AIG Shares Fall After U.S. Says it Plans $18B Sale (Article)

September Article

http://abcnews.go.com/m/story?id=17196929&sid=74

The Treasury Department said it would sell $18 billion of American International Group Inc. AIG -2.22%stock in a public offering, slashing its stake by more than half and making the government a minority shareholder for the first time since the financial crisis was roaring in September 2008.

The sale will mark a step that seemed hard to imagine four years ago, when the New York insurer was effectively nationalized as part of a controversial financial-industry bailout. The U.S. will move closer to recognizing a profit on its largest rescue, which included as much as $182 billion of committed aid, and AIG will revert to being mostly nongovernment-owned, fulfilling a priority of Chief Executive Robert Benmosche.

U.S. officials four years ago said the rescue of a teetering AIG was necessary because the company was so entangled with other financial firms around the world via complex instruments that its collapse could have unpredictable effects including possibly bringing down many other firms.

But the fury spawned by the rapid series of bailouts, typified in some ways by that of AIG, would eventually run wide. The government's extraordinary intervention in the economy helped seed the tea-party movement on the right. On the left, it helped spawn the Occupy Wall Street movement, which among other things contended the government propped up bankers but did less for struggling homeowners.

A near-exit by the government from one of the most controversial bailouts is both a significant accomplishment for the Obama administration and a sign of how far the markets have come in four years, thanks in part to the rescue of financial companies and the Fed's efforts to support the economy by reducing interest rates.

 

But the sale could also renew complaints that Treasury still hasn't outlined a concrete strategy for exiting other large financial-crisis investments, such as those in mortgage investors Fannie Mae and Freddie Mac FMCC 0.00%and lender Ally Financial Inc. The government remains in the red on its investments in Fannie and Freddie, which have received $188 billion in taxpayer support. The U.S. continues to hold sizable stakes in General Motors Co. GM -0.07%and Ally that it spent $68 billion on and may not fully recover.

 

In addition, the AIG sale could raise questions about timing, coming less than two months before a closely contested presidential election.

 

"Anything that happens between now and the election will seem to some to have political motivations," said James Angel, finance professor at Georgetown University. "But either way, the fact that AIG is in good enough shape to buy back shares is excellent. And the deal also shows that the government is getting out of the business of owning large stakes of companies."

 

A Treasury official said the timing had nothing to do with the political season.

 

The public offering of AIG shares will be Treasury's fifth sale of share since May 2011 but its largest, potentially leaving the government with less than a 20% stake in the insurer, depending on the offering's pricing. The Treasury's stake already has fallen to about 53% from 92%.

 

AIG will repurchase up to $5 billion of its shares as part of the offering, the Treasury said. The company has been repurchasing shares to use cash on hand and reduce shares outstanding, a move that boosts earnings per share.

 

More on AIG

Heard: At AIG, Fed Waits in the Wings

MarketBeat: AIG Says Fed Could Force It to Sit on 'Excess' Capital

Treasury Starts Preferred Stock Auctions in 4 Banks

 

"It's part of our ongoing efforts to exit the investment in AIG, recover taxpayer dollars and wind down" the crisis-era Troubled Asset Relief Program, a Treasury official said. An AIG spokesman had no comment on the size of the sale or the timing for its completion.

 

Treasury chose Citigroup Inc., C -1.69%Deutsche Bank Securities Inc., Goldman Sachs GS -0.99%and J.P. Morgan Securities LLC to lead the offering. Like most large stock sales, it is expected to be priced below the recent market price. The lower the price, the more shares the government will likely sell, further bringing down its stake. AIG shares, down 23 cents on Friday to $33.99, have risen 47% this year. AIG shares have fallen more than 95% from their levels in the year before the rescue.

 

AIG has haunted the federal government ever since its rescue, just a day after Lehman Brothers Holdings Inc. toppled into bankruptcy.

 

The AIG rescue and the Federal Reserve Bank of New York's purchases of mortgage securities that AIG previously owned or insured saw tens of billions of taxpayer aid flow from the insurer to banks in the U.S. and overseas. The New York Fed's moves were criticized in some quarters as a backdoor bank bailout that exposed U.S. taxpayers to undue risks.

 

In early 2009, the Obama administration misjudged the public outrage that boiled over after reports of large bonuses that were supposed to be paid to AIG executives, and struggled to contain the backlash.

 

But from the outset, Fed officials including Chairman Ben Bernanke said the U.S. was acting to protect the country from financial meltdown and expected to be fully repaid on loans provided to support AIG.

 

As of the last Treasury sale of AIG shares, the government had $24 billion of AIG-related investments outstanding, according to Treasury data, while the bailout of AIG had yielded over $18 billion in interest, fees and profits. With the coming sale of $18 billion in securities, the government by one measure can consider itself to have recouped the funds it extended on the bailout.

 

The government says it has already made a profit on the emergency funds injected into banks at the time of the financial-industry bailout, and the Fed has fully recouped money spent on acquiring toxic assets from troubled companies.

 

The Treasury, which invested $245 billion in more than 700 banks, has so far collected $264.7 billion from its bank programs.

 

The New York Fed, meanwhile, has fully recouped $72.7 billion in loans that were used to buy toxic assets and has reaped gains of more than $5.2 billion so far. The New York Fed last month sold the last toxic assets it acquired in the AIG bailout.

 

For its part, AIG has shed its most toxic assets and returned to profitability. But with the coming sale, AIG may have some new headaches.

 

In its latest annual report, AIG indicated it expected to become regulated by the Fed as a savings-and-loan holding company when Treasury ceases being a majority shareholder, because AIG owns a small thrift. The company said it might become subject to rules on leverage and risk-based capital. Some Wall Street analysts speculated in notes to clients that the Fed could limit AIG's use of cash to buy back shares.

 

"To have a regulator like the Fed come in for the first time is certainly a step in the right direction," said Christy Romero, the special inspector general for TARP. In a July report to Congress on bailout programs, Ms. Romero's office warned that the U.S. financial system remains vulnerable to another crisis and urged regulators to toughen oversight

AIG Shares Fall After U.S. Says it Plans $18B Sale (Personal WriteUp)

Article Summary

Today (September 10, 2012), share prices of American multinational insurance corporation AIG (American International Group) fell after the United States Treasury Department announced that it would sell $18B worth of the company in a public auction. At the peak of the late financial crisis in 2008 and 2009, The Treasury Department and the Federal Reserve offered an $182B lifeline in stimulate packages for an 80 percent equity stake, high interest on loans, and levels of management and control of the company. With two previous smaller auctions already made, the government will now make its biggest sell-down of the company reducing their 53 percent equity to merely 20 percent, loosing full control of the company.  With the two previous auctions, on both cases, the shares faced a drastic decline in share prices after the announcement, making it no surprise to face a drop in share prices again with its biggest auction yet. Closing at $33.30 (-2.03%), the company’s future remains undetermined.

Relation to Course

Post Hoc Fallacy:

The post hoc fallacy underlines the assumption that if event B happens after event A, event B must have been caused by event A. This fallacy may be argued as the entire intention of the article itself. The article is blaming the United States’ Government plan on selling their 33 percent equity of AIG, as the sole reason for its fall in share prices late Monday. This may also be argued as a Fallacy of Single Causation, but in fact it was the wording used in the title that may lead some to believe and debate it as a Post Hoc Fallacy. It states “AIG shares fall after U.S. says it plans $18B sale”, it is in fact the term “after” that one may draw such conclusions from. The term after highlights a time frame of events, casting blame on event A for event B simply because event A occurred first. For this reason, some may conclude that the entire article’s message may be viewed as a Post Hoc fallacy.

Fallacy of Single Causation

The fallacy of single causation is the assumption that a single factor or person caused a particular event to occur. This fallacy may arguably be present in the following passage from the article: “The Treasury Department’s two earlier, but much smaller, stock sales in May 2011 and March 2012 were priced at $29, while AIG shares were trading at levels below $32 before the announcement”. Though one may argue it as a post hoc fallacy due to the event timing it prescribes, it may also be argued as a fallacy of single causation as it blames such an event (announcement) as the only factor that led to the fall in the share prices, when in fact there could have been many other contributing factors. Through such reasoning one may argue the passage as a fallacy of single causation as it blames one event for the outcome, when in fact there may have been several other contributing factors.

Economic Relations

In the article, many economic relations have been demonstrated, the biggest of all being the news vs. share prices. In this article, the late news portrayed a vital role. It was announced that the United States Government would sell 33 percent of its equity in AIG (from 53 percent to 20 percent); immediately following, share prices of AIG dropped, and is expected to continue its fall in the days to come. Therefore an economic relationship can be modeled as the latest news regarding the economy/industry/company vs. share prices of a company. Though the news may not have a measurable quantitative value to model a direct or inverse relationship specifically; it however has a qualitative value. Depending on the news released regarding the company, the company’s share prices will fluctuate from there. If good news is announced such as a stimulate package to fund economic growth for the company, it is then obvious that there will be a boost in the share prices. In contrast, if negative news immerses such as a recent fraud or scam pending investigation in the company, then the prices of the shares will fall. In a nutshell, if the news regarding the company is positive, then the share prices will increase, but if the news pertains a negative value, then the shares prices of the company will fall. This models a direct relationship between the two, as the two variables fluctuate together in unison in the same direction. In such a model, the news will determine the fluctuation of the share prices, making the news the independent variable, and the share prices as the dependent variable.

Macro Issue

The economic situation portrayed in the article would fall under the macroeconomic subheading in economics. Macroeconomics is defined as “a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes national, regional, and global economies” (Wikipedia). Macroeconomics deals with issues such as but not limited to the following: national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In summary, it is a branch of economics dealing with large economic units as a whole, and their impact on the economy. In contrast, microeconomics deals with the behavior of individuals that are the quantitative living collective of the economy, and their financial decision making.

The topic discussed in this article is a macroeconomic issue, as it regards to large finance institutions such as the United States Treasury Department, the Federal Reserve, and the American International Group. These are large financial institutions that play vital roles in the management and ongoing cycle of the greater economy. This topic is in regards to national income, unemployment, inflation, savings, international trade, and international finance, making such a topic a macroeconomic issue as it deals with the greater economic issues, in contrast to smaller financial units such as consumers (microeconomics).

Positive Statements

In most case scenarios, investment and finance articles, generally articles relating to the business world, are completely indulged in positive statements, as they are full with facts to support their claims.  Business articles generally either highlight current or past events in the economy, or make future economic forecasts based on past economic statistics. Making them in most cases either descriptive or conditional positive statements.

Consisting of a vast majority of positive statements, two examples are the following:

“The Treasury Department and Federal Reserve extended a combined $182 billion lifeline to AIG at the peak of the financial crisis.”

This is a descriptive positive statement. A descriptive positive statement portrays things as they are in the present or have been in the past. It is simply statistics and conclusions that have been verified. This is a prime example of such a statement as it stated that the Treasury Department and Federal Reserve extended AIG a $182B package. It is a true fact that has occurred without an opinionated perspective, making the statement a positive descriptive statement.

 

“AIG itself will buy back $5 billion of its shares in the upcoming stock sale, with the rest going to the broader public. AIG will use $3 billion worth of cash and short-term securities, and $2 billion in proceeds from the sale of its stake in Asian life insurer AIA Group to buy back stock from the government”

 

This is a conditional positive statement. A conditional positive statement makes future forecasts through careful analysis of economic behavior. Meaning it predicts the future using current conditions and past events. This statement states that, in the upcoming stock sale, AIG will buy back $5B of its shares, in $3B worth of cash and $2B in proceeds from the sale of its stake in Asian life insurer AIA Group. This event has not occurred yet, but AIG has made this statement, on the current conditions it is facing today. It is not fact yet, but such a forecast is highly probable in occurring. Therefore, this is a conditional positive statement, as it is a factual statement forecasting future economic behaviors/activities based on current conditions. It is not a descriptive statement as it has yet not occurred, but if everything proceeds as planned; such a forecast will soon become a fact.

 

However, usually conditional statements fall under the form ‘if X occurs, then Y will follow”. Though not in that direct wording, the AIG regarded statement mentioned above, can still be considered as conditional, as the first condition that must be met for their statement to hold of true value. For if and only if, the government auctions its equity in the company, then will AIG be able to purchase it back. It can therefore be worded in the sense ‘If the government auctions 33 percent of its AIG equity in shares at a value of $18B, then AIG will buy $5B of it back, consisting the use of 3 billion worth of cash and short-term securities, and $2 billion in proceeds from the sale of its stake in Asian life insurer AIA Group”   

 

Comments

I have chosen this article because of my personal connection with AIG. My father was greatly interested in this company near the 2008 Stock Market crash. When the market was near its fall, my father believed that this company was going to fall. In those days each stock was valued at nearly $1000 a share. My father was interested in short-selling this company however, plans changed and he didn’t end up short-selling the company. This was a great mistake as each share dropped to nearly $30. After hearing this, I developed a large interest into the stock market, as it was shares such as AIG and Bank of America that interested me into the investment world. After doing further research into the subject matter at that time I found that the Treasury Department and the Federal Reserve offered an $182B lifeline in stimulate packages for an 80 percent equity stake, high interest on loans, and levels of management and control of the company. After doing great research into the company, I became very interested in it. And when I stumbled upon this article, it was of a great concern to me, and so I decided to do my assignment on it due to my personal connection with the company.   

Petronas Rejection Casts Doubt on Cnooc $15.1 Billion Bid (Article)

October Article

Canada’s rejection of a bid by Malaysia’s state oil company for Progress Energy Resources Corp. (PRQ) casts doubt on Beijing-based Cnooc Ltd.’s $15.1-billion takeover of Nexen Inc. (NXY) and raises questions about the openness of Prime Minister Stephen Harper’s government to foreign investment.

 

Industry Minister Christian Paradis said in a statement he wasn’t satisfied the C$5.2 billion ($5.23 billion) acquisition by Petroliam Nasional Bhd., known as Petronas, is in Canada’s interest. Harper’s Conservative government reviewed the bid under its foreign takeover law, which says transactions must be judged to have a “net benefit” to Canada.

 

“The implication now is that the government does not want a foreign national oil company to acquire Canadian companies,” said Eric Nuttall, a portfolio manager with Sprott Asset Management LP in Toronto. “For a Conservative government to make this decision is mind-boggling. The amount of capital that that decision wipes out is stunning.”

 

The Petronas rejection marks the second time in two years Harper’s administration has denied a multi-billion dollar overseas bid. The government blocked BHP Billiton Ltd. (BHP)’s $40 billion hostile offer for Potash Corp. (POT) of Saskatchewan Inc. in 2010 after the province’s premier, Brad Wall, opposed it.

 

Shares Drop

Shares of Nexen dropped 5 percent to $24.14 in New York, about 12 percent below Cnooc’s $27.50 offer price. Progress Energy shares plunged 9 percent to C$19.64 in Toronto, 11 percent below the C$22 per share offered by Petronas.

 

The cost of insuring Nexen debt against default rose. Five- year credit-default swaps tied to the company’s bonds traded at 111 basis points today compared with 98 basis points on Oct. 19, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

 

Petronas has 30 days to appeal or provide additional concessions, at which point the government will make a final decision, according to the statement by Paradis. The company can be given more time if both parties agree.

 

Petronas and Progress said today they will meet with Canadian officials “to better understand Industry Canada’s requirements” for the takeover bid. The two companies “will work together to ensure that the Minister has the necessary information to determine that the proposed acquisition of Progress would likely be of net benefit to Canada,” according to a statement released in Calgary.

 

Policy Framework

Harper told reporters today he wouldn’t “say anything that would prejudice that particular discussion during this time,” adding that his government would “fairly shortly” publish “a clear and new policy framework” for foreign investment.

 

“Foreign investment, generally speaking, is of benefit to the Canadian economy, and as a general rule, we obviously welcome interest in the Canadian economy,” Harper said.

 

Canada’s ruling in this case shouldn’t be seen as a precedent for other transactions, International Trade Minister Ed Fast said.

 

“This decision does not set a precedent because every single application is considered on its own merits,” Fast told reporters in Vancouver yesterday. “Each application has its own specific circumstances that are being brought to bear.”

 

The ruling undermines Harper’s message that Canada welcomes foreign investment, investors said. Harper has called it a “national priority” to sell more natural resources to Asia, to boost growth in the world’s 11th-largest economy by diversifying exports away from the slower-growing U.S. market, which consumes three-quarters of Canada’s shipments abroad.

 

Canada’s gross domestic product of $1.74 trillion exceeds Malaysia’s annual output of $279 billion, according to data compiled by Bloomberg.

 

Proposed Projects

Current proposed projects in Canada’s oil-sands, part of the third-largest oil deposits in the world, require investments of C$220 billion, the Canadian Energy Research Institute said in a March report.

 

Progress Chief Executive Officer Michael Culbert said he’s “hoping” the Canadian government will see a net benefit to the sale.

 

“What we’re trying to do is really move forward,” Culbert said in a phone interview today from the Calgary airport before departing for Ottawa.

 

Peter Hunt, a spokesman for Cnooc, said in an e-mail that “our regulatory application is proceeding as normal.” Patti Lewis, a spokeswoman for Nexen, did not return e-mails seeking comment.

 

Strategic Acquisitions

Petronas has stepped up strategic acquisitions abroad while investing more in domestic oil and gas exploration to replenish Malaysia’s diminishing energy reserves. Tenaga Nasional Bhd., Malaysia’s biggest electricity generator, is among companies that have complained of gas supply shortages.

 

The Southeast Asian nation’s underground gas holdings should now last 37 years, two fewer years than previously forecast, even after reserves grew 3.6 percent to 92.1 trillion cubic feet, Malaysia’s finance ministry said in a Sept. 28 report. Natural gas output declined 5.3 percent to 5.62 billion cubic feet a day during the first seven months of 2012, mainly due to “operational challenges,” it said.

 

“We’ve seen price increases of between three and ten-fold for certain commodities and investment has surged,” Jeffrey Wilson, lecturer in politics and international studies at Murdoch University in Perth, said by phone. “This has really skewed the bargaining power in negotiations between multinational resource corporations and governments squarely in favor of the host governments.”

 

Decipher Intentions

Some investors say it’s hard to decipher the government’s intentions without any explanation for the rejection. Investment Canada Act rules prevent Paradis from commenting, aside from saying the deal didn’t provide a net benefit.

 

The Globe and Mail newspaper reported Oct. 20 that Petronas refused a last-minute request by the government to set a new deadline for the review, citing three people familiar with the discussions. According to the report, the government wanted more time to consider concessions from Petronas that were needed to meet the net benefit test.

 

The lack of transparency of the review process allows politicians to treat controversial takeovers like a “pinata,” said Perrin Beatty, president of the Canadian Chamber of Commerce.

 

‘Black Box’

“What we have today is completely a black box,” he said in an Oct. 19 interview. Until the government provides more clarity, every large deal is “subject to political debate.”

 

Opposition lawmaker Peter Julian, the New Democratic Party’s spokesman on natural resource issues, said Paradis’ late night announcement showed “not only a lack of transparency, but a level of improvisation and incompetence that we’ve rarely seen.”

 

“I’ve been in parliament for eight years and I’ve never seen an announcement made at midnight on a Friday night,” Julian told reporters.

 

The government has been seeking more ambitious commitments from companies looking for approval of foreign takeovers, said Dany Assaf, a partner with Toronto-based law firm Torys LLP.

 

“When I first started practice in this area in the mid-90s, Investment Canada regulatory approval was really just a matter of process,” Assaf said in an Oct. 11 interview. “Today, the negotiations are more intense. Businesses are going to have to offer more.”

 

Under the Investment Canada Act, the government reviews foreign takeovers valued at more than C$330 million.

 

Net Benefit

The government considers six main factors in determining whether an acquisition provides a “net benefit,” according to Industry Canada. The criteria are the impact on economic measures such as employment; the degree of participation of Canadians in the business; the impact on productivity and technology development; the effect on competition; the compatibility of the investment with “national industrial, economic and cultural policies”; and the contribution to Canada’s ability to compete globally.

 

Canada issued additional guidelines in 2007 for investments by state-owned enterprises, saying such companies are expected to run the acquired business on a “commercial basis.” State- owned firms may be required to appoint Canadian managers or directors or list shares of the acquiring company or Canadian business on a local stock exchange, Industry Canada says.

 

In announcing its offer July 23, state-owned Cnooc pledged to follow through on Nexen’s capital spending plans and keep the company’s employment level and management. It also promised to make Calgary the head office of North American operations, and list its common shares on the Toronto Stock Exchange.

 

Prior Rejections

Prior to the BHP rejection, Canada blocked the acquisition of the aerospace division of MacDonald Dettwiler & Associates Ltd. (MDA) by a U.S. company in 2008. Before then, the country hadn’t rejected any foreign takeovers since the Investment Canada Act took effect in 1985.

 

“After BHP’s purchase of Potash was rejected, this will give the impression Canada isn’t open for business,” Geof Marshall, who manages $6.3 billion of fixed-income assets at CI Investments Inc. in Toronto, said in an e-mail. “We’re entering a new era of capital controls as part of the next phase of global deleveraging and this will see governments even more protective of national business interests.”

 

The bid by Beijing-based Cnooc for Nexen of Calgary has raised questions about the degree of control state-owned enterprises should be allowed to have. Fifty-eight percent of Canadians oppose the Nexen takeover, according to a poll by Angus Reid Public Opinion released Oct. 16.

 

Conservative Concern

One Conservative lawmaker, Rob Anders of Calgary, said last month some of his colleagues are concerned about the sale of Canadian assets to Chinese state-owned businesses.

 

“I know there are people inside my caucus who have concerns about asset sales to China,” Anders told reporters. “I’m never in favor of the whole state-ownership thing, especially in the case of a non-benevolent country like China.”

 

“I would say the Petronas decision certainly makes the case of betting on Nexen weaker than it was before this announcement,” said Stephen Jarislowsky, CEO of Montreal-based Jarislowsky Fraser Ltd., Nexen’s second-largest shareholder according to data compiled by Bloomberg. “We believe that it should go through. Whether it does go through, we don’t know.”

 

Harper said Sept. 6 he’s aware Canadians are wary of Chinese investment. The government said Oct. 11 it had extended its review of the Nexen takeover by a month.

 

“It could be the death knell of Nexen if the grounds are around reciprocity and state-owned enterprises,” Jack Mintz, director of the University of Calgary’s School of Public Policy. Canada’s foreign-investment rules remain vague and “the government needs to send a clear signal on what’s on and what’s off in terms of foreign investment.”

 

‘Intrinsic Value’

“It is unfortunate that this transaction was not approved as anticipated,” said Linda Sims, a spokeswoman for Canada Pension Plan Investment Board, which holds 16 percent of Calgary-based Progress’s shares, according to data compiled by Bloomberg. “CPPIB continues to believe that there is substantial intrinsic value in Progress Energy and that this proposed acquisition is of long-term benefit.”

 

The Petronas decision is “shocking” said Gordon Currie, an analyst at Salman Partners in Calgary. “I don’t yet know what the government’s reasoning is, but this has implications for the Nexen and Celtic deals, and may cause a ’chill’ on future transactions with foreign investors.”

 

Shale Gas

Exxon Mobil Corp. (XOM), the world’s largest energy company by market value, said Oct. 17 it had agreed to buy Celtic Exploration Ltd. (CLT) for C$2.86 billion in cash and stock, adding oil and gas production in Canada’s Montney and Duvernay shale.

 

Calgary-based Encana Corp. (ECA), Canada’s biggest natural gas producer, fell 3.9 percent, NuVista Energy Ltd. fell 3.2 percent and Cequence Energy Ltd., dropped 7.1 percent. NuVista and Cequence both have operations in the Montney shale region of British Columbia. Celtic Exploration Ltd. fell 1.4 percent to C$25.84.

 

Investors should buy Progress shares if they fall as far as C$17, said Catharine Sterritt, a Toronto-based risk arbitrage strategist at Bank of Nova Scotia, in an e-mailed report.

 

Most people in Canada’s oil and natural gas sector thought the government would approve the bid by Petronas, said Mike Tims, chairman of Peters & Co., a Calgary investment bank.

 

The deal was viewed as positive because Progress is a small company that couldn’t afford to extract resources quickly. A liquefied natural gas terminal proposed by Petronas for Canada’s west coast would create new gas markets, he said.

 

“We’ll see a bunch of stocks pull back because we’ve been introduced, for a period of time, to new uncertainty until we see what the policies actually end up being,” Tims said.

Petronas Rejection Casts Doubt on Cnooc $15.1 Billion Bid (Personal WriteUp)

Article Summary

The big idea that arises from this article is whether or not the Canadian government is allowing foreign takeovers. The problem in this article first arises in Malaysia. Malaysia is currently suffering from diminishing energy reserves as they are experiencing a gas supply shortage. From this year’s forecasts it is expected that the nation’s underground gas reserves should last 37 years. This is a 2 year drop from last year’s reporting’s, though there has been a 3.6% increase in the reserves. Moreover, the natural gas output has declined 5.3% in the past year. In summary, Malaysia’s energy reserves and future prospects are not in mint condition.

But in order to solve such an ordeal, Malaysia’s State Oil Company, has looked towards foreign investments, in particular a strategic takeover of Canadian Oil Companies. It has recently offered to takeover Progress Energy Resource Corp., a Calgary-based Oil and Gas company for $5.23 Billion CAD. But under the Investment Canada Act, any company takeover valued over $330 Million, must be reviewed and accepted by the national government. In this case, the Harper administration shockingly rejected the offer, as it did not meet “Net Benefit”. With such a rejection, this casts Canada in a large concern in the investment world as investors now believe that Canada is not open for business. With this denial, Canada might be setting itself in great international business concerns as it is closing its borders to globalization.

How it Relates to the Course

The content demonstrated within the article heavily relates the content of the course. This can be demonstrated through the following examples:

In this course, we have heavily focused on the concepts and theories of Supply and Demand. This article demonstrates this in the beginning passages regarding the problem seen in Malaysia. Malaysia as highlighted is currently having issues with their gas supplies as they have a shortage. This means that there is a greater demand than there is supply, causing the prices to peak over the market equilibrium price.

 

In addition, it is shown that Gas is a tangible resource that falls under the heading of land, a resource belonging to the government/corporations. But what is interesting about gas along with other tangible assets is their scarcity. Gas cannot currently be synthetically created to meet demands at low and productive costs, as it is a limited natural resource, making it a scare asset, a topic that we highlighted in class.

 

 This returns to the Economic Problem that we discussed, where humans have unlimited needs and wants but limited supply to satisfy them. This is the case in this scenario, where humans have an unlimited demand for gas as they need it for daily activities, but we only have certain supply of it to satisfy the wants.

 

And it is how we satisfy these wants that determine our economy. This in turn leads to the topic of types of governments that was discussed in class. We went over a variety of different types, from communism to mainstream capitalism.  This article highlights how the Canadian Economy is leading into a more Socialist platform. If it was just pure capitalism, the government would not intervene in such matters, and leave the companies as a separate entity from the nation, but in fact the Canadian Government is intervening in such transactions, taking over the business world by a storm, fixating it for the greater good of the people.  It is more concerned about the majority of the population and other small businesses than it cares about the good of the elite, making the national priority the greater good of the majority of the people, opposed to the high-class elite running such major corporations.

 

This article also demonstrates a variety of different Economic methods. It demonstrates different examples of positive and normative statements. Examples include the following:

 

Positive Economics (Descriptive Statement – facts portraying things as they are in the present or have been in the past): “Shares of Nexen dropped 4.5 percent to $24.01 at 12.04 p.m. in New York, about 13 percent below Cnooc’s $27.50 offer price. Progress Energy shares plunged 10 percent to C$19.40 in Toronto, 12 percent below the C$22 per share offered by Petronas”. 

This is a clear demonstration of a descriptive statement as it simple portrays stats as they were, perfectly meeting the definition.

This article also demonstrated a variety of different fallacies. Examples include the following:

 

Fallacy of Composition (mistaken beliefs that what is good for the economy as a whole is good for individuals): “Foreign investment, generally speaking, is of benefit to the Canadian economy, and as a general rule, we obviously welcome interest in the Canadian economy,” Harper said.

 

Foreign investment is good for the economy as a whole but may harm smaller financial units as they can no longer compete with these international corporations. In addition, if such large companies begin to monopolize nations, they will be given unlimited power and they may do whatever they please, which can greatly harm the standard of living if they decide for example to eliminate minimum wage.

 

Fallacy of Single Causation (a single factor caused a particular event when in fact there may have been other contributing factors): Shares of Nexen dropped 4.5 percent to $24.01 at 12.04 p.m. in New York, about 13 percent below Cnooc’s $27.50 offer price. Progress Energy shares plunged 10 percent to C$19.40 in Toronto, 12 percent below the C$22 per share offered by Petronas”. 

 

It states that the share prices dropped because of the rejection by the Canadian Government when in fact there may have been other contributing factors which could have led to the downfall.

 

The reason in which the Canadian Government rejected the takeover was because it failed to meet the requirements by Industry Canada as a net benefit. As stated before, the requirements were the following:  employment; the degree of participation of Canadians in the business; the impact on productivity and technology development; the effect on competition; the compatibility of the investment with “national industrial, economic and cultural policies”; and the contribution to Canada’s ability to compete globally. This is specifically a majority of the Canadian Economic goals we studied in class, as these are the business goals that the Canadian Government strives to achieve, and so they can guarantee their fulfillment by controlling business transactions, in this case business takeovers.

 Comments

There is much to be said regarding this article. The reason I have personally decided to select this article is because of its relation to my interests. For the last several months, I have been in deep interest with Canadian energy companies. I believe that there is great potential in this nation’s energy reserves, especially as a long term prospect. I believe that these Oil companies, will either witness great development themselves, or will be taken over as apart of foreign investment. If major corporations takeover these Canadian oil companies due to their potential, there will be large gains. I am personally on the verge of deciding whether or not to investment my personal funds into small corporations like Alberta Oil Sands. Foreign takeovers is a great concern for such a matter as it demonstrates the potential and strength of the industry and corporation. Therefore I did much research into the topic. That is when I stumbled upon the article, and decided to select it for this assignment.

This article was of great importance to my decision regarding my investment. It demonstrated that the Canadian government has rejected many propositions made by foreign private and crown corporations. This would not be great news for my investment, as I would have relied on foreign aid to help ever expand or takeover the company, as I aimed at companies such as PetroChina and ExxonMobil for foreign inquisitions. However, if the Canadian Government is to deny such foreign takeovers, this would be catastrophic news for the industry, and would be a bad personal investment for me.  Therefore, this article was of great significance to me, due to my personal interests in the field.

U.S. Stocks Tumble as Treasuries Rally on Budget Concerns (Article)

November Article

http://www.bloomberg.com/news/2012-11-07/european-futures-treasuries-gain-on-obama-victory-dollar-falls.html

U.S. stocks slid, sending the Dow Jones Industrial Average to its biggest drop in a year, oil sank and Treasuries surged the most in five months as President Barack Obama’s re-election set up a budget showdown with the Republican-controlled House.

 

The Dow tumbled 312.95 points, or 2.4 percent, to 12,932.73 for its worst drop since Nov. 9, 2011. The Standard & Poor’s 500 Index, which is up 64 percent since Obama took office in 2009, lost 2.4 percent to 1,394.53, its lowest level since August. Ten-year U.S. yields sank 12 basis points to 1.64 percent. Oil slid almost 5 percent in its biggest decline of the year.

 

Enlarge image Dow Tumbles Most in Year, Treasuries Rally on Budget 

Dow Tumbles Most in Year, Treasuries Rally on Budget Dow Tumbles Most in Year, Treasuries Rally on Budget  Peter Foley/Bloomberg

Traders work on the floor of the New York Stock Exchange on Nov. 7, 2012.

 

Traders work on the floor of the New York Stock Exchange on Nov. 7, 2012. Photographer: Peter Foley/Bloomberg

Ritholtz: Sell-Off Is Wall Street's `Hissy Fit' 4:55 Nov. 7 (Bloomberg) -- On today's "Street Fighter," Fusion IQ's Barry Ritholtz and Barclays' Michael Gapen talk about the market sell-off. They speak on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Harry Wilson on Obama's Re-Election, Markets 5:00 Nov. 7 (Bloomberg) -- Harry Wilson, founder and chief executive officer of Maeva Advisors LLC and a former adviser to President Barack Obama’s Auto Task Force, talks about Obama's re-election and its impact on markets. He speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "Market Makers." (Source: Bloomberg)

Obama Seeks to Build on Progress Made in First Term 20:40 Nov. 7 (Bloomberg) -- President Barack Obama speaks to supporters in Chicago about his victory over Mitt Romney, the shared goals of Americans and the need for Republicans and Democrats to work together. (Source: Bloomberg)

What Is Happening in the Markets? 5:20 Nov. 7 (Bloomberg) -- On today's "Technicals Vs. Fundamentals," Jefferies & Co.'s David Zervos and LPL Financial's Jeffrey Kleintop discuss their investment strategies for stocks and bonds. They speak on Bloomberg Television's "Lunch Money." (Source: Bloomberg)

El-Erian Says Muni Debt Attractive After Election 10:30 Nov. 7 (Bloomberg) -- Mohamed El-Erian, chief executive officer and co-chief investment officer of Pacific Investment Management Co., talks about the 2012 U.S. election, the outlook for financial markets, and fiscal and monetary policies. He speaks with Betty Liu on Bloomberg Television's "In the Loop." Jim Reynolds, chief executive officer of Loop Capital Markets LLC, also speaks. (Source: Bloomberg)

Corpina: Obama Win Was Already Priced In to Markets 1:13 Nov. 7 (Bloomberg) – Jon Corpina of Meridian Equity Partners talks with Bloomberg’s Matt Miller about market reaction to President Barack Obama’s re-election. He speaks on Bloomberg Television’s “In The Loop.”

Greenspan, Rivlin, El-Erian on U.S. Fiscal Cliff 2:35 Nov. 7 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan, Alice Rivlin, a senior fellow at the Brookings Institution, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., and Peter Orszag, former director of the Office of Management and Budget, talk about outlook for action to avert a so-called U.S. fiscal cliff following the election of President Barack Obama to a second term. This report also includes comments from former White House spokesman William Burton, Potomac Research Group's Greg Valliere and Jefferies & Co.'s David Zervos. (Source: Bloomberg)

Enact Fiscal Austerity With a Delay, Orszag Says 6:23 Nov. 7 (Bloomberg) -- Peter Orszag, vice chairman of corporate and investment banking at Citigroup Inc. and former director of the Office of Management and Budget, talks about the outlook for U.S. fiscal policy after President Barack Obama was elected to a second term. He speaks with Tom Keene and Sara Eise on Bloomberg Television's "Surveillance." (Orszag is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

Obama now faces negotiating with Congress to avoid the so- called fiscal cliff of more than $600 billion in tax increases and spending cuts next year that threaten to slow U.S. growth. European stocks erased early gains as concern grew that the debt crisis was hurting Germany’s economy, while Greek police beat back anti-austerity protesters outside parliament.

 

“It’s a rush to safe haven,” said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $325 billion. “We’re selling off further on rising fears about what a fiscal cliff negotiation is going to mean here. People bring all their worst fears in. At the end of the day, you have the fiscal cliff, Europe and you see a risk-off trade.”

 

‘Stocks Are Worth Less’

Obama now must decide how to contend with opposition from Republicans who demand a tax-cut extension for all income levels.

 

U.S. House Speaker John Boehner said Republicans would be willing to agree to new revenue from a tax system that would generate faster economic growth and be accompanied by changes to entitlement programs. Boehner of Ohio said all sides are “closer than many think” to being able to revise the U.S. tax code. The two parties remain divided on what the top tax rate should be and on whether fresh revenue should come from tax increases or only from economic growth.

 

The potential for higher taxes contributed to the slide in stocks today, according to Bill Gross, co-chief investment officer of Pacific Investment Management Co.

 

“The marginal income-tax rate is probably going to go up with this fiscal resolution, you know, from 35 to 40 percent, capital gains from 15 to 20, dividends from 15 to who knows where,” Gross told Bloomberg Television. “And ultimately if dividend and capital-gains tax rates go up, then stocks are worth less and that’s what you’re seeing.”

 

Market Leaders

Gauges of energy, financial, technology, telephone, industrial and utility shares lost more than 2 percent to lead declines in all 10 of the main industry groups in the S&P 500. Bank of America Corp. and JPMorgan Chase & Co. slid at least 5.6 percent while Hewlett-Packard Co., Exxon Mobil Corp. and UnitedHealth Group Inc. lost at least 3.8 percent for the biggest declines in the Dow, which slid as much as 369 points.

 

The KBW Bank Index sank 4.6 percent, the most since June, as all 24 of its companies retreated. Bankers were hoping Romney would win and give them more sympathetic regulators or that Republicans would take the Senate and they could rewrite the Dodd-Frank overhaul of the industry, said Edward Mills, a bank policy analyst at FBR Capital Markets in Arlington, Virginia, and former aide on the House Financial Services Committee.

 

“Neither happened and the floodgate is going to open for the final rules under Dodd-Frank to go into effect and it’s likely to come in the next three to six months,” Mills said. “The industry has gone from a posture of trying to delay to now where they are going to be pushing for certainty.”

 

Defense Stocks

The iShares Dow Jones U.S. Aerospace & Defense Index Fund, which tracks contractors such as United Technologies Corp., Boeing Co. and Lockheed Martin Corp., sank 3 percent. “This is ‘Ground Zero’ for Fiscal Cliff stress,” Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said in a note to clients.

 

Peabody Energy Corp., Alpha Natural Resources Inc. and other U.S. coal producers slumped on speculation that Obama’s re-election will mean more regulation for the industry.

 

Barclays Plc reduced its year-end estimate for the S&P 500 by 5 percent on concern a divided American government will delay the resolution over spending cuts and taxes. Barry Knapp, head of U.S. equity strategy, cut his 2012 forecast for the index to 1,325 from 1,395.

 

“With a polarized federal government we see little reason to increase the probability of avoiding the tax cliff, avoid brinksmanship over the debt ceiling or to expect pro-growth tax and entitlement reform in 2013,” Knapp wrote in a note to clients today.

 

Knapp’s Plays

Knapp said that while he “would not be tempted to add risk” in economically-sensitive companies, he would buy stocks with high dividends if they fall on concern that capital-gains tax will increase because the Fed would probably respond to a slowdown created by higher taxes.

 

Twenty companies in the S&P 500 are due to release earnings today, including Time Warner Inc. and Kraft Foods Group Inc. (KRFT) Earnings have topped estimates at about 72 percent of companies that have reported so far, while 60 percent missed sales projections, data compiled by Bloomberg show.

 

While Obama received at least 303 electoral votes to Republican Challenger Mitt Romney’s 206, Republicans kept a majority in the House of Representatives. Democrats retained control of the Senate.

 

The election boosted speculation Federal Reserve Chairman Ben S. Bernanke’s asset-purchase programs will be preserved. Bernanke’s stimulus has helped keep the U.S. economy growing by purchasing $2.3 trillion of Treasuries and mortgage-related bonds and instituting a plan to buy $40 billion of home-loan securities a month. Romney had said he wouldn’t reappoint Bernanke to a third term in 2014.

 

‘Question This Commitment’

“The alternative was that Governor Romney would get elected, that he would name someone to replace Bernanke and that the markets would question the forward-guidance language, would question QE3, would question this commitment to keep the foot on the accelerator well into the recovery,” Mohamed El-Erian, chief executive officer of Pimco, the world’s biggest manager of bond funds, told Bloomberg Television. “All that hasn’t happened and that’s why I think the Fed will continue to be investors’ best friend.”

 

The dollar strengthened against 13 of 16 major peers, climbing 0.4 percent to a two-month high of $1.2770 against the euro

 

The yield on two-year Treasury notes fell four basis points to 0.266 percent, the lowest since Oct. 16. Ten-year yields, benchmarks for mortgages to corporate bonds, fell from 1.75 percent yesterday and extended this year’s decline to about 25 basis points. They have tumbled about 75 basis points since Obama took office.

 

Bond Returns

U.S. bonds have returned 1.8 percent this year, including reinvested interest, and about 15 percent since Obama took office, according to Bank of America Merrill Lynch indexes.

 

Ever since Lyndon B. Johnson defeated Barry Goldwater for the presidency in 1964, yields on 10-year Treasuries have dropped about 40 basis points in the first month when a Democrat wins, and risen 19 after a Republican victory, according to data compiled by Bloomberg.

 

Oil sank 4.8 percent to $84.44 a barrel to lead losses in 16 of 24 commodities tracked by the S&P GSCI Index, which tumbled 2.4 percent for its biggest drop since July.

 

The Stoxx Europe 600 Index slid 1.4 percent, erasing earlier gains after European Central Bank President Mario Draghi said the German economy is beginning to be hurt by the euro-area debt crisis and the European Commission said the region will virtually grind to a halt next year. German industrial production fell for a second month in September, the Economy Ministry in Berlin said today.

 

European Markets

About seven shares fell for each that advanced in the Stoxx 600, with commodity producers and banks leading declines among the gauge’s 19 industry groups. Randgold Resources Ltd. (RRS) sank 6.4 percent after the producer of gold in West Africa said full-year output will be at the bottom of its target.

 

BNP Paribas SA (BNP) rallied 1.1 percent as France’s largest bank said third-quarter profit more than doubled after it posted higher revenue at the investment-banking unit.

 

Greek Vote

Greek 10-year bonds erased earlier gains, pushing the yield up 13 basis points to 17.35 percent. Prime Minister Antonis Samaras faces a test of his coalition government as he seeks parliamentary approval of austerity measures to unlock bailout funds amid the third general strike in six weeks. Approval of the legislation is the first of the parliamentary votes required by Nov. 12 to receive a 31 billion-euro ($40 billion) portion of international aid. A roll-call vote was expected tonight in Athens.

 

Yields on German 10-year debt declined six basis points to 1.38 percent, the lowest in two months. Rates on Spanish and Italian debt of similar maturity increased three basis points and one basis point respectively.

 

The exchange-traded fund tracking developing-nation shares sank the most in two weeks as equity indexes from Hungary to Brazil fell along with U.S. stocks and oil. BYD Co., the Chinese carmaker partly owned by Warren Buffett’s Berkshire Hathaway Inc., surged 11 percent.

 

The iShares MSCI Emerging Markets Index ETF tumbled 1.5 percent. BYD led gains in industrial and technology companies in the MSCI Emerging Markets Index, which was little changed.