The Not So Big Three

Bloomberg is reporting that stock futures are up on the expectation that the Fed will ease rates another 50 basis points. I don't see that as being a reason for it. The rate cut has been expected for weeks, so that should already be worked into the market. Moreover, those who know what is going on know that the cut will really have no impact, other than perhaps a psychological one.

http://www.bloomberg.com/apps/news?pid=20601087&sid=alwndV3znKjM&refer=home

It may be the prospect of a Big Three bailout is helping the market. Reuters is saying it could come as early as Wednesday, though reports on this change daily, so I am not counting those chickens just yet.

http://www.reuters.com/article/ousiv/idUSTRE4B50CL20081216

Nonetheless, a bailout probably makes more sense than the other alternatives. Even with a bailout, the Big Three are bound to become the Not So Big Three in due course. They need to drop models and brands that are not performing and focus. Ford began scaling back sooner than the others, as I recall, which is probably a reason it is fairing better. One might say that Ford has Focus (sorry, but I could not resist. At least I didn't say that they have the Edge). Nonetheless, Ford will also need to continue shrinking.

And the shrinking Not So Big Three will put even further pressure on parts manufacturers, who are already on the edge. Less pressure, however, than a Chapter 11 bankruptcy. Yves makes a good point that Chapter 11 could make parts manufacturers wait a long time to get paid on outstanding obligations, which explains why some of GM's suppliers are demanding payment in advance.

http://www.nakedcapitalism.com/2008/12/european-automakers-dispute-assumptions.html

Another important aspect of this noted in the post above is that their failure will lead to many parts manufacturers undoubtedly failing as well. The other auto manufacturers rely on some of these parts manufacturers too. Undoubtedly, in time, the void would get filled, but not before a lot of chaos and further losses.

Smart Move By China

This is too little and too late to help China in the current crisis, but in the long run programs like the one reported on by Bloomberg are the type of forward thinking China needs. This program gets college graduates into the rural areas helping them to make advancements and connect to the rest of the world. In other words, the aim is to build domestically, which is exactly what China needs to do. For a country the size of China this effort is thus far way too small to have any noticeable impact, but you have to start somewhere.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a2c4a3o81mM0&refer=home

For more on the turmoil in China, the following is a good summary. I like the last line:

"It would be a historic irony if the Chinese Communist party was thrown into crisis, not by the collapse of communism in 1989 – but by the convulsions of capitalism in 2009."

http://www.ft.com/cms/s/0/a1ff5944-cac6-11dd-87d7-000077b07658.html

"dramatic and potentially long-lasting change in consumer behavior"

I have talked about the new world order in terms of consumer behavior. Looks like the reality is starting to set in for corporate America. Corporations need to be prepared for when the economy does NOT return to where it was in 2007. Better than now, sure, but nothing like it was. I have beat this drum too much lately, but it is an important point. Best Buy is catching on and the above quote comes from their press release where they announced reduced capital spending plans for next year. Frankly, I am surprised there are any capital spending plans for next year.

http://www.calculatedriskblog.com/2008/12/best-buy-cites-historic-slowdown-cuts.html

Another Day Another Record

Housing starts were at a record low in November; the worst since tracking started in 1959. Just 625,000 starts last month, which compares to 771,000 just the month before. Moreover, the number of permits issued in November was down 12% from the previous month, indicating that there will be even fewer starts in December.

This sounds really bad, but the rate of decline is promising. This will help to reduce inventories which will, in turn, help us get to a housing bottom. The sooner the better.

If you are looking for a good graphic representation of cliff diving, Calculated Risk has a nice chart on housing you have to see. It also provides a lot more detail on the housing starts.

http://www.calculatedriskblog.com/2008/12/housing-starts-decline-to-record-low.html

He's Got Mad in His Name

And a lot of people are going to be just that. I mentioned yesterday how some funds (namely funds-of-funds or FoF) are really just passive investors passing on their client money to other fund managers like Madoff. They justify their 1% fee and up to 10% of the profits pay by claiming their expertise on picking the best hedge funds. To do this, they have a thorough vetting process and ample due diligence. These guys are the best at what they do and they look under every rock to insure your money goes to the best hedge funds. They earn their money with unheard of levels of due diligence. And they have a bridge you can buy if you are interested.

Henry Blodget has a nice write up on Fairfield Greenwich Group, which is a fund I noted yesterday. They apparently had over 50% of their money (as in their clients' money) with Madoff. After all, he had spectacular success, though no one seems to have understood how. Well, now they know.

I mentioned yesterday that Fairfield Greenwich might have some soon to be litigious clients. Based on what they represented to their clients on their due diligence practices, there are some pretty fertile fields for those looking to sue. I doubt their pockets are deep enough, however, to begin to make up for the losses.

http://clusterstock.alleyinsider.com/2008/12/fairfield-greenwich-experts-we-thought-bernie-madoff-was-the-best-money-manager-in-the-world

Stories like Fairfield Greenwich and the following just go to show you, never trust your entire nest egg with one advisor or group. You could do well, but you also could lose everything. Diversify!

http://www.time.com/time/business/article/0,8599,1866398,00.html

Just Ask a CFO

You want hype, ask the CEO. You want the straight and narrow, ask the CFO. These are the folks looking at the books every day and they know first hand just how ugly it is getting out there. Indeed, they seem to be a rather depressed lot at the moment, which is just another way of saying that their "optimism index" is at an all time low. Probably not as depressed as home builders, but not far behind. And most expect our recession to continue for another year or more. I am in the "or more" category myself, though I am open to change.

http://www.ritholtz.com/blog/2008/12/cfos-recession-to-last-another-year/

Disclosure: None