Fuel prices dropping....

[NM_Shooter]

I just bought diesel for $3.96 a gallon.  Down from $4.70 a few weeks ago. 

I'm surprised that the disparity from station to station is so high.  Many stations are still at $4.49 a gallon for diesel.  I wonder if they sell it as a commodity or if they got stuck with a full load of fuel at a higher price.

Heck, I almost feel like going cruising just to celebrate.

-f-

[muldoon]

benevolence, you sure got a point there.  Not sure if its cart leading the horse or what, but the catalyst has been a strengthening dollar the last 3-4 weeks.  From a money flow perspective, chaikin charts say money is leaving commodities and going into american dollars lately.  Perhaps its just politickin, too hard to call the motivation... or even identify the primary mover and shaker in the move for that matter. 

It does however, reinforce my underlying trading thesis from last fall that has never changed.  There will be no hyperinflation.  There will be deflation, what we have now in my opinion is mostly still deleveraging... deflation is still months away.  From a consumer perspective both suck.  inflation means you have more money but cant buy things because they cost more.  deflation means things get cheaper, but you have no money and still cant buy them.  (not literal, its a generalization there).  In the above, you can replace the word money with credit and use them interchangeably as the fit different situations. 

In a deflating asset spiral, cash is king.  An example of that is the tens of thousands of 2005+ SUVs on sale for 10k right now.  cash is king for those with it.  Houses in Detroit now selling for 1 dollar.  http://www.detnews.com/apps/pbcs.dll/article?AID=/20080813/METRO/808130360/&imw=Y  ..  even at the $1 price it took 19 days to find a buyer.  that same house sold for 65k in November 2006.   Strong dollar? 

[desdawg]

That is why I keep my credit lines open. Windows of opportunity sometimes open and close rather quickly so the having some agility without depleting your reserves is handy. There isn't always time to start from square one. Borrowed money can be moved around at a later time to a more favorable interest rate. Someone is always throwing around a promotional rate in an attempt to get new business. The old balance transfer trick. Then you have to pay attention to your timeframes so you don't go past the promotional period before doing it again.

[desdawg]

Credit if used appropriately is a tool for operating a business. Sometimes bigger ticket items are needed and the sock drawer won't cover them. People can certainly do damage to themselves if the usage and repayment aren't disciplined. It is kind of like using a circular saw. If you don't use it properly you can certainly hurt yourself with it.

[muldoon]

Credit if used appropriately is a tool for operating a business.

Thats the key right there.  I think that used to be true.  In fact, there are tens of thousands of ivy leaugue MBA's out there running companies with that mindset.  I dont believe it is a valid statement anymore, and going forward I think it is downright dangerous to continue to do so.  Why?  cost of debt is increasing.  Companies who rely on debt to operate, especially those that continually must roll over debt on an ongoing basis are getting squeezed.  Well, not squeezed, some are getting outright slaughtered. 

Consider CMBX, http://www.markit.com/information/products/category/indices/cmbx/history_graphs.html
So this is spreads for debt over swap for commercial real estate.  Basically, it is the cost of debt for malls, apartment buildings, office buildings and such.  They pay a notched increase over a set rate such as the 10 year TNX.  As they float bonds to try to raise cash, the cost of their debt increases. 

Starting with AAA rated


This means they get a 180 basis points over benchmark.  Note the direction, note its doubled in 3 months. 

Now consider a lesser rated company: say the BBB rated


Holy hell, its 2500 basis points over benchmark, and damn near going vertical. 

When we hear about companies going bankrupt the last few months I have questioned the "why".  Take Bennigans and steak & ale going belly up recently, sales were down something like 8% in the quarter.  Certainly a bad situation, but are their margins so tight that 8% puts them under?  I doubt it.  They got crushed by debt in my opinion.  Enter the leverage factor. 

They owed some amount, and kept it rolling on a continual basis paying a percentage.  They brought in a certain amount as revenue and kept the debt serviced calling the rest profit.  When incoming is down 8% and outgoing goes up 100% they were dead.  End of story.  Were going to see ALOT of this coming.  Seriously, this is bad for our job market. 

Also, just because 99% of American families dont see this coming doesn't mean smart money doesn't.  CFO's and CEO's.. hell even CPAs should be able to read the credit spreads and see where this is going.  Layoffs, hiring freezes, travel bans, inventory controls.  All working towards tightening the balance sheets in an effort to stay within cashflow. 

The same economic principles will occur at the family level in coming months, and many many will be blindsided.  Take the proverbial family that runs a revolving credit balance and transfers it every 6 months to a 0% or other teaser rate card when the offer expires.  What happens to them when they go to transfer and the best rate available is 20%?  Same damn thing as above.  Debt is not your friend here.  As job loss and profit loss happens from above, defaults will increase.  This raises risk and rates follow.  Expect those credit lines to shrink or disappear outright.  There is no intervention that can stop it. 

It's not coming, it's here now for commercials and were going to see the effects in the next 30-60-90 days. 

[desdawg]

I guess the rules are changing. I have been doing just this very thing for quite a few years. It has allowed me to answer the door when opportunity knocked on a number of occassions. I might as well just quit trying to be self supporting if I am doomed to failure. Maybe I will just become a democrat and apply for welfare and get myself an Obama bumper sticker. You guys paint a pretty gloomy picture. I try to use a little judgement in these matters. But it sounds like I have just enough rope to hang myself with. If all of my credit lines went away tomorrow I wouldn't really miss them. Most of them are currently unused.I got as copy of my credit report this AM as part of a mortgage application. It showed 45 credit lines with a zero balance. Made my score look pretty good. So I have plenty of rope if I get irresponsible. That would require a level of desperation I haven't achieved yet. On my side I don't have an MBA. Perhaps I am not educated enough to be a threat to myself. I shut the excavating business down when I saw the end of that market coming. I was prudent enough to not throw good money away on non-productive overhead expenses. That must not be taught in MBA school. All of these big companies push it to the limit. If they are the roll models we do have a problem. They don't have problems until they issue their earnings reports. Or the consumer saying I will leave this house when I get thrown out. Sounds like a judgement, moral and ethical problem. I can't be broke I still have my little plastic card and two boxes of checks.
I was amazed this morning to see the headlines about inflation and how it was affecting the market todayat the open. It seems that the people who run the money didn't know it was here until someone printed a report.    I had to wonder what they thought they were involved with when they went to the gas pump and the grocery store for the last several months. I watched some of the gurus this past week on TV talking about how great the current deflation is. Cramer was one of those. Sometimes I see too far and some times I am too myopic.
Removing those credit lines would be like someone taking all the wrenches out of Peters tool box and then telling him he better get that car fixed if he wants to eat. That removal will cripple industry. It has become considerably more difficult to prove yourself worthy of credit. The lenders really want to see a track record of reponsibility and performance. Don't get me wrong I would like to own everything outright. And to a large extent I do. I have 53 properties and 4 mortgage payments. And only one equipment payment. The rest is paid for. But as I stated there are big ticket items where paying cash isn't feasible for the masses. Credit has become much more inaccessible to those who are irresponsible with it. If you don't trust your abilities there is no reason for anyone else to do so. I think we are back to where trust is truly an earned commodity. Maybe I will screw it all up before it is over and go out the same way I arrived.

[muldoon]

desdawg,

I think you misunderstand where I'm coming from.  having 45 lines of credit with a zero balance is NOT a reliance on debt.  It is the opposite.  I am making the statement that credit markets are nearing meltdown stage, and for business models that RELY on it they will get burned very badly.  For homeowners and consumers that RELY on it it will be the same. 

As you said, credit lines are becoming more difficult and getting more expensive to those it is available for.  This trend is due to increased risk in loaning money and a decrease in the mount of capital available.  All these writedowns take money out of the system, in fact due to reserve requirements it takes 8times more out of the pool available then when it went in.  As there are fewer dollars (credit) available, demand says prices go up. 

If your business pays its bills and grows by borrowing and you pay to service that debt by the revenue generated this is dangerous.  It doesn't sound like that's your scenario.  Looking at the chart above, take commercial real estate, let's say I sell bonds to construct a mall, being AAA rated I pay 180 basis points above ten year swaps (roughly 5%), or 6.8% total.  I need to generate that 6.8 +plus business overhead in revenue to stay afloat.  If I am a BBB rated company, or if I was just downgraded and my bonds need to be rolled I see 2500 basis points or 25% interest.  Suddenly I am paying guido style 30% rates.  And it couldnt come at a worse time, because sales are down, and people are not paying my invoices because of their own troubles.  Much of corporate america works in this fashion and it is a nightmare out there. 

Consider one that was in the news this week, Uno pizza.  A midwest and eastern coast chain is flat defaulting on their loan payments.  Also add Village Inn, Marie Calenders, Perkins, are in talks with their lenders as well.  A few days ago one of the largest pizza hut franchisers filed bankptcy.  Those are just restraraunts but the problem is everywhere.  Take GM, they are losing the entire market cap of the company every month.  National dry cleaners 213 stores bankruptcy this week, mr bubble this week, Whitehall Jewler's 373 stores (and they have been in business over 100 years), Irving saw mill up in Maine ... the list goes on.  Linens and things earlier this year, sharper image as well. 

There are minor trends and major trends.  I believe this is a major trend, its gonna crush people that dont see it coming.  If you want to read history and see where it occured before, read up on US bond market dislocation 1930-1931. 

It may or may not be doom and gloom for you specifically, to be honest it sounds like you may be well positioned to ride it out or even profit from it if you recognize the situation and are ready to act as opportunity presents.   However, it *IS* doom and gloom for many right now.  Really, all you have to do is being ahead of the herd so to speak.  Sounds like your there. 

[desdawg]

I figured I would get in trouble with that post. I only use the credit when I need to move pretty fast. I would get into trouble if I was unable to move it around when I needed to and I can see how that could be coming. The new mortgage would be 30 year fixed and I don't even know if that will go through. Much of what I do is seller financed and those usually come with a due on sale clause but the repo market takes that option off the table. So if you are going to buy from that supply you have to be able to finance or have way more cash than I do. Even getting a mortgage for an investment property takes a 20% down payment. Which might be pretty prudent even for owner occupied property. I don't like being in debt and I sure don't want my alligator mouth to overload my hummingbird hiney. So I hear where you are coming from Muldoon. It is a bit depressing to think I have to find another way to do business.
Well, I have to go get my Obama sticker. He will only make it worse. If a person has a little initiative he will try to penalize you and give the results to a couch potatoe somewhere. If McCain want to finance another 8 years of war the results will all be the same anyway.

[desdawg]

Based on this conversation I am withdrawing from the mortgage application and pulling back on the credit thing. After thinking it over I am going to try to liquidate some assets and pay down. With the fuel price decline maybe I can get some trucks and trailers sold without giving them away. I have more than I can use if I am not hauling equipment but no one was buying anything lately so they have just been sitting. Now may be a better time.

[glenn kangiser]

After the major fuel gouge and record posted profits ignored by many, it is common for the price to drop a bit to now make you happy for their generosity

You will be happy paying the new higher gouge price (but lower than the max).  That is the way they do it.. 

[ScottA]

I'm very greatful to pay the new lower gouge price.