Chingo De Dinero

So, I just reviewed the GE quarter announcement, and I am a little worried that bad things may be coming.  Many analyst expected the dividend to be cut to keep the financial stability to keep the AAA rating.  This did not happen, what this means is that S&P or another credit rating agency could cut the rates, which will increase the cost of borrowing (Moodys will probably not cut it due to the ties with Sir Warren).  After this happens, GE will be in big trouble…with so much debt, the additional cost of borrowing will hit earnings, resulting in a decrease in investments in the various businesses, resulting in deterioration of their competitive advantage, which will hit the top line and start a nasty cycle.

If you look at the numbers, most of the cash generation is from the industrial side, which will probably tighten up mid way through this year.  Addtionally, you have to wonder how the current loans made by GE are…since many of them are through credit cards.  They do have a reserve for losses, but if it is large enough is a good question. If there is some unexpected weakness in the loan portfolio, along with a slowing industrial side, mixed with additional costs to renew debt…you are talking major trouble.

In looking at the actions of management, it looks like they are trying to build confidence, which could be a last grab at keeping the AAA and stoping the downward spirl.  Not cutting the dividend and raising money from Warren are two examples of management trying to get in the publics eye to prove everything is okay.  Although, I did see the recent debt having to pay 7%…a little high for how much debt is out there.  Lets see when it gets a little worse if we hit the slippery slope.

One of the best ways to get a good bargain stock is to buy something with short-term negatives when their future is bright.  That is the case with Aracruz Celulose (ARA).  If you fallow the Brazilian Real, you will know that it dropped 30% vs the Dollar very fast.  One of the casualties was Aracruz Celulose.  The reason being ARA uses hedge contracts to sell Dollars and buy Reais in the future.  Why would they do this, because most of their revenues are in Dollars and most of their expenses are in Reais.  So, to keep earnings fairly constant, it is beneficial to enter into these contracts.

Did they enter into more contracts that their future business can support, maybe.  If they do not use hedge accounting, they have to show the loss on the financial instruments right now, even if they have future cash flows that are the opposite of the hedge.  Even if they use hedge accounting, they can only do it for so far in the future, while the exposure to the Dollar to Reais still there.  Basically, what I am getting at is they had these hedges, which with the depreciation of the Real lost a lot of money, but on the business side, this will lead to higher profits.  So, if you have some time, for the short term problems to clear, there could be a ton of upside.

On a side not ARA owns a ton of land, which usually is not fully valued within the Balance Sheet.   There could be a lot more value than people think, and a lot of earning potential in the future.

If you have looked at the currency markets lately, it looks like the Dollar and Yen are really kicking butt.  In all honesty, the actions the US Government are taking to help the economy is nothing more than printing money, and putting it in business’s pockets.  That being said, why is the dollar not getting slammed.  I guess it all comes down to relativity.  Although the US is in the dumps, Europe is worse off.  You do not know how happy I am to see this after the last few years of an appreciating Euro.

All that being said, who is doing even better is the Yen.  For years, the government has been keeping it artificially low, which reduces consumption and helps increase production (imports cost more exports are cheaper).  It is almost as if the company has been saving in some roundabout way.  If the government lets the Yen keep appreciating, it will be interesting to see how strong it gets.  Once that happens, there could be some major purchases coming for foreign companies.

Additionally, I keep wondering where China is in all of this.  The Yuan has been pretty steady for a while, after appreciating after the government let it float (somewhat float).  We hear so much about the dollar reserves and the government messing around in the markets…I wonder if they truely let it float, what it would do.  My guess is appreciate like crazy.  Even if they don’t let it appreciate vs the dollar, we are bound to see it stay the same.

All this being said, if you can figure out how to play it you could make a lot of money.  For me, I am looking for cash heavy businesses, trading at low valuations, which will not be majorly impacts if the world economy gets hurt.  This may seem like difficult criteria, but from what I see Chinese online gaming stocks fit this.

After today, I am wondering how bad it can be in the future.  Really, if you look at valuations, it is crazy.  Even if the economy slows by a little, you can make a killing.  Based on prices now, the economy is going to come to an halt.

If you watch the news you will probably come up with the same idea, but if you take a step back, really how bad is it.  Go to the mall or a fancy restaurant and surprise they still have people making purchases.  If you are looking for a home to purchase, you can still get a loan, with a relatively low rate.  It just doesn’t make sense to me, but we will see.  Watch Q3, if it comes in okay and the forecast isn’t too bad, we will see some big jumps.