Thursday, May 28, 2009

The average Joes aren't paying close enough attention

The following is not meant to be a political article, but intended to defend free markets.

On May 1st, the rule of law, the bedrock of our legal and economic systems was chipped. Instead of company ownership being redistributed based on the provider's place in the legal capital structure, as the law requires, Chrysler's redistribution of assets took place based on a very subjective criterion. By shafting bondholders and undermining the bankruptcy system, the legal system may change the way investors view different investments and the risk of those investments.

Using the public's economic fear of the current recession as a weapon, the government took Chrysler from its rightful owners: Secured loan holders (banks, stockholders, mutual funds, hedge funds and pension funds). They gave it to struggling, very sympathetic, $40-an-hour earning blue collar workers, who will now be earning $15 an hour (Chrysler's employees and the United Auto Workers Union). Chrysler was stolen from its rightful owners.

Bond investors spend time studying bond covenants, which spell out how assets are disbursed in the event of a bankruptcy. Secured senior lenders get the secured assets; unsecured, junior bondholders and loan-holders follow (as a part of leveraged buyout, Chrysler had no unsecured outstanding bonds or loans); unions and employees are next in line; and equity investors get whatever is left, which in this case would be almost nothing.

For 200 years the United States has had a well functioning bankruptcy-court system that was designed to make sure that division of assets is equitable. That system has now been threatened.

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Wednesday, May 20, 2009

News that lulled the markets:

Monday, May 18, 2009: As in most weeks before a holiday, there appears to be little earth shattering news. However, with the lack of bad news, the markets made their own news by posting stellar one day returns: DJIA +2.85%, Nasdaq + 3.11%, S&P 500 +3.04% and EAFE +0.37%. Oh those international guys never seem to be in step (EAFE).

The best news of the day for me was being on the cover of Lansing State Journal's Business Weekly, at .

Tuesday, May 19, 2009: The Supreme Court agreed to hear a potentially significant appeal from Conrad Black., the jailed former newspaper CEO who was convicted under the broadly worded anti-fraud law that makes it a crime to deprive someone of honest services. Black was prosecuted for skimming millions of dollars from Hollinger International and the Chicago Sun Times.

His attorney says the vaguely worded criminal prohibition allows prosecutors to charge corporate executives and public officials with crimes, even without proving they wrongly took money for themselves.

This sounds, to me, like something that should be used on some of the CEOs from the banks and companies that screwed up the economy last year.

Another item Tuesday was an article on Ford adapting the EcoBoost system that BMW and Audi have used to create more energy efficiant cars. They are going to use it in their Lincoln MKS and MKT, Ford Taurus and Flex crossovers. In 2010 they plan to put it into their vehicle of choice for the Millionaire Next Door, the Ford F-150 pickup.

The EcoBoost combines turbocharging with the direct injection of gasoline to allow Ford to replace larger engines like V8s with smaller, more fuel efficient V6 engines without giving up much performance.

Wednesday, May 20, 2009: The Vex, a stock market confidence gauge, is showing investors are more comfortable and think they see more clarity in the stock markets than earlier this year. These same investors have less fear of the stock markets and are less panicked.

All this is as we appoach the General Motors chapter 11 filing deadline. Is it just me or does this look like a possible train wreck going somewhere to happen?

Wednesday, May 13, 2009

News to ponder:

Saturday, May 9, 2009: 9 out of 13 banks going through the Federal Governments's stress test did not need to take more money.

Monday, May 11, 2009: Over the last 10 years, nearly 2 out of 3 actively managed mutual funds underperformed their category benchmarks after fees and taxes.

Tuesday, May 12, 2009: President Obama's top antitrust official announced that the administration would restore an aggressive enforcement policy against corporations that use their market dominance to elbow out competitors or to keep them from gaining market shares. This is a direct reverse of President Bush's administration's approach, which strongly favored defendants against antitrust claims. It returns to a policy that led to the landmark antitrust lawsuits against Microsoft and Intel in the 1990s.

Many smaller companies complaining of abusive practices by their larger rivals were so frustrated by the Bush administration's antitrust policy that they went to the European Commission and to Asian authorities. May 13, 2009, the European Union regulators slapped Intel with a $1.45 billion fine today for unfair antitrust actions undermining rival chip maker AMD.

Wednesday, May 13, 2009: April home foreclosures shocked everyone with a 32% increase over the year before and 1% higher than last March's record breaking levels. There was a record 342,000 foreclosures. More than 1.3 million homes have now been foreclosed on since the market meltdown began in August 2007. The top 10 states were in order highest to lowest: Nevada, Florida, California, Arizona, Idaho, Utah, Georgia, Illinois, Colorado and Ohio. Hooray, Michigan is not #1 in something!

The stock markets lost money for the last 3 days. It will be very interesting to see how the stock markets react as we get closer to General Motor's Chapter 11 filing deadline, June 1, 2009. I plan to be very careful for the next 4 weeks.

Thursday, May 07, 2009

News you can use:

Monday, May 4, 2009: Warren Buffett says he sees the economic slide ending, but won't put a timetable on recovery.

He believes Treasury Secretary Paulson and Fed Chairman Bernanke acted honorably and intelligently when they forced Bank of America to close the Merrill Lynch acquisition. Considering the fragile situation at the time, had Bank of America been allowed to invoke a major adverse change clause and back out, it may have been disastrous for the financial system. And although they have sympathy for Wells Fargo's complaints about being forced to accept TARP money against its will, by and large they believe the government handled the financial crisis well.

Inflation: The aggressive stimulus policies will have consequences, and might produce inflation. The US borrows from the rest of the world and will have an incentive to reduce the cost of that debt by inflating the currency. It is the easiest way out, and therefore the most likely. Incidentally, US revenue from taxes this year is going to be lower than last year; and so the people actually paying for the AIG bonuses and all those other expenditures we had recently are the Chinese and other foreigners who are buying US government bonds. They will see their purchasing power erode, perhaps substantially. The impact of foreign exchange rates is unclear since other countries are doing even worse than we are, running even larger deficits per GDP in order to offset falling demand.

Future of the world's economy: While Buffett has no idea what the near future holds, he believes that, over time, people will live better. We are able to produce today much more than our ancestors did, even though they had the same inherent intelligence and natural resources we have. But our system unleashes human potential and that process has only just started. There will be greed and fear, but the trend will be improving. Despite all the horrors of the 20th century, with two world wars, political turmoil, a Great Depression and several recessions, US standard of living improved sevenfold. Our enormous human potential will generate much more progress, despite occasional hiccups.

Tuesday, May 5, 2009: Inflation: Kraft Foods, Inc., the world's second largest food maker, said first quarter profits gained 10% on price increases and cost savings. Net income advanced to $660 million from $599 million a year earlier.

I waited to post this week's blog for one day, because I wanted to know more about the following two items. They are the real news of the week.

Thursday, May 7, 2009: Associated Press: Some of the nation's largest banks will be scrambling to demonstrate that they can raise capital after results of government stress tests leaked out, showing many need more funds. The Treasury Department will officially release results later Thursday. The tests were designed to gauge whether any of the nation's 19 largest banks would need more capital to survive a deeper recession. It turns out many of the banks do: Wells Fargo & Co., Citigroup, Inc. and Bank of America Corp. all need billions more, regulators have told them. Citigroup will need to raise about $5 billion; Bank of America will need to raise $34 billion; Wells Fargo needs between $13 billion and $15 billion; GMAC, the lending arm of beleaguered automaker General Motors, is said to need $11.5 billion; Morgan Stanley is looking at between $1 billion and $2 billion. The Journal said at least seven of the banks will need a combined $65 billion. The entire group is deemed to need around $100 billion combined. Officials have said they will not let any of the 19 institutions tested fold.

The first test scenario envisioned unemployment reaching 8.8 percent in 2010 and housing prices dropping another 14 percent this year. The second imagined unemployment rising to 10.3 percent next year and homes losing another 22 percent of their value this year. But economic assumptions have changed since the tests were designed in February. Unemployment already has surpassed the 8.4 percent the test's first scenario predicts for 2009, which leaves some analysts wondering whether the tests were harsh enough.
General Motors, which faces a June 1 deadline to cut debt and expenses or else file for bankruptcy protection, on Thursday said it lost $6 billion in the first quarter. GM is losing $113 million a day. It had $11.6 billion in reserve as of March 31, 2009, but I think we have seen that would probably be gone by the end of June.

Thursday, May 7, 2009: General Motors, which faces a June 1 deadline to cut debt and expenses or else file for bankruptcy protection, on Thursday said it lost $6 billion in the first quarter. GM is losing $113 million a day. It had $11.6 billion in reserve as of March 31, 2009, but I think we have seen that would probably be gone by the end of June.

Many people were surprised that President Obama forced Rick Wagner to resign as the Chairman of General Motors. I was not. I believe that Mr. Wagner knew General Motors was going to file chapter 11 bankruptcy when it took the $15.4 billion from the federal government. I also believe President Obama found out about this and gave Mr. Wagner a choice of resigning or going to jail.

I can see no other option for General Motors than filing chapter 11 bankruptcy on or before June 1, 2009 and that, as I pointed out last week, is going to test the strength of the current stock market rally.