Liquidity Watch: Revisiting the TED Spread

Treasuries are rising on Lehman jitters, LIBOR won’t budge

The spread between closing 3 Month Treasury Yields and Libor are at the widest level since July. As short term borrowers like the team at Lehman can tell you –in this market those that have liquidity are demanding payment from those that require liquidity.

PNRA - A VERY favorable CHART!

In addition to a more favorable commodity trends, the company cut capital spending to maximize returns over the next 12-months.


On 8/18/08, I wrote a note on LDG titled California Dreaming. In that note I said;

“In short, selling a company’s undervalued real estate creates an enormous tax burden, which limits the cash available to maximize value for shareholders. I truly believe that Bill Ackman knows this, and I have yet to see a structure from him that would get around the tax issue completely.”

Yesterday, LDG offered these comments in a filing;

“The Company’s owned properties were acquired over the life of the Company and, as such, have a low tax basis. Accordingly, if the Company were to sell these properties outright or in a sale-leaseback transaction it would incur a significant tax liability in doing so. The Company determined that, taking this tax liability into account along with the transaction fees, the after tax proceeds from the outright sale of its owned real estate would not offset the loss of income from the sold properties and that the sum of the amounts that the Company could obtain from the sale of its owned properties and operating business separately would not exceed the value of the consideration offered by CVS. Similarly, that if the Company were to lease back these properties that the capitalized value of the increased rent and property tax expense payable over the lease terms would more than offset the net proceeds of the sale (i.e., after payment of the tax liabilities and transaction expenses) and would accordingly not increase the consideration that an acquirer would pay to acquire the Company.”

From this we can rule out another bidder to take advantage of LDG’s undervalued real estate! Where do we go from here? I believe that it’s unlikely that WAG is going to out bid CVS. So who else wants to buy an underperforming drug retailer? WMT? I still have yet to see a sum of the parts analysis that values the company above $71.50, but WMT has the cash to pay more if it wants to.

Wal-Mart Stores is getting ready to open its first Marketside store in Phoenix, AZ. Apparently, WMT is also looking for locations in Southern California. According to the Financial Times, Wal-Mart has applied for a liquor license for a Marketside unit in Oceanside, a coastal city north of San Diego — a couple of miles from a Tesco’s Fresh & Easy. Marketside stores are modeled around a 15,000-20,000 sq. ft. box and will offer fresh foods and prepared meals. I mention this because the average LDG store is also about 20,000 sq. ft. so LDG’s current stores could fit perfectly with WMT’s Marketside store strategy.

Relative to the market capitalization of WMT, buying LDG is a drop in the bucket. With WMT outperforming TGT and the stock on the new high list, the distraction of buying LDG would not sit well with shareholders.

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Allergan (AGN): Bullish headache data on the tape this morning

My Partner, Tom Tobin, who runs our healthcare business, will have a note out on this later on. Bottom line is that this is a positive incremental event for Allergan. Bottom line is that this is a positive incremental event for the company. My short term upside target is $57.83. We are long it in the Hedgeye Portfolio.
  • KM
chart courtesy of

He said it... not me.

“I feel like I am playing whack-a-mole every day”... Fuld to the Wall Street Journal.

This is the unfortunate outcome for those who manage their business reactively vs. proactively.

(picture courtesy of:


If I were a ruthless CEO of a competitor to PPC, I would make them suffer. For PPC to survive under the weight of significant losses and an over leveraged balance sheet one of two things needs to happen (1) corn prices decline by another 40% which would allow the company to return to profitability given current market prices (corn would need to fall below $4.00) or (2) the industry cuts capacity allowing chicken price to rise by more than 40%, so the company can return to profitability.

According to Agri-Stats, no matter whether you measure by bird numbers, live weight or by total tonnage produced, the U.S. broiler industry expanded production in 2007, and 2008 is on track for increased production, too. Importantly, ownership and control of production has been consolidating into fewer and fewer firms. In 2008, EMI Analytics forecasts look for U.S. output to total about 36.6 billion pounds of RTC (bone-in ready to cook) chicken. Estimates show the 4 largest firms will control roughly 57% of broiler production - Pilgrim’s Pride, Tyson Foods, Perdue Farms, and Sanderson Farms. The 8 largest companies will account for 71% of U.S. production, and the 20 largest will supply over 93%.

As I see it, the fate of PPC is in the hands of eight companies that control 71% of U.S. production. If those eight firms decide not to cut production in any meaningful way, industry pricing will remain under pressure. Going back to my point about being the CEO of one of PPC’s competitors, it would not make sense for Tyson, Sanderson Farm, or Perdue Farms to cut production as the increase in market prices would provide the most incremental benefit to PPC as it is the market share leader (holds 25% of the market). PPC’s competitors have the financial flexibility to withstand current pressures over the next 6-12 months until market prices stabilize and would most likely rather watch their biggest competitor sweat it out.

The issues around PPC’s balance sheet have been well documented. Right now the issue with PPC is not liquidity, but rather the company’s ability to maintain the fixed charge coverage ratio if the industry turmoil continues well into 2009. Depending on how you measure it, PPC has $500 to $600 million of liquidity. For the company to maintain its fixed charge coverage ratio, it must return to profitability in 2009.

Right now that looks highly unlikely.

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