The Seattle Times: Sound Economy with Jon Talton

Weyerhaeuser finds a big deal in its back yard

Mon, 17 Jun 2013 22:05:48 PDT

On the way to becoming a real estate investment trust in 2010, Weyerhaeuser got out of the fine paper business, closed mills and factories, sold its containerboard, packaging and recycling business and shrank its workforce by 70 percent. There seemed to be little left to see from this one-time titan except the mandatory funneling of most of its earnings to investors and benefiting from the tax break for REITs. That changed over the weekend, when the company, headquartered in Federal Way, announced that it would buy Longview Timber for $2.65 billion. Not only that, but it said it might dump its house-building subsidiary.

The former is a blockbuster deal that adds to Weyerhaeuser's timberlands at a time when timber demand is rebounding. The latter, if it comes to pass, would represent a major shift from Weyerhaeuser's strategy. In the mid 2000s, facing years of underperforming the S&P 500, Weyerhaeuser placed special hope in residential real estate and its Wreco (Weyerhaeuser Real Estate Co.) unit which includes Quadrant Homes and Pardee Homes. Also, one of the little-discussed appeals of focusing on holdings of timberlands, was the notion that exurban building would continue and some of the company's land might become valuable subdivisions. Not for nothing did Wreco's former chief, Dan Fulton, become chief executive of the new Weyerhaeuser. Then the housing crash hit, not only tanking demand for lumber but badly wounding Wreco like all house builders. As part of Sunday's news, the company said Fulton, 63, will retire and Doyle Simons, former CEO of Temple-Inland, will become chief executive in August.

Simons, 48, came up through the executive ranks of Temple-Inland, a pulp and paper company which was purchased last year by International Paper. Even as it was converting to a REIT, Weyerhaeuser was saying "trees are our future." This leadership reaffirms that mantra, and if the housing division is spun off the company will become even more of a pure play. Housing is recovering, but we're not going back to a 2000s boom, nor is exurban mass building as appealing as it seemed before the crash.

In a conference call with analysts on Monday, Fulton said the acquisition will expand Weyerhaeuser's timber holdings in the Pacific Northwest by 33 percent to approximately 2.6 million acres. After completing the deal in July, the company will own or control 7 million acres. The company will assume $2.65 billion in debt, but Fulton said, "This one-of-a-kind acquisition is very straightforward. It's one that we believe can be completed quickly, and we are confident that we will start to realize the benefits immediately...We believe that this is a truly unique opportunity for Weyerhaeuser to do a scaled transaction of high-value timberlands west of the Cascades, right at our own backyard." CFO Patty Bedient said nearly 40 percent of Weyerhaeuser's timber holdings will be in the Northwest with this acquisition.

Fulton sought to soothe investors in the REIT. The company announced an increase in its quarterly dividend from 20 cents to 22 cents a share beginning with the third quarter dividend, which will be payable in September. This will be the third dividend increase in the past four quarters. Even so, Standard & Poor's lowered its outlook on Weyerhaeuser from stable to negative. The ratings agency warned it could downgrade the company's debt, already close to junk status, if the acquisition is funded with less than 50 percent equity or of the housing recovery fades. Even so, shares rose today and are up about 38 percent over the past year.

Emphasizing that the new timber is west of the Cascades, the most valuable timberland in the U.S., Fulton told analysts:

We intend to leverage our silviculture, infrastructure, logistics and marketing expertise to reap the full potential of these lands. This transaction enhances our leading position as the largest owner of Timberlands in the region. These lands are highly complementary and contiguous with our existing ownership in these areas.

No timetable was given for the evaluation of Wreco's future. But with this acquisition, Weyerhaeuser gains a bunch of mature trees as demand and prices are rising, including from Asia. The trick will be managing the debt.

And Don't Miss: Oil prices — the triple-digit barrel | The Economist

Today's Econ Haiku:

Governor Haley

Isn't in Paris either

Bonne chance, mon ami

Vote: How did the recession change your behavior? | Jon Talton

Fri, 14 Jun 2013 12:31:08 PDT

People who grew up during the Great Depression were forever scarred by the experience and it affected their financial behavior, or so they say. Members of my family who experienced that calamity were horrible with money, the antithesis of the risk-averse, hyper-saving Depression archetype. On the other hand, research does show a substantial cohort was influenced by the event. For example, a Stanford paper indicates it had a "substantial" effect. After the crash of 1929, it was decades before many average investors trusted the stock market again. This time, the market came back quicker and returns on fixed income investments have been horrible. No wonder a Vanguard study showed 401(k) participation returned to pre-recession levels by 2010.

How has your behavior changed — or not. You can make multiple answers. If I left something out or you want to explain further, please use the comments field.

Read on for some of the best stories of the week you might have missed and the haiku.

This Week's Links:

• The age of fraud | Ritholtz

• China could supplant U.S. as the supercomputing power | Wired

• IMF urges repeal of 'ill-designed' U.S. fiscal cuts | Reuters

• How the NSA's just like Wall Street | Salon

• The Farm Bill is a corporate victory and a slap to struggling Americans | The Guardian

• Financialization as a cause of economic malaise | Bruce Bartlett/NYT Economix

• Report highlights STEM workers who often go ignored | Washington Post

• Massive real wage cuts will not improve growth prospects | Billy Blog

• Intergenerational occupational mobility since 1850 | Owen Zidar

• Should Japan default on its sovereign debt? | Noahpinion

• Wal-Mart accepted clothing from banned Bangladesh factories | ProPublica

Today's Econ Haiku:

It's a turning point

But the signs are all confused

They're all marked 'exit'

What's going on with the markets | Jon Talton

Fri, 14 Jun 2013 06:33:22 PDT

Japan's Nikkei has entered bear territory. Other Asian markets have suffered sell-offs, too. The Dow Jones Industrial Average swooned Tuesday and is staging only a cautious recovery today. The Wall Street Journal's estimable David M. Wessel wrote, "The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo." Is the world returning to something like normal, where America grows again, China does a soft landing to slower growth and the Japanese economy can finally find its footing?

Or is it a harbinger of more volatility in financial markets—perhaps the result of a misreading of the Federal Reserve's policy intentions by the markets or a premature move by the Fed to cut back on easy money—that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called 'escape velocity'?

The question of what the Federal Reserve will do is rightfully a preoccupation. Can it make the pivot to slightly tighter money without tanking the markets? And can emerging markets continue to thrive on the "hot dollar" trade now that Treasuries are becoming more appealing? A couple of charts explain what is not happening.

As you can see, the Fed has done an astounding amount of stimulus since the Crash of 2008, not just keeping interest rates near zero, but also expanding the monetary base. But the red line shows inflation via the Consumer Price Index. So there's no evidence that the rise in Treasury yields is a harbinger of runaway inflation.

More evidence comes from the chart above, which tracks the 10-year Treasury Inflation-Protected Securities (TIPS). This is the best way to guage investor sentiment about inflation. Although overall Treasury yields have begun to rise, and may affect the housing market, TIPS are barely above zero again. UC-Berkeley economist Brad DeLong comments: "When the 10-Year TIPS yield gets above 2.5%/year it might be time to start thinking about whether the long run in which the bond market wreaks its will upon the economy and constrains the Fed might be on the way. When the TIPS yield crosses zero? No way." That hasn't stopped JPMorgan from placing a big bet on rising rates.

So what's going on? No question a more appealing Treasury yield will draw more investment to U.S. debt, and provide a bit of relief for those on fixed incomes. But the action is in Asia. Abenomics doesn't seem to be working in Japan — or at least have the confidence of the markets. But more important, China is slowing with perhaps profound implications. There are assorted bubbles in China, too. Meanwhile, unemployment remains high and consumer demand weak in the United States. That makes any sudden change in Fed policy unlikely. And all that is predicated on no new major shocks to the global economy.

And Don't Miss: Facing up to uncertainty in climate-change economics | Vox

Today's Econ Haiku:

Feds check on bank risk

What? There's gambling going on?

Shocked! (Revolving door)

The secret life of Amazon.com | Jon Talton

Wed, 12 Jun 2013 13:46:06 PDT

Nothing shows the evolution of Amazon.com from a cute online retailer to a technology giant than its competition against IBM to land a $600 million cloud computing contract for the Central Intelligence Agency. The Wall Street Journal reports, "Companies like IBM have long supplied the U.S. military and intelligence services with computers, software and the know-how to operate them. Now, new contenders like Amazon are getting into the act, drawn by a fresh source of revenue as business spending on technology remains sluggish and by the imprimatur of providing services to clients that have the highest security standards."

If the Journal report is true, the competition comes at an awkward time, as revelations about the extent of national security spying on American citizens are the big story. But it also shows that Amazon's appetites for competition in the technology arena are extremely large — and its expertise is substantial and growing. The Defense Department alone spent about $35 billion on information technology last fiscal year. Adam Selipsky, a vice president at Amazon Web Services, the company's cloud-computing unit, told the Journal: "The federal government opportunity is enormous. We believe that will be a very significant business for Amazon Web Services going forward."

There are risks. Even though a Pew Research Center poll shows that 56 percent of respondents are supportive of National Security Agency phone tracking as an anti-terrorism tactic, this could change as more people come to understand the proportions of the spying and how it affects their privacy — and they could turn on a company that wants it all, from selling books and groceries, to becoming a big player in the surveillance state.

The competition is also brisk. Booz Allen Hamilton, the company where leaker Edward Snowden worked, has enjoyed an extremely profitable relationship as a national security contractor. As Michael Hirsh writes in the Atlantic, "Some of America's biggest social media and tech companies have been denying in recent days that they were aware of the National Security Agency's recently-exposed 'PRISM' and telephone monitoring programs. But these denials obscure a larger truth: The government's massive data collection and surveillance system was largely built not by professional spies or Washington bureaucrats but by Silicon Valley and private defense contractors."

Whether Amazon wins this contract or not, it's clear the company is ready to play a new game. Smile.

And Don't Miss: The drone corporation | Washington Post

Today's Econ Haiku:

T-bond yields are up

The markets are uneasy

Get that mortgage now

Household wealth still far from recovery

Tue, 11 Jun 2013 13:01:05 PDT

Four years after the official end of the recession, the average American household has recovered only 62.8 percent of the wealth it lost in the crash. The findings come from a new report by William Emmons and Bryan Noeth at the Federal Reserve Bank of St. Louis. That's in real dollars. All household net wealth has rebounded 114.3 percent from the trough to a record high, but it doesn't account for inflation or increased population. Adjusted for these factors, the number is well below where it stood in 2006. And the recovery is highly uneven, mostly benefiting the better off with the stock-market boom and saving the big banks.

According to the Fed's Survey of Consumer Finances, household finances were "severely" affected by the downturn. Median household wealth dropped 39 percent. Among those worst hurt were the young, those with less than a college education, minorities and those carrying heavy debt. With wages largely stagnant, wealth was increasingly dependent on housing, which was in a bubble. In a separate essay by Emmons and Ray Boshara, the importance of household balance sheets to the larger economy is explained. This element was largely discounted by many macroeconomists before the collapse.

It has come as somewhat of a surprise, therefore, that many economists now are calling the Great Recession of 2007-09 a "balance-sheet recession" and that balance-sheet failures of the type described above are seen as important contributors to the downturn and weak recovery.

Only some macroeconomists could have been so blind. Naturally, the recession caused a huge decline in consumer demand, which makes up 70 percent of gross domestic product. Defaults and deleveraging further contributed to the depth of the recession and the slow recovery. The damage to families is substantial, too, affecting the ability of children to attend college and economic mobility. The report pays less attention to how persistent joblessness and federal austerity have made rebuilding household wealth more difficult, particularly for the hardest-hit groups. Nor does it account for intergenerational wealth, a valuable safety net that many lack. Also missing is an examination of how changes in the economy — a hollowed out manufacturing base, increased low-wage services and financialization — have contributed to the household burden. Until all these ills are addressed, we will continue to see a very dysfunctional recovery.

And Don't Miss: The new normal America: A country where eating and drinking are the new manufacturing | Zero Hedge

Today's Econ Haiku:

Here's Amazon Fresh

Trying to make Wal-Mart stale

Main Street got thrown out