After a very brief courtship ,Fiat and Chrysler announced earlier this year that they had reached a deal under which Fiat will acquire 35% Stake in Chrysler, the ailing U.S. automaker.It would seem at first sight that this may mark the end of Chrysler's troubles, but it is not so.Under the deal Fiat is not bringing in any money into Chrysler. In return for its stake in Chrysler it will just supply its latest fuel efficient technology to it.Fiat plans to convert a couple of Chrysler's U.S. factories to producing Fiat's small and medium sized vehicles. It's dealers worldwide will also sell Chrysler cars besides its own vehicles. In theory at least this should be a big plus for Chrysler which has a limited presence in overseas markets. Fiat argues that this will not only strengthen Chrysler's product range which is presently loaded in favor of trucks and SUV's, but also increase its global sales.
This marriage seems to have the blessings of the Obama administration,most probably because there are no other suitors for Chrysler. As a gift the government will give billions in fresh loans to Chrysler.It has also persuaded its major creditors to write down the value of their loans and accept about 29 cents to the dollar instead of trying to recover more by auctionong off the whole company.This has cleared the way for a sale in which Chrysler will be divided into two, with the good parts going to Fiat and the unviable parts being sold off.
The only question that now needs to be answered is, will it work? Fiat's exposure to the U.S. market and U.S. automakers is not new. It licensed its first plant in the U.S. in 1910 and its cars fetched a premium. This plant was shut down when theU.S. joined World War II in 1917. Later it again entered the U.S. market but withdrew in 1989, facing complaints over quality and competition from Japanese vehicles.GM acquired a stake in Fiat in 2000 with an option to purchase the entire company. In case GM chose not to buy out Fiat it had to pay a penalty of $2 billion! GM chose to pay the penalty and dissolved the agreement with Fiat in May 2005. Now Fiat is saddled with a car company that is constantly losing market share. Fiat seems to think that it is in a win-win situation as it is not paying cash for Chrysler and is only bringing in technology,besides spending time managing it. But car companies all over the world are losing money and closing plants.Fiat's introduction of a low volume niche product in the U.S., even if successful against Japanese and other American cars, is unlikely to make much of a difference to Chrysler's fortunes. Unless a miracle happens the marriage will last only as long as the U.S. government is willing to fund Chrysler.
Monday, May 11, 2009
Sunday, May 10, 2009
What The Bank Stress Test Conceals!
In order to restore public confidence in the health of the U.S. banking system,the Fed decided to put nineteen of the biggest banks,each with assets of over $100 billion, through a 'stress test.' Since these banks together form about 65% of the U.S. banking system, it was felt that maintaining their health was of utmost importance in order to protect the entire banking system.Though the idea was conceived way back in September of last year it was implemented now.
The Fed's anxiety is reflected in the way this test was conducted.Discussions with the banks resulted in a more lenient test than originally planned and the results were 'leaked' a few days in advance. The official results showed that nine banks passed the test and would not need to raise any additional capital.The remaining ten banks would need to raise about $75 billion of additional capital which is lower than expected.
Even before the results were announced banks had announced their first quarter results for this fiscal which beat street estimates.But the real picture is not as rosy as it appears at first sight.Banks at the moment have borrowing costs which are close to zero.Additionally, due to changes in mark-to-market accounting rules by the FASB they are managing to avoid making write downs in the values of their loan portfolios.This also allows lower provisioning for future loan losses. Make no mistake, such losses are going to be substantial.Residential housing prices have still to hit bottom and the meltdown in commercial real estate prices has just begun. Rising unemployment is bound to increase credit card delinquencies.
Although banks are finding it very profitable to make new loans as the cost of borrowing is virtually zero, the stress test is silent about as to how these banks will go about repairing their damaged balance sheets. The visible options are that either the banks will raise more capital from private investors or the government will convert preferred shares into common stock. In all probability some mixture of the two alternatives will be pursued though it will dilute the value of the stocks held by present investors. Finally the test tells nothing about how the banking system is going to rid itself of the 'toxic assets' that continue to haunt these banks.All in all the banks continue to be weak and a lot of uncertainty still lies ahead.
The Fed's anxiety is reflected in the way this test was conducted.Discussions with the banks resulted in a more lenient test than originally planned and the results were 'leaked' a few days in advance. The official results showed that nine banks passed the test and would not need to raise any additional capital.The remaining ten banks would need to raise about $75 billion of additional capital which is lower than expected.
Even before the results were announced banks had announced their first quarter results for this fiscal which beat street estimates.But the real picture is not as rosy as it appears at first sight.Banks at the moment have borrowing costs which are close to zero.Additionally, due to changes in mark-to-market accounting rules by the FASB they are managing to avoid making write downs in the values of their loan portfolios.This also allows lower provisioning for future loan losses. Make no mistake, such losses are going to be substantial.Residential housing prices have still to hit bottom and the meltdown in commercial real estate prices has just begun. Rising unemployment is bound to increase credit card delinquencies.
Although banks are finding it very profitable to make new loans as the cost of borrowing is virtually zero, the stress test is silent about as to how these banks will go about repairing their damaged balance sheets. The visible options are that either the banks will raise more capital from private investors or the government will convert preferred shares into common stock. In all probability some mixture of the two alternatives will be pursued though it will dilute the value of the stocks held by present investors. Finally the test tells nothing about how the banking system is going to rid itself of the 'toxic assets' that continue to haunt these banks.All in all the banks continue to be weak and a lot of uncertainty still lies ahead.
Saturday, May 9, 2009
'Porsche'-Auto Company Or Hedge Fund?
Thorsten Jacobs,a car industry analyst described Porsche as 'an investment bank with a car showroom attached.' Maybe with good reason.Under Holger Harter, its finance director,Porsche has been making more money from financial market operations than from selling cars,for the last several years.
It was Ferdinand Porsche, the founder of Porsche who had designed the Volkswagen Beetle,before setting up his own company which bears his name till this day.
So why was Porsche dabbling in stocks instead of concentrating on selling cars? Its long term goal has been to acquire VW,a company almost fifteen times its own size! Using cash-settled options Harter ensured that Porsche had cornered almost 75% of VW shares by October 2008. Strangely market speculators could never guess Porsche's interest in VW. The credit crunch had hit the auto industry very hard and auto shares all over the world were in freefall. VW shares defied logic and refused to budge. Hedge fund managers, sensing a killing, short sold VW shares in huge quantities.They reasoned that that it could not be long before VW shares also started sliding, following the likes of GM and Toyota. But this did not happen. The reason behind this was revealed on 26th October 2008 when Porsche announced that it controlled almost 75% of all VW shares.Hell broke loose on the trading floors on Monday,and by Tuesday VW shares crossed the 1000 euro mark as short sellers, caught on the wrong foot, desperately tried to cover their positions. In the process, VW now valued at 287 billion euros, briefly became the world's most valuable company.
Hedge funds, hit with losses of almost 30 billion euros, cried foul, prompting an investigation by the German regulator BaFin. Porsche on its part denied any wrongdoing. 'It is the funds themselves that are responsible, with their huge bets on a fall in VW shares that never happened,' a Porsche spokesman said. Porsche further offered to help hedge funds settle their loss making short positions on VW by offering to unwind some of its own positions.
In January this year Porsche announced that it had taken over VW by purchasing more than 50% of its shares. Thereafter in March, Germany's financial regulator BaFin halted its probe into Porsche regarding a possible manipulation in VW shares.'We didn't find any indications for a share manipulation,' said a spokesperson. Now on Wednesday after several weeks of talks, Porsche and VW have announced plans to merge, in the process creating a German car giant and one of the world's largest auto companies.
It was Ferdinand Porsche, the founder of Porsche who had designed the Volkswagen Beetle,before setting up his own company which bears his name till this day.
So why was Porsche dabbling in stocks instead of concentrating on selling cars? Its long term goal has been to acquire VW,a company almost fifteen times its own size! Using cash-settled options Harter ensured that Porsche had cornered almost 75% of VW shares by October 2008. Strangely market speculators could never guess Porsche's interest in VW. The credit crunch had hit the auto industry very hard and auto shares all over the world were in freefall. VW shares defied logic and refused to budge. Hedge fund managers, sensing a killing, short sold VW shares in huge quantities.They reasoned that that it could not be long before VW shares also started sliding, following the likes of GM and Toyota. But this did not happen. The reason behind this was revealed on 26th October 2008 when Porsche announced that it controlled almost 75% of all VW shares.Hell broke loose on the trading floors on Monday,and by Tuesday VW shares crossed the 1000 euro mark as short sellers, caught on the wrong foot, desperately tried to cover their positions. In the process, VW now valued at 287 billion euros, briefly became the world's most valuable company.
Hedge funds, hit with losses of almost 30 billion euros, cried foul, prompting an investigation by the German regulator BaFin. Porsche on its part denied any wrongdoing. 'It is the funds themselves that are responsible, with their huge bets on a fall in VW shares that never happened,' a Porsche spokesman said. Porsche further offered to help hedge funds settle their loss making short positions on VW by offering to unwind some of its own positions.
In January this year Porsche announced that it had taken over VW by purchasing more than 50% of its shares. Thereafter in March, Germany's financial regulator BaFin halted its probe into Porsche regarding a possible manipulation in VW shares.'We didn't find any indications for a share manipulation,' said a spokesperson. Now on Wednesday after several weeks of talks, Porsche and VW have announced plans to merge, in the process creating a German car giant and one of the world's largest auto companies.
Thursday, April 30, 2009
Can The Dow Jones Rally Any Further?
On the 9th of March this year the Dow closed at 6547,its lowest close in more than twelve years.It has come a long way since then,closing at 8185 yesterday,a gain of over 25% in about seven weeks.Although it needs to put on another 75% from current levels to be anywhere near the peak of 14164 that it touched on October 9th 2007,the present rally is nothing short of spectacular and somewhat inexplicable considering that things have not really improved much.
In a recent report the I.M.F. has estimated that global losses due to the present crisis may touch $4 trillion.It had originally estimated that total losses would be only about $1 trillion,a figure which has already been exceeded.The U.S. Fed acknowledges that the U.S. economy continues to contract,although the speed of the fall has slowed somewhat.
At the bottom of the mess are the toxic assets,primarily mortgage backed securities that the financial system is saddled with.Not only have they lost value but they are also extremely illiquid.Almost all financial institutions have been compelled to undertake distress sales of blue chip assets to cover the losses caused by these securities.The Fed has now announced that it will buy up to $1.25 trillion worth of such securities.This is welcome news to the holders of these securities as it will not only improve liquidity but may also serve to set benchmarks for valuing these otherwise hard to value assets.This in turn may also lead to a revival of sorts in the market for these assets.
So where does the Dow go from here?This is a trillion dollar question.Certain things have to be kept in mind before taking a call on its future direction.According to Roubini the financial system will have to writedown another$2.4 trillion in losses.The I.M.F. puts the figure closer to $2 trillion!Considering that U.S. companies have only written down about $1 trillion so far it would appear that we are not even halfway through the process.The financial sector accounted for almost 8% of G.D.P. and almost 35% of corporate profits.What cannot be ignored is that the weightage of the top financial companies like G.E.,A.I.G.,BoA,Citigoup etc.along with G.M.,put together, was about 25% before the crisis started.These companies are now worth a fraction of their earlier value and are in fact battling for survival. Even if they do survive, thanks to intervention by the government it is going to take them several years to regain their financial health.In this scenario it may not be long before the Dow starts its downward journey once again.
In a recent report the I.M.F. has estimated that global losses due to the present crisis may touch $4 trillion.It had originally estimated that total losses would be only about $1 trillion,a figure which has already been exceeded.The U.S. Fed acknowledges that the U.S. economy continues to contract,although the speed of the fall has slowed somewhat.
At the bottom of the mess are the toxic assets,primarily mortgage backed securities that the financial system is saddled with.Not only have they lost value but they are also extremely illiquid.Almost all financial institutions have been compelled to undertake distress sales of blue chip assets to cover the losses caused by these securities.The Fed has now announced that it will buy up to $1.25 trillion worth of such securities.This is welcome news to the holders of these securities as it will not only improve liquidity but may also serve to set benchmarks for valuing these otherwise hard to value assets.This in turn may also lead to a revival of sorts in the market for these assets.
So where does the Dow go from here?This is a trillion dollar question.Certain things have to be kept in mind before taking a call on its future direction.According to Roubini the financial system will have to writedown another$2.4 trillion in losses.The I.M.F. puts the figure closer to $2 trillion!Considering that U.S. companies have only written down about $1 trillion so far it would appear that we are not even halfway through the process.The financial sector accounted for almost 8% of G.D.P. and almost 35% of corporate profits.What cannot be ignored is that the weightage of the top financial companies like G.E.,A.I.G.,BoA,Citigoup etc.along with G.M.,put together, was about 25% before the crisis started.These companies are now worth a fraction of their earlier value and are in fact battling for survival. Even if they do survive, thanks to intervention by the government it is going to take them several years to regain their financial health.In this scenario it may not be long before the Dow starts its downward journey once again.
Wednesday, April 29, 2009
U.S. Economy Slides 6.1% In Obama's 1st 100 Days.
Figures released early Wednesday showed the U.S. economy shrank at an annualized rate of 6.1% during the first hundred days of Obama's Presidency.These figures were worse than expected. Experts had predicted a decline of about 5%.
To be fair to Obama he has not been able to set any economic agenda.He inherited an economic meltdown and has been simply trying to get the economy back on track.So far, all he can be credited with is the passage of a $787 billion stimulus plan.The stimulus plan has also not led to any significant increase in government spending so far.Government spending has actually declined by almost 4% in this period. Both home prices and home sales continue to fall, and unemployment continues to rise.
Many see the first glimmers of hope . Consumer sentiment has shown a marginal improvement and consumer spending is showing signs of stabilising.The benefits of increased government spending and tax cuts are also expected to kick in from the month of May, and Wall Street is back to where it was when Obama took office.Nevertheless the fact is that the economy continues to be as bad as it was in the last quarter of last year when it contracted at an annual rate of 6.3%.
Many experts caution against being overly optimistic about the near future.They say that the current optimism stems from the fact that companies have announced quarterly results that are not as bad as expected.But this does not take away from the fact that both sales and profits continue to fall, it is just that the rate of fall is slightly slower.They emphasise that the jobless rate is at 8.5% and will in all likelihood hit 10% by the end of the year.U.S. exports have fallen 30% and are unlikely to revive any time soon. Spending on home building as well as fresh business investment are all down sharply.A 2.2% increase in consumer spending can best be described as a blip.This is because increasing unemployment, declining wealth and tougher lending conditions will continue to exert a downward pressure on consumer spending and thereby on manufacturing.High unemployment will also raise default levels on both consumer and corporate loans which will further affect the health of the financial system
Clearly the economic crisis is still to find its trough. There is more pain to come.Recovery is bound to be a slow and lengthy process.
To be fair to Obama he has not been able to set any economic agenda.He inherited an economic meltdown and has been simply trying to get the economy back on track.So far, all he can be credited with is the passage of a $787 billion stimulus plan.The stimulus plan has also not led to any significant increase in government spending so far.Government spending has actually declined by almost 4% in this period. Both home prices and home sales continue to fall, and unemployment continues to rise.
Many see the first glimmers of hope . Consumer sentiment has shown a marginal improvement and consumer spending is showing signs of stabilising.The benefits of increased government spending and tax cuts are also expected to kick in from the month of May, and Wall Street is back to where it was when Obama took office.Nevertheless the fact is that the economy continues to be as bad as it was in the last quarter of last year when it contracted at an annual rate of 6.3%.
Many experts caution against being overly optimistic about the near future.They say that the current optimism stems from the fact that companies have announced quarterly results that are not as bad as expected.But this does not take away from the fact that both sales and profits continue to fall, it is just that the rate of fall is slightly slower.They emphasise that the jobless rate is at 8.5% and will in all likelihood hit 10% by the end of the year.U.S. exports have fallen 30% and are unlikely to revive any time soon. Spending on home building as well as fresh business investment are all down sharply.A 2.2% increase in consumer spending can best be described as a blip.This is because increasing unemployment, declining wealth and tougher lending conditions will continue to exert a downward pressure on consumer spending and thereby on manufacturing.High unemployment will also raise default levels on both consumer and corporate loans which will further affect the health of the financial system
Clearly the economic crisis is still to find its trough. There is more pain to come.Recovery is bound to be a slow and lengthy process.
Tuesday, April 28, 2009
Is The U.S. Turning 'Pink'?
Beleaguered U.S. auto giants G.M. and Chrysler inched towards agreements Monday, that would help them avoid bankruptcy.
Chrysler union leaders voted Monday to approve concessions that would help the auto maker ward off bankruptcy.The settlement will see the UAW union ending up with 55% of a restructured Chrysler LLC. Fiat Group SpA will own 35% and the remaining 10% will be divided between the U.S. government and several lenders.
A restructuring plan for G.M., unveiled Monday calls for cutting 21,000 U.S. factory jobs by next year and bidding goodbye to the Pontiac brand. About $27 billion of bond debt will be converted into G.M. stock. It will also offer stock to the UAW towards part of its liabilities to a union managed trust that will take care of retiree health care expenses.If this scheme goes through, the U.S. government along with the UAW union will own 89% of G.M. stock, with the government holding more than 50%. The present stockholders will be left with about 1% only.
These two companies will be the latest additions to a long list of failed business giants like AIG, Lehman Brothers, Fannie and Freddie to name a few.To get a proper idea of the scale of economic destruction over the last eighteen months, one would need to add the long list of smaller banks and companies which have simply disappeared.
The companies which have been bailed out are those which are just too large to be allowed to go under.Their annual revenues run into into hundreds of billions of dollars, larger than the GDP of virtually every nation on this earth, leaving aside about the top twenty countries or so.In economic terms the U.S. has lost more, than perhaps Russia did after the break up of the Soviet Union.
The way out of this mess is expected to be led by a massive injection of funds by the U.S. Fed into these companies with scant regard to their ability to repay the money.The money is to be given at virtually zero percent interest, while the U.S. government itself will have to borrow on interest in order to finance its almost 1.4 trillion dollar deficit in 2010. Banks have been given to understand that they have access to government funds under the preferred swap scheme whereby government loans will get converted into equity.
Although it is premature to conclude that the U.S. government has plans to nationalise important parts of the economy, particularly the banking and insurance industries, it is true that the U.S., regarded as the most capitalistic of nations, may be turning 'pink' after all.
Chrysler union leaders voted Monday to approve concessions that would help the auto maker ward off bankruptcy.The settlement will see the UAW union ending up with 55% of a restructured Chrysler LLC. Fiat Group SpA will own 35% and the remaining 10% will be divided between the U.S. government and several lenders.
A restructuring plan for G.M., unveiled Monday calls for cutting 21,000 U.S. factory jobs by next year and bidding goodbye to the Pontiac brand. About $27 billion of bond debt will be converted into G.M. stock. It will also offer stock to the UAW towards part of its liabilities to a union managed trust that will take care of retiree health care expenses.If this scheme goes through, the U.S. government along with the UAW union will own 89% of G.M. stock, with the government holding more than 50%. The present stockholders will be left with about 1% only.
These two companies will be the latest additions to a long list of failed business giants like AIG, Lehman Brothers, Fannie and Freddie to name a few.To get a proper idea of the scale of economic destruction over the last eighteen months, one would need to add the long list of smaller banks and companies which have simply disappeared.
The companies which have been bailed out are those which are just too large to be allowed to go under.Their annual revenues run into into hundreds of billions of dollars, larger than the GDP of virtually every nation on this earth, leaving aside about the top twenty countries or so.In economic terms the U.S. has lost more, than perhaps Russia did after the break up of the Soviet Union.
The way out of this mess is expected to be led by a massive injection of funds by the U.S. Fed into these companies with scant regard to their ability to repay the money.The money is to be given at virtually zero percent interest, while the U.S. government itself will have to borrow on interest in order to finance its almost 1.4 trillion dollar deficit in 2010. Banks have been given to understand that they have access to government funds under the preferred swap scheme whereby government loans will get converted into equity.
Although it is premature to conclude that the U.S. government has plans to nationalise important parts of the economy, particularly the banking and insurance industries, it is true that the U.S., regarded as the most capitalistic of nations, may be turning 'pink' after all.
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