Hypothesis on the subprime market issues & its impacts on other financial instruments (REVIEW)

Wrote this short prediction back in 6th July, 2007 (2 months before the subprime crisis imploded). I thought it's time to dig it out and see if my prediction correlates with what is happening right now. Major predictions will be worded in RED, and the explanation that follows will be in BLUE:

'Introduction: Subprime market refers to the housing loans that are below normal credit ratings issued to home buyers with lower income. When the market interest rate is low, it makes sense for banks to make the loans as it offers substantially higher return over interbank rates, and the default rate will be low as the borrowers are more likely to be able to service the loan payments. However, when the market interest rate gets higher, there will be more defaults, simply because the borrowers are not able to service the loans.

Typically, bank & mortgage lenders partially issue securities such as bonds (normal & tranche) backed by the future loan payments, known as collateralized debt obligations (CDO), in order to get advance payments to re-invest in. These bonds are tradable, and the price depends on the market yield as well as the default rate. As default rate rises, these bonds will become cheaper as the future loan payments from the borrowers are not secured. As these bonds are bought by large financial institutions such as investment banks for its high yield, a collapse of the bond prices backed by the subprime market will result in high losses, inadvertently affecting its investors negatively.

Explanation: A largely correct prediction. Debts are currently priced at 20-30 cents on the dollar for the junk CDOs, and even prime loans to affluent customers are being traded at just 70-80 cents on the dollar. This situation extends even to corporate loans to major companies in the Fortune 500, suggesting that the credit crisis has extended to the corporate sector.

The impact of the subprime market can’t be discounted easily. Housing mortgages is a huge part of the US economy (50-60% of GDP), and the subprime market is a sizable part of it, accounting for between 12% - 15% of the total housing mortgages (year 2001). Already, Bear Stearns has made a loss of USD 1.6 billion dollar related to the subprime market collapse, and more revelation of losses will follow from other institutions as well as mortgage lenders overexposed to the subprime market, triggering a meltdown in the financial market sector.

Explanation: the losses that was revealed by Bear Stearns at that time (USD 1.6 billion) turns out to be a drop in the bucket of losses that has since unravelled. Currently the figure stands at around USD 1.04 trillion, and with many well-known Wall Street and European banks still bleeding profusely, the figure would eventually reach USD 2 trillion all up. For example, Merrill Lynch, which was taken over by BoA, announced losses of USD 15 billion in the 4th quarter of 2008. It still has USD 110 billion of toxic assets on its books, prompting BoA to seek further infusion of capital from the government, and also requested the government to guarantee up to 90% of the potential losses from Merrill before they conclude the takeover. Looking at this scenario, there is still much potential losses that hasn't been fully unravelled yet.

Although subprime in itself is a small portion of the housing mortgage sector, the frantic sell-down after losses are exposed will cause the market to plunge deeper than it should, a phenomenon called applied reflexivity first proposed by George Soros. Given that consumers who have defaulted on debt are declared bankrupts, they would spend less for day-to-day purchases, therefore bringing down the profits of corporations, hence dragging down the stock market as a whole. In particular, businesses that focus on serving the lower-end market are going to be the most affected.

Explanation: This part of the prediction has missed out on a crucial point: even though the subprime crisis originated from the lower end of the market based on indiscriminate lending from the mortgage houses and banks, it is the AFFLUENT CUSTOMERS that finally ended up with these CDOs after Wall Street repackaged these loans for sale. Hence, instead of the drag in the lower end of the market, it is these MIDDLE UPPER CLASS that are trading down to lower end market. Those that are already in the lower end market initially still had to shop for essentials, and coupled with the middle class that are trading down, businesses that serves the lower end market will instead do BETTER as there are now more people shopping for only essentials. The best proof of this will be the increasing profitability of WalMart even when other businesses are doing badly.

Effect on the loan market

Perhaps, the most worrying effect will be on the loan market. With the current buying spree by the private equity outfits growing larger than ever, funded by cheap credits and also investors’ willingness to accept haphazard terms on loans made, there is every chance they will freak out if the subprime market collapses dramatically, raising doubts on the quality of the loans used in the LBOs by the private equity firms. After all, LBOs are highly risky ventures that depend on cash flows to service the loan payments, and when interest rate rises, the cash flow might not be enough to handle the increase, and hence making the business illiquid, and ultimately defaulting on payments.

Since the private equity takeovers are growing larger & larger in size, if the cash flow to loan ratio of these companies are not large enough, there is every possibility that many may become insolvent, and as they are large companies, there will be reverberation effect in the whole market.

Explanation: This past year has seen many firms funded by high LBOs (almost) go out of business. Cerberus's Chrysler & Sam Zell's Tribune Co. are just 2 high profile victims of the credit crisis. The problem is 2-fold: Firstly, the current downturn doesn't allow them to generate enough cash flow to make the interest payment, and secondly, it is not possible to roll over their loans as majority of their assets are either sold or already serving as collateral to the banks for the initial LBO fund. Since refinancing is not possible, banks will recall the loans once the term is due, hence causing illiquidity. Firms associated with these LBOs, whether as suppliers or customers, would be severely affected as well, hence dragging down the economy as a whole as bad debts increase.

As can be seen from the explanations above, many of the predictions have already been realised. The question now is, what are the terms for recovery, and when is that going to happen? I will cover these points in the next post!

US Dollar future trend prediction (2 December 2008)

My first post on Finance in nearly 2 years. Let's get warmed up with some current facts on US dollar.

First, USA owes more than USD 10 trillion dollars to foreign lenders currently, and the figure is increasing rapidly with the increasing budget deficit, as well as the planned rescue plan from the President-elect Barack Obama, which will likely cost upwards of USD 2 trillion all up. Below's a picture taken from my recent NY trip. I'm sure you'd identify the number on the counter straight away:

In case you still didn't manage to guess what the numbers represent, read the paragraph above again. Oh btw, the Americans added a full stop after the first number because they obviously didn't expect the deficit to grow THIS HUGE and they couldn't even fit in the figures anymore, so the first number (1) with the full stop represents 10 instead. Well who can blame them really?

(Side note: we came back to the same spot an hour later and the figure has increased by roughly 6 million! How cool is that?)

Second, the USD has rebounded almost to its highest point in 2 years against all major currencies after its rapid depreciation last year.

Now, conventional Finance theory tells us that it is impossible. When a government needs to spend money, it will do what no other institution can peform: printing money to fund its expenditures. As the current monetary policy of almost all the nations are NOT backed by gold bullions in their respective central banks like in the old days, one word remains as the holy grail for all currency holders: faith.

Yes, faith is the sole word for any currencies in the world right now. It is the faith that the government of whichever currency you're holding will not blow its budget and spend irrationally, hence keeping its fiscal policy constant and not overblowing its budget or at least maintaining a budget neutrality (read; income equals spending), which theoretically means that all other things equal, its currency should not be depreciating against any other currencies.

When government expands its expenditures, either to fund its fiscal policy (ie. increasing spendign on infrastructure, etc) or to pay interests due to its huge foreign debts, it will print more money. This is a common trick that can only be performed by the Central Bank, as the cost of printing money to the country is just those pieces of paper you're holding in your hand right now. The more money it prints, the more worthless the piece of paper in your hand becomes.

Let's illustrate this point using some figures. Imagine USA's economy as a VERY large pie (worth USD 13.7 trillion in 2007). This large pie is divided among the many people that own a very small piece of the economy (the paper money you're holding in your hand). There are 4 different scenarios that can happen, holding all other things constant:

1) Pie size grows bigger (equivalent of an economy boom): the paper money you hold in your hand becomes more valuable, because you now own a larger piece of the economy in absolute term, even though the percentage is the same.

2) Paper money supply increases (equivalent to government printing more money for the reasons explained above): You now own a smaller piece of the economy, because there are more 'shareholders' in the economy even though the pie size remains the same.

3) Pie size grows smaller (equivalent of a recession): You now own a smaller piece of the economy in absolute term, for the opposite reason described in (1).

4) Paper money supply decreases (government collects excess money from public): The same pie is divided into smaller number of people, hence making your share more valuable.

The current situation happening right now would be a combination of (2) and (3), following the analogy above. Government prints more money to boost spending and service its debt, which increases the paper money supply. At the same time, the economy shrinks, hence making the pie size smaller. In effect, you have the double combo of getting more 'shareholders' in a shrinking economy, which effectively makes your paper money worth much less than in normal times!

To be fair, government is increasing the spending to 'enlarge' the size of the pie, so to speak, hoping for a multiplier effect in the economy (ie. businesses start spending again following the lead from the government). Basically in the short term, the public sentiments might not follow that of the government and hence there's little effect, but in medium to long term it just might boost spending from the private sector again, provided government keeps leading the way and not run out of budget midway.

Returning to the topic of exchange rate, following the analogy above we should have the USD depreciating rapidly against other currency, NOT appreciating as it is doing currently. To get to this point, we might have to add in another model on monetary policy, as this is what central banks around the world does in modern days to stimulate the economy, rather than traditionally restrictive fiscal policy, for the exact reason described above. Basically monetary policy revolves around increasing or cutting interest rate to either cool or boost the economy respectively.

The logic lies in if the interest rate is high (ie. when government feels economy is overheating and needs to cool it down), businesses would rather keep their money in the bank and enjoy the high interest rate without taking additional risks in business, hence slowing down new investments. At the opposite end, with the low interest rates businesses would rather borrow from the banks to invest and earn a higher return as there is no point keeping their money in the bank.

With the high interest rate policy, government aims to collect the public money in banks & keep it in reserve, preventing oversupply and therefore propping up the value of the currency. The opposite is also true as when government wants to circulate more money in the market to boost the economy by handing out cheap loans to businesses. When this happens, currency will drop in value.

There are a few other models to consider such as carry trade, etc, but for the moment it is sufficient to just consider the impacts on the models described above. As per our prediction, USD should depreciate, and yet it is doing exactly the opposite right now. Why is that so?

Firstly, USD is unlike any other normal currency as it is still the holding currency of choice for international trade, accounting for more than 65% of transactions worldwide. Many important commodities are priced in USD, and therefore the effect on this status is still unknown compared to a normal currency.

Secondly, with the relative size of USA's economy at close to USD 14 trillion, even a debt of 11 trillion doesn't sound that daunting currently. However, as the budget deficit keeps growing, the debt will soon reach parity with the GDP, and that will be when foreign holders of government debt will start to panic & doubt whether their loans can be repaid. As they say, 'when it rains, it pours', and once public gets words that huge bond holders are dumping their US bonds, they are bound to follow suit and the equivalent of a financial stampede will occur. US government will find it hard to refinance and in the worst case scenario, it might announce its bankruptcy.

IMPORTANT!

Up to this stage, all the predictions above are made according to the books, ie. using conventional finance theory. However, my instinct has been telling me that the brilliant minds of the many economic Nobel Laureates currently in the payroll of USA government would have noticed this impending disaster before anyone else even had a sniff of it, and therefore if they're not panicking right now it should mean there are some unknown elements that are alien to normal people on the street right?

Some very well-known businessmen has been criticizing the US government on the deficit and publicly stated they will move their assets out of US as they predicted the same result as the model above, ie. impending collapse of USD. These people include Bill Gates, and also Jim Rogers, c0-founder of Soros funds, who is moving all his assets to RMB as he predicts it will continue to appreciate over the next 2 decades. As market is driven by public sentiments, regardless of whether the economic basis is true or not, should we or should we not follow the prediction of these successful businessmen? after all, they have obviously seen the opportunities that many didn't, and in the process made themselves obscenely rich?

It is a big dilemma, and one that I can't possibly solve on my own. However, I do have some insights into how this may play out, and it will depend on the next term of the presidential race, NOT the impending Obama administration.

Given that increasing government spending is a must over the next 2-3 years of the 4-year Obama reign, it is unlikely that the long term future of USD will be decided at the current term. Obama still has to be prudent in managing the economy and not increase deficit by too much while trying to rescue the economy in order to let the next President (who might well still be Obama as he qualifies for a second term if he does a good one in the first) work his way out of the deficit as economy recovers. As economy recovers, taxes from the companies returning to profitability will increase substantially, and therefore the deficit might be lowered and with luck, turned into surplus at the next administration.

The last time US economy has been in budget surplus was in Bill Clinton's reign, a democrat, and obviously it would be nothing short of a miracle if Obama manages to turn it around in his first term, with the huge deficit created by the incumbent Bush administration. Obama does have the support of the many prominent US businessmen and economists, including Warren Buffett and CEOs from the Fortune 500 companies. How he tailors his policy according to recommendation from his economic team will be key to the reversal of USA's fortune, and the central issue will be to at least turn a budget surplus within his first four years in order to regain confidence of foreign bond holders.

The same philosophy that works on capital flight will also retaining those investors, and once the largest bond holders are convinced US bonds will not default, then the whole market will regain its confidence too. At the same time, the economy should be recovering after all the government stimulus, and extra tax revenues mean the possibility of reaching budget surplus also increases.

With luck, if the plan works out, USA will have its own pie.. well a BIGGER pie and eat it too!

Reviews of the latest financial news

This page hasn't been updated for a while, so I thought I would just share a few interesting stories that I've read recently:

1) Paul Wolfowitz's scandal (World Bank)
It was a headline-capturing piece of news: the World Bank's chief apparently promoted his alleged lover to an executive post, paying her more than USD 200k/annum for working at World Bank. Now, if this is happening in Indonesia, I'm sure no one would even bat an eyelid, but the irony is that he is thought to be the one fronting the campaign against world corruption & collusion!

Verdict: a 'resignation' looks to be on the card to save the reputation of the World Bank, one of the most highly respected world institutions...

Trivia: Paul had always been a controversial choice for the World Bank chief post, and it again proves President Bush has been as astute in making his choice of key personnel in his administration as deciding the internal and foreign affairs policies

2) to be continued...

Lesson on Entrepreneurship

What if someone comes to you today and says, 'I have a business that can earn $40 a month. Do you think you would want to do it?'

I was thinking, like the majority of people would, 'Bloody hell. Who would want to do something like this? I can't even feed myself with it!'

Suppose that the income is only from a SINGLE unit of the business, and there is minimal set-up cost, would you want to do it now?

This person that came up with this idea has 1400 units of the same business, hence making 1400 x $40 = $56000/mth, without coming up with a single cent upfront!

The story is like this.....

Person A recognized that there is a need in the market to provide telecom service to millions of village workers coming to big cities to work. These workers would normally be spending most of their time after work in the countless warung (equivalent of mamak stalls in M'sia), having meals and chatting there. Now, to provide this service to them, there are actually many ways of doing it, but most, however, require high start up costs.

A did his research and thought that since all the workers are having meals in the warungs, where better than to put the equipments right at the places that they are hanging out in? He then contacted the warung owners, negotiating deals that would split the income in 1/2, but the owners would have to come up with the capital for the telecom equipment that cost around $350/set. A return of about $40/mth to them would be much more than what the banks could offer, & many of the owners approached were more than keen to sign up for the plan. Hence, his small telecom empire was born; He set up a business that virtually cost nothing to run, because the only expense incurred was to hire runners to go & collect the money from the warung owners after they take out their portion of the profits.


Now this is what I call entrepreneurship.


When people say that times are rough these days & it's harder to make a living, always remember that it only takes a spark of creativity to set up the first business, sometimes at no cost. Using marketing terms, all it takes is to identify a 'latent need', that is, needs that not even the users realize, and capitalize on it. Take the opportunity fast when that happens, because some chances will disintegrate over time when the market condition changes.

Also remember that it's never too late for you to discover your creativity streak. I've heard of someone who was leading a poor life all along, & he finally set up his shipping company when he was 48 years old; He hasn't looked back since and now owns one of the biggest shipping fleets in Singapore & South East Asia, with over 1000 metal tankers in operation, all in the duration of about 20 years.

It never ceases to amaze me how chinese Indos, especially those on Java provinces, always have this entrepreneur spirit instilled in them. They could always find niche in the world dominated by giant MNCs and as a result create many rags to riches stories. There is a statistic recently compiled by UBS Singapore that says there is a total of around 55000 people in Singapore who own at least 1 million USD, outside their own residential properties. What is even more amazing is that more than a third of them are of indonesian parentage, which means that there is a good chance one in about eight indos you know in Singapore would be a millionaire. Add that with tens of thousands of indos living in Singapore who don't have citizenship or PR status, and the statistic would change to about 1 in 5.

One of the respected venture capitalist firm owner recently commented on the possibility of a YouTube case in Singapore:

Q: Is there a possibility of setting up a start up with the success of YouTube in Singapore?
A: It's possible, but I have 2 advices to give to the potential aspirants: Think big, & think global (mass market)

This is exactly the lesson to be learned: anything that can be mass-marketed is gonna be successful. So think big next time, & think of the demographics in your respective markets when your next new bright idea comes springing up!

Topic 2- Role of commodities in the modern era

Gold has an important role to play in the society through out the history of mankind. Ever since it was discovered, the ancient people had been using the precious metal for trading purposes, serving as the unofficial currencies of the world economies back then. In the 1900s, the role of gold has diminished substantially as the trading currency, even more so when the majority of the countries in the world adopt the current monetary policy of inflation targeting, which banks on the reputation of central banks around the world rather than the gold-backed greenback exercised in the early to mid 1900s.

With all these changes to the world monetary systems, gold’s role has been relegated to mainly of jewellery uses and futures trading purposes. However, with the recent resurfacing instability of the oil prices and the US dollars, on which gold price is based upon, its existence has taken a higher significance now.

The trade deficit in the US economy has kept on increasing for the past decade, and by logical measure, even if the Chinese devalues the yuan by 10% in the next decade, the gap is only going to get wider & wider. Many economists have predicted that this situation is not sustainable, and the USD will collapse sometime in the future because of the enormity of the debts it owes to many of its government bond holders. Even the richest man in the world, Chairman of Microsoft Corp. Bill Gates, has recently stated that he is hedging his bet against the USD. The question is, if the richest man in the world, plus a lot more of renowned economists, say so, is there a higher chance that the few brains in the White House get their prediction right that the deficit won’t cause any problems?

With this impending issue in mind, let’s analyze its impact on the gold prices. Gold prices have increased by more than 70% in the past 1 year, after remaining roughly constant for more than 6-7 years. It must be noted that the last big fluctuation was during the Asian economy crisis. The empirical evidence suggest that there is a steady equilibrium price for gold during normal times, but there will be an upward surge in price when the currencies are getting unstable, & it will return to its inflation-adjusted equilibrium price slowly after that.

The current upsurge in gold price suggests that investors are getting nervy about the USD, which has devalued by around 7% recently. The situation has also been exacerbated by the recent upsurge in oil prices due to the Iran standoff.

The role of gold as a stabilizer mechanism cannot be denied. In turbulent times, when government’s monetary policy is given less credibility, gold has stepped up and become the unofficial currency again. 1 kg of gold will have the price of 1 kg of gold when the crisis is over, but a 100 USD bill may only have half its value when the tide is gone. The other scenario, when the currency actually appreciates during the crisis, may also happen, but people would rather take the safer option of getting the same value for their ‘money’ by buying gold. Hence, gold plays the role of a hedging mechanism when this scenario occurs.
There is the question of why other commodities, such as oil, can’t have the same role as gold in the economy. To answer this, we have to divide all the other commodities into 2 broad categories: consumable and inconsumable. Consumables refer to commodities such as oil and aluminium, which has to be used everyday to ‘run the world’. Since it has to be used every single day, and it can’t be replenished easily, the choice to use it as a hedge would not make sense as its supply will run out one day. There is also the extra risk of being held hostage by oil producing countries like the OPEC and the Arab nations, which hold almost 75% of the proven oil reserves in the world.

Inconsumable refer to the commodities such as silver, diamonds, and gold. These are commodities that are used minimally in the industries (supply > industry use) and could potentially serve as hedges to the worsening currency crisis. However, since traditionally gold has been used as a currency before, people have the perception that it is a better commodity to use rather than silver which is less valuable in the monetary sense.

As explained above, the escalating gold prices will likely come to a stop in the future, but there is no guarantee that it will come down to its previous level because of the current situation with the oil crisis. It will most likely stay at a new higher equilibrium in the future, before its value is again reassessed in the next crisis.

Topic 1 - Psychological factors in Finance

We learn in the Corporate Finance course that companies that are not 'disciplined', ie stray from their own fields of expertise and ultimately fail in the end, will eventually be subjected to ‘market discipline’. This means that another company, usually a larger company with the same core business or ‘trade hawks’, will come in to acquire the entity. It will then sell off its non-core assets and then attempt a restructure, and for the ‘trade hawk’ case, sell the company in the end for a huge profit after turning around the money-losing firm in a few years time.

The case I want to discuss here is this: if it is so amazingly simple to make the formula work again, ie sell off non-performing units & return to winning ways, why can’t the wannabe conglomerate do that itself? After all, they could have done what the buying company will be doing, ie sell or spin off the non-core assets, and concentrate on the core businesses. I could come up with a few reasons here, in order of importance:

1) Management (psychological issue). Imagine if you were a passenger in the Titanic and you got dragged down to the Atlantic Ocean because of an oversight by the Captain. You survived and took the next ship to head to US and found that the same Captain that almost killed you has also been rescued and WORSE, appointed as the Captain (again) of this ship that you are taking this time. The 1 million dollar question is, would you still take this ship and be led to another disastrous journey? You might even be thinking that you would be better off just swimming off to your destination, because at least you have saved the money for the ticket! Although this scenario may not play out in reality, the psychological effect on the person is undeniable and it is more likely that you will get out and wait for the next ship that goes out.

Exactly the same situation applies to the corporate world. Once the incumbent management team is judged as not doing its job properly, shareholders would demand a change to the team, & if unsuccessful, be likely to dump their shares, getting out of the sinking ship before it meets its final doom. They would rather salvage some value out of it rather than waiting to see if the situation could be reversed. They would then be found pounding themselves when they find out later that all it takes to rescue it is just to throw off the unnecessary luggage aboard (the non-core assets) and the ship (company) will still be able to sail smoothly to its destination (meet its profit target). In the end, panic is the culprit that makes the situation looks even worse than it is, & the trust factor that has disappeared altogether when in a frenzy.

Obviously sometimes it’s not always the situation that the shareholders are just not patient enough when in a crisis. If the management could not see the point of concentrating its effort on the core assets, or that they have some other hidden motives (read: $$ incentives or promotion prospects), then it is definitely time to get rid of it and install someone who can perform the job.

2) Prestige (another psychological issue). While it is true that often the companies that succeed are the ones that stay true to their core businesses, conglomerates are the ones that are held at a higher esteem, at least in the psychological aspect, than the non-diversifying firms. They are often the ones hiring hundreds of thousands of people in their respective countries and are normally revered in their own countries, even by their own respective governments because of their enormous influence on the countries’ economies. Governments’ bailouts of struggling conglomerates have been very common in many countries, simply because of the devastating effects it would have on the economy if they collapse. Hundreds of thousands of jobs are at stake, and the country could be caught in a downward spiral if this happens because of the multiplier effect in the system. As such, these conglomerates are usually very confident in branching out of their industries, as they believe the government would come to their rescue in the case of failure. This will lead to higher confidence from the shareholders as well because the support from the government means a much higher return than other ventures, at an insignificant increase in risk.

Laying off non-performing units would then be seen as financial incapability of their parent units & reflects badly on the conglomerate as a whole. As such, conglomerates tend not to lay off units quickly and try to rescue them by injecting more funds to keep them afloat, without changing the top management of the units. More money is pumped in, but results normally don’t show because they are still run by the same ineffective people.

An example of this is the Mistubishi Corporation of Japan. It has a automobile producing unit that has been losing billions of dollars for many years, but yet has not been shut down because the conglomerate is very powerful in Japan. It keeps channeling the profits from another of its highly profitable unit, Mitsubishi Bank, one of the top four banks in Japan, to plug the deficit in the automobile unit. This results in lower profit for the group, clearly violating the mandate for the management, that is to safeguard the shareholders’ interests.

3) Trade unions. In some countries like US or Germany, trade unions are so powerful that they can hold the companies hostage if necessary. Therefore it is virtually impossible to simply lay off non-performing units and get back on track because they could be liable for hundreds of millions, or even billions, of dollars when they do that. One good recent example is the case of Siemens Mobile. Siemens is a rare conglomerate in Germany and it has ventures in almost every industry, from construction to chemical production. Its Siemens Mobile phone unit has been losing money for years and it has been unable to sell it off or even give it free to other companies because no one is willing to take the risk. In the end, BenQ of Taiwan, a much smaller mobile phone producer contacted Siemens, which at that time held a 5% share in the mobile phone market, about a possible takeover and the agreement was that Siemens had to pay BenQ in excess of US$500 millions for it to be willing to take over the ailing unit. BenQ’s plan is to slowly shift the production out from Germany to Taiwan and reduce the workforce there till it is finally fully shifted out. It could do that because it is an overseas outfit and hence would be less tied to the trade unions’ power if it tries to reduce the workforce in Germany. This will be a win-win situation for both parties.

Out of the 3 reasons above, 2 of them are psychological factors and only one has to do with the economic of the real world. So next time when you read a report on any business magazines or journals, remember that the deal is always more than what it seems. A lot of the companies depend on not just their products, but also their image to survive. Martha Stewart’s Living OmniMedia and Richard Branson’s Virgin are two very good examples, as is Donald Trump’s Trump Organization. Psychological factors feature prominently in business deals, but yet it is not given enough recognition because it can’t be measured in numbers. This has to change.

Introduction

My purpose of creating this blog is to discuss corporate news and issues that can be seen & read everyday in the news. Mergers, acquisitions, spin-offs, etc are so common that people seem to take it with a pinch of salt and rub off their significance.

The truth is, there are a lot of psychological motives behind these moves, even though it might not be at all beneficial for the shareholders of the respective companies. This certainly goes against the basic principle of any business, that is, to safeguard the shareholders' interests.

I will express my views in this blog and they may be totally wrong. Therefore, I hope that the readers could contribute to the discussion and feel free to add on or criticize any of the comments made.
It's only through free discussion that we'll be able to generate the best ideas that will in turn set the best practices.

Disclaimer: Topics discussed in this blog are purely for analytical purposes. The writer of the blog is not in any way liable for the damages incurred by following any advices given in the discussion. Please contact the blog owner if you wish to republish or reuse the information elsewhere.