Archives for October 2011

October 2011 - Page 7 of 9 - Money Morning - Only the News You Can Profit From

U.S. Automakers Getting Back on Track at Just the Right Time

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Just two years after two of the "Big Three" U.S. automakers declared bankruptcy, Detroit's favorite sons have grown strong enough to steal sales back from their Japanese rivals.

For the month of September, sales for General Motors Co. (NYSE: GM) were up 20%, sales for Ford Motor Co. (NYSE: F) were up 9% and sales for Chrysler Group LLC were up 27%.

Meanwhile, sales for Toyota Motor Corp. (NYSE ADR: TM) plunged 17.5% and Honda Motor Co. Ltd. (NYSE ADR: HMC) fell 8%.

It's quite a reversal from the late 2008-09 period, when both GM and Chrysler declared bankruptcy and took government bailout money to keep from closing their doors. Toyota at that time took the crown of world's largest automaker from GM. And the U.S. auto industry collectively shed 120,000 jobs.

"The image change for Detroit in the last three years probably has been more than any of us in the industry anticipated," Jesse Toprak,vice president for industry trends and analysis at TrueCar.com, told USA Today.

The Japanese automakers lost market share this year as they were pounded by the devastating earthquake and tsunami that rocked the island nation in March. Disruptions to manufacturing have caused lapses in inventory that have hurt sales.

However, the American automakers have taken full advantage of the opportunity to get car buyers to give them a chance.

Both GM and Chrysler picked up 1.7 market share points in September compared to the previous year, while Honda lost 1.7 points and Toyota lost 3.8 points.

Jeff Schuster, executive director of global forecasting and analysts for J.D. Power and Associates, thinks that the Japanese automakers may find it hard to win back those lost customers.

"[The March earthquake] created a more open environment coming out of the recession," Schuster told Bloomberg Businessweek. "I think buyers are more open to looking at other brands now."

Advantage Detroit

Several factors are working in favor of the U.S. automakers now that they've regained their financial footing.

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Bring On the Tobin Tax - But Only After Making This One Key Fix

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The European Commission (EC) on Sept. 28 proposed a Tobin tax for the European Union (EU). It's likely to pass, in one form or another, but it won't stop there.

The United States will be next – and as investors we should be grateful. I just hope policymakers make one key change first.

I'll explain.

I penned a column for Money Morning almost exactly one year ago that said major world economies should adopt a "Tobin tax" – a small tax on financial transactions, named after its inventor, Nobel laureate James Tobin.

It's always nice – albeit unusual – when politicians take my advice. And I'm certainly glad that the EC is doing just that. But the commission still hasn't gotten it quite right.

A Promising Proposal

You see, the Tobin tax I proposed would be at a very low rate, perhaps 0.01%. Apart from raising revenue, its main effect would be to inhibit speculation. By that I specifically mean "high-frequency trading," or HFT, where computers trade bonds, stocks, and derivatives in milliseconds.

High-frequency trading is objectionable for two reasons.

First, its proponents claim it provides liquidity to the market, but that's not really the case. In periods of turbulence, the liquidity that HFT supplies is quickly withdrawn, as the institutions operating the trading systems shut them off for fear of large and destabilizing losses. Indeed, liquidity that switches off when it is most needed is of no use at all. To the contrary, it destabilizes the market rather than stabilizing it.

The second reason high-frequency trading is bad is that it uses machines to get trade information before competitors. Of course, trading based on extra-fast knowledge of the trading flow should qualify as inside information, and thus be illegal.

Unfortunately, it can't be made illegal, because market-makers do it all the time. And what's more is that stock exchanges make huge sums of money by renting space within feet of the exchanges' computers to high-frequency traders.

And that brings us to the tragic flaw of the EC's proposal.The Tobin tax proposed to the European parliament by EC President Jose Manuel Barroso would impose a 0.1% tax on stock and bond transactions and a 0.01% tax on derivatives trades.

It's backwards.

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American Autumn vs. Arab Spring

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Global Economic Intersection Article of the Week Ever heard of the term "American Autumn"? It started on September 18, 2011, when a few college students camped out, occupying Wall Street. Since then, not only has the crowd been getting bigger, but also it has become a national movement, spreading to the big cities from Boston […]

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Deutsche Bank AG (NYSE: DB) Will Be Crushed Under the Weight of Europe's Debt

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Frankfurt-based Deutsche Bank AG (NYSE: DB) is about to be critically wounded by the European banking crisis.

Don't get me wrong – it will survive the spiraling financial mess. Germany will defend it because it's the bellwether of big banking in Europe. It's their version of "too big to fail."

But as the continent's largest bank, it won't be able to escape unscathed from the capital crunch about to take over the European banking system.

So it's time to sell Deutsche Bank AG (**), before the region's financial system falls apart.

Europe's Coming Capital Crunch

Many European banks don't have enough money to survive a Greek default. They hold huge amounts of their home sovereign's debt, as well as debt of their troubled Eurozone neighbors. Any write-down of those holdings will slam their balance sheets.

These banks were already overleveraged when the financial crisis started in 2007, and they have relied on outside sources like the United States to maintain core capital ratios.

In the 2008 crash, the European banks turned to the U.S. Federal Reserve for trillions of dollars of liquidity injections. They also used sources like U.S. money market funds for short-term loans – commercial paper that matures in less than 270 days – to cover capital loaned out at longer maturities. In May 2011, U.S. money market funds had an average 40% of holdings in European commercial bank paper.

But then U.S. banks, afraid of the unfolding European sovereign debt drama, let these short-term loans mature. This brought the capital back home and took an estimated $350 billion in liquidity out of the European banking system.

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How the Legacy of Steve Jobs Could Haunt Apple

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Now that its iconic founder is truly gone, Apple Inc. (Nasdaq: AAPL) must figure out how to remain true to the legacy of Steve Jobs without getting hamstrung by it.

It's not as easy as you might think.

The challenge starts with finding a successor CEO who can carry on the legacy of a founder like Steve Jobs without being intimidated by it.

"Much like Disney, Apple's founder was the brand. He was their Mickey Mouse, he was their Betty Crocker," corporate governance expert Nell Minow of GovernanceMetrics International told Reuters. "They have to replace him in five different ways."

That Jobs himself groomed former Chief Operating Officer Tim Cook to follow him as chief executive reduces Apple's risk, but doesn't erase it.

Companies such as The Walt Disney Co. (NYSE: DIS) and Wal-Mart Stores Inc. (NYSE: WMT) have learned that staying faithful to the ideals of a legendary founder can be fraught with pitfalls. Rigid adherence to old ideas can lead to stagnation, but straying too far from them can undermine what made the company such a huge success.

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One of These Banks is Europe's Lehman Bros. - And We're Going to Profit From Its Collapse

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Back in July, I warned you that Europe probably had its own Lehman Bros. – an unstable financial institution on the brink of a collapse.

At the time, I didn't know exactly which institutions were most at risk.

Now I have a pretty good idea and want to share that with you.

One big firm, the Brussels-based Dexia SA, is already set to be dismantled.

And based on an analysis of 50 European banks with a combined $129 billion (92 billion euros) tied up in Greek sovereign debt, I've identified two other suspect institutions: BNP Paribas SA, and Societe Generale SA (PINK: SCGLY).

These banks have a high level of exposure to Greek sovereign debt and once they're forced to acknowledge the precariousness of their situation investors will stampede for the exits. That will have negative effects for both European and U.S. banks, as well as the overall markets. But there is a way to not only protect yourself, but turn a serious profit.

I will explain that to you shortly, but first, let me give you an idea of what it is we're dealing with.

Europe's Lehman Bros.

Basically, there are two ways to judge which banks are most at risk. You can look at how expensive the credit default swaps on these banks are compared to their peer group. And you can look at how quickly those credit default swaps have climbed.

Credit default swaps, in case you are not familiar with them, were originally created as "insurance" that protected the lender in case of a default. When they are purchased, the loan is turned into an "asset" and is then "swappable" for cash if the borrower defaults.

Generally speaking, the more expensive a credit default swap is and the faster its price has increased, the greater the risk there is associated with it.

As of Oct. 4 , the senior debt of the top 25 global banks with tradable CDS instruments was at 289 basis points. (A basis point is equal to 1/100 of a percentage point . They are commonly used to denote a rate change or, in this case, the difference or spread between two interest rates.)

However, the five-year senior credit default swaps for Societe Generale and BNP Paribas are considerably out of line with that figure – or at least they were as of Oct . 6. They've recovered since rumors of another rescue surfaced, but they're still dangerously high. Five-year senior credit default swaps were recently valued at about 386 points for Societe Generale and 287 basis points for BNP Paribas.

As for how fast the cost of insuring that debt has risen, the data is even more incriminating. Since 2009 Societe General's credit default swaps are up 294.17% and BNP Paribas credit default swaps have risen 199.60%.

This suggests two possibilities: 1) Traders are betting that the banks are substantially undercapitalized – meaning they may not have enough money to meet potential losses; or 2) They've got way too much exposure to Greek debt to withstand the country's failure.

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Renewable Energy and Government Subsidies Go Hand in Hand (for Now)

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The Obama Administration is coming under fire for providing subsidies to renewable energy sources, such as solar, wind, and geothermal.

And not for the first time.

The latest tiff results from a $528 million loan to Solyndra LLC. Despite receiving federal funds, the private, California-based solar panel maker went belly up on Sept. 1, filed Chapter 11 bankruptcy protection, and laid off every one of its more than 1,100 workers.

U.S. Secretary of Energy Steven Chu has gotten more political flak from the loan program in recent months. Political opponents claim it's an example of government waste in the making.

Since 2009, Washington has doled out some $16 billion in 28 loans. The Energy Department says this loan money has resulted in 60,000 jobs.

However, with $6 billion being committed in only the last few weeks (to beat a Sept. 30 budgetary deadline), disasters like Solyndra are something best avoided when Chu speaks on renewables.

Just as predictably, they are likely to figure prominently in the rhetoric coming from the other side.

But the current debate that the Solyndra failure has prompted brings a broad question: Can renewable energy sources make it in the market without a significant push from the government?

Not initially.

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Dear Occupy Wall Street: Will You Stand with Me?

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Dear Occupy Wall Street Demonstrators,

Let me start by saying that I applaud your initiative. Grassroots protests are the essence of democracy. And as we've seen with the Tea Party movement and the Arab Spring, nonviolent protests are a powerful way to effect meaningful change.

Yet even though I'm 100% behind you in spirit, I can't fully support your cause.

Don't get me wrong, I want to join you. But I can't – not yet, anyway.

And the reason why I can't support your ultimate goals is a simple one: I don't know what they are.

So how about this? I'm going to tell you what I stand for. I'm going to tell you what my goals are. And if you agree, then we can stand together. And i f you agree with me, I won't wait another minute before joining you whenever and wherever I'm needed.

So here it goes.

The reason I'm already leaning towards your side is that the fountainhead of your disgust seems to be "Wall Street."

Now, I don't know what Wall Street means to you. But to me, it means all the crony capitalists and market manipulators whose calculators and spreadsheets say the present value of their self-serving greed is worth discounting all of America's future.

That's the Wall Street that I'm committed to fighting – the Wall Street that's littered with greed and corruption.

But to me, the "Wall Street" we're fighting against is not synonymous with capitalists. The enemy we share doesn't include the entrepreneurs and self-starters that have built this country up brick by brick.

So if you think socialism is better than capitalism, you can count me out. If you think that redistributing earned income from hard working Americans to support lazy, self-indulgent, able-bodied crybabies is fair, count me out. If you think that making a lot of money, fairly and honestly, is un-American, count me out. And, if you're thinking about violence or destroying other people's property, count me out.

But if you're mad that Wall Street money has bought our Congress; if you're mad that there's an oligarchy of banker puppeteers pulling the strings of the U.S. Federal Reserve; if you're mad that Wall Street is hell-bent on toying with the stock market and turning the screws on fixed-income investors, parents, and retirees to expand their profit margins; and, if you are mad that "too-big-to-fail" banks can wreck the economy and get bailed out, only to become bigger bullies while tens of millions of Americans lose their homes, jobs, and retirement savings, then I am solidly with you.

And, if you're with me, we agree that we need to tear down Wall Street to rebuild Main Street!

That's where we stand, hopefully united.

Now let me offer up a list – a manifesto, if you will – that you may or may not choose to adopt. But remember, I'm not trying to hijack your movement. I just want to offer some vision and clarity.

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U.S. Economy In Crisis: How To Prepare For The New 2012 Recession

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just finished a battery of media appearances on Fox Business, Bloomberg, BNN and CNBC Asia, and without exception I was asked about two things: President Barack Obama's jobs bill and the U.S. Federal Reserve's "QE3."

The first thing investors and analysts want to know is whether or not the president's jobs bill will work. The answer to that question is "no" – not as it stands, anyway.

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