Your Great Grandfather’s Stockmarket
Wednesday, March 18th, 2009
Since the summer of 2007, the stock market has exhibited an unusual amount of volatility. Two percent swings in the broad market indices such as the Dow Industrial Average and the S&P 500 have become commonplace as are double digit swings in individual high profile names in the banking and technology sectors. In 2007, for example the Dow Jones Industrial Average moved two percent or more on 15% of the trading days, most of those coming in the final quarter of the year. In the final quarter of 2008, 2% moves occurred a whopping 61% of the time and in the most recent quarter ending March 31, 2009 there were 2% or greater swings on one third of the trading days. Perhaps we are heading back in the right direction. Less would certainly be more on this front.
This kind of volatility in the financial markets has characterized periods of extreme economic unrest such as the Great Depression of the 1930’s and the Panics of 1907 and 1870’s. Those debacles supposedly resulted in some financial market reforms that were designed to mitigate such extremes. The NYSE,AMEX and NASDAQ all tell us that their specialists and dealers are charged with maintaining a “fair and orderly market.” In prior periods of extreme volatility such as 1907 and 1930, there was no such expectation. There was no Federal Reserve regulation, margin requirements did not exist, corners on stocks and underlying commodities were frequent, and large moves were the rule, not the exception. We, however, are supposed to be in a brave new world with state of the art trading systems on the exchanges which maintain a “fair and orderly market,” automatic circuit breakers which close the NYSE in the event of a 10% swing and wise men such as Richard Grasso and Bernard Madoff who have served as the respective heads of the NYSE and NASDAQ boards.
We hear many cries for more regulation, more transparency in derivatives such as credit default swaps and House Financial Services Chair Barney Frank saying that the uptick rule for short sales should be reinstated. These are excellent ideas and perhaps such measures will help. But our markets reflect the ultimate global democratization of capital and as New York Times columnist Tom Friedman has said a world made flat through technology. Our world is jittery, on edge and in a manic depressive state. Our markets will reflect that with or without additional regulation.
As Goes General Motors, so Goes the Nation.
Friday, November 14th, 2008
For the past two decades, this remark made by the head of GM when Dwight Eisenhower was President, was thought to be a quaint bit of “Americana” no longer relevant in the new economy. A memorable moment was when Microsoft surpassed GM in market cap in the mid-90’s and some financial journalists suggested changing the mantra to “as goes Microsoft, so goes the nation,” since the fortunes of America’s largest technology company was thought to be a more important indicator than a car manufacturer. That was then. In the past eighteen months, however, as the economic downturn has gained breathtaking speed, we are now struck between the eyes by its relevance as GM has come to Washington hat-in-hand and our President-elect and several members of Congress agitate for a bailout of US automakers.
This brings us to the recent comments of the auto analyst at Deutsche Bank who reduced his rating on General Motors to sell and set a price target of zero. As several readers of the Wall Street Journal opined, thanks for the helpful comment. We might want to alter the last word of the often quoted line from Shakespeare’s Henry VI, Part II: “The first thing we do. Let’s kill all the lawyers.” GM is now back to its 1946 price level and the question at present is whether or not a government backed bailout would help enough. Many Wall Street and armchair analysts think GM is more than a lost cause. Perhaps so, but before tossing in the all the towels, we should take a hard look at a relevant precedent in the very unexpected and stunning turnaround of Nissan/ Renault.
Nissan Motors, in 1998 had been given up for dead. The Japanese economy was in a prolonged recession and Nissan was suffering more than its competitors Toyota and Honda whose global franchises were thriving . Nissan had an enormous amount of debt for its capital structure, a crumbling stock price and a lack of profitable models. Sound familiar? Into the fray stepped Carlos Ghosn, a Brazilian born Lebanese citizen of France to take the helm the third largest Japanese auto manufacturer. Brought in as the Chief Operating Officer as a result of the merger with Renault, Ghosn became the CEO and orchestrated an improbable and spectacular turnaround under very difficult economic and cultural conditions. Ghson focused the merged company on the leverage that could be gained through a few profitable models. Japanese corporate culture was viewed as impenetrable by an outsider and Nissan, like Ford was for many years run by the founding family. Being an outsider proved to be an advantage since part of the turnaround of Nissan involved layoffs and plant closings—steps a Japanese corporate insider would have been hard pressed to execute. When responding to questions about how he was able to do this, Ghosn very diplomatically speaks about how he was able to connect with Nissan employees and get them to buy into his vision for change. Ghosn also put his own body on the line saying he would resign if he did not return Nissan to profitability after one year and eliminate their debt after 6 years. Ghosn is still at Nissan and recently placed the company in the forefront of electric car development through his partnership with Project Better Place. The ultimate cultural seal of approval came for Ghosn was when his life was turned into a Japanese comic book series.
Can GM be saved along the lines of Nissan? A couple of years ago, Kirk Kerkorian thought it could and became the largest individual shareholder of GM. His plan was to have Ghosn run GM, but he could get nowhere with the GM board. Kerkorian sold his stock and CEO Rick Waggoner still occupies the head seat. Would Ghosn be interested in taking on the largest challenge in the history of the auto industry? Perhaps he is content to stay where he is, but two things are clear: it is crunch time and a version of the Nissan template needs to be tried in Detroit. If the respective managements cannot see the light then Detroit’s new partner, the US taxpayer and their new CEO need to apply the necessary pressure to the car makers to clean house and to Michigan legislators who have prevented this by protecting the Big Three from fuel efficiency standards and modifying union and legacy contracts. So we are more than ever back to the original saying about GM and the nation and there is the potential for a great success story or a missed opportunity. In either scenario (hopefully the first), there will be far reaching consequences for the economy and financial markets.