Monthly Archives: September 2009

Trade action: their tires vs. our chicken feet

September 15, 2009 By in Current Market Thoughts, Recent Market Action, Strategy Tags: , , , Leave a comment

A 35% tariff on low-end Chinese tire imports

President Obama has just approved the imposition of import tariffs for the next three years on low-end tires from China.  The duties, which will go into effect in about two weeks, start at an extra 35% charge for the first 12 months and decline to 30% and 25% in the remaining years.

Chinese tire imports have gone from next to nothing five years ago to about 1/6th of the US market in 2008, 46.9 million tires worth about $1.8 billion–or $38+ each.

A “safeguard” action

The tariffs are being imposed under the “safeguard” provisions of the World Trade Organization.  That is to say, there’s no claim that the Chinese tire makers have done anything unfair or illegal.  They’re not “dumping” output at a loss or below production cost.  They just make better cheap tires than we do–so much so that they’ve pretty much taken over the low end of the market.  “Safeguard” actions are temporary, emergency measures intended to allow a formerly protected industry time to catch its breath, regroup and reenter the fray with new, improved, better value-for-money products.

The way safeguard actions work, the US and China have a short period of time for consultations to try to resolve their differences.  Failing that, China can bring a complaint to the WTO, a process that can take two years.  Typically, the way safeguard rules are finessed, it looks to me like the tariffs tend to run out about the same time as WTO hearings are slated to begin.

China gets to put equal tariffs on imports from the US

Again, according to the rules, China gets to put tariffs on US products entering China during the time before hearings, up to the amount of the tariffs the US is putting on Chinese tires.  China has already picked out the areas it will tax:  unspecified auto parts, and cooked poultry (read: chicken feet).  The chicken feet people are understandably up in arms (as it were).  They get $.60-$.80 a pound for the things from China, “multiple” times what they get in the US.  Chicken exports to China amounted to $722 million last year.  Who’d a thunk it!!

Wait.  The story gets stranger.

Not a single tire company supported the request for tariff protection, which came from the United Steelworkers union.  Cooper, a US company that has a Chinese tire plant, actively opposed it.  That’s not quite as odd as it sounds at first, since other than Cooper and Goodyear most US-based tire plants are owned by foreign firms.  So they may be hesitant to speak their minds.  Still, no one appears eager to “regroup and reenter” the low end.  In fact, the prevailing strategy seems to be to concentrate on high-value tires within NAFTA and supply the low end through Chinese imports.

As a result, there’s no evidence that a single steelworkers manufacturing job will be saved by the tariff, though some Americans who work for the wholesalers and distributors of Chinese products will doubtless lose theirs.

Who will bear the cost of the tariffs?

The Chinese tire makers can’t eat much, if any, of it.  They say they have single-digit profit margins now.  If they lower their selling prices they open themselves to accusations of dumping.  US manufacturers don’t want the business.  Will Mexico export more?  Will the distribution chain take something off its markups?  I don’t know.  But it sounds to me as if the main effect of the tariff will be much higher prices paid by lower middle class and working poor American drivers.

And, of course, what will we do with all those tons of chicken feet that won’t make their way to China?  (Note:  for more on the virtues of American chicken feet, see the New York Times article of 9/16/09.)

Not a sensible economic move

All in all, what President Obama has done makes no economic sense.  And it has the potential to be an awful shoot-yourself-in-the-foot moment if, say, highway deaths of young families driving on worn-out tires are connected to this action.  Which implies that the president has done this for purely political reasons.  Help with a health care bill?  the price for dropping the “public option”, maybe?

Will events escalate?  I doubt it.  Autoworkers can scarcely complain about lack of government support, nor are they likely to criticize the steelworkers, no matter what China’s actions in response to the US are.  And apparently chicken ranchers aren’t labor-intensive enough, or don’t vote Democrat enough, to count.

From China’s point of view, plants producing low value-added pollution-causing chemical products, especially when owned by foreigners, are scarcely its vision for the future.  Especially for any under the patronage of unruly regional authorities, Beijing may be secretly pleased to have them shut down.  In fact, the whole “conflict” has the sense of being agreed to and pre-orchestrated behind closed doors before Obama’s tariff announcement.

The bottom line: from a human point of view, it’s hard to understand how the poorest Americans deserve to be treated this way.  From a narrowly stock market point of view, it’s a little bizarre, but this looks like a tempest in a teapot.

Last week’s company announcements–positive for tech stocks…for retail, maybe not so much?

September 14, 2009 By in Current Market Thoughts, Recent Market Action, Strategy Tags: , , , , , , 1 Comment

What they said

Fedex issued a small press release on Friday, saying that the company’s August quarter earnings came in at $.58 a share, much higher than its guidance to analysts of $.30-$.45.  The November quarter looks strong as well.  Why? …a rebound in international business and cost-cutting in the US.  The first fits with the recent comments of a number of foreign governments that their countries are exiting recession sooner than expected.

A striking number of IT hardware companies have been saying that their business is better than anticipated.  The reason?…a continuing rebound in unit volume (and revenue) growth.  This contrasts with the reports of retailers worldwide, who are turning in relatively strong results, but all based on cost-cutting in a declining revenue environment.

To my mind, the most interesting announcement comes from ASML, the Netherlands-based manufacturer of wafer steppers, a type of semiconductor production equipment.  The company, which had been losing money earlier in the year, announced in a (very) short press release that is it seeing a strong pickup in orders, both from logic and memory chip makers.  It will report results on October 17th.

What makes this important is that ASML’s offerings are expensive pieces of capital equipment used for capacity expansion (the average price of a new machine shipped in the June quarter, for example, was about $46 million).  Industrial companies, and semiconductor makers in particular, almost never borrow to pay for capital equipment; the money virtually always comes from cash flow.  So this announcement means ASML’s customers are feeling a lot richer than they were six months ago and their customers are pressing them to expand.

Implications for stocks Continue reading →

Why the dollar may be weaker than most people expect

September 11, 2009 By in Constructing a Portfolio, Current Market Thoughts, Recent Market Action, Stock ideas, Strategy Tags: , , , , , , , Leave a comment

China’s the reason

The bout of dollar weakness that started a few days ago seems to me, contrary to the views you hear on financial talk radio/TV, to be tied directly to the Chinese announcement that it will soon issue renminbi-denominated government bonds to foreign investors through a Hong Kong offering.

This is a (small) step toward relaxing the iron control that China has exercised over its currency.  But it’s a significant one, given that such control is what allowed China to avoid any hint of contagion during the Asian currency crisis of the late Nineties.  The move is also a necessary step in China’s severing its currency peg to the US dollar.  And it comes faster, I think, than the markets had expected–hence, the weakening dollar.

Interest rate differentials will likely move against the dollar, but…

True, many other nations have been reporting recently that their economies appear to be exiting recession more quickly than anticipated.   These countries are actively planning to restore money policy to a normal footing by raising interest rates.  In contrast, the US, the ground zero of this financial crisis, is far from being in a position to follow suit.  The widening interest rate differentials that will result from differing policy actions should by themselves cause some dollar softness.  But China’s weak renminbi-strong dollar policy has been so significant a support for the greenback that I think a change in China’s stance is a much more powerful and longer-lasting factor in determining exchange rates.

Why is China acting?

Why is China doing this?  Why now? What are the implications for stocks? Continue reading →

Motors Liquidation (MTLQQ.PK): a pink sheet stock

September 9, 2009 By in Autos, Industry Analysis, pink sheets Tags: , , , , , , 2 Comments

Q is for bankrupt

My friend Tom (Hi, Tom!) mentioned this stock to me when he and his wife were visiting a week or so ago.  And, yes, an added Q at the end of a ticker symbol does mean the company in question is in bankruptcy.

What is Motors Liquidation?  As part of its Chapter 11 bankruptcy proceedings, General Motors separated its assets into two piles:  those that it thought were economically viable, and the real junk.  It  transferred the good pile into a new corporate entity that is not (yet) publicly traded, in return for a 10% interest in the new company and warrants to buy 15% more.  It left the junk, plus a lot of liabilities, inside the “old” GM, which was delisted from the New York Stock Exchange and re-tickered as GMGMQ.  The bankruptcy court’s instructions to the GMGMQ managers were  to sell what they could, pay the proceeds to GM creditors and then turn out the lights for good.

What’s inside MTLQQ?

Besides the “new” GM stock, there are a bunch of obsolete plants being taken out of service, a lot of debt, plus legal, environmental, and union claims.  MTLQQ has repeatedly said that creditors are highly unlikely to be paid in full and that, therefore, there will almost certainly be nothing left for MTLQQ shareholders.

SEC filings for MTLQQ aren’t chock full of information, but I tend to believe the MTLQQ management.  It would be hard to believe that in such a high profile and carefully scrutinized bankruptcy–one in which unions and boldholders are going to lose billions of dollars–there would be any value left for common equity holders.  Remember, too, that common shareholders are routinely wiped out in any Chapter 11 filing.

In other words, a lottery ticket has better prospects than MTLQQ.  Lotteries are set up to pay out only a fraction of what the state takes in, but that does mean something to some ticket holders.  MTLQQ is set up to pay zero.

MTLQQ generates lots of trading volume…

Yet, the stock has had average daily trading volume of over 25 million shares through July and August.  This big volume has gone through even after the regulators stopped trading for three days, changed the ticker from the initial designation of GMGMQ, doubled the Qs and issued a public warning that MTLQQ was worthless.  Here’s a link to the SEC statement.

Where is the investor interest coming from?  The SEC cites “confusing, potentially misleading information” disseminated by “rumors in fax or email newsletters, Internet message rooms or on web sites offering online stock tips.”  The Washington Post also cites interest from MIchigan residents who want to support the auto industry and who are unaware of the facts, despite having the GM restructuring going on in their own backyard.

…and trades on the pink sheets

as a “Pink Sheets Limited” stock.

True, the stock is labelled as providing “limited” information to potential investors and the pinksheets website makes it clear the company is in bankruptcy.  And, of course, Enron was an NYSE stock, so a listing pedigree isn’t a foolproof guarantee against fraud.  MTLQQ volume was, I think, produced by a combination of laziness and ignorance as well as  deception.

Nevertheless, information is the lifeblood of investing.  Information is particularly important in the case of small- or medium-sized stocks.  Domestic pink sheet stocks, almost by definition, lack this commodity.  So the mere fact of pink sheet trading should mean that you must be especially vigilant and do your own research before buying.

November 15, 2009

See my update dated today.