’BIG CHANGE – In the last 3 years at auction sales, the first 5-6 months of the year were fantastic. Great attendance, great prices and great enthusiasm. This year 2013, the first 5 months completely reversed. From the auction side, all auctioneers have seen a complete change at auction sales. There is no enthusiasm at the sales, attendance has dropped and prices have dipped a little – maybe 10-20%. But if you are selling the latest and greatest all the above is cured.
In our last report we stated, “China went from a growth rate of 10% to 7% – it probably felt like a recession. They have created an internal economy due to their creation of a middle class. They have eliminated a need to import and less of a need to export.” Well, it is here now.
China has completed catching up with its growth so that supply finally meets demand. What China is now saying “Thank you very much for offering all these materials but I think we are just fine right now.” China is now going thru the social ills they have created due to all their growth – smog, infrastructure, overcrowding, pollution & the retraction of their crazy growth rate.
In the long term it should raise their cost of goods thereby making the U.S. more competitive. There is a real opportunity here for the idiots in Congress to make a move to bring back ‘money’ to the U.S. by making some adjustments to the tax rates the U.S. Corporations will pay if they bring the money back to the U.S. Then next – if the idiots can completely overhaul the tax rate code and close the loopholes: we may have a chance.
U.S. Corporations are doing fantastic and manufacturers in the U.S. are doing great. But, some industries that thrived off of exporting materials to China are really going to feel it if they increased their overhead during the good times. Scrap Steel is now down to $250/Ton and I can see it going to $150/Ton. What does this mean? At an auction sale, we had an insurance policy that if something did not sell as usable; then at $650/Ton you could still obtain a good value. But now at $250/Ton the cost to process the scrap at the auction site “almost” negates any price a scrap auction buyer will pay. So you can see the problem at $150/Ton. This means that you as a lender have a problem if you have to remove all of your collateral from the facility. If you are going to be asked to finance an old press stamping plant – you will have to think twice. It may go back to “smaller is better.”
Stainless, copper and brass are all down (which companies will adjust to) but there will be a direct trickle down effect. Plastic recycling is somewhat depressed which will create an environmental problem for products that need to be cleaned before processed. Before, with all the high value of recycled products – the dirty items just got taken care of. Now it may come to a point where a recycling company may not accept ‘dirty’ products.
From the business side, everything stopped. Industry in the U.S. is doing well but they are not looking to expand. They may upgrade and are “finally” starting to get to full plant capacity but they are not going to open a new plant; unless they are moving out of California. Finally, California is starting to ‘financially’ look like Downtown New York. California is starting to become a financial clearing house. As an owner “I want to live here, but I don’t want to manufacture here.” So you now have the corporate headquarters in California but the manufacturing is done elsewhere.
Sincerely,
TAUBER ARONS, INC.
T/A APPRAISAL, INC.
STEVE W. QUALE
Sq/cmm
I don’t know of an industry that isn’t doing better than it was 2 years ago. The reason I say 2 years is because in 2110, January thru May there was a huge change in the purchasing appetite for machinery and equipment. But from June thru December, things leveled off. So for a normal growth cycle there is always a surge of purchases for the first half of the year by using up their capital budgets for the year. But this year it is even stronger than last year and it seems much more sustained. The manufacturing sector has been in such a state of contraction from 2006 thru 2009 and add to that all of the companies that have either gone under or been purchased, it doesn’t take much of an upturn to make it appear like an economic boom time. I hear people say that we are in the same economic boom time as 2006 but that isn’t the case; (compare first half 2006 GNP, excuse me GDP, to first half 2011 GDP) it’s a start but not an economic boom economy like 2006; because 2006 was the culmination of an economy with no base below it. It is really understandable to all people in industry why they are experiencing such a euphoric windfall, but it is because of where they have come from. China has really screwed up their chance to dominate all industry and has left the door open for us to get back in the game, reduce our trade deficit, increase the strength of our dollar, reduce our cost of US debt and restore the world’s faith in our country. That way we can go ahead and sell them some more junk paper and leverage ourselves out of control. Or we can learn from this mess and get back to basics.
We may get another chance but we have to do the things (not words) that give us a trade surplus which will in turn reduce our budget deficits and will draw in investor dollars into our country, if they can be assured that they won’t get screwed again. But so far it has just been rhetoric about putting restrictions on the capital markets on how they invest the investor’s money. We used to have those restrictions in place after the 1930’s but they were removed in the 1990’s. Our whole problem is not a last ten year problem but actually a 30 year problem of looking the other way while our country transformed.
With this upturn, you as lenders, will be seeing an enormous need for cap ex lines in the manufacturing sector and all companies are going to have cash flow problems. It is now the lender’s turn to jump in with this surge to continue the expansion in manufacturing. That doesn’t mean 0 down at 2% interest on an $800,000 house to a kid that is making $40,000 a year. Bush had a “NICE” idea but it doesn’t make business sense.
MACHINE / SHEET METAL SHOPS
These guys are going as fast as they can go. Aerospace is still strong but a lot of it is based on future production of the F35 fighter. I think at some point the defense department is going to realize that we are really fighting different types of war and they may rethink the need for so many air fighters. But the defense guys will come up with something new to facilitate that need. It may be the expansion of the drone surveillance plane or probably some type of drone foot soldier. Sheetmetal Fabricators, even as old as the early 1990’s, are selling well. CNC Press Brakes, like Amada, are selling well in the 1980’s if they are the right model. Punch presses are still soft, but look for an upswing next year.
PLASTICS
Plastics have been on the upswing for the last two years and even more so now. With the automotive turnaround all the plastics providers for the automotive marketplace are filling all the capacity they have plus they are expanding to cover all the competitors that have gone under. Large capacity molders (500 ton and up) are back in vogue, the small tonnage for the medical industry never declined, but the only negative is the increase of resin prices and their inability to pass on those increases to their customers. But again almost all plastic resin users are also commodity brokers.
Blown film has some interesting changes. You’ve seen where some grocery markets are going to remove plastic bags from their store which will affect some blown film companies. But what is interesting OUR GOVERNMENT, believe it or not, has blackballed some countries (China-India) from exporting plastic bags into our country because they were DUMPING products into our country. This is the best news that I have heard where our country is actually making an effort to protect our industry. This is exactly what is needed to turn around our country, bring us out of the recession and restore confidence in our country and how we our viewed.
The extrusion side of plastics is a little soft but the downstream portion of extrusion is strong enough to pull up that portion of plastics. What will really give this industry a lift is if resin prices drop because that is base of all plastic products. Probably they only way this will be accomplished is if a new source of energy is developed or other methods are utilized for the mainstay of our energy demand.
CONSTRUCTION
Although the marketplace has not returned the prices have. Construction is used in arenas other than building houses. Used machine prices may be down 20% from 2005-2006, which means they are back to what a normal person would pay. It will be awhile for housing to return but the housing inventory seems to be slowly working down. Housing prices are still down — but all that means is that the lender will not be so quick to drop the hammer.
WOODWORKING
Still improving but as compared to the other industries it is a little slower. We probably won’t ever see the huge furniture manufacturers like we used to have in the 70’s but there will always be the demand for some quality furniture and cabinets. What is surprising is that the sawmill industry is starting to come back. Auction prices are on the upswing.
PRINTING
The only industry that is not going to come back anywhere in the form that it used to be is the printing industry. What have become popular is the large format digital printers that go on vinyl. We now are really a visually stimulated society and reading material just doesn’t seem to attract our senses. There will always be a small demand for high end printing and if you can be creative on the design portion of printing, then you will have a marketplace for your equipment.
FOOD
Prices are still fantastic, but I do want to emphasize a point. These buyers stay in their particular area of production. We had (3) meat sales this year and prices are great on the meat side (grinders, blenders, totes, etc.), but stainless steel tanks do not do all that well. A dairy buyer will not buy stainless steel tanks at a meat sale. A meat buyer will not buy dicers at a produce sale. So when you are appraising this equipment, you are appraising what industry it is in. The only thing that will drop prices is if stainless steel price drops. You have stainless steel commodity brokers who are always buying stainless steel to fill contracts.
Sincerely,
TAUBER-ARONS AUCTIONEERS
STEVE QUALE
SQ/cmm
In Memoriam – Jerry Hayes, who worked with us for 12 years, recently passed away at age 62. Jerry was one of the most conscientious people I have known and took his work personally. Jerry will be sorely missed on a personal level as well as on a business level. R.I.P. Jerry!
HUGE CHANGE – (In June it became downgraded to “an upswing.” From the 4th quarter of 2009 to the 1st quarter of 2010, there has been extreme upswing. The attendance has doubled, but more importantly, people have come to buy because they need the equipment. Almost every industry (except for a few because of technological obsolence) are showing signs of activity. There is also a marked slowdown in auction sales. We can attribute this to the following factors individually or mixture of each:
1. Attrition – It seems that industry has finally completed the survival of the fittest contest. All these industries have sized down or consolidated to the point that their overhead and supply match the demand for their product. But now with the increase in business activities, these companies are looking to expand, but they have trained themselves to be cost conscious so they are looking to buy on the used market place. The result: larger attendance, increased activity & higher prices.
2. Higher Demand For Product – there seems to be an increase in the demand level of products. Small – but a definite heart beat. It may take another 3-6 months before you see unemployment make a real drop, but it should start dropping the 4th quarter of 2010.
3. China – China might have finally matured enough to grow up and join the rest of the world on their currency standard; or has the Congress finally woke up in August 11, 2010 (10 years too late) saying “it just isn’t ‘fair’ that their exports keep on expanding at a rapid rate.” Maybe we will create a container import tax (07-6-07 report).
But in viewing the economy in the state of anxiety that it is, I can only use an analogy of a linebacker in football before a play. As the opposition breaks from the huddle, he is analyzing the formation, where they are going and what types of things could happen. And just when the ball is getting ready to be snapped, he is on the balls of his feet in an athletic position. Once the ball is snapped, he is immediately reacting to what is happening in front of him. Sometimes linebackers overreact. This is the way the economy reacts. The economy reacts so quickly to everything that is told each day: so that they won’t be caught in a disastrous condition. It is really hard to tell what is a long term indicator as compared to an overreaction of what they see for the moment.
MACHINE SHOP
Definitely on the upswing. Whether you are building airplanes, oil rigs or nuclear energy plants, you need big – big – big expensive machinery to do this. So how do I go about buying a Bullard or Cincinnati Hydro 10′ Vert. Boring Mill or how about an Axelson 36″ x 20′ Engine Lathes?
You don’t – all the U.S. machine tool companies have evaporated.
But I can still buy a used one that has been sitting in a warehouse for 20 years. Instead of spending $1.5 Million for a new Japanese tool – I will buy a 1940’s Vert. Boring Mill for $100,000, rebuild with new ball screws and up-to-date CNC controls for another $150,000 and be into an up-to-date competitive U.S. tool for $250,000 instead of $1.5 Million. It can really distort the auction value of WW II war vintage machinery.
AEROSPACE – Huge demand for CNC Profilers – If the airplane companies ask for the delivery of the planes they have on order with Boeing – this industry will be busting at the seams. But it comes down to orders as to taking delivery. The demand is there, but I still question that the financing is going to be available to the airlines. Again, may be a future Boeing financial. In other industries, such as oil tool etc. where they use large capacity equipment – the prices can swing sharply for even CNC equipment in the 80’s because new prices are so high. Example: (1979) Mori Seiki SL7 CNC Turning Center sold for $32,500 in 2010. That is the same price we were getting if it had been sold in 1989 when it was 10 years old instead of 22 years old.
SHEET METAL
The old standbys of Press Brakes, Shears & Saws seem to be coming back. But, Stamping & O.B.I. Punch Presses are still on the bottom and don’t seem to be showing any near signs of recovery. Steel Processing Equipment such as Slitters and Cut-To-Length Lines are doing well, but can be volatile depending on overseas demands.
PLASTICS
Injection Molding – doing much better and it seems that most of the automotive suppliers auctions have taken place and there is a definite upswing on prices. But again the machine needs to be no older than 7-10 years (2000-2003) otherwise the price really drops off.
Extrusion – the base form of the Extruder itself is not doing well but when you attach it to Pelletizing or Regrind Lines – the complete system brings the value up. Most plastic companies have become recyclers for their own use to level out their cost of resins.
Blown Film – we know the industry is just doing “so-so” but there have been no auction sales. The companies that are going under are being bought by competitors. “You have the option of going out of business or you can give me 55% of your company and I will provide the huge volume discounts that I get; which will make you profitable.” Step aside ego and play ball. It is like the Blown Film companies are out in the middle of a calm lake waiting to come onshore when everything settles down.
WOODWORKING
We have had approximately 15 woodworking sales in the last year and there is a definite upturn in prices since February. January there were no sales but from February on the prices are definitely improving. It’s not just that we have doubled the attendance, but the buyers are buying out of need, not waiting to steal something.
FOOD
We have had (2) food processing sales in the last 3 months and the prices were about 30% higher than we anticipated. There is just a real shortage of food auction sales which in turn elevates the price. Also the food industry never went into the recession.
PRINTING
Probably will never recover from technological changes, but it is morphing into large vinyl banner products. Since nobody can read or spell anymore, the media is relying on the visual aspect of advertising. So all printers are moving into the large laser jet vinyl products. It will be a salvation for awhile and then the price cutting will hit. Until then the laser Jet printer equipment manufacturers are going to do fantastic.
Video post production
We just had a large post production house that we sold at the end of July. This industry has always been a popularity contest of what is hot at the time and also what product model becomes the industry work house and retains its value over the years. The Routers & Switchers become tough to sell because they need to fit a customer’s specific requirements. I would be concerned on your UCC Filings and your Debtor’s Covenants in this industry.
OBSERVATION
There seems to be a slight undertow of movement upwards for equipment that is being manufactured here in the U.S. It is not just sentimentality to buy a U.S. manufactured product but rather that we are starting to build a better product and the user can justify the additional costs. Now all we need is for Congress to open the doors rather than putting up road blocks.
Sincerely,
TAUBER ARONS, INC.
T/A APPRAISAL, INC.
STEVE W. QUALE
Sq/cmm
FROZEN. This is the best description of what we see going on in the economy and is exactly what you don’t want if you are trying to recover from a recession. It’s a catch 22. The banks are not loaning money; so companies are not buying assets to expand, because they can’t get money from the banks, and the banks are not liquidating assets because the prices are too low, because nobody can borrow money to purchase the distressed assets.
Sounds stupid – sounds simplistic, but that is what is happening and that is why you see Obama stressing that banks have to start loaning money. I keep hearing from everyone that the banks have plenty of money, there is plenty of money available. I hope, I hope this is true and not that they just have plenty of assets on their balance sheets (which I feel is the case) and they cannot afford (accounting wise) to turn those over-inflated assets into loanable cash, because it will create financial reports from the banks that the powers to be do not want us to see because it potentially could be the catalyst that creates more distrust in our economy and could deepen the recession. Now take a breath.
We keep getting fed these reports that in the fourth quarter we had the largest growth period in 10 years, banks having record earnings – everything is getting better; but we the people keep saying bullshit. I understand the banks’ posture of sitting on assets because sooner or later the economy will turn around. It has worked in the past but it may lengthen the recovery period. We are waiting for something to spur the economy. The war got us out of the 30’s; the computer got us out of the 80’s, so maybe something else will get us out of this one, which may be energy (nuclear).
In the meantime, there are a few in Congress who are trying to reintroduce acts that will safeguard our economy from going into this mess again. In the 30’s, the government passed an act restricting banks from going into certain types of investments. It did not get repealed, but a new act in the 90’s allowed banks to go into high yield risky investments. Certain safeguards are put into a system to protect it from destroying itself. When you are seeing huge growth spurts, people forget and think a depression will never happen again. They remove those safeguards, greed takes over and the same consequences happen over again each time. It is inevitable. I am a businessman and I too feel that greed is good. Praise be to Geko. We are all playing monopoly and the goal is to put your competitors out of business so that you can control the supply side and therefore control pricing which results in higher profits. The free enterprise system is based on competition and the free flow of supply and demand and as long as they are not monopolized they will always work. But, that is why we had certain acts such as the Sherman Anti-Trust Act passed so that the free enterprise system (greed) would not destroy itself. The basic instinct of the entrepreneur (greed) that makes the free enterprise system the best system in the world can also be the virus that destroys the system if left unchecked. Our Congress has ignored those safeguards in the financial industry and the industrial sector and now we are mired in a catch 22.
So what does the above have to do with the appraising and auctioning of equipment?
The auction marketplace for the selling of equipment is still a viable option, but there have been some alterations. We need to get the word out much earlier than we used to. Where it used to be a minimum of 30 days, it is now more like a 45-60 day process. Since money is so hard to get from lenders; the buyers need more time to set up financing and just to get the word out and give it time to circulate. Also the marketplace for equipment in Europe and the U.S. is very depressed, whereas the marketplace in India and South America shows activity. Forget China – they can make it new cheaper that we can sell it to them used. But we are starting to see more activity from certain areas of overseas buyers; so it takes longer for them to logistically make arrangements. They are not going to travel for small sales but they will travel for large sales or a situation where an industry has left the U.S. and is now being done completely overseas.
We are seeing more volatility in the pricing of equipment at auction sales. This is going to sound hard to believe, but attendance is actually up from 3rd quarter of 2009. This partially from people appraising their own shops and also from “the survivors” wanting to take advantage of depressed prices. Remember – for every business that closes; someone picks up a little more work. It seems like we have bottomed out 4th quarter 2009, as we suggested a year ago. The guys left are really good businessmen, but are only buying what they need now; or will project what they will need in the near future.
And here’s the rub. Twenty years ago, we had a massive used machinery network that provided a base price for machinery. We didn’t feel real good when we sold to them because we knew the machine went cheap; but we always considered them brothers in the same type of business – “buying & selling equipment.” They are gone. The internet, the economy and industry leaving the U.S. has just about eliminated the “stocking” used machinery dealers. So when you have an auction, there is no base price. If you have that one user who makes the sale; then you have a good sale. If not, you have a bunch of users going “boy that’s cheap – but I didn’t need it no matter what the price is.” This has led auctioneers to buying back equipment at the sale and then reselling later thru other means. So, when we review auction results, we really have to look at what makes sense and what doesn’t. Just because you hear “sold”, doesn’t actually mean it sold. In turn; when we appraise I will repeat what I have said for 20 years “You have to appraise at an average auction value.” You have to look at a general trend in a price change before you alter your evaluations. One sale does not justify a price change in appraisal values.
MACHINE SHOP
Prices are a little down from 6 months ago but not depressed. Since machine shops cross over into so many different industries; it hasn’t taken any sharp declines. Aerospace declined but there is talk that there may be an upswing on the commercial side since the 787 got off the group and didn’t come apart. I’m still having a tough time with the idea of joining metal with a composite material. But it flew and there is a little glimmer on the commercial large jet aerospace side. It will be interesting to see if there is going to be financing available for the purchase of these jets. Maybe Boeing will start a Boeing Financial just like the car companies did.
Prices on CNC equipment are down about 10% from 6 months ago which is a small expected dip but nothing like some other industries. One segment that has dropped is CNC Horiz. Machine Centers. They cost twice as much as a Vertical but bring about the same price at auction as a comparable size Vertical
SHEET METAL
Stamping Presses (unless really new) are in the scrap metal mode and we still haven’t seen the sale of automotive stamping plants from the Big 3. Here is an important point. Most of us are appraising old stamping presses at scrap value which is around $250/ton; which still makes the presses saleable for scrap. But you really have to take into consideration the scrap market and where the proximity of the scrap market is compared to where your auction sale is. If you are holding the sale in Torrance, California, you can figure the price to be much higher than if you holding the sale in Albuquerque, New Mexico. And this goes for many other industries – auto. screw machines – foundry equipment – die casting, etc. And if you throw into the mix, hazardous waste (oil, etc), it can even magnify the problem. My point is that since the metals market (stainless steel – steel – copper – brass) is being manipulated and now treated like an agricultural commodity it is open to huge swings but not from weather, but from manipulation and speculation. So if someone (China) turns off the demand, the prices can drop drastically in a short amount of time which happened with steel, stainless steel and copper. The consequence is that you may not be able to remove equipment from an old plant and whomever owns the real estate may be stuck with a huge cost to return the commercial real estate to a rentable/saleable condition.
Even the old standbys – small O.B.I. punch presses, press brakes and shears have dropped dramatically.
PLASTICS
Injection Molding – there have been a few sales with some upturn in sale prices, but we don’t know if that is a couple sales or a turnaround from a dead industry.
Extrusion – really down and getting worse. Doesn’t matter if it is pipe extrusion or resin recycling, they are all down.
Blown Film – really odd. It seems like all the fat has been cut off and the survivors are not expanding or consolidating – but just holding their own. Very few auctions.
WOODWORKING
These guys just can’t hang on any longer. When furniture left the U.S. some went into cabinet making. When housing fell off they just didn’t have anywhere else to go. With the 10-year housing boom that we had everyone became a cabinet maker or a contractor regardless of their business ability. They have tried to hang on but – .
FOOD
Still great auction sales but there have been very few.
PRINTING
Just going to be a whole different industry. Visual banners and digital creation of non-paper advertising and media. If Google has its way then say goodbye to book publishing and the equipment used to produce books.
OBSERVATION
Looking backward, I don’t know which term I dislike the most “Mover & A Shaker”, “An Event”, or “Transparency”. All you have to do is say those words and it gives credibility to what you are saying. Also, I found it odd how a speaker was described at a conference “The Honorable Henry M. Paulson, Jr.”
Sincerely,
TAUBER ARONS, INC.
T/A APPRAISAL, INC.
STEVE W. QUALE
Sq/cmm
GENERAL
Sorry to take so long to get this report out, since our last report of November 2008; but I wanted to see the results of the auction sales that we had and others had during the first 6 months of 2009. Since the last quarter of 2008, myself and all other appraisers knew we had to reduce values; but how much? I was estimating that if I appraised a shop in September of 2008; then in the first quarter of 2009 I would be dropping values by 20%. But, to be quite honest, all of us were somewhat guessing because the bank meltdown presented a new problem; in that the companies who do survive during this time may not be able to get money to buy equipment. I would say that from January thru June prices probably dropped anywhere from 20-50% depending on the industry.
I really feel a recession is the wrong defining term for an economic downturn. I feel an economic downturn should be measured when the slowdown begins, when it levels off and then when it rises. These economic downturns used to be in 15-year cycles, but now are more in a 10-12 year cycle. They are in varying shape of a “U” instead of a “V” where all of a sudden the recession is over. Back in 1971, Barry Goldwater, a great businessman, who spoke to our business class in Arizona, explained the 15-year economic cycle. You saw these cycles in the 60’s, 70’s, 80’s & 90’s, but then a gradual change took place which I feel is noteworthy and why I am going thru this Econ 101.
This recession started in April of 2007, with the normal downturn when something is overvalued and the speculators bail from that commodity. Please refer to our October 29, 2007 Newsletter as follows:
“HOUSING – probably about 2 ½ more years of downturn. Prices haven’t dropped much yet but at some point people will have to drop prices to move their property especially when new home developers start dropping prices to move inventory. Once that inventory is evaporated then it will probably be status quo for five years because people will be afraid of getting burnt again. Just a repeat of the stock market collapse. It takes awhile for people to jump back in again, and after that the next five years should have up tick in prices. The saving grace is that this did not happen in a recessionary period – Yet.”
This downturn would have continued thru the 1st quarter of 2010; but with mortgages being rewritten with a large balloon payment at the end; the homeowner can stay in his house and this policy reduced the housing inventory that would have come on the marketplace. The owner may not triple his money at the end of the mortgage, but at least he won’t lose his house. Real good move by the lenders, otherwise the supply side of housing would have expanded and it would taken forever to reduce the supply which would have deepened the recession. So based on these creative mortgages, I feel the economy will stop declining in the fourth quarter of 2009. The recovery will mean a couple of years of bouncing around on the bottom until something spurs it with a 3-year rise. That 2-year bottom leveling out period will seem like a rise after this immense downturn, but is really only a leveling off period – which is a good thing.
And this is where I am trying to go with all this. Please refer to the July 2008 Newsletter as follows:
“The last recession April 2000 – June 2004 was the adjustment from the over-inflated stock prices. But what was unusual was the recovery. Usually a recovery has a lot of pop to it. From June 2004 to June 2007 things were better based on where they came from but not great. What seemed to spur the recovery was housing instead of the manufacturing sector. Housing is really a matter of trading up or speculating on over-inflated values. So in the last recovery period the manufacturing sector recovered but really didn’t seem to expand because most of the manufacturing left the country. It seemed like 2 steps downward (2000-2004) and one step upward (2004-2007). Going into this recession it looks like another couple steps downward.”
An economic cycle used to be 10-15 years. The last decline was in April of 2000 and the start of the next decline was April 2007. Only 7-year cycle. These economic cycles are getting too close together and I attribute it to not just speculation and manipulation but to the manipulation of speculation.
Remember Carnegie, Rockefeller, etc. who were creating monopolies in their respective industries. The government stepped in and passed bills such as the Sherman Anti Trust Act. It is a businessman’s goal to put everyone out of business except himself (monopoly), so that he can control supply. If he can control supply, you can control price and of course make more money. So the government stepped in and said by doing this you are altering the natural flow of supply and demand which is the basis of our free enterprise system.
Enters Boeing – “You have to let us buy McDonnell Douglas since the aerospace industry is now an international marketplace and we need this acquisition to be able to compete with Airbus; who doesn’t need to make a profit. If you do not let us do this – then it will mean that we will close up and will be the end of the aerospace industry in the U.S.”
Congress – Not that I don’t really appreciate all the greasings from you and the lobbyists, but you know what “this is for the good of the American people.”
So Boeing is now in the position that – we are so big that the U.S. Government will not let us close down. Sound familiar.
Once you control the supply – you control the price. This is only one example. OPEC is at least upfront about price fixing “we are going to cut supply so that we can increase the price.” The U.S. companies respond “we cannot control OPEC, but it is so expensive to do explorative drilling that we will just have to go along with OPEC, even though we highly denounce their practices.” RIGHT.
Now that all this consolidation of companies has been allowed they control the marketplace. So when you are going to speculate in a commodity, a stock or whatever – you are subject to your speculation in that commodity being controlled by the manipulation of that commodity by a few.
What Problems This Create For Appraising. I would like to refer you to the November 2008 Newsletter as follows:
“We have been in a recession for about a year so we probably have another 1 ½ years to go before we see a through and then an upturn. So about a year ago in our letter, we were warning about the automotive and how it was going to downturn the sale of large injection molders. In June when scrap was at $650/ton, we were telling you to watch out for an adjustment because it was overvalued. Large injection molders dropped and scrap prices tumbled down. But it doesn’t help to send out to you a warning letter when it has already happened – it’s too late, you are already into the deal. You need to know when something has topped out and will at some point will correct. Scrap steel was historically at the $50-$60/ton range, bottom out at $25/ton and top out at $100/ton. So you can see that when it is at $450/ton, we are telling you to watch out. It’s nothing new – the stock market did it – the housing sector did it. We’ve had some food processing sales where at the first sale, stainless steel was at 71 cents a pound, 2 weeks later at a Tuesday sale, it was 17 cents a pound and at the Thursday sale, it was at 3 cents a pound.”
This volatility, especially now, supports what I have been saying for the last 20 years. “When you are appraising, you cannot appraise for today’s market, but instead appraise on an average marketplace. Your adjustments are made on long term changes of marketplaces.” If a machine normally sells for $10,000 and will vary from $15,000 to the absolute high when you cannot get the machine; to $7,000 as a low when a dealer buys – then we have always approached the appraisal process as follows for appraising equipment as a new loan. If we are in a very high market and the machine is selling for $15,000 – we are appraising at $12,500. If in a low market at $7,000 – we are appraising at $8,000. If the appraisal is for the work out department, then we are appraising at the exact level it is selling for at that immediate point in time.
I understand the argument that it is not my responsibility to perform that function – which I disagree with. If you know in your heart that something is overvalued and the price is too high; then I feel it is my absolute responsibility to make that call.
Another example is the oil industry. When the oil industry mutually decided to raise prices; of course what followed was a rush to pump as much oil out of the ground as they could. There was a boom in the sales prices of Vertical Boring Mills & Long Bed Engine Lathes. 1940’s 8’ Vert. Boring Mills were bringing $150,000 at auction when normally they would be in the $25,000 – $50,000 range. So how do we tell an owner when we are doing a loan appraisal that “Yes, I know your machine is selling at $150,000, but I can only figure it for $65,000.” Well, the oil boom lasted for about 6 months and then dropped off as well as the prices for these oil machine tools. But something interesting has happened: since almost all American made machine tools have gone out of business (Bullard, King, Axelson, etc.), the buyer is only left with rebuilding used 1940’s machine tools which has also exaggerated the prices.
Change in Auctioneers. This is not a new change since it really started about 10 years ago. Used machinery dealers needed to expand their ability to move equipment quickly since a CNC Machine depreciated quickly and the onset of an owner being able to sell their equipment online by offering their equipment to a worldwide marketplace and circumvent the dealer. So many used equipment dealers became auctioneers to combat this problem. It wasn’t anything noticeable during the good times but it is now. Many auctioneers, who are also machinery dealers, set a price that “if it doesn’t bring this price, I will just put it into inventory” which is not divulged to the buyers.
So you have the auditor writing down prices that are later put in publications announcing auction prices, when a stamping press gets run up to $250,000 when the last legitimate bid was $25,000. As first viewed “wow, he got a lot of money for that equipment.” But, the problem that we are seeing is that the buyers are getting to the point of ‘why even go – I will just wait till the sale is over and I will call and find out what’s left over!” It’s starting to affect the buyers in the original concept that “everything will be sold to the highest bidder” and in turn is changing the industry. You want the buyer to come to the sale with the idea that “I’m going to try to get this thing real cheap!”; which plays into getting good auction prices. But once they assume that it will be protected, then the buyers just stop bidding and expect that it won’t be sold and will just wait till after the sale.
In general, all industries have dropped to varying degrees, and the first 6 months of the year have (for the most part) presented some disappointing numbers. It takes awhile for equipment to come on the marketplace once a recession occurs. We still have a lot more equipment to sell, but there are signs in the horizon that we will probably bottom out by the end of the 4th quarter 2009 and may even see some active purchasing. This is also basically what the stock market is telling us.
MACHINE SHOP
Please refer to our July 2008 Newsletter as follows:
“Still doing well but can’t help but think this is only promoted by the aerospace industry. Boeing has had some delivery problems on its 787. These are the orders that catapulted Boeing and the U.S. aerospace industry; but if these problems are not corrected and with the change in administrations look for the aerospace industry to correct in 2009 . Yes I know that the contractors have defense orders until 2012 but orders can be put on hold (ie. the Carter admin. and the B-1 bomber).”
Machine shop maybe only dropped off 10% but look for aerospace to really drop off. The following factors have created that conclusion. 1. The change of administration means less defense spending. 2. The Corporate & Regional jet boom fell off because of the financial crisis (except for Nancy). 3. The delay of Boeing 787 could be a huge problem. If Boeing realizes that this thing may have structural problems, or people will be just too afraid to fly it, or the airplane orders are just being cancelled – then Boeing will have some major problems.
We had purchased a CNC Machine Shop in November 2008 with a lot of Haas CNC Machine Tools in it. We had to put the sale off until March of 2009 because some orders needed to be completed. In February of 2009, Haas had a surplus of inventory and dropped its prices 20-30%. Most of the other machine tool manufacturing (Mori Seiki) did the same. So you can imagine our concerns about the sale in March. We lost about 4% on a $1 Million purchase. Not going to kill you, but just leaves a bad taste in your mouth. Most auctioneers during those first 3-4 months of 2009 went thru the same pitfall. The good thing is now Haas sold the surplus and has raised his prices back up to ’08 levels, but just making the point – “when you see a new price quote, there is about 20-30% to play with.” The same thing happened in the 80’s recession because of the oil boom/bust.
PLASTICS
Rotten – especially in the high tonnage molders due to the automotive industry. We had a sale in June with (2000) Cincinnati 250 Ton Electric (not hydraulic) molders were bringing $20,000 – $25,000 which we were very happy with. We have had (3) Plastic Injection Molder sales – and the old moulders are interesting. A 500 Ton Molder is bringing $2500, which we used to figure as $0 when scrap was $50/Ton. But now at $150/Ton it is worth someone to scrap it out.
This is why lately when we appraise obsolete equipment we try to let you know what the scrap price was that day. Buyers are very selective now and the molder really needs to be within the 7-year old range to attract interest. Also the bigger it is – the worse it is, due to power, moving & storage costs.
WOODWORKING
I guess there are a few left, but not many. We are starting to see a trickle of work coming back because of long term quality of the goods & delivery times for Asian products. Woodworking will survive, but on a much smaller scale than before. The high end, low production, low overhead guy will make it and lumber mills will return when housing returns.
PRINTING
I don’t want to talk about it. OK I will. This industry is being hit by the double whammy. 1. Recession has been deep enough that people are not looking at advertising as a way to attract buyers. 2. Transformation of how media is presented to the consumer. Media has left the ground level and has moved up into the airwaves. Another industry falls to the computer age. People just don’t use printed material as their source of information. We have seen publications that we used to advertise auction sales, close down. People read books on a handheld. The size of a newspaper is about 1/3 of what it used to be, because who is going to advertise in a newspaper. Interesting to see how much of a newspaper is news. The newspapers are going to have to double their charges for a daily paper.
I have noticed something interesting. We have had sales where we advertised in a nationwide trade journal and sent out email blasts – same old story. But, we recently bought a trade publication mailing list in addition to our list for a sale and it doubled our attendance. So there is something to be said for receiving a published notification as compared to an email blast. So even though the trend is to go over the internet; I do believe you will see a return to the published material. The main obstacle in the way is the postage rates.
We were always worried about the digital press taking over, but it was the change in media presentation that changed the printing industry. Digital presses are about 1/3 of the price and size of a paper press and will continue to have its place. I don’t know how much of a marketplace there will be for a $3 Million sheet fed press & a $12 Million web press. Printers have always been high equipment cost/low profit margin guys anyways; and these numbers just don’t seem to add up.
FOOD
Maybe only, if any, down 10% from its high point of a year ago. But, there haven’t been a ton of sales, so when we do a food sale; it is almost an automatic success.
SHEET METAL
Having a real tough time on the high production side. CNC Fabricators are tough right now and so are all presses, S.S.D.C. & O.B.I. are all tough to sell because of automotive. If automotive had started closing all the plants that they would have had to if they hadn’t been bailed out by the government: it would have been a blood bath, so I guess mothballing a plant is a better alternative than scrapping it. Stamping & O.B.I. presses are probably down 50% from a year ago, where press brakes and shears are only down about 20% from a year ago.
CONSTRUCTION & HOUSING
– Empty –
GENERAL
Hopefully a new Congress will do what needs to be done to bring industry back to the U.S. Hopefully money will loosen up a little for the companies that deserve it. Hopefully the investment funds will have to make money to attract investors. Hopefully corporations will only be allowed to present one set of books to the public – the same ones they present to the IRS. Hopefully Congress will start enforcing the Anti Trust/Price Fixing Acts. And hopefully we will have term limits on Congress and start paying a new group of Congressmen a decent pay so that we can attract some people to Congress that will work for us instead of themselves.
Or we can sit back and hope it all fixes itself.
Sincerely,
TAUBER ARONS, INC.
T/A APPRAISAL, INC.
STEVE W. QUALE
Sq/cmm
Well if you got the chance to watch our distinguished Congress at work at the finance sub-committee headed by the Honorable Barney Rubble from Massachusetts. What happened? Why weren’t we told? Which Republicans are responsible for this disaster?
Then you have the other side of the fence; Paulson who says “This has to be done immediately because I had no idea this was going on” or “How am I going to save Goldman Sachs, make it a bank, so I can be the CEO when I get out of this mess I have ignored.”
But somewhere along the line, the Executive Branch was informed how serious this is. Mr. President you have a group of major banks that are going to have to be taken over by the FDIC and if the general public makes a run on its deposits in those banks, the FDIC will not be able to cover the deposits. And when that occurs, panic will take over and people will make a run on deposits in banks that are in good condition. So instead of the FDIC taking over those failing banks, let’s give $700 Billion to the surviving banks that we choose to survive and we will make them buy out the failing banks so the FDIC doesn’t go broke. By the way, let’s also tell everybody that the FDIC will increase the insured amount from $100,000 to $250,000 per account. Did the FDIC just win the lottery or how do they double their insurance premiums overnight?
I mentioned PANIC in the last report in June and that is all they are trying to prevent. This was not to be a cure, it was the only tourniquet they could apply to the wound to prevent disaster. But what the government doesn’t understand is that everyone realized this was all horseshit and the only reason there was not a run on the banks is because we all know what that would do. We could all run to the banks, grab our money and then what are we going to with it? – put it in your backyard and have the dollar become worth 10 cents? Housing is down, stocks would dump; there would be nowhere to go with that money and what saved us from a severe crisis is the general public’s understanding of what the consequences would be if we made a run on the banks (not the government’s bailout).
We have been in a recession for about a year so we probably have another 1 ½ years to go before we see a through and then an upturn. So about a year ago in our letter, we were warning about the automotive and how it was going to downturn the sale of large injection molders. In June when scrap was at $650/ton, we were telling you to watch out for an adjustment because it was overvalued. Large injection molders dropped and scrap prices tumbled down. But it doesn’t help to send out to you a warning letter when it has already happened – it’s too late, you are already into the deal. You need to know when something has topped out and will at some point will correct. Scrap steel was historically at the $50-$60/ton range, bottom out at $25/ton and top out at $100/ton. So you can see that when it is at $450/ton, we are telling you to watch out. It’s nothing new – the stock market did it – the housing sector did it. We’ve had some food processing sales where 3 weeks ago at the first sale, stainless steel was at 71 cents a pound, 2 weeks later at a Tuesday sale, it was 17 cents a pound and at the Thursday sale, it was at 3 cents a pound.
So in general, what you are seeing now is the opposite of speculation. It’s like when a building is on fire, you see everyone running out and firemen running in. That is why you see Warren Buffet running in because now everything has become undervalued. Because we had some greed, get caught with its hand in the cookie jar doesn’t mean that production has gone to zero.
Where I feel the base of the problem started in the early 90’s was that industry was leaving the United States. This got disguised in the mid 1990’s because of the internet and P.C. industries took the place of our core industry. So in the mid 1990’s you really didn’t notice the loss because of the replacement industry. But in 2000 everyone had a computer, has an internet, had a software, had a gameboy which created a leveling off in the industry and the realization that these industries were overvalued, with the result of a recession from 2000-2004.
But underlying this is what happened. You never hear of the term Gross National Product anymore. Caterpillar may sell a D-8 for $350,000 with a profit margin of $100,000. Now Caterpillar’s margin profit still looks good at $100,000 a unit, but what is missing is the $250,000 of production costs in the U.S. that increased our Gross National Product. Every year, the Gross National Product was an important figure but over the last 10-15 years, you never hear about it. It’s kind of like our unemployment rate being 5% when it is probably more like 10%. I really don’t feel our country will be healthy again until manufacturing returns to the U.S. Until then we will continue to live off speculation. We have become commodities investors (not commodities in the pure term sense) but in the concept of speculating of what could possibly happen in the future. What is missing is the core growth of a corporation inside the U.S. We need to protect industry in the U.S.
I would like to see how Greenspan’s comments that were made at the CFA a few years ago would be accepted if made today.
In general all prices at auction sales have dropped anywhere from 10% to 50% from 6 months ago.
MACHINE SHOP
Prices off about 10% and of all industries except for food is probably doing the best. In the last (2) newsletters I have said to watch out for Aerospace. I will repeat – “watch out for Aerospace” – it has topped out. I don’t care how many defense contracts you have; with the new administration, defense is going to be chopped. Also watch out for Boeing if they don’t clean up production delivery schedules on the 787. The great thing about machine shops is that it crosses over into so many industries. The Aerospace guys have always juggled commercial and defense work depending on what’s hot. Kind of like farmers – they produce the product on their land that gives them the best return.
PLASTICS
Probably down 20% from 9 months ago. Mainly on the large injection molding and extrusion side. Sounds like a lot but when you think of a (2000) 900 Ton Molder selling for $200,000 nine months ago – it doesn’t sound all that horrible at $160,000 now based on what has happened in automotive and financial sector. With resin prices starting to ease it may bring some relief.
WOODWORKING
Down 50% from a year ago. And now the lumber industry is getting hit. The lumber guys were still doing well when furniture left, but now with housing down and overseas not gobbling up our natural resources – they are starting to feel it.
TRUCKING
Down 20-30% from 6 months ago. Watch for the price of new tractors and trailers to drop.
METALS
Down 90% from 5 months ago. Doesn’t mean that I-Beams, Sheet Stock, Coil Stock , etc are not going to be used or new price is going to drop that much. But their cost of recycled products is going to drop dramatically. So as long as they didn’t play the commodity’s game and bought a bunch of high priced inventory – they will be fine. But after awhile, competition will grind on each other and slowly prices will drop. Not a bad thing. Metals are a core of industry which should reduce the costs of core goods and reduce inflation.
FOOD
Up 20% from 6 months ago. Why? – They didn’t leave the U.S. Some of it was the crazy high costs of stainless but every sector of this industry is going great. In 50 years, watch out if we concrete over all our good agricultural land.
CONSTRUCTION
Prices finally started to come down over extremely inflated used prices. Why it will take a little while to really be impacted is because of long term infrastructure and building projects that take a while to be completed. Small housing contractors may have to provide service to their clients, do housing redo’s or go back into the movie set decoration business.
CLOSING
This is going to sound crazy but I am more optimistic that I was 9 months ago and we were in a recession then (not the technical definition of a recession but a downturn heading into a recession). We are slowly starting to see some manufacturing come back to the U.S. Some of it happened because of our dollar devaluing but other reasons I feel are more long term. It is really a hassle doing business outside this country. You never have a deal so that you can go forward and concentrate on your own business. You spend most the time renegotiating written contracts. You can’t go full speed ahead because the rug may be pulled out from under you. The main difference between our country and others is a criminal and judicial system that is enforced. Governments of other countries are unstable and you may end up riding the wrong horse. Increased labor and shipping costs are starting to equal the costs that were originally saved.
All our federal and state governments have to do is make an effort to get industry back, rather than taking the pompous attitude that we don’t need you anymore. All our arrogant politicians have to do is make an effort to understand the business problem instead of “my way or the highway.”
Sincerely,
TAUBER ARONS, INC.
T/A APPRAISAL, INC.
STEVE W. QUALE
Sq/cmm
With $200 worth of software you can now alter a PDF document. And yes, I have heard that if you apply the “double secret whammy” no one will be able to alter the PDF document. Which is the same thing that was said when people first started using a PDF document “it is secure and can’t be altered!”
Any time you start relying on electronically transmitted documents, you are running a risk. The risk is diminished if you only review documents from the original sender. I would suggest a verbal confirmation with the appraiser that the document you received is the same that was sent. With all the borrowers applying to the syndications of multi-lenders, a telephone call or insisting on seeing the original document may be in order. We have always sealed our numbers on our original document.
Any suggestions as to how to secure electronically transmitted documents would be greatly appreciated on files we send.
GENERAL
It looks like that recession we mentioned about in the last letter in October 2007 finally arrived. But, what you are not seeing is a ton of auction sales (yet) that you normally see with an economy like this. I feel this is due to the venture capital and hedge funds are gobbling up the sick companies that would normally be sold at auction. The Fund Managers are doing the same thing that the Stock Fund Managers did in the ‘90’s. “If you buy mine – I’ll buy yours.” And this is what seems to be happening with these investment funds so that each time a piece is sold it is sold at a little higher value and the spiral continues upward. But when the chips are called in and everyone realizes that what they have is way over-valued – then the spiral goes downward and it becomes a game of musical chairs.
The banks are seeing this and with the problem they have had with housing they have tightened credit. The government is concerned that if credit is tightened too much, the downward spiral could steepen and produce the one thing they don’t want – PANIC. You can feel it – everyone is starting to grab for the money and not let go. The next six months could be interesting. The Feds can’t drop rates much more and it may just have to come down to “open the curtain, let’s see what we have here and deal with it.”
We had a die casting shop in May and we knew how bad the industry was and figured the die casters for $1,000 – $2,000 each. We had 22 die casters and only 4 went to users. The rest sold to scrap dealers who paid $4,000 – $7,000 each. Yes, they were worth more dead than alive. Scrap used to bottom out at $25 per ton and top out at $100 per ton with it usually around the $60 per ton range. In October 2007, we mentioned that scrap had doubled – well now it has quadrupled. Scrap was at the $400 – $460 per ton range and copper was up to the $6 per pound level. What concerns me is that in talking to the scrap dealers, they are saying it is going to continue to go up and won’t ever come down; – which means it is going to drop soon. As soon as someone says the stock market will always go up – that’s when you know it’s going to drop soon; as soon as someone says that the housing prices will continue to go up-that’s when you know it is going to drop soon—– because in everyone’s heart of hearts – we all know when something is over-valued.
MACHINE SHOP
Still doing well but can’t help but think this is only promoted by the aerospace industry. Boeing has had some delivery problems on its 787. These are the orders that catapulted Boeing and the U.S. aerospace industry; but if these problems are not corrected and with the change in administrations look for the aerospace industry to correct in 2009 . Yes I know that the contractors have defense orders until 2012 but orders can be put on hold (ie. the Carter admin. and the B-1 bomber). What will be the new aerospace industry are the orders from outside of Boeing for the regional and corporate jets such as Bombardier etc. We had a CNC Shop and even the older CNC equipment did well. New CNC equipment pricing has increased therefore driving up used CNC equipment prices. No real changes except milling and turning is being incorporated into one machine.
SHEET METAL
We had a CNC Fabrication Shop in May and the CNC Press Brakes did fantastic. Accupress is giving Amada a run for its money as far as used resale value. CNC Fabricators and CNC Lasers may be off approximately 10% from where they were.
WOODWORKING
Probably the most affected. Furniture, housing, overseas has all made it next to impossible to compete. Prices are down about 30-40% from six months ago. We did a large woodworking shop in Tijuana and it was difficult because of production related equipment. Most U.S. shops have an affiliate shop in China or Vietnam for large production orders and their local shop is for fill in if overseas orders get delayed. The delay in delivery is the only fault I have heard about overseas products.
PLASTICS
Large tonnage injection molding machines are having a real tough time. Size, cost to move, energy drain, automotive, resin prices have all attributed to a tough market place.
Blown Film is strange. There haven’t been any auction sales but dealers are saying the companies are not buying any equipment with a recent plastic bag sale having mixed results. The extrusion side of the blown film business has had a tough time where the downstream equipment (bag making) has done well. Grocery store bags at markets are talking about charging for plastic bags and you are starting to see shoppers use canvas bags that are brought with them to the market. It may take awhile for market shoppers to remember to take the canvas bags with them but when they do, it makes sense cost wise and environmentally.
FOOD
Prices are great because there haven’t been a lot of auction sales in this industry. But what we are starting to see is that most of the majors are starting to send out to co-packers. This is a tough decision for a food company to make because it only takes one product scare to ruin a label. If 50 people die from “Mama Ragu’s” Ravioli it also kills the entire product line and the recovery period can be devastating.
CLOSING
The last recession April 2000 – June 2004 was the adjustment from the over-inflated stock prices. But what was unusual was the recovery. Usually a recovery has a lot of pop to it. From June 2004 to June 2007 things were better based on where they came from but not great. What seemed to spur the recovery was housing instead of the manufacturing sector. Housing is really a matter of trading up or speculating on over-inflated values. So in the last recovery period the manufacturing sector recovered but really didn’t seem to expand because most of the manufacturing left the country. It seemed like 2 steps downward (2000-2004) and one step upward (2004-2007). Going into this recession it looks like another couple steps downward.
I know everyone wants to focus on gas prices and housing but housing was really just a normal adjustment from over-inflated values. The gas problem is a little different. (1) The quickness in the rise of prices haven’t given companies time to pass on those increases. (2) This rise in price is going to affect everything (food, transportation, energy bills) but it’s OK because our government has explained to us it hasn’t affected inflation??? (3) These price increases are being artificially manufactured by price fixing and controlling the supply of oil to drive up prices. Have you seen any lack of gas or lines of cars trying to get gas? These prices are not from a lack of supply but plain and simple “price fixing.” With our reserves where only 5% is being used – at what price do you really start using the U.S. reserves? Or are they trying to tell us “why use it now when it is going to be a lot higher–then I’ll use my reserves”. Or make the public suffer enough so that I can drill in areas where they’ve stopped me before. Their gamble is being governmentalized but not much of a gamble due to their Congress ties. The only good thing I can see is that we will be forced into using another source of energy (nuclear, hydrogen, etc.) which may be our reward. But until then, who will buy a motor home or a gas guzzling car; maybe we will think twice before we jump on a plane or get in our car. But the net effect is that these fuel prices are going to create a bottom swell of inflationary prices that will effect every facet of our lives.
The other happy factor is if credit keeps tightening, you may see interest rates climb due to less availability of capital. When you write off $30 Billion it’s not just an accounting transaction. “Now that I have written it off everything is OK.” That $30 Billion has to be replaced with either 1.)An outside infusion of capital . 2.) A higher return of your assets (higher interest rates) or 3) An increase in the size of the loan portfolio or a combination of all of the above.
But to get that infusion of capital, it may cost you ownership or you may have to pay higher rates to get the funds,– therefore charging higher rates when you loan your money will make you noncompetitive. And when that happens, it makes it pretty hard to increase your market share.
Sincerely,
TAUBER ARONS, INC.
T/A APPRAISAL, INC.
STEVE W. QUALE
Sq/cmm
The sale at Boeing was another example – (1986) Cincinnati 10-axis CNC gantry machine centers were bringing $2,250. No, we are not missing any zeros. New, 15 years ago, that machine probably cost $1,500,000. The (1981) K&T data mill 700 CNC mills were bringing $1,500-$2,500 and this is a machine that doesn’t take up a lot of space like a gantry machine center. We recently conducted an auto. screw machine sale, but this industry seems to be doing well. Acme 1 1/4″ machines in the 1940’s are still bringing $12,000-$15,000, which has been a consistent price for 20 years.
Here is a valid point…We are now in a transition stage of the value of used machines – where used machines increased in value because of inflation – they decrease because now we are in a period of deflation. The lender or the appraiser can no longer be saved by inflation. Instead we are at the mercy of a machine becoming older; new machinery is now cheaper; and a machine is now being outdated by a faster more sophisticated machine. But the real concern is since borrowers have been geared to lesser payments because of longer terms – how are you going to get them back to shorter terms to cover the deflation and the devaluation of equipment? – even without considering an economic downturn.
SHEET METAL
This industry seems to do well even if the equipment is being sold in an aerospace machine shop. Example – we had a (1947) Cincinnati 10′ x 3/16″ power shear that brought $16,000 at the Advanced sale. That is the same price that this machine has been brining at auction for the last 15 years. HOW COME. NO COMPUTER. Certain repetitive processes such as shears, presses, plastic injection molding, automatic screw machines are basically the same machine as they were sixty years ago.
So what’s the gimmick? Finance machinery that is not being outdated by technology? Not very glamorous; and you may have to start financing equipment in Mexico, but it is better than being into a deal with debt outstanding of 50 Million dollars and your only collateral is a PC computer, a desk and a chair, unless recovery of collateral is not a concern. Large presses are always a little difficult in the West because, we for the most part, are not a heavy manufacturing industry on the West Coast. The main reason is the size of the equipment equating to high per foot land costs on the West Coast and the cost to move. We may be in a new price deflation period, but the cost to transport and store has continued to go up.
Computer panel shops that use CNC fabricators age like any other CNC machines. CNC laser cut & CNC water jet has gotten popular for certain finishes on a product compared to a punch
PLASTICS
A real concern. The oil prices have affected the prices of the raw material resins that are used by all plastic manufacturers. So if the oil prices have gone up 30% in 4 months and in turn your raw material costs have increased that much – it becomes pretty difficult to increase your prices that quickly. Compounded with the higher interest rates is the lower retail demand – well, you can see their problem. But the real effect is that plastic resins are such a large part of everything we own that if the resin prices stay high or become higher, it will, at some point, produce an inflationary spiral. Of course this is not on the government’s agenda, so there will be some type of government pressure to reduce oil prices.
But the problem is not going away for the plastic manufacturers and we are starting to see it. We signed up 3 plastic sales in one week and there have been some recent large auction sales of injection molding:
1995 Toshiba 500 Ton Molder w/ Robot. $80,000 – $95,000
1993 Toshiba 500 Ton Molder w/ Robot. $75,000
1992 Toshiba 500 Ton Molder w/ Robot. $60,000
1992 Toshiba 390 Ton Molder. $45,000
1994 Toshiba 390 Ton Molder. $52,500
1995 Toshiba 1950 Ton Molder. $280,000-$370,000
1987 Toshiba 1450 Ton Molder. $120,000
1992 Toshiba 720 Ton Molder. $95,000
1984 Toshiba 720 Ton Molder. $25,000
Injection molders are not enhanced with CNC since it is a long run production press that they are the same machine as for the last 20 years. But to be productive they need to run 3 shifts a day and they tend to depreciate fairly quickly due to use not technology. Ten years seems to be the good life of a molder and if a machine is older than that, the price drops quickly – similar to CNC machines. The two recent large injection molding sales went well but I do feel there will be quite a bit more equipment dumped on the market place and in turn the prices will decline. Really watch your plastic accounts because they are usually a leader of what’s to come for the entire manufacturing economy.
WOODWORKING
There haven’t been a lot of sales, but we are hearing that the furniture industry is slowing down on the East Coast and there should be some increased auction sale activity. What does seem to be doing well are the cabinet manufacturers because of the long run of a good housing industry.
PRINTING
This industry also seems to be pretty stable and there haven’t been a lot of sales to track. The one area that really changed is business forms presses such as Harris presses and collators. Much of this area is being done on a personal computer and has affected the market. This industry has also converted to laser business forms and there was a sale recently where the laser business form printers went through the roof. But technology is changing quickly in this area and the graphics segment. Many companies are doing their own graphics in-house with the cost of new continuing to become more affordable.
FOOD INDUSTRY
We had purchased a large 3-day sale in Stockton and it went very well. We bought another food deal in Michigan and don’t expect it to do nearly as well. The reason? The bankruptcy filing of Tri Valley Growers which is one of the largest growers in the US. This has put the food processing industry in a “wait and see” stage. So until the future of Tri Valley is resolved, I don’t think you will see buyers purchasing much used equipment.
TRUCKING
Large downturn due to the cost of fuel. The companies that are highly leveraged probably are going to have real difficult times due to their cost of fuel.
CARDBOARD BOX
Strong downturn due to alternatives to boxes. Manufacturers have tried to venture into niche products.
VIDEO
Due to the inception of high definition TV, you are seeing most of this industry scrambling to acquire the cutting edge hi-definition equipment to stay competitive. This is the smart move, but the equipment is very expensive and as more equipment comes on the market place, the cost of new will drop and be outdated by the new state of the art equipment. You will need to have short term debt structure so that you are not caught with high balances on outdated equipment. Nobody is going to want to go backwards in this industry once they convert.
SCRAP METAL
Most all companies have adjusted to the lower scrap prices and they are not holding onto inventory purchases at $100/ton when they now buy at $25/ton. But the same problem exists. How do I cover my overhead when my gross is 1/4 of what it used to be? At auction sales of other industries, we could always count on selling everything, because the worst case scenario a scrap dealer would buy it. With rising fuel, labor and trucking costs – this is not always the case. If you cannot abandon the equipment, you may now have clean up costs.
GENERAL
We are in a transitional stage of a wait and see phase. With the elections, fuel prices, rising interest rates, stock market, it is hard to appraise equipment or predict what will happen the next quarter. We are coming off a long run of great prices from a great economy. Many companies that do close are purchased by a user, so there haven’t been a lot of sales to get a good read on. If that bulk purchaser or the equity money dries up, we should get a better indicator where used prices are. If new equipment purchases no longer extend the “no down and no money for six months terms” then it should drive the price for used up. Same idea as Home Depot doing well during a downturn.
But the US., especially California, is becoming less and less a manufacturing country. So we as liquidators are becoming more and more dependent on the out of country buyers. But to do this you must have a large sale and also provide the capability to bid online. Tauber-Arons has been doing auction sales on a live and simultaneous internet bid basis and in the right situation, we have found it to be a good promotional tool.
We still find that the larger buyers still attend the sale but the activity from the internet increases prices overall. I guess this consolidation trend will continue until the companies become too massive to operate economically or until the Justice Department wakes up.
Talk to you next in January.
Sincerely,
TAUBER-ARONS AUCTIONEERS
STEVE QUALE
SQ/cmm