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(breakingviews.com) — Shares are having a choppy week. Most of the leading indices are down 2-3% from their recent peaks. But it’s too early to say whether the markets have merely paused briefly or reached the end of their long run. Stocks in Europe and the U.S. are up by 35-50% since March.One thing is clear. A collection of revolutionary fiscal, monetary and corporate policy experiments has helped stop the GDP freefall which started last September. This favorable change in economic direction — and the cash created by these policies — explains the stock market rally.But looking forward, confusion reigns. To take one example, credit is still getting tighter in the U.S., according to the Federal Reserve’s survey of loan officers. But the U.S. Treasury reports loans advanced by the 22 banks receiving government aid are up 13% in a month. There are similarly mixed signals in most countries about inventories, unemployment, production and even prices.Economists would like to help clarify matters, but they are largely at a loss. Neither theory nor history can provide much guidance. The crisis showed the detailed models used by all economists were inadequate in exactly the point of greatest current uncertainty — how changes in financial conditions affect economic activity. Incredible, but true.What’s more, the models assume the existence of a simple economic pattern: a succession of fairly similar cyclical distortions around fairly stable underlying GDP growth rates. But the credit bubble and crunch may not fit into the schema.Some economists prefer to throw out the detailed workings of inputs and outputs in favor of relying on what happened in similar situations in the past. But no one knows which, if any, past episodes are relevant.There have been many recessions and many debt crises in many countries, but this time — near-zero interest rates, near-record peacetime government deficits and unprecedented government support for the financial system — really could be different.Of course, the future will come whether or not it is accurately predicted. But investors and experts have good reasons to keep changing their minds. There could be some more big market reversals before the trends are clear.

Source:CNN

(breakingviews.com) — Las Vegas is haunted by its own image. The U.S. gaming capital’s “What happens here, stays here” motto helped cement its naughty reputation during the boom.But that marketing message has become a burden. Budget-minded tourists and conventioneers are eschewing Sin City’s self-conscious extravagance, battering its economy.The city’s marketers briefly tried to respond to the downturn in early 2008 by adding another — somewhat equally off-color — message: “Your Vegas is Showing”. Another, “Vegas Right Now” also failed to draw tourists to the famed Strip.Visitor volume fell by 6% in the year to June even as hotel room inventory continued to grow. This has brought room rates down a whopping 25.5%. The fall-off in tourism has hurt shops, shows and casinos, where gambling revenue has tumbled 15% from a year ago.There has also been a 16% drop in the number of conventions — one of Las Vegas’ economic mainstays — as recession-pummeled companies have scrambled to cut costs. And government agencies have been told to hold their meetings in less expensive and conspicuous locales, prompting protests from Nevada and Florida senators.The casino giants are not immune. MGM (MGM, Fortune 500) and Las Vegas Sands (LVS) recently posted second-quarter losses, and Station Casinos filed for bankruptcy. Private equity owned Harrah’s has restructured its debt twice in an attempt to stay afloat.This has all led to cutbacks in tourist industry employment, which in turn has decimated the city’s housing market. Las Vegas has a foreclosure rate more than 7.5 times the national average. Lenders seized one in every 47 housing units in July. And condo prices are less than half what they were a year ago.And yet, hotel developers continue to plough ahead. The Hard Rock Hotel recently added a 490-room tower. The Mandarin Oriental chain plans to set up shop in December. Some 7,000 new hotel rooms are slated for completion in 2010.These companies are still betting that tourists will regain their enthusiasm for excess. But in this era of newfound frugality, glitzy seems more, well, unseemly. Sin City may have to reverse course, and start trying to sell its virtues.

Source:CNN

(breakingviews.com) — For most rockers and aging hippies the 40th anniversary of Woodstock this weekend will mark a happy occasion.Those who still can may recall love freely given, heads sprouting with muddy but flowing locks of hair and the notes of Jimi Hendrix’s electric rendition of the “Star Spangled Banner”. But for the rock and roll industry itself, the anniversary elicits more mixed sentiments.That’s because the music business currently finds itself in a sort of Alice in Wonderland version of the reality that emerged after the 1969 music festival. The three-day concert, which attracted more than 350,000 people, was actually a financial disaster. Yet through the subsequent release of a live album and an Oscar-winning documentary, Woodstock’s architects were eventually able to make a profit.Today, the economics of rock and roll are reversed. Yes, record music groups like Warner Music (WMG), EMI, Sony (SNE) and others still ply their trade by signing aspiring artists, convincing radio stations to play their tunes and then selling them in stores or on the web. But the spoils are increasingly accruing to those who handle the mechanics of concert tours and festivals like the one that took place four decades ago this weekend.Consider the arithmetic of Woodstock. The event was organized by Woodstock Ventures, whose principals were Michael Lang, John Roberts, Joel Rosenman and Artie Kornfeld. For a ticket to all three days of the festival held on a farm in Bethel, New York, the promoters charged 18 in advance. When adjusted for inflation, that would be about 106 in today’s dollars.Now compare that to the price of admission to Bonnaroo, the jam-band festival held every June in Tennessee; or Coachella, the alternative music extravaganza that takes place in April near Palm Springs. Three-day passes cost 250 and 269 respectively. Moreover, both festivals attract rich sponsors, such as Budweiser, Heineken, AT&T (T, Fortune 500), Whole Foods (WFMI, Fortune 500) and others looking to hawk their wares to a hip clientele.Famously, few of Woodstock’s groupies actually paid to get in — a tenth of them according to the event’s promoters. And as many as 18,000 of those who did shell out for advance tickets were actually later given refunds because they were unable to reach the venue after the roads were closed to traffic. With the festival costing 3.4 million — including Hendrix’s relatively modest 18,000 fee — Woodstock Ventures was in debt to the tune of 1.6 million after all the litter was picked up from Max Yasgur’s farm.And here’s where the music industry, then entering its heyday, swooped in for the kill. Warner Brothers received exclusive distribution rights to the documentary Michael Wadleigh shot for just around 100,000. In exchange for the rights, the concert’s promoters took a 1 million flat fee, plus a small take in the back end. Within a decade, the film took in over 50 million in worldwide box office receipts and Warner Brothers earned 16.4 million in rentals. It also won the 1970 Oscar for best documentary.And then there was Woodstock, the album. A year after the festival, Atlantic Records, now a subsidiary of Warner Music, released a 14.98 three-record compilation, which sold more than two million copies that year and topped Billboard’s pop album chart. A sequel released the following year instantly went platinum.Concert-goers no longer clamor for slickly-produced documentations of their musical experiences. Why would they when they can record concerts on their cellular phones or their handheld Flip video cameras? They are all bootleggers now. And even those who’d rather enjoy a concert outside the lens of their telephones can find multiple versions of most events uploaded and broadcast for free on YouTube.All of this has conspired to push more of the financial pie to the concert itself, a fact not lost on the industry. It explains why, for example, Warner Music has been acquiring stakes in companies like Australia’s Peppermintblue Entertainment, which offers a wider array of services to artists than those traditionally peddled by labels.It’s also the reason Ticketmaster (TKTM) and Live Nation (LYV) are trying to merge, creating a vertically integrated promoter, ticketing service and artist management group. Of course, with economics gravitating to these parts of the rock business, it is also why legislators, rivals and even artists like Bruce Springsteen are amassing heavy opposition to the deal. So much for peace, love and rock and roll.

Source:CNN

(breakingviews.com) — When is the right time to quit the hedge fund rat race? For Tim Barakett at Atticus Capital it’s at the age of 44 with 1 billion in the bank – but near the bottom of his game.That’s not ideal, but at least it’s honest to hand back money when your heart’s not in the job. Others make the mistake of hanging on too long and being forced to give up.Barakett told investors this week he’s dissolving the 3 billion flagship Atticus Global fund he started with a few million 15 years ago. Over the past year the fund fell 13%. While better than the S&P 500’s 20% slide, it marks a low point for Barakett’s strategy of taking concentrated bets on companies he considers cheap.Over the past half-decade, when the bulk of investors would have committed their funds to Atticus, Barakett chalked up annual returns of 9% while the market was flat. So while Barakett can claim a relatively robust long-term track record, the former Harvard hockey champ isn’t leaving with a trophy cup above his head for lifting investors out of the past year’s mess or avoiding the crisis completely.Contrast that with, say, Andrew Lahde, who started winding down his smaller, eponymous fund last September as the markets began their six-month meltdown, having made an 870% return in the previous year.Of course others exiting the business have fared far worse than Barakett. A handful of stalwarts of the industry recently hoisted the white flag over their funds: John Meriwether, Arthur Samberg and James Pallotta to name a few.But in most of these cases, the decision to give up came too late. Investors had already sustained stinging losses — in the case of Meriwether nearly 50%. And trying to salvage a reputation for savvy investing looked too challenging a prospect. Pallotta needed to gain nearly 40% to begin making any performance fees.At least Barakett appears to have recognized there’s no use continuing in a job to which he’s not fully committed, and it’s better to make that decision while you’ve still got the respect of most of your investors. That makes the inevitable comeback that much easier to pull off.

Source:CNN

(breakingviews.com) — Shareholders often suffer when a company engages in side transactions with members of its management.Barnes & Noble’s deal to purchase chairman Leonard Riggio’s college bookstore chain had even more potential for abuse than a typical related-party transaction. But in this case, the U.S. bookseller’s shareholders have got more than a fair shake.The bookstore chain was originally part of Barnes & Noble (BKS, Fortune 500), which Riggio owned. When he decided to buy a rival firm in 1984, he funded the purchase by selling a stake in everything but the college chain to a group of minority investors.Barnes & Noble — but not Barnes & Noble College Booksellers — subsequently went public. Riggio now owns 29% of the public bookstore chain.This relationship benefited Riggio. College owned the rights to the Barnes & Noble name and licensed it in perpetuity to the other company. Because they both used the same name, College got a free ride on investments the publicly traded firm made in areas such as advertising.Such a relationship could be rife with conflicts of interest. Yet the price Barnes & Noble is paying to sew up this awkward relationship looks more than fair. The deal values both firms at four times historic EBITDA.That’s not bad considering College has grown faster and arguably has better growth ahead of it — while adults have been reading less, college students are still required to buy textbooks.Now this may simply reflect the circumstances. The independent directors on the company’s board presumably had negotiating leverage because Riggio approached them, seeking to sell College.But many independent directors are still loath to take on a chairman — especially one that holds a huge chunk of company stock. Nonetheless, Barnes & Noble’s board did shareholders right by signing a sweet, rather than sweetheart deal.

Source:CNN

(breakingviews.com) — Morgan Stanley has left less on the table for Tim Geithner than Goldman Sachs did. The former has bought back its Troubled Asset Relief Program warrants for 950 million, against Goldman’s 1.1 billion.That makes sense. John Mack’s firm could afford to negotiate a bit harder with the U.S. Treasury — after all, it hasn’t made quite so much money out of the crisis.Each firm originally gave the Treasury warrants over 1.5 billion worth of shares when the U.S. government invested 10 billion under TARP. The ingredients of warrant valuation are complex, and Morgan Stanley’s may have been worth a bit less than Goldman’s because of differences in share price moves since they were issued or other factors.But Morgan Stanley (MS, Fortune 500) also negotiated a bit with Treasury, while Goldman (GS, Fortune 500) — under public scrutiny for its profits and accrued pay — took the Treasury’s opening offer, even though it was far higher than the firm had proposed paying.It’s faint praise to suggest that Morgan Stanley could afford to drive a slightly harder bargain because it hasn’t done so well out of the crisis. But Goldman may well have felt that pushing for an even slightly lower price would worsen its PR problems.Morgan Stanley says that after interest on the now repaid TARP investment is added to the warrant payment, U.S. taxpayers made a 20% annualized return on its investment. Coincidentally or not, that just crosses the level needed to put it in the same psychological box as the 23% Goldman says it delivered.In a way that’s the wrong way round. Both firms were briefly in serious danger, but Morgan Stanley was first in line and therefore arguably the riskier investment for the government. But for now the firm isn’t looking in quite such rude health as Goldman. Perhaps that entitles it to deliver a slightly less profuse message of thanks.

Source:CNN

(breakingviews.com) — Donald Trump’s resurrection isn’t necessarily a bellwether for buyouts. The casino mogul-turned-reality television star has convinced a bank to restructure a loan to allow his Atlantic City, N.J., casinos to emerge from bankruptcy — again.But while that sounds like an encouraging return of lender risk appetite, it doesn’t necessarily mean financing will start to flow for private equity firms seeking to fix their own problem children. And buyout firms are in any case less likely to want to resuscitate their cratered companies.Trump Entertainment Resorts (TRMPQ) entered bankruptcy for the third time in February, when a clash with its bondholders caused Trump to resign. He subsequently bid to buy the company for 100 million, a deal that the company chose over a competing offer from bondholders. As part of the deal, Beal Bank Nevada agreed to extend the maturity on a 486 million loan.Of course, plenty of other investors, like buyout firms, are seeking to restructure loans. Only buyout shops are having a harder time. Deutsche Bank (DB) played hardball over a debt swap proposed by Kellwood, a clothing retailer owned by buyout firm Sun Capital, before agreeing on terms. JPMorgan (JPM, Fortune 500) is fighting cable company Charter Communications (CHTRQ, Fortune 500) in bankruptcy court over a plan that would disadvantage its senior lenders.Beal may be willing to cut The Donald some slack because the casinos are so closely tied to his brand. He has run the company for decades. So other investors might hesitate to swoop on properties so closely associated with him.By contrast, other failed companies have attracted a flock of vultures. Nortel (NRTLQ), for example, recently received several bids for a telecom unit that it was selling out of bankruptcy. And Trump may be one of the only parties who believe the casinos have a future. Banks may not like backing him, but he may be their best hope for some recovery.Private equity firms also don’t get as much advantage out of the long and expensive process of reviving failed portfolio companies, often preferring to leave them in the hands of creditors and set sights on their next targets. Trump’s ego and brand give him more reason to go the extra mile. Beal had better hope Trump’s third new beginning proves to be the charm.

Source:CNN

(breakingviews.com) — Commodity prices are flashing a danger signal for the world economy. Generally, price spikes occur at the peak of economic cycles. This time however, a sharp rebound is coinciding with an economic trough.That could be caused by the recent rapid growth in global money supply, by large infrastructure-heavy fiscal stimulus programs or by the continued upsurge in demand for commodities in India and China. Whatever its cause, further price strength could spark inflation and stall recovery of the global economy.White sugar prices reached record levels on August 3, while gold traded at close to record levels, oil moved again above 70 per barrel and the CRB Continuous Commodity Index traded within 1% of its June high. The price of copper, generally considered a good barometer of global economic conditions, has almost doubled in 2009, rising above 6,000 per metric tonne.Such sharp price moves generally occur at inflationary economic peaks, such as those in 1973 or 1980. A price spike near an economic trough is highly unusual. A continued commodities price spike endangers economic growth.If the cause is monetary, it could bring general inflation. If it is fiscal stimulus, it may well cause indigestion in global bond markets. It may be due to India and China’s growing needs, as their citizens’ demand is more commodity intensive than that of the rich West.In that case, it may cause commodities shortages and price spikes to occur while demand in western economies is still far below its full-employment level. Resurgent inflation, swooning bond markets or commodities shortages could all bring incipient economic recovery to a premature end.For commodity producers such as Brazil, Russia and members of the Organization of Petroleum Exporting Countries, the price surge is good news in the short term. For the global economy, it may spell further trouble ahead.

Source:CNN

(breakingviews.com) — Does General Electric need to put aside more cash to handle bad loans at its finance arm? GE says it doesn’t — it even insists it has higher loan loss reserves than the biggest US banks. But investors aren’t fully convinced. And a look at just one small slice of GE Capital’s 650 billion of assets suggests why they are right to be skeptical.The company’s reserves against losses in its 38 billion of leveraged loans are around 1.2% of its book. GE estimates these losses will probably peak next year at around 1.9% or slightly less. But this prediction, which would imply GE Capital just needs to set aside another 266 million or so, seems too low when judged against the market.The average leveraged loan currently trades around 81 cents on the dollar, according to S&P Leveraged Commentary and Data. If marked to market, GE’s debt portfolio might trade close to that level too, based on the distribution of credit ratings on those loans.While some of the 19 cents on the dollar discount the market now attaches to the average leveraged loan may be a function of illiquidity, a large chunk is the market’s way of suggesting defaults will be far greater, overall, than the 1.9% that GE is banking on.Now, it’s true that GE’s portfolio may be of higher quality than the broader market. If the firm’s boasts about its superior credit management skills are to be believed, it probably has fewer dud loans. The company also claims it is “willing to work longer and harder to recover full value” – even if rivals like Goldman Sachs (GS, Fortune 500) or JPMorgan (JPM, Fortune 500) aren’t widely known for letting borrowers off the hook easily.So assume for the sake of argument that GE’s leveraged loans have only lost half as much of their value as the average. That still would suggest potential losses of some 3.6 billion — or eight times its current reserves.That may not seem like a big deal. After accounting for reserves already taken, it would amount to just 5% of the finance arm’s total shareholders’ equity. But if investors apply similar arithmetic to the other 600 billion-odd of assets on GE’s books the losses would clearly start to add up.GE may prove naysayers — and the market — wrong by riding out the downturn and the credit cycle, and getting most of its borrowers to make good on their commitments. But with one small, but important, piece of the puzzle already looking wonky, shareholders can be forgiven their wariness for now.

Source:CNN

(breakingviews.com) — Huge government deficits have many people worried. But why are they harmful? One popular answer to that question is that issuing floods of debt to finance them creates a mortgage on a nation’s future. But it’s not as burdensome — or as simple — as that analogy suggests.If nations worked like individual families, the frightening argument would hold. Suppose the old parents take out a mortgage. They will have more money to spend now, but the mortgage payments mean the children will have less when they inherit the house.But government borrowing doesn’t actually shift money through time. It moves funds now from one group to another and promises different movements later.Start with the present. A government has three ways to get the money it spends. First, there’s printing money. That can easily lead to an inflationary mess. Second, there are taxes. That’s money that the government confiscates, quite legally, from the nation’s available financial resources.Finally, there is borrowing. Like taxation, this involves the government collecting money from the nation’s available financial resources. Unlike taxes, the contributions aren’t compulsory and they are compensated with future interest payments and eventual repayment.The money a population has available to spend today is reduced equally whether its members make tax payments or buy bonds of the same value (and a government has the same amount to spend in each case, too). The government may believe that selling bonds is better for the economy than raising taxes — because deficits are supposed to stimulate more economic activity than balanced budgets — but the basic financial equation is identical.Fast forward a few years. Any government that borrowed in the past will need to raise a bit more money than it would if the books had been balanced, because it has to make interest and principal payments on past debts.Suppose the heavily indebted government chooses to raise the additional funds through taxes. Those are the payments on the supposed national mortgage. But tax revenues don’t get sent backwards in time, so they don’t change the situation today.The future debt-payment taxes do, of course, take money out of the economy when they are levied. But that money, in theory at least, flows right back into the economy as holders of government debt reinvest the interest and principal payments they receive. There is really no mortgage at all: just present transfers to the government to finance deficit spending and future transfers from the government to pay interest on and redeem those bonds, in turn financing spending by bondholders.Even though there is no mortgage, there are still at least two problems.First, the U.S. and U.K. governments, in particular, sell much of their debt to foreigners. For a globally minded economist, that doesn’t change the picture. But anyone thinking in national terms is right to see something like a mortgage. Locals get to consume now, thanks to foreign-financed deficits. But foreigners will get to consume more later, as those deficits come due. Governments issuing swathes of debt can head this problem off to some extent by trying to sell more of their bonds to patriotic locals.Second, higher borrowing now does mean governments, as opposed to their citizens as a group, will eventually have to cut spending or collect more taxes. That can disproportionately affect the poorest layers of society.But the additional burden doesn’t have to be huge. The National Institute of Economic and Social Research, a British group, expects the U.K. will need an additional 25 billion of annual tax revenues four years hence to meet additional interest expense from the crisis period. That’s about 1.8% of GDP, less than half the 4% of GDP the government added to its tax take — raising its share from 38% to 42% — between 1997 and 2008.Even if some of the incremental taxes leave the country to pay foreign lenders, the debt adjustments to taxes wouldn’t create a big problem in a well run country. Many countries, including the U.S. and the U.K., have paid down much higher debt burdens, generally incurred during wars.Assuming a disciplined government, when repayment time comes around some combination of economic growth, controlled inflation and perhaps some government surpluses gradually reduce the share of GDP dedicated to interest payments. In the meantime, clever tax policy can ensure that the rich, who typically own bonds, don’t profit too much at the expense of the poor, who typically don’t and therefore lose when the government has to pay lenders.But perhaps a country governed well enough to achieve those things would not allow gigantic foreign-financed credit booms and busts in the first place. Or try to test what the future effects of massive government borrowing really are.–The above comment reflects the personal view of Edward Hadas, editor at Breakingviews.com

Source:CNN