10. Yahoo rejects Microsoft’s $45 billion takeover offer – February 11, 2008. This one has to rank as one of the most stupid business decisions ever. Since Yahoo practically started the internet search business back in the 1990s, they have quickly given up their dominant position to Google in the past ten years without a major fight. By the middle of 2007, Google had a 53.6% market share of the search engine business, versus Yahoo’s rapidly shrinking 19.9%. Microsoft’s $44.6 billion in cash and stock offer was literally a lifeboat and gave Yahoo the best chance for long-term survival. Yahoo rejected the offer and a later offer in May valued each Yahoo share price at $33. Yahoo’s share price had been languishing around $19 in recent years. Yahoo’s CEO and founder Jerry Yang demanded $37/shr! Eventually Microsoft got tired of Yahoo’s demands and pulled all negotiations off the table. What is Yahoo today, end of 2008? The share price is $13.03 and Yang was ousted in November. Although Microsoft still has lukewarm interest in Yahoo’s search business, the main opportunity for Yahoo has passed.
9. Housing prices continue to go down town – It’s amazing how so many analysts and normal people knew that the meteoric rise of housing prices was due to risky ARMs and other loans that were impractical and ticking time bombs. It’s amazing the federal government did not see this coming or chose to not do anything about it. Because of the dot com bust from a few years ago and the recession soon after, the Feds turned a blind eye and let free credit run rampant. The bomb went off in 2006, and median housing prices have gone on a free-fall from an inflation-adjusted high of $275,000 in 2005 to near $200,000 at the end of 2008. It will take a good while to sort this thing out. Housing prices are still historically high and with high unemployment rates, increasing foreclosures will continue to flood an already over-supplied realty market.
8. Unemployment rate – The United States has been pretty lucky in terms of unemployment rates for the past two decades or so. Ever since the recovery from the high inflation, 9.0+% unemployment rates of the early 1980s, the rate has stayed well below 8.0%. Since 1995, the rate has performed even better, only touching above 6.0% once during the short recession recovery in 2003. In January 2008, the rate was around 5.0% but had already been steadily rising throughout 2007. Since this January, the rate has put on the rocket boosters and is now at 6.7% nationally, with no signs of slowing down. Several states, such as Michigan (9.6%) and Rhode Island (9.3%) already have unemployments rates above 9.0%! Another five states have rates above 8.0%! Stats were from Nov 2008 and look to be higher when December stats come out.
7. What happened to the commodities bull market? – Oil, gold, silver, platinum and copper. All were at multi-decade highs in 2007 and even in 2008. Since then? Crude oil prices have dropped from $150+/bl to $37/bl! Most commodities lost more than half their values. Exchange-traded funds such as SLV, GSG, and XLE all dropped more than 50%. The one exception so far has been gold. Although gold prices have dropped from a high over $1000/oz, they have not dropped below $700/oz, and have recovered into the $800s since then. Gold is an unique commodity and it appears that it mostly trades as a safe-haven currency than a physical commodity. In looking at the chart of GLD (below), gold prices have solidly bottomed out at $70/shr and is looking like it will have a strong 2009.
6. Remember the $168 billion original stimulus package? – That amount seems so little nowadays especially when Obama is bandying around an $800B to $1 trillion stimulus package. Add to that the $750B bailout package given to financial companies and automobile companies. This is a year of bailouts and stimuluses and so far they have not helped the economy. Instead, the state of the economy is at its worst at the end of 2008. The expected package by Obama will be an early focus of the Obama administration. I think most people could use an extra few hundred dollars in their pockets.
5. The survival of American automobile companies – General Motors, Ford Motor Co. and Chrysler became the poster child of the current economic crisis hitting main street. On display was the millions of jobs, especially blue-collar jobs, in America at risk of disappearing due to the recent decades of mismanagement, overhead and foreign competition of the US auto industry. With the finance industry easily getting a $750B bailout, it seemed absurd that an industry that for decades represented hard working Americans and unions had to literally beg for a few billion dollars to survive. It was obvious where the attention of politicians were. Although Bush recently said that $18B of the $750B bailout would be immediately used to prop up GM and Chrysler, the long fought battle was wasted time and energy by the attention garnering and bureaucratic Congress.
4. Bernard Madoff arrested on $50B Ponzi fraud scheme – When the $50 billion Ponzi fraud scheme by Bernard Madoff was revealed in early December, it was the main headline of major news websites for a mere few hours. Since then, as more details trickle out, the fraud continues to take a back seat to the macro-economic recession covering the globe. In any other year, the news of a legendary and consummate businessman (and a former NASDAQ chairman) being arrested for a fraud-scheme covering possibly the largest dollar amount in Wall Street history would ripple for weeks, if not months. However, with white collar crimes dominating the post-dot-com era (Enron, Worldcom, Martha Stewart, Tyco and the 2008 unraveling of the hedge fund industry), the public is now immune to financial fraud. Quite unfortunate. (See here for What is a Ponzi scheme)
Corporate bankruptcies on the rise in 2008.
3. Bankruptcies and those near it – It has been a sad year for many corporations as they head towards bankruptcy. Many of them well-known with years of solid profits. The list continues to grow and the impact of the recession on the consumer and his/her buying habits is only beginning. Circuit City, Linens ‘N Things, KB Toys, Frontier Airlines, Mrs. Field Cookies, Steve & Barry’s, Whitehall Jewelers, Mervyns, Sharper Image and Waffle House are some of the big name bankruptcies. And this list doesn’t even mention financial companies, which I discuss in #2. See this list for a more comprehensive list of corporate bankruptcies in 2008.
2. The demise of the hedge fund and mortgage finance industry – The derivatives market has become a multi-billion (if not, trillion) dollar investment industry that is complicated and largely misunderstood, even by the most astute financial advisors. Derivatives, as its name suggests, are investment products that are created off of actual traditional investment products. That means their intrinsic value is conjured up and their existence puts them closer to full-blown gambling. The current financial laws and oversight are not suited for such trading. Over the years hedge funds and derivatives took on more and more of the investment strategy of major financial corporations. Derivatives that were based on risky mortgages and insurance eventually collapsed as housing prices plummeted with lendees’ inability to pay the mortgages. The result has been a credit lockup unforeseen in decades. Major financial companies toppled and its effects are still not fully known. Major companies that totally collapsed include Bear Sterns, Lehman Brothers, Washington Mutual, ANB Financial, Fannie Mae, Freddie Mac, and AIG. See this list for a more comprehensive list of financial collapses in 2008.
KBW Philadelphia Bank Index - performance since 2004
U.S. Recessions since WWII (Courtesy of CNN)
1. Recession or Depression – Which leads to the number one financial news in 2008. Are we in a deep and difficult recession or a depression? In early December, it became official that the U.S. went into a recession in December 2007. To some analysts, this is good news because it means we are closer to coming out of it. As you look at the chart on the right, most recessions last around one year. Based on the official Dec 2007 start date, historically we would already be on the tail end of the recession. However, to other analysts, this is bad news because the worst is yet to come, and we are already twelve months into it. With no light seemingly at the end of the tunnel, these analysts portend a long recession. Bad news from around the world keep coming in and the bottom of the current economic crisis still has not occurred. Oil prices continue to drop, gold prices have since rebounded (bad for economy), and the dollar index has begun dropping again. Signs of major inflation on the horizon are evident, especially with the massive bailouts and the Feds lowering the overnight interest rate to its lowest level ever, 0%-0.25%.
The entire 2008 Top 10 in Finance is all bad news. Most of them have to do with the current economic crisis. The key hope is that the Bush administration is finally over and 2009 brings a more adept and intellectual administration that will do just about anything to get America out of the economic dump. An administration that seems focused on the middle class and job creation. However, with it comes more and more national debt and the mortgaging of the future. There seems to be no alternative. This will most likely lead to long-term inflation when countries such as China, India, Russia and other Asian countries continue their rise to redefine the existing economic world order. This is not to say that the United States is doomed to be a second-bit player, as we know that is unlikely. However, the country needs to refocus on what made it a superpower in the first place, investments in technology, jobs, science, and innovation.
Gerald Feldman’s book Allianz and the German Insurance Business is a look at the links between the Nazi party and big business in 1930s Germany concentrating on Allianz’s relationship. According to Holocaust historians and legal experts, such as Professors Michael Bazyler and Gerald Feldman from the United States, Allianz insured the concentration camps at Auschwitz-Birkenau as well as other death camps.
Previous Board member Kurt Schmitt was a German economic leader and the Reich Economy Minister from June 1933 until January 1935.
Eduard Hilgard, a general director of Allianz AG and head of the Reich Association for Private Insurance during the entire National Socialist regime.
Allianz’s leadership, represented by directors Kurt Schmitt and Eduard Hilgard, led a policy of drawing nearer to the Nazis, even before they seized power. Already in October 1930, ties were forged with Hermann Göring. These contacts were realized through company dinners and by providing private financial loans. Heinrich Brüning and Franz von Papen tried without success to get Schmitt a ministerial office.
There are several ethical questions to consider regarding this situation. Are there any current ties to the Nazi party now in Allianz? How much has Allianz admitted its Nazi past? And if they have, how apologetic are they?
The question I am interested in in this post is the first one. If there are no current ties to their past actions, how much should they be vilified or discriminated against? How much is the current corporation and governing board responsible for its predecessors past actions? Now obviously you can go into a case by case basis and closely investigate how much of the corporate culture of the past still exist today or if the current company is essentially a new company with the same name and industry as its former. But from a simple ethical perspective, should a company be currently punished for its historical actions many years ago?
As we have witnessed, this ethical question is not limited to corporations. Many individuals have been affected by links to controversial ancestors. Henry Ford, the founder of Ford Motor Company, had associations with Adolf Hitler. Hitler was known to have said, “I regard Henry Ford as my inspiration.” Ford was also awarded the Grand Cross of the German Eagle, the highest medal awarded by Nazi Germany to foreigners. Even the company itself has had to fend of allegations of Nazi collaboration. However, this has never had much of an impact on Ford’s descendants and even the company. History has judged him more for his inventiveness and pacifism (He was strongly against both world wars) than Hitler’s admiration of him. This is apparent today as his Ford Motor Company continues to be one of the major automobile corporations in America and his great-grandson William Clay Ford, Jr. (executive chairman) continues a long line of Ford descendants as major players in the company.
On the flip side is the question of whether descendants take too much honor in the greatness of their ancestors. For example, as the Yankees play their last season in the old Yankee Stadium, or “The House that Ruth Built”, many of the families of Babe Ruth and Mickey Mantle are clamoring for more celebrations to honor their great ancestral baseball players. It makes sense since they are the bearers of the Ruth and Mantle names, but they themselves have not done anything for baseball on the field. Even the descendants of Thomas Jefferson feel some sort of pride and responsibility in upholding the sanctity of the Jefferson name.
Finally, we must broach this ethical question in regards to countries and governments as well. One of the main examples has been the question of whether the United States should pay reparations for the heinous culture of slavery before the Civil War. This example actually analyzes both the responsibility of the country and the individual. One, should a government be responsible for actions it caused over one hundred to three hundred years ago, considering no one in the government was alive during that time? Second, if they are, should the descendants of slaves get the awards their ancestors should be entitled to, considering none of the descendants are or were slaves? These are very interesting questions to consider and will probably never be resolved. One possible sticking point has been who is considered a descendant of a slave, since the Census did not keep track of slaves and slave owners.
This leads back to the original motivation of this article, Germany and its Nazi past. I stayed in Munich, Germany for 3 months last summer and it was definitely hard to fathom that it was the center of Nazi culture. Germany is a much different place now. It almost has a non-feeling atmosphere, where everyone still feels guilty of its past, where everyone is afraid to show any form of nationalism. The past 60 to 70 years have been very difficult for most Germans to comprehend. I definitely believe that although Allianz had connections to the Nazi party many years ago, no one in that company does now. Germany has become one of our steadfast allies, and although there is some negative symbolism in naming one of our football stadiums after such a company, I think we also have to have some sense of closure and acceptance at the new realities.
As what was strongly stated in The Corporation, this whole discussion lends credence to the fact that corporation indeed can be perceived as superhumans.
GOING GREEN DOES NOT NECESSARILY MEAN GOING SMALL PERMANENTLY
Having a commanding 76% market share (GM 43.8%, Ford 20.4%, Chrysler ~12%) in the United States in 1980, the Big Three Automakers now only carry a 47% share of the domestic cars and light trucks market in 2008. With a complete hold on the domestic market, what happened? The answer lies in how the perception of domestic brands versus international brands have completely swapped. The reason has been the inability of GM, Ford, and Chrysler to predict the intermediate-term trends of the consumer market.
Automakers market share through the years
Whether this was due to hubris, denial or plain ignorance is debatable, and most likely a combination of all three. Japanese cars in the 1970s through the end of the 1980s had the perception that they were horribly unreliable and problematic. European cars had a slightly better, but still negative perception. Instead of realizing that underdogs, or those working from behind, tend to be more hungry and nimble, the Big Three sat on their behinds and continued to pump out staid and non-innovative cars. When the perception of Japanese cars started making headway in safety and comfort in the 1990s, such as the Accord, Camry and Lexus brand, the Big Three was still slow to respond. When the European automakers started importing cars known for luxury, style, speed and beautiful interiors, the Big Three was slow to respond. Even for American icons such as the Chevrolet Corvette, the constant criticism had always focused on how ugly and boring it’s dashboard was. It wasn’t until the latest version, the C6 generation debuted in 2005 (and to a lesser degree the C5 in 1997) did people start complimenting it’s interior. Why did it take so long? What about the Ford Taurus, which was the highest selling car in the mid-1990s? Instead of maintaining it’s sales lead with innovation and style, Ford had to scrap that model in 2006 (only to be resurrected in 2008 by re-labeling the Five-Hundred as the Taurus). When they fell behind in the 1990s, the perception of American cars became that which its competitors were known for a decade or two ago, boring, unreliable, and unsafe.
The last twenty-five years, we have witnessed the Big Three automakers miss or been slow to recognize the consumer trends toward reliable, safe, comfortable, fuel efficient and greener vehicles. The decline of its market share is clearly a result of this. However, it is also important to note that another big reason for its inability to be nimble in recognizing trends is due to its ancient corporate culture and the strength of the autoworkers union. Had the union and the companies worked together by compromising, we might not be seeing such drastic layoffs and cuts the past ten years.
The near-sightedness continues to this day. In an article today on MSNBC.com – GM to close 4 factories, may drop Hummer, CEO Rick Wagoner makes another strong statement in reference to the decline of large vehicle sales, “We at GM don’t think this is a spike or a temporary shift.” He believes that the change in the U.S. market to smaller vehicles is likely permanent. As already behind the curve in a consumer move towards more fuel-efficient cars, by jumping on board now with blanket statements like that seem near-sighted. Although current trends support the notion that fuel-efficiency is equivalent to size of vehicle, this might not be the case in the long term. Current vehicles support that correlation only because the weight of the vehicles require larger engines and thus more gasoline per mile driven. However, this is purely an energy source problem and not a size of vehicle problem.Americans are not moving to smaller vehicles because they want smaller cargo space, weaker torque and lower high-end speed, they are moving to smaller vehicles out of necessity. High oil prices and sympathy to global warming have forced them to evaluate the price and efficiency of the cars they drive. If large vehicles, like the SUV, were to be powered by a renewable alternative energy that is just as powerful and efficient as gasoline, just as affordable as current vehicles, and much cleaner for the environment, Americans would be more than willing to buy them, probably at a higher pace the late 1990s. Imagine a brand new 2009 GMC Yukon that achieves the equivalent of 50 miles per gallon, produces no waste, and costs $40,000. GMC would have a hard time keeping up with demand. Although not possible today, it is possible in the next 10 to 20 years. Look how much vehicles have changed since the 1970s. Seatbelts, airbags, electronic-stability control, cleaner fuel, and hybrids are just to name a few. Why make a statement that large vehicles are gone for good? It sounds good now, but it’s purely another example that GM fails to recognize that the problem today is fuel efficiency, which might not correlate to size of vehicle in the future.
The highway system of America is built for large vehicles, not small vehicles such as the Mini Cooper or Smart ForTwo. Even in the cities, small vehicles are not necessarily safer. Our highways and suburbs were built with the notion that gasoline would be permanently accessible and affordable. As the world moves to renewable energy resources as oil hits peak production, it is in the best economic interests of America to continue researching safe and efficient vehicles for our highway system, instead of the other way around. Thus, GM is near-sightedness in completely scrapping the idea of big vehicles. They should be researching the possibility of renewable energy efficiency in big vehicles in parallel to short-term trends of small cars having higher fuel-efficiency.
UPDATE 11/18/08 – The Big Three automakers are in Congress today seeking $25 billion in assistance from the Senate. Seems like even they are sick and tired of the short-sightedness, mismanagement and irresponsibility of the industry:
“Sen. Chris Dodd (D-CT), chairman of the Senate Banking, Housing, and Urban Affairs Committee, dressed down auto industry executives at a hearing Tuesday, calling them short sighted and unimaginative, as the industry seeks $25 billion of taxpayer money to ward off looming bankruptcy.
‘Their board rooms in my view have been devoid of vision,” said Sen. Chris Dodd (D-CT), chairman of the Senate Banking, Housing, and Urban Affairs Committee, in opening remarks at a hearing attended by the executives of the nation’s Big Three automakers. “The Big Three turned a blind eye to opportunities. They have promoted and often driven the demand of inefficient, gas guzzling vehicles, and dismissed the threat of global warming.'” (Source: Steve Hargreaves, CNNMoney)