Focus on China

November 10^th

 

Chinese Laborers Face Grim Job Search

http://online.wsj.com/article/SB122627144171511961.html

 

“It’s very difficult to find jobs these days; people worry a lot about the future.”

-Li Wuhui, 28, Dongguan, China

 

Sound familiar?  China’s slowdown is putting many Chinese industrial workers in a predicament that they thought would never happen.  Bankruptcies and unemployment are steadily growing in south China, one of the country’s main manufacturing areas.  Remember the toy paint scare earlier?  This report mentions that half of China’s toy exporters that are tracked by China’s customs agency were driven out of the market the first seven months this year.  Dongguan is known as the toy-making capital of the world.  This slowdown is hurting many more than the toy makers, however.  Decreases in electronics as well.  The Chinese are also hurting from what American manufacturers are – rising energy and raw materials costs and sluggish sales.  Remember that Americans are large consumers of Chinese goods and when our pockets tighten, China’s imports sit on shelves, unprofitable in the U.S.

 

Where are these manufacturing jobs going?  According to the article – Vietnam, Cambodia, Bangladesh, and Mexico.

 

November 10th

 

China Sets Big Stimulus Plan In Bid to Jump-Start Growth

http://online.wsj.com/article/SB122623724868611327.html

 

“The announced sum of four trillion yuan represents about 16% of China’s economic output last year, and is roughly equal to the total of all central and local government spending in 2006.”

 

In case you don’t have a currency calculator handy, that sum is relatively equivalent to $586 billion USD.  What I’m wondering is: Why this sum is significantly less for a country that has a much, much larger GDP than ours?  Its actually quite scary to think at how much trouble America has really gotten into during the latest crisis.  We’ve had a problem of exporting too little and importing too much for so many years.  It’s really difficult to remember that we used to be a major exporter of raw materials (such as timber, oil, etc.) and durable goods.  That is, up until the second half of the 20^th century.  Where has this trade deficit gotten us?  Now we’re trying to essentially create money from nothing and jobs from no real durable goods.  Yes, I know that we’re really not the agricultural or manufacturing giant that we once were – we’re now service and knowledge workers (Drucker), but what services are we really providing the world?  Will the world pay for them as they’ve been doing?  India is launching a rocket into space and due to U.S. working visa restrictions, we can’t allow enough highly technically trained Indians into this country to fill all of the available spots.  Not to ramble too much, but I think that we really need to take a hard look at our educational system and make significant improvements.  Not all of our children are going to be able have manufacturing jobs out of high school.  Judging from the current state of our financial markets, they may not even be able to be investment bankers anymore!

 

November 12^th

 

Weak China Data Show Why Beijing Acted Fast

http://online.wsj.com/article/SB122639642217517069.html

“China’s large trade surpluses were once seen as the result of a mighty export engine. But the increases in recent months, when export growth has been slowing, are more the result of a rapid deceleration in import purchases — a sign of domestic economic weakness, not strength.”

A couple things that I noted from this article:

 

China is a major exporter of oil and soybeans.  I don’t know about many of our local farmers, but my uncle planted corn and my neighbors mostly planted soybeans.  From my earlier article about the cost of farming leading to a major decline in one of the most profitable farming periods in American history, I found out that many U.S. farmers are looking to plant less corn and more beans (the latter being the least expensive, please let me know if I am misinformed).

 

I always believed that the reason China has such a booming GDP was due to the impact of its exports to the U.S. and other developed nations.  I never really thought about it from the opposite angle – that of imports.  If you look at it from both angles, with the GDP being the difference between imports and exports, you see that even though their GDP is growing, taking into account that the Chinese are also importing and consuming less, the GDP is therefore growing at a much slower rate than it looks at first glance.

 

I also see that we’re not the only ones feeling the housing crunch.  I tend to think of China’s economy as somewhat impervious to the global crunch, but this article really opened my eyes to the fact that the global community is having many of the same problems.  I didn’t really take into account that China might have a housing slump.  According to the article, they experienced a 0.3% decline in property prices in October.  This is one reason for passing their parallel bailout package as soon as they did.

 

It also looks as though China will be funneling money into public works and infrastructure projects, which to me echoes what FDR did during the Great Depression and what the U.S. government may be doing in our future to create new jobs.

 

November 14^th

 

China’s 4% Fall in Electricity Output May Portend Worse Economic Slump

http://online.wsj.com/article/SB122660290165425119.html

 

“The 4% decline in power generation in October from a year earlier, announced Thursday by the National Bureau of Statistics, deepens what has become the most severe falloff in electricity output in a decade.”

 

This article points to more evidence of China’s growth slowing immensely.  My previous articles this week on my sort of “Focus on China” feature has pointed to several factors that are strengthening the argument that China is starting to slump.  Another statistic that this article points out is that the energy used to power manufacturing plants is slowing due to the exports slowing: Their government reported the weakest growth in manufacturing output in the past four years.   China’s four largest banks disclosed plans today to increase lending to bolster the Chinese economy in addition to their proposed $586 billion stimulus package.

What’s Happened to DJIA Since We Began MBA

 

From the Beginning of MBA to Today - DJIA Movement (click to enlarge)

 

 

I made this interactive chart to see how the Dow has changed over the course of the three months that we’ve been MBA students at WSJ.com.  I chose to compare it to the “DJ World except the US”.  It’s interesting to see how interlinked the world really is.  We’re quite dependent on one another.  I know that it may be premature and optimistic, but I definitely think that things will be looking up sooner rather than later.  As far as economic crises go, I think that America has really learned from its mistakes and has (and will continue to) put measures into place to safeguard these kinds of staggering swings.  Also, though, you have to consider that historically, the ups and downs are a part of life as well as the market.

Terry mentioned that organizational valuation tool.  It’s helpful to see what companies might be worth in terms of their assets and their financial ratios to put a highly inflated or deflated stock price into perspective.  The only thing that truly scares me about the markets right now are the seemingly unending strings of bailout packages themselves.  I worry about what will happen if we bail out these banks that might need to fail in order for the market to recover along its natural progression.  How do you make the choice as to what companies to let fail and which ones to bail?  I also consider that even Mighty Greenspan now admits that he may have been mistaken about his de-regulation ideals in terms of the current crisis.

Russia Sets Pipeline Deal With China

Russia Sets Pipeline Deal With China

One of the first large market cap companies that we mentioned in the first day of class was PetroChina ($135.98 billion).  This article deals with Sinopec, another oil producer based in China with a market cap of around $1.33 billion.  In this deal, Russia will provide 40 miles to hook up with Sinopec’s 600-mile extension so that Russia (OAO Rosneft and OAO Transneft) may supply Sinopec with more oil to meet China’s ever-increasing demand.  To put this in perspective, the following article contrasts the two companies and explains why Sinopec wants this Russian oil so badly:

Profit gains at PetroChina, drops at Sinopec

Basically, Sinopec imports 70% of the oil it refines.  If it provides the financing that the tough credit market won’t lend for the construction of this pipeline in order to hopefully boost its market share.

It will be interested to see how both Russia (purported to be “warming up” to OPEC) and China will affect OPEC decisions.  We as Americans would like to think that OPEC is only punishing us with their pricing, but the fact is that China is also a major consumer of oil.  I know that I have traditionally looked toward the Middle East when I think of OPEC, but the truth is that we have suppliers of oil from all over the world.  I think that as Russia’s infrastructure and middle class continue to build and grow, their natural resources (oil is but one of them) will propel them back to the top of the world economic stage.

Bankruptcy Fears Rise As Chrysler, GM Seek Federal Aid

Bankruptcy Fears Rise As Chrysler, GM Seek Federal Aid

In a previous post, I mentioned how ingrained the Big Three were in the mind of this American psyche.  I inextricably link these three automakers with the essence of my national pride.  To me, Ford Motor Company is “As American as Apple Pie”.  I still remember being in the Ford summer home in Ft. Myers, Florida last summer.  His neighbor while there was none other than Thomas Edison.  Ford and Edison – two fundamental fathers of American innovation and a testament to what has – and what can – happen when an ingenious product and a complementary sense of how to make that product mass marketable in this country.

Who has not heard of the Ford vs. Chevy battle?  It’s along the same lines as the Coke vs. Pepsi division.  A question that speaks to what kind of person you are.  It demonstrates how we have identified ourselves with a product so much so as the brand personality demonstrates your personality.  The two have almost become inseparable.

It’s obvious that America won’t let these business – considered national institutions – fail.  I think that they will definitely change, but until the change actually happens, it’s hard to say if they will all merge together, or parts will merge and some will be sold off, or if an investor will step up (if that investor is the U.S. Government or one like Cerberus Capital) and just purchase everything of one of the Big Three.

It’ll have to happen soon, as the article states that they will run out of cash in about a year…

Glory Days Fade for U.S. Farmers

Glory Days Fade for U.S. Farmers (Article Link)

Since my grandfather passed away, he and my grandmother’s farmland was put into a land trust.  I have a lot of vested interest in any articles about farming, as it is the business of my grandparents and many of my uncles on both sides of my family.  I was interested to see how land prices have increased over time, the second largest corn crop in U.S. history (recorded, at least) is expected this year, which will cause prices to drop, which in turn will increase the U.S. Government subsidy payments that are meant to stabilize farmers income.

What I kept in mind while reading this article was that this land has appreciated over time.  I think that this is the case with many self-employed, small family farmers.  The land that they own has been passed down over generations and was not paid for through debt.  Our ancestors – even up until our grandparents generation – are very debt-averse.  I believe that there was a radio interview on NPR with some of that generation in which the man said that they didn’t purchase anything unless they had saved enough to purchase it.  It’s hard to imagine, with our current consumerism and instant gratification slant, that people ever saved to purchase something that they wanted to buy.  This holds true for businesses as well.  Many of them purchase what they need to start the business through either debt or equity before they begin to produce.

I propose that there is another reason why the debt-to-asset ratio is dropping over time.  In the case of my family, many of these small family farmers come to farm because it was passed down to them, not started as a new business.  So there was no initial long-term asset purchases for many of these farmers save for equipment purchases.  Of those in my generation, farming is definitely on the decline.  My uncle has taken over farming since my grandfather had to stop and none of this generation in our family has shown any interest in farming.  We find that less and less farmers are still renting land to farm.  Either its owned by the family, or they haven’t the money to keep renting due to rising costs and unstable prices.

A third reason why the debt-to-asset ratio is shrinking is due to the delaying of purchasing more equipment, as was shown in the article.  So farmers aren’t taking on as much new debt to purchase newer assets – they are leaving their older assets in use and delaying purchases until they feel that the market is again on the upswing.  I think that my uncle bought a used piece of equipment recently, but other than that, is delaying purchases.  So the valuation of the land as an asset is their major asset.

I was surprised that the land in the article sold for over $7,000 per acre.  That is really very high, but I really don’t expect land to depreciate over time.  It’s really amazing to see that the real wealth of these farms is proving to be the land itself.  I think that our ancestors really saw the importance of owning land.  We have to realize that this is a privilege that used to be reserved only for the first-born and the wealthy.  If you were a second son or “of no means”, then you weren’t able to own land in Europe.  That’s one of the many reasons that many of our European ancestors came to America.  It’s something to keep in mind when people think about selling land that they are inheriting.  What is your short-term gain versus your long-term loss?

Also surprising is how much the dividends were on the ethanol-producing company.  That was just an incredible figure!  What pays out a $75 dividend?  Show me where it is and I’ll put some money in it!  (Note that they didn’t mention the price per share, though.)

E.U. Summit – IMF, Regulation, Global Accounting Standards

E.U. summit to push global regulation

I think that it’s interesting to note that Stephen mentions how European countries formed some of the financial structure on a Wall Street / U.S. model.  Now that our system is starting to crack, E.U. knows that it must scrutinize its own financial systems in order to avoid the type of crises that are occurring in the U.S.  Previously, I mentioned (search GAAP in my blog) about the SEC looking to move away from U.S. Generally Accepted Accounting Principles (GAAP) and more toward the International Financial Reporting Standards (IFRS) from an announcement earlier this year.

Another topic of the summit is the role of the International Monetary Fund (IMF) in the current crisis.   Here is a quote from the IMF website on one of their current roles:

“The IMF also lends to countries with balance of payments difficulties, to provide temporary financing and to support policies aimed at correcting the underlying problems; loans to low-income countries are also aimed especially at poverty reduction.”

It will be interested to see how the IMF responds in this situation.  Since it was formed in 1945 (after WWII to help the European recovery from that war), I don’t think that the IMF has really been tested in such a manner as today’s economic crisis.  Also, keep in mind that as opposed to the $700 Billion U.S. bailout package, the IMF’s reserves are approximately $255 Billion (see below table from their website – ignore all links in the table).

Liquidity Table

					Aug. 2008
			2006	2007	SDRs	US$
I.	224.2		224.6	224.2	352
		Members’ currencies	209.0	209.6	210.0	330
		SDR holdings	2.8	2.6	1.9	3
		Gold holdings	5.9	5.9	5.9	9
		Other assets	6.6	6.6	6.5	10
		Available under GAB/NAB activation	-	-	-	-
II.	Less:Non-usable resources		63.0	59.3	60.8	96
		Of which: Credit outstanding	9.8	6.0	7.7	12
III.	Equals:Usable resources		161.2	165.4	163.4	257
IV.	Less:Undrawn balances under GRA arrangements		3.9	3.1	0.8	1
V.	Equals:Uncommitted usable resources		157.3	162.3	162.6	255
VI.	Plus:Repurchases one-year forward		2.8	0.3	0.2	0
VII.	Less:Prudential balance		34.8	34.9	34.9	55
VIII.	Equals:One-year forward commitment capacity (FCC)		125.4	127.7	128.0	201
	Memorandum items:
		Potential GAB/NAB borrowing	34.0	34.0	34.0	53
		Quotas of members that finance IMF transactions (see Financial Transactions - http://www.imf.org/cgi-shl/create_x.pl?ftp )	173.8	174.4	174.4	274
		Liquid liabilities	17.5	13.7	15.0	24
		US$ per SDR	1.50440	1.58025	1.56988

The Beginning of the Euro Bailouts

The lens through which I’ve decided to view the American financial crisis is actually through that of the world economy.  As economists point to indicators of a worldwide recession, I’ve been paying extra attention to how this is affecting the European as well as emerging markets of Asia, South America and Russia.

Relief drives European confidence

This newscast (from Marketplace on NPR) was interesting to me because I’m an Anglophile.  I’ve traveled to GB and have many friends there.  I was interested to hear how England would respond to the financial crisis here in the States.  The concerns of Britain’s people are very similar to our own.  They worry that Britain’s politicians, now that they effectively own half of their country’s residential mortgages (and a sizeable portion of the banking system at large), will use its financial power for political gain.  A key difference in the GB bailout is that they implemented it much more quickly than we did in the U.S., while our banks might be saying “Show me the money” for quite some time.

What’s at risk for Europe’s taxpayers?

Another newscast tonight from “Marketplace” was the bailout from some of the EU’s countries’ perspectives.  Our price tag at $700 Billion is still a massive amount in the mind of the taxpayer (and rightly so), but when we look at the proposed price tags of France ($400 Billion) and Italy (numbers haven’t even been estimated yet), it seems as though the costs will be high worldwide for those governments who are choosing to intervene.

The Crisis – A Timeline (from money.cnn.com)

I found a good timeline as to what has transpired in the federal bailout.  Here is the link for each of the days:

Sunday, Sept. 14 – Trouble brews
Monday, Sept. 15 – The collapse
Tuesday, Sept. 16 – The Fed steps in
Wednesday, Sept. 17 – Another free fall
Thursday, Sept. 18 – The bailout
Friday, Sept. 19 – The confidence boost
Saturday, Sept. 20 – The plan
Sunday, Sept. 21 – The end of an era
Monday, Sept. 22 – Second thoughts
Tuesday Sept. 23 – A spirited debate
Wednesday, Sept. 24 – Closer to a deal
Thursday, Sept. 25 – Deal, or no deal
Friday, Sept. 26 – Back to the bargaining table
Saturday, Sept. 27 – Bailout breakthrough
Sunday, Sept. 28 – Hard-won agreement
Monday, Sept. 29 – Crushing defeat
Tuesday, Sept. 30 – Rebound
Wednesday, Oct. 1 – The first hurdle
Thursday, Oct. 2 – Wait and see
Friday, Oct. 3 (House Passes Bailout on Second Try)

Bank Mergers and Acquisitions Since 1930 (wikipedia.org)

 

Year;  Acquirer;  Acquired Bank; Transaction Value (links are dead, visit article for correct links)

2008	JPMorgan Chase	Bear Stearns	JPMorgan Chase	$1.1 Billion
2008	Bank of America	Merrill Lynch	Bank of America	$50 Billion
2008	JPMorgan Chase	Washington Mutual	JPMorgan Chase	$1.9 Billion[7]
2008	Wells Fargo	Wachovia	Wells Fargo	$15.1 Billion[8]
2008	5/3 Bank	First Charter Bank	5/3 Bank

More listed in the Wikipedia article.  This was really interesting.

Week 5 Portfolio Intro (Edited – Moved Some to Week 6)

This week, I’ve been doing a lot of reading and not much posting here. I was deliberately waiting for the bailout plan to reach some sort of resolution before posting my thoughts on it (I should’ve known better! – as there is as of yesterday night no such resolution). I’ve spent more time this week on accountancy, watching “Money As Debt“, staying on top of the bailout plan as well as the banking situation daily through articles/reports on WSJ, CNN and NPR, some Fannie and Freddie research in regards to their federal takeover, and reading all of the articles everyone’s been posting. Over the next few days, I’ll organize my thoughts on these topics, assemble the articles I’ve read in a logical fashion, and try to break it up into some posts. In addition, I’ve also found some things interesting this week about financial gurus, philanthropists, and entertainment moguls. The organization may be as follows:

• MA – The Accountant’s Role in the Organization
• MA – An Introduction to Cost Terms and Purposes
• MA – Cost-Volume-Profit Analysis
• MA – Determining How Costs Behave (Week 6)
• MA – Master Budget and Responsibility Accounting
• MA – Flexible Budgets, Direct-Cost Variances, and Management Control
• MA – Flexible Budgets, Overhead Cost Variances, and Management Control
• Bailout TImeline – What’s Next? (Week 6)
• Bank Mergers and Acquisitions Summary – Who’s Left? (Week 6)
• Forbes Magazine 400 Richest Americans / One Philanthropist
• Myspace Music Player Update as Part of Deal with Major Label Cos.