Toro's Running of the Bulls Market Blog

Invest in France, Have Your Building Blown Up

From the Financial Times.

Workers at a failed French car parts supplier are threatening to blow up their factory unless the company’s two biggest clients – Renault and PSA Peugeot Citroen – stump up extra compensation.

Employees of the engine parts maker New Fabris have rigged up a series of gas canisters inside a factory workshop which they say will be detonated on July 31 if the two carmakers fail to pay €30,000 to each of the 366 workers facing unemployment.

The company, which went into receivership for the second time in two years last month, holds an estimated €2m of stock ordered by the two carmakers, as well as a machine belonging to Renault valued at about €2m.

The threat could [emphasis added] still be an empty one as government officials said there appeared to be some doubt as to whether the gas canisters were full. Nonetheless, the government is taking the threat seriously, fearful that the lastest hold up marks a significant increase in labour tensions that have been present for several months. The fire brigade has been put on stand-by and emergency service reinforcements sent to the area near the factory in Châtellerault in western France, according to a news agency report.

Earlier this year France was hit by a wave of boss-nappings, where workers held factory managers hostage, sometimes for several days, to force better redundancy payoffs or protest at factory closures. Most ended without violent incident. ...

Guy Eyermann, member of the hardline CGT union that appears to be leading the protest, insisted that the battle would not be abandoned. “Are we capable of blowing up the factory? Yes we are,” he told a gathering of about 100 workers yesterday.

Why would anyone invest in a plant in France, or at least in a plant that does not serve the French market?

Barney Frank is a Jackass, but He is Correct. And What America can Learn from Sweden.

I caught the last snippet of Barney Frank's interview on CNBC this morning.  I wanted to track it down and watch the whole thing, so I went to the CNBC website and dug it up, which you can watch here.  I would highly suggest you watch it. 

Frank acts like a jackass at the end of the interview.  Mark Haines was asking legitimate questions, and Frank responds like a petulant, teenage Prima Donna and storms off.  However, he is absolutely bang on in his argument, and is correct when he says that shareholders should have increased power over corporate boards.

The United States has serious issues at the board levels of corporations.  Too often, boards are like clubs, with directors being too close to the CEO, who is often also the Chairman of the Board (another serious problem since no CEO should be the Chairman of the Board).  There is not enough independence amongst directors, nor is there enough independence amongst the compensation committee.

The best model for corporate governance in the world is in Sweden. In Sweden, shareholders have far more rights to oversee what management is doing with their money, including

• The separation of the titles of Chairman and CEO
• Mergers must be approved by shareholders
• Shareholders of a certain size can call extraordinary meetings
• The nomination committee to the board must have shareholder representation
• It is much easier to remove management, CEOs and directors
• Compensation is approved at the AGM
• A plurality of votes, rather than a majority, is needed to pass resolutions and amendments.

Reforming board structure in America along the lines of governance structures in Sweden would go a long way towards eliminating the venality and agency/principal risk inherent in corporate America, which contributed to the debacle in the financial industry.

What Worries Me

I would very much like to extend my appreciation to all the kind words yesterday.  One of the reasons why I started this blog was to provide unbiased (though, in retrospect, not always correct) observations about what is happening in the market.  If I have helped you understand things a little clearer, then I have accomplished one of the missions of this blog.

I have not gone away, at least not yet.  However, circumstances are changing such that it may no longer make sense for me to actively blog as I have done so in the past.  That decision remains to be taken, and I will continue to post, but only occasionally until decisions have been made.  Then, we will see.

I do owe at least one post as Isam reminded me in the comments yesterday. And that is what really worries me.

The economy and the markets have gone through a traumatic shock unlike anything we have seen in seven decades.  You know the story by now - housing bubble collapse, Lehman bankruptcy, subprime mess, credit market implosion, deleveraging, etc. 

I believe the market had priced all of this in, and more, given the record spreads in credit and dirt cheap valuations in equity.  If we are to break to new lows, then another convulsive shock must occur to the economy.  There must be something as big or bigger than what has already been experienced to send the market into a free-fall once again.

Bears argue that the shock is going to be commercial real estate and/or credit cards.  I disagree.  I believe the market has already priced in the decline for both.  The REIT ETF, ticker IYR, fell 77% from the highs, while credit card giant American Express fell over 80%.  Those are depression-like returns.  These are well known and have already occurred.  I also believe that both are no where near as threatening as what has already happened in the housing and mortgage markets.

But there is one thing that I believe is not well known, and it does worry me. 

And that is the potential collapse of Eastern Europe.

The collapse of the economies of Eastern Europe is an event that could rival or even surpass the collapse of the housing market, and I do not think American investors fully realize the ramifications of such a collapse. 

The region is not particularly important in terms of global output.  However, it is the exposure of European banks to the former eastern-bloc countries that could cause a chain reaction which could bring down the European banking system, causing the economy to plunge further and markets to collapse once again.  Given the hodge-podge of European financial regulation and a patchwork political system, the European authorities are less able to respond to such a crisis than the United States.

By some accounts, the eastern European countries are in worse shape than the Asian countries were at the start of the Asian Contagion in 1997, with sky-high indebtedness and large current account deficits.  Western European banks financed the borrowing in eastern Europe, and large defaults could bankrupt the European financial industry.

I do not know if the ultimate denouement is the implosion of the European banking system triggered by a collapse of the highly-indebted countries in Eastern Europe, but it worries me.

France Threatens to Walk

From Bloomberg

French President Nicolas Sarkozy will walk out of this week’s Group of 20 summit if his push for stricter international financial regulation flops, Finance Minister Christine Lagarde told the British Broadcasting Corp.

Sarkozy will refuse to sign any statement if he feels “the deliverables are not there,” Lagarde said in the interview. “I think he is very determined.”

My first thought was "So?  Who cares?"

But amazingly, someone (who isn't French) does.

"It’s a bombshell to be honest,” said Philip Whyte, senior research fellow at the London-based Center for European Reform. “If such a high-profile leader would walk out of the summit, it likely would be seen as very negative on the stock and bond markets. It would highlight the disunity among the leaders when the times require a show of unity, concrete actions and stabilization.”

I just can't see it.

Heck, I didn't even know France had a stock market...

Is Switzerland Bankrupt?

Generally, as markets approach extremes, opinions and predictions become more and more outlandish.  Remember those who predicted oil was about to go to $250?  Or when the Canadian dollar would rise to US$2?

Now, an economist is arguing that Switzerland may soon be bankrupt.

Switzerland threatened with bankruptcy

Swiss banks have given billions of credit to Eastern Europe - now the customers cannot pay back the money. Switzerland is threatened with the fate of Iceland, says economist Arthur P. Schmidt.

In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31 percent of all loans are in Swiss currency. Amongst household loans, they are almost 60 percent.

Borrowers in distress

Now, the financial crisis has ended the era of cheap credit. As a result, Eastern European currencies are falling. At the end of September, one had to pay 46 francs for 100 Polish zlotys. Today it is 30 francs. That means more and more borrowers are having problems with interest payments and repayment. So the question is what effect this has on the Swiss financial marketplace. One who sees a dark future for Switzerland is economic expert Artur P. Schmidt. He believes that the Swiss franc is in danger because of the loans in Eastern Europe.

In Poland, Hungary and Croatia, the Swiss franc has become an important foreign currency - the dollar, so to speak, of Eastern Europe. Thousands of households and businesses have franc loans. Why?

The rapid growth in many countries of Eastern Europe was stimulated through loans in Swiss francs. Swiss banks and offshore institutions loaned the local banks francs, which passed the francs onto their customers. The loans were attractive because borrowers pay interest rates much lower than required for loans in local currency.

Now, this system has been shaken?

Yes, the system has only worked as long as the exchange rate between the franc and the currencies were reasonably stable. But that is not currently the case. For example, the Hungarian forint and Polish zloty have lost over a third of their value against the Swiss franc in recent weeks. Because of the devaluations of the national currencies, the debt to Switzerland has increased by more than one-third. Many of the Eastern European countries have serious payment difficulties, and are virtually bankrupt.

What does this mean for Switzerland?

It is likely that a significant proportion of the total 200 billion U.S. dollars of Eastern European loans were issued in Swiss francs. According to a report by the Bank for International Settlements worldwide franc loans equivalent to around 675 billion U.S. dollars are in circulation - which was about 150 billion directly from Switzerland, 80 billion of Great Britain and about 430 billion U.S. dollars through offshore financial centres. How many of these loans have gone bad is not known. But even if the failure rate is 20 percent, the banks would lose a lot of money.

Of course, the alternative is that the economist is, you know, correct.

Short Spain

Looking for a macro idea to short when this bear market bounce fizzles out?  Try Spain.

Spain, in short, is screwed.

You think the housing market is bad in America?  Spain is much worse.   

David Owen, Europe of Dresdner Kleinwort, said Spain could face serious difficulties this year as the excesses of a decade-long boom finally catch up with the country.

"The size of the Spanish corporate sectors financial deficit is truly is really scary. It rose to 14.5pc of GDP in the third quarter of 2007 from 10pc in the first quarter. This must be a record for a relatively large economy. Clearly this is not sustainable. Cost imbalances have a nasty habit of unwinding, quickly and very painfully," he said.

Mr Owen said Spain was acutely vulnerable since it cannot cut interest rates or let the currency slide to cushion the downturn. "Several years of no growth could now beckon. It will be very difficult for the economy to pick itself up again inside EMU," he said.

Spanish corporate debt is now 112pc of GDP. The current account deficit is 10pc of GDP. These are both flashing red warning signs.

Spanish direct expenditures in residential construction (which includes only the activity directly associated with residential construction and excludes ancillary businesses such as mortgages and other tertiary effects) is 18% of the economy compared to 6% in America.

We discussed the Spanish housing market in a post a few months ago.  When an adviser to the Prime Minister of Spain says that a drop in housing prices is unthinkable, its only a matter of time.

Europe's Philosophy of Failure

From the Financial Times, via Trade Diversion

“Economic growth imposes a hectic form of life, producing overwork, stress, nervous depression, cardiovascular disease and, according to some, even the development of cancer,” asserts Histoire du XXe siècle, a text memorised by French high-school students as they prepare for entrance exams to prestigious universities...

In several texts, students are taught that globalisation leads to violence and armed resistance, requiring a new system of world governance. “Capitalism” is described as “brutal”, “savage” and “American”. French students do not learn economics so much as a highly biased discourse about economics...

German textbooks emphasise corporatist and collectivist traditions and the minutiae of employer-employee relations – a zero-sum world where one loses what the other gains. People who run companies are caricatured as idle, cigar-smoking plutocrats...

Describing globalisation, another text has sections headed “Revival of Manchester Capitalism”, “Brazilianisation of Europe” and “Return of the Dark Ages”. India and China are successful, the book explains, because they practise state ownership and protectionism, while the freest markets are in impoverished sub-Saharan Africa. Like many French and German books, it suggests students learn more by contacting the anti-globalisation group Attac.

It is no surprise that the continent’s schools teach through a left-of-centre lens. The surprise is the intensity of the anti-market bias. Students learn that companies destroy jobs, while government policy creates them. Globalisation is destructive, if not catastrophic. Business is a zero-sum game. If this is the belief system within which most students develop intellectually, is it any wonder French and German reformers are so easily shouted down?

And the Europeans wonder why their economies have been sclerotic the past decade.

The full article is here.

Gini Co-efficient for Canada, UK and Sweden

From Worthwhile Canadian Initiative

Americans Happier than Europeans

From the American Enterprise Institute, via Greg Mankiw

By almost every measure, Europeans do work less and relax more than Americans. According to data from the Organization for Economic Co-operation and Development, Americans work 25% more hours each year than the Norwegians or the Dutch. The average retirement age for European men is 60.5, and it's even lower for European women. Our vacations are pathetically short by comparison: The average U.S. worker takes 16 days of vacation each year, less than half that typically taken by the Germans (35 days), the French (37 days) or the Italians (42 days).

Why these differences? There are two standard explanations, neither of which casts Americans in a particularly good light. First, we are emotionally stunted. According to Time magazine, "In the puritanical version of Christianity that has always appealed to Americans, religion comes packaged with the stern message that hard work is good for the soul. Modern Europe has avoided so melancholy a lesson."

Second, we are under the yoke of hard-bitten capitalism. London's Daily Telegraph reports that the heavy U.S. work effort does not result from a special affinity Americans have for work; rather, it is because we are "terrified of losing [our] jobs" in a labor environment in which workers have few of the protections Europeans enjoy. ...

The truth is that most Americans don't feel particularly shackled. To begin with, an amazingly high percentage of us like our jobs. Among adults who worked 10 hours a week or more in 2002, the General Social Survey (GSS) found that 89% said they were very satisfied or somewhat satisfied with their jobs. Only 11% said they were not too satisfied or not at all satisfied. ...

No doubt there is great job dissatisfaction among people with low incomes and little education--the folks working in factories and on farms; the people who sell you socks and serve you lunch--right? Wrong. There is no difference at all between those with above- and below-average incomes: nine in 10 are satisfied, as are people without college degrees. 87% of people who call themselves "working class" are satisfied.

But even if we are satisfied with our jobs, might we still be happier at the beach? Imagine asking people something like this: "If you were to get enough money to live as comfortably as you would like for the rest of your life, would you continue to work or would you stop working?" Certainly a high percentage would answer in the affirmative? Wrong again: In 2002, the GSS found that number to be less than a third of all workers. And once again, there is no difference between those at different levels of income or education. 69% of working class folks say they would keep working even if they didn't have to.

For most Americans, work is a rock-solid source of life happiness. Happy people work more hours each week than unhappy people, and work more in their free time as well. Even more tellingly, people with more hours per day to relax outside their jobs are not any happier than those who have less non-work time. In short, the idea that our heavy workloads are lowering our happiness is twaddle. ...

This may be one reason why Americans tend to score better than Europeans on most happiness surveys. For example, according to the 2002 International Social Survey Programme across 35 countries, 56% of Americans are "completely happy" or "very happy" with their lives, versus 44% of Danes (often cited in surveys as the happiest Europeans), 35% of the French and 31% of Germans. Those sweet five-week vacations and 35-hour workweeks don't seem to be stimulating all that much félicité. A good old-fashioned 50-hour week might be a better option.

Good News from Europe

Corporate tax rates are coming down.

A tax-cut war is spreading across Europe as leaders of the continent's biggest economies give up criticizing smaller neighbors for slashing business rates and decide to join them instead.                

The move toward lower levies on corporate profits in Spain, Germany, France and the U.K. is aimed at wooing companies and reinforcing the strongest economic expansion in six years. It comes after Ireland and new European Union members from eastern Europe succeeded in attracting investment, and irking their larger rivals, with tax rates of less than 20 percent -- among the world's lowest. ...

The EU's average corporate tax rate at the end of 2006 was a record-low 26 percent and is falling even more. Gordon Brown, the U.K.'s chancellor of the exchequer and prime minister-in- waiting, in March lopped 2 percentage points off the top rate, which is now 28 percent. Germany's lower house of parliament last week backed Chancellor Angela Merkel's plan to pare its corporate rate to 30 percent from 39 percent.

Cutting Rates                

Nicolas Sarkozy, elected French president this month, promises to reduce his country's 33 percent rate by at least 5 percentage points. Spanish Prime Minister Jose Luis Rodriguez Zapatero's government is cutting its rate to 30 percent from 35 percent; and the premier of Italy, Romano Prodi, is considering a reduction in his country's 33 percent rate.

The rush to lower business taxes is a turnaround for the region's biggest nations, whose governments once complained their neighbors were engaging in ``tax dumping'' and threatened to cut aid to them. Just three years ago, Sarkozy, then France's finance minister, sought EU support to implement a common minimum corporate tax rate throughout the bloc.

Feeding the complaints were business-tax reductions by Poland, Slovakia and Hungary prior to their European Union entry in 2004. Poland cut its levy to 19 percent from 27 percent. Slovakia adopted a flat-tax rate of 19 percent, down from 25 percent, and Hungary went to 16 percent from 18 percent. ...

Supporters of lower corporate taxes point to the success of Ireland, whose 12.5 percent rate, the lowest in the developed world, is down from 47 percent in 1988.

That proved a magnet for such U.S.-based technology companies as Microsoft Corp., Intel Corp. and Dell Inc. and helped Ireland's economy grow more than three times the rate of the euro-area in the past decade, while still running a budget surplus in nine of the 10 years. ...

This is great stuff.

I have always thought that perhaps the greatest factor in the EU's favour was the inclusion of the low cost, low tax eastern European countries into the union.  Much of the European population is in denial about the long term costs of their socio-economic model. The eastern European countries will force the likes of France and Germany into much needed reforms that will lower costs and disentangle regulations stunting growth in the Western countries.  That would have eventually happened anyways whether or not the eastern countries were included in the EU.  However, the lowering of barriers to the east hastens the process and ultimately mitigates the costs that would eventually have to be borne by the western European nations.

Also, competition amongst political jurisdictions is a good thing.  Unlike some on the Left who believe that jurisdictional competition leads to "tax dumping" and a "race to the bottom" (as some on the Right believe in equally destructive nationalistic economic policies such as protectionism), competition amongst political bodies leads to many of the same outcomes as competition does between corporations, namely innovation.

Many in America are down on Europe, particularly the French and their, at times, juvenile opposition to globalization.  This blog has not been shy at taking shots towards the policies of the Europeans. However, pro-market reforms are occurring in Europe.  That can only be a good thing, for both the economies and for equities in the long run.