Chris B

German Press: Fiat to Sign Deal with Opel, Not Chrysler

I queston Fiat's sanity for considering a deal with Chrysler.

Can anyone recall a joint venture between a European or Asian car company and one of the big 3 that didn't lose billions? GM-Saab - no. Daimer-Chrysler - no. Ford-Volvo - no. Ford-Land Rover - no. Ford-Jaguar - no. GM-Opel - no. These deals lose billions every time.

As for the rationale for an Opel - Fiat combination, this is a good example of why 70% of mergers destroy shareholder value. Honda and Toyota are capable of growing organically. All the others seem focused on merger gimmickry.

If they're smart, Fiat will try to pick up some cheap Chrysler real estate, dealers, and maybe a brand name in the bankruptcy auction. Perhaps the current talks are a stalling tactic to keep Chrysler and GM alive long enough for Fiat to get together the necessary financing. After all, they're at a disadvantage to the Chinese at the bankruptcy auction. The Chinese have cash.

Deflation Returns to Britain

"Deflation can be defined as the contraction of credit leading to the contraction of money supply. Global authorities are inflating 24/7 and articles like this one, highlighting falling prices, help give them license to do so. "
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Sorry, but you can't just take a word and decide that it "can be defined" to mean what you wish it would mean. Language doesn't work that way. Words are defined. See your Econ 101 textbook if you have one.

I believe you mean to use the term "money supply." For everyone else in the world, the term "inflation" means a period of broadly rising prices and "deflation" means a period of broadly falling prices. Prices can be related to money supply, for sure, but often move independently. They are separate concepts.

If it's the increase in money supply you are opposed to, just say so. If you think the increase in money supply will result in inflation, say so. But don't confuse people by making up your own definitions for words. I cannot understand why a grown man should be ticked off because everyone else doesn't use the definitions he made up for already well-established words.

20 Stocks with High Net Cash

Then again, all that cash isn't earning anything. Don't get me wrong, cash is certainly necessary to have a stable business, but keep in mind that as an investor, you are buying that cash when you pay for shares, then you're covering payroll for a whole corporation to sit on it for you. If the money isn't spent to produce revenue, your investment loses value.

I would ask exactly how these companies plan to use their cash to generate growth in the future. Will Apple invest in economies of scale to reduce the prices of their excellent computers? What is Google's plan to revolutionize how we retrieve INFORMATION, rather than just word matches from the Internet? Is Forest Laboratories going to raise their R&D budget?

A big cash cushion might prevent a company from going bankrupt within the next couple of years, but only a solid business plan will prevent them from burning through all that cash and making losses. How much cash was GM sitting on 5 years ago?

Brazil's Interest Rates Will Fall

Observation 1:
Hyperinflation is defined as a period of inflation higher than 50% per year. Brazil's 10-15% past inflation range was "high" inflation, but never qualified as "hyper."

Observation 2:
Falling interest rates may reduce the exchange value of Brazil's currency compared to, for example, the USD which will see rising interest rates in about 1.5 years (unless Bernanke repeats the mistake of his mentor).

Observation 3:
Brazillian long-term bonds bought at today's interest rates will appreciate rapidly as rates decrease in the future. However, as observation 2 points out, these benefits may be slightly reduced for dollar-based investors by a falling Brazillian real.

Observation 4:
The appreciation of Brazilian stocks will likely far outpace any currency depreciation issues (also changes in long-term fx rates are only hypothetical. Lower interest rates have a concrete effect on Brazillian growth.). With a hypothetical ceiling on its currency set by contrarian interest rate moves and low interest rates in general, Brazil could exceed the economic growth of China in just a few years. Unlike China, however, Brazil is an established democracy.

Observation 5:
EWZ has a P/E of less than 8 (!!!!!!)

Observation 6:
You're right. EWZ is a buy. I'm already up 30% but additional investment is easily justified. EWA, EWY, and VWO are similar bargains.

Paulson Throws Bernanke Under the Bus, Backs Ken Lewis

Another take on this situation is that BAC would have been the victim of the systematic and counterparty risk of a Merrill collapse, much as AIG was eventually demolished by the Lehman bankruptcy. Lewis had the choice of (1) letting the fragile BAC be bankrupted by the collapse of Merrill, or (2) buying Merrill and potentially getting a bunch of government loans to see them through (taking on Merrill's liabilities, but avoiding the counterparty and systemic risks). He chose the later course of action because it was the only non-hopeless option.

Next, his "fiduciary duty" to shareholders was to squeeze the most money and the best terms out of his new creditor, the government. He figured threatening to back out of the deal would do that. It was certainly worth a shot. In a best case scenario, BAC would get to keep the govt. loans but not have to take on Merrill's losses. Merrill would go under, but the loans would allow BAC to survive the losses.

Paulson anticipated such brinksmanship and was having none of it. As a creditor and shareholder to BAC, the govt. had little leverage but they could probably get the already-on-thin-ice board and management fired. Paulson alluded to that leverage, and the brinkmanship was over.

Results of this minor skirmish: BAC lost, taxpayers won.

Long Treasury Bonds vs. Short (Deflation vs. Inflation)

The mainstream definition of inflation is a rise in prices over an extended period of time. The "Austrian" definition is an increase in money supply, even if this does not lead to immediately rising prices.

This ideological difference in definitions will become more and more important in the coming years, as money supply continues to increase while price increases remain low or negative. Some people will insist that such a situation is a high-inflation scenario while others will point to the low increases or even decreases in prices (e.g. CPI, PPI, deflator #'s). Their perceptions and investment choices will depend on what definition of "inflation" they are using.

One side of this debate will win and the other will lose big. As an investor, you will have to commit to one way or the other.

Geithner to Put Chrysler in Bankruptcy Next Week

Thank you bricki. Most of the people complaining about the UAW still getting their pensions don't realize that the Earnings Retirement and Income Security Act (ERISA) passed back in the early 70's puts taxpayers on the hook anytime a corporation offering pensions goes under and the pension fund is underfunded. It's sort of like the FDIC of the pension world. Look it up.

Obama does not have a choice here, aside from trying to repeal the law or break the law. If you don't like the law, complain about the law.

Also, the government can legitimately force Chrysler into bankruptcy because (1) overseeing and mandating bankruptcies is a fundamental and traditional role of government in capitalistic societies, and always has been since the days of debtor's prisons, and (2) the government is a creditor of Chrysler's and therefore has an ownership stake in Chrysler's remaining assets just like the hedge funds and other bondholders.

What each creditor gets will be determined in bankruptcy court - a tradition of government intervention that has existed for hundreds of years in capitalist societies.



On Apr 23 11:59 PM bricki wrote:

> UAW pensions are already guaranteed by ERISA so it doesn't matter
> if they are protected by the bankruptcy or by the ERISA legislation,
> the taxpayer is stuck. Having the pensions handled outside ERISA
> is probably a good idea because the guarantee agency is already on
> very thin ice.
>
> Since Chrysler is a privately held company the government and the
> owners Cerberus Capital can come to any agreement they want to as
> far as applying for bankruptcy protection. Nothing particularly sinister
> here since Cerberus has effectively already washed their hands when
> they refused to recapitalize Chrysler.
>
> It would be a lot more disturbing if Geitner were to do something
> like this to a public company.
>

Gaping Hole in the Deflation Argument

Three common mistakes:

1) Inflation does not equal changes in the supply of money. It is a long-term increase in prices. See your econ. textbook.

2) The vast majority of the "stimulus" packages went to purchase things (bonds, treasuries, equity, etc.). These were largely transactions, not handouts (the summer 2008 "stimulus checks" on the other hand, were handouts). These transactions are reversible.

3) Assuming that paying 20% over historically high spot metal prices for collector coins will protect your purchasing power from inflation. That will depend on whether your collector coins will, in the future, be in higher demand than the assets that could otherwise be bought with that money.

It used to be considered common-sense wisdom that real estate was the best way to protect oneself against inflation. After all, there's a fixed amount of it and you can always raise rents. In fact, generic real-estate pundits like Robert Kiyosaki advocated buying up residential housing in 2006 on the justification that inflation HAD TO BE right around the corner and that real estate prices were rising because people were finally figuring this out. People who took that advice bought at the peak of the bubble. Might there be a lesson there for gold investors?

Evidence That End of Housing Price Collapse Is Not Far Off

Interesting conspiracy theory. My question is, how would hundreds of "the banks" all cooperate and agree not to sell their foreclosed houses - maybe for years? What if just one bank refused to cooperate, and sold all their foreclosures? Would the others keep paying insurance and taxes on the properties just for the sake of the conspiracy?

Not even OPEC can manage to keep its handful of members from cheating on oil production levels. Why would an illegal cartel of competing banks and mortgage companies be any more successful?



On Apr 23 01:12 PM conceptwizard wrote:

"The banks are definitly manipulating the market. "

"If regulators were deployed to the banks that are keeping foreclosed homes off the market, they would probably find that the banks are actually servicing the mortgages on a monthly basis to conceal the extent of their losses. They'd also find that the banks are trying to keep housing prices artificially high to avoid heftier losses that would put them out of business. "

Retail Energy Utilities Caught Between Bad Regulators and Distressed Customers

Good analysis.

I suspect, however, that the utilities are a golden goose for both executives and regulators. Both have to show results that satisfy their constituents. However, they must do so in a way that doesn't draw attention to their destructive essence.

For example: if the utility fought back with rolling blackouts, aggressive shutoffs, or lawsuits in an attempt to preserve shareholder returns, it would be a PR nightmare for both sides. Some would see executive compensation and dividends as being treated with more importance than the common man. Others would see the negative effects of hyper-regulation and political interference finally showing their consequences.

A slow, quiet milking of the good customers, though, is a win-win for all sides.

Inflation will emerge as the U.S. economy's predominent problem by next year, Martin Feldstein says. The Harvard economics Professor warns that the Fed's policy of spreading money by buying up illiquid mortgage securities could come back to haunt it when it needs to soak the cash back up.

Um... did anybody know that the Federal Reserve owns about 47% of US treasuries?

en.wikipedia.org/wiki/...

Even if they raise rates on new treasuries and therefore have to sell the old ones for a loss, that still represents at least $3 trillion in open-market liquidity that can be removed from the markets.

Then there are hundreds of billions in bank bonds, preferred stock, and common equity that have been purchased recently. Markets for these items are just fine in terms of liquidity, even as bad as things are now. The Fed could sell these items within a month and remove hundreds of billions of dollars from circulation.

Finally, the government always has the option of selling the mortgages at auction for low prices. Liquidity will appear when the right ROI is offered, I assure you.

As a last resort, interest rates in the 7-15% range would crush money supply and inflation - just like it did in the early 80's.

Quite an arsenal. Perhaps we should instead be asking what weapons the government has to fight deflation, with interest rates near zero and little political will for more expansionary policies.

Chrysler's Clock Is Ticking

"The lenders’ counteroffer marks a significant act of brinksmanship as the banks and the Obama administration’s auto task force duel over concessions to avoid liquidating the country’s third-largest car company."
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Toyota is being liquidated???

Here's Why I'm Happy I Drive a Ford

On Apr 22 10:25 AM Paul Killinger wrote:

> I really like the idea of a gas tax! It would do more to un-elect
> politicians in a single stroke than term limits or anything else.

We already pay a gas tax. Most of our national debt was accrued defending our access to Persian Gulf oil. If you know a dead or disabled veteran, he or she paid part of the tax too.

Oil costs both blood and money, and you pay only a fraction of the money at the pump. If Exxon and Conaco had to pay to defend their access to oil. Gasoline would run about $10-15 / gal. Instead, they're taxpayer subsidized.

Five Myths About Business Failure in a Downturn

I'm beginning to wonder if it's really a case of "defending the religion of the current business model."
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In American culture, our ideal mythic leader is decisive, unwavering, and determined to force his leadership upon the group. You see this in our entertainment ("24", John Wayne), in our politics (protestors dressed as "flip flops" mocking politicans for changing their mind), and in our corporations (Ivy League degrees).

For executives who are paid millions of dollars in company resources, the job is to embody this cultural ideal so that their employers and employees will continue to see them as the proper and legitimate leader, deserving of the rewards. For them, continued rewards are tied to obtaining political support by conforming to expectations.

Yet, the modern business world is increasingly incompatible with our cultural ideal of a leader:

1) Decisions must be made - increasingly by teams, not individuals - based on a tentative interpretation of a vast amount of vauge data, which puts "decisive" leaders at a disadvantage because they jump to conclusions too soon. Perhaps many of Chrysler's recent mistakes in product development and quality control were based on decisions made by decisive leaders and then never questioned.

2) The business, economic, and technological environment is in constant flux, which means that "unwavering" leaders might be correct exactly once before reality changes a week or an hour later and makes them incorrect. Successful companies today are the ones that are (a) nimble, and (b) constantly studying changes in reality so that they know how to adapt. "Unwavering" companies are also known as sitting ducks.

Meanwhile, being an effective contributor - teamwork - is now much more important than individual fortitude, dominance, or ambition. There are too much data to analyze, too many systems to learn, too much specialized knowledge to remember, and too many languages to speak for one mythic leader to drive an organization's success alone just on the basis of hard work and determination. Increasingly, the task of managers is to find ways to unlock and collaborate the talents of their teammates and to then assign them credit for the positive results, rather than taking credit themselves like an arrogant jackass.

Unless the American cultural ideal for leadership changes, expect more of the same.

The Bull and the Bear Case for HOG

1) Harley's price cuts remind me of what GM and Ford did with flooding the rental car market with their Tauruses and Malibus. It keeps the lines running in the short term, but could damage the brand and eventually profits long-term. It sounds like HOG has an old-school mass production mentality instead of a modern Just-In-Time, flexible manufacturing mentality. High fixed costs due to labor contracts are probably the reason for this behavior - they can't save any money by reducing supply to match demand.

2) Harley is among the most discretionary of discretionary purchases - and a massive purchase too. Therefore, consumers who have been unable to refinance their soon-to-reset, underwater ARMs, who have seen their credit card rates increase, and who face the daily risk of layoffs will postpone this purchase first of all. Of course, in an economic recovery, all these factors will sort themselves out. However, I suspect that we have seen the last of 0% consumer savings rates and the housing ATM. In the future, consumer savings will return to the long-term norm of 10% of income (up to 4% so far). Many of Harley's customers were spending that 10% on their bike payments! Many others took out home equity loans to pay cash for their bikes (I suppose if your house is foreclosed, such a maneuver got you a free bike!). This long-term shift is what should really be troubling HOG shareholders, because it challenges the whole business model.

3) Harley's dependence on outside credit and securitization is troubling. At least Countrywide Mortgage can recover ~50% of their principal through foreclosure and resale. What does the lender get when somebody quits making motorcycle payments? A rapidly depreciated bike with massive foreclosure, hauling, storage, and resale costs? Does Harley have the cash resources to self-finance if their subprime loans cannot be securitized and resold? I would imagine Harley securitized instruments are currently selling for less than the $0.30-$0.50 on the dollar that subprime mortgage securities are selling for. How do you finance your customers in an environment like that, other than self-financing?