Same credit bear market. Different day.
In today’s episode of the collapsing global credit bubble, we find American financial stock Morgan Stanley (NYSE:MS) taking a US$10 billion loss and selling 10% of its equity to the Chinese Investment Corporation for US$5 billion.
Brother, can you spare some capital so our balance sheet meets Basel II requirements?
Let’s just be clear about what’s happening. Investment banks, brokerages, and financial stocks are taking losses. But in order to retain required capital levels, they are selling pieces of themself off to cashed-up lenders (mostly sovereign wealth funds). The new shareholders now have a claim on future profits, should the financials turn it around and start making money again, instead of losing it.
If you had a few billion dollars would you sink it in a financial firm in exchange for equity? Or would you buy a chunk of Fortescue Metals (ASX:FMG)? Andrew Forrest’s little iron ore start up has found another 700 million tonnes of iron ore in the Pilbara (where the stuff is apparently just laying around).
One of the reasons all that ore is lying around and not on its way to China already is that BHP (ASX:BHP) and RIO (ASX:RIO) own all the rail lines out West. And they certainly don’t have an interest in sharing that infrastructure with up-and-coming players, do they?
A new government program should solve the problem. It’s an office called “Infrastructure Australia”. Today’s Australian reports that, “Infrastructure Australia can’t come soon enough. Port bottlenecks, poor rail infrastructure and roads that need networking and repairing are just a few of the problems facing Australia and hurting economic growth. The Business Council of Australia estimates that Australia has an infrastructure deficit of AU$90 billion…the infrastructure backlog is costing the country about AU$6.4 billion a year in lost production. “
Appellation is the first step in characterisation, Professor Zapatka used to say. What you call something is important. Names define things. An “infrastructure deficit” is a good name, if you want a new government program.
But politics aside, the investment angle here is simple. Follow the money. If the government is spending, who is cashing the cheques? Follow the money…
“The construction boom is forecast to increase 10.8 per cent in 2008 and 7.4 per cent in 2009, largely underwritten by infrastructure projects and mining-related construction, particularly road, which is estimated to rise 15.4 per cent, rail projects to jump 22.2 per cent, water supply projects at 24.8 per cent, electricity generation and supply at 19.3 per cent and telecommunications at 15.1 per cent. “
There are plenty of infrastructure funds to choose from. But there are plenty of stocks to look at too. It’s not rocket science. As always, avoid companies with debt—especially these days.
Markets and Money