Waiting for Congress’s “Aye” but the Problem is Gigantic

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Oct 03 2008
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When you read from the government-controlled media that Malaysia’s economy has the capacity to weather the destabilizing consequences of developments in the US economy and international financial markets, that’s when you need to start worrying about the economy. It’s better for newly appointed Finance Minister Najib Razak to shut his mouth and do what his boss didn’t do for the last four years – listen to foreign (and domestic) investors what they want in order to attract them into the country and carry out those reforms. Stop bragging about the US$119 billion international reserves because going by the rate FDI outflows are pulling out, the chicken feed of US$119 billion will not help in the long run.

The fact is many countries are still depended on U.S.’s economy and if this super-power is not doing well chances are high that countries such as Malaysia will be affected. Like it or not diversification can only do so much and you still need foreign investors to bring in their hot money to excite the domestic activities. It would be foolish and disastrous to underestimate the current problem of U.S. financial crisis. Former premier Mahathir had tasted the medicine before during 1997-1998 Asia Crisis and the old man screamed the exact same wordings – country’s international reserves were strong, economic fundamental was strong, banking sector was strong, export was healthy and heck, everything were strong. The dictator almost ran a one-man show with total control over Malaysia’s economy and he spent lavishly to build the biggest and the tallest, apparently in his obsession to search respect from the West.

Mahathir NajibYet when the stock market nose-dived to 200+ points from 1,000+ points back then, Mahathir pointed his fingers are outsiders particularly the speculators and the Jews. It was so bad (the stock market) that Mahathir was literally asking the rich to pawn their jewelry overseas and bring back the money to the country in order to replenish the treasury. He also begged average-Joe to donate their jewelry to help the country’s economy but of course nobody gave a hoot about it. People were also asked to plant vegetables in their front yard to reduce foreign bill for food. Wonder what happened to that “silly program”.

On Wednesday, U.S. Senate strongly (74 to 25 in favour) endorsed the $700 billion economic bailout plan and the ball has been passed back to Congress which had earlier rejected the plan causing the Dow Jones to tumble 777 points. Congress will decide again on Friday whether to approve the rescue plan after sweetener of $150 billion in tax breaks for individuals and businesses was included. Analysts expect the latest modified $700 billion plan to get the backing from Congress this time. Really, after the 777 points drop and many fingers pointed at Congress it would be interesting to see if Congress dares to screw up again. Frustrated, some investors were asking whether Nancy Pelocy, a hippie from San Francisco, is more qualified to make critical economic decisions than Secretary Paulson, the former CEO of Goldman Sachs.

Warren Buffett becomes greedyNational service or not, Barack Obama and his Republican rival, John McCain, scrambled to make personal calls in their attempt to switch “Nay” lawmakers to “Aye”. If things are not bad enough, U.S. auto sales dropped below 1 million last month for the first time in more than 15 years thanks to difficulties in getting loans. The Labor Department reported that initial claims for jobless benefits increased by 1,000 to a seasonally adjusted 497,000, the highest since the Sept 11, 2001 terrorist attacks. Commerce Department reported that factory orders in August plunged by 4 percent compared to July, steeper than 2.5 percent drop expected. Another sign of economic distress is the sudden “Sales” and promotions from stores nationwide. Heck, even Berkshire Hathaway’s (NYSE: BRK.A, stock) furniture and jewelry stores are not spared by the U.S. economic problems.

Billionaire investor Warren Buffett said the nation has been hit with an “economic Pearl Harbor” and predicts that the rest of the “Main Street” economy will start to have problems if the government’s financial bailout plan doesn’t pass Congress soon. Buffett who has always tries to be greedy when others are fearful is still shopping for good deals, the latest being $3 billion of preferred shares of Electric Company (NYSE: GE, stock), which carry a 10 percent dividend – that’s $300 million a year dude. Last week, the Sage of Omaha invested $5 billion in preferred Goldman Sachs Group Inc. (NYSE: GS, stock) shares which comes with a 10 percent dividend string attached – that’s another $500 million a year, mind you. But the icing is the warrants to buy $5 billion in Goldman Sachs common shares at a strike price of $115 that can be exercised at any time over the next five years in addition to the right to buy $3 billion in GE common shares at a price of $22.25.

Dow Drop 350 pointsThe question on traders’ mind before the stock market starts Friday morning is whether an endorsement by the Congress will help push up Dow Jones permanently. Using the indicators (Dow erased almost 350 points) after the closing bell Thursday, the answer is an obvious “No”. Buffett said in his adult lifetime he has never seen people as fearful economically as they are now and that was precisely the sentiment on the trading floor Thursday. It simply means the $700 billion won’t save the economy from a potential severe recession. So will Dow register positive gains after Friday’s closing? Most probably! Will we see the sunshine again thereafter? Most likely not simply because the problem is too gigantic in scale to be solved by a $700 billion bailout alone so don’t expect an immediate recovery! If you’ve some Put Options on hand and it’s in profitable territory, prepare to dispose some. It’s always nice to take some money off the table instead of expose it to the risks.

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Hi. That bit I may not agree with you. I donot “read up” about American Stocks and as such not well verse with them. But when we talk about 10% dividend attached with it we have first to know what’s the par value of the stock. If they are say at US1.00 / share. Then 10% comes with US$0.10 per share dividend. But what’s the share price Buffett paid for per share? I do not see any cost per share listed anywhere. Very likely, not at 1 USD per share. He may have paid 3 Billion for the share but the dividend may be not at USD300 million.

thanx elmo …

kindly refer to http://www.sciam.com/article.cfm?id=buffett-dives-into-ge-ami

cheers …

We have USD119 billion or foreign reserves?

I thought we have lesser than that..:(

Recently an insurance company nearly wind up….

A bank is nearly bankrupt……

How it affect you? Did you buy insurance? Did you buy mini note or bonds?

Who fault?

They only talk about how bad the crisis will be, but they did not give regulation measures…..

Although not approved initially when thinking of using tax payer money, $700B is used to save finance industry only, how about the industry that you are in…..retail industry, construction industry, manufacturing industry, R&D, electronics, electrical, mechanical, chemical, IT etc…. each industry will be able to enjoy at least $10B…….Which will make every industry vibrant…..

They say without using tax payer money, they will not be able to lend to small companies…..

Bank primary role is to lend money….else what sort of business will let them earn….?

Many companies had been merged and consolidated, and they are stronger now, so don’t bail out, they will consolidated…..

Many ways of raising their own funds eg preference shares, sovereignty fund etc.

The top management of the Public listed company ( belong to "public" ) salary should be tied a portion of it to the shares price ( IPO or ave 5 years )…. so when the shares price drop, it don't just penalise the investors, but those who don't take care of the company…..If this rule is pass on, without any need of further regulation, all industries ( as long as it is public listed ) will be self regulated……

We must push for it for our next generations……

Sign a petition to your favourite president candidate, congress member again and ask for their views to comment on this, and what regulations they are going to raise for implementation…..If you agree on my point, please share with many people as possible….

Media and finance sector are the only two sectors ( hopefully Hacker can also ) which can overcome political incorrect power, so it is time to fine tune to the correct path, so hopefully media can united to report the truth…… ( because after this incident, they will still required media in future )


Arghhh… very confusing. $24.50 per share at 10% div.. 300million return. something mssing somewhere.

thanks pal.

hello kris,

that’s what they trumpeted, USD$119 billion … but i guess nobody can proves it … only after the country bankrupt then only we’ll start questioning the figures …

cheers …

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