Bleak future of GM

Well, after a week of high, the future of GM has not been changed. Even though it’s a pity that I did not wait for a few more days to earn a total of $2k profit. But I did not feel too much about it because of the past few days before GM while I’m holding their stock, it’s been a nightmare. A vicious cycle that keeps me to my lappie checking for every news that reported about it. It’s a good lesson learnt. I’m working too hard for my money.

Sorry for the digress. Let me explain why GM may not survive in this recession. Because investing base on emotion is a sure fail plan. And it can be a very strong factor that the stocks raise from $1.09 to $1.92 in a matter of days. There’s a lot of speculation or hope that the company will survive and pick up from there.

GM has solved the union problem. Good.

Their pension debt got restructured. Good.

Got more money loan to sustain for another month plus. Good

Offer for Opel. Good.

But the biggest problem lies in the bondholders. Asking them to forfeit $10Bn for only a maximum of 10% of the restructured company, does it make sense?

Do not blame them for the downfall. The focus should be on the company itself. They are investing in the company at a much lower returns. So they have the right to be the first to get the money in case the company goes bankrupt.

Right now the union owned 35%, US govt owned around 50%. So left maybe 10% for bondholders and 1% for shareholder. It means the shareholders will be super uber massively diluted. Maybe only worth 10 cents a share at the end of restructuring.

Given this type of situation, if people are telling me they’re going for long term, then they’re in for a rude shock. It’s all emotion at play. Buying stock because it’s cheap. Long term requires company with good fundamental. And it means more risk too.

Like what my pop always said, a bird on hand is worth two in the bushes.

Just for fun during recession

Found some funny articles from reuters on how Singapore actually cope with recession.

June 1, The ultimate decree for General Motors

June 1 will be the day Americans and ME (as a shareholder at least for now) will be very concerned because it is the day GM fate will rest on.

They’ve been busy selling off assets (have to) because of their position. GM has become quite cumbersome and it is good to shred off some weight. And it is a liability for a company that is losing money for every car sold. Not to mention the size of pension fund needed in just Canada alone.

BUT My bet is Obama will not let GM declare bankrupt because 6 in 10 jobs in usa is tied to the Auto industry.

GM price is now back to square one. It means if you buy GM 76 years ago, you are back to the same amount of money. This shows how stupid “buy and hold” is if one not adjusting his strategy to the current changes. Especially one is not buying the right company.

I strongly believed the pension fund should be scrap off. People should learn to save for retirement. Union should also be in the position of helping the company to prosper and at the same time fighting for the rights of the employee rather than dragging the whole company with them to the grave. It does not make sense especially when the company had to close down.

The best way ahead is to convince the union to change the bonds, pension fund to stocks to reduce outflow of cash. Sell off some assets for liquidity and provide retraining for their employee in prepare for the downturn!

Citi in trouble?

It’s been a mad rush after the Fed reported that all the 19 banks have passed the stress test. Strangely, they have not mentioned what are the criteria they use to do it? The amount of money on hand? All they mentioned is 2 scenarios are used to gauge the survivability of the banks. That’s very vague isn’t it? For all you know that it may earn $1 and yet lose $1.50. Could it be just to contain the economy from further implosion?

At the same time, I was quite surprise Citi’s share hasn’t went up but drop 1 cents. How can this be possible? Only when the Ceo Vikrem was rumoured will be replaced by the government. Under his stewardship, the company has shown strong profit grow. Or is it otherwise?

Or can it be like the previous news, when BOA’s CEO was forced to purchased ML. Things will be quite interesting for the coming weeks.

JP Morgan valued Citi at $1.50 per share for buy and currently it’s $3. So is it still over-valued? Anymore bad news will prolong this recession and hard to gauge if the market has bottomed.

US Govt force BOA to buying ML

This just show us being in business, Government is the biggest boss. It chills to know that they have the rights to force company to make such decision. I thought they’re suppose to be pro-human rights? Oh yes I forget, it’s about human not company. Just wondering what more do they have up their sleeve. I fear that there will be lots of cover up for the stress test

Extracted from Yahoo Finance

CHARLOTTE, North Carolina (AP) — New York’s attorney general says government officials pressured Bank of America’s CEO Ken Lewis to complete the bank’s purchase of Merrill Lynch and threatened his job security.

 

A letter from New York Attorney General Andrew Cuomo’s office released Thursday said Lewis testified in February that former Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke threatened to oust Bank of America’s management if the bank tried to back out of buying the investment bank.

The government helped orchestrate the acquisition of Merrill by Bank of America over the same weekend in September that another investment bank, Lehman Brothers, went under, setting off one of the most intense periods of the financial crisis.

Bank of America acquired New York-based Merrill Jan. 1.

Uncle Sam: The Debt Collector

From the investment/business point of view, like what the article said, it will show the fundamental of the bank itself. if GS really return the money, you will see a whole lot of mess.

But u can’t stop people from returning money they borrowed right? isn’t it weird?

Ah Long Uncle Sam: you cannot return the money, must remain under the conditions i set and pay interest bcos it’s no good for the the other borrowers.
Borrower GS: But I already have enough money to return. So Why can’t I? What the economy got to do with me…

April 11 (Bloomberg) — Goldman Sachs Group Inc., by selling stock to help it repay $10 billion to the U.S. Treasury, may pressure competitors to follow suit or appear dependent on government support, analysts said.The company, scheduled to report earnings April 14, is considering announcing the share sale as early as next week, the Wall Street Journal reported yesterday, citing unidentified people familiar with the matter. Lucas van Praag, a spokesman for New York-based Goldman Sachs, declined to comment.

A 47 percent gain for the company’s stock price this year and a return to profitability in the first quarter may help Chief Executive Officer Lloyd Blankfein raise new money, analysts said. That might let Goldman Sachs, the sixth-biggest bank, return the cash received in October from the Treasury’s Troubled Asset Relief Program and shake off compensation and hiring restrictions imposed on banks that took the U.S. aid.

“It’s in Goldman’s best interest to be free from the TARP,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “But just because it’s best for Goldman Sachs, doesn’t mean their repayment is in the best interests of the broader U.S. economy.”

Goldman Sachs’ repayment may lead banks “to race each other to access a very weak equity market and to write their checks to the Treasury,” Hintz said by e-mail yesterday. “This could set off new credit concerns about the banks that can’t repay and could set back the recovery of the credit markets.”

One question, I would asked is if Uncle Sam going to set another rule for Goldman Sach to delay the payment or are they going to receive the payment and let the frenzy begin. I can foresee Citi share price to drop again once it happens

The worst recession but the fastest recovery?

It’s been barely a month since our ministers urged us to brace through this recession. But in the past 2 weeks, there are so much optimism everywhere that the recession is coming to an end within this year. But ain’t it incredible that leaders throughout the world has mentioned time and time again this is the worst depression ever since world war 2.

For the past 2 weeks, US market has been on the rally. Not to mentioned that AIG and Citibank has gained 300% profit in a matter of two weeks. Market rally has been based on the point that Citi’s CEO mentioned that the company is making profit for Jan and Feb in a MEMO. Market rally just base on a MEMO? Ain’t it just incredible? Including the fiasco of Federal Government going to the point of taxing any bonuses paid out by AIG. Executives should know it’s not going to work well with US citizens, afterall, it’s taxpayer money.

Obama has also taken a tough stance towards bonuses payout using bailout money as well as making his point clear that American will ride out of this recession under his leadership. There has also been plan to buy out the toxic asset by Federal. So far, Geithner has been trying to create regulatory reform to the financial sector. I’ll reserve my comments on whether it will work. The housing sector is showing good sign that it is recovering. It is good news for the subprime crisis is root for this recession.

But no matter what, it is far too early to determine if the recession is truly over. Not until the end of the year. But it’s not a bad time to invest with everything on sale right now. Dollar averaging is a good strategy now. Buying Index fund is also a good idea due to low risk and low transaction cost.

Beware of buying on sentiment as the current rally is due to speculation and financial institute has been shorting stocks for this week. It has ended quite badly. So now, I still encourage the buy and hold strategy as the market is already near its bottom and market timing doesn’t really ensures that you can buy at the cheapest price and due to transaction cost.

Credit Crisis explained

Nice explanation about how we get to such a state. Maybe people shouldn’t be too innovative on the financial sector. Is there a need in any way in the first place?

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

GIC Citi conversion

Extracted from Hard Hitting in the Lion City

1) Citi’s closing price on Thursday is at US$2.46 a share!
2) By converting, GIC will lose the 7% annual dividend that it has been receiving if it chose not to convert its holdings.
3) based on Thursday’s closing price of US$2.46 for Citi shares, GIC will now suffer a US$1.67 billion loss
4) data clearly show that the U.S. recession is going to get worse before it get any better with the U.S. economy shrinking more than expected in the fourth quarter of 2008
5) U.S. government has just taken a 36% stake in Citigroup (I don’t care if the Americans don’t want to admit it, that’s a nationalization of a bank)
6) GIC is now the second-biggest shareholder in Citi with a stake of about 11%, and Citi’s shares plunged 37% to US$1.55 at the start of US trading on Friday after the bank’s announcement. GIC is paying US$3.25; the current price is US$1.55. Do the math!
7) The profitability of all US banks is likely to be impaired in the next two years’ and Citi is still in danger

Another articlefrom asiaone is also worth reading

THE Government of Singapore Investment Corp (GIC) will convert all its preferred shares in Citigroup into common stock to cut its losses. The swop will give it an 11.1 per cent stake in the troubled US bank, which yesterday announced a sweeping plan to boost its common equity base. The conversion will pare GIC’s paper loss on its original US$6.88 billion investment in Citi from 80 per cent or US$5.5 billion to 24 per cent, or US$1.67 billion, based on Thursday’s closing price of US$2.46 for Citi shares.

Separately, Citi said yesterday that it plans to swop up to US$52.5 billion of its preferred stock, including US$25 billion of the US$45 billion held by the US government, for ordinary shares.

Citi also recorded a massive US$10 billion charge for impairment of goodwill and other intangible assets in the fourth quarter, resulting in an additional net loss of US$9 billion for the final three months of last year.

For GIC, the decision to convert its shares appears to have been the lesser of two unpalatable choices. Citi yesterday suspended dividend payments on its preferred shares as well as common stock, which means that GIC would lose the 7 per cent annual dividend that it has been receiving if it chose not to convert its holdings.

The conversion will make GIC the second-biggest shareholder in Citi with a stake of about 11 per cent, compared to about 4 per cent at the time of its original investment. The US government will be Citi’s largest shareholder, owning 36-38 per cent of Citi’s common equity. The final stakes will depend on how many investors in the publicly held tranche of Citi’s preferred stock decide to participate in the share conversion.

One thing is certain: Existing ordinary shareholders will suffer massive dilution of more than 70 per cent. Citi shares plunged 37 per cent to US$1.55 at the start of US trading yesterday after the bank’s announcement. At that price, GIC’s unrealised loss on its Citi investment would be US$3.6 billion. The profitability of US banks ‘is likely to be impaired in the next two years’, said Ng Kok Song, GIC’s group chief investment officer in a statement.

So is this a move of investment interest or otherwise? Either or, it doesn’t bode well for Citi having to rely on others to bail out from this recession. As well as the interest of Singaporeans watching closely on higher losses by GIC and TH as compared to our resilience plan given out.

Citibank - Good Buy?

Just wondering if Citibank is a good buy after dropping $0.96 till $1.50? Stock prices fall due to conversion of preferred stocks to common stocks by GIC and US Government has caused a flooding of common stocks which in turn caused common stocks to dilute substantially. Investors are starting to panic on the rise US government holding till 36%. It has become increasingly risky that Citi may be nationalized.

With worldwide unemployment on the rise and news that US economy will continue to fall and not improve till next year, it can be quite risky to put money in especially not really knowing how much toxic assets Citi is holding. For now, cash in king unless you’re willing to take a gamble.

GIC convert Citi stocks

GIC downgraded its Citi preferred stocks with common stocks. The catch is they’re exchanging 7% of annual dividend (confirm will get) for another extra 11% of stake in the company. Many funds are yet to exchange their stocks. If others investment institution did the same, the same 11% of stake in the bank will watered down to a few percentage. It seems likely this move is more of to provide a helping hand for Citi and the possibility upside of the stock will raise to a level hight enough to pay them back in the future. But with US increasing their stake to 36%, it gives a scary possibility of the bank being nationalized and our dearest GIC will have to default on this investment.

Another to note is that Singapore is always on the back heel to react to stuff like Lehman brothers fiasco (remember Hong Kong government and Tan Kin Lian?) and for this they decided to convert just within days that Citi announce the news to convert preferred to common shares. It just makes me wonder the real meaning behind this move.

From CNA
SINGAPORE: The Government of Singapore Investment Corp (GIC) has said it will convert its convertible preferred notes in the US lender Citigroup to common stock in a bid to help shore up the troubled US lender.The exchange price is US$3.25 a share – a 32 per cent premium to Citigroup’s closing price on Thursday. The price is way under the conversion price of US$26.35 a share under the original terms of the investment.

With the conversion, GIC’s stake in Citigroup will rise to an estimated 11.1 per cent, without any injection of additional funds.

In January 2008, the Singapore sovereign wealth fund bought about US$6.88 billion worth of perpetual, convertible notes in Citigroup. These preferred stocks would pay a 7 per cent annual dividend.

IBM to cut more than 2,800 jobs

Another round of job cut, nothing can be more painful than this. But I thought, they are doing relatively well. Well it’s a tough world with manufacturing industry especially the electronics taking a hit. Irony is that someone actually asked me to apply for IBM.

My cousin is working in one and his company has been burning a million a month (due to 0 order), from a factory size of 60 to now 6. I also discovered in order for the company to retrench you, they don’t have to compensate you base on the number of years you work in the company. 3 months compensation is more than enough for manager level. Another friend suggested to cut pay by half and another half the next month to force people to leave instead. Really have to shudder at how pragmatic the world is.

I am just worried for people who just graduate or about to graduate. I don’t see the economy will recover in a year time. Not even next year. But it all depends on Obama policy. But even in his term I believe won’t be enought time. Just not enough….

IBM to cut more than 2,800 jobs: “WASHINGTON - US computer and software giant IBM Corp. is planning to cut more than 2,800 jobs, a labor union representing the firm’s employees said Monday.”

(Via CNA > Business News.)

Starbucks don’t seems to be affected by recession

In times of recession, people cut back on spending or rather use the money more wisely. As such government do have to pump in money to boost the economy, to help business stay afloat indirectly.

I’ve been in New York for almost a week and yet everywhere I go, I see people drinking a cup of Starbucks coffee on streets. The shop seems to be always full of people queuing up to purchase the coffee. Seems like Starbucks is immune to recession!

There must be some factors to it.

Firstly, the current cold weather do force people to find ways to keep warm. One of the easiest way to get hot drink. What is a better beverage than a cup of Starbucks coffee?

Second reason is that the price ratio of coffee to meal is not that high. Let me explain. In Singapore, a meal will cost two to three bucks. But a cup of Starbucks coffee is $4.50-6.50. Assuming using SGD$5 as the price for coffee and SGD$2.50 as price for meal, the ratio is

5/2.50 = 2

So the cup of coffee cost twice as much as a normal meal!

But in states, a normal meal cost between 6 to 10 bucks while the a cup of stabucks cost USD$4.50-6.50. As usual, taking USD$8 for meal and USD$5 for coffee, the ratio is

5/8 = 0.625

So in comparison between the 2 ratio, you can find that it’s more expensive to buy a cup of Starbucks coffee in Singapore than in states. So this can be reason why people in states is more willing to buy expensive Starbucks coffee.

There’s also a third possibility which is the restructuring (recent shutting down of stores) is working. With less store means each store have to serve more loyal Starbucks customers. If each store can serve 500 customers per day and yet because of too many stores around and can only serve 200 customers, it makes sense to close down some stores to optimize the operations of each store.

p.s: yes, even though I know it’s way overprice for a cup of coffee, I still have to enjoy my pumpkin spice latte. Hmm bet my friend in Singapore has yet to try it!

US already in recession, says Warren Buffet

When one of the richest man has decided that recession is already in states, it’ll be quite hard to refute his knowledge. IMO, it is due to the Beijing Olympic and recent disaster events that make us lose focus on the economic recession that we need to deal with.

US already in recession, says Warren Buffet: “BERLIN : While economists quibble, the world’s richest man has decided: the United States is already in recession. So Warren Buffett tells German magazine Der Spiegel in an interview to be published on Monday.”

(Via CNA > Business News.)

Gloom ahead for SUN

With the US market going downhill, it is not really surprising that SUN actually make a loss. Most of their customer is based on US and hence explain this situation.

The acquisiton of MySQL is a rather interesting one but it really remains how SUN play their next move. With analyst predicting that SUN will only grow at 3% next quarter, it will kinda put off more investment funds from coming in.

Oh no, will it be a budget cut for SCA program too?

When in a recession, restructuring is often seen and the by-product is often job loss and perhaps a leaner company. This means SUN won’t be hiring so much from this quarter onwards.

In light of a surprising third-quarter loss, analysts sound cautionary notes and CEO Schwartz announces plans to lay off up to 2,500 employees

A day after posting its worst financial results in more than a year, Sun Microsystems (JAVA) announced May 2 that rock musician Neil Young would join its executives on stage in San Francisco to promote a new music project that uses Sun’s Java programming language. Young’s appearance at Sun’s annual JavaOne conference May 6 may grab headlines, but it surely won’t help the worsening business fortunes hammering Sun’s already battered shares.

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