The Donald

By Mike Myatt, Chief Strategy Officer, N2growth

The DonaldThe Donald is up to his old tricks again…When everybody and their brother is looking for a bailout, the Donald simply engineers his own rescue by playing hardball with his creditors. Remember it was The Donald who said “If you owe the bank a million dollars the bank owns you, but if you owe the bank a billion dollars you own the bank.” This particular time around the magic number seems to be $1.25 billion dollars, which is the amount of the debt restructuring he’s trying to negotiate with bond holders. In today’s post we’ll take a look at “The Art of The Deal” Trump style…

Trump casinos received a two week extension today to reach an agreement with bond holders on restructuring $1.25 billion in debt. My question is this…Do you really think Trump cares whether or not the debt is restructured? He has previously sought Bankruptcy protection on two other occasions so why not a third time? What I’m trying to point out is that being cross purposes with creditors is not awkward for Trump, rather it is part of his strategic plan. What I don’t understand is why investors haven’t awakened to the game…Well actually I do; it’s called greed.

For some time now Trump’s business model has been to use his formidable personal brand and the cash flow from his casinos to leverage into real estate deals and business opportunities well beyond his repayment capabilities. He adroitly maneuvers investors and lenders into a position where if they don’t bend to his will by restructuring the terms and conditions of his financial obligations he’ll seek shelter in the safe haven of the Bankruptcy courts. Either way he wins…he reduces his debt service and buys the time to continue to grow his business at the expense of his investors and lenders.

While you have to love his chutzpah, I’m not sure you have to like his style, or his hair… 

Good Money After Bad…

By Mike Myatt, Chief Strategy Officer, N2growth

Good Money After Bad...Good money after bad…this is perhaps the most apropos description of the current proposal to bailout the  big three US auto makers. Have we learned nothing? Are we again going to let fear mongering subject us to more flawed decisioning? The lack of management and accountability for the trillion dollar government bailout of the mortgage and finance industry has been nothing short of amazing to me. Do you sincerely believe the appointment of an “auto czar” and the submission of business plans is going to make a difference? I don’t; it’s simply more political gamesmanship, more of the same, and will result in nothing more than throwing good money after bad. In today’s post I’ll share my thoughts on the auto bailout…

Here’s a news flash…when a business becomes insolvent there is already a provision within our legal system that affords a mechanism for protection. It’s called a Chapter 11 Bankruptcy, which oddly enough is often referred to as a “reorganization,” “restructuring,” or “workout.” I don’t know about you, but a workout or restructuring certainly has more appeal to me than another “bailout.” Filing for protection under Chapter 11, a corporation can seek temporary protection from its creditors by submitting a business plan to the court for approval, which if approved, will grant the company sufficient time to restructure itself and work it’s way out of a financial crisis. This is the Bankruptcy Court’s job and falls squarely within the realm of the Judicial Branch of the government. It has nothing to do with the Legislative Branch of government, and Congress should flat out abstain from such an over-reaching and improper use of their authority.

But Mike, what happens if the reorganization doesn’t work? Then the business fails and its assets are liquidated to offset the outstanding debt owed to creditors. This is how business works and the automakers should have no special rights or privileges. If they fail they fail…period end of sentence. 

But Mike, what about all the workers who will lose their jobs if the automakers fail…wouldn’t this throw our country into a depression? First of all, there is no guarantee that they will fail by going through the normal channels of filing for bankruptcy. They may actually survive to be better run companies. However, even if they were to fail, it wouldn’t throw our nation into a depression. If you aggregate all the direct employees of the big three, along with all the indirect (dealers, suppliers, etc.) employees associated with the big three, it doesn’t even come close to the numbers of people employed in small businesses across the country. This wouldn’t be as tough for our country to absorb as the bursting of the bubble, or other sector rotations that have occurred historically.

So what would happen in a worse case scenario? Three companies that failed to innovate and to sustain their competitive advantages would suffer the just consequences of poor leadership. Some people would suffer the hardship of temporary unemployment while they were recycled back into the workforce, and other new businesses would blossom as a result of new ideas and innovation aided by the law of necessity. By way of example, just look at the logging, mining, and shipping industries. They all went through their boom and bust cycle and our nation survived. We took many unskilled workers thrust into the ranks of the unemployed, retrained them, and redeployed them as better skilled workers. This is the natural order of things, and while certainly not pleasant, it is nothing to be feared.

The moral of this story is that the free market economics of capitalism work best if left alone. Those companies that do the right things prosper, and those companies who don’t keep pace with the competitive forces in the market fail. It’s not a bad thing, it is an unfortunate thing, but it is what it is… 

Bailout Plan Rejected

By Mike Myatt, Chief Strategy Officer, N2growth

Hold on tightly...I wasn’t sure Congress had the intestinal fortitude to do it, but the House did step-up and reject the proposed Bailout plan today…Much to the chagrin of Nancy Pelosi, Harry Reid, and Barney Frank, the majority of Republicans and 95 Democrats actually listened to the American people and said no to the Bailout. My hope in our elected representatives (at least some of them) has been temporarily restored. The Republicans have an alternate plan that will be put forth later this week that will more closely represent the “workout” I’ve described in previous posts than the Bailout that was killed earlier today.  With your continued phone calls and e-mails to your representatives inside the Beltway we can avoid a disastrous Bailout and actually force Wall St. to pay for their own mistakes. Don’t give up the battle…For those who are fearful about the markets reaction today, I’ve outlined a few thoughts on the following page for your consideration…

There is no doubt that the market fell sharply today on negative reaction to the rejection of the Bailout. The market fell 777 points today, and in the early hours of foreign trading it is not looking too good. While it is highly probable the market will fall further in the days ahead, we did not even come close to the implosion the so called “experts” were stating as a foregone conclusion.

As I’ve said before, markets have to correct themselves when they become out of balance, and sometimes sharply so. While market declines may be painful in the near-term, taking the time to pass the right piece of legislation is so critically important to the financial future of our nation that it will be well worth the short-term hits we may take. Our country has weathered far worse than what we’re currently facing, and we’ll survive this as well. My hope is that we don’t just cave-in and make our lives worse in a rush to pass a flawed piece of legislation.

We’re Being Duped…Again.

By Mike Myatt, Chief Strategy Officer, N2growth

We’re being duped again…This rush to pass the Bailout plan is nothing short of self-serving fear mongering on the part of the people who caused this problem in the first place. Don’t you find it interesting that Congress convened at 7:30am this morning hoping to rush the vote on the Bailout plan before the American people could weigh-in? If the Democrats believe so strongly in this plan, then why don’t they just pass the bill? The Democrats have enough votes to carry this, they simply won’t do it without support from the Republicans. The Democrats want to be able to say this Bailout was a bipartisan act, and are looking for some Republican cover. Shame on the Republicans if they do this. This Bailout is bad for America, and stands for everything that’s wrong with big government politics.   

While I’ve spent a great deal of time lately discussing various topics surrounding the current financial crisis and Presidential politics, I feel that I’d be remiss if I failed to do so. Not only do both of the aforementioned topics have a direct impact on business, but the spin and rhetoric is so far out of control that I fear it is becoming more and more difficult for the average Americans to distinguish fact from fiction. The simple truth is that sound-bites, opinions, and theory rarely reflects the history and facts underpinning our current debacle. In today’s post I’ll share more of my thoughts on the subject at hand, as well as providing some great video footage in support of my positions.

If you think Nancy Pelosi, Harry Reid, Chris Dodd, and Barney Frank care about anything other than covering their own backsides, then you haven’t really thought this through. Let’s say for a moment that you don’t buy-in to what I’m espousing in this post, do you really trust these four individuals to solve the crisis they were responsible for creating, and do it all in just a matter of days? 

I hope the Republicans will show the backbone and character necessary to stand-up and kill this bill, but sadly, this probably won’t happen. What I can urge you to do is to call and e-mail your Representatives and Senators and let them know that you will most certainly not re-elect anyone who supports this madness.   

Bailout or Train Wreck?

By Mike Myatt, Chief Strategy Officer, N2growth

Beware the Bailout...Will today’s meetings in Congress produce a Bailout, or will the end result be just another cobbled together train wreck in the making? Is the Bailout a prudent step forward for our nation, or is it just another band-aid solution forestalling the inevitable? So, will Congress agree to a deal today? If so, will it be the right deal? Will it work? If not, what will be the market ramifications? In today’s post I’ll provide you with my thoughts on the aforementioned questions, as well as put forth some economic observations and alternatives for your consideration…

Call me a die-hard free market capitalist, but I’m not in favor of a bailout. From my perspective nationalizing Wall St. simply rewards the wrong behavior, provides no assurance of an acceptable outcome, and unilaterally transfers all the financial risk to the taxpayers.  The following thoughts and observations will provide you with the underlying reasoning behind my thoughts:

  • Will Congress agree to a deal in the near term? I think so; and if not today, likely by the time the Asian markets open on Monday. There is tremendous pressure for Congress to make a move to stabilize the markets, and I believe they will do so in the near term. Even though the current polls show that only 25% of American’s are in favor of the bailout, I believe most Americans anxiously await some form of swift resolution. Since we all know that polls are a key driver of decisioning in Washington, it is likely that some spin will enter the equation with the bailout being sold as something that it is not. The truth is that most of the really bright financial minds that I talk with see the bailout as a bad move. There is still a possibility that Republicans will dig in their heels in opposition, but this will likely only result in short-term delays rather than killing the bailout.
  • What will happen if Congress doesn’t agree to a bailout in the near term? The market thinks the bailout is a done deal and has already factored in a price gain reflecting this. As mentioned above, I think the odds of Congress not stepping-in are unlikely. That being said, if they don’t, the capital and credit markets will have a severe negative reaction, and a bit of main street panic will ensue. There is a strong likelihood that a recession or worse could follow.  However, this is where I differ from the politicians…my contention is that the aforementioned scenario is not necessarily a bad thing. Markets need to correct themselves in order to purge themselves of corruption, bleed out inefficiencies, regain their balance, and move forward in a healthy fashion again. Would there be pain and suffering that follows letting the markets correct themselves? Absolutely, but this is the natural order of things. Markets and economies ebb and flow. They do not just run in an upward direction in perpetuity. To think that they should is fantasy. To think that the government should step-in and bail them out when they don’t is socialism. Both positions constitute flawed thinking.   
  • What will the bailout look like? I don’t think it will differ greatly from the original plan submitted. While the plan will most likely call for a $700 Billion dollar bailout, it is highly probable that it will mushroom up to $1.5 Trillion dollars with near term adjustments that will most certainly follow the initial adoption. Sizing aside, there simply isn’t time to get consensus on sweeping changes and still meet the markets expected timing for a resolution. It will likely contain a few watered down oversight provisions, and a few points of clarification, which will in turn give Congress a few sound bites to leverage about how they’re looking out for taxpayer interests. However, from a meaningful perspective, it will still be woefully inadequate in terms of managing the risk associated with a bailout. 
  • Will a bailout work? There is an argument to be made that previous bailouts (i.e. Roosevelt’s New Deal, the 1979 bailout of Chrysler, and the Resolution Trust Corporation) have had prior success. This gives hope that the bailout being currently contemplated may work as well. While this sounds good in theory, times have changed, and the stakes are much higher in our current situation. While I think the proposed bailout may provide some temporary market relief, at the end of the day, my belief is that all we will have done is to compound the problem and forestall the inevitable. The Government is framing this as an investment with upside, but it is actually a mandate with tremendous downside risk. There are absolutely no assurances this will work. I believe that assumption that capital and credit markets will ease post bailout is a flawed assumption. I think lenders and investors will still remain on the sidelines, more banks will fail, the stock market will remain highly volatile, and the collapse we’re trying so hard to avoid will still occur. We’re just buying time…
  • Are there better alternatives? I think so…In principle, I’m much more of a believer in workouts than I am bailouts. The difference between the two are substantial. In a workout, the parties directly involved solve their own problems…some successfully, and others not successfully. In a bailout, third parties (that’s you) step in and underwrite the mistakes of others. Bailouts transfer risk, and workouts mitigate risk. The other point of distinction is that the end game isn’t simply to implement a bailout. What is truly needed is a comprehensive economic reform. The systems, regulations, and oversight (or lack thereof) that allowed this to happen must be reformed. In the absence of true economic reform, I again submit that we are just forestalling the inevitable. 
  • Do you have any examples of other alternative solutions to the bailout that would make a real difference? Here a just two examples of alternate mechanisms that would more than sufficiently increase liquidity without taxpayer involvement: Impose a small percentage fee to be levied against the exchanges on all securities trades. This would raise hundreds of billions of dollars in the near term. This solution has been successfully implemented in a number of other exchanges around the world. It would allow Wall St. to pay for their own mistakes. My second suggestion is to eliminate the capital gains tax. If we coupled the implementation of exchange fees with the elimination capital gains taxes we would generate more liquidity into the system than the bailout, all without transferring risk to the taxpayer. If the bailout were to move forward, and the taxpayers become a conscripted class of investors, I would at least like to see a tighter bailout plan that actually treats us like investors. What is the exit plan, and how will the capital be returned? What type of return on ivestment will we receive, and over what period of time? Surely we should expect some form of return to augment the risk we are assuming.

All the pontificating aside, batten down the hatches. Things are going to get worse before they get better. More banks will fail, more business will fold, more mortgages will be foreclosed on, and more bankruptcies will be filed. The good news is that this too shall pass. The economic problems will eventually correct themselves and we will regain our course. In the meantime, while others are panicking, failing, and making the wrong decisions, you don’t have to. Cut out waste, hire good talent (there is more of it wandering around these days), keep investing in your marketing and sales initiatives, and don’t allow yourself to get caught-up in the chaos.