Brace yourself. Here comes the next...
(Sep 18, 2008)
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In this issue:
» The next crisis - US auto
» Bank takeovers...
» Crude oil and gold jump
» Olympics over, protests begin
» ...and more!
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US, the most capitalist society in the world has been learning quite a fair bit of socialism these past few months. And the latest beneficiary of the same is likely to be the country's auto industry. Emboldened by the government's bailout of Wall Street firms, the 'Big Three' of the US auto industry have appealed for a US$ 25 bn government aid that would help them invest significantly in technology and come out with more fuel-efficient cars.
||The next crisis - US auto
While it is common knowledge that the US auto industry has not in the best of health for quite some time now, raising the aid issue now speaks of impeccable timing by the auto majors. With the US government pumping in trillions of dollars to save the severely fragile financial institutions, it could ill afford to turn a blind eye to the auto industry's demands of billions, especially at a time when election frenzy is at its all time high.
Furthermore, auto industry's bargaining power turns all the more powerful as the main auto producing hubs of Michigan and Ohio are very crucial for both the Republicans as well as Democrats. To put it simply, the US government is increasingly finding it difficult felling this enormous demon of bailout that it itself helped create. We wonder if auto is the next major crisis after the subprime mess and crude price spike!Also read - Auto sales are slowing in India and China
The turmoil in the financial industry in the US and Europe has considerably accelerated since the start of the week. While the demise of investment banking heavyweights Bear Stearns and Lehman Brothers set up the tone for a plunge in the global stockmarkets, AIG's harrowingly narrow escape from bankruptcy also set the industry talking. In this mayhem, buyouts are suddenly taking centre-stage, as the institutions afflicted by the ills of the credit crisis are desperately hunting for suitors to save themselves from completely going under water.
||Some banks get taken over...
In the case of Lehman, touted as the biggest bankruptcy filing ever, Barclays has stepped in and provided some sort of a breather to the company by purchasing its investment banking arm for US$ 1.75 bn.
While Merrill Lynch was bought over by Bank of America, AIG was bailed out by the US Fed, which injected a 2-year loan of US$ 85 bn into the ailing insurance company for an 80% stake.
UK has also been facing merger activity with Lloyd TSB Group Plc acquiring HBOS Plc for about £ 12 bn (approx. US$ 22 bn) to create a lender that controls more than a quarter of the UK mortgage market. This development took place following HBOS' shortage of funds to back its mortgages. Given the steep decline in the stock prices of these ill-fated companies, the acquirers have been able to acquire these businesses for bargain prices. Whether these buyouts will add value to the businesses of the acquirers remains to be seen.Also read - Lehman's downfall
After Lehman and AIG, investors vented their fury on the investment banking firms Morgan Stanley and Goldman Sachs on Wednesday. Despite better than expected quarterly results, shares of these investment banks plummeted to multi-year lows. While Goldman Sachs shares plunged 14%, Morgan Stanley shares dropped 24% lower (lowest level in close to a decade).
||But all banking stocks get battered...
Even Macquarie (Australia's largest investment bank) and Babcock and Brown Ltd. (Australia's second-largest investment company) were not spared. Both the stocks tumbled 18% apiece. The collapse of Lehman Brothers, AIG's appeal for aid and the forced sale of Merrill Lynch, has sent shockwaves across financial markets. The potential weakening in operations due to the increasing dislocation of global financial markets and lower estimates of profits have further added to the fire.
Fears of more credit market turmoil, Wall Street's troubles and a falling dollar unnerved investors and pushed them out of equities and into other asset classes. Crude prices jumped US$ 6 per barrel on Wednesday – the second largest single day jump on record. Oil prices were also helped by the Energy Information Administration's weekly inventory statement reporting declining supplies of petroleum products. Gold prices also zoomed by US$ 85 an ounce- the largest one-day jump for the commodity in absolute terms.
That's the assessment of US Senator Harry Reid. As reported on Bloomberg, he believes that the US Congress is unlikely to pass any new laws to revamp financial regulation in the current scenario as most regulators are scratching their heads for ideas. Moreover, with President George Bush close to leaving office, the Congress will not be in a position to pass them.
||Crude and gold make record jumps
Mr. Reid's view does sound realistic given the extent of the current financial mess. While the markets and regulators will eventually sort out the issues, it will be some time before the pain subsides. There will be those who would dismiss his statements as harmful to investor confidence, but we believe now more than ever is time for some realism.Also read - Financial crisis deepens
In a decision unprecedented in its nearly 95-year history, the US Fed plans to accept equity as collateral for loans hoping to control the credit crisis. Interestingly, this is exactly what the Bank of Japan did after an asset bubble burst in the 1990s in the much the same way as the US housing market imploded last year.
The Japanese central bank had then expanded eligible collateral and the US central bank is now doing the same. While Japan suffered a decade of deflation thereafter, it remains to be seen whether the US economy heads the same way. Moreover, the Bank of Japan lost some of its influence on markets, something that might happen in the US too. It may be noted that Japanese banks could rise from the crisis only after banks were able to raise fresh capital, something the US banks will eventually have to do.
There has been a lull in China after the end of the Beijing Olympics. But now, as per The Economist, there are reports of protests around the country on a wide variety of issues. While Chinese citizens did not conduct any protests, as they wanted the Olympics to go without any incidents, they are now increasingly voicing their grievances. Interestingly, many protests are regarding the levels of pollution in Beijing, especially the uninhabitable conditions in localities around waste disposal plants.
||Olympics over, protests begin
The authorities are however more willing to address the problems. Local governments are now promising to clear smelly air, officials are being sacked for mishandling riots, and the government has even admitted that poor quality construction was partly responsible for the causalities in Sichuan province earthquake earlier this year. In fact, Chinese intellectuals have been arguing that China should initiate political reform and allow greater democracy. While it remains to be seen how far China opens up, we believe it is impossible in the long term to pursue capitalism and simultaneously disallow political freedom.Also read - Fending off the Olympics 'curse'
Key Asian markets closed weak today. The losers' list was led by Taiwan (down 3%) and Korea (down 2%). Indian markets opened deep in the red but moved upwards as the day progressed. The benchmark BSE-30 index closed with 0.5% gains. Overall, while Asia pared its opening losses in subsequent sessions, European stock and US index futures climbed on the news that the US Fed, the European Central Banks and the Bank of Japan will inject US$ 180 bn into the financial system to ease the liquidity crunch.
"Where the company has the highest credit rating because both its past record and future prospects are most impressive, we find that the stock market tends more or less continuously to introduce a highly speculative element into the common shares through the simple means of a price so high as to carry a fair degree of risk." - Benjamin Graham
||Today's investing mantra
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