Thoughts on Brexit…

Ah, the crazy Brits…they’re always up to something that’s bound to cause a stir. Whether it’s voting for Scottish independence (2014) or voting on the United Kingdom (UK) leaving the European Union (EU) (this year). One thing I do admire about the system of government in the UK is how they put they major policy questions directly to the citizens for a vote (even if the referendum was non-binding)

With that in mind, I wanted to share some thoughts on Brexit…

Like the majority of the rest of the world, I was quite surprised when the majority of the votes came in favor of leaving the EU. I do think that the British people are making an ill-informed decision or a decision that they are bound to regret in the years to come. There’s many things that the British government will have to do such as re-issuing passports, review current laws that were passed for EU regulatory purposes, negotiate a new trade agreement with EU, determine the status of EU citizens in Britain and British citizens living in the EU, and the list goes on and on! One other thing for consideration is that by leaving the EU, it may also force the break up of the UK. Every single county in Scotland voted to remain in the EU. Also, Northern Ireland is exploring its options to keep trade and borders open with Ireland. It’s no wonder Prime Minister Cameron is letting the next PM activate article 50 of the Lisbon Treaty that allows the 2 year clock on leaving the EU to begin ;).

I also think that the U.S. markets are overreacting. The markets in the U.S. have dropped almost 1,000 points from last Thursday’s close due to the “global uncertainty” associated with Britain leaving the EU. In fairness, Britain is the world’s 5th largest economy, however, a lot can and will happen if Britain decided to declare under article 50 that they are leaving the EU. What this overreaction presents for me is opportunities to buy stock at discounted prices! I only wish I had more cash to take advantage of the price drop. It’s like I was explaining to one of my co-workers today, our company is not materially worth less the today because the British people voted to leave the EU. I’m also a believer that this price drop in the market will eventually recover.

From a selfish standpoint, now is a great time to travel to Britain as the exchange rate has gotten much more favorable for the U.S. dollar. Additionally, if you’re buying a house in the next 30 days or so, you may be able to lock in a lower interest rate as there as been a significant surge in buying 10 year U.S. Treasury bonds. This has caused the yield on the bonds to decrease and because mortgages are closely tied to the 10 year Treasury yield, interests are lower.

It will be interesting to see how the vote to leave the EU plays out. There has been talk in Britain of voters not understanding what they were voting for, a petition calling for another vote on leaving the EU, and leaders of the “Leave” campaign walking back on their pledges on what happens and how certain programs would be funded if the “Leave” vote won.

Leaving the EU will be a complex affair with lots to consider for Great Britain and its (former) EU partners. There is much to discuss if and when Britain declares that it’s leaving. So far the biggest losers of the vote to the leave the EU have been the British citizens with the pound losing its value, markets in turmoil, and the potential for Scotland to leave the UK.

I’ll leave you with one thing to ponder…

Given that the vote on last Thursday was non-binding for the British Parliament and the complexities behind actually leaving the EU, will the British actually leave or will this end up being bluster that will end up causing a lot of anxiety and costing people a lot of money? As for me, while everyone is panicking about the uncertainty and trying to figure out what to sell, I’ll be happily buying cheap stock!

If you’re interested in reading more about “Brexit”, I encourage you to consult the following links:

News Link – A 15,000 dollar tax credit for buying a house after all??

I saw this link on one of the message boards I frequent. Apparently the Senate wants to increase the home buyer tax credit to 15,000 and remove the income and first time buyer restrictions.  Originally, when the stimulus bill was being considered in Congress, the first time home buyer tax credit was $15,000 in the Senate version and nothing in the House version. Through negotiations, the tax credit was watered down to $8,000 with certain restrictions.

Now apparently to encourage even more home buying the Senate would like to increase this tax credit back to the original $15,000! You got to love the government for trying. Personally, no tax credit is going to completely solve the problem with people losing their jobs, unable to meet their monthly obligations, and unable to easily get approved for financing.

This is definitely one to watch though.

Senators Want Homebuyer Tax Credit to Rise to $15,000 (Update2) – Bloomberg.com.

What to do with GM

Well it’s been quite a week of activity for GM. Many events have led to the what has finally happened this week. On Monday they filed for bankruptcy. In past few months, GM has received over 19 billion dollars in government loans to continue operating while it came up with a re-organization plan. Their first restructuring plan was rejected by the government. As part of rejecting this plan, the government told Rick Wagnor, the long time CEO of GM, that he must resign.

This week GM also sold its Saturn brand to the Penske Automotive Group and sold the Hummer brand to a Chinese manufacturing company. GM has also gotten its unsecured bond holders to agree to an equity share in the new company in exchange for debt forgiveness. Rounding out the shedding of GM brands is Opel which was sold to the Canadian auto parts company, Magna.

GM also took steps to reduce its legacy costs. In its deal reached with the United Auto Workers union, GM was able to get the union to agree to taking on 10 billion dollars in equity in the union healthcare benefit fund. In exchange for this, the UAW’s healthcare fund will receive a 17.5% equity stake in the new company.

Finally, GM was able to secure bankruptcy up to 30 billion dollars in financing from the government. It’s not like this wasn’t a given, considering the U.S. government will control 60% of the new GM making it the majority owner.

For those who say the GM bankruptcy filing was a product of the economic crisis that started in real estate, I say think again. In 2005, BusinessWeek ran an article analyzing GM’s business plan. Here’s what BusinessWeek predicted:


How bad could it get? BusinessWeek’s analysis is that within five years GM must become a much smaller company, with fewer brands, fewer models, and
reduced legacy costs. It’s undeniable that getting to that point will require a drastically different course from the one Wagoner has laid out so far. He is going
to have to force a radical restructuring on his workers and the rest of the entrenched GM system, or have it forced on him by outsiders or a bankruptcy
court. The only question is whether that reckoning comes in the next year, if models developed by Vice-Chairman Robert A. Lutz fall flat; in 2007, when the
union contract comes up for negotiation; or perhaps in five years, when GM may have burned through its substantial cash cushion.”

It’s now about 5 years later and GM is finally shedding brands, closing factories, and reducing costs. There has been a lot of other analysis done on why GM has failed. This is one article I highly recommend reading which takes a look at the decisions that GM made decades ago to pay for employee healthcare and pensions and how accounting changes in 1992 affected the company.

Make no mistake about this, GM’s failure is a result of poor management decisions.

Now that the U.S. tax payers are the new majority shareholders of GM, we have a chance to have a say in the way GM operates. I propose to the Obama Administration that not only should the current Board of Directors be replaced for violating their fiduciary responsibility to manage the company, but the top 3 layers of management at GM be shown the door. Too often have these same people been granted the authority to manage the company and change the direction of the company only to make poor decisions. It is time to get new blood in the highest levels of GM management and run the company appropriately. Apologists may say that this time will be different in that GM will be smaller, have less legacy costs, and that the decisions will be easier for management to make. I disagree. Top management has had their chance for decades to make GM work. We’re here today because of poor management decisions, nothing more, nothing less.

Feel free to leave your solution and suggestions for GM in the comments especially since the U.S. tax payer is financing GM’s bankruptcy and the new majority shareholder!

The Obama Speech in Cairo

On June 4th, President Obama fulfilled one of his campaign promises. That is to give a policy speech in a major Arab capital. His speech focused on reaching out to the Arab world and asking for a new beginning between Arabs and the West. President Obama called on Americans and Muslims around the world together to have a “new beginning” based on “mutual interest and mutual respect, and one based upon the truth that America and Islam are not exclusive and need not be in competition.” He shared his broad background of having a Muslim Kenyan father, living in Indonesia, working in Chicago communities with those of the Muslim faith, and being a Christian himself. He recalled that the first country to recognize the United States as a country was Morocco, a Muslim country.

After laying the foundation for his speech, Obama addressed 3 major issues – Afghanistan, Iraq, and the Middle East. On the Afghanistan issue, he made clear that “we seek no military bases there.” He made clear the United States was in Afghanistan to pursue violent extremists “determined to kill as many Americans as they possibly can.” He acknowledged that a military solution alone will not solve the issues facing Afghanistan and Pakistan pledging support of foreign aid to build schools, infrastructure, and to “develop their economy (referring to the Afghan economy) and deliver services that people depend on.”

Obama was blunt on the Iraq issue. He called Iraq a “war of choice” and acknowledged that even though the Iraqi people are probably better off without Saddam Hussein, he shared the lessons we have learned from this choice namely – “the need to use diplomacy and build international consensus to resolve our problems whenever possible.” He talked about America’s responsibility “to help Iraq forge a better future — and to leave Iraq to Iraqis.” and he discussed his orders to support this responsibility which is the removal of all troops by 2012.

Finally on the issue of Middle East peace, Obama was upfront and honest. He addressed the fact that the United States and Israel have close ties. He acknowledge the “the pain of dislocation” and “the daily humiliations ” of the Palestinian people. He endorsed a 2 state solution “where Israelis and Palestinians each live in peace and security.” He listed things that both sides must do. For the Palestinians, he said they must abandon violence and develop a capability to govern. For the Israelis, he stated that they must acknowledge the Palestinians right to exist and called on the Israeli “settlements to stop.”

Obama also discussed the issues of nuclear weapons, democracy and religious freedom. Obama ended his speech with references from the Jewish, Muslim, and Christian faiths talking about peace. His speech seem to be well received from the audience and certainly set a new tone in United State policy towards the Arab and Muslim community.

Whether you agree or disagree with Obama’s policies, I think you would be hard pressed to disagree that this speech was not necessary. After the attacks of September 11th, 2001, the United States had the entire world offering their assistance and condolences for the event that occurred to our citizens. In my humble opinion, this country squandered that good will by pursuing our own agenda in Iraq and other parts of the world. In the interest of full disclosure, I will say that I initially supported our invasion of Iraq, but as more facts became apparent, I became convinced that our invasion of Iraq was unnecessary and harmful to our country’s security. Now with the election of new leadership in the White house, the U.S. once again can set a new direction and tone.

President Obama’s speech in Cairo was the first step in setting this new tone. It will be interesting to see what immediate steps the Obama Administration takes to take the goodwill and new tone from this speech and put it into actionable events. If Obama does not act in the coming weeks and months, his speech will have done nothing to restore goodwill and positive thoughts of America in other parts of the world.

After Obama was elected President in November, I took a trip to India. Everyone that I talked to in India was excited to hear my thoughts on Obama. They were excited to have a new U.S. President who would take a different approach. I think that similar conversations were taking places in other parts of world as well. I think we are seeing the start of this new tone and approach.

Betting against the American economy (My bet against the Dow)

Throughout the months of March and April, as the markets were moving up and down, Steve, my roommate, and I exchanged 125-150 emails on the subject of the market. Some of the time I would email an article that I knew Steve would disagree with, just to get a discussion going. Much of the time, I was pointing out that the markets were still too high and how more bad news was forthcoming. I complained as the markets moved positively on bad news such as increasing unemployment or companies not losing as much money as predicted. He complained the markets pulled back from earlier gains on things like housing news and the analysis of bank quarterly earnings. Eventually, this led to the following email exchange:

my roommate:“will the DOW hit 9000 this year? ill bet you $20 bucks”

me:“Just because it hits 9000 doesn’t mean it will stay at 9000. I’d be dumb to take this bet because all you have to do is hit 9000. it could go down the next day, but you could still claim victory.”

my roommate:“ok whats your bet then”

me:“My bet is that DOW will unable to sustain 9000 for an entire month during 2009. 20$.”

my roommate:“deal. dow stays above 9k for a month

remember that you are betting against the biggest badest economy in the world: the american economy. while capitalism and all these ‘stupid banks’ show how capitalism goes astray – it also adapts quickly – there is a monetary incentive to do so.”

me:“and you’re betting that the illusions created in this current market will hold up.”

As of today, the market stands at about 8360. The market has swung up as high as around 8500 recently, but nowhere near 9000. Now I realize 2009 isn’t over yet and that it is too early to claim victory, but, I don’t see the Dow making 9000 this year. I think there is going to be more bad debt writes off by the banks and more prime borrowers having problems due to job loss and declining home values. The banks in their quarterly earnings reports were increasing their provisions for bad debt. So even the banks are expecting more bad news. From time to time I will update the status of this bet.

Feel free to leave your comments or predictions for the Dow / markets in 2009.