Australia bails out economy - Bad.
US bails out economy - Bad.
Europe bails out economy - Bad.
China bails out economy - Good.
Well, not quite. For a start, the AU$849 billion ’stimulus package’ proposed by the Chinese sounds like a lot of money. And it is. It is more than the US government is spending on its TARP initiative to bail out the credit market.
But at least the Chinese money might be spent on something useful. The US government is spending nearly the same amount just to buy dodgy debt.
The one thing we don’t know about this package is how much of the USD$586 billion is additional money to what had already been promised.
For instance, back in July US investment firm Merrill Lynch estimated Chinese infrastructure spending to be USD725 billion per year over the next three years. Sure, things have changed a bit since July, but there is no evidence yet that this is entirely new money.
Even so, it is still significant. So if we suppose the USD586 billion is added funds then it will likely take Chinese infrastructure spending to north of USD$1 trillion per year.
The upside is twofold. First it is being spent on things that country needs. Second, if it wants to, China can pay for it in cash, unlike in the US, Europe and now Australia where ’stimulus’ packages will have to come from debt.
And then we have the Australian government version of a stimulus. Give the money to a basket case industry and hope for the best.
The one positive about the hand-out to the three Australian based car manufacturers is that it involves them spending $3 to get $1 of government funding. To be honest, we’re not sure that is likely so the taxpayer’s $6 billion should be safe.
The automotive industry in Australia employs about 60,000 people directly and up to another 200,000 in related industries. It is a big employer. But does it warrant special treatment by the government on this basis alone? We don’t think so.
Our guess is that government’s view vehicle manufacturing the same way as they view national airlines: a ‘badge of honour.’
General Motors to be Worth Zero
We aren’t the only ones who think the $6 billion investment in car manufacturers is a waste of money. Deutsche Bank has downgraded shares in General Motors to… $0. That’s ZERO.
Barclays Capital doesn’t think much of the future of GM either. It has put a $1 price target on the company. That’s a long way from the stock’s price of $3.36 this morning. It’s an even longer way from GM’s all-time high of over $90 in early 1999. It doesn’t matter whether these analysts are right or wrong. But they sure think car manufacturers make a lousy investment.
You only have to look at the last financial statements for GM to see what a hole it is in. For the last financial year GM generated revenues of USD$181 billion. It made a net loss of USD$38 billion. In other words, it made nearly four times as much revenue as BHP Billiton. The difference is that BHP made a profit of USD$15 billion.
Surely if governments were interested in investing taxpayer money they should do it in a business that can make a profit.
B&B - Will it Survive?
We haven’t mentioned it in a while, but things don’t seem to be getting any better at Babcock & Brown [ASX: BNB]. It has turfed out some - not all - of its old management, and is desperately trying to offload some of its satellite funds.
Or maybe the funds are trying to get rid of B&B. We aren’t completely sure which party is the most desperate.
Now B&B can hear the sound of the death rattle from the ratings agencies. Standard & Poor’s has downgraded the company’s credit rating to ‘BB’ due to the “impact of the financial market dislocation on the pace of asset sales required for BBIPL’s debt reduction plans.”
This morning the B&B share price is down by 26% to just 55 cents. There must now be a serious question about whether it can survive…or whether it will go the same way as Allco Finance and ABC Learning.
Cheers.
Kris.
