Running Out of Time and Money

BALTIMORE – We are looking ahead. And coming together is not only a clearer picture of how Trump’s reflation might turn out – but also a better understanding of what has gone wrong with the whole economy.

 

The famous Sears Tower (now Willis Tower) dominates the Chicago skyline. Its former owner Sears Holdings is on the ropes after being in business for 130 years. What happened?

Photo credit: Carol Highsmith

 

Over the next three days, we’ll look at a few of Trump’s money men. Then, we’ll conclude the series with a guess about what will happen when these fellows get to Washington.

When we were growing up, we shopped for nearly everything at Sears stores. If it wasn’t in the stores, we ordered it from Sears’ big catalog. The latter was a marvel, where we saw all the things America’s Main Street had on offer at the time. That’s where we did our Christmas shopping.

But looking at a chart of Sears’ stock over the last eight years is like looking at a photo from Aleppo. From nearly $200 a share, it now trades for just over 10 bucks. What happened?

How could such a great company – owner of Kmart as well as its own Sears’ stores – anchoring malls all over the country with title to some of the choicest commercial space in the nation and owner of the brands we grew up with – including Kenmore appliances and Craftsman tools.

How could such a company suddenly put itself into what looks like a death spiral?

 

A chart like a photo of Aleppo: Sears Holdings, monthly. After ailing Kmart took over likewise ailing Sears, Roebuck & Co., the merged company was renamed and re-listed as Sears Holdings. In the first three years after the merger, it looked like things might work out – but that soon turned out to have been an illusion. Over the past four years it has lost around $8 billion – click to enlarge.

 

Business Insider reports:

 

According to a recent report by The Wall Street Journal, toy maker Jakks Pacific Inc. recently suspended sales of its products to Kmart, which is owned by Sears Holdings, due to worries about the company’s financial health…

Fitch Ratings in October identified Sears as one of seven major retailers at risk of going bankrupt in the next 12 to 24 months and eventually liquidating.

In September, Moody’s analysts downgraded Sears’ liquidity rating, saying Sears and Kmart don’t have enough money – or access to money – to stay in business.   The Moody’s analysts said Sears is bleeding cash and will have to continue to rely on outside funding or the sale of assets, such as real estate, to sustain operations. Kmart in particular is at risk of shutting down, the analysts said.

 

The company is running out of time and money. It had $1.8 billion in the till a year ago. Now it has only $238 million. And $3 billion in debt. How does a company do that? How does it destroy itself… wiping out 130 years of accumulated wealth and knowledge?

The answer is to be found in fake money and the financial insiders who use it to strip out value from Main Street and move it to Wall Street.

 

Another terrible chart associated with Sears: In 2012 Sears Holdings decided to spin off certain stores (hardware and appliances stores) under the name of Sears Hometown & Outlet Stores. The spin-off almost immediately turned into a complete disaster for shareholders – click to enlarge.

 

Debt and Duplicity

First, as described here many times, fake money weakened the middle class, which shopped at Sears. The rich went to more upmarket retailers such as Neiman Marcus and Nordstrom. The poor went down to dollar stores and Walmart. Sears was left in the middle.

But the more interesting story concerns a Mr. Steven Mnuchin. Mr. Mnuchin was on the board of Sears for the past 11 years, throughout its devastating decline. He is resigning now, letting the ship go down without him. Besides, he has already stolen the silver.

How do you destroy a business? It’s not that hard. Rather than invest in new people and new methods, you take the money for yourself.

It is even more attractive if you can borrow a lot of fake money at ultra-low rates against the company’s credit, pay it out to yourself and other financiers… and then jump ship, leaving the company, its employees, and its creditors to drown in your debt.

That is what Mnuchin did. Here’s David Stockman:

 

[…] during the last 11 years [Sears] spent $7 billion on stock buybacks or nearly double the amounts it reinvested in maintaining and renewing its store base, which at one time numbered more than 4,000 Sears, Kmart, and other specialty store units.

 

In terms of sales, Sears spent less than a third as much as rival Walmart on capital improvements. Instead, insiders pumped the money into their own pockets, mainly with buybacks.

 

Steve Mnuchin, his pockets well lined from an 11-year stint at the Sears board that presided over the company’s death-spiral, emerges from an elevator. Guess why he’s grinning (caption contest!). Meanwhile, one of his ex-Goldman buddies helped with the Sears asset stripping operation described below. The good news is that Mnuchin can no longer harm Sears.

Photo credit: DPA

 

Classmates and Cronies

Then, either seeing the handwriting on the wall, or putting it there themselves…    they pulled a fast one, evidently with Mr. Mnuchin’s cooperation.

Two hedge funds swooped in with a plan: They would use cheap financing to transform valuable Main Street real estate into a Wall Street asset. They set up a real estate investment trust (REIT), took the property out of the company, and put it in the REIT. [Note: a REIT is similar to a mutual fund, except that it holds property investments instead of stocks].

Sears can go broke; they will still have the company’s most valuable assets. And now they can sell the REIT to investors. And by the way, one of the two funds involved is run by a former college classmate and Goldman Sachs crony of Mnuchin’s, Eddie Lampert.

 

Sears property spin-off SRG, which holds 266 properties that were formerly owned by SHLD. Another well-known crony capitalist, Warren Buffett, has taken a $70.5 million stake in it. For once, a Sears-related stock seems to be doing a bit better. Sears shareholders at least did get an opportunity to purchase rights to the REIT when it was spun off. It is worth noting that while the spin-off delayed the bankruptcy of SHLD by solving its immediate cash flow and debt problems, which had become acute by 2014, it will eventually saddle the company with an even higher debt load due to soaring lease obligations. SHLD remains with another 400 properties it can “monetize” – unless its creditors grab them first – click to enlarge.

Stockman continues:

 

[…] the whole deal was a backdoor financing to get assets out of SHLD [Sears] prior to its impending bankruptcy. The hedge fund insiders will now have a secured senior claim through the newly created REIT, which they substantially own, rather than worthless SHLD common stock.

 

At least Steve Mnuchin can do Sears no more harm. Donald Trump picked him as his Treasury secretary.

 

Charts by: StockCharts

 

Chart and image captions by PT

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 


 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

2 Responses to “How Do You Destroy a Business?”

  • Hans:

    The author got this piece badly wong. Sears, is failing
    in just the same fashion as WT Grant and Monkey Wards
    did a decade ago.

    The retail business model has changed but certain retailers
    failed to change with the times. Others and there are more
    others than not, will simply fail as the American economy evolves.

    CG, I recently priced an American built car jack stands – at $123.oo each!
    A hybrid one – overseas parts but assembled in America, are priced at $68.oo.

    Red China car jack stands can be priced as low as $13.95 online.

    Hell, sell Sears to Red China and they can sell us Maoman tools!

  • CG23:

    Sears used to be the place to buy reasonably priced, but good quality American-made products…now most of the stuff they sell, (including most Craftsman tools!) is the same Chinese made crap you find in Wal-Mart, Target, dollar stores, etc… I still have a lot of American-made things that I would like to replace instead of keep repairing or nursing along, but I refuse to buy Chinese-made crap to replace it. Are there any business genius’s out there (actual, intelligent business people, not the grifters and looters that the MSM fawns over and calls “genius’s”), who want to try and serve us with good, American-made products?

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist