Saturday, October 11, 2008 0 comments ++[ CLICK TO COMMENT ]++

Miscellaneous Articles for the Wost Week Ever

Supposedly this is the worst week ever for the stock market. The short-selling ban was removed on Thursday so that is partly what made it look worse than ever. Anyone sitting on the sidelines waiting to short clearly jumped into the market on Thursday and made it seem worse than it really was. This is more of a one-time thing and likely to subside in the future.

Anyway some articles of interest:

  • GM & Chrysler consider a merger (The New York Times): A blockbuster merger is being considered, with GM possibly merging with Chrysler. The transaction may involve GM giving up a small stake in the merged entity to Cerberus, the current majority owner of Chrysler, and/or swapping GMAC. A mega-merger with Chrysler? I'm not really sure whether this can be executed successfully. They would need serious concessions from the unions since there is going to be huge overlaps that they need to eliminate. Furthermore, I am of the belief that GM has mixed branding strategy and way too brands, and this simply adds more brands to the company. For instance, Toyota, which is a similar size as GM, has only two brands--Toyota and Lexus--compared to GM's countless ones. This looks like a desperate move but these are desperate times for the American automakers. A merged entity would easily become the largest automaker in the world, ending up way above Toyota.
  • China considers letting farmers buy/sell land-use rights (The New York Times): Assuming they implement something concrete, this seemingly subtle change has massive ramifications. China's agriculture-oriented rural areas are inefficient, poor, and, well, let's just say it isn't much of a free market. Opening up these areas will help in the long run, although it may involve some short-term problems. The proposed moves will increase flexibility for the farmers, with them being able to sell their land rights and enter a new field; or buy up even more land and become a larger, more efficient, producer. Farming rules in most countries are antiquated and I suspect there is huge potential for wealth creation by reforming these rules. Other countries like India should also pursue such moves.
  • Russian oligarchs lose $230 billion (Bloomberg): Yes, it's not just you and me losing money. It's time to shed a tear for the billionaires who have lost a lot over the last year ;) It's amazing how heavily leveraged some of these guys are.
  • How government misuse their power (The Globe & Mail): It looks like the ultimate collapse of Iceland occurred when Britain used its anti-terrorism act to seize the assets of Icelandic banks. I'm sure this was in the interest of Britain and most British would agree. But I don't like the fact that they used the anti-terrorism rules--and this clearly is not a terrorist incident in any sense of the meaning--to seize the assets. The government will always lie when stripping rights and then use it for anything. This is why people like me are always critical of new laws to strengthen "freedoms" such as the Patriot Act in the US, or the Canadian Anti-terrorism Act, Bill C-7. These laws are more likely to be used in non-terrorism situations or against own citizens than against some foreign terrorist. (On another note, it makes sense why Iceland had to seek help from Russia. Britain clearly was against the Iceland view of the situation and the rest of Europe and America likely didn't want to take a public position contrary to Britain. The IMF or World Bank may still intervene but it's not clear what is going to happen in Iceland. Icleand, although very risky, is similar to what Marc Faber remarked about Argentina in 2001. The stock market has plunged and more importantly the currency has collapsed. This is a double bonus for foreign investors as they may be able to pick up assets at a low price. Companies with low debt and sizeable foreign sales (maybe those fishing companies) may be worth looking at. The interesting thing about Iceland is that the government didn't default on its debt. Rather, it's the private banks that have run into problems. Unlike many collapses in developing countries--Argentina, Russia, etc--this problem was created entirely by the private sector.)
  • Can Switzerland end up like Iceland? (Naked Capitalism) Switzerland is nothing like Iceland but there are some similarities. Their banks, particularly the megabank UBS, are infected by the subprime virus (and worse). These banks are very large compared to the country (kind of like Iceland but not as bad.) The country also depends on the financial services sector so things are likely to deteriorate on the economic front. Jim Rogers is bullish on the Swiss Franc but I wonder if he is overlooking the potential need for Switzerland to bail out banks that are larger than itself.
  • Fear gripping Tokyo (The New York Times): The fear over here is with mortgages (originally subprime but now Alt-A and commercial real estate) but the concern in Japan is the slowing economy. I am still in the minority in thinking that the economic concerns are overblown. Japanese industry is mostly cyclical so they will get hit but they seem better positioned than many other parts of the world.
  • Russia plans to buy shares in the market (The New York Times): Russia plans to start buying shares in the stock market soon. Usually this doesn't work but in the case of Russia it actually might. However, I feel that some of their tactics are misguided and simply going against the inevitable. For instance, if commodity prices are dropping, well, commodity profits and asset prices are going to drop. The article also notes that Russia will go into a budget deficit if oil drops below $70.
  • Jim Rogers Bloomberg interview (Bloomberg; click on link at top-right): A polemic on the current situation, but he still provides some non-mainstream views.
  • William Ackman takes positions in Wachovia and AIG (Bloomberg; click on link at top-right): I lost the post I was writing early in the week about this but for those who missed it, William Ackman took long positions in Wachovia and AIG. He thinks Wachovia is worth a lot more and bought it after the Citigroup merger announcement. He views the AIG investment as speculative and feels that a lot more value can be extracted from the assets.

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