Investing

[Screwball]

2 hours ago, Tigeraholic1 said:

Interesting, most folks here say everything is fine. Dobbs something something......

I think the keyword is "here."  Other places not so much.  From the CEO of FedEx; FedEx CEO says he expects the economy to enter a ‘worldwide recession’

Coming from a large global shipper, and this isn't about housing.

[Screwball]

17 minutes ago, gehringer_2 said:

which is probably fine. At least from the capital expenditure side, I doubt interest rates have a lot of impact on decision making until they get to or above 4%. The difference between 1% and 2% money over the time horizon of (i.e short) of American business isn't going to change many decisions. IMV most of the move from 0-3% was just picking up the slack in the tow rope.

Because corporate debt doesn't matter?  Go ask FedEx.

[mtutiger]

11 minutes ago, Tigeraholic1 said:

Tied DIRECTLY to skyrocketing inflation. Rent has doubled price of milk, eggs, gas doubled. Anything cheaper now than 12-18 months ago? 

Again, you seemed to be implying that most folks here think everything is fine in the real estate market.

Who are they?

[Tigeraholic1]

13 minutes ago, Screwball said:

I think the keyword is "here."  Other places not so much.  From the CEO of FedEx; FedEx CEO says he expects the economy to enter a ‘worldwide recession’

Coming from a large global shipper, and this isn't about housing.

Exaclty my point.

[gehringer_2]

25 minutes ago, Screwball said:

Because corporate debt doesn't matter?  Go ask FedEx.

It matters, but I don't think the differernce from 1 to 2 % makes much difference to how much it matters. At 4% I can see it getting more traction. 

Its clear enough that where we are now has pulled down home sales, which by itself is a pretty big drag overall. The question is how much more blood the FED wants to see on the floor and how high rates have to be before a wide enough cross section of industries slow down for the Fed to relent.

I also believe that we are due for a major round of wage adjustments in the US. Virtually everyone getting paid by the hour has been falling behind for 30 yrs and with the labor market now finally tight and little hope of immigration reform, all those folks finally have a little leverage to start catching up a little bit. That is inevitably going to increase a lot of prices. And TBH, if that's why I'm paying some higher prices, I'll live with it.

Edited September 16, 2022 by gehringer_2

[gehringer_2]

28 minutes ago, Screwball said:

I think the keyword is "here."  Other places not so much.  From the CEO of FedEx; FedEx CEO says he expects the economy to enter a ‘worldwide recession’

Coming from a large global shipper, and this isn't about housing.

I've seen some people speculate were are moving into an era of trade disengagment. That's probably net recessionary, but it absolutely is going to hit shippers! 

China is such a wild card though. Are Xi's policies going to force the rest of West to disengage with China in partcular? Will increasing authoritarianism begin to rot the Chinese economy the way it has the Russian? Big swings in those questions that we can only guess the answers about but will affect us all. If we do end up repatriating any large amount of Chinese manufacturing, it will certainly be inflationary, even if it does end up good for American workers in the longer run.

[Screwball]

22 minutes ago, gehringer_2 said:

It matters, but I don't think the differernce from 1 to 2 % makes much difference to how much it matters. At 4% I can see it getting more traction. 

Its clear enough that where we are now has pulled down home sales, which by itself is a pretty big drag overall. The question is how much more blood the FED wants to see on the floor and how high rates have to be before a wide enough cross section of industries slow down for the Fed to relent.

I also believe that we are due for a major round of wage adjustments in the US. Virtually everyone getting paid by the hour has been falling behind for 30 yrs and with the labor market now finally tight and little hope of immigration reform, all those folks finally have a little leverage to start catching up a little bit. That is inevitably going to increase a lot of prices. And TBH, if that's why I'm paying some higher prices, I'll live with it.

What's 1% of 22 billion?  It matters.

[Screwball]

4 minutes ago, gehringer_2 said:

I've seen some people speculate were are moving into an era of trade disengagment. That's probably net recessionary, but it absolutely is going to hit shippers! 

China is such a wild card though. Are Xi's policies going to force the rest of West to disengage with China in partcular? Will increasing authoritarianism begin to rot the Chinese economy the way it has the Russian? Big swings in those questions that we can only guess the answers about but will affect us all. If we do end up repatriating any large amount of Chinese manufacturing, it will certainly be inflationary, even if it does end up good for American workers in the longer run.

Our problems are self induced. Quit blaming everyone in the rest of the world and look in the fucking mirror.  And it didn't start in 2016 either.

[Screwball]

The hits keep coming;

 

[gehringer_2]

48 minutes ago, Screwball said:

Our problems are self induced. Quit blaming everyone in the rest of the world and look in the fucking mirror.  And it didn't start in 2016 either.

who said I was blaming anyone, only that we get do get affected by what happens in other places and that the predictions about those things end up in the policy decisions that get made in DC. If they guess wrong about those, that is just one more route to get US policy wrong. WRT 2016, the Fed has been up the creek since the crash in 2009. The experience of the post crash years is a reason I doubt the Fed's first couple of interest rate moves off low levels - 1-2-3% etc made much difference. It took until they hit the level that moved mortgage rates. On the way down the cuts at those levels really didn't move anything in terms of prices, so I don't see why they were going to on the way back up. I would have made the first increase something like 2.5% instead of dinking around with 50 and 75 BP initially. We'd be 6 months further ahead.

[gehringer_2]

1 hour ago, Screwball said:

What's 1% of 22 billion?  It matters.

That's the sad thing, for an American board looking by the quarter, 1% on 22 Billion is 55 million. Chump change. That's probably FedEx's office furniture budget. 

[Screwball]

1 hour ago, gehringer_2 said:

who said I was blaming anyone, only that we get do get affected by what happens in other places and that the predictions about those things end up in the policy decisions that get made in DC. If they guess wrong about those, that is just one more route to get US policy wrong. WRT 2016, the Fed has been up the creek since the crash in 2009. The experience of the post crash years is a reason I doubt the Fed's first couple of interest rate moves off low levels - 1-2-3% etc made much difference. It took until they hit the level that moved mortgage rates. On the way down the cuts at those levels really didn't move anything in terms of prices, so I don't see why they were going to on the way back up. I would have made the first increase something like 2.5% instead of dinking around with 50 and 75 BP initially. We'd be 6 months further ahead.

You said "Will increasing authoritarianism begin to rot the Chinese economy the way it has the Russian?."  This sounds like you are blaming them for our own self destruction.  It goes back further than 2009.

My point still stands. Our problems are self induced.

[Screwball]

1 hour ago, gehringer_2 said:

That's the sad thing, for an American board looking by the quarter, 1% on 22 Billion is 55 million. Chump change. That's probably FedEx's office furniture budget. 

Oh please. 55 million is not chump change in any corp, but keep jerking that chicken.

[gehringer_2]

1 hour ago, Screwball said:

Oh please. 55 million is not chump change in any corp, but keep jerking that chicken.

Tyranny of large numbers. Fedex's annual rev is 94 billion dollars. 55 million is 0.05% of that. (That's $50 bucks on a 100K income). That's not driving any decisions at the board room level. If it is the board needs to be fired for micro-managing.

[Screwball]

That's funny.  You must be from the Paul Krugman "debt is good" school.

These 4 Measures Indicate That FedEx (NYSE:FDX) Is Using Debt Extensively

FTA:
 

Quote

 

According to the last reported balance sheet, FedEx had liabilities of US$14.3b due within 12 months, and liabilities of US$46.8b due beyond 12 months. Offsetting these obligations, it had cash of US$6.90b as well as receivables valued at US$11.9b due within 12 months. So it has liabilities totalling US$42.3b more than its cash and near-term receivables, combined.

This is a mountain of leverage even relative to its gargantuan market capitalization of US$53.1b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

FedEx has net debt of just 1.3 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 9.4 times, which is more than adequate. In fact FedEx's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky.

 

Debt load is part of (EBITDA).

[1984Echoes]

25 minutes ago, Screwball said:

That's funny.  You must be from the Paul Krugman "debt is good" school.

These 4 Measures Indicate That FedEx (NYSE:FDX) Is Using Debt Extensively

FTA:
 

Debt load is part of (EBITDA).

No it isn't.

Debt Load is Balance Sheet. Not Profit & Loss.

Wanna explain how the fuck you're getting debt load into EBITDA?

[gehringer_2]

3 hours ago, Screwball said:

That's funny.  You must be from the Paul Krugman "debt is good" school.

These 4 Measures Indicate That FedEx (NYSE:FDX) Is Using Debt Extensively

FTA:
 

Debt load is part of (EBITDA).

who said anything about FedEx's total debt load? You're jumping from apples to oranges. The question was the cost of 1% on that debt. Whether the quarterly interest paid on that debt under ZIRP ( 1% interest rate etc) is an issue for Fedex's board to worry about and whether the cost of carrying that debt as rates go up suddenly becomes one is exactly the point. At 55 million a quarter 100 billion operation doesn't care. Get to 5 or 6% then they are going to start to care. 

[Screwball]

Jesus h christ

This all started when I brought up corporate debt, and the cost of servicing it. Which goes to the bottom line as a loss against revenue. Which is part of the bigger picture known as EBITDA of a particular company.

This should be obvious, but when interest rates go up, so does the cost of servicing it. Since the 55 million seems to be a metric, and should be ignored, and people even fired over it, if I understood things correctly, fine.

But the companies I worked for would fire my ass in a heartbeat if that happened.

And maybe look at it this way; how many jobs would 55 million create?

Doesn't matter, they are trimming fat because they are losing money, or at least the current investment community thinks so (bunch of downgrades today).

Penny smart, dollar stupid. Should be corporate America's motto.

[Screwball]

4 hours ago, 1984Echoes said:

No it isn't.

Debt Load is Balance Sheet. Not Profit & Loss.

Wanna explain how the fuck you're getting debt load into EBITDA?

The interest paid on debt?

[1984Echoes]

1 hour ago, Screwball said:

The interest paid on debt?

EBITDA =

Earnings BEFORE Interest Taxes and Amortization (depreciation).

Notice how Interest is EXCLUDED in EBITDA?

However...

EBITDA is basically Cash Flows from Income Statement (excludes Balance Sheet movement) which states how much cash a company is making to service debt (interest) and taxes. Depreciation (amortization) is non-cash so it's excluded. You are in the ballpark but your technical details are a little off.

[Screwball]

22 hours ago, 1984Echoes said:

EBITDA =

Earnings BEFORE Interest Taxes and Amortization (depreciation).

Notice how Interest is EXCLUDED in EBITDA?

However...

EBITDA is basically Cash Flows from Income Statement (excludes Balance Sheet movement) which states how much cash a company is making to service debt (interest) and taxes. Depreciation (amortization) is non-cash so it's excluded. You are in the ballpark but your technical details are a little off.

I get that.

I used EBITDA as an example to show why interest on debt matters.  The "I" in EBITDA is interest. It is just another tool investors use evaluate companies. If your argument is the balance sheet is a better source for sound investing advise, I'm on board with that.

EBITDA might have a purpose but not a metric to fall in love with.

But servicing debt matters - which was my main point.

The price of debt going forward will determine how we live. Rising interest rates are deflationary. That is the purpose of doing so, which the Fed is doing.

The rule of 72. The last CPI print was 8.3. That means a double in 9 years.

Those numbers are simply unsustainable unless we want chaos. The only question is who will feel the pain?

But don't worry, the Fed pukes and Bubblevision tell us hiking interest rates can be done and have a soft landing at the same time - whatever the fuck that means.  It's different this time I guess.  <giggle>

Except it ain't funny.

[1984Echoes]

If you want to use EBITDA you would use it exactly thus;

 

As a way to determine how much debt load a company should carry. I haven't worked in a capital-intensive company in forever... so I don't remember the exact calc's... but you wouldn't use a 1-to-1 ratio (EBITDA = to exactly the amount of interest a company would pay monthly.. because a firm would be over-exposed to interest rates.. as you've pointed out. And here, Taxes and Depreciation (non-cash, money's already been spent on the capital assets) are meaningless so EBITDA is a perfect unit of measure...).

Instead, the ratio would be 3-1 or 4-1 or 5-1 or something like that. A 2-5% rise in interest rates would not affect a High-EBITDA company as they aren't going to expose themselves to interest rate risk like that.

Here is where rising interest rates hurt the corporate world:

A) Growth companies. They're losing money, and need debt/ stock proceeds to fund their growth while they are building their business/ losing cash incessantly since they're trying to obtain that growth. Interest rate jumps = harder to service the debt when they are cash negative and bank funding dries up. Market will go down and growth companies' stock prices get hammered which means going to the capital markets can dry up on that basis. For growth companies, and can be a downward spiral to oblivion. It's one reason that growth stocks get absolutely hammered in a rising interest rate environment.

B) A strong cash (EBITDA) company can still get hammered if they are highly leveraged. If Revenues/ EBITDA drop due to a recession/ slow-down, etc... Now they're can get trapped between a Rock (dropping EBITDA) and a hard place (rising interest rates/ debt service). But... that also only affects NEW debt or variable interest debt. Companies mostly sign onto fixed rate debt since they like static forecasted cash flows (stability). They may have variable rates on any lines of credit they have but for Cap-Ex purchases those should be fixed rate debt. That shields a company from rising interest rate environments. For the most part. But it may also affect their ability to take on new debt based on some of the factors I listed above...

C) A rising interest rate/ recessionary environment may, or may not slow down capital expenditures, further slowing down an economy. Usually this is a function of current debt load. Highly leveraged companies will put off Cap-Ex because it's not a good environment to add debt. A low-or-zero-leveraged company, with a huge cash flow... might not care about the rising interest rates/ recessionary environment and go ahead with Cap-Ex purchases anyways because they don't care about interest rates.

 

As to your statement that interest rate matters... I would rather say that it... depends. Upon the factors I outlined above. And that it's not really EBITDA that is impacted/ or impacts decisions from rising interest rates, but other factors. I wouldn't use EBITDA except to determine whether I want to add/ not add debt. I wouldn't use it to rate the affect Interest Rates are having on a company... Just my 2 cents.

[ewsieg]

I usually side with you Screwball, but the numbers don't work here.  Paying an extra 55 million in Interest is a great thing, not only for FedEx, but for UPS as well, especially if UPS was more responsible with debt.

FedEx will lay off workers in order make up for it and they'll make sure to lay off enough that the severance packages incur large additional costs which they will write off, while shrinking their costs for next year and demanding more out of their existing staff.  UPS will state that this is an advantage that FedEx has over them now, so while they don't even need to, they will follow suit and due the same.  Their service will be worse next year, but their profits will be up.  It's clearly a win/win for everyone involved.

[1984Echoes]

55 minutes ago, Screwball said:

... The price of debt going forward will determine how we live. Rising interest rates are deflationary. That is the purpose of doing so, which the Fed is doing...

... Those numbers are simply unsustainable unless we want chaos. The only question is who will feel the pain?

But don't worry, the Fed pukes and Bubblevision tell us hiking interest rates can be done and have a soft landing at the same time...

Obviously they are raising rates to fight off inflation... and they were probably too slow to start on that due to the huge uncertainty coming out of the pandemic.

I don't know if we'll get a soft landing... can we avoid a recession while the Fed is trying to kill off inflation? That's the $64,000 question right now. They've jumped interest rates a few times already and will again this month... and yet Employment/ Inflation/ and consumer demand are still going strong.

The rest of the world has slowed down enough that maybe the supply chain issues fix themselves (I believe they already have for the most part) but Russia's war on Ukraine is also F'ing everything up because that is causing worldwide food shortages/ fertilizer shortages/ energy shortages etc... all inflationary and counter-acting what the Fed is trying to do.

But I think the U.S. will be sharply less impacted than anywhere else in the world... except maybe China also won't be affected too badly... they have a lot of insulation against these factors...

So maybe we will get a somewhat soft landing with only a few markets impacted (housing, stock markets, food prices) whilst others aren't impacted all that much. We'll see... This is a really unique environment for us so... we'll see. But also... whatever impact we do get with these rising interest rates... I believe will only be temporary. We still have too many growth factors counter-acting inflation/ rising rates that says we're not going to get much recession, even if we do get some... and interest rates (Fed Rate) should stabilize around the 4% mark... I believe that was the Fed's target...

Plan accordingly I guess...

[gehringer_2]

30 minutes ago, 1984Echoes said:

A rising interest rate/ recessionary environment may, or may not slow down capital expenditures,

In the high capital industries I worked in (energy/chem) it always did because it took lower ROI projects off the table. I can't get my 10% ROI project funded if interest rates even approach maybe 7% because even if the company has internal cash flow up the kazoo and doesn't need to borrow, the suits in NY would rather put those funds out in the financial markets  - where they don't have to worry about the risk and complexity of seeing Capex through to product.

The finance guys only love Capex when they can't get returns anywhere else, and even then only sometimes. Which has helped turn the US into an under-invested place.

If Biden succeeds in moving the needle on that even a little he gets a cheer from me....

Edited September 18, 2022 by gehringer_2