Junk bonds : Chartered Semiconductor debt rating lowered to junk By Fitch

This article belongs to the Singapore stagflation watch story arc.

bloomberg.com :

Chartered Semiconductor Manufacturing had its debt rating cut to junk at Fitch Ratings on concern it's not generating enough cash. Junk bonds can raise a company's borrowing costs as a lower debt rating increases the perceived risk of a company's inability to pay debt. Chartered said it will lose money in Q3 2008. Chartered derives about two-thirds of its sales from the US, where household spending is projected to stall as wages fail to keep up with inflation and property values slump. Negative free cash flow was "substantial" at 20% of 2007 revenue. Chartered's free cash flow has been negative in 31 of the 34 quarters since the company sold shares in 1999. Chartered shares have slumped 44% this year, underperforming the 19% decline in Singapore's benchmark Straits Times Index.

- I started tracking Chartered's activities in a sort of offhanded way for personal reasons : Biow used to work there, a brother-in-law still works there, and my own parents had lost some money buying their shares earlier. In the larger scheme of things, this company plays an important part in Singapore's economic landscape, being a billion-dollar company with over 5,000 employees. But at the rate things are going, the only billion-dollar thing about Chartered would probably be their billion-dollar debt.

When people asked me what was wrong with Chartered several months ago, I would tell them, "Fab 7 is idle". Fab 7, of course, being the higher-end facility where they make the latest, greatest chips (or rather, used to be latest) with the higher margins, such as the AMD64 processors and the chips for the Microsoft Xbox360 console. But with AMD not doing too well against Intel, and the Xbox360 not doing that great either, obviously that would go all the way upstream, and result in idled capacity - which isn't very good for very expensive equipment, which I'd suppose, looking at their debt position, they borrowed money to buy in the first place. And as we know, semiconductor manufacturing equipment tends to get obsolete frighteningly fast.

It's not a pretty picture, and it explains why Chartered's shares fell to just 40 cents today, from over $1 around Q4 2007, down from, I don't have the exact figures right here but I've heard it was over $10 back in the dotcom times. My worst mining juniors have done better than that. Not a pretty picture.

Americans drove 53.2 billion miles less since Nov 2007 due to gas prices, weak economy

news.yahoo.com, fhwa.dot.gov :

Since Nov 2007, US motorists have driven 53.2 billion fewer miles than they did over the same period a year earlier, topping the 1970s drop of 49.3 billion miles caused by recessions and gasoline price increases. Americans drove 4.7% or 12.2 billion miles less in June 2008 than in June 2007. According to Energy Department data, total US petroleum demand shrank by an average 800,000 barrels a day during the first half of 2008, the biggest decline since 1982, because of soaring pump costs and a weak economy. Americans appear to have given up their long love affair with big, gas-guzzling vehicles. US car sales in July outpaced SUV's and light trucks, with cars accounting for 55% of all vehicles sold. Honda, the industry leader in fuel efficient cars, is expanding its fleet in 2009.

- All the signs are pointing toward a massive slowdown amidst demand destruction, with oil prices falling, stock markets tanking, weakening economies and now we have these reports of fewer miles travelled and reduced oil consumption. Is there any bright spot at all among all this? I can think of one or two. If you are a long-term investor *and* you have steady income, now is a great time to be accumulating cash, waiting it out, and looking for a chance to pounce on the coming bargains with traders and hedged funds, in their mad rush to de-leverage, doing the proverbial throw-the-baby-out- with-the-bathwater thing. It would be nice to steal a march on the SWF's (Sovereign Wealth Funds) and get a better deal than them when the dividend yields out there start to hit the 20% level.

Japan economy shrinks 2.4% as exports decline; recession looms

bloomberg.com :

Japan's economy contracted in Q2 2008 as exports fell and consumers spent less, bringing the country to the brink of its first recession in 6 years. Japan's GDP shrank an annualized 2.4% in the 3 months ended 30 Jun 2008. Exports dropped for the first time in 3 years, while record fuel and food prices deterred spending at home. Toyota reported its worst earnings decline in five years as US sales slumped, and Japan Airlines said it will cut wages to counter rising costs. Stalling growth and the fastest inflation in a decade have created a dilemma for the Bank of Japan, which will probably have to keep its benchmark interest rate at 0.5% for the rest of the year. Japan joins Canada and Italy among G7 economies that have contracted this year.

- With a shrinking economy and rising inflation, Japan's economy can be considered to be officially in stagflation mode. Meanwhile, mainstream economists, and the mainstream media by extension, are loathe to bring up the "S" word, because under the Keynesian economic model, there is no real cure for stagflation. It goes this way - raise interest rates, inflation goes down, but the economy rapidly gets even worse. Lower interest rates, the economy gets a boost, but inflation goes way up. Do nothing at all, and there is every chance that both inflation and the economy will continue doing what they're doing - deteriorate further. The classic Fed dilemma is now spreading worldwide.