Five Things You Need to Know: Don't Worry, It's Well Contained
But for the smooth malt liquor picker, now is a time to rejoice!
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Paulson Says "Relatively Well Contained"
While everyone was busy watching the meaningless steroid scandal sideshow in Washington, Treasury Secretary Henry Paulson was barely a stone's throw away testifying before the U.S. House of Representatives on the fiscal stimulus package.
Among other things, the Treasury Secretary repeated his assertion that although the economy is "slowing markedly," we're not headed into recession, and that even though the housing market correction hasn't run its course, we will continue to grow as an economy. There was one change in the customary upbeat commentary. He refrained from characterizing credit market issues as "well contained," opting instead for "relatively well contained."
2. But Delphi Problems Show Otherwise
While the Treasury Secretary was busy testifying before the House of Representatives about how things are "relatively well contained," we were busy reading up on Delphi Corp., and learning how things are actually not relatively well contained at all.
Delphi, the auto-parts maker formerly owned by General Motors (GM), may need financing help from GM to complete a $6.1 billion loan package needed to emerge from bankruptcy because can't find any lenders willing to extend the company credit.
Lead banks JP Morgan (JPM) and Citigroup (C) are having trouble syndicating the loans to other lenders because the investors say the debt isn't priced correctly for the perceived risk, the Wall Street Journal reported.
But it's not just a Delphi issue, because it if was that would mean credit problems are relatively well contained. Instead, as Bloomberg this morning noted, over the past six months banks have been forced to abandon loan sales or in some cases offer discounts of as much as 5% for companies including Harrah's Entertainment (HET), First Data Corp. (FDC) and Alltel Corp. (AT) due to slack demand for high-yield, high-risk debt.
Advance Monthly Retail Sales reported this morning came in above expectations, but what does this really mean? Check out the first installment in Minyanville's newest ongoing series, What Is It and Should I Care? Advance Monthly Retail Sales.
3. Panera Bread Company and the Case of the Disappearing Cash Balance
This morning on its earnings conference call Panera Bread (PNRA) was forced to detail why the company had to write down $1 million due to a short-term investment in the Columbia Strategic Cash Portfolio, an enhanced money market fund through Bank of America (BAC) that we wrote about in Five Things back in early December.
Since 2004 Panera has held an operating cash level of $10 to $15 million in a cash reserves fund, a traditional money market fund. Amounts above that threshold the company held in the Columbia Strategic Cash Portfolio.
According to PNRA CFO Jeffery Kip, in November of last year the company had $26.5 million in the Columbia fund - more than 75% what PNRA says is the maximum balance kept in the traditional money market fund, which to me seems like a lot of risk for a few extra basis points - and asked BAC to remove the funds, but were not allowed to do so. Shortly thereafter, of course, we learned that BAC and Columbia had frozen the fund to redemptions.
OK, so we're almost halfway into February and PNRA is now writing down $1 million. Time to move on, right? Not exactly. Since November, PNRA has withdrawn approximately $8.2 million from the fund, which according to Kip is 98.7 cents on the dollar. They still have $18.2 million in the fund, which is still more than 20% of the max value the company keeps in traditional money market funds.
Meanwhile, PNRA is valuing its investment in the fund at about 96 cents on the dollar, but how? According to the company, this valuation is based on direct market quotes, valuations from Interactive Data Corp., the ratings agencies, and the company's assumption that anything in the fund with lower than an A rating (approximately 6% of the holdings) returns an average of 40%.
We're not so sure this is the end of the story.
4. Upside Down Mortgages
According to a report published by real estate data service Zillow.com, 39% of those who bought a home two years ago already owe more on their home than they can sell it for, raising the possibility that the numbers of homeowners choosing voluntary foreclosure - walking away from their homes even though have the ability to continue paying their mortgage - will increase.
As many as 5 million U.S. homeowners may have mortgages that exceed the value of their homes by the end of this year, according to estimates from Kenneth Rosen, head of the University of California's Fisher Center for Real Estate and Urban Economics, Bloomberg reported.
Fannie Mae (FNM) is forecasting a 4.5% decline in home prices this year, further pressuring an oversupplied housing market and making it difficult for those who are upside down to refinance their adjustable rate mortgages. Bottom Line: A continued decline in the velocity of money.
5. Bottled Water Now More Expensive Than Malt Liquor!
According to scientists, water is vital to life. But malt liquor beverages are vital to an enjoyable weekend, and since weekends are a part of life, and malt liquor is made with water, it follows logically that malt liquor is the key to all of life.
Considering that bottled water is now more expensive than malt liquor, that's quite a bargain for the smooth malt liquor picker.
A Minyanville random survey of retail outlets found that the average retail price for 40 ounces of Dasani Purified Water is $3.10.
However, the average retail price for a 40 ounce bottle of Colt 45 is $2.05, a savings of more than 33% over water. And that's despite a surge in beer prices thanks to a shortage of hops and malted barley.
Well, enjoy it while you can, malt liquor lovers. Beer prices were up last year, and companies such as Anheuser Busch (BUD) and Molson Coors (TAP) are expected to continue to raise prices, perhaps by as much as 10% to 15% this year.
Colt 45, by the way, is owned by Pabst Brewing Company. Believe it or not, Pabst is a "virtual brewery," meaning it owns no breweries of its own and instead pays others such as Miller to brew its beers while retaining ownership of the brand.
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