Friday, May 8, 2009

The biggest IPO in 2009

During this financial crisis, many companies, especially those in the developing countries, which originally planned to raise capitals by issuing IPOs decided to postpone their IPO issuances or even cancelled them because their business volumes sank tremendously. They were also afraid that the plunging stock market will drag down their stock price substantially, thus negatively impacting their reputations.

Despite general fear, some companies in the developing countries are optimistic with the business outlook and entered the market when others stayed on the sideline. In particular, China has taken the lead in spreading its optimism in the stock market with the rest of the world. Its aluminum-product maker, China Zhongwang Holding Ltd., is the world’s biggest IPO ($1.26 billion) this year so far. It is followed by U.S. pediatric nutrition company, Mead Johnson Nutrition with $828 million.

Zhongwang entered the market at this time because it wants to take advantage of the Chinese government’s 4 trillion yuan stimulus program, which will spend a large portion on infrastructure construction. These railroad and transport-related projects will certainly increase the demand of Zhongwang’s aluminum products.

Hopefully, with Zhongwang’s big IPO issuance, other companies will feel more confident in the financial market outlook and resume their IPO issuances again in the rest of 2009.

Mr. Buffett took a hit!

The legendary investor, Warren Buffett’s insurance company, Berkshire Hathaway Inc. released its first quarter earnings today. Unexpectedly, Berkshire reported a loss of $1.5 billion in the first quarter.

According to the report, because more companies filed for bankruptcy in this quarter, Berkshire took a loss from its credit-default swap (CDS) portfolio. CDS is a form of insurance against the default of a loan.

In addition, the loss also contributed from its $3 billion preferred stock on Dow Chemical Co. What made it a bad investment because Dow Chemical lost the funding for an acquisition from Kuwait’s government; this immediately put Dow into a financial distress and further credit crunch. Since then, Dow’s share price plunged.

To many people, this news implies that nobody was immune from this financial crisis, even a legendary investor like Mr. Buffett also suffered a loss. But one thing that distinguishes Berkshire from other financial institution is that it did not take any TARP money from the government. Hence, it will be easier for Berkshire to return to profit in the coming quarter.

Tuesday, May 5, 2009

A Protectionism Move by the U.S.

During the G20 meeting last month, many global leaders (U.S. was one of them) voiced their oppositions against the protectionism policies imposed by other countries. However, on Monday, the U.S. President Obama pushed out a protectionism policy: a tax proposal which will eliminate the off-shore tax-avoidance techniques used by multinational U.S companies, which will increase the government’s tax revenue.

Obama also wants to use this proposal to increase the U.S. employment. But I don’t think it is feasible. Will the U.S. multinational corporations scale back their overseas businesses to minimize their tax expenses and sacrifice the overseas business opportunities to other foreign companies? I doubt it would happen. Here are the reasons:

The current recession is not turning into a depression because a lot of manufacturing activities are supported by many multinational corporations such as Caterpillar, Procter & Gamble, Johnson & Johnson, 3M, etc. Their annual reports showed their profits over the past couple of years were mainly driven by an increasing growth in international businesses and sales, especially in Asia. On the other hand, corporations that do not have international businesses were struggling hard to maintain profit margins, and even suffering losses.

As the multinational corporations have to incur heavier tax expenses, their profits will be lowered. However, foreign companies who are not affected by this proposal will generate more profit, given all else equal. Therefore, Obama’s tax proposal will seriously drag down the U.S. multinational companies’ competitiveness in the global platform, and possibly increase unemployment from those multinational corporations.

Therefore, if Obama really wants to create jobs in his tenure, this tax proposal may not be the right one.

Monday, May 4, 2009

The Overprotected U.S. Auto-Industry

Despite the U.S. Treasury’s effort in pumping so much money into the auto-industry to prevent them from failing, the talk between the U.S. Treasury and the lenders broke down last Thursday, which finally led Chrysler to file chapter 11.

Prior to Chrysler’s bankruptcy, besides constantly injecting funds to the auto-companies by the U.S. government, the government used an overprotective measure, by kept forcing the lenders to convert their debt into less amount of equity, meaning forcing the lenders to make a huge loss on their investments. This abrupt change in rules is extremely unfair to the lenders. At the same time, this is not a suitable solution for the problem. The problem is how to make the U.S. auto manufacturer more competitive.

When comparing to the Japanese auto manufacturer such as Honda, Toyota and Nissan, the U.S. auto-companies can feel that the Japanese auto-companies are taking up more market shares from the U.S.’s in the auto-market.

The labor union also contributed to the collapse of the auto manufacturer because the healthcare and other workers’ benefits are enormous. These excessive expenditures drained a large amount of cash out of the auto-companies. If the labor union wants to become more competitive and secure their jobs, instead of having prolonged strikes and delaying production, they should cooperate will the auto-companies’ restructure proposal by reducing those benefits.

Personally, I don’t think the bankruptcy of Chrysler is a bad think but is the opposite. Even though this event reflected the auto-industry is still in big liquidity crunch, Chrysler’s bankruptcy and subsequent operation by Fiat will make the auto industry more competitive in the future. Because now, with Ford and GM remaining, they really need to figure out how to be more competitive globally in order to survive in the auto-industry.