Richard Vedder touched on the education topic in an interesting article here:

So what does increasing loans for students accomplish? Just put yourself in the shoes of a college administrator to find out. The 61 percent increase in inflation-adjusted federal loans over the last decade leaves virtually all their students capable of paying more in tuition. The schools can either raise tuition, using the additional money to help build a better (more prestigious) college , or could leave tuition unchanged in an inflation-adjusted sense. The decision they made is obvious from U.S. Department of Education data. Over the last 10 years, after adjusting for inflation, tuition is up 48% at public schools and 24% at private schools.

Will someone please relay my rants to the populist arm of the democratic party so we can make some honest policy decisions?

In other news, the new computer should be here soon.  You can expect some more, higher-quality posts then.

The Ultimate Giffen Good: Rice?

From the Freakonomics Blog:

[S]ubsidies enjoy significant political and popular support because it is believed they at least protect the nutrition of the poor. This is especially the case when comparing subsidies to other forms of welfare, like cash payments, since people worry that the poor may spend the cash on things other than food, or at least may not use the money in a way that improves their nutrition...

...In fact, in Hunan nutrition actually declined in response to the subsidy. In Gansu, the effect on nutrition was essentially zero. And our sample included only the very poorest households, malnourished by international standards and earning much less than a dollar per person per day — i.e. the exact group whose nutrition subsidies are intended to improve.

Think about that when those fighting for the Panderer in Chief tell us we need to subsidize goods to "protect the poor."

Observations From My Semi-Annual Trip to the Mall

In light of our recent lack of posts (and 1-2's still-missing computer), this past Saturday I sucked it up and went out to New Jersey to check out the action at one of the more popular area shopping malls, Garden State Plaza in Paramus.

First though, I just want our dear readers to understand that I consider going to a mall (especially such a monstrous/crowded one) on roughly the same level as getting a Brazilian bikini wax - if not worse - but in the interest of research (er, "research"), I rolled up my  sleeves to see the story first-hand.

My observations, in no particular order, below:

• Parking lot (~10,000 spaces) is PACKED.  Takes me at least 10 minutes to navigate to the far-end just to park in the absolute boonies, because its ridiculous to drive around for 45 minutes waiting for a closer space (another story for another time).
• There is jailbait EVERYWHERE.  At least I presume its jailbate, which is probably the safer bet.  I digress...
• Walked past, and unfortunately into, Aldo.  When did it become the status-quo for stores to blast annoying music at ear drum-destroying levels?  I walk out of Aldo purely for this reason alone (although their selection was nightmarishly weak enough to have forced me to leave anyway).
• Notice that there are roughly 3 people in Zumiez.  Make note to self to short stock on Monday (oops, didn't place the order, stock's down ~10% d'oh!).
• Walked into Abercrombie & Fitch.  Obnoxious, obnoxiously loud music.  Store reeks like all merchandise has been treated with Abercrombie Cologne. Store isn't too packed (although I'm in a daze from the 1-2 Knockout (excuse the pun) of the olfactory and auditory assault.  I stop to ask an employee (who appears to be some sort of manager-type?) if she's noticed any change in sales, etc.  She doesn't understand what I'm talking about or why I'm asking (huge surprise).  After explaining myself, she rambles on about how everything seems normal to her.  I discount this information appropriately.
• Holister - which similarly blasts quasi pop/rock music - is far busier than Abercrombie.  I wonder how people figure out what looks good in a store that has about as much ambient light as a cave in Afghanistan.  Crowd seems to be high school-to-college aged.  I realize that I am old, start to tear-up, and walk out with my head down, hopefully before any of aforementioned jailbait notices.
• The Gap is pretty empty.  I note the store location is on the side of the mall with the least amount of traffic and wonder to what degree this is the cause.  Walk into the store and realize the answer is probably somewhere between "not at all" and "zero".  There goes the idea that consumers are rotating their apparel purchases away from the more-expensive Abercrombie-type stores to more discount retailers like Gap, Aeropostale, etc. 
• Banana Republic was about as crowded as I remember it being any time I've been in one of their stores over the past 2 years or so, maybe a little less.  I notice the price-creep on many of their items ($100+ for a button-down??  $400 for a sport coat?  At Banana?  Huh?).  There are many items on sale at ~25%.  Fitting-room attendant stares at my butt as I walk by with a look that made me feel violated; I now understand what girls must feel like all day.  Regardless,  I buy a pair of summer chinos and a t-shirt thingy.
• Who designs these places?  They must be pretty smart, what, with putting every store I want to go to on complete opposite sides of the mall.  Touche to the planning folks at Westfield (or chance, whatever). 
• American Apparel's ad for its new store - presently under construction - is scandalous.  I think how strange the CEO, Dov is, yet at the same time can't help but think that he's kind-of awesome.  Being the upstanding citizen I am, I question whether the girls featured in APP's ads are all of-age, yet decide any responsible company would have obviously checked such things so it must be OK to look.  Again, I digress...
• Sharper Image still looks to be operating as if everything is all fun & games.  No signs of any bankruptcy (or other) sales.
• Brookstone is EMPTY.  I mean E-M-P-T-Y!  As in, nary a soul, save the washed-up looking salesman.  Note to self: Find way to profit off inevitable bankruptcy filing.  Corollary: Consider shorting Tempur Pedic (although its already pretty-much in the crapper).
• 25% off shoes and other stuff at Kenneth Cole.  The hook works, I'm sold, ring up a new pair of much-needed shoes.  I wonder why this particular act is so exhilarating for members of the fairer-sex.  I am stumped, and move on.
• Can't...Find...Strength...To...Enter...Department...Store...Self...Preservation...Instinct...Too...Strong.

All things considered, I was a bit surprised at my findings.  Prior to my adventure, my investment thesis was to go short the U.S. Consumer.  However,when I left the mall I was admittedly concerned that this view might be incorrectly pessimistic.  Upon further analysis though, I realize that Bergen County, NJ wasn't exactly the epicenter of the subprime meltdown, and might not be very representative of the rest of the Country as a whole, being that it ranks somewhere in the top-20 Counties in terms of per-capita income.

In-all, and purely from this one experience, I'm inclined to believe that retailers are discounting merchandise (and shifting focus towards more discount items to drive volumes/keep inventories in check/etc).  I'm skeptical of analysts who purport that certain retailers are "defensive" plays as consumers move to more affordable alternatives than their more-expensive 'staples' of the past.  I'm massively skeptical of growth stories (see LuLu Lemmings) in this environment.  Minus the likely one-time boost retailers will get from tax-refunds and "stimulus" checks in the coming month-or-so, I see the slow-down in consumer spending lagging other recessionary indicators.  I'm also either massively long (or short, depending on which is the legal trade) jailbait.  If someone could come up with a security to monetize it, they'd make a fortune.

Disclosure: Anal_yst is short Aeropostale.  Anal_yst, 1-2 Knockout or its affiliates do not speculate, nor do they have any open positions in jailbait.  Consult your financial advisor.

Chrysler Puts Up a Prayer

Here we go again:

19:05 05/05 =DJ Chrysler To Offer $2.99 Gas Guarantees To New Customers

DETROIT (Dow Jones)--Chrysler LLC, looking to spur sales while connecting with
financially stressed consumers, will offer new car buyers a $2.99 gas guarantee
starting Wednesday.
  The auto maker will give new customers a Chrysler, Dodge or Jeep branded fuel
card that will lock their gas price at $2.99 gas per gallon for three years,
Chrysler co-Chairman Jim Press said Monday. The money allocated to each
customer will be based on 12,000 miles a year divided by a vehicle's estimated
miles per gallon.
  "We aren't in a position to know what the cost is but we hope it helps the
customer," Press said in a conference call Monday. "We feel this is necessary
to help our customers through difficult times."
  Chrysler is looking to rejuvenate sales despite the slumping U.S. economy, as
customers are delaying or skipping purchases. The auto maker's April sales fell
23% to 147,751 vehicles.
  The card will be available through June 2 and apply to high-volume vehicles,
such as the Dodge Caliber and Chrysler Sebring.
  Chrysler announced a similar program in 2005 when it gave two tears of free
gas on select models. The deal also included two years of free scheduled
maintenance. Chrysler gave customers a $2,400 debit card for the gas.

So, lets run some numbers, quick & dirty:

Irrespective of any other offers or fine-print, this offer clearly provides less incentive for consumers to purchase the more fuel-efficient vehicles in Chrysler's fleet (e.g. Dodge Caliber, EPA 24 mpg city/29 highway) than for gas-guzzlers like the Chrysler Aspen V-8 (335hp, 15mpg combined).  We'll see what happens as they release more details on this program, but at the very least, it seems pretty clear that Cerberus-owned Chrysler, LLC is concerned about propping-up sales of SUV's, Trucks, and other gas-guzzlers in their fleet as the price at the pump continues to rise.

I don't know what other tricks Bob Nardelli and Jim Press have up their sleeves, but this program seems to reek of desperation.  I'd like to get my hands on Chrysler's internal projections as to how they see this fitting into the larger restructuring plan, but for now I'm pretty-much stumped.  As I pointed out in my run-down of the New York International Auto Show, I'm at-best disappointed with Chrysler's product offerings, and similarly skeptical of any financial trickery designed to boost sales.  As much as I want to see this thing work out for all parties involved, I've yet to see any real signs that Cerberus is going to emerge the victor from this battle.

Update: Fixed the calculation to account for the 3-year gas-price guarantee

Bank of America's Bryant Park Building Blues

Later this year, Bank of America (together with the Durst Organization) is set to open the doors to their swanky new Platinum-L.E.E.D-certified office tower in Midtown Manhattan.  The project, a ~$1BN project, 50/50 joint-venture between the two organizations was set up with BofA to occupy 1.1 million square feet of the tower, with another ~1m sq ft of office space for other tenants above.  Only a very limited amount of space is left, with asking office rents reaching $200 per foot. 

When BofA began construction on this tower a few years back, things were looking fan-tas-tic; the economy was recovering nicely from the lows of 2001/2002, the Corporate and Investment Bank was expanding, things were looking up UP UP!  Unfortunately, the fates simply had other plans for Kenny Boy and his Merry Men From Charlotte.

From my research, by 2007 Bank of America had roughly 10,000 non-retail banking employees in NYC, +/- a few 'k here-or-there.  Since then however, they have lost - through the combination of layoffs and attrition - about 5,000+ of these employees, with rumours that even more will be layed off as soon as this week. 

Now, the problems for BofA here are twofold:

1. 1. They have a boat-load (technically speaking) of office space to which they are committed for the next 20 years.  Among which are 6 high-tech trading floors ranging from ~50,000 to ~100,000 sq. ft.  Even with very liberal assumptions as per the density of employees within the space, and the amount of actual "usable" space, BofA has committed to occupying FAR more space than their current (and for the foreseeable future) staffing situation requires.  However, due to the lack of new commercial space coming to market, a sub-lease situation could provide BofA with a solid alternative to utilizing ALL of their space, especially given the popularity of the building, the tight Midtown Manhattan office market, the quality of product, quality of tenants who’ve already signed leases (Akin Gump, Marathon Asset Management, HBK Investments), Green elements, and last-but-not-least, its location.

2. BofA received a number of "subsidies" for the construction of this building, many of which have drawn scrutiny from critics.  However, some of these subsidies are tied to specific employment numbers, which BofA has to reach by certain dates, lest they forfeit, or are forced to pay-back some subsidies.  From Site Selection:

 

These numbers are faily old (2004, I believe) and could very-well have been re-negotiated.  Also, there are other claw-back provisions (see the Site Selection report, link above).

Given these realities, I'm curious whether with BofA as both lessor AND lessee, if "they" have sub-lease or assignment rights per the contracts in-place.  Sources in the NYC commercial real estate game whom I've spoke with tend to doubt that BofA would do this, and if not, by my rather liberal calculations, they're going to be sitting on about 100,000-200,000 sq. ft. of empty office space for the foreseeable future, not to mention giving back a few million $'s in subsidies.

On a positive note, any Analysts still stuck around (assuming, of course, any in fact, are) might be getting that corner office alot sooner than they though.

Stand Up Economics

HT: Greg Mankiw's Blog

Yoram Bauman's Website

This Week in "Duh": Pension Bonds

Per this Bloomberg story, State issuance of Pension Bonds is picking up steam, with Connecticut, Alaska, Wisconsin, and others issuing the bonds at rates not seen for the better part of a decade.

The idea is simple (and hardly revolutionary): Issue debt that pays a lower interest rate than you can earn by investing the proceeds.  Connecticut, for example, issued $2.2BN of pension debt in April paying 5.88%, money which when invested, officials predict will earn 8.5%.  I've ran some figures through our proprietary models just to get an idea over what we're dealing with, and no matter how hard I try, I can't seem to find any holes with this strategy.  I mean, what could possibly go wrong here?

Well, some Corzine guy seems to think he knows:

It's the dumbest idea I ever heard,'' said New Jersey Governor Jon Corzine, the Democrat and former chairman of investment bank Goldman, Sachs & Co. ``It's speculating the way I would have speculated in my bond position at Goldman Sachs.''

Hmmm, interesting point sir.  You mean theres a chance that the States WON'T acheive their return predictions?  And if they don't, the fallout is going to be further catastrophic expansion of pension funding deficits?  GASP!

A study released last month by consulting firm Greenwich Associates in Greenwich, Connecticut, found that public pension managers expect to outperform market benchmarks by 1.46 percentage points over the next five years, an outcome it said was "probably not'' realistic.

Wait, so fund managers' tend to over-estimate their investment prowess and thereby their estimated returns?  Thank god they have convinced all of their state employees that they're getting X at retirement.  I mean, why would they want to incentivize their employees to save for themselves?  That would be silly, and it would force them to have personal responsibility (who needs to espouse personal responsibility when you have friends like Barney Frank, Chris Dodd and Charlie Rangell to bail you out).  And state revenues are going to decline soon too?  So they won't be putting more "organic" money into these funds to grow them?  Whoops.

You can guarantee contributions...but anyone who guarantees investment results is a fool...and probably a politician.

Duh.