Dear Ladies and Gentlemen: (amended commentary to include inventory movements)
Gold closed today at $1594.20 down $10.00 on the day. Silver followed suit down 35 cents to $28.70
Since the MF GLobal scandal the bankers are having full control over the futures on gold/silver as volumes completely dry up. It is very strange that again for the second straight session there have been no updates on inventory movements. The last reporting session was 22nd of December. I checked the CME bulletin and still no updates. This is most unusual. I get the data from the Nymex daily reports
under the section of warehouse and depository stocks. The copper inventories were updated today.
In the body of the commentary we will witness that most of the LTRO euros are heading straight back to the ECB which probably indicates that one or two European banks are in trouble.
Let us head straight to the comex and see how trading fared today:
The total gold comex OI fell by 2217 contracts to 422,747. We are seeing more evidence every day of OI and volumes drying up. The front delivery month of December saw its OI fall 599 contracts to 138 from 737. We had 577 deliveries on Friday so we lost 22 contracts or 2200 oz of gold standing and that may be have through cash settlements or an error in Friday reporting. The next big delivery month is February and here the OI fell by around 1000 contracts to 244,098. The estimated volume today was an unheard of 46,261 even though it is still the holiday season. The confirmed volume on Friday came it at 47,497.
The total silver comex OI rose by around 100 contracts to 102,330. The front December contract saw its OI fall from 27 to 18 for a loss of 9 contracts. We had 4 delivery notices on Friday so we lost 5 contracts or 25,000 oz to cash settlements. The next big delivery month is March and here the OI remained relatively constant at 56,287. The estimated volume today at the silver comex was an anemic 11,962. The confirmed volume on Friday was also extremely weak at 10,812.
Inventory Movements and Delivery Notices for Gold: Dec. 27 2011:
Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in oz
No of oz served (contracts) today
No of oz to be served (notices)
103 (10,300 oz)
Total monthly oz gold served (contracts) so far this month
Total accumulative withdrawal of gold from the Dealers inventory this month
100 exact oz.
Total accumulative withdrawal of gold from the Customer inventory this month
We finally received inventory movements in both gold and silver around 8 pm est. Gold had
no deposits of any kind only one withdrawal by the customer at HSBC to the tune of 3504 oz.
There were no adjustments. However the registered inventory fell to 2.539 million oz over the holidays and I have no entry for this. This new total now represents 78.90 tonnes of gold.
no deposits of any kind only one withdrawal by the customer at HSBC to the tune of 3504 oz.
There were no adjustments. However the registered inventory fell to 2.539 million oz over the holidays and I have no entry for this. This new total now represents 78.90 tonnes of gold.
The CME reported that we had 35 notices filed for 3500 oz of gold. The total number of notices
filed so far this month total 22,40 for 2,204,000 oz. To obtain what is left to be served upon, I take the OI standing (138) and subtract out today's deliveries (35) which leaves us with 103 notices or 10,300 oz to the served upon.
Thus the total number of gold oz standing in this delivery month of December is as follows:
2,204,000 oz (served) + 10,300 (0z to be served) = 2,214,300 oz. or 68.8 tonnes of gold.
we lost 2200 oz to cash settlements.
If we add the 1.77 tonnes from November we have a total of 70.57 tonnes or 89.36% of registered dealer gold.
And now for silver
We finally received data at 8 pm this evening.
We had no silver deposited to the dealer and no silver was withdrawn.
We had one entry of a customer deposit to a customer at Delaware vault.
We had the following customer withdrawal:
1. 67,649 oz Brinks
2. 4760 oz HSBC
3. 51,401 oz (JPM)
total withdrawal: 123,810 oz.
we had no appreciable adjustments.
The dealer inventory in silver rests tonight at 33.97 million oz.
Somehow the total inventory of silver tonight reads at 115.29 million oz.
The CME notified us that we had 12 delivery notices filed today for 60,000 oz.
The total number of notices filed so far this month total 1013 for 5,065,000 oz.
To obtain what is left to be served upon, I take the OI standing (18) and subtract out today's
deliveries (12) which leaves us with 6 notices or 30,000 oz left to be served upon.
Thus the total number of silver oz standing in this delivery month of December is as follows:
5,065,000 (oz served) + 30,000 (oz to be served) = 5,095,000 oz
we lost 25,000 oz to cash settlements.
Today there are two huge papers on the plight of Japan. The first, written by Wolf Richter of www.testosteronepit.com talks about their budgetary deficit of over 56% of revenue. Ninety five percentage of their debt is held internally in the country. However as savings rate declines and citizens withdraw their cash, bond yields will rise and this will probably produce a financial cataclysmic event over there. Japan's main strengths over these past several decades has been their exports and savings and both are plummeting. The interest on the debt equates to a touch greater than 50% of the budget.
In the second paper, Econmatters discusses the huge debt coming due with fewer and fewer buyers of the debt. Both are extremely well written:
Monday: Dec 26.2011:
The EndGame: Japan Makes Another Move
Wolf Richter: www.testosteronepit.com
It’s a doozie. On December 24, the cabinet approved a draft budget for fiscal 2012 whose headline numbers were horrid enough: ¥90.3 trillion ($1.173 trillion) in outlays, ¥42.3 trillion in tax revenues, and a deficit of ¥48 trillion. 49% of the outlays are to be covered by issuing bonds, a record even for Japan. But it gets worse. Accounting shenanigans gloss over the fiasco by removing two items from the general budget: the reconstruction budget of ¥3.8 trillion and pension payments of ¥2.6 trillion. When they’re included, the deficit jumps to ¥54.4 trillion.
Fiscal 2012 Draft Budget
Reconstruction budget, left out of general budget
Pension payments left out of general budget
Estimated tax revenue
Deficit to be funded by borrowing
Percent of budget to be funded by borrowing
The Japanese government will have to borrow 56.2% of every yen it spends in 2012. But it gets even worse! Japan regularly passes “supplementary budgets” during the year—four of them in 2011, the last one on December 1 for ¥2 trillion. So there may be a few in 2012 as well, which could push borrowing requirements toward a dizzying 60% of outlays.
Despite the near-zero interest rate policy the Bank of Japan has been pursuing for years, interest expense on the debt—at 230% of GDP by far the highest in the developed world—will eat up ¥21.9 trillion in 2012, a stunning 51.8% of tax revenues! If yields on 10-year JGBs were to rise from 1% to 2%.... Better not think that way. Keeping yields near zero is simply a matter of survival.
Funding these deficits and rolling over the gargantuan debt has been made possible by the institutional setup and cohesive psychology of Japan Inc.: 95% of JGBs are held within Japan. Individuals directly or indirectly hold over 50%. Government-owned or controlled institutions hold over 40%. Among them: the Government Pension Investment Fund, the government-owned Post Bank, financial institutions the government can lean on, and the BoJ. Foreigners hold 5% for decorative purposes.
But two of the strengths of the Japanese economy that have supported the absurd deficit levels—a high savings rate and a large trade surplus—have collapsed. The savings rate is in the low single digits, and the trade surplus has turned into a ¥2.2 trillion ($29 billion) trade deficit in 2011 through November.
In November, imports grew 11.4% over a year ago, in part due to liquefied natural gas imports—up 21%. Since the Fukushima disaster, utilities have shut down reactor after reactor for scheduled maintenance but have not restarted them. Of the 54 reactors, only six are operating (one was shut down December 26, three more will be shut down in January). To make up for the shortage, utilities have revved up natural gas plants—though reductions in power consumption have also been implemented.
Exports dropped 4.5% from a year ago. Exports to China, Japan’s largest export market, declined 7.7% while imports grew 6.6%. Japan used to have a trade surplus with China. No more. The pace of offshoring is picking up, particularly in the auto and tech industries. While a weaker yen could slow down that trend, it would also drive up the cost of imports, including fossil fuels and raw materials—posing additional strains on the struggling economy.
The strategy for keeping it all glued together for a few more years? An increase in the unpopular consumption tax from the current 5% to 10%. Prime Minister Yoshihiko Noda proposed it in November. The opposition howled. Noda’s approval rating has dropped from 63% to 44.6% in the four months he has been in office (for the whole debacle of weak governments and revolving-door prime ministers, read.... Japan Inc. Plays By Its Own Rules). In pushing the consumption tax, he might run into a buzz saw. And if it passes, it will constrain consumption even further.
"Japan's budget-making processes and its reliance on public debt have reached their limits," Finance Minister Jun Azumi told a news conference on December 24, the winning understatement of the year. And what solutions did he propose? Well, pass the consumption tax “and somehow reverse the falling birthrates."
Reverse the falling birthrates? If that ever happened—doubtful in the current social climate—it would unleash a new wave of government expenditures (schools, healthcare, etc.) for two or three decades before it would generate a boom in productive and tax-paying members of society. But keeping the system glued together for that long would require a miracle. And for a finance minister to count on a miracle seems a bit silly.
Life goes on. A convoy of 20 supercars was speeding down the Chūgoku Expressway, entered a left-hand bend at 90–100 mph, though the posted speed limit was 50 mph. The highway was wet. And the rest was very expensive.... Superlative Supercar Pileup (incl. video).
The second paper by Econmatters:
Debt Crisis 2012: Forget Europe, Check Out Japan
Submitted by EconMatters on 12/27/2011 09:56 -0500
The recent massive demand for ECB's LTRO (Long Term Refinancing Operation)--nearly 490 billion euro in three-year 1% loans from 523 banks--only confirmed the suspicion of some market participants that European banks are having financing issues, and that the LTRO is unlikely to flow into the Euro Zone supporting the troubled sovereign debt and economy.
In addition to the current Euro crisis which we discussed here and here, Japan, the world's third largest economy, could have its own debt crisis as early as 2012 bigger than the Euro Zone.(see graph below or at our site)
|Graphic Source: Awesome.good.is, 20 Dec. 2011|
Japan has long been mired by an aging population, sluggish growth and deflation since an asset bubble popped in the early 1990s. The country already has the highest debt-to-GDP ratio in the world--about 220% according to the OECD -- and a debt load projected at a record 1 quadrillion yen this fiscal year.
Based on a plan approved by the Cabinet in Tokyo on 23 Dec, the country is now looking to sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen ($1.16 trillion) of spending in fiscal year 2012 starting 1 April. That will raise Japan budget’s dependence on debt to an unprecedented 49%.
According to Bloomberg, the government projects new bond issuance will surpass tax revenue for a fourth year. Receipts from levies have shrunk about a third this year after peaking at 60.1 trillion yen in 1990. Non-tax revenues including surplus from foreign exchange reserves also halvedto 3.7 trillion yen. Social-security expenses, now at 250% of the level two decades ago, will account for 52% of general spending next year
Moreover, an April 2011 analysis by CQCA Business Research showed that "Japan has an extremely near-future tilted debt maturity timeline" (see chart below). CQCA estimated that in 2010, Japan was able to push 105 trillion yen into the future, but concluded it is doubtful that Japan will be able to continue this.
|Chart Source: CQCAbusinessresearch.com, April 2011|
Indeed, as one of the major and relatively stable economies in the world, and since almost all of its debt are held internally by the Japanese citizens or business, Japan has been able to still borrow at low rates (10-year bond yield at 0.98% as of Dec. 26, 2011), partly thanks to the Euro debt crisis going on for more than two years.
So as long as Japan could keep financing a majority of its debt internally without going through the real test of the brutal bond market, the country most likely would not experience a debt crisis like the one currently festering in Europe.
But the chips seem to have stacked against Japan now. On top of the new and re-financing needs, the Japanese government estimated that the economy will shrink 0.1% this fiscal year citing supply-chain disruptions from the earthquake and tsunami disaster in March, the strengthening of the yen and the European debt crisis. Moreover, S&P said in November that Japan might be close to a downgrade. After a sovereign debt downgrade to Aa3 by Moody's in August, 2011, it'd be hard pressed to think Japanese bond buyers would shrug off yet another credit downgrade.
Burgeoning debt, coupled with the global and domestic economic slowdown, and continuing political turmoil (Japan has had three Prime Ministers in the last two years, and the current PM Noda’s popularity has fallen since he took office in September), would suggest it is unlikely that Japan could continue to self-contain its debt.
It looks like its massive debt could finally catch up with Japan in the midst the sovereign debt crisis that's making a world tour right now. While some investors might see Japan as a bargain, it remains to be seen whether the country will continue beating the odds of a debt crisis.
In my Saturday commentary we suggested that the European banks may not engage in the carry trade but just shore up its balance sheet with the LTRO money. Sure enough on the second day post the LTRO trade, most of the money was redeposited back into the ECB. Thus of the net 210 billion Euro repo, a full 167 billion euros was redeposited back into the ECB. These funds only receive .25% per annum and thus they are losing .75% per annum on the transaction. The why do it? Europe is insolvent!!
LTRO "Bazooka" Is Epic Disaster As Banks Scramble To Redeposit "Free Carry" Cash With ECB, Lose Money On "Inverse Carry"
Submitted by Tyler Durden on 12/27/2011 04:54 -0500
When on Friday we penned "And This Is Where The LTRO Money Went" we said that the final nail in the "Carry Trade" theory was that instead of using the LTRO "Bazooka" cash to collect meaningless pennies in front of a steamroller, Europe's banks turned around and deposited it right back with the ECB after the bank's deposit facility soared to a 2011 record €347 billion, €82 billion more than the day before. Today, any residual doubt of where the LTRO cash proceeds went is eliminated, as the ECB has just confirmed that what goes out of one pocket comes back in the other, as the ECB's deposit facility has just exploded to not a 2011 record, but an all time record high €412 billion, a €65 billion increase overnight, and €167 billion higher in the past two days alone, which effectively accounts for practically all of the LTRO's free €210 billion.
And to those who foolishly claim this is a seasonal year end cash parking, we present the full history of the ECB's facility usage since it exploded on the scene in 2008. P;ease go ahead and show us when in 2008, 2009 and 2010 there was a spike in year end facility usage. We have all day. But wait: there's more! In another independent confirmation that all hell is about to break loose, we just saw the 1 Year Bund drop sub zero again. As a reminder, the last time it was there was in the last days of November, just before the global central bank cartel had to come in and provide a global liquidity bailout for Europe's banks. So: back to square minus one ladies and gentlemen of an insolvent Europe?
But the biggest slap in the face of Sarkozy is that instead of banks pocketing the "guaranteed" 2-3% in carry trade between the 1% LTRO rate and the soveriegn bond yield, banks are losing 75 basis point on this inverse carry trade, where they take LTRO cash and deposit it with the ECB where it yields... 0.25%!
ECB Facility Usage (source):
And 1 Year bund yield:
Bond issuance in 2012 is becoming alarming as fewer and fewer uptake this debt:
Hold On Tight: European Bond Issuance In January Is About To Get Very Bumpy
Submitted by Tyler Durden on 12/26/2011 13:54 -0500
While someone continues to guietly push the EUR offer ever higher in the quiet holiday session, the reality is that with only 5 days to go in 2011, the holiday for Europe is ending, and "the pain"TM it about to be unleashed. All 740 billion worth of it. Because while Japan is monetizing its deficit (and having to issue more debt than it collects in taxes), and America is hot on its heels (as a reminder the US also issues roughly one dollar of debt for each dollar in taxes collected), Europe is still unsure whether it will monetize explicitly (that said, we did clear up that little bit of confusion over implicit monetization, with the ECB's balance sheet having exploded by €500 billion since June,or more than all of QE2). Unfortunately, as the following analysis from UBS indicates, it won't have much of a choice.Here are Europe's numbers: €82 billion in gross debt issuance in January, €234 billion in gross debt issuance in Q1, €740 billion in gross debt issuance in 2012. And then itreally picks up because what is largley ignored in such "roll" analyses are the hundreds of billions in debt that financials (i.e., banks) will also have to roll in 2012. In other words, the biggest risk for 2012, in our humble opinion, is that the global repo perpetual ponzi engine (where every primary dealer buys sovereign debt than promptly repos it back to its respective central bank, and courtesy of Prime Broker conduits is allowed to do so without ever encumbering its balance sheet - explained in detail here) is about to choke.
Yes, ladies and gents, the trillions and trillions in total financial, non-financial, government and household debt that are finally coming due will need to find willing hosts wherein to gestate. Alas, said hosts are rapidly disappearing, and as hard as they may try, the global central banks are failing at being willing replacements to the traditional repo ponzi mechanism. But back to the imminent surge in bond issuance of €720 billion which UBS has the following words to describe: "Given the contraction in the investor base for most Eurozone sovereigns on the back of the increased market volatility and spread widening experienced by most issuers, we expect funding conditions to be quite challenging next year. We expect the majority of the issuers to front-load supply in the first three months of the year and to bring to the market a number of new lines with large initial outstanding amounts." Sure enough, enjoy the holidays, because in January things are gonna get very rough: "we expect January to remain the busiest month despite a EUR 5bn reduction in bond redemptions from EUR 63bn in the first month of 2011 to EUR 58bn expected for January 2012. Consequently, net issuance in January is expected to be particularly heavy at EUR 24bn vs. EUR 22bn in 2011." In other words: hold on tight.
We expect issuance of coupon bonds in the first quarter of 2012 to decrease only slightly compared to the same period in 2011. Supply in the first quarter of 2012 is likely to total around EUR 234bn vs. EUR 242bn recorded in Q1 2011. The amount corresponds to around 32% of the overall annual bond supply. Issuance will remain heavy in the first quarter despite an expected reduction in net borrowing by the EMU issuers in 2012 due to significantly higher first quarter redemptions which will increase from EUR 136bn in 2011 to EUR 157bn in 2012.Given the contraction in the investor base for most Eurozone sovereigns on the back of the increased market volatility and spread widening experienced by most issuers, we expect funding conditions to be quite challenging next year. We expect the majority of the issuers to front-load supply in the first three months of the year and to bring to the market a number of new lines with large initial outstanding amounts.
Yes, that means Q1, and specifically, January.
Of the EUR 234bn of bonds likely to be sold in Q1, around EUR 82bn will be issued in January alone. The monthly gross supply is then expected to decrease slightly to EUR 75-76bn in both February and March. The figures compare to an aggregate issuance volume of EUR 85bn, 78bn and 80bn in the first three months of 2011, respectively. As a result, we expect January to remain the busiest month despite a EUR 5bn reduction in bond redemptions from EUR 63bn in the first month of 2011 to EUR 58bn expected for January 2012. Consequently, net issuance in January is expected to be particularly heavy at EUR 24bn vs. EUR 22bn in 2011.
The increased flexibility in the funding strategies of the issuers, which aims at dealing with an expectedly challenging primary market particularly at the beginning of next year, makes it difficult to forecast the likely issuance patterns of the issuers as the reliance on funding via tap auctions of off-therun bonds will probably increase.
For an increasing number of issuers this will affect the regularity of the re-openings of benchmark bonds and consequently the timing at which new lines will be brought to the market to replace ageing issues. Also, issuance activity will likely become more dependent on changing market conditions and on meeting investors’ demands for specific issues which are hard to forecast ex ante.
A detailed look at January, going down country by country,
Our key bond supply assumptions for January 2012 and the major issuance highlights expected during the quarter are summarized below on an issuer by issuer basis.During the first quarter we expect further re-openings of the o-the-run 2Y, 5Y and 10Y bonds for EUR 5-6bn and we expect a new 2Y Schatz 03/14 to be launched in late February (EUR 6bn). Therefore we expect Germany’s bond issuance in January to total EUR 21bn and to decrease to about EUR 16bn in February and March.During the quarter we also expect the launch of a new 10Y OAT most likely on Feb-2 (EUR 5.5bn). This, together with regular re-openings of the 2Y, 5Y, 10Y and longer dated benchmark issues as well as an extensive tapping activity of off-the-run bonds as in 2011 should result in a monthly supply of about EUR 18-19bn in February and March. A new 15Y line could be launched in Q2.During the quarter we expect the launch of a new 5Y BTP in February (EUR 4-5bn). After the EUR 16- 17bn issuance volume expected in January, Italy’s supply is expected to rise to EUR 18-19bn in February and March due to the heavy bond redemptions of about EUR 26bn and 27bn expected in second and third month of the quarter.During the quarter we expect the launch of a new 3Y Bono, most likely in February (EUR 4bn). Spanish supply is expected to average between EUR 7-9bn in the remaining months of the first quarter.The Netherlands also announced a tap of the DSL 01/17 which has been scheduled for February 14 and a tap of the new DSL 04/15 for March 13 (EUR 3.5bn expected for each tap). In addition Holland will launch a new 10Y DSL and a new 20Y DSL in the first quarter. Given the absence of off-the-run tap auctions in the Dutch supply calendar in February and March, we expect the new 10Y DSL to be issued via DDA in late February and the new 20Y DSL to be sold via DDA in late March for a likely EUR 5-6bn each. As a result Dutch supply should total EUR 6bn in January and EUR 9.5bn and 8.5bn in February and March, respectively.
And the non-cores:
- Belgium: We expect Belgium to launch a new 10Y OLO via syndication in January (EUR 5bn), therefore no tap auctions should be expected during the month. After this, Belgium is likely to reopen its 5Y, 10Y and 15Y benchmarks as well as off-the-run issues for an amount of around EUR 2.5bn per month.
- Austria: We expect Austria to launch a new 30Y RAGB via syndication in January for a likely initial outstanding of EUR 4bn, replacing the old 30Y RAGB 03/37. The current 5Y, 10Y and 15Y RAGBs still have relatively small outstanding amounts of EUR 7-8bn and are therefore expected to be tapped regularly throughout the quarter, possibly in combination with small off-the-run lines with lower outstanding amounts for an average monthly volume of around EUR 1.5bn per month.
- Finland: In the first quarter Finland may sell an additional EUR 1.5bn of the current 5Y RFGB 1.875% 04/17 which was launched in September and we also expect the launch of a longer dated issue (most likely a 10Y bond) in mid March for an expected EUR 4bn. Finland is likely to sell 2 new benchmark bonds in 2012 (one in H1 and one in H2, the latter being most likely a new 5Y bond) and to hold 4 tap auctions during the year. The 5Y bond could be re-opened further by EUR 1bn in H1 to reach a final outstanding of EUR 6.5bn while the remaining 2 taps would increase the outstanding amount of the two lines launched in 2012.
Needless to say, the biggest problem for Europe is that unlike other countries, the bulk of the issuance is not to fund net debt (thus new "growth" however Keynesians define this), but merely to roll existing debt, which does nothing for incremental ecnomic growth, but merely avoids systemic insolvency. Alas, as rates keep on creeping higher and higher, this is with 100% certainty a game that the status quo will lose.
Furthermore, with France just announcing the highest unemployment rate since 1999, the realization that newincremental debt has to be issued will dawn quite soon. Alas, with everyone already monetizing their own, the only option will be for the ECB to join the party. Which is why we are confident that the ECB will, if not so much to bail out its banks, as to provide bond demand of last resorts (also known as monetization), very soon enter the printing party. Luckily, by now we are confident all readers know what the natural hedge to a resumption of the race to the bottom is.
Sales in the USA are not too good. Let's look at Sears with collapsing margins and the closing of many stores including its 100% owned KMart). Here are two zero hedge commentaries on the plight of Sears:
(courtesy zero hedge)
(courtesy zero hedge)
Thanksgiving Day Massacre: Sears Slaughtered On Collapsing Margins, To Shutter Hundreds Of Stores, Provides Revolver Update
Submitted by Tyler Durden on 12/27/2011 06:24 -0500
That retailer Sears, aka K-Mart, just preannounced what can only be described as catastrophic Q4 results should not be a surprise to anyone: after all we have been warning ever since the "record" thanksgiving holiday that when you literally dump merchandize at stunning losses, losses will, stunningly, follow. Sure enough enter Sears. What we, however, are ourselves stunned by is that as part of its preannouncement, Sears has decided it would be prudent to provide an update on its credit facility status as well as availability. As a reminder to anyone and everyone - there is no more sure way of committing corporate suicide than openly inviting the bear raid which always appears whenever the words "revolving credit facility" and "availability" appear in the same press release. Just recall MF Global. And here, as there, we expect shorting to death to commence in 5...4...3...
Sears Holdings Corporation ("Holdings," "we," "us," "our," or the "Company") (Nasdaq: SHLD - News) today is providing an update on its quarter-to-date performance and planned actions to improve and accelerate the transformation of its business.
Comparable store sales for the eight-week ("QTD") and year-to-date ("YTD") periods ended December 25, 2011 for its Kmart and Sears stores are as follows:
Kmart's quarter-to-date comparable store sales decline reflects decreases in the consumer electronics and apparel categories and lower layaway sales. Sears Domestic's quarter-to-date sales decline was primarily driven by the consumer electronics and home appliance categories, with more than half of the decline in Sears Domestic occurring in consumer electronics. Sears apparel sales were flat and Lands' End in Sears stores was up mid-single digits.
The combination of lower sales and continued margin pressure coupled with expense increases has led to a decline in our Adjusted EBITDA. Accordingly, we expect that our fourth quarter consolidated Adjusted EBITDA will be less than half of last year's amount. For reference, last year we generated $933 million of Adjusted EBITDA in the fourth quarter ( $795 million domestically and $138 million in Canada ).
Due to our performance in 2011 we expect that we will record in the fourth quarter a non-cash charge related to a valuation allowance on certain deferred tax assets of $1.6 to $1.8 billion . Although a valuation adjustment is recognized on these deferred tax assets, no economic loss has occurred as the underlying net operating loss carryforwards and other tax benefits remain available to reduce future taxes to the extent income is generated. Further, we may recognize in the fourth quarter an impairment charge on some goodwill balances for as much as $0.6 billion . These charges would be non-cash and combined are estimated to be between $1.6 and $2.4 billion .
"Given our performance and the difficult economic environment, especially for big-ticket items, we intend to implement a series of actions to reduce on-going expenses, adjust our asset base, and accelerate the transformation of our business model. These actions will better enable us to focus our investments on serving our customers and members through integrated retail – at the store, online and in the home," said Chief Executive Officer Lou D'Ambrosio. Specific actions which we plan to take include:
- Close 100 to 120 Kmart and Sears Full-line stores. We expect these store closures to generate $140 to $170 million of cash as the net inventory in these stores is sold and we expect to generate additional cash proceeds from the sale or sublease of the related real estate. Further, we intend to optimize the space allocation based on category performance in certain stores. Final determination of the stores to be closed has not yet been made. The list of stores closing will be posted atwww.searsmedia.com when final determination is made.
- Excluding the effect of store closures, we currently expect to reduce 2012 peak domestic inventory by $300 million from the 2011 level of $10.2 billion at the end of the third quarter as a result of cost decreases in apparel, tighter buys and a lower inventory position at the beginning of the fiscal year.
- Focus on improving gross profit dollars through better inventory management and more targeted pricing and promotion.
- Reduce our fixed costs by $100 to $200 million .
In addition to the specific store closures listed above, we will carefully evaluate store performance going forward and act opportunistically to recognize value from poor performing stores as circumstances allow. While our past practice has been to keep marginally performing stores open while we worked to improve their performance, we no longer believe that to be the appropriate action in this environment. We intend to accentuate our focus and resources to our better performing stores with the goal of converting their customer experience into a world-class integrated retail experience.
We currently expect the store closure and inventory reduction actions to reduce peak inventory in 2012 by $500 to $580 million and reduce our peak borrowing need by $300 to $350 million in 2012 from levels that may have resulted in 2012 without such actions.
At December 23rd , we had $483 million of borrowings outstanding on our domestic revolving credit facility leaving us with over $2.9 billion of availability on our revolving credit facilities ( $2.1 billion on our domestic facility and $0.8 billion on our Canadian facility). There were no borrowings outstanding last year at this time.
During the fourth quarter through December 23, 2011 , we have not repurchased any of our common shares under our share repurchase program. As of December 23, 2011 , we had remaining authorization to repurchase $524 million of common shares under the previously approved programs.
The Chickens Have Finally Come Home To Roost At Sears
Submitted by Reggie Middleton on 12/27/2011 14:29 -0500
In January of 2009 (nearly three years ago, which is ironic), I went bearish on Sears due to a variety of reasons, the least of which was less than competent management (hedge fund managers don't necessarily make good department store managers), macro conditions and fundamentals sloped towards hell. Although this was initially a very profitable trade, the rip roaring bear market rally of 2009 shredded the short profits - turning them into losses if uncovered, and simutaneously disguised the many issues that we brought up in our initiail short analysis. Well, you can run but you can't hide, and the truth will ultimately rear its head. On that note...
CNBC Reports In the Wake of Poor Sales, Sears to Close Stores
Sears Holdings plans to close between 100 and 120 Sears and Kmart stores after poor sales during the holidays, the most crucial time of year for retailers.
In an internal memo Tuesday to employees, CEO and President Lou D'Ambrosio said that the retailer had not "generated the results we were seeking during the holiday."The closings are the latest and most visible in a long series of moves to try to fix a retailer that has struggled with falling sales and shabby stores.
Sears Holdings Corp. said it has yet to determine which stores will close but said it will post on the list online when it's compiled. Sears would not discuss how many, if any, jobs would be cut.
The news sent shares of Sears [SHLD 36.50 -9.35 (-20.39%) ] to their lowest point in more than three years, and it was posting the biggest percentage decline in the S&P 500 Index.
As does Bloomberg: Sears Plunges on Plans to Close as Many as 120 Stores
Sears Holdings Corp., the retailer controlled by hedge-fund manager Edward Lampert, tumbled the most in... Sears fell (SHLD) 18 percent to $37.65 at 9: 42 a.m. in New York,...
As shoppers may realize, the retail store is at a disadvantage this year for sales activity has simply been weak. Thus, U.S. Stores Ramp Up Bargains as Sales Lag. I discussed the effects of this on retail malls last week in The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet! The kicker is the effect on Sears will be most exaggerated since it has real estate, fundamental, macro, industry induced and management issues to deal with as well as the paradigm shift towards internet shopping (which it should have been able to hedge with Sears.com and Kmart.com, alas this brings us back to the management issues, doesn't it?. BoomBustBlog subscribers, please refresh your memories by downloading the following...
Those who don't subscriber can view the 4 page preview below.
America Maxes Out Its Credit Card Again - Treasury To Raise Debt Limit By Another $1.2 Trillion On December 30
Submitted by Tyler Durden on 12/27/2011 10:22 -0500
You didn't think US consumer confidence could be bought for free now did you?
- U.S. TREASURY SAYS DEBT LIMIT TO BE RAISED BY $1.2 TRILLION
- U.S. DEBT TO BE $100 BLN WITHIN LIMIT ON DEC. 30, TREASURY SAYS
- STEPS FOR INCREASING DEBT LIMIT UNDER 2011 BUDGET CONTROL ACT
And the piece de resistance that 100% debt to GDP brings:
- OBAMA ON DEC. 30 LIKELY TO ASK CONGRESS TO RAISE DEBT LIMIT
Just as we thought the circus was over if only for a few weeks...
Jim Sinclair’s Commentary
Until you feel there is a route to some cure of the Western world debt problems, gold remains the financial insurance policy that will function.
Obama to ask for debt limit hike: Treasury official
WASHINGTON (Reuters) – The White House plans to ask Congress by the end of the week for an increase in the government’s debt ceiling to allow the United States to pay its bills on time, according to a senior Treasury Department official on Tuesday.
The approval is expected to go through without a challenge, given that Congress is in recess until later in January and the request is in line with an agreement to keep the U.S. government funded into 2013.
The debt is projected to fall within $100 billion of the current cap by December 30, when the United States has $82 billion in interest on its debt and payments such as Social Security coming due. President Barack Obama is expected to ask for authority to increase the borrowing limit by $1.2 trillion, part of the spending authority that was negotiated between Congress and the White House this summer.
Biggest 2 Month Jump In Confidence Since May 09 As Housing Drops To March 03 Levels
Submitted by Tyler Durden on 12/27/2011 10:41 -0500
As if we needed yet further evidence of the dichotomous macro data that seems to provide as much bearish fodder as bullish decoupling confidence, today sees a near-record two-month jump in conference board confidence at the same time as S&P/Case-Shiller prints at a seasonally-adjusted 103 month low. With the Richmond Fed also missing expectations (though positive), we remain in the miasma of CONfidence uninspiring macro data as the underlying sub-indices of the conference board data show little to no shift in purchasing decisions despite some seemingly incredulous ramp in confidence that incomes will rise more than they decline in the next six months.
The 2-month percentage change in the Conference Board's headline confidence data is the second largest on record - only beaten by the jump out of the March 09 lows, expectations for a continuing trend seem extremely unlikely given previous jumps. Furthermore, this shift still leaves us below the Feb 2011 post crash highs.
All the while, house prices continue to fall - now at lows not seen since March 2003.
China, Japan to Back Direct Trade of Currencies
By Toru Fujioka -