Corporate managers typically use the fourth quarter to clean their books and prepare a low bar for the coming year. Management will write off most suspect assets in the last quarter of a bad year. This year offers an especially opportune moment for such a trashing, as expectations for it are high and broad reaching. As a result, the impact on share price and the scrutiny of management’s performance should be minimal. So, this year, the corporate junkyard should be full of kitchen sinks.
The term, “writing off the kitchen sink” illustrates the depth with which companies will go to clear their books in a bad year. The analogy is drawn to a house cleaning, where you might throw many things out. The last thing you would trash is the kitchen sink, which has a daily utility value. Therefore, when companies “throw out the kitchen sink” they go far.
Nascent market decline has been attributed to fourth quarter concerns. It has been suggested that the market has only just considered that the fourth quarter could be horrible. We argue that current valuations should already incorporate consideration for both a dire Q4 and tough outlook for ’09. Nevertheless, forward guidance and operating actions should prove more distressing for some than others. Also, despite market efficiency, we concede that market sentiment plays a role in setting expectations and in exacerbating them.
It’s been a rough year! In the midst of deep economic recession, and with the S&P 500 Index down roughly 41%, the exchanges are full of companies reporting losses. Besides the battlefield littered with the dead bodies of the likes of Lehman Brothers, Bear Stearns, IndyMac, Linens ‘n Things, Polaroid and the dead men walking: AIG, Fannie Mae and Freddie Mac, there are scores of half-baked companies just barely surviving. In a market like this, and with peers and rivals also reporting worst nightmare type earnings, there’s very little stigma attached to failure. It’s the norm!
Record lows are being set across economic data points and corporate press release pages. Toyota Motors for instance, just noted expectations for the first loss of its history. General Motors, Chrysler and Ford will likely write-off both the kitchen sink and the toilet, where they may end up flushed down as well eventually. Everywhere you look, companies have incentive to shed troubled assets. After all, if you keep them, you risk tarnishing your 2009. More importantly to cash strapped firms, losses often represent a good tool for tax reduction and cash flow creation.
For banks, write-offs this year will not be a new thing. Still, many newborn banks, or those passing through metamorphosis, are in a fiscal year “stub” period this December. Once proud investment banks like Goldman Sachs and Morgan Stanley are now commercial banks, or owned by others who are. This means their fiscal years move from October or November-end to December-end. As a result, the December period becomes a stub. All the more reason to write stuff off!
For companies across America, 2008 will be the watershed year. That’s if 2009 doesn’t top it! The losses are mounting and companies have both incentive and opportunity to be rid of ailing assets. Those business lines that hadn’t been paying off as expected, can now be axed and forgotten in the fog of the 2008 recession.