Propeller Skies

Holy. Fucking. Shit. J.P. Morgan Chase (JPM), just bought Bear Stearns (BSC) for a whopping… wait for it… $2.00* a share. Goddamn it - I sold my Morgan Stanley puts based on technicals Friday. I made a few ducats, but cockroach theory (there’s never just one) says some other investment banks are fucked - I should have held on. This is just the first round - this shit is going to make the dot bomb bust look like amateur hour.

I wish I had bought some lottery ticket puts on those fools at BSC early in the week when they claimed not to have solvency liquidity issues - but based on technicals and the greeks, they were overpriced, so I passed.

[UPDATE: Trading in Asia is now open, and the Nikkei is not liking the purchase - the index is down 1.25 percent. ]

notes:

See: JPMorgan Buys Bear Stearns for $2 a Share After Clients Flee at Bloomberg.
* BSC closed at $30.00 (worthless) U.S. Dollars on Friday - down $27.00

Somewhere in Augusta is located in a shopping center on Washington Road. This should come as no surprise to alert Prizzo Skeezy readers familiar with the AUG, because everything in Augusta is located in strip commercial along Washington Road.

Several weeks ago, I had the pleasure of hanging out at Somewhere in Augusta with Recurring Propeller Skies characters H-Dogg and The Photographer. Highlights of Somewhere in Augusta include the following:

• Our waitress had a nice rack;
• The aforementioned waitress wore a tight shirt ;
• Our waitress also possessed a tight ass and nice legs;
• Said waitress had mad sartorial skills, as she wore ridiculously short shorts; and
• Last, and most importantly, Terrapin Rye Pale Ales sold for only three dollars per bottle.

Since even the mainstream media has figured out the world in general is suffering from a gnarly credit crunch, now is a great time to discuss the debt to equity ratio. The primary use of the debt to equity ratio is to determine the solvency of a company.

Debt is not necessarily bad - if a company can borrow at 5 percent and generate a return of 10 percent, the difference benefits the company. However, too much debt leaves companies at risk during recessions. If the return drops below the interest rate on the debt, a company begins losing money. After they lose enough, they default on the loans and lenders can force them into bankruptcy. Shareholders end up with a fat fucking zero at the conclusion of bankruptcy proceedings.

To calculate the debt to equity ratio, divide long term debt by shareholders’ equity. This is easy, as both inputs are found on the consolidated balance sheets. While total liabilities can be used instead of long term debt, I prefer using long term debt because short term debt is already captured in other metrics I calculate. [UPDATE: For more on the many faces of debt, see Michael Brush on buried debt - Ed.]

Acceptable debt to equity ratios vary by industry. Capital intensive businesses, such as railroads, generally have higher debt to equity ratios. In contrast, businesses with low capital investments, like software companies, have lower debt to equity ratios. As such, the debt to equity ratio is best used to compare companies within an industry, with lower numbers being more desirable.

As shown in the above table, all railroads improved year over year and managed to beat their five year average. While this is certainly positive, shareholder equity increased in all six railroads from 2005 to 2006, necessitating a look at the debt side of the equation. Long term debt increased at Burlington Northern (BNI), Canadian National (CNI), and CSX. Should this trend continue, it will become an issue at all three companies. However, because CSX is toward the bottom of the heap with regard to several profitability measures, the year over year increase in debt is cause for concern.

To mitigate the inevitable complaints, it’s Melissa time:

See also: Cash King Margin, the previous post in the series, and Railroad Performance Measures: Operating Ratio at the beginning.