Category Archives: Money
RadioShack’s days are numbered
RadioShack’s future is about as bright as the VHS tapes it used to sell. The chain of 4,000 stores has just $62 million in cash left – a figure that is rapidly approaching zero. Things are so dire that it actually doesn’t have enough money to close the 1,100 locations management says it needs to shutter.
Investors, credit rating agencies and the company”s lenders seem to be in agreement that RadioShack’s days are numbered.
Even the company’s own Super Bowl ad mocked its stores for being decades out of date.
“They have been irrelevant for a long time,” said Robin Lewis, CEO of The Robin Report, a retail strategy newsletter. “If they’re not the sickest patient in ICU, they’re minutes away from being rolled in.”
Related: Most endangered brands
Last month research firm B. Riley & Co. made the unusual move of cutting its price target for RadioShack (RSH) shares from $1 a share — to $0. Shares of RadioShack (RSH) , hit a record low of 62 cents Thursday after Moody’s said it expects RadioShack to run out cash by Fall of 2015.
“A significant turnaround has to happen for them to survive. But we haven’t seen any evidence of a turnaround yet,” Moody’s analyst Mickey Chadha told CNNMoney. Moody’s now has RadioShack debt only two short steps above a default rating. And it will probably be cut further.
Related: Autopsy of America – Photos of dead shopping malls
In March the chain announced plans to close over 1,000 stores, about one out of every five. But its lenders refused to give RadioShack the cash it needed to do so on terms the chain could afford, so instead it announced plans to close only 200 stores.
That’s forcing the company to burn cash even more quickly.
“That 1,100 store closing plan was in essence saying they don’t have the capital to manage 4,000-plus stores,” said Chadha. “But the lenders are taking a dim view of the turnaround themselves and positioning themselves for liquidation.”
Can RadioShack survive? The company’s huge network of stores has done little to help it hold off competition from Amazon (AMZN, Tech30) and other online retailers.
The company now depends on smartphones and tablets for more than half its sales. That’s a competitive, low-margin business, said Chadha. And each smartphone sale hurts RadioShack’s chance to sell its higher-margin products, such as digital cameras and GPS systems..
Company officials did not respond to a request for comment about Moody’s outlook or its cash problems.
U.S. hits debt ceiling
Treasury Secretary Tim Geithner told Congress he would have to suspend investments in federal retirement funds until Aug. 2 in order to create room for the government to continue borrowing in the debt markets.
The funds will be made whole once the debt limit is increased, Geithner said in a letter. “Federal retirees and employees will be unaffected by these actions.”
He went on to urge Congress once again to raise the country’s legal borrowing limit soon “to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens.”
Congress, meanwhile, is not showing any signs of budging. Many Republicans and some Democrats say they won’t raise it unless Congress and President Obama agree to significant spending cuts and other ways to curb debt. (Social Security and Medicare squeezed)
Geithner told Congress that he estimates he has enough legal hoop-jumping tricks to cover them for another 11 weeks or so.
But then he said that’s it. If lawmakers don’t get it together by Aug. 2, the United States will no longer be able to pay its bills in full. (Slashing spending alone won’t cut it)
The rhetoric about whether to raise the ceiling and under what conditions has been loud, harsh and, at times, misleading. Exasperatingly, it’s far from over.
What is the debt ceiling exactly? It’s a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public (i.e., anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare.
The first limit was set in 1917 and set at $11.5 billion, according to the Center for a Responsible Federal Budget. Previously, Congress had to sign off every time the federal government issued debt.
How high is the debt limit right now? The ceiling is currently set at $14.294 trillion. The country’s accrued debt hit that mark on the morning of May 16.
But by taking various extraordinary measures like suspending investments in federal retirement funds, Geithner will be able to bring total debt down enough to allow the government to continue borrowing until Aug. 2.
Hence, by the end of trade on May 16, total debt subject to the limit was a mere $25 million shy of the official cap — or $14,293,975,000,000. Total debt can fluctuate up or down on any given day.
How is the ceiling determined? They don’t admit it, but lawmakers tacitly agree to raise the debt ceiling every time they vote for a spending hike or tax cut.
“Congress has already passed and the president has already signed legislation that increases spending or decreases revenues. Those decisions have already been made,” said Susan Irving, director for federal budget issues at the Government Accountability Office.
So in reality arguing over the debt ceiling is essentially arguing over whether to pay the bills the country has already incurred.
Debt ceiling: Time to get realBut politicians who make a stink about the debt ceiling will always try to make the case that the guy who votes to raise it is a fiscal spendthrift.
And politics, of course, permeates the whole debate. Lawmakers who want to make hay of the issue for political gain may push for a small increase so the debate comes up again soon. Others may want a bigger increase so they don’t have to revisit the issue for awhile.
How many times has the ceiling been raised? Since March 1962, the debt ceiling has been raised 74 times, according to the Congressional Research Service. Ten of those times have occurred since 2001.
Expect more of the same over the next decade. Barring major changes to spending and tax policies, “Congress would repeatedly face demands to raise the debt limit,” CRS wrote.
Why does Congress even bother to set a debt limit? In theory, the limit is supposed to help Congress control spending. In reality, it doesn’t.
Every time the debt limit needs to be raised, lawmakers and the president are forced to take stock of the country’s fiscal direction, which isn’t a bad thing necessarily.
But the decision about how high to set the ceiling is divorced from lawmakers’ decisions to pass spending hikes and tax cuts. It’s also made after the fact, so it doesn’t do much to pull in the purse strings.
That’s why budget experts say it would be better to tie the debt limit decision to lawmakers’ legislative actions.
What happens if Congress doesn’t raise the debt ceiling before Aug. 2? No one knows for sure. But the going assumption is that no good can come of it.
What happens if Congress blows the debt ceiling?Treasury would not have authority to borrow any more money. And that can be a problem since the government borrows to make up the difference between what it spends and what it takes in. It uses that borrowed money to help fund operations and pay creditors.
Geithner’s critics say he could prevent default by simply paying the interest due to bondholders.
But since average spending — minus interest — outpaces revenue by about $118 billion a month, Geithner won’t be able to pay all the country’s bills.
That means he will have to pick and choose who to pay and who to put off every day. And there’s no guarantee that paying interest while shirking other legal obligations will protect the country from the perception of default.
Geithner said it would be akin to a homeowner who pays his mortgage but puts off his car loan, credit cards, insurance premiums and utilities. The mortgage is taken care of, but the homeowner’s credit could still be damaged.
Ultimately, if lawmakers fail to raise the ceiling this year, they will have two choices, both awful.
They could either cut spending or raise taxes by several hundred billion dollars just to get through Sept. 30, which is the end of the fiscal year. Or they could acknowledge that the country would be unable to pay what it owes in full and the United States could effectively default on some of its obligations.
0:00 / 1:34 Debt ceiling’s history lessons The first option would be impossible to execute without serious economic repercussions.
And the second option could cripple the economy and send world markets into a tailspin.
“Not only the default but efforts to resolve it would arguably have negative repercussions on both domestic and international financial markets and economies,” according to the CRS.
At a minimum, a default could hurt U.S. bonds, the dollar and investors’ portfolios. “Our bond market and stock market would crash,” said former Congressional Budget Director Rudolph Penner.
Will reaching the debt ceiling for good cause a government shutdown? Not technically.
A government shutdown occurs if lawmakers fail to appropriate money for federal agencies and programs.
By contrast, if the debt ceiling is breached, Uncle Sam would still have revenue coming in that could be used to fund the government, Penner noted.
But if Geithner is coming up short by $118 billion every month, and lawmakers just decide to cut spending by that amount, that could effectively mean a partial government shutdown.
China continues to manipulate its currency
China continues to manipulate its currency and the nation’s “exclusionary” trade policies have contributed to a massive deficit with the United States, a special commission said Wednesday.
According to a draft of its annual report to Congress, the U.S.-China Economic and Security Review Commission said lawmakers should urge the Obama administration to respond to China’s policy of undervaluing its currency and look for ways to overcome trade barriers with the world’s most populous country.
The commission, made up of 12 experts in trade and defense issues, was created in 2000 to provide lawmakers with advice on how to manage America’s economic and military relationship with China.
“China’s currency manipulation continues to harm U.S. manufacturing and employment,” the commission’s chairman, Ohio businessman Dan Slane, said in prepared remarks. “There appears to be no real motivation by the Chinese to adopt market-based approaches with regard to its currency.”
Critics argue that China’s currency, the yuan, is kept artificially low by hoarding reserves, keeping its exports cheap and undercutting international competitors. China has expressed concerns that a stronger currency could hurt its economy and undermine social stability.
The Obama administration should work with its trading partners to pressure China, the report recommended. But U.S. officials should also act independently to “encourage China to help correct global imbalances and to shift its economy to more consumption-driven growth.”
President Obama and Treasury Secretary Tim Geithner have already raised the currency issue with China, most recently at the Group of 20 meeting of global economic powers in South Korea last week. But the talks have failed to gain traction.
While the G-20 meeting ended with a pledge to avoid”competitive devaluation” of currencies, the leaders postponed more difficult decisions on how to rebalance the global economy.
China announced in June that it would allow its currency to fluctuate in a narrow range according to market forces. But the commission and other critics say the move has been insufficient. The yuan has only appreciated 2.3% so far this year.
The commission also said Congress should look for tools to deal with policies that China uses to block access to its markets that are not covered under World Trade Organization regulations.
“The Chinese government quite simply intends to wall off a majority of its economy from international competition,” said Slane.
Under its “indigenous innovation” policy, China has given its domestic manufactures an advantage and forced U.S. companies to disclose “sensitive technological information” to compete for lucrative government contracts, the report said.
These policies and others have contributed to America’s trade deficit with China of a whopping $1.76 trillion annually, the report said.
“The resultant unbalanced nature of the trade and economic relationship between the United States and China has helped give China the financial resources and new technological capabilities that have enabled it to strengthen and grow its economic, military and political power,” the report read.
The commission also advised Congress to direct the Treasury Department to “fully account” for how much U.S. debt is sold to foreign governments, as well as how much they currently hold.
The report acknowledged that China’s position as the largest holder of U.S. debt “has raised concerns about the degree of influence China has on the U.S. economy.” But the commission downplayed those worries, suggesting that China could hurt its own interests if it stopped lending money to America.
