Sunday, November 18, 2012

A Cliff, a Storm, the Gates of Hell and a Wounded Brand

Last week, Middle East tensions increased as Israeli and Hamas leaders launched air strikes against each other. Hamas military leaders said Israel opened "the gates of hell on themselves" after a military leader was killed. Israeli Foreign Minister Avigdor Lieberman said, "Every time that Hamas fires there will be a more and more severe response.” Egyptian President Mohamed Morsi added, “I’m warning the aggressors against Gaza – they can’t have any power over the [Gaza] strip”. Today various players in the region are trying to arrange cease-fire talks.

In the U.S., the Federal Reserve reported that October industrial output unexpectedly declined 0.4% (a 0.2% increase was expected) and suggested that the impact of Superstorm Sandy contributed to the weak results. At a financial summit in Atlanta, Federal Reserve Chairman Ben Bernanke said, “that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery”. In addition, President Barack Obama and Congressional leaders met to discuss potential solutions to the “fiscal cliff” debt issues.


Finally, Hostess Brands (the maker of Twinkies and Wonder Bread) filed for bankruptcy and CEO Gregory Rayburn said the firm “will move promptly to lay off most of its 18,500 member workforce” along with closing 33 bakeries, more than 560 distribution centers and 570 bakery outlet stores.


MY TAKE

  • Regarding Middle East conflicts, while actions of political and military leaders may not align with the views of its citizens, last week’s actions reinforce concerns that persistent historical tensions may expand into broader regional conflicts.
  • Regarding the U.S., 1) Superstorm Sandy will drive a long-term rebuild and replacement cycle, but short term business disruption will have a negative economic impact, 2) improving bank lending dynamics will require more stable economic growth and 3) global market volatility may continue until Congress and the President reach an agreement for managing the “fiscal cliff”.  
  • Regarding Hostess, against a nostalgic backdrop, this is another bankruptcy resulting from 1) poor decisions by private equity firms, company management and unions and 2) changing consumer demand for its products. There is an obvious negative impact to the firm’s employees, as well as its production and distribution network partners, but some of its brands will likely attract new investors.

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