The New York Times leads page one with a story on a “wave of bankruptcies” at retail chains, something it says is “expected to remake suburban malls and downtown shopping districts across the country.”
There’s not much here that hasn’t been written anywhere else, including in The Providence Journal two months ago. The Wall Street Journal, in a Wednesday story about the closings’ effect on retail real estate, noted that the supply of shop space will increase about 3.5 percent this year—not good timing.
The Times notes that eight “mostly midsize chains” have gone belly up since the fall and another, Linens ‘n Things, is on the brink. The paper says store closings this year will be at the highest level since 2004, in part because even healthy chains are paring poor performers.
The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable…
“You have the makings of a wave of significant bankruptcies,” said Al Koch, who helped bring Kmart out of bankruptcy in 2003 as the company’s interim chief financial officer and works at a corporate turnaround firm called AlixPartners.
“For years, no deal was too ugly to finance,” he said. “But now, nobody will throw money at these companies.”
Retail sales have been soft in recent months after years of solid growth, as this Barron’s chart shows. Yesterday, the Commerce Department reported that sales rose 0.2 percent last month. But after counting inflation the real number is actually negative. And without including gas purchases, sales were flat.
Last week, consumer confidence dropped to a twenty-six-year low—and, of course, people don’t spend as much when they’re not feeling good about their finances. In another measure of sales activity, Bloomberg says slow sales caused inventories to increase 0.6 percent in February.
A credit watch for Uncle Sam
Standard & Poor’s put the U.S. government on a sort of credit watch, saying it may have to downgrade the entire shebang if the federales have to bail out mortgage-backers Fannie Mae and Freddie Mac. The government has enabled the two to increase their housing exposure in recent months in a bid to prop up the housing market Weekend-at-Bernie’s style.
How could Fannie and Freddie get in so much trouble that they’d threaten the creditworthiness of the entire American enterprise? Here’s how, says the Financial Times:
In the second half of 2007, about 90 per cent of new mortgage funding was provided by GSEs. They have about $6,300bn of public debt and mortgage securities outstanding, more than the $5,100bn of outstanding US government debt.
What would it mean if the U.S.’s AAA ratings were downgraded? The papers don’t tell us, but the almost certain financial chaos and widespread economic impact that would ensue merit a look.
And the housing bust isn’t the only thing threatening our creditworthiness, the FT reports:
In January, Moody’s Investors Service, another credit rating agency, said the US could risk its triple-A rating within a decade unless soaring healthcare costs and social security spending was curbed.
The WSJ reports on A14 that Brazil’s state-run oil firm says it has struck some big-time black gold off the country’s coast. If the 33 billion-barrel unofficial estimate is correct (and the Journal questions the number), the paper says it would be the one of the biggest oil discoveries in decades, at a time when oil prices are at a record, and turn the country into an “important” petroleum exporter.
Brazil is fast becoming the talk of the oil world. It is a rare bright spot in terms of oil in the Western Hemisphere, too. With production declining in Mexico and Venezuela, the two traditional regional oil powers, the rise of Brazil as a major oil exporter would be good news for the U.S., which increasingly is relying on oil imports from the Middle East.
The Journal says getting the oil out of the ground will be difficult and expensive.
Peak oil in Russia
In other oil news, the WSJ and the FT both front news that Russian oil production fell for the first time in more than ten years, even as super-high petroleum prices make it more profitable than ever. Yesterday, oil hit a record $112.48 a barrel.
The FT reports that an executive of the Russian oil giant Lukoil tells it that the country’s oil production has peaked.
Mr Fedun compared Russia with the North Sea and Mexico, where oil production is declining dramatically, saying that in the oil-rich region of western Siberia, the mainstay of Russian output, “the period of intense oil production [growth] is over”.
The same exec tells the Journal the country needs a trillion dollars in investment over the next twenty years to keep up current production levels.
Is United-Continental next?
Delta officially agreed to merge with Northwest. If the deal goes to fruition it will create the biggest airline in the world. Bloomberg reports that it would control one-quarter of all U.S. air travel, and the Minneapolis Star Tribune says it would be “half again the size” of top carrier American Airlines.
The papers all say the deal is likely to spark a round of airline mergers. The WSJ on B1 says the deal will “unleash a wave of consolidation as U.S. carriers try to bulk up through mergers to endure deteriorating industry conditions.” It and the NYT report that United is expected to try to court Continental. The NYT says airlines will have to hurry to get them done before the merger-friendly Bush leaves office.
The NYT says the two companies hope to have the deal completed within a month. The paper says the deal is worth $3.1 billion, while Bloomberg and the Financial Times say it’s $3.63 billion. The WSJ fails to put a price tag on it.
The deal still faces headwinds from labor problems. The Atlanta Journal-Constitution, the hometown paper of Delta, says the news was “drawing howls of protest from Northwest pilots.”
Wachovia reported a near $400 million first quarter loss, officially announced that it’s raising $7 billion in a 14 percent-off sale to shore up its balance sheet, and cut its dividend by 41 percent. Its share dropped more than 8 percent.
In its C1 story, the WSJ goes up high with the heat on the bank’s CEO, while the NYT and FT emphasize the turmoil the loss signals for the rest of the financial industry, which is heading into earnings season (though it says the loss was only $350 million).
The FT quotes said CEO as saying things in loan land are about to get worse. Here’s the NYT:
A growing number of homeowners with mortgages from Wachovia walked away from their homes when they fell behind on their payments. Charge-offs nearly doubled, to 0.66 percent of net loans. Wachovia’s capital levels, meanwhile, have been depleted by the mounting losses from its ill-timed acquisition of Golden West Financial, a large California lender, near the peak of the housing boom. Lenders of all sizes face similar problems, and for some the situation is dire. On Monday, the Fremont General Corporation, a troubled mortgage lender, agreed to sell its retail banking assets for $198 million.
The WSJ puts the Fremont sale in a separate C1 story, and the Los Angeles Times notes that “California’s mortgage woes keep landing on Wall Street’s doorstep.
The Bear’s meager profit
In Bear Stearns news, the company somehow managed to report a profit of eighty-six cents a share (down 79 percent) in the first quarter despite its near collapse and rescue by JPMorgan Chase and the Federal Reserve.
The company said that the Securities Exchange Commission and the Federal Trade Commission are trying to wipe their feet on the Bear rug, the former for anti-competitiveness and the latter for violating consumer-protection laws.