Financial Media and Communications

Is there a future for oil and Exxon Mobil?

2008-11-23T13:46:00.001-08:00

After six years of rising oil prices, they have in recent weeks taken a roller coaster ride down.
This is good news for the end consumer but not for the oil industry who is no longer recording countless profits.

Since this summer, oil prices have fallen by an incredible 70% from about $150/barrel to about $50/barrel today. After observing these facts, Exxon Mobil still stays optimistic and remains confident that it can handle the slowdown better than its rivals.

However, this confidence might evaporate quickly as the new president of the United states, Barack Obama is convinced of moving away from the dependence on oil and adapting in the long run to more renewable energy sources.

Will the business model of Exxon Mobile, which has been proven very successful over the past years keep being competitive in the years to come? And will their strategy of brutal honesty about the need for oil and gas to power economies for decades to come turn out to be true?

For now, Exxon Mobil is worth about $375 billion, being the world’s largest corporation, it’s credit rating is better than most governments and it is the most profitable American business, with earnings of 14.8 billion in the third quarter. Can anyone do better?

Unrealistic statement from G-20 Summit

2008-11-23T10:08:00.000-08:00

On Saturday, 15 November, the leaders of the group of Twenty held a meeting in order to discuss the challenges the world economy and financial markets are facing.
Many measures has been taken in the past but they all seemed very vague, unrealistic and turn out to be inefficient. Leaders of different countries around the world agreed after this meeting to continue their effort to try and support the global economy, stabilise financial markets and this by working together and taking joint actions.

In this meeting, the leaders did not recognise the fact that they made some fundamental mistakes but pointed their fingers towards policy-makers, regulators and supervisors, in short, the international institutions such as the ECB, the FED, etc.

The states are said to continue their efforts and “take whatever further actions are necessary to stabilize the financial system”. However, I find that this type of expression is very ambiguous and unrealistic. People, I think, will step-by-step lose confidence in the governments and international institutions as they are not able to keep the promises they have made in the past but still continue to make.

Points of action such as helping emerging and developing countries gain access to finance in these hard times is, again a point of discussion. I can not understand how these countries are planning to help others, if they can not even help themselves. Developed countries, currently facing one of the worst recession of the history, should think about their own problems and solving them instead of thinking about problems other countries are facing and trying to solve them first.

The future of Citigroup

2008-11-23T09:23:00.000-08:00

The current situation of Citigroup is not looking too promising. Citigroup was seen as one of the strongest banks to survive the current financial crisis; but the last week has been disastrous for the bank.

The merger of Citicorp and Travellers Group, about ten years ago, brought Citigroup along. Since then, the group has been able to survive many turmoil periods. But now, it is different, the problems that Citigroup is currently facing are due to the failure of the merger between Citigroup and Wachovia in September 2008, which would have made Citigroup into one of America’s dominant lenders.
The failure to successfully conclude this deal led to the steady decline of Citigroup’s share price. However, after fear this week that Citigroup might require a government bail out, the share price collapsed which led to the vaporisation of half of Citigroup’s market value.

Rumours go around that Citigroup has never had the ability to fully integrate all its divisions and let them work as one company. This disability costs a lot of money as this company could not take advantage of economies of scope and this in a period of crisis is likely to signify the end of Citigroup.

In order to try and save Citigroup from bankruptcy, actions will have to be taken. Will Citigroup be split in the future, are pieces of this bank going to be sold or will the whole entity be sold at once? Other options include a federally forced merger, or nationalisation of the bank. Only the future will tell.

Bail out in the auto industry needed al over the world

2008-11-23T06:54:00.000-08:00

The question is; should the different governments such as the US government bail out Detroit and the Chinese government bail out JAC Motors or Geely?

History has taught us that two different scenarios are possible when the governments are bailing out national car manufacturers. The first scenario involves the UK car manufacturer Leyland who received from £11 billion from the UK government in the ’70 and ’80 before going out of business in 2005. The other, more successful story involves the French car manufacturer Renault. Renault, who needed a bailout from the French government in the 1980s of $5.1 billion in today’s money, re-invested this money into the company to help design new models. These odels turned out to be a great success which has ultimately led to Renault being highly profitable today.

The problem however with Chinese automakers is that they have borrowed in order to make heavy investments in the past years as their industry was booming; with more than 20% annual growth in six consecutive years. Now, conversely, car sales were negative compared to last year and car manufacturers need government money in order to pay off their debts and stay in business. The government has not agreed to any specific sort of help but car manufacturers such as Geely Automobile Holdings are desperate to receive any help.

For Detroit, it will be interesting to see whether or not the US government will help this car manufacturer. If it does, it is crucial that the government assists the company in the spending of the money and the new management as this company needs both money and assistance and not one or the other.

Crude oil prices plunge

2008-11-05T11:54:00.000-08:00

Crude oil prices have fallen dramatically from their record high of $147.27 a barrel in July and are down today to $65.50. This drop can be explained by the current global crisis which has hit the wider economy and dampens fuel demand. Aramco, the biggest oil producing company has been forced to review its expansion projects. This is a good illustration of how the global recession is affecting the oil-rich Gulf.

But in order to minimize the volatility of the crude oil price, the OPEC agreed last month to slow down its output by 1.5 million barrels a day, Saudi Arabia is one of the countries that already reduced its exports. Still yesterday, this approach of reducing supply seemed to stop the fall and increased the oil price with 10.36 percent, the largest one-day gain since September 22. Also on Tuesday the dollar got crushed in anticipation of what would turn out to be a Presidential elect Obama blow-out. And because oil is traded in dollars, a lower dollar make oil less expensive for holders of other currencies and tends to pressure the price of crude higher. This gain of Tuesday, however, melted away today when the oil price dropped by 7 percent.

Predictions about the future price of crude oil are hard to make. Demand and supply will determine the price. President Obama is working on both supply and demand. He does not seem to allow many supply increases as he is not in favour of off shore and Artic National Wildlife Refuge drilling. However, if we can believe him, he will also work on the reduction of demand. This will be done by letting America save more oil than the country is currently importing from the Middle East and Venezuela by putting 1 million electric cars on the road.

Will Denmark be the next country to adopt the Euro?

2008-11-02T10:23:00.000-08:00

Although the Danish government had recommended the introduction of the Euro in 2000 as it met all the economic convergence criteria for joining the Euro, the Danish population was not ready yet and rejected the introduction of the Euro in their country.

Today the stakes are different. Prime Minister Anders Fogh Rasmussen thinks that the current economic problems have made the Danish population aware of the problems concerned with keeping their currency and he therefore announced last week that a second referendum might take place soon in order to ask the Danish population again about their attitude towards the introduction of the Euro. According to the Danish newspaper, Politiken, 52% of Danes would vote in favour of the introduction of the Euro.

The main reason for this change had been the acceleration -two increases in one month- of the base rate by the National bank of Copenhagen to 5,5%. These measures had to be taken in order to stabilise the heavily pressurised Danish krone. The Danish base rate is therefore currently 1,75% higher then the base rate in the Euro zone.

Mr Rasmussen said at the European Liberal Democrats annual conference in Stockholm that "the euro ensures political and economical stability in Europe and the current financial turmoil makes it evident that Denmark has to join the Euro."

The difference between Fortis and Fortis Bank

2008-10-27T11:23:00.000-07:00

The connection between the Fortis and Fortis Bank has finally come to an end.
Concretely this means that the activities of Fortis Bank should no longer have an effect on the share price Fortis and the other way around; the share price of Fortis has no longer an effect on the operations of Fortis Bank.

Fortis Bank, a stand alone company, still owned by the Belgian government until the 15th of December 2008, when 75% will be sold to BNP Baribas, now wants to offer more transparency towards their clients concerning the recent turmoil the company went trough. In order to do this, the company launched a completely new website on which it claims to communicate openly towards and with its clients.

However, the link between the two companies is still not final when it comes to the upper management. Mr. Dierickx is still in charge of both Fortis and Fortis Bank. When looking into the future, Fortis Bank wants to create a committee which would have a controlling function and in which two BNP Paribas members and two members of the Belgian government would take part.

As for Fortis which still is active on the Belgian and Dutch stock market, now incorporates international insurance activities, cash and bad credits from the former Fortis Group. Today there still is some confusion as to which company incorporates what, therefore it is said that one of the two will change names in some months to come to clear this up.

A trading room at home

2008-10-14T06:19:00.000-07:00

Online trading providers give the trader or investor the possibility to follow different indices and financial instruments such as stocks, options, futures real-time and buy and sell these instantaneously. Especially with current extremely volatile markets, this online trading service gives the trader the possibility to know his profits or losses on the spot.

The differences between trading with an online trader or trading with a normal bank as a private investors, are enormous. Three main differences are highlighted.
The first and most important difference is the amount of information available to the investor. When having subscribed to an online trader such as BinckBank or Keytrade Bank in Belgium, you get access to real time changes in European, Asian, American indices; and the possibility to track, follow-up and trade stocks, options, warrant, futures… An online trader experiences the same feeling of adrenaline as a trader in the trading rooms. Your computer screen shows you clearly the amount at which the last trade was completed, the current bid and ask price and the quantity offered. This gives the internet trader the change to have complete information of the market in which he wants to invest. This amount of information is not provided by any normal bank such as Fortis (BNP Paribas), Dexia, ING, Société Générale, UBS.
Secondly, the orders put in with the internet provider can be executed immediately, with one click. This again is a big difference between online trading or trading via a bank; a trader wanting to give an order to his bank, has to call, put his order in and wait for it to be executed. This takes time, precious time in a volatile market!
Thirdly, the price to complete an order differs greatly between online trading providers and normal banks. Normal banks ask 74% more than then internet trading providers. This high cost is due to the amount of staff needed to execute the orders provided by a normal bank whereas the lower price demanded by the internet trading provider can be explained by the fact that computer technology is used to execute the orders.

It is very important to have the best available information which is provided in the market, as this will help the investor to make the right investment decisions at the right time. I personally believe that this is only possible when investments are made via a online trading provider, where the maximum of information is provided. Normal banks are lacking innovation in this field and should, if they want to stay in this business, improve and expand their services into providing real-time quotes and information at a better price.

Financial Armageddon

2008-10-08T13:21:00.000-07:00

A wave of selling is sweeping through global equity markets. The American, including Latin and South American, European and Asian stock market indices have been colouring blood-red since Monday. The $700 billion bail-out plan which passed by Congress last Friday has failed to calm down investors this week. And although, today it has been commonly decided by central banks and the Fed to lower their interest rates by 50 basic points, with on top of this the UK announcing to further invest 50 billion in banks and 250 billion to ensure inter-bank lending, global markets plunged again.

Markets are very nervous because investors now think this is a problem that needs a political solution, but even with all the measurements made by different institutions and governments around the world, markets can not seem to positively end their day.
This is mostly due to the lack of confidence by investors and not the lack of liquidity in the market. In these times, the concept of panic selling appears; people have had enough and they want to get out.

The biggest drop was seen across emerging markets with trading briefly suspended last Monday in both Russia and Brazil. Foreign investors, selling stocks in Brazil to cover losses they made in other markets, together with falling commodity prices have added to the climate of fear in Brazil. Until recently commodity prices were holding up in spite of the crisis but this sudden downturn has hit Brazil full on.
Asia-Pacific markets are sinking as investors focus on growing concerns about a global recession and the lengthening list of bank falling victim to the credit crisis. The biggest fear of today is that the crisis will hit the Asian Banking system. The distrust between Asian banks is very high.
A sharp sell-off US equities pushed the Dow Jones Industrial Average below 10,000 as concerns heightened that banking crises would deepen and further hurt the global economy.

How much further can global central banks and governments go in the lending of money and bailing out of banks ? Will any measurements taken be able to restore the confidence of investors?

Where about in the crisis are we?

2008-10-05T04:32:00.000-07:00

Let us first consider the situation of the United States, the country in which this current crisis initially developed. Last September, the US economy lost 159,000 jobs and the unemployment rate increased to an alarming percentage of 6.1. For the US, this is the 9th executive month of job losses in which all industries are affected. The above figures all offer evidence that the labour market is becoming increasingly fragile. This is mostly due to the drop of new orders at US factories by 4 per cent in August 2008, the largest fall since October 2006. A sign that the credit freeze of the different financial institutions is biting into manufacturing.
As well as the labour market and the US industry, the housing market shows signs of permanent weakness. The S&P/Case-Shiller Home Price Indices, the leading measure in of US home prices, showed a 16.3 per cent drop across the US twenty largest cities.

In the United Kingdom, the situation is not looking any brighter. Here, the services sector is at an ultimate low since the readings started 12 years ago. The lack of client confidence in the UK is at the root of this problem.
House prices in the UK have fallen for 11 executive months due to the low demand. An economist from Global Insight, Mr. Archer said “House prices seem poised to fall substantially further for an extended period as fundamentals are pretty ugly”.

When taking into account all facts above in both the US and the UK, it can be concluded that these old rulers of the world, as these two countries were better know as, are in a vast recession. This recession does not seem to be coming to an end any soon. As for my personal opinion, I think we have just started to see the consequences of the weak fundamentals this ‘great’ economy was based on. I like to think that Brown is quite right when he made the following announcement at the launch of the National Economic Council that “these are new times, where huge changes are taking place”, and where the economy will never be the same again."

Safe investments in Great depression II

2008-09-23T09:54:00.000-07:00

Although the gold price has known a large volatility over the last weeks due to the current uncertainty in financial markets, gold has proven in the past to be a save investment in times of crisis.

Since 2000, the gold price has rising almost continously. According to Citi Investment Research, gold prices could rise again as high as US$1000 per ounce by the end of 2008. In the long term, they even see the prices double or triple.

Larry Edelson, an analyst of Weiss Research has mentioned that “gold has preserved its purchasing power for over 5,000 years of civilisation”, having outperformed any kind of paper currency. This was backed up by Kevin Grady, a gold trader at MF Global in New York who states that investing in gold is a safe bet as financial markets are still trembling.

Gold is seen as a stable investment for investors.

This investment however is not without risk; investors paying US$100 for one ounce of gold in 1977 could have sold this same ounce of gold for US$700 three years later. However, investors buying in 1980 at a price of US$700 were less fortunate and lost half of their money in 2 years time. Because of the relative small size of the gold market compared to the stock market, it is much easier to destabilise it. Central bank dumping their gold stock or the discovery of a new gold mine can have big consequences for the price of gold.

Last Wednesday, gold jumped 11%, the strongest one-day gain since 1980. This is a perfect example of how investors who have lost faith in the stock market, usually start looking for some other investment opportunity, gold can then be an option. As seen in the past, during crises, stock markets crash but the gold price stays stable.

Banks put their real estate up for sale

2008-09-13T08:04:00.000-07:00

Fortis, one of the largest European financial institutions, is planning to sell as much as 170 million euros of real estate by the end of the year. Is this a sign of last resort?

Since last year, few finincial istitutions have brought good news to the world. Many are struggling to recover from the enormous losses made during the credit crunch but it seems the worst is still to come.

Fortis did suffer from the credit crunch, but on top of this, the company also acquired its Dutch rival ABN AMRO just before the economic downturn started last year. Fortis bought ABN AMRO at a price of 24 billion euros. Today, because of the current tumult the global financial market is facing, Fortis with ABN AMRO integrated is worth less than these 24 billion euros. This is mostly due to the fall of the share price, from 30 euros in October 2007 to 7 euros today. What is surprising for this company is that Standard & Poor's Ratings Services is confident in Fortis and are still giving Fortis an A/stable rating.

Financial institutions such as the Japanese Shinsei Bank already sold much of their real estate in order to raise money to shore up finances damaged by the credit crunch. The Belgian Fortis, prefers to raise their money by setting up a 'sale and lease back' operation, where the building is sold but there is still a leasing agreement for a certain amount of time. The banks face a mounting pressure in these difficult times to divest non-strategic assets such as real estate and focus financial resources on core competences. These actions of selling real estate will shrink their balance sheets and could save a bank from being bought by their rival.

Although there are growing signs of weakness in the commercial real estate market, it has not suffered as much compared to the residential real estate market, therefore it might still be the right time to sell commercial properties at this moment in time.

Banks are selling precious real estate in important city centres such as Tokio or Brussels. Should this worry the stakeholders of these financial institutions? Is this a solution of last resort or are the banks just securing their cash flow for worst times to come?