by Gary S. Meyers and L. Steven Platt

In addition to other announced asset sales, what we are told is that BP is leaving North America. Between the Gulf of Mexico disaster, problems with their N.A. pipelines, the Texas City refinery explosion a few years ago, other liability issues, and a large scale public relations attacks on their planned expansion in Whiting, Indiana, BP wants off this continent. The likely buyers appear to be Exxon-Mobil, Shell and Chevron, in that order. However, Exxon-Mobil also may be concerned with the liabilities; which begs the question, would that make Shell the front runner? If there are no other takers expect Chevron to devour BP North America like a hungry shark.

by Gary S. Meyers and L. Steven Platt

The Meyers Report hears a huge national drug store chain is preparing to sell its Pharmacy Benefits Management (PBM) operations to make itself a prettier acquisition target. The firm’s profits are flat-to-declining after a long strategy of deliberate overgrowth to eliminate competition, a planthat is backfiring. To save itself, the chain seeks to be acquired by a much stronger chain with a profitable PBM component. But first their PBM must go.

What are PBMs? Insurance companies usually insist that long-term, maintenance drugs are purchased in 90-day increments through mail order services at volume discounts. This gave rise to mail order prescription companies that in turn threaten the very existence of both the neighborhood pharmacy and the major drug companies.

Initially, to compete, the drug manufacturers bought PBMs. What better way to control the PBMs than to own them? Merck purchased Medco Containment Services in 1993. SmithKline Beecham bought Diversified Pharmaceuticals Services (DPS), supplying 14 million beneficiaries and selling (or buying) over  $2 billion in drugs in 1994. Eli Lilly bought PCS in 1994, and Pfizer purchased Value Rx.

More recently the retail drug chains got into the act for fear they would lose the most lucrative aspect of their business, refilling perscription maintenance drugs, to these insurance company PBM conglomerates. As a result, CVS merged with CAREMARK. Longs Drugs merged with Rx/American. And then there is the company in question.

Their strategy of expanding to crowd out the competition has worked, but they have paid a heavy price. Their PBM isn’t getting much business and  continues to lose prescription business to the PBMs. If this trend continues they will be out of business. At present the pharmaceutical aspect of their business remains one of their strongest components, hence the desire to lose their uncompetitive PBM. Then they can be taken over or merged with a stronger company that already owns a PBM.

The Bottomline: Less work means fewer jobs and lower pay. A sell out means a big payday at the stock market. Looks like the employees will get screwed again while upper management gets a hefty pay off.

by Gary S. Meyers and L. Steven Platt

A “Fair Trade” bill is currently pending in Congress to make changes to this country’s open-ended free trade policy most visibly exemplified by the North American Free Trade Agreement (NAFTA).

This agreement between the United States, Canada and Mexico took effect on January 1, 1994, with the “promise” of creating hundreds of thousands of new “high-wage” U.S. jobs and raising the living standards in Mexico and Canada. In 2005, Congress voted to extend NAFTA to five Central American countries. The last trade restrictions were eliminated on January 1, 2008.

NAFTAs 900-page one-size-fits-all rules requires limits on safety and inspection of meat sold in our supermarkets and impacts many other U.S. jobs, products and services.

Since NAFTA was passed, the United States has lost millions of jobs; many went to Mexico at first and then to the Pacific Rim. The opening of Mexico’s and Canada’s borders mostly have helped corporate profits, but have not led to new jobs for American workers as the tax laws provide companies with incentives to ship jobs overseas.

NAFTA was supposed to create more jobs in Mexico and stop illegal immigration. The opposite has happened. Since American manufacturers have been able to sell their products in Mexico, thousands of Mexican workers have been displaced resulting in more illegal immigration to work in the livestock slaughtering industry, in other menial agricultural, or janitorial jobs. They work until they are injured or become sick from the bacteria they are exposed to and then they are sent back to Mexico and are again unemployed.

The high unemployment level in Mexico has fueled drug cartel activity to the extent that some U.S. law enforcement officials believe parts of Mexico are actively engaged in a civil war with the drug lords. People are crossing the U.S. border at an increasing rate and we have seen the response in border states like Arizona.

The new Fair Trade bill would not stop free trade but it would impose certain restrictions. For one thing, it would eliminate tax incentives to companies that ship jobs overseas. For another, it would penalize countries like China that deliberately undervalues their currency, or like Japan, dump steel in the U.S. until they kill our entire industry.

Does this make sense? For years after the depression, the United States had a modified free trade system which imposed tariffs on countries that cheated, like Japan and China. Work was at an all time high in the 1950s and workers were able to earn a living wage. Now, for example, people who work as meat cutters, generally are illegal aliens working for below minimum wage without safety and protection from injury and illness. Outbreaks of salmonella from industrial farming are at an all time high. Are we really better off this way? What do you think?

by Gary S. Meyers and L. Steven Platt

June was not a good month for the local steel industry. The word on the street in (Northwest Indiana) the mills is that they are out of orders. They are going to complete their projects and then cutback again. Orders for raw production of steel simply dried up in June. Finished products, tube, pole, pipe and sheet still seems to be going okay for now, but we will see.

On another bad note, last week a mechanical accident at USS caused a break in the natural gas lines that fed their cauldrons causing an immediate unplanned shutdown. The result: the steel hardened and at least three facilities will have to be relined and will be out of action for 30 to 60 days, could be more.

More problems for steel and utilities. Coal fired power plants in the West cannot get enough coal to work efficiently. There is plenty of coal; the problem is the shipping coal to the users. There is only one railroad supplying the coal to the West and it is not American owned. Canadian National will not invest money to lay the needed track for more efficient shipping, because they don’t have to. The plants are at the mercy of the railroad. The railroad is a monopoly and not at risk of competition, and no one is going to start a railroad. “The Canadian National is buying up more and more of U.S. rail lines and they don’t give a damn,” said one industry expert.

In NW Indiana, the steel plants are at the mercy of the railroad too. There are three rail lines servicing them. Currently there is a “war” of non-cooperation going on between the Canadian National, Norfolk Southern and the Indiana Harbor Belt. These railroads have intersecting track and need each others’ permission to cross their tracks to deliver coal or just about anything else.

“If the Canadian National has to cross the Norfolk Southern’s track, they have to put in a request, which delays progress. In the meantime, the mills are the pawns and we all lose while trying to recover economically. This lack of cooperation is jeopardizing the security and welfare of our nation,” said our expert.

by Gary S. Meyers and L. Steven Platt

It is nothing short of amazing how our government repeats past errors…and calls it change. Consider this history:

June 1973. While sitting with Max Eisenstein, an owner of Terminal Construction (aptly named), one of this column’s authors asked, “What market research and product planning did you do before starting to build your 350 unit condo tower in Verona, NJ?”

“Well, none really, because we know the market here and we have an identical rental property next to the site. Besides, if it wasn’t a good deal, our lender XYZ Big Bank (NY) wouldn’t have funded. They are professionals and know what they are doing,” came the reply from Mr. Eisenstein.

July 1973. While sitting with the Senior V.P. at XYZ Big Bank (NY), who funded the Terminal loan, one of this column’s authors asked, “What market research and product planning did you do before you funded the 350 unit condo tower in Verona, NJ?”

“Well,” said the Senior V.P., “none really, because Terminal Construction knows their market. Besides, if it wasn’t a good deal, they wouldn’t be doing it. They are professionals and know what they are doing.”

Result: The project failed and tens of millions of dollars were lost. And for those skeptics, these conversations really did take place and are accurate.

June 2007. While sitting with Tony P., an owner of P. Construction, a major homebuilder and land developer in several regions of the country, our  author asked, “What market research and product planning did you do before starting most of your projects?”

“Well, we know the markets because we have been successful there before. Besides, if these projects weren’t good deals, PDQ Big Bank (Chicago) wouldn’t have funded. They are professionals and know what they are doing.”

July 2007. While sitting with several of the senior executives of PDQ Big Bank (Chicago), who funded hundreds of millions of dollars to P. Construction, the same author asked, “What market research and product planning did you do before you funded all this money?”

“Well, none really, because P. Construction knows their markets. Besides, if these weren’t good deals, P. Construction wouldn’t be doing them. They are professionals and know what they are doing. The company is so strong that when they ask for cash, we ask where do you want the money sent. And all of our loans to them are non-recourse.”

Results: In both cited cases the borrowers and the banks failed during the real estate and banking melt-downs of the 1980s and 2000s—and the government reacted the same way.

Both times the government wrote checks, using taxpayer money and made the cash available to cover losses. Then to fix the problems, the government put the same people in charge who caused the problems in the first place when they made the bad loans.

In the 1980s the government forced healthy S&Ls to absorb sick institutions, allowing the “good will” associated with the sick S&Ls to be used as capital. Then the government changed the rules and made the healthy S&Ls sick, which resulted in their failure.

Today, the government is rewarding the bungling banking giants with bailouts, cash and favorable contracts. The healthier, smaller local and regional banks are being hit with all sorts of restrictions, from limiting the interest rates they can pay on CDs, to requiring increased reserves for performing loans that “might” be a problem later, to increasing deposit insurance premiums for problems that have not yet occurred. All of this reduces the capital these banks have and now it prevents them from lending—assuming that they are not now failing.

Throughout all of this, absolutely nothing has been done to understand the fundamental problem of how to properly evaluate real estate. The net result is that banks are not lending for fear of making mistakes.

Is this history repeating itself or change?

by Gary S. Meyers and L. Steven Platt

Wonder why there are fewer ads promoting new homes for sale? Or, why more homebuilders are going out of business? The reason is the same all across the country; no one is buying new construction. According to the Greater Chicago Market Report, a 35-year old cooperative activity report among the metro area’s homebuilders, this past week was very ugly and there is no improvement in sight.

Last week the average subdivision traffic was 2.2 families…for the week! In 2009 for the same week the number was 2.8. Sales per subdivision all of last week averaged 0.1 contracts with just 2.5 sales YTD. For the same week in 2009 the average was 0.2 contracts or 5.7 units YTD.

As bad as these numbers are, other facts point to the greater impact on the industry as a whole as well as on jobs, labor, materials suppliers, communities surviving on less revenue from builders’ permit and impact fees, etc.

When the same period of July 2010 is compared with  July 2005, the change is even more dramatic.

Item July 2010 July 2005 % Change

Number of projects 80 262 -69.47%

Traffic for week 177 4,133 -95.72%

Sales reported 10 257 -96.11%

Traffic YTD 7,738 127,001          -93.91%

Sales 568 8,421 -93.25%

Why did we give so much money to banks that failed?

by Gary S. Meyers and L. Steven Platt

The word from the construction trades is all bad. Previous forecasts of a summer recovery have simply not panned out. The reason, the banks not lending and jobs continue to dry up and commercial construction projections continue to worsen.

Most building trades contractors are reporting that they have no work on the horizon and none scheduled for the balance of the construction season. There had been some talk that things would improve by August of this year, but then the banks stop doing what little lending they did earlier this year. Everything has ground to a halt.

Some trades report that they are either scaling back or closing down their apprenticeship programs for the foreseeable future.

Work hours are down 30-40% for the year from last year (2009), which was down about 30% from the year before (2008). One trade reported that even if things were to recover at the average rate of job in- creases  they experienced  throughout the 1990s, it would take until 2013 just to get back to 2007 employment levels.

Even when some of the trades, such as the cement masons, are being supported by the federal stimulus program, the outlook is bleak. The concrete contracting industry has historically been supported by private industry. Now it is being supported almost entirely by the public sector and that work is about to dry up.

Some residential construction contractors are going on their third straight year with no work. Those that were holding on for the recovery this year can hold on no longer. The unions are laying off business agents. Residential home builders are vowing to go non-union for purely economic reasons if and when they recover from this recession.

In all, the construction industry figures look bleak for the rest of the year. What this means in the broader scheme of the economic recovery remains to be seen in other sectors.

by Gary S. Meyers and L. Steven Platt

Home builders are going into their third year of sales drought, with no rain on the horizon. When the entry level tax incentives expired, the market died.

Raw land builders have been holding is virtually worthless. Out-of-pocket costs for preparing it for construction is greater than a fire sale of shovel-ready finished lots. Adding to this is the ‘cash and kind’ requirements municipalities have with each permit a builder draws.

“Production home builders simply cannot survive with projects that sell two to six units a year,” said housing expert Steve Hovany, president of Schaumburg, IL-based Strategy Planning. “All of the builders are trying to renegotiate their deals with municipalities. The current economy has destroyed an enormous amount of wealth that that consumers had in their homes and builders had in their land.”

A bright spot in the market is first-time buyers. But, they have no money and their jobs are uncertain. In response, home builders are reducing dramatically both home and lot sizes.

The generational problem. Today’s first-time home buyer has less affluent than their counterparts in recent decades, less perhaps than at any time in the last 40 years. “We are talking about the current crop of 30 year olds,” said Hovany. “In part this is a function of the younger generation maturing later and getting out of college later than their parents.”

In the past, parents helped their kids with down payments. Because of the recent evaporation of wealth, the Baby Boomers don’t have the money to give their kids or grand kids today. Thirty or more years ago, when today’s retirees started out, they planned on renting for several years, saving cash and getting their jobs stabilized, so that they could afford to ‘buy a place.’ Today’s kids are getting out of school later, starting their careers later, and want to skip the renting and planning stage. It just doesn’t work easily.

The bottom line. The homes that first-time buyers might afford are not being built because banks are not lending.

by Gary S. Meyers and L. Steven Platt

Over the past 12 months home values, not including distressed sales, rose in eight states by 2.5% or more; 12 states saw increases of less than 2.5%. This left 30 states with declines. Five states took hits of 5% to 10%, the rest were down by 5% or less. However, these results, through March of 2010, came out before the impact of the now expired first time homer buyer tax credit. For more data go to our website, www.commercialcorpfinance.com.

by Gary S. Meyers and L. Steven Platt

About the only place to find loans is through government insured programs from HUD. As a direct lender through our correspondent, we are seeing several problems. First, the backup at the regional HUD offices is absolutely staggering. Refinance loans that normally would have processed in 90-120 days in many cases are taking almost double that. New construction loans are taking a year, as opposed to the “normal” six to nine months. The other issue is that HUD primarily makes commercial loans for apartment rentals and licensed senior care-medical facilities, which limits what is eligible.