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Bernanke on Equipment Leasing
Our foolish fearless financial leader gave a speech
this week titled Restoring
the Flow of Credit to Small Businesses. As near as I can tell
the Chairman had little to offer those small businesses that were
looking for some of that free money the Fed is doling out. One sentence
in this did catch my eye. He quoted a participant from Detroit:
"If you
thought housing had declined in value, take a look at what equipment is
worth."
This hit a personal chord. I have been trying to sell my 55 horse, Ford
diesel backhoe/bucket loader for a few months. While my tractor has been
gracefully aged (it’s still beautiful to me) it is young in terms of
hours worked. No one wants it. Its value is a tad over the scrap value
of all that steel.
Some data on the equipment finance segment of the economy from ELFA (Equipment Leasing
Financing Association).
-Total financial assets are today $520 billion. At a half trillion this
is a fairly large number.
-2009 was a disaster for this group. Some highlights:
Return
on assets (ROA) declined by half, falling to 0.6 percent from 1.2
percent during the year-earlier period.
At a ½% return on assets no one is making money. Keep in mind that
during most of 2009 we had ZIRP. The lousy net numbers are a result of
charge offs.
New business volume among a sample of the ELFA
member companies declined 30.3 percent in 2009.
Actually 2009 was not such a bad year, so this drop is a measure of how
bad things are in equipment leasing land.
Pre-tax
income and net income, in dollar terms, declined by 55.7 percent and
54.4 percent, respectively.
If a public company announced results like this the market would take
the stock out back and shoot it for half its value.
These are the results from 2009. We are today more than halfway through
2010. We all know that things have improved somewhat since then. Woody
Sutton the ELFA President had this to say:
“Fortunately,
it appears the worst is behind us."
Unfortunately for Mr. Sutton his customer base does not agree with him.
The results from a survey of its members says something different:
100% of
the leadership still evaluates the current U.S. economy as “poor” or
“fair.” In June, 67.4% rated the economy as “fair” and 32.6% rated the
economy as “poor”.
Think about that for a second. 100% of the responders think the economy
stinks. Not even 1% thinks it is good. As the economy slows this fall
and winter this industry group is going to suffer. New business will be
down, charge-offs will rise. With that in mind do you really want to go
out and buy those GE shares? To me it looks like a $10 dollar stock in
the making.
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This will also translate into deteriorating recovery rates. 40% recovery is a joke IMHO.
I always rank BK high among the ZH posters and never miss his comments.
This one strikes closest to me as a small biz owner (no debt, always pay cash, hate the banks, etcetera).
I have a couple of new machine tools sitting in warehouses that I have to get onto my shop floor. The market for the very serviceable machines to be replaced is horrible. I should have never dropped the 335k on these as I knew that the shit would be hitting the fan soon enough. The buys were for tax reasons so that I would have something left from previous efforts (40 tons of machinery) rather than giving it away to the fedgoo and stategoo.
My quotes came in for "health insurance" at 35.7% over last year's bill. Our company loss ratio over the past twenty years is well below 20%, yet they are piling on for anyone that meets the deductible.
I should have kept the purchases at the very low levels that we see in AA and other manufacturers that are reporting. We are very busy now. That can go away in our typical two week to two month lead times.
It is impossible to plan anything under the "bi-partisan" regieme.
I want a collapse so that I can plan farther than the next banking/gombit scam.
Market Ticker Guy; Denninger says: Oil Spew Update: Where's The Doom? http://market-ticker.denninger.net/archives/2511-Oil-Spew-Update-Wheres-The-Doom.html He's from the gulf and says nothin to see here and with the capping all the equipment will, no drill zone, erode away into la la land mark to fantasy rustiness!! Move along! Nothin to see here!!????
Only equipment being leased heavily is bullshit spreaders.
Insolvent and bankrupt are two different things. As long as they can borrow money from depositors (with taxpayers standing behind these liabilities), they won't go bankrupt. They might be insolvent, but so are C and BAC.
TBTF=GE.
I'm short Ge via SH, and a bushel AAPL via QID. There's the break 1070 SP..a close under today what be exclnt.
Then you have our fine state of California pass some ridiculous clean diesel regs for off-road (inc construction) equipment render scads of equipment worthless in Cali, based on wildly high estimates of their pollution contribution. Caterpillar Leasing place down the street closed up about a year ago.
GE was a big donor to O and the Machine, so you can count on them muddling through one way or another ... Can you say "Green Economy" and "High Speed Rail?"
GE at $10? That's crazy talk!
GE is a zero, has been for quite some time. Of course it helps when your CEO is a Class B director of the New York Fed (to represent the public - go figure), and you get awarded $3B contracts from Iraq's government. Here I didn't realize Iraq had a government, let alone $3 Billion.
I especially like when Obama advocates for those redonkulous giant windmills, because it's like standing up and saying, "I don't possess fourth grade arithmetic skills!"
You gotta finance a whole lot of guitar companies to pay off that kind of debt; maybe even get congress to pass legislation requiring all Americans to own guitars. And while GE may make MRI machines, the taxpayer provides GE's life support.
I don't mean to seem ungrateful for the countless hours of propaganda, spin, and cranial diarrhea they've spewed our way, but everyday that GE stock has a price other than zero is a day America can't call itself a capitalist country with a straight face.
The DOW/SP00 leg down has started.
http://stockmarket618.wordpress.com
Gee, ya think? You sure about that?
hey Bruce.
fortunately, GE has massive CMBS and RMBS portfolio assets to make up for the falling value of fixed assets and disappearing leasing cash-flow... (either that, or the portfolio assets have also collapsed)
and fortunately, GE has been aggressively writing down the value of their fixed and portfolio assets... (either that, or they have not at all)
and fortunately, GE is not highly levered so they can afford those massive write-downs to 'real' value when they decide to (are forced to) take them... (either that, or they would have losses wiping out capital 10x over)
this is not a lightbulb company. it's a massive, poorly run, one-directional bet hedge fund.
Thanks to eBay and its transparent price discovery, used s**t ain't worth s**t anymore.
As of today's stock price, GE sells for 4X Q1 tangible book. Why anyone wants to pay even twice book is unclear to me, but even if it trades there, price target is in the $7-8 range.
Given likely aggressive valuations hidden in tangible book, in a new cyclical downturn within the ongoing depression GE could see $1 or go Lehman/AIG.
$10 is a generous PT for a bear.
Book assumes the assets are worth what they are being carried at.
Falling From The Sky
GE will be hurt on multiple fronts, particularly in the "big-ticket" aviation sector. Engine leasing, like the overall airline industry, has been hard hit but imagine the problems with declining assets on the balance sheet of GE Capital Aviation Services, one of the top two aircraft leasing companies.
Why worry about farm equipment when pigs are dropping from high altitude?
No idea why GE even survived... for years, it hasn't been anything but an overleveraged hedge fund with a med devices factory as a false front. Biggest bailout queen on the planet.
Another common feature of the business cycle also calls for an
explanation. It is the well-known fact that capital-goods industries
fluctuate more widely than do the consumer-goods industries. The capital-
goods industries—especially the industries supplying raw materials,
construction, and equipment to other industries—expand
much further in the boom, and are hit far more severely in the
depression.
Murry Rothbard America's Great Depression
Chapter 1 The Positive Theory of the Cycle page 9
It is a great time to buy things, and a terrible time to sell. Fear of what comes next is paralyzing people into deferring purchase of equipment. Does your backhoe have value? Of course--ever try to excavate with a shovel?
I live in a multi-story wood framed condo complex. The morons on the Board of Directors have not maintained it, and as a result, we have issues. Of course, they bring some sharpie who claims that the scope is going to cost $2MM. People here vote down the $23-25 M special assestment. They are shit-scared. A second opinion says the damage is really closer to half that price, and he provides evidence to support that claim.
Doing nothing invites ruin. There is still a workload out there to be performed, but it is the uncertainty that keeps people frozen into inaction. Sometimes perception is stronger than reality. Of course, human nature being what it is, instead of taking advantage of a decimated construction situation, these peeps will likely wait until others have begun addressing similiar issues, and wonder why the prices have soared.
GE makes MRI machines, at a cost of 2MM per unit. The diagnostic that cost $900.00 in 1992 now runs $3,000. My GE oven, dishwasher, and refridgerator are 21 years old, and operate flawlessly. American made. Of course, they scuttle their appliance division to embrace a financing unit, to their peril. Typical American CEO leadership. THAT is why we are fearful. We have to live with the consequences of inept leadership, including the clueless B. Bernanke.
Mr. "pro business" Obama is about to pull the plug on the accelerated deduction for small businesses. Starting January first, the option to expense $100K of capital equipment goes away, replaced by that oh-so-generous $25K relic from the 1980s. Yep, that should light a fire on equipment purchases in this booming recovery.
To his credit, he's driven the economy into the gutter such that the price of capital equipment will be so low that $25k should expense it :D
Aside from equipment, at some point we're going to be like France, where employee rights will be so onerous that nobody will want to hire for fear of not being able to fire. With all the health"care" entitlements coming online, businesses won't be able to hack it, or the profit margins will be so thin we'll have to trade innovation for profit.
Used maybe. Everything new and worth a damn is imported. When it comes to business, this administration is clueless for anything besides keeping unions happy.
Typo: "cord"/"chord"
Yeah. Sort of a musical thing, as opposed to a garrote.
Some how all the talk of tractors got me to thinking about a cord of wood. A natural error...I fixed it. Tks.
Bucket probably holds half a cord, eh?
I tried for months to sell a specialty trailer that costs about $12k new. And I'm in an area with a traditionally healthy secondary market, even in downturns (lots of hobbyists and tinkerers and retirees). Finally put it to auction, and it sold to an out of stater for about 6% of new (near scrap value), which about made me weep. Much to my relief, the buyer never completed the transaction, and I still have it. Because it's a niche product, it's atypical in terms of resell, but in a "normal" economy I could expect to get 18% to 25% return on it.
I sold a tractor about a year and half ago, and took a mild haircut on it. To do the deal I had to truck it about 500 miles to meet someone half way. I was lucky to even get an offer, though it was around 500 hours, and a top brand in like new shape. I sold it because it was just sitting idle - no work for it. 5 years ago I could have made money on something like that.
Excellent article and yes all those tools and bits that supported the inflated construction and other markets a few years ago are now languishing trying to be sold due to needed funds, not be needed at all, etc. There are many factors some might not realize about this slowdown that hurts supporting companies to the main sector. Think of it as if GM went under, what other companies that rely on their sales go under as well.
There was a large equipment auction near us recently. Lots of people looking, very few buying. Anyone that makes, finances, or services this equipment will have a very difficult next 8-12 months. Minimum.
Oh, and I thought that ELFA was Tim Geithner's fraternity.....
tremendous!
Thanks Bruce,
This is deflationary, no?
Renting heavy equipment for the forseeable
future seems correct. Have you tried renting?
Renters beat the crap out of equipment and then bring it back. I'll keep her. My plan was to trade my big machine for a smaller Kubota. I have Ag tires. I need turf. But with no value to my old stuff I am not going to buy new. And that is what makes for recessions.
Besides the high probablity of damage to the equipment, renting will in all likelyhood end up costing you far more money than you'd make, especially when you consider the following:
First, the 1099's you will have filed on you by the renter will necessitate your paying federal/state/county/city taxes on the "profits".
Then the city/county/state officials will be by to find out if you have a business licence, which will cost you a fee and a penalty.
Next, the state will be looking for their business asset tax check.
Then you will be visited by a building/zoning inspector to find out if you have the proper location for operating a rental business, and if not, then look for another fee/fine.
Next you'll see the fire marshall on your front doorstep to inspect/insure that your facility is up to code, fees and penalties to follow. You might need to install a fire sprinkler system, and if your water pressure isn't sufficient, you'll need a $25K pump to get to the required flow.
You will need to obtain a hazardous waste permit for the diesel fuel you have stored on the property, OSHA might pay you visit as well.
Then you will need to hire a CPA to file a federal/state business return for this activity and issue you a K-1. This is after you spend a good day or two searching through your records to locate your original bill of sale, the date you placed the equipment into service, etc., etc. But what the hell, you can depreciate the equipment which is a good thing, except the asset depreciated far quicker than the timetable provided by the IRS. So sorry.
When you look at it this way, the best possible outcome is for the potential renters to sneak back over to your place late one night and steal the darn thing.
You are insured, right? :-)
JTS
I think not. I bought it new 20 years ago. It is out of the weather. No insurance. Not registered. It is great in a blizzard. Nothing stops it. She can scoop up a half yard of gravel in a single bite and carry that aound all day long and not complain.
Bruce, you were robbed yesterday on Dylan's show. Robbed I tell ya! Even Wendy was stepping all over you.
And what's with the "Financial Blogger" title they had under your name? You'll always be more than that in my heart. :>)
P.S. I won't mention the gray hair because at least you have hair.
Tks. Odd twist. NPR picked this up. It will be on air Monday between 9 30 and 11. It is not clear if this is going national or not. Mhari Saito did the bit. She is a regular. Fun to work with. I have not done radio before. This was weepy stuff. Way out of character for me.
Old equip is better quality than new, IMHO. I like the older stuff, and tend to gravitate toward it because it reminds me of what our country used to produce. Hate to see a tractor or any other machine crafted by someone's grandpa wind up being melted down in china to make cheap lawnmowers that don't run worth a damn.
In any event, glad to know you can work
the acreage. Got a spread that's plantable
myself. Keep that baby well greased.
But can't you buy used cheap?
$10 value is on a fundmental basis, correct? What is the value on a QE2/QE3 basis?
9.50 target
http://stockcharts.com/charts/gallery.html?ge
$500 in monopoly money.
Excellent...and good luck financing new equipment too!
A horror sector!
Ritchie Bros Auctioneers (RBA) stock is down over the last year. They seem to have done pretty good overall, because they have catered to one-off projects, among other things. A construction co. building a bridge might buy a new crane, and when they are done a few months later they just auction it to recoup the outlay of capital, rather than let it sit. Not sure what the RBA outlook is, because it could go either way.
On one hand, construction firms may have little enough work they just need to liquidate at any price. On the other hand, those that can afford it just hang on rather than lose their hides in the secondary market. And then there are what would probably constitute most firms, that financed and the equipment is or soon will be bank owned.