11/2/07

The bunny feels betrayed.

All week long he has read nothing but dirty disclosures from top banks about their exposure to the subprime morass. Writedowns, shakeups, CEOs falling on hundred million-dollar swords. It seems each new announcement brings a triple-digit swing to the indices; p/e ratios are so compressed as to muddle fair valuation.

The bunny is so dispirited he could just bypass this whole edition and go to sleep. But that would be unfair to you.

So he will focus on two examples—no more.

Just when you thought it couldn’t get any worse with Citigroup, those early birds at Dow Jones have announced the company is holding an emergency meeting this weekend. (That’ll mess up some golf games.) Is it a Star Chamber to decide Charles Prince’s fate once and for all? For a spin session to try to put a brave face on the prospect of further writedowns, which may affect the company’s ability to pay dividends, which may make shareholders bray for blood? (The bunny is reminded of Georges Danton’s last request to his executioner: “Show my head to the crowd—it’s worth it.”)

This is the biggest bank in the US we’re talking about. The bunny is lop-eared with dismay.

Now, on the far side of the pond, UBS, which has already been bled by the slings and arrows of outrageous fortune, is now being forecast to take another $5 billion in Q4 subprime losses—this is on top of the three billion-dollar loss they’ve just reported. (Okay, that’s an extreme call, from a Merrill analyst—Bear Stearns is only calling for a $2 billion hemorrhage.)

This is a conservative, clients-first Swiss bank, the kind you trust to protect what assets you have when the Nazis are about to invade or the collapse of Communism is set to unleash internecine tribal warfare next door. Now the bunny is supposed to believe that this stalwart European colossus is but a house of cards? Say it ain’t so, Roh!

Neither the bunny’s brain nor his heart will take any more.. He senses a familiar chill in the air, an early darkening of days. It’s time to go to ground.

Bunny milestones of woe:

“UBS Reports a Larger-Than -Expected Loss” by Nick Cumming-Bruce, New York Times 10/30/07
“UBS May Take $5.2 Billion Q4 Subprime Hit” by Steve Goldstein, Marketwatch.com, 11/2/07
“Merrill Lynch Downgrades UBS” by Ramya Dilip, Reuters Research Alert, 11/1/07
“CIti Shares Up on Board Meeting Report”, Reuters, 11/2/07
“Analyst Raises Doubts About Citigroup Dividend” by Eric Dash, New York Times, 11/2/07
“CIBC’s Whitney Spurred Market Swoon on Citigroup Call (update 2)” by Nick Baker and Michael Patterson, Bloomberg.net, 11/2/07

10/15/07

Welcome to the view from the cliff.

The 20^th anniversary of the biggest one-day stock market plunge to date comes after a torrent of bad news. But one thing stands out from the rest of the morass, one ominous cumulus that portends the sort of mayhem that makes the bunny feel as though he is once again peering into the abyss.

No, it wasn’t the New York Post-style screaming banner of this week’s Barron’s (BLACK MONDAY!!!).

It wasn’t the clever Doomsday headline of the Wall Street Journal piece from 10/11 (“The United States of Subprime”), which for the first time the extent of the mortgage mess, and in so doing drove home the point that it is much, much worse than even the most blindly optimistic liar shoved in front of a CNBC camera crew can dismiss.

It wasn’t Landon Thomas quoting Paul Tudor Jones II quoting Robert R. Prechter in the New York Times on 10/13 that the market is set for the biggest bear mauling since 1929 ( hangin’ ten on dat Elliott Wave, brah).

It wasn’t the viral analogy in the very next day’s Times comparing the America’s financial sniffles (which apparently no longer infect the rest of the world) to the pathology of that dastardly bastardly bug influenza.

It wasn’t a torrent of big banks and brokers coming out with multibillion-dollar losses lo the live-long week.

It was Leslie Norton’s feature tucked within the raven wings of the BLACK MONDAY!!! edition of Barron’s, describing the Chinese comet, a stock market making triple-digit percentage jumps year after year. Not only is the dragon flying to yet untrammeled chakras on high, but gweilo investors are chasing said dragon in droves; the bunny nearly choked on his alfalfa reading about how the U.S. Global Investor China Region Opportunity fund (USCOX) is up 73.4% in one year.

Now, it is true that rabbits are social animals, huddling together in their warrens to share warmth and food. But even within such groups, there is an alpha buck, one who crouches alone to master his fate by himself. Such is the lapine scribe of this blog you now peruse. And this solitude gives the bunny the long view of the meditative monk. What he sees is the next rush of lemmings over the cliff (a distant relation by dint of biology, gentle reader, not one the bunny is proud of). Why, the bunny wonders, do humans invest in packs? Chasing the flavor of the moment, all the way back to those dreamy Dutch tulips, hive mentality reigns supreme. It is yet another case of sheep following sheep (astute readers will notice how people have lost their human identity in this edition—the bunny is nothing if not subtle).

The Chinese bubble is but one among several growing around the world, and as prices rise, instead of walking away, het-up homo sapiens rush to grab the comet’s tail in the hopes that (now severely devalued) dollars will rain on their eager upturned faces.

The bunny will take bunker philosophy over the philosophy of crowds any day.

Bunny bullets:

·“Just How High Can China’s Shares Fly?” by Leslie P. Norton, Barron’s, 10/15/07

· “A Pause To Recall the 1987 Crash” by Conrad De Aenlle, and “Sniffles That Precede A Recession” by Robert J. Shiller, New York Times, 10/14/07

·”The Man Who Won As Others Lost” by Landon Thomas Jr., New York Times, 10/13/07

·”The United States of Subprime” by Rick Brooks and Constance Mitchell Ford, Wall Street Journal, 10/11/07

10/5/07

YEEEEEE—HAAAAAAA!

All the pent-up energy building since the dog days of August has finally exploded in a cascade of inexplicable investor frenzy, driving the Dow and S&P back through their July highs and beyond. (Even the Nasdaq is a little over half its March 2000 value!) All this is coming on the back of oil at an all-time high. And gold at a 27-year high.

The US dollar is at an all-time low against most major currencies (touching $1.42 to the Euro). US Treasury prices are on the decline (the yield on the 10-year note is hovering around 4.53%). And the US housing market, long the boost behind the economy lo these last five years, is in its worst slump in history.

Major homebuilders and some large money-center banks are posting horrendous third-quarter results and drawing up layoff lists. The wave of M&A activity which reached arc-welding temperatures in the first half of this year froze solid in August and is only just beginning to thaw. And politicos, pundits, and pugilistic pontificators alike have been whacking around the R-word tetherball again.

What the hell?! Why is this happening? Has night become day, down become up, fuschia become the new black? This has the makings of being one of those bottomless conundrums of the universe, like abiogenesis or the fact that if Pac-Man were three-dimensional, he would resemble a French cream doughnut.

It is the instinctual impulse of Oryctologus cuniculus to discern the cause of the mania, rather than simply embrace it. Dem’s dat does, commences ta perishin’, once the teeth and claws come out. (And they always do.) O, temptation is strong and omnipresent; to just chalk it up to human pigheadedness, as the Financial Times’ John Authers succinctly put it in his 10/3 editorial, “Party Like it’s 1999?”: “The instinctive reaction of many in the fixed income markets is to put this down to stupidity. Equity traders simply do not know what they are doing, or at least do not understand the ramifications of the damage that has been done to the structured credit market.”

Zounds. The bunny thinks the good columnist might be on to something here. For months, he has been experiencing a sense of déjà vu. Maybe it’s been the preponderance of hedge-fund Capulets and Montagues dueling at the Red Cat and Gotham Bar & Grill with flashes of gold and platinum plastic (distinguishable by their French-cuff shirts with dazzling cufflinks, made more visible by the absence of jackets and ties). Or perhaps it’s the eerie similarity, not just to 1999 but early 2002, in which a Fed rate cut dovetailing with a cut on overseas tax earnings pull a US economy mired by recession and the fallout from 9/11 out of stagnation and into—a bubble. (Some have made the case that not only 2001 begat 2007, but 1998, with its rate cut following the Asian financial crisis triggering the dot.com bubble, begat 2001—karma bows to no one.) All the elements are in place—a Fed rate cut, lenient capital-gains tax rates, and a weak dollar which is now favoring large-cap multinational corporations which book a higher percentage of profits from their overseas operations. And the plunging greenback’s overseas effects may not look so bad from a Beltway standpoint. While being able to claim that a weak dollar helps goose exports and lower the trade deficit, it also functions as a tariff-without-a-tariff on those from whom we import manufactured goods (i.e., China), and puts inflationary pressure on those from whom we import commodities (i.e., Saudi Arabia).

This has made for an environment favoring capital flight—whether into the bonds of foreign governments paying higher rates of interest than our own, currencies stronger than our own, or the flavor-of-the-moment investment with the wide-ranging title “emerging markets”.

The bunny does not waver from his dictum that Cheap Money Creates Problems. Bond traders are betting that today’s jobs data will preclude another rate cut at the next FOMC meeting later in the month, but the bunny begs to differ. The next bubble isn’t coming, it’s already here, and the markets setting new records despite the ever-lengthening shadow of the unwinding subprime mess might just bear him out. The hedge funds and buyout firms now squealing like rats in the vacuum of a fast-sinking ship grew out of such a troublesome witch’s cauldron. Capital is no longer flowing into the US in record amounts, but out of it.

And yet Wall Street is whooping it up like the cowboy out on the town at the beginning of Near Dark, and he got exactly what he was looking for. The game will end (and it always ends) once the money stops being cheap, and the signals of the tightening that precede it are already evident. The bunny is well-attuned to listening for the sound of bared fangs in the night, and he knows that no amount of whoopin’-it-up can stave off the whuppin’ those pointed canines carry.

But hey, who’s worried, really?

A selected bunny bibliography:

“What Bad News? Stocks Roar to a Record High” by E.S. Browning and Justin Lahart, Wall Street Journal, 10/2/07

“Party Like It’s 1999? Faith in Emerging markets Fuels an Equity Market Rally” by John Authers, Financial Times, 10/2/07

“Dow Hits Record Despite Losses at Big Banks” by David Reilly, Robin Seidel, and Carrick Mollenkamp, Wall Street Journal, 10/2/07

“Stock Strength Seems to Belie Economic Reality” by Justin Lahart, Wall Street Journal, 10/1/07

“Multinationals Drive US Rally on Weak Dollar” by Francesco Guerrera and Michael Mackenzie, Financial

Times, 10/3/07

“Emerging Markets and Oil Bubble Up” by Justin Lahart and Joanna Slater, Wall Street Journal, 9/20/07

“World Economy in Flux as America Downshifts” by Michael M. Phillips, Wall Street Journal, 9/20/07

“Falling Dollar Squeezes US Trade Partners” by Joanna Slater, Wall Street Journal, 9/21/07

“Our One-Dollar Dilemma” by Judy Shelton, Wall Street Journal, 9/27/07

“Housing Chill Grows Worse, Bites Consumers” by Sudeep Reddy and Michael Corkery, Wall Street Journal (date unknown)

“Merger Frenzy Winds Down After 6 Years” by Dennis K. Berman, Wall Street Journal, 10/1/07

“Treasurys in a Fog Over Rates” by Deborah Lynn Blumberg and Laurence Norman, Wall Street Journal, 10/3/07

“Stocks Rise, Through it All” by Peter A. McKay, Wall Street Journal, 10/1/07

“Cautious Words from a Chastened Bull” by Henry Blodget, New York Times, 10/3/07

8/12/07

"Let them eat cake" is the phrase usually (and probably mistakenly) attributed to Marie Antoinette, referring to the starving non-manicured classes beyond the Versailles hedgerows.

The bunny would add his own version, updated for the present: Let Them Go Broke.

The current Fed helmsman Ben Bernanke is caught up in history, much like newlyweds who buy a home and commence to renovate it only to find that the plumbing is shot, the foundation is skewed and the whole place is haunted by the ghosts of a Waffen SS unit.

Oh, how fickle humans are, chortles the bunny to himself. Life truly is show business--you're only as hot as your last hit. For those without subscriptions, the bunny offers this tasty summation by Alan Abelson in the 8/13 issue of Barron's (p.7):

"Mr. Greenspan, lest we forget, went far beyond the call to entice people, no matter what their circumstances, into buying a home by whacking the cost of credit to as near zero as you can get and still lay claim to being somewhat rational, and urging them to go for those new-fangled adjustable mortgages with deceptively low initial interest rates...As his successor, gentle Ben Bernanke, is no doubt becoming ruefully aware, creating a mess is easy. The trick is in knowing when to slip out, leaving someone else with the job of cleaning it up. And here Mr. G. has proved himself an undisputed master."

Such adroit verbal fencing tickles the bunny's fancy. After all, it's no secret that the current round of bloodletting is due to past Fed policy of cheap money--something the bunny has railed against with abandon in blogs past. Low rates and easy credit a bubble did make. Bursting it is! (For no apparent reason, the bunny channeled Yoda for a moment. Chalk it up to cable TV.) But, ever a keen student of history, the bunny knows this (and the consequent round of chapter 11 filings) is the corrective mechanism of markets at work. Bring on the leeches.

Oh, but if only they would. Instead, the Fed injected billions into the system to keep its glands moist, which smacks of (yeechh!) bailout. But even beyond pleas for cash, the ambient noise machine is now droning for a rate cut--which would only make matters worse. Hedge funds, mortgage lenders and other assorted bottomfeeders who sculpted this steaming bolus would merely go back to their sordid practices, driving us past the ridiculous right into what Mel Brooks in Spaceballs termed simply "Plaid". A rate cut (which Mr. Bernanke, to his credit, has steadfastly resisted, a practice which has probably gotten him crossed off the A-list of every top-tier party circuit from East Hampton to Grand Cayman) is wrong on every level, not least of which is the message it sends to the wrongdoers. It raises what Louis Uchitelle called "'moral hazard'--meaning that the risk-takers who brought on this panic would feel bailed out and likely to do it again" ("Opinions Are Plentiful, as Bernanke Faces His First Crisis", New York Times p. C1, 8/11/07). The logic is simple. If you went away for the weekend and your child turned your bathroom into a meth lab, would you buy him an iPhone? Let the corrective mechanism work--if a thousand hedge funds (of the nine thousand or so which have rather suddenly sprung up in recent years) go under, risk is removed and markets will stabilize. The bad seeds will be purged to make room for a healthier crop. Wall Street works best striving for homeostasis, it is intestinal. Overreaching, running too hot, too much oily spicy food and what have you got?

Bankruptcy, not bailouts, is the markets' Maalox, greedy bipeds, cautions the bunny. Listen to the bailout brayers do not. Let them eat cake--if you stick with timothy hay, the Great Bowel will smile upon you.

7/29/07

You don't have to be a higher mammal to read body language. The bunny is on the defensive.

Long has lagomorphic logic held that the rampant buying binge stemming from cheap money would create a cascade effect, blowing a hole in the bubble of debt-financed speculative acquisitions. This weekend's Wall Street Journal is awash in tales of carnage, though in the bunny's opinion, the New York Times had the best headline (and photo) on 7/27 : "Easy Credit Evaporates, and So Does the Market's Buyout Frenzy" by Sorkin and de la Merced.

CDOs, CLOs, LBOs, IPOs used to finance LBOs--the bunny could never digest this torrent of alphabet soup served up daily by the media. (His kind saw the benefits of a high-fiber diet not long after the last of the dinosaurs went belly-up.) He had been laying low for past few weeks, reading under his fan while the rest of the higher orders sweated out the heat and humidity (you would probably do likewise if you had a fur coat you could never take off).

One thing that has made the bunny's ears stand at acute angles recently was KKR's feeding frenzy. (Try to imagine an amoeba with a swagger.) Of particular jaw-grinding interest was the firm's tooth-gnashing buyout attempt for credit card processor First Data, a deal valued variously at $26 or $29 billion (depending on who covered the story), which stirred up a spat with backer Chase JP Morgan (see Michael Flaherty's Reuters piece from 4/26, "First Data Deal Sparks Spat Between KKR, JPMorgan"). While the tiff centered on the fate of a Chase/First Data joint venture, it was the nature of the deal that set the bunny's mighty mandibles on edge. KKR (which had filed for a $1.25 billion IPO to raise additional cash, according to a Bloomberg story posted 7/16 by Richard Evans and Elizabeth Hester ("KKR to Raise $1.25 Billion in IPO After Blackstone [update 2]), and which is now an object of gloomy don't-think-so speculation, according to the aforementioned Times article by Sorkin & Merced from 7/27, not to mention a piece from Wall Street Journal Europe by Dwight Cass, Nicole Lee, Simon Nixon and Fiona Maharg-Bravo on 6/27) had set out to raise $14 billion in financing for an already agreed-upon deal in so-called "covenant-lite" loans (not to mention another $8 billion in junk bonds), which, according to Dana Cimilluca in the WSJ on 7/9 (p.C1), "don't require borrowers to live up to certain performance metrics for cash flow or profits." Ms. C went on to note that the mechanics of the deal would load up First Data with debt equivalent to ten times its cash flow, which caused the bunny to eviscerate the entire issue with tooth and claw. No wonder Chase was upset--as one of the primary backers of the deal, it would be stuck holding the bag if the credit market soured--just as it seems to be doing. This while KKR has been trying to acquire British retailers Sainsbury and Alliance Boots, Dollar General, and, of course, TXU. (See also "An Assessment of KKR's First Data Bet" in NYT Dealbook edited by Andrew Ross Sorkin 7/10; "Covenant 'Lite' Ranks Swelling in Loan Market" in WSJ's LBO Wire by Cynthia Koons 7/18; and "Buyout Produces Record Cov-Lite Loan" by Dan Andrews in the International Financial Law Review.)

The bunny could just spit, if only he had the glands.

The long period of historically low interest rates has unleashed a torrent of cheap money, which always brings trouble. Look no further than the blowup of two Bear Stearns funds (A-rated by the usual three agencies) that in a matter of one week's time became totally and admittedly worthless. In this case it has led to an orgy of strip 'n flip acquisitions by private equity firms and hedge funds, built largely on credit structures derived from high-risk loans of all stripes. When the house of cards falls, as it inevitably does, as it did and is still doing at Bear Stearns, the vibrations, like those of an earthquake, radiate outward in all directions. This week's bloodbath on Wall Street should not have surprised anyone watching the bloated buyout backlog of recent months. (Though the the bunny counsels that the impulse to panic is overdone. After all, a garden variety stock market correction is historically ten percent, which from a high of 14,oo0 would mean the Dow would come to rest at 12,600--and this would be par for the course.)

Long has the bunny bemoaned the evils of cheap money, high-risk loans, lightly regulated investor pools, and junk paper. Look down, look DOWN that junk road, greedy bipeds, warns the bunny (sounding incongruously like William Burroughs trying to cop on Wall Street). Buying on borrowed money (borrowed from careless lenders) carries an inevitable payoff that no one wants to face, but that everyone eventually will.

6/19/07

Humans are funny creatures. The more they learn about themselves, the more weaknesses they think they have. And the more weaknesses they think they have, the more they scramble for ways to address them, usually with chemicals. And the more they do that, the more conflict emerges between groups advocating their approach as better than everyone else's.

The bunny is too savvy to put his paws into the American healthcare debate (AKA The Morass), but he is curious about the direction of Big Pharma, particularly in the US.

The Democratic-majority Congress, not surprisingly, has declared war on it. The courts have made headlines uncovering all sorts of hanky-panky in cases involving doctors or drugmakers (like the 2005 silicosis case, http://findarticles.com/p/articles/mi_hb268/is_200509/ai_n18878338), doctors have painted drugmakers out to be drug-pushers (check out Elliot Valenstein's Blaming the Brain, http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?z=y&EAN=9780743237871&itm=2)
and then there's the age-old problem of passing costs on to consumers--you lives by de big R&D budget, you dies by de big R&D budget, since the comapny that supplies you with the drugs you may need to stay alive have to keep pace with rising prices too.

Putting aside the prickly points which will doubtless be done to death during the '08 campaign, the bunny sees the big problem as being one of patent rights. All big pharma companies worry about when their product protection expires. Some go to great lengths to hedge against it, others go to ludicrous ones. Take Bristol-Myers Squibb, for which 2007 has been The Year of Digging Out From Bad Decisions Going Back A Decade. Finally emerging from a two-year Federal probation for prior no-no's, and winning a lawsuit to protect the patent on its blockbuster drug Plavix (which the generic competitor, Apotex, is sure to appeal), the company now has to decide if it can get back on its own two feet, or if it would be better off merging with its European partner Sanofi-Aventis (for more on this, check out today's Reuters piece by Ben Hirschler and Ransdell Pierson, "Rumors Fly But hurdles Remain to Sanofi, Bristol Deal"). Litigation is a constant risk for big pharma companies (the bunny figures this is why Warren Buffett never moved to snap up Bristol's battered stock), not to mention the possibility that (besides Federal interference) their product may not work so well (Vioxx, anyone?),

Or the drug dreadnoughts could simply diversify. Johnson and Johnson, for instance, sees about 40% of its revenues coming from drugs, with the balance coming from its highly successful consumer staples. Who says drug companies need make only drugs? The bunny wonders if Big Pharma might borrow a page from the book of Big Manufacturing. 3M makes a variety of drug delivery systems (http://solutions.3m.com/wps/portal/3M/en_WW/DDS/DrugDeliverySystems/), General Electric has moved aggressively into medical imaging and early-detection systems(http://www.gehealthcare.com/usen/products.html).

The bunny figures Big Pharma will feel more Federal scrutiny, not less, though it will not disappear. However, in an election year, with healthcare the perennial issue, the industry will have to come up with new business models to accomodate an increasingly hostile political climate, unending media scrutiny, an army of ambulance-chasing litigators slavering for a payout, and a population that's just sick of it all.

June 18, 2007

The bunny senses trouble on the way.

All the chest-thumping and saber-rattling over a trade war with China (http://www.csmonitor.com/2005/0616/p16s01-cogn.html, http://www.foreignaffairs.org/20050701faessay84407/neil-c-hughes/a-trade-war-with-china.html,
http://www.iht.com/articles/2007/02/02/business/chitrade.php) isn't helping anyone. The massive US trade deficit with China (not helped by prodigious American consumption of Chinese-made goods and a stampede of American investors chasing the dragon), as well as China's enforcement of its currency level despite white-hot economic growth, hardly makes for a level playing field. Then there's the touchy issue of copyright infringement (always a hot topic in an election year), which China is accused of flagrantly ignoring along with other WTO regulations (not entirely a baseless charge, since China's ability to reverse-engineer anything on the planet surpasses even Japan's once-vaunted ability to reverse-engineer anything on said planet).

Then there's the thorny matter of China's trump card--its huge holdings of US public debt. China owns a ton of it. Japan comes close, and any trader with a heart condition likely remembers June 23, 1997, when Japan's prime minister pondered aloud about the consequences of selling some of its US debt holdings, giving the Dow its biggest single-day drop since the crash of 1987. (http://www.thetrumpet.com/index.php?page=article&id=2265) If the US follows through on its tough talk towards the PRC, Beijing may simply decide to dump its US debt holdings. And why not? It's not like they haven't hinted at it already (http://www.chicagotribune.com/business/chi-0703100152mar10,0,4916055.story?coll=chi-business-hed). The impact in the US would be enormous, driving up interest and mortgage rates which would be felt across the board, from buyout/buyback-hungry corporations to anyone carrying debt on a house, car, business, or their education (not to mention the impact on an already weakened dollar).

The bunny thinks this latest slopping-out of Washington rhetoric as being similar to the the latrine full of anti-OPEC litigators. (For more on that lunacy, check out Josef Herbert's 5/22/07 AP filing "House Approves Anti-OPEC Bill", as well as Tina Seeley's Bloomberg dispatch "US Gas Prices Are Due to Outages, Demand, FTC Says" on the same date.) He knows that China has been exporting its unemployment and using its trade surplus to buy other currencies (a process known as "sterilization").

But just as the US cannot maintain its rate of debt increase, so China cannot indefinitely maintain its annual rate of growth (as much as 15%). In time, China's chosen path will force a change in its policies. (The bunny suggests looking at the generation gap in China, between semi-skilled factory workers in living in projects in Shenzhen and their offspring who own--or want to own--cars and cellphones, and who wirelessly surf the Web to brush up on the latest releases from Milan and Hollywood. It's not that wide, and he asks you to consider just how badly the new generations would want to go back to the Good Ol' Days.) But rampant protectionist legislation will only do more harm than good. We should know, we've already tried it. Remember Smoot-Hawley. (http://www.state.gov/r/pa/ho/time/id/17606.htm)

5/27/07

It's not exactly breaking news that the once-vaunted and venerable US auto industry is now a bit rusty, to say the least. Earlier this month, private equity hellhound Cerberus bought a majority stake in the crumbling Chrysler jalopy for $7.4 billion (http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1455392120070514),
with newly liberated Daimler division happily motoring off into a strong Euro-tinged sunset
(http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1537748220070516).

(The strong Euro may prove a mixed blessing. Legendary automotive gran sasso Ferrari is having trouble keeping up with demand for its fabulously cool, extraordinarily expensive products in nations with currencies trouncing our own [see "How to Slow Down a Ferrari: Buy It" by Gabriel Kahn, Wall Street Journal p.B1, 5/8/07], while the Bavarian bouncer ramps up its US-made production lines to keep Das Overhead down [http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1540108020070515]).

Even the once Jolly Green GM isn't feeling the flush flow, having reported a $1.1 billion Q1 loss this year. In the general motoring scheme of things, said Washington Post scribe Greg Schneider on 4/20, "A generation ago, half of all the vehicles Americans bought each year were made by GM; today it's just over a quarter." (You can get the opening salvo at http://pqasb.pqarchiver.com/washingtonpost/access/824304831.html?dids=824304831:824304831&FMT=ABS&FMTS=ABS:FT&date=Apr+20%2C+2005&author=Greg+Schneider&pub=The+Washington+Post&edition=&startpage=A.01&desc=Industry+Giant+Falling+Behind%3A+GM+Reports+%241.1+Billion+Loss
but you'll have to pay the ferryman at the WP archives to read the whole thing.)

Where did the wheels come off?

Once again, the bunny tries to see the big picture.

In the post-bellum US, trade unionism became a social and economic necessity, to correct managerial abuses. Up to and during WWI, unions (more than government) played a leading role in this struggle.

Following WWII, unions (which by this point represented the majority of big industry labor) deviated from the path taken by European unions (which were more willing to accept lower wages in exchange for a greater spectrum of benefits, such as guaranteed employment, longer vacations, maternity leaves etc.). Stateside, unions pressed industry leaders and politicians into a "get more, give less" position. Given their position of power in US industry, management (along with government) caved in.

The business model created from this dynamic can no longer support the modern automotive industry. To begin with, modern US auto manufacturers are no longer manufacturers in the sense that they build cars from blueprint to turnkey all by themselves. Rather, they function as large-scale assemblers of components made by other companies. These others (Delphi? Navistar? American Racing--what's more quintessentially American than a set of Torq-Thrust Ds on granny's Maverick?), having built plants around the Big Three auto makers, face the same labor problems as they do, and consequently must pass on the related costs.

Another problem was the Big Three's egocentric thinking. They didn't go overseas looking for new markets (like,say, those in the oil industry). Foreign plants making American cars (to exploit lower local labor costs) were built primarily to export back to the US. It was an "all about us" mentality, a corporate hubris that considered itself above the pit of collapse lurking beneath all companies that don't make the cut.

For GM, the latest body blow came from within. Its financing arm GMAC (of which it owned 49%, the other 51% held by mortgage company Ditech, a large supplier of ARMs and annoying television commercials) was yet another casualty in the subprime lending fiasco.

American car makers have become bloated bearers of ballooning insurance costs, pension liabilities, and IOUs that will never be collected (and incidentally also make cars). How will the automotive industry, once a pillar of the US economy, survive the 21st century?

Enter Rick Conte and Jim Kaplan, a couple of engineering grads from Clemson University. They are the president and CEO (respectively), of a bold start-up called the Southern Motor Company, based in Liberty, SC (http://www.southernmotorcompany.com/).

Kaplan (who is president of electronics manufacturer Cornell Dubilier [http://www.cde.com], a maker of capacitors nearly a century old), saw the trend in retro car design of recent years as falling short of the mark, and so decided to make his own clean machine, one which would be fully compliant with all Federal safety standards as well as those for emissions (with both California and Canada providing the benchmarks--nothing on the EU as yet).

To do this, Kaplan devised a plan whereby a small facility seeded by his capacitor company would design and build the tools necessary to produce a custom superstructure (cab, panels, bed, and exterior parts), to be grafted onto aftermarket running gear. The entire production procedure would be supervised by another American startup, Panoz Auto Development (http://www.panozauto.com), a maker of high-performance sports cars, to insure a vehicle that's fully compliant for US roads.

Just like that? The bunny was dubious. So he called the good Mr. Conte, who was gracious enough to school him on Southern's genesis and its pilot product, the 358 truck (pictured at top).

"The real strength in this whole company is its business plan," he said in a telephone interview. "Jim Kaplan came up with the concept. We’ve been working on this for over two years now, so he’s put a lot of thought and energy into the program. We’ve identified not only a product that has a huge demand, but taken it through the whole development phase, doing the marketing research, building the prototype, and designing the facility."

Kaplan and Conte's vision of the 358 derives from an existing 1954 Chevy 5-window pickup, tweaked by computer for the 21st century. "We stretched the cab to give more legroom, we tapered the hood to give it a sleeker look, we redesigned the grille, we raised the bed, other subtle changes here and there," he explained. "The exterior will be custom designed and tooled. We’re going to the expense for the body panels, the cab, all the exterior body parts, the bed—all of that will be tooled from the ground up custom for this program." The equipment or "tools" used at this stage will serve throughout the 358's low-volume production, which Conte reckons will be a large savings over the life of the program. The truck's running gear will be based on Ford's aftermarket S-197 platform and 330-horsepower small-block V8 (the heart of the current Mustang GT).

Since Southern Motor has only four employees including Conte, the 358's production will be entirely outsourced to Panoz, which will put the pre-production prototypes of the 358 through their paces. "We contracted with them to design and certify our vehicle," Conte said. "They’ll help us build the pre-production vehicles, and take us through the full safety and emissions certification program. There’s a lot of give and take with them on the design, but they have total responsibility to take this vehicle to full compliance. There are literally hundreds of Federal regulations that have to be satisfied. So we’ll take our prototype and build about six pre-production vehicles, and they’ll take them through all the tests, from EPA to front, rear and side impact, rollover, fuel leakage, visibility, lighting, they’ll take those pre-production vehicles and use those to get us through the certification process."

That satisfied the bunny's perennial paranoia for safety, but why build a new vehicle now, in this climate?

"Because the timing is right," Conte said without hesitation (really, check the tape!). "One, the technology is there, you can design efficiently both the vehicle and the tooling. There’s simulation programs that let you do a lot of the work up front without actually having to build and test. Secondly, there’s the aftermarket. Ten years ago, you didn’t have the aftermarket you have today. You can purchase components, you don’t have to design and build them yourself. You can piggyback on existing technologies."

Kaplan and Conte looked before leaping, a most rabbit-like reflex. They commissioned market research from Automotive Insight, Inc. (http://www.automotiveinsightinc.com) to test consumer response to the 358. "At first we thought it would be mostly male baby boomers with excessive income," Conte said (Arlene Brunner, president of Automotive Insight, specified heads of 3-car households with six-figure incomes). "We're learning though the segment is much wider. 10% of our pre-sold vehicles are from women, 10% from retirees, and another 10% from under the age of 40. We're also finding at that we are seeing a large segment from individuals who aren't necessarily into classic vehicles, they simply love the look of our truck."

The Liberty, SC facility was designed to keep two vehicles in production over their respective sales cycles, which will pay off the cost of tooling and design. "That’s what makes the program feasible. We’re going to produce the same truck over and over, we’re not going to have an extended-cab version, four-door version, or multiple engine choices. Every vehicle gets the same options." Said options are primarily color (which spans a glorious PPG spectrum, viewable on the SMC website). Most of the "options" will actually be standard--no plastic on the interior, unlike the Big Three's heaps, just leather and sheet metal, the way the hot rod god intended. Automatic or manual (6-speed stick) about covers it.

According to Conte, the company has pre-sold 58 vehicles at a cost of $55K apiece. A truck purchased today would be delivered in 2009. "We’re going to start off real slow," he continued. "We’re only going to produce about 40 vehicles in the first six months, to make sure we get it right, make sure we can track new vehicles in the field, evaluate their performance, resolve any issues we may have, feed that back into the process. In ’09 we’ll start focusing on increasing our capacities." Conte said the company aims for a target of 1500 vehicles over a 5-7 year sales cycle, during which another vehicle prototype, possible a sedan, will be explored as Southern's next possible product line.

All this does not exactly make Southern Motor a threat to the Big Three, although the bunny considers it an intriguing alternative. "We consider ourselves a niche, low-volume producer," Conte said. "We’re targeting about 1500 vehicles per year, which is a very small number, when compared with the larger-volume programs that have to sell hundreds of thousands of vehicles per year to make a profit. We’re going after a small niche of semi-luxury vehicles (it’s not too high priced), there’s a demand for the product, we did our marketing analysis, and the results proved that even if this were a full-volume project, the demand would be there. American auto manufacturers may be struggling, but they’re still selling millions of vehicles. We’re just a blip on their screen."

(For readers interested in more on the Southern Motor Company and the 358 truck, the bunny recommends reading Dan Carney's fine feature "Retro Miracle in the Making: Southern Motor 358 Pickup" on Edmunds.com Inside Line (http://www.edmunds.com/insideline/do/Features/articleId=116863), as well as Mark Krzos' News-Press.com business article "New High-End Automaker Seeks Investors in Bonita Springs" (http://www.news-press.com/apps/pbcs.dll/article?AID=/20070328/BUSINESS/70327077/0/SS08)

4/29/07

Good ol' Alan Abelson.

The BARRON'S columnist managed to tickle the bunny's funny bone in the 4/30 issue (vol. LXXXVII no.18, p.6). The bunny would like to show it to you, but he can't, because BARRON'S Online is members only, not even open to WSJ subscribers, which tells him that not only are they serious about security, but also about making money in the wired world of e-freebies.

However, you can read it for free starting tomorrow in the periodicals section of your local library (does anyone remember those?).

In this issue, double-A, whose trademark dry wit can (and probably does) round out the perfect gin martini, harps on the case of a disgruntled Iowan who, perhaps because he felt his own portfolio to be lagging while the market was leaping, expressed his displeasure by sending pipe bombs to the HQs of mutual funds in Denver and Kansas City. (In this case, "going postal" would refer to the probability that the highest casualty rate would not be in the boardroom, but the mailroom.)

The would-be Munabomber motives were not disclosed, and the FBI (like the Porsche Engineering division and Rajiv Chandrasekaran at the WASHINGTON POST before them) did not return the bunny's messages. (He is beginning to think he needs an agent.)

"That someone would indulge in so hostile an action is unequivocally reprehensible," AA writes. "But to do so while not only the Dow and the Russell 2000...were setting all-time highs and the market generally was in full roar, connotes an extraordinary degree of frustration. Anyone unfortunate enough to own shares that have been left behind by this historic rally can't help but experience a touch of empathy for the tormented soul."

That's what got the bunny going, because he thinks it portends a rash of stock market manipulation by force, a proud tradition going all the way back to the hoary 1990s. That bull market attracted all sorts of sundry unsavory types, including the unmanicured classes such as foreign and domestic crime syndicates (okay, the latter, at least, probably do get regular manicures). For a quick 'n dirty summary, try Gary Weiss' plain brown wrap-up for BUSINESS WEEK all the way back in, good gravy, 1996: http://www.businessweek.com/1996/51/b35061.htm

The bunny puts any shock and awe you may be experiencing down to cultural amnesia, but really, he thought you might've remembered. After all, this was the stuff of a Sopranos episode, and he knows that humans are primarily visual creatures who believe that TV mirrors reality (what else would you call all that voyeuristic video-mongering about noncompliant dogs and junk food factories, "fantasy" shows?).

If one screwed-up college kid can become the high scorer in his very own first-person shooter game, then surely some enterprising entrepreneurs with a little savvy and a couple of semiautomatics can go well beyond the venerable pump-and-dump scheme? At a time when low volume amidst gloomy GDP and record fuel prices mean that the slightest bit of financial flatulence can push markets well beyond the pendulum of more peaceful times, such bold initiatives may be just what the doctor will have to patch up later after the markets go turbo down the road, across the divider, through the guard rail and over the side of the burning Bay Bridge.

The bunny knows that humans can't resist an offer they can't refuse.

---

4/23/07

What else is troubling me, thinks the bunny as he gnaws his way through a huge bunch of kale. Dark greens are good for you.

These days, what makes the bunny's jaws grind even more than congressmen and presidential wannabes are hedge funds.

Like most prey animals, the bunny does not like taking risks. But he is truly baffled by how much faith (and money) humans place in these freewheeling, cowboying crap shoots in suits.

Originally thought up as a means to balance out risk, hedge funds' original goal of "hedging" is defunct in all but name. There are now over nine thousand of these funds, financed heavily by high net-worth private investors and free from much of the regulatory pressure which define the conduct of peer investment organizations. Basically, these self-styled financial gurus lock up capital for a period, with their investments leveraged on the order of about 20 to 1. The formula usually goes 2% annual charges to the investor--and 20% of the profits to the hedge fund manager.

This kind of gig sorely tempts the young, for it can rapidly enable any nitwit to parlay someone else's money into a Nolita condo and one of the various foreign status-mobiles the bunny always sees double-parked in front of Pastis. (Along with the obligatory and unfortunately-termed coke bunny in the front seat--the bunny views this slur as an affront to lagomorphs everywhere.)

For those of you who read history, the bunny would like to remind you to read up on the investment pools of pre-1929. Former Fed fuhrer Greenspan didn't slap tighter controls on hedge funds for fear they'd flee offshore--which they did anyway, many of these funds having incorporated outside US limits.

The bunny hopes tighter controls will be enacted to rein in the crazy trading and wild capital surges of the hedge funds (or at least the banks that work with them). Their wild ways make for volcanic volatility, and one bad day (as opposed to, say, a bad month for stock markets) can bring disaster down on the whole warren. Bayou Management or KL Group, anyone?

The bunny is not alone on this. On 4/12 Ben Bernanke at least tried to ring the bells, though few besides the bunny seemed to notice. "The failure of a highly leveraged fund holding large, concentrated positions could involve the forced liquidation of these positions, possibly at fire-sale prices, thereby imposing heavy losses on counterparties," he intoned. ("Counterparties" in this context would be everybody else, starting with commercial and investment banks, then their depositors; after that, the pellets roll downhill.) "In the worst scenarios, these counterparty losses could lead to further defaults or threaten systematically important institutions." (For more of Bernanke's long answer, check out this short article, http://select.nytimes.com/search/restricted/article?res=F20911FB395B0C718DDDAD0894DF404482)

In other words, the style and volume of hedge fund activity is enough to spill the whole cauldron (and scald the cook to death.) Look up, look up, greedy primates, warns the bunny. Pouring money into hedge funds in hopes of quick enrichment is tantamount to baring your cheeks to the buzzards.

4/16/07

Gresham's Law states that "Bad money drives good money out." This maxim came back to the bunny as he waited out the most recent cold spell in his customary fashion--plopped on the couch for his umpteenth viewing of WATERSHIP DOWN. (Yes, he still chokes when Hazel croaks; no one does death scenes like bunnies. Kudos to that Richard Adams feller.)

The US dollar plungeth; if you don't believe the bunny,try Euronews://newsclip.ap.org/D8OHUDL00@news.ap.org. This is not merely to say that it has lost value against other global currencies--other nations are losing their faith in it. Aside from the enormous ownership of US debt by foreign governments, this is measurable in the spike in commodity prices--most notably gas and oil.

Typical responses of the wizards in Washington to this situation have been either to A) print more money, with the consequent inflation requiring exceedingly high interest rates to correct, or B) a realignment of the currency [read: a further, planned devaulation], such as took place with the 1985 Plaza Accord (the legacy of which, for all you 1980s bunnies, included the purchase of Rockefeller Center by Japanese interests).

The bunny knows that when the green upon which one depends has lost its nutritional value, it's better to hold out for greener pastures. The devaluation of the dollar which continues as of this writing is a primary reason for US capital flight. This, in turn, disrupts global trade patterns. There is no neat and clean way to rectify the problem, but curbing expenditures is at least a partial remedy. A slowed slide in the US dollar can at least buy time until said pattern disruptions present difficulties to trading partners which may (and historically, have) reversed the slide in the dollar's strength. Not until then would the "good money"--investment from other nations with greater currency stability--return, thus making lean pastures green again.

A good thing, from the bunny's point of view.

POSTSCRIPT: the bunny is far too freaked out by Jeffrey Ball's article on renewable diesel (http://online.wsj.com/article/SB117669276713570908-search.html?KEYWORDS=jeffrey+ball&COLLECTION=wsjie/6month)

but his loyal staff has braved its messier implications to conduct further research.

3/25/07

The bunny thinks he is losing his mind.

He thinks this because he has lately heard a mantra on CNBC increasing in volume and frequency: buy high, sell higher (and borrow cash to do it).

The first time he heard this he thought he had ear mites.

An era of historically cheap money has yielded rampant speculation across the board. Its legacies are a real estate bubble, the subprime lender meltdown, the carry trade, and an explosion of loosely-regulated hedge funds, all of which carry much more water than needed to rock the boat.

And humans are still not satisfied. Woe betide you, greedy bipeds, thinks the bunny. As ye sow, so shall ye be reaped, prison-shower style.

The bunny thinks thinking an interest rate cut is baked in the cake derives from copious cranial/culinary confusion. A rate cut would be akin to squirting gasoline on a barbecue, with increased borrowing to fund increased speculation the messy result. As if things weren't volatile enough.

Watching the self-styled seers on television or eating their words from the periodicals he shreds, the bunny is reminded of the famous Joe Kennedy story, in which one of America's most successful crooks beat the Great Depression by selling all his stocks after being questioned on the market by a shoeshine boy just before the crash. (A close personal acquaintance of the bunny's experienced the same thing in the fall of 2000, when a Haitian cab driver asked him in broken English for that day's closing price for Microsoft.) The moral is clear and straightforward--rampant speculation Bad.

An interest rate cut (which may yet occur as we slouch toward another election sludgefeast) would only intensify volatility and inflate future bubbles. Not good with an incumbent legislature that does not even call "letting current tax cuts expire" a "tax hike".

And just as overly cheap money is financial nitroglycerin, so too is unchecked media harping on the subject. Incessant round-the-clock yammering about rate cuts fans the flames too. As Max Frankel said when writing on the Scooter Circus in the NYT magazine (http://www.nytimes.com/2007/03/25/magazine/25Libby.t.html?pagewanted=10&_r=1&ref=magazine), "Back off. Butt out."

The bunny would add the following corollary to the good folks inside Media Moloch: "Shut up and shut down."

3/11/07

The bunny loves it when the president takes trips. Thanks to television, it seems to the bunny that he goes along too.

This president, however, seems to have a fly in his suntan ointment. Said fly, is, of course, his oddball ethanol policy, which has Latins screaming and throwing things from Mexico City to Rio de Janeiro.

Corn is the flavor of the moment in Washington, and as a dedicated herbivore that suits the bunny just fine. It's just that politics is spoiling all the prime vacation spots. There's no way for him to check out all the hot beach bunnies and their Brazilians in Sao Paulo as long as the US maintains high duties on their ethanol to protect US ethanol makers. Nor can he munch mami's tortillas south of the border, since their price has jumped 40% to .35 a pound, in a country where the minimum wage is less than $5 a day. (See Elisabeth Malkin's article on Mexican protests and food prices in the NEW YORK TIMES, 2/1/07.) Poor President Calderon--his buddy the Texan has caused the price of corn, Mexico's staple grain, with ethanol embrace.

Massive US subsidies of ethanol producers are having all sorts of unintended consequences--the price of animal feed, for instance, which spiked thanks to the corraling of corn for ethanol, which took 20% of last year's corn crop and is expected to take 25% of this year's. Which means that the price of meat and poulty rises, natch. (See AP 3/9/07, or just read the latest report from the USDA, http://www.ers.usda.gov/Briefing/Baseline/livestock.htm.)

The bunny is all for cleaner, more efficient technologies. But being a prey animal makes him an expert on cause and effect, and this one's shaping up to be a doozy. Screaming Brazilians, man, screaming Brazilians. These are the people who redefined languor, in Portugese no less! The bunny dreads what the politics attending the biofuel craze will lead to next. If somebody comes up with a way to run cars on semolina, the president better cross Italy off his list, for someone will surely take a shot at him.

3/5/07

If the bunny had opposable thumbs, he'd be sticking them in his eyes by now. Sticking them in his ears wouldn't hold out all the nonsense that's clogging up the networks, airwaves and bandwiths these days--those long lepine ears, perfected by listening for the slightest hint of danger for millennia, are far too acute for such crude measures.

One newsbomb has his whiskers in a twist, however. The bunny cannot believe that Congress is seriously pushing the H.R. 800 bill, which would enable union certification with just the flash of a card. Goodbye secret ballot, goodbye worker choice, goodbye oversight. Picture the scene, the bunny asks you: one fine morning, you hop to the front door of your work-warren, where six gorillas are waiting for you. Carry this card from now on, they say, Or Else. Implicit in the "Or Else" suffix is the unspoken understanding that your "vote" will reflect the union party line. It better, since the results will be made public to your co-workers, union reps and the bosses. The potential for coercion is immediate and unmistakeable. It is a mafia pipe dream.

Steve Pfister, a head flack for the National Retail Federation's government relations arm, said as much in a letter to House Speaker Nancy Pelosi on 28 February. "There are many examples where card check elections have been challenged on the basis of coercion, misrepresentation, forgery, fraud, peer pressure and promised benefits." (PR Newswire, 3/1/07).

Such self-segregation of unions from Federal regulatory bodies would be "throwing away half a century of labor law in a single month," warned Pfister's co-flack Rob Green.

This, the bunny thinks, could make unions much easier to manipulate for particular agendas. Strikes could be crushed from within, whistle-blowers would end up in dumpsters with the evening trash.

All of which has happened before. This, the bunny thinks, is what happens in a major port city where the ports are now largely for tourists. Albert Anastasia got his start running the Brooklyn waterfront; the Westies ran the Hell's Kitchen piers. Again, again, all over again.

The bunny shudders and goes back into his box.

2/25/07

The bunny is currently indulging one of his rarely witnessed hobbies: media mastication.

Like all prey animals, the bunny lives in a constant state of Yellow Alert, scanning his surroundings for any hint of impending danger. Having survived this long, part of a species that was old before glaciers gouged great gashes across Westchester, Duchess, and Orange counties, he is highly adept at reading the warning signs.

And occasionally, perhaps in a spirit of vengeful mammalian malevolence, he likes to shred them.

Take, for example, Jennifer Ablan's whistle-blowing analysis of record margin buying of both domestic and foreign equities (Reuters, 2/22). Margin debt has cleared its record high of $285 billion, and just seems to keep rising. Any similarities to 2000, 1991, 1987, or even 1929? Say it ain't so, Jen! SHRED! The bunny makes all gone in a fit of lagomorphic mayhem.

Then there's Wil Hylton's aping of the Constitution's Articles of Impeachment in the March issue of GQ (hang the designer!), for the accurate but woefully unpatriotic listing of Vice President Cheney's gross violations of Federal law with respect to the cherry-picking of intelligence and his ongoing, lucrative and highly questionable relationship with Halliburton. Shred!

Don't forget the gleeful expose in VANITY FAIR by Don Barlett and Jimmy Steele on SAIC, the shadow contractor hawking "expertise about weapons, about homeland security, about surveillance, about computer systems, about 'information dominance' and 'information warfare' (p.344) to a government too downsized to deal with such trivial matters itself. Too insidious, too suggestive, too manga? Shred, shred, shred!

And let's not overlook Byron Calame's troubleshooting Op-Ed piece in today's NYT, in which the Public Editor gamely runs interference for all the nay-sayers among us (not even counting the bunnies) "who believed the TIMES was again serving as a megaphone for the White House" (E14) in its reporting of US arrangements for air strikes on Iran. Shred! Craig Unger's more detailed reporting on same? Shred! Seymour Hersh, The Man, with even more details on this from the region, due to spurt from newsstands in tomorrow's NEW YORKER? Shred, shred, shred!

If the bunny could find a way to get his mighty mandibles around TV broadcasts, he certainly would, what with CNN's saturation coverage of Anna Nicole's meltdown and Jim Cramer's braying about a Dow at 16,000 all over CNBC. A triumph of Cenozoic design, the bunny's jaws would make short work of such troublesome fodder, all of which points to carnage on a blood-red horizon.