Thursday, July 16, 2009
Lehman, Again, Must We?
“A shut-down in rational decision making”
Good afternoon. In today's call we will continue to use the word unprecedented to describe our environment. As a Company, we have never seen a change as abrupt as the one that has occurred in our E&C market since early September.
The first break came in mid-September when demand dropped as a result of the meltdown in the financial markets….—Steven Berglund, CEO Trimble Navigation; February 3, 2009
Trimble Navigation is, for readers who don’t know the company, the Garmin or Tom-Tom of the agriculture and E&C (engineering and construction) businesses.
Steve Berglund, for readers who don’t know him, is about as straight-talking a CEO as they make.
And it was Berglund’s comments about the credit collapse from the company’s February conference call—especially “the first break in mid-September”—that played in our minds as we considered the following headline on our Bloomberg:
CIT Says U.S. Bailout Unlikely as Talks End, Studies Options With Advisers
CIT, for readers who don’t know the company, is to the retailing and manufacturing businesses of America what Lehman Brothers—whose collapse triggered that “first break in mid-September” of 2008—was to hedge funds and commercial real estate developers.
And it was the collapse of Lehman Brothers that triggered the credit crisis Steve Berglund, in that same February call, described as forming “two distinct periods” in 2008:
Total year 2008 really consisted of two distinct periods. The first nine months were recession conditions and difficult.... The sharp break in the fourth quarter represented a major loss of confidence by businesses which constituted our primary customer business base.
This resulted in businesses across the U.S. and Europe cutting back dramatically on investments. In practical terms, the E&C market has shut down rational decision-making while awaiting events.
Now, we hear at NotMakingThisUp are not suggesting CIT's problems will have any impact on Trimble Navigation. If CIT goes down, it will not be the engineering and construction business that will “shut down rational decision-making.”
Rather, it will be thousands of small and middle market and large companies that borrow money and lease equipment from CIT that may well see a “shut down in rational decision-making.”
For CIT lends to manufacturers and wholesalers and distributors and importers and retailers and technology companies, and broadcasting, publishing, security, gaming, sports and entertainment companies.
And it provides credit to Small Business Administration borrowers.
In addition, CIT does business with “all of the U.S. and Canadian Class I railroads,” according to the CIT 10K. It leases hopper cars to ship grain, gondola cars for coal, open hopper cars for coal, and center beam flat cars for lumber through CIT.
And CIT leases aircraft to airlines—23 aircraft placed in 2008, and 114 aircraft on order at the end of 2008—and it finances parts for defense companies.
And woe be the retailers who finance their accounts receivable through CIT—$42 billion worth in 2008—and the small commercial businesses who lease office equipment financed by CIT.
When Lehman went down, the Feds claimed they couldn’t get involved, even while they were preparing the necessary documents to take over AIG, the collapse of which would have brought down the world (see “Widespread Panic, Starting Today” from September 18, 2008).
CIT may not bring down the world, but its failure, we think, could well trigger an echo of the Lehman collapse.
Why the Feds are not prepared to help—a shut down in rational decision making in and of itself—we can’t fathom.
I Am Not Making This Up
© 2009 NotMakingThisUp, LLC
The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 8:36 AM