Toyota's Credit Rating Reduced

The downturn in the global automotive industry is becoming so severe that Toyota now has to face a credit downgrade from AAA to AA by Fitch Ratings. Global slumps in demand as well as adverse exchange rates are impacting the company with increases in material costs coming down the pipeline. Toyota has noted that for every 1 Yen decrease in the Yen's value to the Dollar and Euro trims operating profit by 40 Billion Yen for the Dollar and 6 Billion for the Euro. Toyota's profits have decreased by 2/3 in the past year as they are expected to bring in 5.5 Billion in net profits. Toyota depends heavily on the U.S. market where half of their operating profit is made. They have relied heavily on taking market share from SUV's and trucks and have based their growth strategy on this gain. This may be halted for the next 2-3 years as the slump is expected to continue. This year alone has seen an operating loss of 34.6 Billion Yen in North America. Industrywide analysis shows a decrease to 11.7 Million cars sold from 14 Million forecasted and Hyundai says they believe the U.S. could fall to 10 Million cars sold.

Japanese carmakers are still in a much better position than the U.S. big three. For the past 20 years Japan's business model has included a fuel efficient culture while U.S. manufacturers have insisted on sitting on SUV's and pickup trucks to bring profits. After weak periods in demand for these auto's a spike in demand has the big 3 making profits while smaller more fuel efficient cars are foregone. This cycle may be ending now. The big 3 did not reinvest their profits to include more fuel efficient cars and this time they may not be able to pull it together after years of very little planning. Car makers need to look to Toyota's vision and change their core thinking in envisioning a world with limited resources.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aybXO4OangM0&refer=home

http://www.cnn.com/2008/BUSINESS/11/24/japan.auto.industry/index.html

http://www.businessweek.com/ap/financialnews/D94MC3QO0.htm

China's Manufacturing Risks

China is becoming a risky place to do business according to a new survey. More manufacturers are pulling out of China and moving into areas in their own backyard such as Mexico and even back here in the U.S. More and more U.S. companies are indicating a demand for products made here that have moved to China in recent years. It is cheaper to order from the U.S. in the face of exchange rate fluctuations, labor costs, and shipping costs. American companies are able to compete now but the problem is that they do not have the capacity ready for orders. The biggest risks companies face in China are decreasing quality and intellectual property theft. There has been a sharp increase in these concerns since May of 08. Other risks include regulatory compliance, commodity price volatility, supply chain security breaches, and information technology problems. Piracy, sweatshop abuse, and recent worker protests are also contributing to upswings in costs and harm reputations of companies.

China seems to be forcing itself to grow when it does not seem able or ready. There are questions to the truth of the percentage rates of growth they have been experiencing in recent years as the leadership bases its legitimacy as a Communist nation on the expansion. The worker uprisings across the country signal demands for better pay and working conditions while the country downplays the extent of the unrest. China is no longer a haven for cheap labor and high quality products and intellectual property violations indicate the business community is becoming untrustworthy in partnerships. U.S. companies should consider expanding capacity at home and in Latin America to take advantage of the swings in costs. China is simply becoming too big for its low quality britches.

http://www.businessweek.com/bwdaily/dnflash/content/nov2008/db20081126_315336_page_2.htm

http://www.businessweek.com/magazine/content/08_26/b4090038429655.htm

Homebuilder Bailout

The nation's homebuilders are next in line for a government bailout. The companies are not asking for a direct injection of capital but a program for subsidies and tax credits. They are calling this program "Fix Housing First." The tax credit for new home purchases would be 10% of new homes purchased while the subsidy would work to bring interest rates down on new mortgages to 3% for the beginning half of 2009 and to 4% for the second half of the year. Realtors are also pushing for 4.5% interest rate buy down for new mortgage loans. They say that for each 1% that rates fall 500,000 to 800,000 new homes could be sold. These ideas will only temporarily fix a systemic problem. Further drops in interest rates would temporarily relieve the basis risk of small business's and homeowners while it increases in the long run when asset prices decrease from an oversupply. We don't need more easy money in the system and we certainly don't need anymore homes in the market. These plans will allow the homebuilders to build new homes and make quick money as they increase the supply of an already flooded market. It would attempt to inflate a bubble that already burst and we would then be taking our money to make the situation worse. Housing prices need to increase along with income to be sustainable, not inflate independently and artificially. Homebuilders already have a surplus of labor and there isn't a need to continue paying idle workers. Before running to the government serious thoughts on employment levels, compensation, and the over-inflated prices of the homes they offer should be re-evaluated. The country can survive without these enormous homebuilders. Any of the workers presently employed could go off and make their own companies if they wish when the time is right. Thats the best part of economic downturns and layoffs.


http://www.nuwireinvestor.com/blogs/investorcentric/2008/11/homebuilders-next-in-line-to-beg-for.html

http://tranharry.com/2008/11/do-home-builders-really-need-that-bailout/

Balking Banks

Goldman Sachs called off negotiations with Panasonic on Tuesday over electronics subsidiary Sanyo because they were not pleased with Panasonic's bid for the company. Panasonic offered $1.26 per share with a present value of $1.55 and a Goldman estimated worth of $2.58 per share. Sanyo is the world's number 1 producer of lithium-ion batteries and a major producer of solar cells, both very promising capacities for the future. If any of the past couple months have taught us anything its that the nations banks must raise capital in order to save themselves from failure. Most firms have had to do this by selling assets at unfavorable prices. It is becoming unacceptable for company's not to go through with offers like these when the future does not look good for the economy and the nation's business's. Eventually, firm's such as Goldman Sachs will be owned by the U.S. Government and essentially the tax payers. The less stake the government has in these companies, the less the country will have to pay for these mistakes. If the firm's in question can do what is necessary to save their companys, even if the terms are not favorable, then they have a responsibility to do so without waiting for government intervention.

Accountability, Citigroup, and Robert Rubin

Since the U.S. government took over Citigroup over the weekend the call of taxpayers to point fingers and place the blame where it is due is becoming louder. It goes beyond politics at this point and the real players in the destruction of the banking industry are coming out of the wood work. A recent article in the New York Times points the finger at Robert Rubin for the downfall of Citigroup and his allowing the company to go 40-1 on leverage. He is being credited as the architect of the present financial crisis when, as Secretary of the Treasury, along with Alan Greenspan, he opposed the regulation of derivatives when proposed by the head of the Commodity Futures Trading Commission. Overexposure to derivatives such as Credit Default Swaps was essentially the cause of the failure of Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, and Washington Mutual. In November of 1999 Alan Greenspan and Robert Rubin recommended that Congress permanently strip the Commodity Futures Trading Commission of regulatory authority over derivatives. This was accepted. Charlie Gasparino, on-air editor at CNBC, says Rubin was the chief advocate at Citigroup to over leverage the company and that the board of directors and Bob Rubin hold the largest amount of blame for mismanaging the company. The most concerning part of all of this is that Rubin is now one of the top economic advisors to Barrak Obama. If Alan Greenspan, head of the federal reserve with the power to adjust interest rates, and Robert Rubin were joined at the hip on deregulation of the derivatives industry, and Bill Clinton, days before Rubin departed as Treasury Secretary, repealed the Glass-Steagall Act (allowing the supermerger between Travelers and Citi just in time for Rubin to join the company 4 months later), I would question the subsequent build up of leverage. When a company builds up incredible amounts of leverage in the way that Citi did, it means that management is making the company extremely large and taking a large share for themselves while taking no interest in the company shareholders. This was also the case at AIG. The only thing Alan Greenspan could say in front of congress was, "I still don't fully understand why it happened", while admitting, with 3 other regulators, that deregulation was wrong and a mistake. Poor management is not just a risk to these companies, it is a risk to the entire nation.

http://en.wikipedia.org/wiki/Robert_Rubin

Hedging Opportunity for Airlines?

In a recent interview aboard a Virgin Airlines aircraft, CEO David Cush spoke of a unique opportunity to hedge fuel prices. The airline was founded last year and currently has a fleet of 28 planes. The one year old airline recently moved their profit targets back a year to 2011 in light of the current economic crisis. Hedging fuel costs now could save the company cash and have it continue running for at least the next 4-5 years. The airline currently has enough funds to last 3 years without hedging. Cush says he plans on taking long positions 4 years out to lock in the fuel prices of today's markets.

The recent credit crisis could dampen the possibility of this idea, however. Reports out of Europe have many European airlines not seeking new hedging arrangement even with the price of oil down to $55/barrel because of the rising costs and risks. The failure of Lehman Brothers puts into question the viability of such deals. Its much harder and more expensive simply because its difficult to find a counterparty in a deal with a market so illiquid. Lufthansa, for example, is hedging down from 85% to 72% of its fuel bill in 2008 and is at 57% for 2009. The failure of Lehman saw the loss of many contracts and contributed to these decreases. The decisions will remain with the airlines. Irish airline, Ryanair, has followed a strategy of not hedging its fuel prices and suffered for it over the summer. They decided to enter the hedging market at triple digit prices and have now decided to switch back to their old strategy. It seems airlines are not finding it easy to get new deals. The deals appear to be out there, however, as some airlines are continueing their hedging strategies even with prices at $55 such as French airline Air France-KLM. Aggressivly seeking counterparty's willing to take a position would be the best opportunity for airlines dedicated to a hedging strategy.

http://www.iht.com/articles/2008/11/13/business/air.php

Public Ownership of the Banking Industry

Hugh Hendry, Chief Investment Officer at Eclectica Asset Management, says the U.S. government will own all the financials in a year. He says in terms of profitability, there is none left for these companies. The nationalization is an alternative to dramatic losses in the private sector that will affect society on a much broader level. Society has had to intervene in the failure of the banks because the risks to society are too large. Mergers between even the two largest banks, Goldman and Citi, is being ruled out as irrelevant because, ultimately, the largest partner will be the U.S. Hendry believes the punishment is being felt by the shareholders through the stock prices of the banks because they looked the other way for more than a decade in a case of excessive moral hazard. The shareholders should get nothing as the government comes in and buys these banks at very modest prices because the tax payer will be paying for these mistakes for a very long time.

Such a huge amount of wealth is being held by the executives of these companies as the country pays for their taking on of such huge risks and subsequent ignorance of the warning signs. This money should be taken back and those much better qualified to deal with the present situation need to be brought in. There are too many stakeholders in these companies (the American people seem to be the biggest) to allow those who made these mistakes to go scott free while also keeping the money they did not earn.

GM Cannot Fail

In an interview on CNBC, billionaire investor Wilbur Ross spoke of how a GM bankruptcy is not an option as opposed to government financing. He was not as concerned about the employees of GM itself and the losses associated with an isolated GM failure, he was more concerned with the auto suppliers supplying parts to the company. There are four times as many employees in the supplying sector then in the big car companies - about three quarters of a million. If GM or any of the other big car companies were to go bankrupt the suppliers would have to write off 10% of this years receivables. Few suppliers would be able to handle this and would be forced to shut down and would then cut off supplies to the other car companies. He claims the car makers problems were the southern states allowing subsidized transplants for the Japanese, Koreans, and Germans taking $35/hour jobs from the North and creating $17/hour jobs in the south. It helped the states, but hurt the nation as a whole in coordination with a poor national economic development policy. The country would not be able to stomach the failure of GM and its connected suppliers but I still see the government trying to keep an industry alive that is doomed to failure. Even if there was a restructuring to allow more fuel efficient cars or cars not dependant on fossil fuels to be built, would the suppliers not be out of business anyway? There was simply not enough planning and no account for a world demanding more and more oil. The best the company can do now is accept government assistance to use its existing manufacturing capabilities and, as quickly as possible, change its entire production line because it is unsustainable in its current form.

Investing and the VIX

The riskiest moment for investment firms and individual investors to commit capital to an investment is the best moment - or is it? In the past 25 years there have been four market bottoms: the 1987 crash, the 1990 Iraq war bottom, the 1998 LTC bottom, and the 2002-2003 dot com bottom and second Iraq war bottom. Characteristic of these four periods included four indicators; front page headlines of market pains, an Investors Intelligence survey of less than 40 percent bulls, large outflows from mutual funds, and a VIX reading above 40. A reading in the VIX of above 40 indicates pure panic in the market place. Given the VIX has moved as high as 80 on Oct 27, the highest it has ever been, you may think and still think even at 53, where it is today, that investing would be a viable option. Knowing how close we came to a second great depression, had we not had the knowledge of the first one and the methods to prevent another one, we can pretty well gauge that it was entirely possible. Seeing the VIX jump to 80 is understandable given that possibility, but this may not be the best moment to jump in for investment firms. If you look at volatility during the Great Depression and the 1907 Bankers Panic, which was as high as present fear values, the fallout was more severe.

Even though we have the tools available to prevent the collapse of the financial structure of the country (so far so good) we may be in a situation similar to the 1929 and 1907 crashes; a long term decline in the stock market. Whats different about the four bottoms previously mentioned is that there was a bounce back. There wasn't a bounce back in 1907 or 1929. During those crashes the market headed a lot lower following the sharp rise in volatility. The question then becomes, are the stops in place today able to stop a long term decline in stocks? The amount of debt and the debt mentality of this country isn't changing and won't change until our standard of living and quality of living decline to levels unbearable (modest in comparison to other countries). Saving is the most important financial policy that firms, governments, and individuals should keep (China's savings rate is 40 percent while the USA's is...zero percent, the lowest since the Great Depression). Until this sinks in we will continue putting band-aids on a rotting system. We will eventually have an enormous ball of band-aids holding together something that is no longer salvageable. When we unwind the ball of band-aids and heal the real underlying problems in the system, it will be safe to enter the market again. Lets just say it will be a while.