Monday, March 16, 2009

A few more thoughts on the stimulus

There's a great interactive chart over at the WSJ that covers the state by state breakdown of the stimulus spending. A couple of observations - Governor Corzine of NJ (former head of Goldman Sachs) must have some pull with someone in Washington in order to have managed to receive $135,000 per square mile and my previous concerns that the stimulus is merely plugging holes in state budgets seem to be confirmed.

- Education - "for state education budgets"
- Pell Grants - "to meet the federal student loan program's shortfall for 08-09"
- Medicaid - "federal relief for state programs"

Compare and contrast our stimulus moves with those of the Chinese government in this article. I've mentioned before the immense risks facing the Chinese economy -- mainly the fact that they are very good at making low quality, mass produced, consumer goods --- but if they are smart with their investing dollars, they could invest like 100 Warren Buffett's - buying the best assets at distressed prices.

Case in point --- "Alcoa has agreed to sell its investment in Rio Tinto Group to Aluminum Corp. of China for $1 billion and is seeking to sell other businesses to raise additional cash." More on Alcoa below...

"Guangdong province alone, here in southeastern China, is quadrupling its vocational training program this year to teach four million workers engaged in three-month or six-month programs.

The main comparable program in the United States, under the Workforce Investment Act, has been training fewer than 250,000 a year, although President Obama’s stimulus program provides funding that could double the number of American workers in training programs.

The Guangdong training programs are half in the classroom and half in the factory, usually the business that plans to employ the trainees. By increasing productivity, training programs can hold down corporate labor costs per unit of production for years to come."

The power of a training program that puts feet in the field is much more valuable than generic skills training.

A final note on stimulus -- stimulus plans designed to boost the whole economy can lead to some poor decision making at the corporate level.

The anticipated uptick in demand for steel as a result of the US and Chinese stimulus programs, led numerous Chinese steel manufacturers to increase production. However, there has not yet been an uptick in demand so the market is being flooded with steel that it can't absorb, thus, prices are actually falling. Falling prices in a weak economy = more trouble for the global steel market. Not exactly the stimulative result everyone was hoping for....

Also, the many green initiatives anticipated in the US led to a substantial increase in the hype around solar companies. However, according to the California Solar Initiative......

"new applications were running over 1,000 a month for the last five months of 2008, but have since taken a tumble: 608 in January, and 646 in February. And March is shaping up to be even worse, with just 188 applications received through March 11."

Many solar installations are not eligible for tax rebates until after you file your taxes for 2009, so the demand for solar installations might be back-end loaded, but the trend seems to be negative right now.

Finally, just a quick note on Alcoa since it is a large local employer. The company remains stuck with a moderate cost structure and falling prices for their products. The moves announced today - cutting the dividend, selling stock and debt, cutting capital expenditures - will likely enhance their near-term viability, but it could be painful for the shareholders (the stock sale alone might take 15-20% out of the stock). After gaining 8% today, the stock was down 11% after the market closed.


Job sharing/part-time/cut backs.

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