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alstry (36.44)

Why Alstry is All or None

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June 20, 2008 – Comments (6)

This logic doesn't apply to all, but does apply to many individuals, businesses, and municipalities.

After revenues decline to a certain point, whether 10%, 20%, or 30%, there is a certain point where the revenues reach a level that the entity can no longer sustain itself and defaults.  Whether you call it fixed costs or monthly nut, the semantics really don't matter. 

Right now, a number of people, businesses and municipalities below, at, or near that point.

Let me provide an easy example for illustrative purposes only:

A shopping center generating $1 million dollars per year in gross rents.  The taxes and maintenance are $100K and debt service is about $700K per year. ($10 million at 7%).  At 10% vacancy rates, income is cut in half but all is OK.  At 20% the shopping center is break even and at 30% it is losing $100K per year.

Different centers have different leverage.  In the go go years, many loans were written at much higher leverage rates than described above so just a slight decline in revenues creates a default situation.

The same approach can be applied to an individual or municipality.  There is only so far expenses can be cut before total default.

It is my belief we have 25-40% of excess commercial space in America to support a less leveraged society.  At those kinds of vacancies, most commercial projects fail and trillions in loans are in jeopordy of default.

We probably have 20-25% more workers than we need in an unleveraged economy.  Salary reductions can assist as well.

The effect of deleveraging will be devasting for our cities and states.  Just take the fact that car sales in June are about 2/3 pace of last year....carry that forward and just in sales taxes alone....billions will be lost.  Many dealerships will go out of business impacting property taxes and income taxes....and we could go on.

When an entity goes bankrupt, as an investor, it is a total failure because as a stock holder you are totally wiped out.  Right now I see a lot of bankruptcies on the horizon as the slowing continues.

6 Comments – Post Your Own

#1) On June 20, 2008 at 7:22 AM, alstry (36.44) wrote:

Negative 30% is becoming commonplace.

From WGO this morning:

"The motor home market has changed significantly in the past year, with dramatic declines in the past few months," said Winnebago Industries' Chairman, CEO and President Bob Olson. "Discretionary purchases have declined in the United States as the country is faced with unstable fuel prices, consumer confidence at 16-year lows and a tighter credit environment. Industry-wide, the motor home market has faced double digit retail sales percentage declines for eight of the last nine consecutive months.

Statistical Surveys, Inc., a retail reporting service for the RV industry, recently reported a decrease in retail sales of Class A and C motor homes of 26.1 percent for the first four months of calendar 2008, with a decline of over 30 percent in both March and April, which are typically some of the seasonally strongest months. On a wholesale basis, industry forecasts indicate volumes will decline to levels that haven't been seen since calendar 1991."

There are not many businesses in America that can sustain 30% declines in revenues without serious harm to the business or being forced to shut down.

As we have documented, more and more industries are facing greater and greater pressures confronting dramatically slowing revenues with dramatically rising costs.

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#2) On June 20, 2008 at 8:25 AM, abitare (57.16) wrote:

Aligned

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#3) On June 20, 2008 at 8:53 AM, alstry (36.44) wrote:

Ask yourself this simple  question:

How much capital do the banks really need to shore up their balance sheets due to defaulting loans?

Then ask, is there that much capital in the world?

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#4) On June 20, 2008 at 8:53 AM, alstry (36.44) wrote:

Ask yourself this simple  question:

How much capital do the banks really need to shore up their balance sheets due to defaulting loans?

Then ask, is there that much capital in the world?

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#5) On June 20, 2008 at 9:29 AM, joeykid13 wrote:

I agree whole heartedly with your observation here.  Something had to give eventually, it was just a matter of time.  I think it is important that people PREPARE themselves for the worst case scenario, at least mentally, so they are not completely blindsided.  The writing is on the wall...no doubt about it, but as always, there will be a very large amount of folks burying their head, that is...until they get kicked in the tail.

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#6) On June 20, 2008 at 2:46 PM, EScroogeJr (< 20) wrote:

I agree about commercial RE. There is no reason in the world for Cahse Manhattan to have a multibillion dollar headquarters in an expensive city. The proper place for any coporate HQ is a picturescue corn field in rural Minnesota. But CEOs will  not give up their expensive office toys in our lifetime, and shareholders will never have the brains to demand frugality from someone who is merely a hired employee.

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