President Obama’s American Recovery and Reinvestment Act includes a section that stipulates all iron, steel and manufactured goods used in projects paid for with stimulus funding must be sourced from the U.S. When he came to Ottawa, the President re-assured Canadians that the stimulus package would be subject to NAFTA and World Trade Organization rules, which specifically bar discriminatory practices.Funny. Buy American will eventually mean only Americans will be allowed to.However, those agreements don’t apply at sub-national level and Canadian companies like Hayward Gordon say they are already being squeezed out of projects at state and municipal level, even if those projects are funded with federal dollars.
Worse is likely to come, since new legislation governing the billions of dollars to be spent by municipalities in the U.S. on drinking water improvements include the same Buy America provisions. The Water Quality Investment Act has already passed through the House of Representatives, replete with language that bars foreign firms from bidding on waste and sewer infrastructure projects, and the legislation is set to begin debate in the U.S. Senate next week.
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The inevitable response in Canada has been a call for retaliation. “My members are saying ‘I’m being locked out of the American market but Americans have unfettered access to Canadian procurement’. There are growing pressures to have Canadian municipalities impose some reciprocal provisions,” he said.
The Town of Halton Hills has already passed a resolution that stipulates only companies from countries that have not imposed their own trade barriers can compete for infrastructure projects. “This supports the notion of free trade and is very distinct from a Buy Canada resolution,” said Mr. Hayward, who promoted the resolution’s adoption. “Halton Hills is a small town and this action is largely symbolic. But it will be presented to the Federation of Canadian Municipalities and if they acted it would not just be symbolic.”
Archive for April, 2009
Retaliation to U.S. Protectionism: Canadian Town Penalises US companies
Chrysler is Bankrupt
Chrysler LLC, the automaker that survived a near-death experience in 1979, filed today for bankruptcy protection to streamline operations and shed debt in a reorganization that includes Italy’s Fiat SpA as a partner.Ah, the perils of living in a socialist land. First, the government is taking over to save a few jobs - jobs that shouldn't have existed in the first place, not at Chrysler. The first time it was bailed out was in 1979, and in 2006 it made such a big hole in Daimler-Chrysler operations that it was quickly sold to Cerberus.The company, third biggest among U.S. automakers, missed a U.S. government deadline to come up with a restructuring plan by today that was rigorous enough to avoid bankruptcy and qualify for more bailout aid. The carmaker tried to negotiate an alliance with Fiat, reduce $6.9 billion in secured loans and cut $10.6 billion owed to a pension fund. Some lenders refused to slash the debt to $2.25 billion.
The carmaker and the government plan to use the bankruptcy process to revitalize Chrysler by putting its best assets, such as its Jeep and Dodge Ram brands, in a new company that wouldn’t be burdened by current costs and debt. A slimmed-down version of Chrysler, armed with Fiat’s small-car technology, would emerge from such a process, giving the carmaker a “new lease on life,” U.S. President Barack Obama said today.
And why did it lose money? It made mediocre and expensive cars, because it had to make them at expensive United Auto Workers (UAW) staffed factories in Detroit, with the UAW bargaining hard for unsustainable wages, and the government making the company cave in.
Holman Jenkins at the Wall Street Journal has an interesting take on it.
Nearly 25 years ago, a Los Angeles Times reporter innocently and accurately invoked the "M" word in describing the domestic auto sector, noting that the arrival of Japanese auto plants was "threatening the UAW's traditional monopoly on labor in the domestic auto industry."Our own government had the policy of only buying Indian made cars (Ambassador/Premier) and flying only the nationalised airlines. Only recently has that policy been relaxed, but you can imagine how one-sided it is, and who they end up saving. I only expect more in such times.The erosion of the Big Three's market share since then has really been the erosion of the market for monopoly labor-produced cars. The UAW standard tactic, "pattern bargaining," which it pursues without embarrassment, would have gotten Bill Gates thrown in jail under the antitrust laws.
When the L.A. Times wrote, the labor cost differential versus a Japanese plant was about $2,000 per car. Twenty years later, the cost difference was about $2,000 per car. Today's lament is, "The bankers have benefited from a bailout, so why shouldn't auto workers?" But they have, they have -- for decades. For the business model described above could not possibly have survived otherwise.
Chrysler was bailed out directly with government loan guarantees; the Big Three all benefited from Reagan era "voluntary" quotas on Japanese imports to prop up domestic car prices. But these were temporary fixes. For more than 40 years, a 25% tariff has kept out foreign-built pickup trucks even as a studied loophole was created in fuel-economy regulations to let the Big Three develop a lucrative, protected niche in the "passenger truck" business.
This became the long-running unwritten deal. This was Washington's real auto policy.
For three decades, the Big Three were able to survive precisely because they skimped on quality and features in the money-losing sedans they were required under Congress's fuel economy rules to build in high-cost UAW factories. In return, Washington compensated them with the hothouse, politically protected opportunity to profit from pickups and SUVs.
Great Depression Rallies and Falls: AlphaTrends
(HT: Big Picture)
Gotta do this for the Indian markets. Where are we, 50% now? Seems we can go much higher...
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Commercial Real Estate in the US: A time bomb? (Zero Hedge)
If I really wanted to trap the essence of that article I'd have to post it in full, which is cheating, so please click the above link and read it. Tyler talks about how Commercial Real Estate (CRE) is not just CMBS (Commercial Mortgage Backed Securities) but also direct unsecuritised lending by banks and insurance companies. And how, this exposure will need refinancing, of an order of 1.4 trillion, in the next four years (till 2013). And how refi is a problem in itself because the property values have dropped so much, there is very little probability banks can refinance without taking huge losses (as they have to have a certain Loan to Value maintained). Extending the loan to avoid refinancing is just delaying the problem, and the reasoning to extend itself will not be sound (you usually extend only if the customer, at the end of the extension, will be in a shape to refinance)
The figures are staggering - less than 32% of loans will even qualify for refinancing. And the only hope is, that by 2013, another CRE bubble happens, of a massive variety, which is what the Fed/Treasury combine seem to want. Tyler summarises:
In this light, anything that the government can try to do, absent continuing to print massive amounts of dollars, is irrelevant. The equity market can easily go up indefinitely, short squeezes can be generated at will, TALF can see 10 new, increasingly more meaningless permutations, the administration can prepare worthless stress tests that are neither stressing nor testing, and talk up a storm on cable TV to convince regular investors that all is well, yet none of these will do one thing to provide the banks and CMBS borrowers with the massive capital they will need to plug the value gap either during a CRE loan's term or at maturity. The multi-trillion problem is simply too massive to be manipulated and is also too large to be simply swept under the carpet for the next administration and generation. It is inevitable that the monster hiding in the closet will have to be addressed head on, and the sooner it happens, the less the eventual destruction of individual and societal net worth (however, it still would be massive). Delaying the inevitable at this point is not a viable option: Zero Hedge hopes the administration realizes this, ironically, before it is too late.
Zero Hedge on the Stress Tests
1) “more than 150 senior supervisors, on-site examiners, analysts and economists” spent a month reviewing the 19 BHC’s that hold two thirds of the country’s bank assets and account for one half of the loansIt's unbelievable. Anyone who tells me the U.S. is transparent, and "clean", and capitalist, or whatever, deserves a whack on the posterior. But, at least they're honest people out there commenting on the blatant lying and fogging that's going on out there. (In this part of the world, news about the bad stuff is the problems, not the bad stuff)More than 150 means at least 151. Is the US Iceland or something? Ten trillion dollars in assets and five hundred trillion dollars in derivatives in one month? A typical single bank examination utilizes hundreds of examiners and takes several months. Clearly the next release of public sector productivity numbers is going to astonish.
(2) ”the firms were asked to project…..the firms were asked to provide…etc.”
In other words, the banks tested themselves and the 150 examiners took their word for it. Any wonder they passed? (3) “traditional role of capital, especially common equity, is to absorb unexpected losses and thus to protect depositors and other creditors. ”
Well, it used to be. Now that job has been outsourced to the US Taxpayer.
(4) “As a result of the loss recognition framework for assets in the accrual loan book, the results of this exercise are not comparable with those that would evaluate such assets on a mark-to-market basis”.
Absolutely. What does the market know anyway? The banks’ models got us into this calamity so damn if they can’t get us out!
(5) “The SCAP analysis is forward looking, but over a limited time horizon. Losses and resources are projected over a two-year period (2009 to 2010) …”
Apparently Treasury is absolutely certain that the crisis they never saw coming will be over soon and in no way is today like 1930. Great news!
(6) “Each participating firm was instructed to project potential losses on its loan, investment, and trading securities portfolios, including off-balance sheet commitments and contingent liabilities and exposures over the two-year horizon beginning with year-end 2008 financial statement data. “
Again, Treasury outsourced the testing to the banks themselves. So what was the job of the Treasury staff other than to photocopy , collate and file? Was this a Temp Staff? Kelly Girls?
(7) “Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate. ”
I know it looks bad, but believe me, it’s getting better!
(8) Chart Page 9
Under the baseline case the economy stops its downward acceleration in Q3 2009. In the so-called adverse case this occurs in…Q3 2009.
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(10) “Under the baseline scenario, BHCs were instructed to assume no further losses beyond current marks”
It’s over! Great news!
(11) “For other consumer loans and for commercial lending (including various types of commercial real estate lending), the agencies estimated loss rates using techniques such as regressions of historical charge-off or default data against macroeconomic variables such as home price appreciation “
I know there are some modelers out there. How does one reasonably construct a regression analysis on past data when nothing similar has ever happened?
(12) “Supervisors evaluated firm loss estimates using a Monte Carlo simulation that projected a distribution of losses by examining potential dispersion around central probabilities of default.”
Ah…smells like Gaussian distributions. The old standard. We have seen how well that assumption works in these unusual times. An example of the dependability of using Gauss, taken from stock market movements in October, and calculated by Nassim Nicholas Taleb of Black Swan fame, showed that the price movements seen in October 2008 could be expected to occur---using estimates based on Gaussian distributions---once every 73,000,000,000,000,000,000,000 years. For those of you not tied to Biblical strict constructionism, the Universe is around 18,500,000,000 years old. Looks like it will be a few quintillion years before we see October again.
(13) Appendix
Take a good look at just how complex and thorough this “test” was. An online dating questionnaire is more probing.
This is one of those times when you can't say it's bad, because it gets worse. You have to ask yourself, if we're standing on such bloody thin ice, is it worth imagining it's thicker and therefore, not moving? If these banks die, is it the end of the world? It can't be. It's never been. By denying them death, the smaller banks of the world, the smarter, well capitalised blokes, are losing out; capitalism feeds the second rung when the first rung dies, and the first rung is on eternal life support.
Maybe the right thing to do is to boycott these banks anyway. Take out all the uninsured money (>100,000) and put it in different, better capitalised banks. Should help in cutting off life support, at least.
ICICI Bank reports 35% drop in EPS/Net Profit
The consolidated Annual EPS is 32.07 compared to 32 last year. At the current price of 434, that's a 13.5 P/E, which one might think is fairly high for a company whose consolidated EPS growth is less than 2% over the last two years (for 2006-07 it was 30.92). And, mind you, it traded in this period at over 1,400.
I've had a long period of dissatisfaction with the stock, but it still seems overvalued compared to any of the other banks. Public sector banks trade at about 5 P/E even today, and Axis Bank in the private sector is showing much stronger growth. I think this stock needs to be much lower than it is today, with prices like 200, not 400.
Interestingly, the consolidated Q4 EPS shows a growth - of nearly 20%. This is on the NSE site but not on ICICI's site, so I'm not yet sure what to make of it. Plus, the transcript of the conf call isn't up yet - that should bring more details.
Yes, the time is not for fundamental thinking - despite all the negative data out there, markets move up. Short at your own peril. Things can defy logic longer than you and I can stay solvent. The next ride down will be easier, but it isn't apparent how long it will take to come.
RBI cuts rates by 0.25%
RBI expects 2010 growth of 6%, which in my opinion is wildly optimistic. But it does expect inflation to drop below zero - no marks for getting that right - and an overall annual inflation of about 4% in the next year. Of course, they believe that this isn't deflation from lack of demand, but a general blip in an otherwise untarnished record of inflation. To me real lack of demand is a distinct possibility, but we'll see how it goes in October.
Another significant announcement, is that the way savings bank account interest (currently 3.5%) is calculated - on the lowest balance between the 10th and the last day of the month - will be changed to a daily product rate. This probably means the end-of-day balance multiplied by a daily interest rate. It's nice to cheer, but this does not apply till April 1, 2010, so don't hold your breath.
Interestingly, the savings account rate at 3.5% is greater than the reverse repo rate of 3.25%. That means RBI is paying less to banks than they have to pay people for their savings account balances - so banks can balance out their SB liabilities by depositing extra cash with the RBI. They have to really lend. And they're not going to, for multiple reasons: Lack of demand is one. So what will happen? Most likely, government bond rates will go up and so will t-bill rates. Of course, RBI can change the savings account rates too - but in election season, it's highly unlikely.
Bank stocks got hammered today, with ICICI losing some 6% in the day. And the RBI policy does contain some interesting notes about fresh regulation, "stress" tests and such - warrants a deeper read.
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Delta says goodbye to Indian Call Centers
Delta Air Lines Inc. said Friday it has stopped using India-based call centers to handle sales and reservations, making it the latest U.S. company to decide the cost benefits of directing calls offshore are outweighed by the backlash from customers.In the 2000 bust, companies scrambled to outsource work to India; the cost saving was enormous. Lessons from this: In a recession, cost-arbitrage matters. In a depression [okay, a "deep recession"], it doesn't. All the accent issues etc. are just fronts for the public distaste for outsourcing, and it fosters protectionism. Which, eventually, is loser-ism. (this goes for India too, remember the Chinese toys ban)Delta said it stopped routing calls to India-based call centers over the first three months of the year. Customers had complained they had trouble communicating with Indian agents, the airline said. Last month, Chrysler LLC said it would move its customer-service center back from India.
"It is fundamentally cheaper to do it in India, but there's also the question of whether it's better to do it cheaper or better to do it better in terms of the relationship with your customers," said Ben Trowbridge, chief executive of Alsbridge Inc., a Dallas-based company that advises on outsourcing.
Call-center representatives in India earn roughly $500 a month, or about one-sixth the salary of their U.S.-based counterparts, he added.
Delta's move also reflects the need for airlines to streamline their sales and reservation operations as customer-call volume dwindles amid the ongoing recession. And, as layoffs mount in the U.S., it could be a smart public-relations move for companies to cut their outsourced business before eliminating payroll positions.
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Last week, SLM Corp., the student lender known as Sallie Mae, said it would return to the U.S. 2,000 jobs it outsources in India, the Philippines and Mexico. The jobs, mostly call-center and information-technology positions, were recently moved overseas as part of a plan to trim 4,000 jobs from the company's overall U.S. payroll of 12,000 employees.
And United said earlier this year it is also moving some India-based phone work back to the U.S.
I look at it as a fantastic thing. First, these outsourcers paid no local taxes. That gets me pissed off. Then, by their lower tax structure, their glory ensured that development for the local market just died - software development for India remains pathetic and urban focussed. And finally, by dwelling on cost-arb they refused to innovate in ways that would truly change the world.
The more jobs lost in outsourcing, the better. We need to get out of our comfort zone. America doesn't seem to want to stop buying BMWs or Toyotas; the products do better, and can cost more than their competition. We gotta get up there, not down at the call-center operator level.
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