Obamacare Makes Labor Market More Favorable To Small Businesses

 

Republicans champion capitalism, especially “the pursuit of happiness”.  For that, Republicans consider businessmen to be their safe constituents.  Is enabling small businesses to compete more effectively against the mega corporations something Republican look forward to?  Interestingly enough, Democrats are doing that this time instead of Republicans.  And that is through this Obamacare.

Extending health care to all is the idea of Obamacare.  Having this barrier to health care obviously gives an edge to someone.  In terms of politics (or policy), the question is always about who gets the advantage (or the disadvantage).  Prior the Obamacare days, the advantage is to the employers who can afford the administrative cost of providing a health care insurance to its employees, thus giving them an overwhelming advantage in recruiting and retaining the human resources they need.  This disadvantage suffocates small businesses and self employed.  Ultimately, innovation is sacrificed. 

Plenty of employees make employment decisions based on the health care package.  Many people give up their business dreams and stay as an employee because of the fear of not having health care for their families.  Almost everyone will be covered when Obamacare becomes effective.  Yes, the operating cost is higher for small business owners, however, this increase cost will draw the small business owners much closer to the advantage enjoyed by the mega corporations than if they acquire the health package alone.  In fact, only 38% offer health insurance to employees among the small business owners in 2009 versus 61% in 1993 (read here). 

If America’s small business owners’ talents for success are not willing to move to them and continue to stay in General Motors, ATT and like, then where is the next Google?

Geithner: What Did You ACTUALLY Say?

http://www.reuters.com/article/newsOne/idUSTRE52O6JP20090325?sp=true

 

Geithner had a hearing, not quite an announcement on future regulation framework.  And you cannot get much out of a hearing.  So, if you were looking for a pdf of details that can help you get a feeling if Citi (NYSE:C) will get more oversight versus Northern Trust (NASDAQ:NTRS) or Union Bank of California, then sorry.

 

This is the best article I can come up with so far: 

http://www.reuters.com/article/newsOne/idUSTRE52O6JP20090325?sp=true

 

This article says merger of regulators is now a lower priority than before.  The consequence for that is the work force continues to be in limbo.  This is not the time to make these regulator employees second guessing where their jobs will be.  The administration would want them to strengthen enforcement.  The impact of this is on banks, not banks regulated by Federal Reserve (largest banks), but OCC and OTS.

 

Another interesting point is about Mark-To-Market.  Is Geithner really thinking about modifying Mark-To-Market?  This will be a plus for the banks that operate in metropolitans since theirs assets more volatile.  

 

Securitization: Congressmen maybe simplifying the problem.  However, that can be one of the fixes.  Just don’t believe that is THE fix.

 

Most of the consumer protections make sense.  However, it looks like one thing is forgotten, unless will be included in the details: education loans got loads of undesirable business practices behind the scene.  This is a good time to take care of that too.

 

Provision standard:  be careful with this one.  Geithner may end up hurting the small banks as well.  The original intent was to decrease systematic risk, i.e. reduce largest banks’ influence and increase the market share of the small ones.

 

Credit rating agency: Geithner may as well talk about appraisal firms.

 

The international settlement part will play well with countries who want more multi-polar settings.

 

It is now becoming a pattern that Geithner / Obama always gives expectation of a “plan” and then end up with a power point presentation.

AIG The Sacrifice: The Reflection Of America’s Political Risk

 

I agree quite a few points of this article in regard to the AIG episode.

 

Of course, nothing is perfect.  I would change a word here:

“It will certainly make Mr. Obama’s task much more difficult when he tries to sell the public [my version would be:  investors] on his administration’s ability to manage the rest of the bailout, and when he tries to sell private firms on the public-private partnership that will be needed to make the recovery work.”

 

Obama will have more difficulty to convince investors his future plans work (already stated in the article).  Also, Obama will have more difficulty to get troubled entities to take the bailout.  Look at AIG.  This bailout actually bites! 

 

AIG was politically insensitive.  This story alone will make firms in the future to invest more to mitigate political risk or at least reputation risk (branding), which is not a good news.  

 

In addition, a good portion of the reason for these companies to require a bailout is that their valuation (capitalization) fluctuated so greatly they were literally worthless.  So, some companies may realize taking themselves off the exchange is not a bad idea, at least they can insulate themselves from the volatility.  Is that what we want: fewer choices for mutual fund managers and pension fund managers?  If they have fewer options and social security is running out, then what are to do?

 

Fewer choices on the exchange also means quicker wealth concentration.  Gini coefficient will spike up very quickly.  Is that what Obama wants?

Gimmick? What Difference Does It Make?

Obama did not actually ask for pay limit.  Obama pretty much asks for pay through options: exercise to sell the stocks when you pay back the money to the government.  Obama also asks for more say for the shareholders.  Some will say such an ask is ridiculous.  Some will say if you want the money this badly, then this is the price to pay.  

 

Obama will likely get his way, not because of media bias, but because he is likely to get the votes for this one.  

 

Ideologies aside, what is really at stake?  This proves American economy is increasingly political.  Very soon, America will have a government with hands so full in the operations of the economy that it is not too different from China or India.  

 

Pay limit takes the headline.  However, if you read the content, the other point is the more important one: “bank shareholders will have a greater say about the salaries paid to company heads.  The measures will put in place greater transparency for costs such as holiday parties and office renovations.”  This actually follows the same concept of SOX. 

 

Obama is actually addressing quite a few things here.  

 

In large corporations, small shareholders never get a say.  The big shareholders usually end up being mutual fund companies.  Mutual fund companies tend to be silent partners.  So, they do not say much.  In fact, they do not even want a seat on the board.  Boards are still running the way it used to be 50 years ago, 100 years, old boys club.  However, the number of shareholders these days is: way too many.  However, 100 years ago, a large corporation did not have hundreds of thousands of shareholders.  These days, if you count the mutual fund holders, you easily have millions of shareholders.  Large shareholders get ways to take care of themselves, preferred shares or even board compensations for the lucky dozen.  The theme of transparency in this issue is actually consistent to one of his campaign messages.

 

Annual reports are informative.  For a large publicly traded company, say 100 million operating budget or 1000+ employees, tucking in ridiculous expenses on executives is too easy.  Even though SOX asks for any small thing that is “material”, what is half a million to a 100 million?  Obama essentially is having one stepping further: SOX is about relative to the nature and complexity of the business, let’s have it relative to ordinary people.  

 

Impact on economy?  For people who have >500k, do they spend all the money and let the money circulate in the economy and create jobs?  No, they tuck half of it in their 401k anyway.  In a way, Obama is actually tying up all their 401ks into their own company’s stocks.  Now, since these executives will have no diversification of the assets, they now have complete vested interests in the survival of the company.

 

So, political gimmick or not, this move actually does make a difference. 

Obama Administration Begins! (Or ?)

Obama settled on his economic team late Friday afternoon, sending Dow 400 points higher, just above 8,000 points.  Then, news about Citi’s (NYSE:C) bailout came about.  This news probably marks the beginning of Obama administration.  Here is also why this signal is important.  

 

A plan like Citi is facing must have been laid in advance.  What has been in the dark is if the plan gets proper continuity through its execution.  Therefore, the first priority is people.  The people had to be properly identified.  The team had to understand what is involved.  Geithner’s appointment had a lot to do with his familiarity in the financial crisis as well as the solution already in place.  He probably had a hand in the solution as well.  For an announcement that spans through two administrations, Obama had to approve.  Bush had to approve this plan as well since Obama is doing to take the credit for its success but Bush will take the blames if it fails.  Geithner’s appointment is an additional (in addition to James Jones’ appointment) indication of the desire for smooth transition. 

 

Of course such a “smooth” transition means a blend of old and new, ie some more of Bush people, and some of Bush ideology gets carried over.  However, media is very willing to forget about these things, when it is done by Obama.  

 

The importance of the news, in addition to sending DJ and S&P up another 3% in the first 2 or 3 hours of a Monday morning, is this: Obama already replaced Bush; expect more consequential news from now on.  Obama’s administration is not going to begin on 2009.01.20.  His administration starts now.  Therefore, if you thought your decisions could wait until 2009.02, then you may want to re-juggle your vacation schedule.  Your Q4 board probably is going to get busier than usual, not only the economic news and your company financials matter, but also Obama will deliver statements earlier than previous presidents.  Decisions about your public relations firm, lobbyists, policy research contracts will have to be revisited now rather wait after Christmas.  

Fund managers have to get busy too.  Just look at Citi’s stock this morning: 2 hours and 66% increase.  Obama’s statements will make big swings.  So, don’t slack. 

Who Just Financed The Auto Bailout? What Do They Really Want To Buy?

How much money are GM (NYSE:GM), Ford (NYSE:F) and Chrysler asking?  $25B.  What if someone already lent more than that $25B money to America 2 months ago?  Should America use that money for the auto industry or something else?  Like the new stimulus people talked about? 

 

Back when Treasury Secretary Paulson was having his stunt show of $700B domestically and internationally, China became the largest lender to the largest debtor (from the second largest).  While most (16) of the reported 29 markets shrank their lending to America, China actually made the biggest increase in lending this year in September (the latest data available) both in dollar amount as well as in proportion of the portfolio.  

 

China lent an addition of $43.6B, from $541.4B to $585B, largest in the year for China, as well as the largest increase in the world.  This is 8.1% increase for China.  China is actually taking a much larger portfolio risk on America.  If China had any portfolio risk management, China must have broken all their portfolio risk controls by now.  

 

China is of course serving its own interest at the same time.  Propping up US economy for a while will assure that US currency slows down its decline, slows down its decline in imports, that the pressure on currency exchange rate is dampened.  

 

This is another angle to this irony.  Competitors or not, China and America are dependent on each other.  If America is indeed in decline, as CNN reports and National Intel Council finds, then America may want to learn a lesson from England.  

 

UK has been experiencing a decline for a long time.  However, they continue to enjoy a greater influence than their economy can support.  They managed to find a buyer for their asset, political asset.  This is no different than a retiring accountant (doctor, lawyer, real estate brokerage owner) selling his book of business to a younger partner through an earn-out model.  

 

When you sell your business, you can sell the whole business up front, in cash.  Say 2 years, 3 years of the profit.  However, the buyer may have a hard time to take everything in one go, especially we are talking about a young business partner.  The young business partner needs a certain time to get acquainted with the clients to prevent client attrition, especially if the business is a relationship heavy business, like politics.  So, have two partners in the firm at the same time, the young partner gradually increase its shares over the years as the old partner reduces his work load and introduces the younger partner to the existing clients.  

 

This is what England did.  England maintained a “special relationship” with America by serving American interests since WW2, transforming its political assets to the benefit of America, re-aligns its own interests at the same time.  England did not suffer the decline France had.  If America perceives this “decline” as reality (rather than another ploy from the intelligence and military community to get more budget), then the next question is: Who will secure our future interests?  Who is the buyer?  What is our inventory?  At what price?  Who is our rep? 

 

 

With that in mind, how consequential is Sudan or Tibet or even Taiwan in this bilateral relationship?

 

 

How Long Can You Wait For A GM Bailout?

GM (NYSE: GM), Chrsyler and Ford (NYSE: F) are asking for a nagging for an auto industry bailout.  This is what should have been expected once the $700B bailout flood gate is open.  After the auto industry will be the steel industry, the building industry.  If you bailed one, you need to bail all. 

 

Obama said the auto industry is important.  That may be an electoral language.  It may be too early to tell if he will deliver or break the promise.  However, one thing is certain: he should focus more on transition than governing.  For that reason, he is likely to remain mute on this issue.  

 

What about Bush?  Bush already said he will not bail out.  Some think Bush is using that to bait Senate to rectify trade treaties.  It is more likely Bush is being a prudent and a responsible out going president – do nothing.  This is best described by Treasury Secretary Paulson’s article on NYTimes.  During a transition period, the stunt show could have been to advocate for McCain (“who else can steer us through this mess?” Not that it worked).  Once the election is (or was) out of the equation, the job (Paulson’s job) is make sure the ammunition is available for Obama and hope that Paulson does (did) not have to use the ammunition or use all the ammunition.  Here is why: Paulson’s reputation will be the first for crucifixion under the Obama administration when Obama is up for a recovery failure.   The best Paulson can offer is to recommend the best talent he can find.  

 

The starting point to any bailout is the House.  Will House give the money?  Even if Pelosi wants it, she is unlikely to get the ammunition to push it through, given the controversy of the $700B and the margin that vote had.  Suppose it passes, it does not have enough votes to override Bush.  

 

Will Obama ask for it?  Who will take credit for the bailout?  Or the blame?  Who will have to be accountable to the execution of the bailout, if the money actually goes through?  Obama administration or Bush administration?  Obama wants no ambiguity.  Bush is unlikely to want to create another potential mess for a Democrat to manipulate against him.  The $700B stunt show is already enough for both Bush and Obama.  

 

So, the story is then: forget about trading auto stocks based on political news or even the hearing.  No matter how appeal the hearing will turn out to be, the earliest possible actionable news is after Obama’s cabinet becomes clear, if not after inauguration.  

Prudent Obama Prolongs Uncertainty

 

Obama is not going to G20 because there is only one president at a time.  This is prudent.  This also makes him safe.  He should not be responsible for anything Bush commits.  By being next to Obama, he either has to say sorry to Bush or to the other leaders or he has to acquiescence to the conditions.  Alternatively, if he takes a more active role, then he would be taking Bush’s last thunder.  Bush deserves to have the last ride before he leaves. 

 

Great that Obama is doing all that.  What about the rest of us?

 

These prudent actions actually prolong the uncertainty in the financial world.  The financial world is now waiting for Obama.  Who is the new Treasury?  What is his view on the bailout?  What is his view on Detroit?  What is his differ from Obama’s? 

 

The financial market cannot bring in too much good news in the near future due to political uncertainty.  Where is your 401k’s fund manager going to place his bets?  Dump GM or not?  What about your uncle’s pension fund manager?  What can he do about it?  Keep Citi or not?  They are all waiting.  Other presidents took more time to do all that.  It’s just Obama got a really bad deck of cards.  And if he plays bad, we will have to sweat for it.

Market Is Still Waiting For Obama

How is the Obama administration doing?  Obama may not have assumed the duties.  However, he definitely started his impact.  For one, gun sales are going up and that translates into stock prices already.   

 

S&P continues to fall.  Starting on November 5 and including today (11^th), S&P has fallen 4 days.  S&P fell from 1005 to 900 now.  This is another 10% drop.  On the other hand, the dollar is rising all other currencies.  US has risen 3.5% against Euro, 4.9% against Canadian, 3.7% against pounds.  

  

So, is it a vote of confidence or not? Or once again, do the foreigners love Obama more than the “real Americans”?  

 

The strength of US dollars is a reflection of international confidence.  In fact, this is more like a no-confidence of everyone else than a confidence of US economy, let alone the perception of future performance under Obama administration.  The market behavior is saying: we are facing a global economic recession, the money has nowhere to go; US is the resort of my money.  

 

The weakness of the stock market is performance is bad, to put it nicely.  The money flowing into the US continues to be in the form of cash equivalents and not into stock market.  The market behavior is saying: The money does not have confidence in the future of US economy.  

 

The market wants to have the most liquid form of capital: cash.  What will tick the market to new behavior?  Political news will set new directions.  Economic news of course is relevant, but we are in a market for political news since the perception is recession and therefore government intervention is expected.  Relevant news are: if there will be announcement on November 15 and cabinet appointments.  

Financial Crisis Now Carries A Political Premium

The financial crisis in America has over rode the presidential election to carry the most political risk in the global economy.  While the American presidential election is a cyclical event and its political risks are more within control than many other political events, such as change of leadership in China.  However, the risks associated to the financial crisis have not only spoiled into arena of political risk, but its impact is immeasurable yet.  This is because its impact is now beyond the financial impact.  

 

The first impact is the presidential election.  This financial crisis is now driving the voter emotion, which is of course in favor of Obama.  The scarcity of information coming out from the candidates implies the candidates are literally clueless – They do not even attempt to own the issue.  This scarcity of information by itself carries a risk premium to any organization that has a budget to be executed in, revenue or input driven from America.  

 

The second impact is American financial industry is now so dependent on the government that its operational independence is questionable.  How far are they from being a “for profit organization”?  Why would a company’s compensation be political for it not because its owner is now a government?  AIG is the perfect example.  How much time will it take for these organizations to get political appointments?  These are unlikely events within a foreseeable future.  However, they are at least academic questions at the table rather than unimaginable.

 

The third impact takes even a longer horizon.  Who is financing the bailout?  Do you think this $700B is coming out from cash?  This money is financed.  Who is lending the money?  Japan, China, Taiwan, Middle East oil producing countries are all big lenders to America.  All exporting countries will take a beating, however not because of their control weaknesses in their financial industry but because the demand in America is weakened.  A smaller pie in America will make the rest of world economy larger in proportion to the States.  Countries like China have a big domestic economy that can sustain a good hit.  Bush asked “Is UN relevant?”  A post 2008 financial crisis world may start to wonder “Is US relevant?”  How much influence from America will be reduced not only by the reduction in moral authority of Bush Administration but also by the scale of US economy in relation to the rest of the world.

 

A corollary of this impact is the influence of global institutions.  A lot of the existing global institutions are founded on the premise of asserting American influence.  A good example is G7.  Who were the G7 countries?  The non communist Security Council holders of WW2 and the losers of WW2 plus the most American loyal country Canada.  This set was to assure that the strongest industrialized nations can be voted to affirm America’s wishes.  World Bank continues to take the most money from the States, not that no other country is willing to offer more.  And money drives the votes in World Bank.  Head of UNICEF is appointed by America to an American citizen because of budget contribution.  All these institutions will see an erosion of America influence.