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Mark's Market Blog

10-30-08: Google and GM

By Mark Lawrence

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The first law of investing is "don't fight the Fed." The Fed has decided that they want to stimulate markets, so in the last two weeks they've dropped the discount rate, the interest rate they charge banks, to 1%. Since we currently have about 2.5% inflation, they're basically paying people to take their money. I've lost track now, but there is a bare minimum of $2T that has been put into circulation in the last six weeks, and I think the actual number is more like $4T. Now everyone is jumping in - central banks from Seoul to Brasilia are pumping money into the system. In fact, several of the foreign central banks ran out of dollars to pump, so the Fed has given something like 14 country's central banks credit lines of $30B each. This is all mostly symbolic, as we're deep in a liquidity trap - there's no one the banks want to loan money to, it has nothing to do with interest rates. A couple days ago the White House got on the phone to about 20 of the largest US banks to tell them it was time to start loaning money again, or there would be detentions given out.

As of today, we're up for the week on high volatility - no one can quite decide if they want in or out of the markets. We had a nice jump on news of the world's central banks rate cuts, and mostly confusion since.

S&P 500 last five days

Something I'm learning recently is that in NYC and DC, it's really believed that banks and stock markets are central to our very existence. I find this curious, as I don't borrow money, few of the people I know do save for perhaps a mortgage, and stocks are just a fun sideline so far as I'm concerned. No new business raises money on Wall street, they do it with venture capital or SBA loans. Since the banks and wall street are having serious problems, and Detroit is too (will the Lions ever win another game???), it's thought that the rest of us must also be suffering. I dunno, maybe there is a major recession coming with double-digit unemployment, but I just don't see it. My business is doing just fine, the business people I talk to are too, house sales are way up in California and the housing market perhaps has hit its bottom, at least here.

In the news: Google has just settled a lawsuit about authors and publishers royalties on digital versions of books. This is being presented in the news as "well, that's settled." I don't see it like that at all: Google has now set themselves up to open the literature equivalent of iTunes. You can expect sometime in 2009 the GoogleBook will be announced to compete with Amazon's Kindle. I think this is going to be really big: outside of the top 10% of books by sales, I think this is where mainstream publishing is headed, and Google has just positioned themselves to be right in the middle of it. I think they're going to wind up making major bucks off this. I also expect in the near future we'll see books go direct to digital, just as a lot of new music is now being released on mp3 first. There's also talk that the GooglePhone (it's basically software, it will run on most anything) will soon be available from Motorola on AT&T and Verizon, and that Google and Apple are going to squeeze Blackberries out of existence. I continue to be very bullish on Google. I missed the run-up on Microsoft stock in the 80s, I'm not going to miss this one.

GM has settled the outlines of a deal for Chrysler with Cerberus. No surprise there: Cerberus' bankers have been twisting their arms for three weeks to get a deal done. A deal means their Chrysler loans have some value, no deal means in 4-6 months the loan is gone down the drain. I understand the Treasury has already offered a $5B loan to help finance this deal; GM is currently asking for the Treasury to buy $3B of stock, put up $3B in low interest loans (like 1.75%), and then guarantee a credit line of like another $4B so that GM can get that money at something like 5% - 6%. The Treasury has few good options here: if they don't go for it, they have to presume Chrysler will go bankrupt and dump $40B worth of UAW pensions on the Pension Benefit Guarantee Corporation, the pension equivalent of the FDIC. I expect this deal will be approved in record time, like maybe even before the election. GM will then sell off Hummer and replace that with Jeep; the word is that Chrysler and Pontiac will be merged, mostly just saving the Chrysler minivans and trashing most everything else; and Dodge trucks will have GM motors and transmissions in no time flat. Lots of plants (~10) and dealers (~7000) will be shut down within six months, and lots of UAW guys (~15000) and white collar workers (~15000) will be bought out. GM will have increased their US market share to about 35%; they will have increased their cash position by $15B or so, and they will have positioned themselves to make serious money in 2010. They will also have more clearly become too big to fail. I expect GM stock is going to go up nicely when this deal is announced and understood. If it does, I for one will be a very happy camper.

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