While other people in the world are dodging bullets, car bombs and tsunamis - we're lucky enough, that our most difficult decision of the day may be to decide whether we'd like to super size our value meal for lunch. Too often we get consumed by our daily routine that we miss the big picture.

From today's Wall Street Journal article: As Dollar Weakens, Hidden Strengths May Stave Off Crisis by Greg Ip.

Just as an individual who spends more than he earns must borrow or sell some of his assets to pay his bills, the U.S. finances its current-account deficits by either borrowing or attracting foreign investment...Lately, it has borrowed heavily by selling Treasury bonds and other IOUs, ofthe to foreign central banks. As a result, the U.S. has gone from having net foreign assets equal to 9% of GDP in 1978 to net liabilities equaling about 25% now...There is no historical precedent for such a large economy being so heavily in debt to the rest of the world....Large current-account and budget deficits -- nicknamed "twin deficits" -- with little prospect of resolution and a growing portion of those deficits financed with short-term borrowing from foreigners.

"The average emerging economy would have already gone belly up with these twin deficits," Mr. Roubini says. The U.S. has been spared, he says, because it can still borrow in dollars instead of foreign currency, meaning that others bear the pain if the dollar depreciates...Even rich countries can be rocked by a run on their currencies. It happened to Britain in the 1970s. Several times in the early 1990's, Canada's dollar came under pressure because of big current-account and budget eficits. The central bank raised interst rates in response, but that worsened the budget deficit by adding interst on the public debt...The U.S. today "spookily" parallels Canada of 10 years ago...The lesson for the U.S. is not to expect a "catalytic" event, Mr. Drumond syas. "It's more of a drift where you pay more and more of a cost"...The U.S. has an additional advantage over any other country when it comes to crisis prevention: Its economy is too important for the world to passivley acceept a dollar collapse.

So in a nutshell: we're too big to fail.

Okay, so is GM too big to fail too? This is perhaps of much more immediate concern to those of us that live and work here in Motown. GM currently has 2.5 retirees per active employee and rising. Many analysts have speculated wheterh this will be the year which marks the downgrad of "The General" to junk status.

 

Talking to myself...don't forget you heard it here - those of you who are giddy with real estate "gains" and have piled into bond funds at 40 year lows in yield. Check yourself before you wreck yourself.

Three More Reasons to Doubt Bond Market's Sanity: Mark Gilbert
2005-01-19 19:08 (New York)

Three More Reasons to Doubt Bond Market's Sanity: Mark Gilbert

(Commentary. Mark Gilbert is a Bloomberg News columnist. The
opinions expressed are his own.)

By Mark Gilbert
Jan. 20 (Bloomberg) -- Investors are lending free money to
junk-rated companies. Argentina is blackmailing its lenders three
years after taking the prize for the biggest default ever. And the
Federal Reserve says there's evidence of ``excessive risk-taking''
in the low yields investors are accepting on corporate bonds.
These three examples should chill fixed-income money
managers. Fear and greed are omnipresent in financial markets;
they also seem to be achieving omnipotence in the current bond
market environment, with fear of unemployment prompting investors
to make greedy bets they'd typically run a million miles from.
In the past four months, bond buyers have made more than $2
billion of ``borrow now, pay much later'' loans to non-investment
grade borrowers including Inmarsat Ventures Plc, a London-based
satellite operator, and New York-based Warner Music Group, the
fourth-biggest record label.
The loans are in the form of so-called discount notes. In
November, for example, Inmarsat sold $450 million of bonds that
are interest-free for the first four years, after which the issuer
starts paying 10.375 percent. Investors pay just $668.94 for
$1,000 of the notes, which boosts the return when they're due for
repayment in November 2012.
Provided Inmarsat meets its obligations, buyers will make 635
basis points more than if they'd bought a U.S. Treasury note of
similar maturity. A basis point is 0.01 percentage point.

Big Risk, Scant Reward

Standard & Poor's responded by cutting the company's credit
rating to B+, four levels below investment grade, citing
Inmarsat's ``more aggressive than expected'' financing policy. The
bonds themselves are rated CCC+, seven steps away from investment
grade. S&P defines debt with such a low rating as ``currently
vulnerable to nonpayment.'' That's four years of big risk, no
reward.
A desperate search for yield is making investors willing to
hand over free money for four years or more to companies such as
Kohlberg Kravis Roberts & Co. and Clayton Dubilier & Rice Inc.,
two New York-based buyout firms that have also sold discount
notes. High-yield dollar bonds offer an average of about 322 basis
points more than government debt, down from about 1,000 basis
points in mid-2002, according to indexes compiled by Merrill Lynch
& Co.
That hunt for yield also means emerging-market countries have
enjoyed their cheapest borrowing costs for at least seven years --
even though Argentina, in the messy aftermath of its December 2001
default, is a reminder of just how risky lending to high-yield
countries can be.

New Bonds for Old

Argentina wants the holders of about $104 billion of debt to
forgo three-quarters of the money they're owed by accepting new
securities worth about 25 cents on the dollar, less than half of
what Russia and Ecuador ended up repaying their bondholders after
defaulting. It's ignoring calls from the representatives of
thousands of small investors, many based in Italy, to sweeten the
deal.
The debt of emerging-market countries yields an average of
about 384 basis points more than Treasuries, according to JPMorgan
Chase & Co.'s benchmark index. That spread got as low as 360 basis
points last month, and is down from an average of about 660 basis
points since the U.S. bank began calculating the measure in
December 1997.
This kind of profligate lending behavior is enough to give
central bankers nightmares. The minutes of the Fed's Dec. 14
meeting, published earlier this month, suggest Chairman Alan
Greenspan and his team are starting to worry about sleepless
nights.

Get This Party Ended

``Some participants believed that the prolonged period of
policy accommodation had generated a significant degree of
liquidity that might be contributing to signs of potentially
excessive risk-taking in financial markets,'' policy makers said.
They cited corporate bond spreads, an increase in initial share
sales by companies, a jump in mergers and acquisitions, and
suggestions that speculators are bidding up house prices.
The Fed is worried that its efforts to avert deflation with
ultra-low interest rates have started a party that will end in
tears. Even as it takes away the punchbowl by raising interest
rates, the guests may already be too drunk to care.
``When central bankers start musing publicly about asset
price inflation, asset managers need insurance,'' Paul McCulley, a
managing director at Pacific Investment Management Co. in Newport
Beach, California, wrote in a research report last week. ``In the
present circumstances, that means getting prepared for an increase
in volatility in financial asset prices, both stocks and bonds,
and maybe currencies too.''

`Excessive Risk-Taking'

The U.S. central bank's reluctance to participate in
puncturing or even identifying so-called bubbles is well
documented. As McCulley argues, that makes its sanction of the
phrase ``excessive risk-taking'' in the December minutes all the
more telling.
As Greenspan said on Nov. 19, ``rising interest rates have
been advertised for so long and in so many places that anyone who
has not appropriately hedged this position by now obviously is
desirous of losing money.'' In its own opaque, idiosyncratic way,
the Fed is screaming at us to be wary of bonds at their current
valuations.
The bond market, though, still isn't listening.

--With reporting by David Russell in New York. Editors: Henry,
Ahearn.

 

Note to rmatic (or anyone else whose been binging at the real estate hog-feeder) - there's a lesson here: save your cash, the good times never last forever....

January 23, 2005 NYTIMES
ECONOMIC VIEW
Deficits May Be Wearing Thin at the Fed
By EDMUND L. ANDREWS

WASHINGTON

THEY are only low-level rumblings, oblique signals of discontent that are stripped of any direct political threat.

But as President Bush embarked on his second term last week, it was hard to escape the sense that his longtime honeymoon with the Federal Reserve may be ending.

The Fed and its chairman, Alan Greenspan, have arguably been Mr. Bush's most important economic supporters. Mr. Greenspan gave his blessing to the Bush tax cuts of 2001 and, less enthusiastically, to those of 2003.

Despite Mr. Greenspan's reputation as a staunch opponent of fiscal deficits, he tiptoed around criticism of the soaring federal debt that Mr. Bush ran up in his first term and will almost certainly continue to run up in his second.

Perhaps most important, the Greenspan Fed cut interest rates and showered the nation with cheap money to soften the recession of 2001 and to keep consumers spending through nearly three years of rising unemployment.

But something new is afoot, and it is not just that the Fed is raising rates back to more normal levels. So far, a measured pace of rate increases has merely reflected the Fed's increased confidence that economic growth is on a steady course.

The new element is a rising concern at the Fed about the nation's imbalances: the federal deficit, which hit $413 billion in 2004; a low and declining national savings rate; evidence of speculative behavior among investors and consumers; and the country's enormous trade and financial deficit with the rest of the world.

In November, Mr. Greenspan noted that foreign claims on United States assets - essentially the nation's net indebtedness to the rest of the world - were now equal to one-quarter of the nation's gross domestic product. The trade deficit this year is almost certain to exceed $600 billion - nearly 6 percent of the nation's economy, and still climbing.

"This situation suggests that international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk," Mr. Greenspan said. That, he continued, would make the cost of foreign debt "increasingly less tenable."

To most economists, such comments are simply a statement of time-honored truth: a borrower who runs up huge debts will become a bigger risk to lenders and gradually have to pay higher rates. But Mr. Greenspan's comments also carried a warning: rising budget and trade deficits come at the price of higher interest rates.

The Fed fired off another warning in the published minutes from its policy meeting on Dec. 14, saying, "a number of participants voiced concerns about domestic and global financial imbalances." Some members of the Federal Open Market Committee, which sets policy, were said to believe that the odds of "significant deficit reduction over the next few years were remote."

More surprising, the minutes said that some policy makers worried that the prolonged strategy of low rates might be fostering "excessive risk-taking" in financial markets and in the market for houses and condominiums. That sounded like a veiled reference to concern about a "housing bubble," an idea that Mr. Greenspan has repeatedly shot down.

A third veiled warning came on Jan. 13 from Timothy F. Geithner, president of the Federal Reserve Bank of New York. In a speech to financial executives about risk management, Mr. Geithner suggested that investors had become too complacent about risks posed by global imbalances - particularly those in the United States.

Declaring that the current account deficit had reached an "unprecedented scale," even as investors continue to demand very low risk premiums, Mr. Geithner warned that they had little buffer for unexpected shocks.

"The present fiscal trajectory entails an uncomfortable scale of borrowing and little insurance against possible adverse outcomes in an uncertain world," he said.

In private sessions, Mr. Greenspan may well be warning Mr. Bush in blunter terms. The Fed chairman meets regularly with Vice President Dick Cheney and periodically with Mr. Bush.

There is a rumor in Washington - thus far unconfirmed - that Mr. Greenspan warned the White House in mid-December that it would have to take more credible steps than it has so far to meet its goal of cutting the deficit in half by 2009.

If true, the unspoken but inescapable threat would be clear: if the Fed wasn't satisfied, Mr. Greenspan could signal his lack of confidence in Mr. Bush's fiscal plan. Investors would be shaken and Mr. Bush's credibility would be damaged.

What is certain is that the White House has started to signal tough cuts - trimming as much as $30 billion over six years at the Pentagon - and Mr. Bush has adjusted his rhetoric about the deficit.

Where administration officials routinely called the deficits "unwelcome but manageable," Mr. Bush and other top officials now describe deficit reduction as the cornerstone of their strategy for shoring up the foreign exchange value of the dollar.

Complicating the chemistry between the White House and the Fed this year is Mr. Greenspan's anticipated retirement in January 2006.

White House officials are trying to expand their list of potential successors. One early favorite - John B. Taylor, under secretary of the Treasury - is no longer in contention, according to people close to the White House.

White House officials are also cool about Martin Feldstein, the esteemed Harvard professor and director of the National Bureau of Economic Research. Mr. Feldstein has been a passionate supporter of tax cuts and partly privatizing Social Security - Mr. Bush's top economic priorities. But some officials are still angry that Mr. Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, criticized deficits run up by his boss.

MR. FELDSTEIN is not out of the running, but White House officials are looking at others. One would be R. Glenn Hubbard, an architect of Mr. Bush's tax cuts and now dean of the Columbia Business School.

A third possibility is Ben Bernanke, a Fed governor and a respected economist. While at the Fed, Mr. Bernanke, not a Bush insider, has impressed White House officials and is likely to be named chairman of Mr. Bush's Council of Economic Advisers. Though Mr. Bernanke would be a long shot to become Fed chairman, a successful tour at the White House could help his chances.

No matter who succeeds Mr. Greenspan, Mr. Bush will have to tread warily at the Fed. It is noteworthy that Republican Fed officials have tended to be more hawkish of late about raising rates sooner rather than later. The most dovish voice has been that of a Democrat - Janet Yellen, president of the Federal Reserve Bank of San Francisco. If tea leaves from the Fed indicate anything, it is that Mr. Bush could get tough treatment from officials tied to his own party.

 

Too much reading. Can we get some SparkNotes on it or something?

 

Am I beginning to sound like a broken record yet? Good - take notice - the shit's about to hit the fan:


All the Talk of Davos: the Weak Dollar and the U.S. Deficits
By MARK LANDLER

Published: January 26, 2005 NYTIMES


DAVOS, Switzerland, Jan. 26 - As the world's most rarified talk-shop opened for business here today, two things were as clear as the Alpine air: the sinking dollar and soaring deficits in the United States are Topic A at this year's conference of the World Economic Forum.

And anyone hoping for an answer to when either will stabilize is likely to come away disappointed.

Economists, politicians and business executives voiced deep unease about the imbalances in the global financial system, which are reflected in the dollar's steep fall against the euro and other currencies.

But most expressed skepticism that the Bush administration would reduce the trade and budget deficits, which have fed those imbalances. Some said they doubted that China, which is financing much of the American debt, would bow to pressure to allow its currency to rise against the dollar this year.

"The U.S. current-account deficit is a problem for the whole world," said Jacob A. Frenkel, an economist and former governor of the Bank of Israel. "I don't see the budget deficit being taken seriously."

The Bush administration, which had dispatched Vice President Dick Cheney and then-Secretary of State Colin L. Powell to past Davos meetings to defend the Iraq war and other foreign-policy initiatives, has not sent a senior economic policy maker to this gathering. That absence has lent the proceedings themselves an imbalanced tone.

"In fairness, it's a transition period in Washington," said Representative Barney Frank, a Massachusetts Democrat, who supplied the American voice on a panel about American leadership. But he added, "The administration doesn't really have anyone they trust enough to send here."

Mr. Frank, the ranking Democrat on the House Financial Services Committee, said he worried that the United States was not paying enough attention to the risks of its growing indebtedness. The repercussions of a weak dollar, he said, had barely registered with the White House.

Other critics were blunter. "There's nobody home on economic policy in America right now," said Stephen S. Roach, the chief economist at Morgan Stanley and a reliable doomsayer at these gatherings.

The twin burdens of household and public debt in the United States, he said, are unsustainable. Describing American consumers as "an accident waiting to happen," he asked, "when does the music stop?"

With the dollar weak and the euro already trading above $1.30 - near its economically tenable limit for Europe - Mr. Roach said the United States could not rely on currency markets to right the trade imbalance between it and the Asian countries who finance American deficits by buying Treasury bills.

The answer, he said, lies with the Federal Reserve, which he said would have to raise interest rates aggressively to curb the spending binge. Whether the Fed could do that without setting off a recession is an open question, especially given the impending retirement of its chairman, Alan Greenspan.

Few here held out much hope for international coordination of the kind that stabilized the dollar in the 1980's, when the Reagan administration helped negotiate the Louvre and Plaza Accords.

"The Bush administration doesn't listen to people," said Laura D. Tyson, a former chairman of the council of economic advisors in the Clinton White House. "There's no hope of changing U.S. fiscal policy."

Professor Tyson, who is dean of the London Business School, said European leaders needed to stop worrying about the actions of other countries and set about streamlining their own economies. She pointed to recent wage negotiations in Germany, in which the unions agreed to longer hours and more flexible work rules, as a hopeful sign of change.

Certainly, Europe cannot rely on Asia to take the pressure off the euro. While people here said they were guardedly optimistic that China would eventually allow its currency, the yuan, to rise against the dollar, few were willing to hazard a guess as to when - or to what extent.

"That will need a political commitment and a political will, and I don't see that happening this year," said Takatoshi Ito, an expert in international economics at the University of Tokyo.

Some economists warned that the burgeoning trade deficit and weak dollar could cast a shadow over negotiations to liberalize world trade, which have been dragging for various reasons in the last year.

China's record trade surplus with the United States could fuel protectionist forces in the United States, said C. Fred Bergsten, the director of the Institute for International Economics in Washington. He said he could foresee moves to slap import barriers on Chinese wood and shrimp.

"This is a poisonous environment for trade policy and for domestic politics in the United States," Mr. Bergsten said.

In the last couple of years, with the White House's march to war in Iraq, Davos itself has been a rather poisonous environment for Americans. Those tensions have ebbed this year, although some non-Americans here were talking about the emergence of new alliances - like one between China and the European Union - that leave the United States on the sidelines.

"In recent years, our leaders have felt more comfortable talking to European leaders," said Yuan Ming, the director of the Institute for American Studies at Peking University. "The United States could be our biggest partner, but it could also be our biggest troublemaker."

 

PistonFan: preaching to a choir who instead wants to sing songs of debt and destruction...

Gates Joins Buffett in Predicting Dollar Will Decline (Update4)
2005-01-31 07:54 (New York)

By James Hertling and Simon Clark
Jan. 31 (Bloomberg) -- Bill Gates and Warren Buffett, the
world's two richest men, are partners in business, bridge and
travel. Now they are both predicting the dollar will weaken.
Gates, chairman of Microsoft Corp., said he expects the
dollar to extend its three-year drop because of widening U.S.
trade and budget deficits.
``I'm short the dollar,'' Gates told television interviewer
Charlie Rose this weekend at the World Economic Forum in Davos,
Switzerland. ``The ol' dollar, it's gonna go down.''
Buffett, whose personal fortune of more than $42.9 billion
is topped only by Gates's $46.6 billion, has been buying foreign
currencies since 2002, citing the impact of the U.S. deficits.
Their concerns were echoed in Davos by policymakers including
European Central Bank President Jean-Claude Trichet and investors
such as George Soros.
The dollar has fallen 26 percent against a basket of six
major currencies since the start of 2002. The trade deficit
swelled to a record $609 billion last year, and the George W.
Bush administration expects the budget shortfall to reach an all-
time high of $427 billion in the year ending in September.
``It is a bit scary,'' Gates said of the U.S.'s $7.62
trillion in debt. ``We're in uncharted territory when the world's
reserve currency has so much outstanding debt.''

Diversification

Buffett, chairman of the Omaha, Nebraska-based investment
company Berkshire Hathaway Inc., bought $1 billion in foreign-
currency contracts in the third quarter, bringing his total to
$20 billion of forward contracts in eight currencies on Sept. 30,
according to Berkshire. The currency position gave Berkshire a
$412 million pretax gain in the quarter as the value of the
dollar fell.
``That's a long-term position,'' Buffett, 74, said in an
August interview. ``I have no idea what currencies are going to
do next week or next month or even next year. I think I know over
time.''
Gates, 49, topped Forbes magazine's list of the richest
people in 2004, with Buffett second. Almost all of his wealth is
in Berkshire stock. Karl Albrecht, an owner of the Aldi
supermarkets in Germany and Trader Joe's gourmet-food chains in
the U.S., ranks third with $23 billion.
Any gains in the dollar may force Gates to ``cover'' his
short-dollar position, by buying back the U.S. currency, Dennis
Gartman, an economist and editor of the Suffolk, Virginia-based
Gartman Letter, a financial newsletter, wrote in a report today.
``It shall be very interesting to see how Gates'' responds,
should the dollar advance past $1.2950 per euro, Gartman wrote.
The U.S. currency has gained about 5 cents against the euro since
the year began.

`Change Agent'

Gates's and Buffett's shared view on the dollar is not the
billionaires' only joint interest.
Gates revealed a $319 million stake in Berkshire Hathaway on
Dec. 21, a week after he joined the company as a director. The
two play bridge and have traveled together, taking a 1995 train
trip through China.
Buffett made his first investment in China in 2003, buying a
stake in PetroChina Co. In Davos, Gates described China as a
potential ``change agent'' for the next two decades. ``It's
phenomenal,'' Gates said. ``It's a brand new form of
capitalism.''
Gates's $27 billion foundation in September received
approval from China's foreign-currency regulator to invest as
much as $100 million in the nation's yuan shares and bonds.
The comments by Gates about the dollar came a week before
Group of Seven officials meet to discuss currency policy and were
echoed by officials from Europe and Asia.

Euro Rally

The euro rose as high as $1.3666 on Dec. 30 and traded at
$1.3044 at 7:49 a.m. in New York today, according to electronic
foreign-exchange dealing system EBS. A stronger euro reduces the
competitiveness of European exports and crimps growth among the
nations sharing the currency.
``The governing council of the ECB has repeated a very, very
short sentence, namely that the sharp moves upward of the euro
were unwelcome and that we thought they were counterproductive
from the economic growth perspective,'' the ECB's Trichet said at
a Davos panel discussion.
U.S. growth reached a five-year high of 4.4 percent in
2004, outpacing Europe for the 12th time in 13 years. The euro
region probably grew 2.1 percent, according to European
Commission estimates.

`No. 1 Risk'

The U.S. budget shortfall is ``the No. 1 risk, disregarding
geopolitical risks'' to the global economy, German Deputy Finance
Minister Caio Koch-Weser said in a Jan. 27 interview in Davos. He
urged Bush to present a ``credible'' plan for getting the deficit
under control.
Chinese central bank adviser Yu Yongding said in Davos the
U.S. government should do more to tackle its record current-
account deficit and ease pressure on China to loosen its
currency's peg to the dollar.
``The U.S. should take the lead in putting its own house in
order,'' Yu said. ``It's the root cause'' of global imbalances.
``China will make its contribution, but the world should not put
disproportionate pressure'' on the country.

--Editors: Neuger, Harvey, Moss, Anstey.

Story illustration: Click on {CNP 09214870107 <GO>} to see a
series of charts and data reflecting the yen's performance
against the dollar and showing the world's best and worst
performing currencies. Click on {EUR <Crncy> GPO <GO>} to
graph the dollar per euro. See {TOP FRX <GO>} for more top
currency news. Click on {DXY <Index> GO <GO>} for the New York
Board of Trade's Dollar Index. Click on {USTW$ <Index> GP
<GO>} for the Fed's Major Currency trade-weighted dollar
index. For Microsoft, see {MSFT US <Equity> DES <GO>}

To contact the reporter on this story:
James Hertling in Davos at (336) 7382-3026 or
jhertling@Bloomberg.net; Simon Clark in London at (44) (20) 7673
2059 or sclark4@bloomberg.net.

 

the bush admin is not doing a good job at staying on top of this. the weakening dollar and our growing debt really scare me. I'm kind of new to this type of stuff, so i may not know what i'm talking about. Isn't it ture that China is financing much of US debt in order to artificially bolster the dollar? This way their stuff still seems cheaper to us, so we buy their stuff. It also keeps out economy from collapsing.

Anyways, I dont know why anyone in the past year would buy bonds becuase the fed is increasing intreest rates. this will increase YTM and lower prices....so buying now is buying high and then (if you want to get rid of them later), selling low. Or is this not true becuase prices already reflect expectations (larger yields in long term bonds as indexed by the yield curve)?

 

I agree.

Me too.

Yes, by buying treasuries - interest rates are kept artificially low.

Yep and yep.

Actually, short rates have moved higher, but long rates have moved lower - a phenomenon which either is predicting a future recession (if we get inverted) or a situation which is untenable.

Yes, IF rates move higher (very probable on the short end, though I don't see Fed Funds getting past 3.50 this year).

The multi-trillion dollar question I don't have an answer for.

 

the whole debt situation is odd......we need a certain amount of debt or else the fed will have nothing to conduct its open market operations with....but too much is harmful....such a delacate balance. i wonder if the fed will meed expectations with its .25 interest rate raise

 

So PistonFan, What am I surposed to do about this ??

Start buying buying Euros, or put my money in a foreign bank ??

Scary stuff...

 

Almost nobody can make money guessing currency prices or interest rates. Unless you plan to spend a bundle in Europe or Japan in the near future it matters little anyway. Over the truly long run currency prices have their ups and downs and are a non-issue. Unless you live in a place like Weimar Germany and the money becomes truly worthless.

 

Well without sounding like a chuck schwab commercial - it's always necessary to be diversified. I still think you need to buy some ETF's and index funds and overweight Asia. I still like emerging market debt. The Western Eurozone needs some serious structural reform - so I'm not crazy about 'old' Europe, but there are some interesting opportunities in 'new' Europe.

Today's action was a non-event - I still have a hard time picturing the FED moving past 3.00 to 3.50 this year. I just have a bad feeling that consumers are overextended and have leveraged themselves via cheap money.

Like one money manager told me today - there are years to play offense and years to play defense - this will be a defensive year. I'd pile up bundles of cash to save up for buying opportunities.

Last point - it really, really scares me when so many investors view an asset class - ala Real Estate, as a no lose proposition.

 

U.S. Trade Deficit Exceeds a Record $600 Billion
By ELIZABETH BECKER NYTIMES

Published: February 10, 2005


WASHINGTON, Feb. 10 - The American trade deficit broke the $600 billion barrier in 2004, soaring to $617.7 billion, the Commerce Department reported today.

The trade deficit now accounts for more than 5 percent of the American economy, a level some economists and lawmakers said was unsustainable. The deficit also adds pressure to push down the value of the dollar and increases the amount of debt held overseas.

Domestic manufacturers, labor unions and Democrats say the growing deficit is responsible for the erosion of the American manufacturing base and the concurrent loss of jobs.

The annual report showed that the United States lost ground last year not only in manufacturing but also in advanced technology products and services, two of the country's strongest sectors. The deficit in technology products grew to $37 billion last year while the surplus for services including banking, insurance and investment shrunk to $48.5 billion, the lowest since 1991.

The Bush administration disagreed with the economists who said the trade deficit was worrisome. Instead, Treasury Secretary John W. Snow said through a spokesman that the report showed the American economy was growing, albeit through consumption rather than production. The imbalance, he said, was a reflection of the ability of American consumers to buy more imports and showed that the American economy was growing faster than those of other nations.

"We are importing more than those other economies, because we are creating more disposable income than they are," said Rob Nichols, chief spokesman at the Treasury Department.

The annual deficit with China also set a record at $162 billion, becoming the largest trade imbalance ever recorded by the United States with a single country. Democrats in Congress seized on that figure to repeat their demands that the administration push Beijing to raise the value of its currency, which many contend is too low against the dollar and thus responsible for the poor performance of American exports to China.

American textile manufacturers and the biggest business organizations have asked the administration to bring China to the World Trade Organization for unfair trading practices that they say are creating the trade deficit. The business group estimates that the United States loses $200 billion every year from China's piracy and counterfeiting of American goods. A textile trade group is also asking for a moratorium on new trade agreements until the root causes of the trade deficit are addressed.

"I am tired of watching ships arrive at the Port of Baltimore filled with cargo for U.S. consumers and then leave empty," said Representative Benjamin L. Cardin of Maryland, the ranking Democrat on the trade subcommittee of the Ways and Means Committee.

He said that five out of six ships delivering goods to the United States from China return home empty. And those with cargo often are carrying waste material, scrap metal or recyclable paper that are among the fastest-growing American exports to China.

Two Democratic senators - Byron Dorgan of North Dakota and Hillary Rodham Clinton of New York - announced today that they were joining with Mr. Cardin in introducing legislation to place a cap on the trade deficit and force action to reduce it if the cap is reached.

Most of the other advanced industrial economies, including Germany, Japan and Canada, have trade surpluses, according to figures compiled by the International Monetary Fund. Economists said that these wealthy nations must begin buying more American goods and services and that currency exchange rates, especially with China, will need to be adjusted, in order to reverse the trend of the United States trade deficit.

The one sign of good news in today's report was a decline of 4.9 percent, to $56.4 billion, in the trade deficit for December. Some economists said the decline was a result of a drop in crude oil prices and imports that month ,while others pointed to the decline in the dollar, which made American exports cheaper overseas and thus more attractive.

"There is hope," said Joel L. Naroff, president of Naroff Economic Advisors, Inc. "We could be seeing some narrowing in the deficit this year and that should add to growth."

Dan Griswold, director of the Cato Institute's Center for Trade Policy Studies, dismissed what he called "alarmist concerns about the size of the trade deficit."

He saw welcome news in the increase in American exports in 2004 to $1.146 trillion, a figure that surpassed the previous peak set in 2000.

But American imports totaled $1.764 trillion, or 54 percent more than exports.

The recent decline in the dollar also indicates that private foreign lenders are less willing to supply new credit to underwrite the trade deficit.

Peter Morici, professor of business at the University of Maryland, said the trade deficit was the "single most important tax on U.S. growth and burden on American working families."

"Cutting the trade deficit in half would increase gross domestic product growth by 5 percent a year and create as many as five million additional new jobs over the next three years," Mr. Morici said.

The 2004 deficit is 24.4 percent bigger than the 2003 trade gap, which had set the previous record of $496 billion.

The Agriculture Department has already warned that the usual agricultural trade surplus is likely to disappear in 2005.

 

Like Nasdaq stocks a few years ago.

Had dinner with an old friend yesterday. She and her husband have done well buying houses in Vegas and renting them out. He wants to keep pulling out equity and buying more because he figures they can retire on them in a few years. She's getting scared. I basically said that at the very least, they should sell a couple of them and put the money elsewhere. Why have your whole fortune dependent on one thing? Eventually, at least for some period of time, that "thing" will fail to deliver, and whenever it does is usually exactly when you need it the most...

 

$84,454 is the average household's personal debt. $473,456 is the average household's share of government debt, including Medicare and Social Security. The government isn't asking you to pay it. Yet.


http://www.usatoday.com/printedition...tcovxx.art.htm

 

Running on empty

As household savings fall close to zero, economists worry what's ahead for economy.
February 25, 2005: 5:35 PM EST
By Chris Isidore, CNN/Money senior reporter


NEW YORK (CNN/Money) - American households are running on empty, spending virtually all the money they have, or more, and putting nothing in the bank. But the economy is hooked on shoppers who give everything they've got at the cash register.

A government report due Monday could show that household savings is in negative territory, effectively for the first time since the commerce department started tracking it in 1947. The monthly Personal Income and Outlays report measures savings by comparing consumption -- what is spent on housing, food, fuel and other goods and services -- to income after taxes.

Fed Chairman Alan Greenspan made the low level of national savings a focus of his prepared remarks to Senate and House committees earlier this month, and other Fed policy makers have also expressed concern, particularly about what the low savings would mean for future spending by consumers.

"The household saving rate has fallen to less than 1 percent, quite low in its range of historical variation," Fed Vice Chairman Roger Ferguson said in a speech last fall. "If households, on net, take steps to return the saving rate closer to the middle of that range, which, I might add, would provide welcome support to capital accumulation, then a sustained period in which consumption grows more slowly than income would result."

As recently as the early 1990s, personal savings were equal to about 7 percent of disposable income, and even in the go-go stock market bubble years of the late '90s, the savings rate stayed close to 3 or 4 percent.

One reason for the low savings rate is the strong real estate market. Many homeowners believe that rising real estate values give them the necessary savings they would otherwise set aside.

Homeowners can also raise funds through home equity loans and mortgage refinancings, which gives them more cash to spend than just income.

Some economists worry that when mortgage interest rates start to rise, it'll cause a decline in housing prices which could quickly cut into overall spending, either because consumers no longer have equity to draw upon or because they will become worried about their lack of savings.

"People got thrown for a loop by the stock market crash at beginning of the decade," said Tom Schlesinger, executive director Financial Markets Center. "It doesn't seem impossible that local housing bubbles bursting would have an effect on people's views of savings. Obviously consumption would take a hit if people save at the historic rate."

Economists argue the pace of consumers' spending compared to their income can't last, no matter what happens to housing prices.

"They can't continue to spend beyond their income indefinitely," said Dean Baker, co-director of the Center for Economic Policy Research. "If people are building up large amounts of debt, you reach a point where they can't continue."

Baker, Schlesinger and others say that when savings do cross into negative territory, it's more of a symbolic rather than actual problem for the nation's economy. The savings rate is already at such negligible levels that a drop below zero is likely to be a relatively minor one. But the only thing worse for the economy than a negative savings rate could be trying to break the economy's dependence on households spending everything they bring in, and more.

Personal savings has dropped into negative territory before, but it was in October 2001, when automakers started offering attractive financing incentives to spur auto sales in the wake of the Sept. 11 terrorist attacks. Since the entire cost of the vehicle is included the month it is purchased, record car sales that month caused a statistical blip of negative savings.



http://money.cnn.com/2005/02/25/news...ex.htm?cnn=yes

 

Agreed - don't put everything into one investment. That's almost basic advice. I think he is getting greedy and that's when people get burned. You told them correctly IMO.

 

I'm just wondering what the opportunities will be... It'll be interesting to see...

 

http://www.nytimes.com/2005/03/01/na...rint&position=

March 1, 2005
Speculators Seeing Gold in a Boom in the Prices for Homes
By MOTOKO RICH

UNNY ISLES, Fla., Feb. 25 - Within six months last year, Carlos and Betti Lidsky bought and sold two condominiums. Then they bought and sold two houses. They say they will clear a half-million dollars in profit, and none of the homes have even been built.

Now Mr. Lidsky, a lawyer, and his wife, a charity fund-raiser, have put down a deposit on a fifth property, a $1.3 million condo in a high-rise under construction, and are planning to sell before the deal closes, without even taking out a mortgage.

"It is much better than the stock market," Mr. Lidsky said. "This is an extraordinary, phenomenally good result."

In several metropolitan areas, from Miami to Riverside, Calif., where the real estate market is white hot, rapidly rising prices are luring a growing number of ordinary people into buying and selling residences they do not intend to occupy, despite warnings from some economists that prices cannot continue to rise as steeply as they have in the last few years.

According to LoanPerformance Inc., a San Francisco mortgage data firm, about 8.5 percent of mortgages nationwide in the first 11 months of last year were taken out by people who did not plan to live in the houses themselves, up from 5.8 percent in 2000. In some markets, that proportion is much higher: in Phoenix, more than 12 percent of mortgages were taken out by investors; in Miami, the figure is 11 percent.

The National Association of Realtors, a trade organization that represents real estate brokers, said in a study being released on Tuesday that the percentage of homes bought for investment might be as high as one-quarter of the 7.7 million sold last year.

"Americans are treating real estate as a viable alternative to stocks and bonds," said David Lereah, chief economist at the Realtors association. And some are buying at least two properties at a time.

Like the day traders of the 1990's dot-com boom, people are investing in a market that seems to just go up. Promoters use Web sites to attract investors, promising quick profits. One site, getpreconstructionprofits.com, is run by a pair of investors who offer online training for $197. On their home page, they say people can earn over $100,000 in six months investing in unbuilt real estate.

Some economists say the influx of investors into the real estate market could have negative consequences.

"Investors are now seemingly buying based on the expectation that house prices are going to grow as rapidly as they have in the recent past, long into the future," said Mark Zandi, the chief economist at Economy.com, a private research group. "How quickly and high fixed mortgage rates rise will determine whether the speculative fever in the market just goes flat or whether it caves."

For now, low interest rates are helping to fuel the frenzy. Sometimes, homeowners borrow equity from their primary residence to finance down payments. These buyers, some of whom lost money when the stock market crashed five years ago, believe real estate is a safer bet.

Rita Lawrence, a construction business owner in Phoenix, has bought three houses in the last two years. Ms. Lawrence and her husband rent out two of them, and they hope to sell the third - which they are buying for $195,000 - for $249,000, after a quick renovation.

Taxes can take a sizable part of the profits in these deals. Investors who sell within a year of purchase face federal short-term capital gains taxes of up to 35 percent, and 15 percent if they wait a year.

Still, investors have been seduced by the steady upward march of house prices over the past few years. Since 2000, the national median price of a house has increased by 33 percent. And in the fourth quarter of last year, out of 129 metropolitan areas covered by the Realtors, 62 markets showed double-digit price rises over the same period a year earlier.

Demand for investment properties has risen in markets with the most spectacular price increases, according to brokers. As buyers were priced out of Los Angeles, they moved into San Bernardino and adjacent Riverside County, where prices rose by 35 percent last year. Nancy Overgaag, a mortgage broker at Financial 2000 in Redlands, Calif., said about one-third of her customers were looking to invest in real estate.

Even in Manhattan, where average sales prices topped $1 million last year, investors are piling into the market, brokers say.

Some investment buyers are willing to rent out their properties at a monthly loss, anticipating future sales price rises. Dru Finley and her husband, Hsiao-Li Pan, who live in Brewster, N.Y., bought a one-bedroom condominium in Battery Park City in Lower Manhattan last summer for $499,000. They rent it out for $2,225 a month, about $1,000 less than their mortgage and maintenance costs. The couple hope to make up the shortfall when they sell the condo in a few years. "It seems that real estate always goes up," in the long term, Ms. Finley said.

Many homeowners are tapping the paper wealth in their own homes to buy more real estate. Mark Purnell, who manages internal technology for a software company in Southern California, said the four-bedroom house he bought eight years ago in Rancho Santa Margarita, south of Los Angeles, had quadrupled in value to $800,000. Last year he took out a $150,000 home equity loan and, with his brother, bought three houses in Phoenix.

Mr. Purnell, 36, who is renting out those houses, said he would buy more in Phoenix but could not find anything. So he is turning his attention to Palm Springs, Calif. His Phoenix real estate agent, Kim Martin of Re/Max Achievers, said that investors had helped deplete inventories of available properties from about 25,000 this time last year to about 8,000 now.

In a backlash against speculative investing in some popular markets like Phoenix and Las Vegas, some homebuilders now prohibit renting or selling houses for at least a year after closing. As a result, investors have started to back off in Las Vegas, where the pace of the price rises started to ease towards the end of last year.

But in Miami, the speculative craze is promoted in part by developers and brokers who help buyers to resell quickly.

Brokers in Miami work overtime to get their clients into V.I.P. sales events before developers start pitching buildings to the public.

The Lidskys were heading out of town early last year when they got a call from Michelle L. Judd, a sales associate at Ocean IV, a high-rise being built in Sunny Isles by a consortium led by the Related Group of Florida, the same company that built the condo where they have lived since 2003. Ms. Judd was offering to sell them a second unit, but only if they would put down a deposit that day.

Shortly before their flight, Mr. Lidsky drove to the sales office and without viewing any floor plans, ended up writing deposit checks totaling $159,380 for a $479,900 two-bedroom condo, and an adjoining four-bedroom unit for $1,113,900. The money came from a bank line of credit not secured by their current home. Within three months, Ms. Judd called again: she had buyers for the two-bedroom willing to pay $625,000 and $1.425 million for the four-bedroom.

Such get-rich-quick stories have increased demand for preconstruction condo units in and around Miami. While many buyers do intend to move in to their homes, as many as half the original buyers of some condos resell them before they are built. Of the 280 units at Ocean IV, Ms. Judd said, nearly 130 had resold.

Thomas Daly, a principal investor with the Related Group in 18 condo projects, said the company did not "encourage investors" but that once a project was initially sold out, the developer would help buyers resell their properties quickly "to accommodate our purchasers."

Developers of some projects do not allow buyers to resell before closing, because they fear this could artificially inflate prices.

One of those projects, Arté City, a 202-unit condo complex being built in Miami Beach, is still attracting investors, although they are those who are willing to wait longer to sell. Jaime Nack, a 29-year-old event producer in Santa Monica, Calif., bought a one-bedroom unit at Arté City for $270,000, financing the down payment with a second mortgage on her one-bedroom condo in Santa Monica.

Ms. Nack plans to rent out the unit for a couple of years before selling. Because of its proximity to the beach, "I think it will be safe even if the market drops a bit," she said.

Some real estate watchers in Miami wonder whether that drop will come soon. With more than 60,000 units in some phase of development in the Miami area, "the supply may be greater than the ultimate demand," said Michael Y. Cannon, managing director of Integra Realty Resources-South Florida, a market analyst. A similar situation in 1986 sent the market spiraling, and it took seven years to recover.

For now, investors like the Lidskys are still buying. They intend to buy at least one more unit - their sixth in less than a year - in another condo. But the couple, who acknowledged being "killed" in the stock market five years ago, sounded a note of caution.

"Maybe we won't lose money, but I just think it is not going to keep up," Ms. Lidsky said . "At some point there are just going to be too many apartments in this area."

 

the bubble will burst

 

This one found by Belzebutt - the sky is falling, the sky is falling.....aaaaargh!!!


http://www.macleans.ca/topstories/wo..._101541_101541

 

Have I earned oracle status yet....

What's Spooking the Street
Corporate earnings are up, oil prices down, and economic indicators healthy. Yet investors remain nervous -- and for good reasons


The market has been waffling all year due to familiar worries -- spiking oil prices, rising interest rates, and less-than-stellar corporate earnings growth. Finally, the past few weeks have brought encouraging news on all those fronts. Oil prices have fallen to $48 a barrel from early April's spike to $58. The 10-year Treasury yield slipped to 4.12%, the lowest level since February, and corporate earnings for the first quarter came in stronger than expected -- 16% higher than a year ago, according to BusinessWeek's corporate scoreboard.

Yet, just when it seems stocks might be poised to rally, a new crop of risks -- rumors of imploding hedge funds, alarmed bond investors, political sparring over nuclear weaponry, even a domestic terrorism scare from an errant plane over Washington, D.C. -- has rattled traders. The Dow Jones industrial average fell 205 points, or 2%, in the week ended May 13, to close at 10,140. For the year the index is down 6%.

Many strategists expect more uneasiness in the coming weeks, as the prospect of further Federal Reserve rate hikes in the face of slowing consumer and corporate spending provides an unappetizing backdrop for buying stocks. "There are a number of potential blow-ups out there," says Barry Ritholtz, chief market strategist at Maxim Group. "When you look at risk vs. reward, it is just not an advantageous ratio right now."

THE HEDGE-FUND FACTOR. The most serious of the new risks rattling investors is that hedge funds, derivatives, and debt could prove a combustible mixture for the global financial system. In the second week of May, rumors surfaced that some big hedge funds were tanking as complex trades based on the securities of General Motors (GM ) and Ford (F ) went awry. As the implosion of hedge fund Long Term Capital in 1998 showed, the demise of a major player in that lightly regulated, highly leveraged investment arena can lead to significant losses at the global banks that lend them money.

"Borrowing has a tendency to make mistakes very expensive," says Peter Cohan, an author and investment strategist in Marlborough, Mass. "Today there is more leverage in hedge funds and a similar lack of information about what they are doing." If a problem is intensifying, "We won't know until it is too late."

Ripples from the downgrades of GM and Ford's debt have rocked the corporate bond markets, and investors have fled to the safety of U.S. Treasurys. Currency markets seem newly wobbly as China makes some noises about revaluing its currency. Meanwhile, 2003-style worries about nuclear proliferation, domestic terrorism, and the future of Iraq have vexed traders.

"UNAPPETIZING MISHMASH." "Many people have gone broke forecasting Armageddon, but there seems to be an increased possibility of a financial accident," says Michael Panzner, head trader at Rabo Securities and author of the book, The New Laws of the Stock Market Jungle.

Economic news is ambiguous at best, and investors are trading day-to-day based on conflicting reports. For example, on May 12, the government's retail sales figures for April were much stronger than expected, but that same day, Wal-Mart (WMT ) warned it was falling short of second-quarter goals. In a recent report, Arnie Berman, technology strategist at CreditSights called the economic picture, "an unappetizing mishmash."

Investors wouldn't be so jittery if they weren't worried about the major underlying risk for stocks: That the Fed will overshoot and keep raising rates as the economy cools, observes Panzner. "When the market is as vulnerable as it is now, it creates potential for a spooking," he says.

WAITING FOR BARGAINS. Ominously, Nicholas Bohnsack, an investment strategist with International Strategy & Investment in New York, notes that all too often a Fed tightening cycle has ended with a financial crisis. He doesn't think we've seen that crisis yet -- just the signs of how one might eventually develop.

Many strategists expect stocks to bottom in the summer after a more serious shake-out, and they are ready to buy at lower prices when they do. "I am not only looking for cheaper stocks -- I want to see a badly oversold market," Ritholtz wrote in a May 13 note. "Ideally, the market will overshoot to the downside, creating bargains."

Bohnsack says a sign from the Fed that its tightening cycle is over will be his cue to start buying stocks. "That will alleviate a lot of other overhangs and the market can move higher from there," he says. His firm has a 1,325 yearend target for the S&P 500, which is 14% higher than its current price of 1,154.

FASTEN YOUR SEATBELTS. But the end of interest-rate tightening seems nowhere in sight. April's job report showed robust growth in payrolls, giving the Fed ammunition to raise short-term rates if inflation pressures continue to worsen. Upcoming reports on producer prices (May 17) and consumer prices (May 18) could be bad news for stocks if they provide evidence of rising prices.

Many individual investors, with portfolios still under water from five years ago, are staying on the sidelines, leaving lots off room for skittish institutional investors to react to news, generating major volatility, notes Cohan. The year may end on an upswing, but for those riding this year's roller coaster, the stomach-churning thrills and chills are far from over.


http://businessweek.com/bwdaily/dnfl...0160_db016.htm

 

I really am a modest person by nature (damn, I'm farcking good!!!!)


General Motors Downshifts Toward Default Drive: Mark Gilbert
2005-10-06 19:07 (New York)


(Commentary. Mark Gilbert is a Bloomberg News columnist. The
opinions expressed are his own.)

By Mark Gilbert
Oct. 7 (Bloomberg) -- Earlier this month, General Motors Corp.
hosted an auto show in Chicago where drivers could try its
vehicles. ``In contrast to past years, there were no lines if you
wanted to test-drive a large sport-utility vehicle,'' says Craig
Hutson, a bond analyst at Gimme Credit Publications Inc., who
attended the event.
General Motors is spinning its wheels. Its shares are at a
five-month low as the boost from Kirk Kerkorian's purchase of a
stake in May fades. Standard & Poor's Corp. warned this week that
it may debase the BB credit rating of the world's biggest
automaker, with a cut of more than one level possible.
Companies in the B credit-rating category have a 30.5 percent
chance of defaulting on their debts within five years, says Gary
Jenkins, the head of European credit research at Deutsche Bank AG
in London. That compares with a 10.7 percent probability for
companies in the BB slice, Jenkins says, based on 35 years of data
from Moody's Investors Service.
September's U.S. auto sales figures are a warning that you
shouldn't rule out the possibility of a trip down default drive or
bankruptcy boulevard for General Motors. Japanese carmakers boosted
their market share to 38.2 percent from 32 percent a year earlier.
Sales by Detroit-based General Motors slumped 24 percent, partly
because last year's discounts inspired a leap in the company's
September 2004 sales figures. That discounting program has also
depleted GM's inventories.

Save the Whale

The biggest worry for holders of GM stocks and bonds was the
collapse in buyers for those big sport-utility vehicles. Demand for
GM's Tahoe and Suburban models deteriorated by more than 50 percent
in the year to September. It looks like gasoline at $3 a gallon is
starting to crimp U.S. enthusiasm for the road whales that are GM's
most profitable lines.
``We are growing increasingly concerned about the prospects of
GM's new line of SUVs, which will be launched in January 2006,''
wrote John Casesa, an analyst at Merrill Lynch & Co. in New York,
in an Oct. 3 research report.
GM has problems other than its inability to find buyers for
its metal. U.K. comedian Ben Elton used to do a sketch about the
little dogs that seem to grow out of old ladies' armpits, yapping:
``Feed me treats, feed me treats, or I'll die and then you'll be
all alone because I'm your only friend in the world.'' Delphi
Corp., the biggest U.S. supplier of auto parts, has turned into
GM's annoying runt.

$6 Billion Bailout

Delphi wants an aid package of $6 billion from GM to help it
fend off bankruptcy, people familiar with the negotiations told
Bloomberg News last month. Delphi Chief Executive Officer Robert S.
Miller has said the company may file for Chapter 11 protection from
creditors by Oct. 17, when U.S. bankruptcy laws are scheduled to
change. The New York Times reported on Oct. 5 that Delphi might
file for bankruptcy as early as this week, without saying where it
got that information.
GM, Delphi's largest customer, is on the hook because of
pledges it made when it sold the parts maker in 1999. If Delphi
goes bust, it could drag down a bunch of companies that it buys
widgets from, leaving GM short of the parts it needs as it ramps up
production of new vehicles in coming months.
Glenn Reynolds, the Suburban-driving CEO of New York-based
research firm Creditsights Inc., said at a briefing in London last
week that even if Delphi avoids the drop, there's still a risk that
its workers will go on strike and starve GM of the components
needed to build enough cars to refill dealerships.

Slumping Stock

GM shares are trading below $30, down more than 20 percent in
the past 10 weeks and dragging the company's market value down to
about $16 billion, compared with the $105 billion it owes
bondholders. Nine of the analysts covering the stock rate it a
``sell,'' according to Bloomberg data, with six advising investors
to ``hold'' and four calling it a ``buy.''
Prices in the derivatives market illustrate renewed concern
about GM's creditworthiness. The annual cost of insuring $10
million of GM debt against default for five years has climbed to
about $505,000, up from about $365,000 two months ago. While that's
still below the $750,000 reached in May, when investors finally
woke up to the reality of its junk status, it's higher than the
$435,000 cost of insuring Ford Motor Co. debt.
To get insurance on $10 million of Delphi bonds, you have to
make an upfront payment of $3 million, plus make an annual payment
of 5 percent of the amount insured.

Overtaken by Fiat

It now costs more to insure GM's euro-denominated debt against
nonpayment than it does for bonds of Fiat SpA. A five-year credit
default swap on Fiat costs about 365,000 euros ($443,000) annually,
compared with 500,000 euros for GM. S&P rates Fiat, Italy's largest
automaker, one level lower than GM at BB-. Fiat's turnaround began
when the company extracted $2 billion from General Motors in
compensation for dissolving their partnership.
So here's the question facing General Motors CEO Rick Wagoner.
Do you let Delphi sink, and pray that you don't drown in the
ensuing splash, or deplete your $20 billion cash pile by sending
over a $6 billion lifeboat and hope it wins you some brownie points
in your union negotiations?
One final thought. GM stock is now below the $31 Kerkorian
paid in May when his holding company, Tracinda Corp., began
building a 9.53 percent stake in the automaker. Kerkorian said last
month he planned to keep buying until he owned 9.9 percent, and may
demand a seat on GM's board. How long before passive becomes
passive aggressive, or just plain aggressive?


source: bloomberg.com