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Five Things You Need to Know: GE Enhanced Cash Fund "Breaks the Buck"; Kevin Announces $1,275 in New Writedowns; What Are "Writedowns"?; Macy's Delays Buyback Parade; "$1,000,000 is the new $10,000"


What you need to know (and what it means)!


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. GE Enhanced Cash Fund "Breaks the Buck"

Yesterday after the close came news from Barron's that a "credit enhanced" cash management fund run by General Electric's (GE) GE Asset Management arm had effectively "broken the buck."

  • First, let's clear up some confusion created after several wire services picked up the Barron's article.
  • Barron's reporter Andrew Bary did a great job making sure in the lead of his story that it was clear this is not a money market mutual fund:
    "A SHORT-TERM INSTITUTIONAL BOND FUND MANAGED by General Electric Asset Management apparently has suffered losses in mortgage and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar."
  • Confusion was created by a number of wire service reports that made it seem as if this was a money market mutual fund.
  • It was not a money market mutual fund, and it was not a retail cash management fund.
  • As Bary notes, it was an "enhanced cash fund" that seeks to provide a higher yield than money market funds.
  • The bulk of the money in the fund, which totaled $5 billion, came largely from GE's pension trust and other GE employee benefit plans.
  • Outside institutions were offered the ability to redeem their holdings at 96 cents on the dollar.
  • The news that it is "breaking the buck" is an important data-point, even if it is not a retail money market fund.
  • For one thing, although these cash management funds - even money market funds - are under no obligation to maintain their $1 net asset value, it is extraordinary when they choose not to do so.
  • Why? Imagine if you are in charge of cash management at a large institution.
  • Would you be willing to hand over your cash to GE's Asset Management products now?
  • The larger issue going forward is one of perception.
  • In credit markets, perception is something that is very difficult to quantify.
  • In fact, perception has been the subtext of every bank conference call I've listened to the past few weeks.
  • Time and again, perception is cited as the reason certain assets are not trading and are effectively "frozen."
  • But if it were simply a matter of valuation, we'd all buy the "undervalued" credit products and get richer.
  • Perception matters.

2. Kevin Announces $1,275 in New Writedowns

Late night I was forced to disclose more than $1,275 in additional writedowns tied to the subprime mortgage mess, and the failure of certain horses to run as expected at Aqueduct, including the collapse of the 8 horse in the 9th race despite having a three-length lead in deep stretch. I mean, who gives up that kind of lead in deep stretch? The horse was literally running backwards in the final furlong!

Investors, meaning "my wife," called the new writedowns "unexpected, shocking and disappointing," especially following on the heels of writedowns last Saturday night totaling more than $500 due to the subprime mortgage mess, and Auburn's inability to cover the spread against Georgia.

The new writedowns are taking place despite a statement released last Sunday morning where I said, "Although the ongoing subprime mortgage market issues are a concern, I am quite confident I have a pretty good grip on the situation at Madison Square Garden today where the winless Heat stand virtually no chance against a Knicks team rejuvenated by the addition of Zach Randolph."

That statement was followed by a clarification the following day: "The ongoing conditions in credit markets, and last night's unexpected three-point loss by the Knicks may adversely impact our ability to eat dinner going forward. However," I cautioned, "should credit market conditions materially improve, and should the track at Churchill Downs come up sloppy this afternoon, there is no reason to expect additional writedowns forthcoming."

For a brief period it appeared I was on track for a profit. The exacta at Churchill in the 3rd race returned $213, and I had the winner of the 8th that paid $11.80. However, as the subprime mortgage market began to show additional signs of stress late yesterday afternoon, also pints of Guinness, those profits quickly evaporated.

Following last night's disclosure of additional writedowns, investors (Hi, Honey, I love you!) called an emergency board meeting with one of her sisters to discuss my exposure to subprime mortgage products, the OTB and whether I would be able to retain control of the firm's debit card. Meanwhile, I am still scheduled to meet this afternoon with Independent Banker, the 8 horse in the 7th at Churchill (seriously!), who is listed at 15-1 in the morning line. However, the possibility of additional writedowns related to subprime mortgages, and the difficult outside post given Churchill's one-turn mile, cannot be completely ruled out.

3. What Are "Writedowns"?

The sad story above raises the question, What are "writedowns", anyway?

In simplest terms, "writedowns" are corporate geek-speak for "losses."

These days many large banks are finding out that certain assets, mostly collateralized debt obligations (See Five Things Nov. 9 for more on Collateralized Debt Obligations), that are being carried on their balance sheets are worth less, and so they are "recognizing" the reduced valuation. This "recognition" is called a corporate "writedown."

Like many accounting terms and phrases, the origin is related to the act of "keeping" the corporate books. Phrases such as "mark-to-market" for example refer directly to the act of "marking" a value of an asset in a book. Writedown refers to lowering the cost of an asset on the books.

  • A great question about "writedowns" came in from Minyan Di yesterday afternoon:
    "what does an institution gain when it "writes down" debt? I assume it affects annual profits, perhaps taxes as well... What exactly is a write down, and what does it mean to the company doing it? Am I crazy for seeing stocks on some of these companies rally after such announcements?"

There are a couple of issues at work.

First, many of the corporate writedowns are required by banking regulatory agencies.

Why? Well, think about it for a moment. The value of assets that are held by a company is extremely important in determining the overall net worth of a company. What has happened under new accounting rules, the FASB 157 we have written about, is that companies are required, when possible, to value certain assets based on market prices. When these assets trade, even if there are very few trades, or when indexes that supposedly track some of these assets move, it creates an observable value for that asset.

But this works both ways. Recently Bank of America (BAC) "wrote up" an investment it had carried in a China bank to the tune of $16 billion dollars or so.

As for the writedowns, the issue is that even if a company has no intention of selling (if they can avoid it) some of these assets that have declined to "distressed" values, they can't just leave them on the books at what they think are more "reasonable prices." They are forced to write down the assets at the observable prices. And this creates losses. In this way, particularly with assets that are valued based on perception of credit quality, losses can beget losses.

And so a vicious cycle gets kick started.

4. Macy's Delay Buyback Parade

Going over the Macy's (M) call transcript yesterday the news was, as one would expect, rather grim. But what is grim is less the anticipated slowing retail sales environment, but other comments related to credit markets, corporate buybacks and the ability to generate EPS growth without the buybacks.

  • The following comments during the call on Macy's share buyback program from Karen Hoguet, Macy's CFO, are telling:

    "Given the current condition in the credit markets, we are carefully evaluating our options with respect to the timing of completing our remaining $1 billion authorization. As a result, some or most of that $1 billion could end up being deferred into next year. While we are optimistic about our prospects, and we believe the stock today represents a great value, we do need to balance this with the benefits of preserving access to all financial markets during these volatile times in the credit market."
  • Remember, there is a specific reason companies repurchase shares of their own stock. And this is another untold consequence of the credit market problems.
  • Without corporate buybacks it is impossible for many companies to get EPS growth.
  • That is where we now are in this economy.
  • Karen Hoguet, CFO, in response to pushing back the billion dollar share repurchase authorization:

    "The truth is that's why we give a range of estimates. If we don't buy back the billion dollars, obviously the operations are going to have to do better to get to the same earnings. But that is part of the reason we give a range. You know, it's not as precise as you all think to estimate earnings going forward. So we do the best that we can as we provide guidance."
  • Yes, if companies such as Macy's can't buy back a billion dollars in their own stock, they are going to have to do better operationally to get the same earnings.

5. "$1,000,000 is the new $10,000"

According to the New York Times, despite fears that the art market might finally begin to crack due to... wait for it.... yes, the subprime mortgage market, an overflowing salesroom of enthusiastic bidders at Christie's "proved the naysayers wrong as 16 record prices, for artists including Jeff Koons, Gerhard Richter and Lucian Freud, propelled the market for postwar and contemporary art to new heights."

  • Here's the quote that really stood out:
    "One million dollars is the new 10 grand," said Andrew Fabricant, a Manhattan dealer, as he left the salesroom. "This was supernatural."
  • Wow, that sounds like the hyperbole of an art dealer who just sold several paintings for several million dollars.
  • But here at Minyanville we wanted to find out, is $1,000,000 really the new $10 grand?
  • Since $10,000 is 1/100 of $1,000,0000 we just need to see at what point the purchasing power of $1,000,0000 was reduced in value to equal $10,000.
  • That's easy enough.
  • Take a look at the chart below of the Purchasing Power of the U.S. Consumer Dollar dating back to 1914, the year the U.S. Federal Reserve began operating, courtesy of

  • Hmmm, looks like $10,000 is not quite yet the new $1,000,000, more like the new $200,000, but we're getting closer every day.
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