IsThisRight

National Semi's Good Quarter: Inventory Reduction More Positive than Bookings Growth

Your article clarifies the statement made by NSM that they have lowered their inventory, in this cycle, from above 11 weeks to 9 weeks.

3 comments :

1/Thru your chart, this is a level reached SINCE DEC 2004!

2/ Since their goal is to keep this level of inventory flat WHILE THEY SEE INCREASED ORDERS, this is good.

3/ Nine weeks ( 65 days) is also the lowest level for TXN back in Dec 03.

Just-in-time manufacturing has the benefits of lower capital ( ie Debt) needed to run the business!!!

Even the most optimistic scenarios don't play well for China, Nouriel Roubini says. "The world where the U.S. was the consumer of first and last resort... and where China was the producer of first and last resort... is changing."

Just like we had a bubble in borrowing, they had a bubble in overbuilding in order to sell to us. Now that EVERYONE realizes that the RATE OF GROWTH was not sustainable, our economy and theirs will settle at a lower level.
But we should think that we will make everything that we need, or that they will have zero production.

Look at the auto production 2-5 forecast : some think it is will 9m in 2010, some think it will be 11m in 2011... So somewhere in the at range of volume AND TIME ( ie we could have 10m in 2010 not necessarily 2011)... So for now everyone is ESTIMATING.

For now, Roubini is using his fame to make judgement call that are not accurate. He should SHUT UP and go drink more wine to celebrate that he made a dire call once, while we fix what is wrong..

Exclusive: Big Banks' Recent Profitability Due to AIG Scam?

Let me try to understand the loop :

Figures below are FICTITIOUS --- just as a model ...

1- AIG, as an insurance company, holds contracts with HIGH liability - let's say 60 cents liability on the dollar ( assuming the subprime papers are worth 30 cents in the Itraxx index).

2- The banks hold/own the actual subprime paper which is mark-to-market at 30 cents. But the banks believe that the value ( based on cash flow) is closer to 60 cents.

3- AIG keeps saying that their CDS is "senior"--- meaning that they do not have to immediately settle until a set condition ( example : only pay IF and WHEN the debt cash flow is interupted. So if the mortgages still pay 92% cashflow, AIG doesnot pay). But meanwhile, on the AIG books, the liability of 60 cents on the balance sheet show LARGE loss.

So the unwind:
4- IF AIG pays 20cents to the bank to close out the contract, AIG balance sheet shows a GAIN of 40 cents ( 60cents liability - 20 cents).

5- The banks never believed that their subprime paper was worth 30 cents. The banks always said that they are not selling at 30 cents. So let's say that they think that it is worth 60cents.
By receiving 20 cents from AIG, they bought the suprime paper for 100 cents, got 20 cents from AIG. So now that the banks can sell the subprime paper for 60cents. Sell for 60 cents + 20 cents AIG = 80 cents bank income... loss of 20 cents ( 100cents purchase - 80 cents income from sales and insurance).

6- Now Mr G. ( Treasury ) walks in with Hedge Funds - $1T Plan - ready to sweep all the subprime away from the banks at 70 cents!.

In Step #5 above, the banks get 20 real cents earnings by 'cancelling' their insurance held by AIG. AIG 'makes' 40c or avoid loosing 40c ( 60 cents liability - 20cents paid). The banks never believe that the insurance is worth 60 cents, but they could not claim it either ( the banks were getting cash from the mortgages)

Zero Hedge is seeing all these unwind transactions at below value, BUT WHOSE VALUE IS TRUE... the market maker value ( Itraxx index?) or the value that the two parties agree to close out their liability? This CDS over the counter market is unregulated, remember? There is nothing that stops one party to accept whatever value agreed by both parties to unwind their own transactions.

When you have a car accident and the adjuster gives you a value for the repair, you can always negotiate a settlement price and turn in the damage car. The subprime papers are being adjusted to be traded in.

We should remember that the 'Banks Gains' are partly reversal of "loss" that they alreay took in 2008. The AIG gains are reversal of write-downs / reserve that they took in 3Q and 4Q 2008. The real 20cents that they transfer to the banks are capital that AIG will collect when they sell their other divisions ( airplane leasing...). AIG looses Broadwalk in the monopoly game; the banks' real losts are 100cents on the dollar minus what they get selling to the Treasury+Hedge Funds.

The CDS market loose the VOLUME of business on naked CDS. there will always be covered CDS on real bonds, but the insurance company will need to post real capital to cover potential claims.


Estimates:
AIG took a loss of $60B in 4Q2008. And we know that they decreased their CDS portfolio from 2.3T to 1.7T = delta $600B. So in round figure they paying 10 cents per portfolio dollar ( 60B / 600B) just to close out the CDS contracts.

Notwithstanding the hullaballoo about U.S. sovereign CDSs clearing 100bps, credit-default swaps are not a default trade. "99% of people buying CDS do not believe that the entity upon which they are buying protection will actually default... People buy and sell stocks because they think the stock in question will increase or decrease in price. Same goes for CDS."

CDS have been quoted as an 'obsolute' risk level as if a value of 100 for junk bonds has the relative weight of country bond.

Second, there is no continuous trend chart of price level, more of a peak thru a peep hole during a 'crisis window'.

The absolute CDS values are also published without volume figures. So a few million dollars worth of trade is supposed to be the guide for hundred of billions bonds with different maturities and rates.

CDS IS THE TAIL THAT WAGS THE DOG!

Buffett's Import Certificates Plan Could Pilot the Economy to a Safe Landing

Which came first the chicken or the egg?
We imported too much AFTER we created the pile of housing debt which gave us the false sense of being richer than we were. We could not have imported too much if we did not borrow to do it.
I still do not know about the chicken and the egg.

Paulson's Plan Fails to Understand the Problem; Madoff Is a Perfect Example

I agree with the conclusion of this theme, but for different rational. My conclusion is as follow : Mr Paulson understands the problem but has not told us, therefore we cannot comprehend Treasury n Fed actions since we donot agree on the problem that we have to address.

My view of the problem and actions :
The $7-10 trillion "invested" by Treasury ( and they have insisted that they are investing not spending) is MOSTLY A REPLACEMENT FOR PAST DEBTS held by US corporations, and/or to REPLACE LOST FUNDS ALREADY INCURRED BY SOME BANKS. So these TARP and Fed transactions are just recognizing these debts ( corp and banks) onto the US balance sheets. The market is not allowing any corporation and banks to expand their debt levels, while these Treasury and Fed actions are underway.
.

We need to to look at the total basket of corp debts and bank Tier 1 assets as the balance sheet of the U.S nation. As the fed lowers rate, the banks earn more. As the corporations log profits each quarter or sell assets to foreign companies, they will be deleveraging. So as a nation, the bank earnings and the corporation profits will help to deleverage the U.S. balance sheet.

At the personal budget level, from our salary, we will also be either saving more or paying back debt. This will also help in the deleveraging process.

Oh yeah, these pesky CDS ( 50 Trilliion liability). Look at it this way, by minimizing corp and banks going bankrupt, the CDS liability goes down as time elapses. The CDS buyers will be fatigue or they with an upswing they will panic and liquidate some of their bets.

Liongterm:
When the fed gets to lend NET NEW MONEY to the banks n corporations, without taking any old debt instruments or bank shares, then these steps would be growth stocking actions. But until now, the "Treasury investments" are just buying U.S. time to deleverage. Paulson did tell us : "we need to delverage" and that is what he and the WW market is driving U.S. to do.


So for now, let's try
1 to tally how much total debt we have
2 estimate our total earnings each quarter
3 assume that we use 80% of our colletive profits to pay down debt
4- estimate how much assets that we can sell externally - at right time at the right price
5- By adding 3 and 4 above, we can estimate the time needed to deleverage the US balance sheet.

Once we can see the end-date for deleverage, then we plan to grow the pie again SLOWLY by controllng both our spending and debt growth rates.

Pacific Ethanol: Market Growth and Increase in Production to the Rescue

This comment is one month later after the original post.

On Oct 2nd at an Oppenheimer Investment event, PEIX CEO stated that although they have increased prodcution, sales volume will be approx 50/50% in-house vs resales production.
So, just to correct point # 2 above, resales group is growing as fast as the new plant coming online in 2Q and 3Q... Good news that local markets are absorbing both production and resales gallons coming across from other companies.

Big Blue's Stock May Be Affected by IBM's 'Bank'

The 'financial engeneers (FEs)' talk about financial revenues as if all businesses operate on the same basis ( i.e you borrow money or get deposit, and then lend it out). Then they compare one company to the other. These FEs, without trying to understand any deeper how 'business' is done, do their utmost to be visible in the press by making predictions based on their own observations of past events.

In the case of 'IBM Banks', let's ask a few questions.
- Do they take get their high margins by borrowing and lend it out at a interest rates? From this they get 46% on the money? In my world, this is a corner loan - called loan shark! Since the company has best high-grade customers, I doubt that these customers are dummies. So my deduction is that this not how 'IBM Bank' earns this High money.

- What else does the 'IBM Bank' do as a business that could account for the high margin? OH, they lend money to customers doing mission-critical services... And that part of the business is growing ( like relieving traffic jam, or placing 100's of operating banks in China...). So by financing the customer's expense for these services, the bank earns more.
Yeah, this is good but still does not account for 46% margin.

-What else do they do to be so good? Ah, the 'IBM Banks' are "USED CAR SALESMEN" ( oops used computer salesmen) around the world.
Imagine being IBM Banks as owner of oops 3-4-5 year big and mid-size computers, kept in a pristine corporate computer centers. Due to efficiency or growth, the first user of these computers want to upgrade. Then the 'owner' of the computer has to take back the 'used computer' still in great operating conditions. By reselling the same computer to someone else who is in dire need for that size computer and making a profit. It is like leasing the best Benz, take it back and resell it at high-value! Ah, that part of the used car ( oops used computer) can have a high margin since the profit on the sale when added to the fact that two sales are made (1 sale to the 1st customer for a newer model and a sale to a 2nd buyer).

Ok, now we can understand that a bank is a bank and a 'used car' sales operation( oops IBM Bank is a bank and 'used computer' sales operation). As a seperate financial unit, due to accounting law, these used-computer sales are not reported in brand sales, but are reported as income in the finance unit. Oops, the cost of the used-computer is the trade-in cost which was established 3-4 years ago! In a conservative bank, Interest money was earned on the original equipment and part of that earning in the past 3-4 years was set aside as a risk mitigation ( in case the trade-in value is less than the resell price). But if the used-equipment sales keep rolling forward, the abl keeps making profits.

Now does the fear about the sub-prime sludge the same as the IBM Bank prospects? You tell me. Oh by the way, in an economic slowdown but a lot more companies might consider used equipments rather than buying new, the margins on the used computers go higher!
The trick is to slow down the expenses on new mnfg to match demand... not to slow the bank who has equipment with higher margin for sale!

This is why a high-level GRADE is assigned to the IBM Bank bonds.

How the U.S. Saved Europe's Banking System

Paul,
thank you for the comprehensive data on the european banks.
Any such insights of comparative info on US and AP banks?

Why I'm Selling Pacific Ethanol

Another 'financial engineer' who does not understand the business. The company had a construction program going for 3 years. You can look at current expense vs income. Of course the outflow of $ are more than income... If you understood the business part, you would have excluded construction expenses and make your deduction on 1- cost of good sold, and 2- SG&A and 3/ on Margin. At least your argument would be on solid ground.

Funny, ...my second comment is that you made your observation right around when they announce that they have COMPLETED their construction of 4 plants and now have reached the 220billion gallons capacity that they had as a goal for the company. Last celebration opening day on Oct 10.

Verasun's Screw Up

Tim, VSE management was rated "to be sharp in a difficult operating environment" because they had overbought corn and decided to sell the surplus at a high price. The very next quarter, they stand to loose 3-5X what they had earned before. Does it not feel like betting at a casino?

Like you, I had judged their 'operating' skills in merging two companies, building bulk supply to be able to optimize distribution thru unit trains, and becoming efficient with low volume production (355 million gallons per quarter).

Hopefully, they will step away from the casino table, rather than raising the ante by more bets- by their own filings, 4Q will also be similar impacted.

It will take sometime to work thru this as they have just added $.70/gallon to the cost of their plants( $100M lost over 1.4B gallon production). At 10% interest, this is a 7c cost to every gallon of ethanol that they sell until they can repay this debt.

I think that they have just made themselves a take-over candidate. May be someone will value their plants at $2.50 per gallon? ADM, or an oil company like BP to the rescue?

Are We at the Bottom of the Ethanol Barrel?

Everyone tries to find the rational of the ethanol stock price in the process of how ethanol is made and /or in how much comparative energy ( fuel gain) is created. All good arguments when there is a stable market and one is setting a comparable price to other stable fuel.
However, the bounce in these ethanol stocks can be best understood this way:
1/ In a "credit crunch" environment, the "squeeze" came from the speculators trying to trap the companies while their cash flow is constrained. The constraints are from the construction obligations and lately the price of corn.
NOW, since PEIX has shown that a) they can generate cash (EBITDA $12M) even at the high price of corn b) they are at the end of their construction plans (3Q08) and c) they finally have a CFO who can look under all the rocks of the financial contracts.... for all these facts, now Wall St can start pricing the stock on its relative value to oil/gas, without the 'squeeze' from the SHORT speculators.

Incidentally, except for ADM who has a lot of cash, most ethanol CORN plant construction will be done by 2008!!! The scarce about corn will be over soon.

Pacific Ethanol: 'Build-Ahead' is a Manufacturing Strategy

Build-ahead in a growth market works EVERYTIME!

Plus today, we learn that 1 of their plant had a few down days. This did not stop PEIX from showing 'better-than-expected' results, in a higher corn price environment.

My next prediction ( give it 60 days) is lower corn price - due mainly to WW supply from poorer countries around the world. An ear of corn is an ear of corn, when fed to the sows.

It's Now 'Official': Ethanol Is a Scam

Bravo, for the 'scam' story. Let's turn off ethanol and buy more oil, while we go wild on using more gasoline!

What is your alternative plan, Mr Perry, PH.D?

AMD Product Ramp-up and New Factory Plan: What Gives?

The point about the Graphics resources : if two teams are folded into one team, you can pursue future designs with less resources... by no means the job is done, but the next "innovation" takes less to do with one team rather than two.