Bankruptcies will be the hallmark of next year

November 6, 2008

Bankruptcies of shipping companies are highly likely to rise in the coming months, as their profit margins collapse with the collapsing price of commodities. Today crude settled around 60 dollars.

 DryShips Inc., a transporter of commodities including iron ore and coal, dropped $4 to $15.30 in Nasdaq Stock Market composite trading. The shares have fallen 80 percent this year, reducing its market value to $666 million, after saying that it may not be able to raise enough money to pay off loan commitments if low charter rates continue, The company said it may sell as much as 25 million shares from time to time to help raise capital.

The company had $2.9 billion in debt at the end of the third quarter, according to a Nov. 3 earnings release.

The Baltic Dry Index, a measure of shipping costs for commodities, has fallen 91 percent this year due to a global economic slowdown and slowing international trade amid tight credit markets.

“We are especially concerned about the company’s compliance under its debt covenants, specifically its value maintenance covenants, given the potential for a fall in secondhand asset values in this weak market environment,” Natasha Boyden, an analyst at Cantor Fitzgerald LLC in New York, said today in a note to investors. She cut her rating on the company to “hold” from “buy.”

The stock market keeps on with its collapse, as central banks keep slashing rates to calm the speculators. They will probably keep falling until the end of December. There may be a brief rally then, but there may be not. What is certain is that the stock markets will keep losing value next year, along with most other asset classes:

U.S. stocks slid, sending the market to its biggest two-day slump since 1987, after jobless claims jumped and the shrinking economy crushed earnings.

 “We’re a long way from the end of the economic challenges,” said Mike Morcos, who helps manage $1 billion at Old Second Wealth Management in Aurora, Illinois. “Earnings next year are going to be significantly lower and estimates are going to continue to come down.”

The Standard & Poor’s 500 Index fell 5 percent to 904.88, extending its two-day loss to 10 percent. Switzerland’s central bank and the European Central Bank reduced their main lending rates by 50 basis points.

The S&P 500 is down 38 percent this year, poised for the steepest annual retreat since 1937. The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed 17 percent to 63.68.

Worries about General Motors viability keep intensifying:

GM’s Survival

General Motors Corp. had the steepest decline in almost a month, tumbling 14 percent to $4.80. The largest U.S. automaker is focused on winning government aid to survive through 2009, not to help a merger with Chrysler LLC, as it uses cash faster than it forecast, people familiar with the plans said. GM plans to give an update on liquidity when it reports third-quarter results tomorrow.

Blackstone tumbled $1.05 to $7.55 after the financial crisis eroded the value of the businesses and real estate it has acquired, triggering a quarterly loss excluding items of $502.5 million. Blackstone had been expected to break even, based on the average estimate of seven analysts in a Bloomberg survey.

As analysts continue to expect profit growth from 2009:

Companies in the S&P 500 may see fourth-quarter earnings advance 15 percent, down from 42 percent projected at the end of August, according to a Bloomberg survey of analysts. Profits in 2009 may grow 13 percent, analysts say, compared with the 24 percent predicted two months ago.

Meanwhile hedge fund clients continue to withdraw their funds, forcing more firms to liquidate. Clients worldwide may pull as much 25 percent of their money from hedge funds by the end of the year, according to a Morgan Stanley report of Oct. 24.

Platinum Grove Asset Management LP, the hedge-fund firm co-founded by Nobel laureate Myron Scholes, temporarily stopped investor withdrawals from its biggest fund after it lost 29 percent in the first half of October. The decline left Platinum Grove Contingent Master fund with a 38 percent loss this year through Oct. 15, according to investors. It joins Blue Mountain Capital Management LLC and Deephaven Capital Management LLC which have also frozen freeze funds to stem the tide of withdrawals.

Scholes, 67, winner of the 1997 Nobel Prize in economics, was a founding partner in Long-Term Capital Management LP, the hedge fund that lost $4 billion a decade ago after a debt default by Russia.

Investors worldwide may pull as much 25 percent of their money from hedge funds by the end of the year, Morgan Stanley said in an Oct. 24 report. Combined with investment losses, industry assets may shrink to $1.3 trillion, a 32 percent drop from the peak in June, the New York-based bank said.

Brazilian hedge funds saw a record 14.3 billion reais ($6.7 billion) in withdrawals last month after returns trailed a fixed-income benchmark even while defying a 25 percent plunge in the Bovespa stock index.

Which all leave Fed as the most active financial player at the moment:

The Federal Reserve expanded its holdings of commercial paper issued by U.S. corporations by $98.9 billion, boosting its share of the $1.6 trillion market in short-term debt to 15 percent. It has incrased its holdings by 68 percent to $244.6 billion in the week ended yesterday.

Direct loans to commercial banks fell to $108.6 billion as of yesterday down from a previous record of $110.7 billion a week earlier, while cash borrowing by securities firms totaled $71.6 billion, down from $79.5 billion the previous Wednesday.

Interest rates on the highest-ranked 90-day commercial paper have dropped more than 1 percentage point since then to 2.24 percent, according to yields offered by companies and compiled by Bloomberg.

Central bankers are flooding financial institutions with temporary loans in an effort to overcome cash hoarding by banks. The loans have enlarged the Fed’s balance sheet to $2 trillion in total assets, $1.2 trillion from a year earlier.

In addition to the CPFF, the Fed started a separate program in September to lend to banks for purchases of asset-backed commercial paper from money-market mutual funds. Loans under that program totaled $85.1 billion as of yesterday, down from $96 billion a week earlier.

A third Fed program involving commercial-paper purchases, the Money Market Investor Funding Facility, will begin soon. Under that program, the Fed will lend up to $540 billion to five special funds to buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or fewer.

But if you really want to see what will happen in the end, look no further than the California of today:

California Governor Arnold Schwarzenegger said his state’s finances have deteriorated so rapidly that a budget he signed just six weeks ago has already fallen into a $11.2 billion deficit and taxes must be raised.

Schwarzenegger ordered lawmakers into a special session to consider ways to close the gap. He proposed increasing the sales tax by 1.5 percentage points for three years as well as raising oil severance and alcoholic beverage taxes and motor vehicle fees. In all, taxes and fees would increase $4.7 billion while spending is cut $4.5 billion.

“We have a dramatic situation here and it will take dramatic solutions to solve it,” Schwarzenegger, a 61-year-old Republican, told reporters in Sacramento. “We must stop the bleeding.”


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