Ask U.S. Rep. Maxine Waters, D-CA, about credit default swaps and she’ll offer this warning: Ban them now or expect a reprise of the ongoing global financial crisis – which the derivative securities helped create. When it comes to elected officials, Congresswoman Waters is not one I would typically feel that I have a lot in agreement with.

A representative of a low-income district in Los Angeles, Waters is a senior member of the House Committee on Financial Services and has distinguished herself in the past by her sharp attacks on the financial sector and capitalism in general – what her own Web site describes as her “no-holds-barred style of politics.”

However, Congresswoman Waters’ bill to prohibit credit default swaps – introduced last Friday (July 10) – is strangely appealing, even for a crusty old capitalist like myself.

If you want a more pro-capitalist confirmation of Waters’ view (andGeorge Soros doesn’t count) try Warren Buffett’s sidekick Charles T. Munger, who has called the CDS prohibition the best solution, and said “it isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.”

Waters has also pointed out – quite reasonably – that unless credit default swaps are banned outright, “the industry will find a way to loosen standards and widen exemptions for customized contracts and we will be right back to where we are today.”

When There’s No “Free” in Free Market

As a free-market enthusiast, my natural instinct is to resist such calls. But I have to recognize that, as we speak, we’re actually not operating in a free market. Key U.S. banks were bailed out by the U.S. government last fall, after which such financial institutions as Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE) and Citigroup Inc. (NYSE:C) have been permitted to carry on as though nothing bad ever happened.

Furthermore, a number of big players in the CDS market – most notably Goldman Sachs Group Inc. (NYSE: GS) – were bailed out through the rescue of busted insurer American International Group Inc. (NYSE: AIG). In that case, the government injected $180 billion into AIG, largely to allow it to make good on the CDS contracts it had written – $13 billion of which were with Goldman Sachs.

If Citi, Fannie, and Freddie had gone bankrupt – as they would have done in a free market – and Goldman had lost the best part of $13 billion (which might well have sent it bankrupt in turn) the financial market today would look very different. The financial industry would be rife with unemployment and apple-selling ex-Citibankers would be on the streets of New York keeping bankers’ salaries and bonuses way down from their pre-crash levels.

But such as it is, Goldman Sachs is said to be heading for record profits in 2009, and its partners are expecting record bonuses. The investment-banking firm reported stellar second-quarter profits of $3.44 billion yesterday (Tuesday). [For a related story on Goldman Sachs’ quarterly financial report that appears in today’s issue of Money Morning, please click here.]

If U.S. taxpayers are going to be called on to subsidize the very banks that got us into this mess – just so these institutions can continue to carry on as if it was still 2007 – then another expensive and damaging financial crash is almost certainly in the making.

There are a number of product areas in which such a crash might occur, but for my money, credit default swaps top the list. That makes it crucial for us to at least rein in the derivative securities with the utmost urgency. And Congresswoman Waters makes an excellent point when she says that it may prove impossible to rein in credit default swaps without actually banning them altogether.

If You Can’t Beat ‘Em, Ban ‘Em

Indeed, there are two fundamental problems with CDS securities, neither of which appears easy to solve:

• First, there is no watertight way of settling credit default swaps in case of default. The current method is by a mini-auction of the obligations on which the swaps are written to determine a settlement price. But this doesn’t work because the mini-auction relates to only a few million dollars of paper, whereas the credit default swaps in question may have a nominal value of billions – hence it’s in the interest of holders to play games at the auction and distort prices. This might not be a problem for non-participants in the CDS market, but it causes huge risks to the financial system – which in extreme cases, must be bailed out by taxpayers, as was the case with AIG.

• The second problem is that holders of credit default swaps have an incentive to push companies into bankruptcy. In the 1930s, short sales of stock (except on an “uptick”) were prohibited to prevent speculators from driving companies into bankruptcy. Well, the leverage available on CDS securities is much greater than on stock, and in the case of financial institutions, the amount of CDS outstanding is also much greater. That means speculators have correspondingly more incentive to load up on CDS and push a company into bankruptcy.

And it doesn’t end there: Since CDS holders also hold a company’s debt, their position in bankruptcy negotiations is a completely false one. This has already been a problem in the bankruptcies of the Canadian paper company Abitibi-Bowater and the shopping centre developer General Growth; it also caused problems in the massive General Motors Corp. (NYSE: GMGMQ) reorganization.

The stellar bonus prospects of the lucky employees at Goldman Sachs, in a year that has been thoroughly lousy for legitimate financial business, are an indication that we are not currently operating in a free market. Credit default swaps provide a means whereby Wall Street insiders can make huge amounts of money on corporate bankruptcies and disrupt the U.S. economy while doing so.

Until we can be absolutely sure that the poisons of the most-recent global financial bubble have been fully eradicated from the financial system, the safest measure is to ban those financial products like CDS that seem likely to cause the most trouble.

Congresswoman Waters may go too far in wishing to ban credit default swaps altogether. However, I see no reason not to impose a five-year moratorium on the securities.

If, by 2014, the poisons of speculation have been removed from the world’s financial system, and a newly sober Wall Street can convince us that credit default swaps are both useful and sound, the derivative securities can then be reinstituted on a controlled basis, most likely restricted as swaps on “indices” of credit representing an entire sector or country, rather than on single companies alone. That would make it more difficult for CDS dealers to engage in their dangerous bankruptcy games.

Perhaps Goldman Sachs employees can do without that third Porsche – at least or now …

Source: Here’s Why It’s Time to Ban Credit Default Swaps ]]> http://www.contrarianprofits.com/articles/here%e2%80%99s-why-it%e2%80%99s-time-to-ban-credit-default-swaps/19101/feed 1 http://www.contrarianprofits.com/articles/investment-news-briefs-tuesday-july-14-2009/19064 http://www.contrarianprofits.com/articles/investment-news-briefs-tuesday-july-14-2009/19064#comments Tue, 14 Jul 2009 13:00:43 +0000 Money Morning Staff http://www.contrarianprofits.com/?p=19064 GM May Salvage Pontiac Car; CIT Void to Be Filled, More Expensive; Dell Expects Higher Q2 Revenue; U.S., UBS Lawsuit Delayed for Possible Settlement; U.S. Deficit Grows; Russian Investor Boosts Stake in Facebook; Microsoft Office Goes Online

General Motors Corp.’s (OTC: GMGMQ) emergence from bankruptcy Friday marks the beginning of the “new GM,” which will try to stay out of the ashes from which it emerged to become a leaner, customer-centric and modern company.

The official ownership of the new GM is divided as follows:

• 60.8%: U.S. Department of the Treasury, after a $50 billion taxpayer-funded investment.
• 17.5%: United Auto Workers (UAW) Retiree Medical Benefits Trust.
• 11.7%: Canada and Ontario governments.
• 10%: The “old” GM.

By the end of next year, the new GM will operate 34 assembly, powertrain and stamping plants, down from 47 in 2008. In the United States, its headcount will decline from roughly 91,000 at the end of last year to about 64,000 by the end of this year, which GM said will create “a company sized to respond quickly to changes in the market, while still retaining the global scope necessary to develop world-class products and technologies.”

Those left behind after the dust clears will be expected to perform with fewer human resources. GM will reduce the number of U.S. executives by 35% and its salaried employment by 20% by the end of the year-”flattening the organization and speeding decision making,” the company said.

Among the executive cuts will be the elimination of the GM North America president position. Taking those responsibilities will be newly announced Chairman Edward E. Whitacre, Jr., who oversaw the creation of the new AT&T Inc. (NYSE: T).

GM’s balance sheet will include a debt of approximately $11 billion, excluding preferred stock of $9 billion, and could change under its fresh-start accounting, it said. Overall, the company’s total debt has been reduced by more than $40 billion, representing mostly unsecured debt and the Voluntary Employee Beneficiary Association Trust fund that provides medical benefits to UAW retirees.

Those looking to invest in the new GM will have to wait until at least next year.

Though not a public company, “[GM] will be transparent in our financial and other reporting to further strengthen trust and confidence,” President and Chief Executive Officer Fritz Henderson said in a prepared statement. “We expect to take the company public again as soon as practical, starting next year, and to repay our government loans as soon as possible.”

The company’s emergence from bankruptcy comes roughly three weeks earlier than the U.S. government expected, and three days faster than Motown rival Chrysler LLC. GM is shooting to beat the clock on its deadline to repay the $50 billion in Troubled Asset Relief Program (TARP) bailout funds.

“We are required to pay off the loans by 2015, but our goal is to repay them much sooner,” Henderson said.

A slimmer catalog will be the face of the new GM, which now has four primary brands: Cadillac, Chevrolet, Buick and GMC. Gone are Saab, Saturn, Hummer and this fall, Pontiac.

Winning Back America

As Money Morning reported last month, the consumer backlash against GM’s bankruptcy likely won’t be as damaging as had been initially feared. In fact, as rival U.S. carmaker Chrysler already discovered in its own bankruptcy process, potential defections and severed relationships can be avoided with aggressive discounts and strong marketing efforts.

The image of the new GM will rest largely on the shoulders of 77-year-old Bob Lutz, whom the company coaxed out of retirement to sign on as its vice chairman and senior advisor. “Maximum Bob,” the auto industry veteran who originally joined GM in 2001 and chief cheerleader for the upcoming Chevy Volt, will be responsible for “all creative elements of products,” as well as customer relationships.

Translation: Lutz is tasked with winning back the droves of customers who fled from GM in the last 40 years-primarily to foreign automakers-to reduce the company’s domestic market share to less than 20%, down from more than 50% in GM’s heyday in the late 1960s and 1970s.

“[Lutz] has a proven track record of unleashing creativity in the design and development of GM cars and trucks. This new role allows him to take that passion a step further, applying it to other parts of GM that connect directly with customers,” Henderson said. “In August, we’ll begin regular visits with customers, dealers, suppliers, employees and others-in the U.S. and abroad-who impact our relationships with customers. We’ll be listening to their ideas, and acting on the ones that will improve our ability to serve our customers.”

A Fresh Coat of Paint for an Old Classic

Parts of GM’s transparency and customer bond-forming attempts will come online. Henderson will hold live chats with customers and respond to some ideas, concerns and suggestions through a “Tell Fritz” website to be launched next week.

Other GM online initiatives include:

• A Twitter page, containing “as it happens” updates on the company.
• A Facebook page, which includes company news, behind-the-scenes videos of things like the production of the Volt, or a video of the “Bumblebee” Camaro as seen in the new Transformers movie, which is filled with GM vehicles.
• GM FastLane, a blog from company executives and other employees.
• GM Facts and Fiction, a website devoted to dispelling myths about the carmaker.

Of course, when the rubber hits the road, modern means environmentally friendly vehicles. The Volt, which GM said can go 40 miles on one charge before using gasoline to continue, gets the most press. That vehicle is currently being road tested and scheduled to launch next year, with prices starting at $32,500 after tax credit incentives.

While President Barack Obama said he doesn’t want the U.S. government to be involved in the day-to-day operations of its bailout beneficiaries, there’s no doubt the pressure is on both GM and Chrysler to produce more fuel-efficient vehicles. To that effect, GM said it has moved “aggressively” to develop a range of energy-saving technologies, including advanced internal combustion engines, biofuels, fuel cells and hybrids.

“The new GM is also taking steps to make advanced battery development a core competency, and expects to make additional announcements on this matter late this summer,” the company said in what will likely be an attempt to address consumer concerns over battery life in hybrid and electric cars.

Source: The “New” GM: What Will it Look Like, and How Far Will it Go? ]]> http://www.contrarianprofits.com/articles/the-%e2%80%9cnew%e2%80%9d-gm-what-will-it-look-like-and-how-far-will-it-go/19035/feed 0 http://www.contrarianprofits.com/articles/investors-looking-to-tech-to-pull-us-stocks-and-the-economy-out-of-their-doldrums/19032 http://www.contrarianprofits.com/articles/investors-looking-to-tech-to-pull-us-stocks-and-the-economy-out-of-their-doldrums/19032#comments Mon, 13 Jul 2009 16:00:03 +0000 William Patalon III http://www.contrarianprofits.com/?p=19032

Stock investors will key next on earnings from tech giant Intel Corp.(Nasdaq: INTC) and banks including J.P. Morgan Chase & Co. (NYSE:JPM) for hints of what to expect in the third quarter — and how badly the recession hurt businesses in the second quarter.

The Standard & Poor’s 500 Index and Dow Jones Industrial Average delayed declined for the fourth straight week last week – the longest string of losses since stocks hit their low point in March – and investors are looking at the tech sector to squelch the ongoing decline. The Nasdaq Composite Index complost 2.47% in the week ended Friday.

Earnings reports this week from computer-chip giant Intel and several big banks – including JPMorgan Chase & Co. - could provide investors and economists some insights on where the U.S. economy…

With the “not-as-bad-as-expected” news surrounding the economy and the initial government stimulus measures have been priced in to the market, we are moving into a period of profound uncertainty. With the release of Alcoa Inc.’s (NYSE: AA) earnings report, earnings season has officially begun.

In most cases each company’s own “easy” restructurings are also behind us.  They have resorted to massive lay-offs and inventory liquidations to bring costs down to the bare minimum required to run their respective businesses.  Those cuts and gained efficiencies also have been priced in.  Now, it is time for these companies to show what they can do organically.

Energy companies appear to have hit a wall now that China has run out of space to store oil. And other commodities businesses are suffering, too, as the U.S. Federal Reserve seems to have found religion and veered toward a much more prudent monetary policy.

After its last meeting the Federal Open Market Committee (FOMC) signaled the end of quantitative easing, at least for the foreseeable future.  This is of paramount importance, because it seems to be a concession to those who worried that the Fed might debase the U.S. dollar with by over-expanding its balance sheet and fanning inflationary forces down the road.

The Fed has done a tremendous job of first restoring some sense of “normalcy” and confidence in the core markets, like interbank lending and money markets, and then proceeding to work outwards to U.S. Treasuries and mortgage-backed securities.  This later step towards more prudent actions is welcome and you are seeing it in the U.S. dollar and renewed confidence in Treasuries.  The latter have been received extremely well by investors and yields have started to move down, reflecting not only the lack of current inflation, but also the confidence that the Fed will not go bananas with quantitative easing.

So, ahead of a very difficult earnings season, I am not going to try to out-predict the market.  The experts have been going around for a couple of months trying to just that by using expensive consultants that do channel-checking and by contacting the companies themselves to clarify statements made under full disclosure.

But the earnings season has extraordinary challenges to surmount, that are deriving from the uncertainty that is hanging over the markets like the proverbial sword of Damocles.

General Motors Corp. (OTC: GMGMQ) and Chrysler Group LLC are emerging from bankruptcy in record time and their costs, debt and massive corporate restructurings will probably make them internationally competitive once more.  But there are still questions about how these companies will cope with the still dormant auto market.

The outlook for the large financial behemoths that are due report earnings is equally uncertain. We still need to see how these institutions play around with their toxic asset valuations, their loan loss reserves and their predictions for the future, particularly given the potential stumbling blocks on the road to recovery.

The three obstacles that I find especially troubling are:

1. The spike in credit card delinquencies.
2. The outlook for commercial real estate.
3. And the pending second wave of residential foreclosures, now in the prime and option-ARM sectors.

But do not discount the possibility of seeing mark-ups in toxic asset valuations that might favor some financials strongly.

Now, with the Fed seemingly on hold and the U.S. government’s stimuli only 30% deployed and showing little traction, where is the growth going to come from, especially since unemployment blew right through the promised 8% peak to the current level of 9.5%? On top of that, last week’s rise in continuing jobless claims and Friday’s drop in consumer sentiment offered little solace.

The good news in all of this is that savings rates spiked to 7% as consumers used their money to pay down debt.  Even though this improvement in consumers’ balance sheets does not show in immediate sales growth, it bodes very well for the future.  And this savings trend, which translates into reduced demand for imported consumer products, together with rising exports, resulted in the lowest trade deficit in nearly a decade.

We are making the difficult progress that we need to make in order to restore the U.S. economy to financial health, and that, in turn, is helping the dollar and Treasuries in the short term.

So, based on these massive uncertainties, waiting to be played out, the best risk-reward ratio appears to be in bonds.  With a massive U.S. Treasury supply well absorbed, we are going to jump into long term U.S. Treasuries for a conservative upside, while we keep waiting for resolution on the healthcare reform, social security, and corporate earnings.

Recommendation: Buy the iShares Barclays 20+ Year Treasury Bond ETF (NYSE: TLT) (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in the iShares Barclays 20+ Year Treasury Bond ETF.

Source: Buy, Sell or Hold: Buy iShares Barclays 20+ Year Treasury Bond ETF For Solid Profit at a Time of Great Uncertainty ]]> http://www.contrarianprofits.com/articles/buy-sell-or-hold-buy-ishares-barclays-20-year-treasury-bond-etf-for-solid-profit-at-a-time-of-great-uncertainty/19017/feed 0 http://www.contrarianprofits.com/articles/investment-news-briefs-friday-july-10-2009/18964 http://www.contrarianprofits.com/articles/investment-news-briefs-friday-july-10-2009/18964#comments Fri, 10 Jul 2009 14:32:44 +0000 Money Morning Staff http://www.contrarianprofits.com/?p=18964 Jobless Claims Fall; China Detains Four Rio Tinto Employees for Alleged Espionage; Retail Roughed Up in June; China Auto Sales Skyrocket; Broadcom Drops Acquisition Attempt; Mortgage Rates Fall; Madoff Won’t Appeal Sentence

• Regulators will hold hearings this month and next to possibly limit the holdings of energy futures traders, including index and exchange-traded funds. The U.S. Commodity Futures Trading Commission (CFTC) will hold hearings in the next two months to consider the need for government-imposed restrictions on speculative trading in oil, gas and other energy markets, Chairman Gary Gensler said in a statement. “Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities such as crude oil, heating oil, natural gas, gasoline and other energy products,” Gensler said in the statement. “This will include a careful review of the appropriateness of exemptions from these limits for various types of market participants.” The CFTC did not give dates on when the hearings would be held or who would speak at them.

Source: Investment News Briefs Wednesday, July 8, 2009

A federal judge handed the Obama administration an important victory in its push to steer the automobile industry back to health Sunday, approving the sale of General Motors Corp.’s (OTC: GMGMQ) most profitable assets to a new government-run company.

The move removes an important barrier to the company’s plan to exit bankruptcy.

Judge Robert E. Gerber of the U.S. Bankruptcy Court for the Southern District of New York issued a ruling saying the sale was GM’s only option and that it would “prevent the death of the patient on the operating table,” according to Reuters.

The 87-page ruling rejected appeals from a group of bondholders, tort claimants and unions who had objected to the plan.

“As nobody can seriously dispute, the only alternative to an immediate sale is liquidation — a disastrous result for GM’s creditors, its employees, the suppliers who depend on GM for their own existence, and the communities in which GM operates,” Gerber said in the opinion.

When the sale is completed, it would transfer GM’s “good assets” – including the Chevrolet, Cadillac, Buick and GMC brands – to a new company majority-owned by the U.S. Treasury.  It would also pave the way for the new GM to exit bankruptcy in less than two months, one month earlier than the government’s projection.

The plan would allow the company to jettison unwanted property to the old GM, including 16 automotive plants in Delaware, Ohio, New York, Indiana, Pennsylvania, Virginia and Michigan. The Treasury will also provide the estate with $1.175 billion to unwind the remaining assets, up from original projections of $950 million after creditors complained about possibly getting stuck with liquidation costs.

The U.S. government would own 60% of the new GM in return for $50 billion in loans, the Canadian government would get 11.7% for $9 billion in loans, and workers would receive a 17.5% stake for relinquishing future health-care benefits.

Bondholders would be forced to convert about $27 billion in bonds into about 10% of stock in the new company, plus warrants with a total value of $7.4 billion. New GM’s total equity is anticipated to be worth more than $38 billion, according to Bloomberg News.

During three days of hearings, the workers and bondholders objected to the plan, saying the “new GM” is just “old GM” minus a slew of liabilities. They contend the company would market nothing new, pedaling the same cars and trucks, made by the same workers managed by the same executives.

Gerber dismissed the bondholders’ assertion that GM should restructure under a Chapter 11 reorganization plan, which would let creditors vote on details of the plan, saying the argument was unrealistic.

“In the event of liquidation, creditors now trying to increase their incremental recoveries would get nothing,” he ruled.

Gerber’s ruling also torpedoed arguments from dealers whose contracts are being terminated, groups of car-accident victims who said they would now be unable to sue GM for their injuries, and others who claimed that the U.S. government had been overbearing in its negotiations to restructure the automaker.
Gerber issued a typical four-day stay of the order approving the sale, which allows for possible appeals.

Steve Jakubowki, a lawyer for product-liability claimants said he would appeal the ruling even though GM recently revised its bankruptcy plan to take on claims from future car-accident victims.

“This issue is too important, too unsettled and too many people’s lives hang in the balance for me not to pursue this appeal through to the end,” Jakubowski told The Wall Street Journal.

Gerber ruled that the sale could be “free and clear of claims,” because his hands were tied by precedents established in the second judicial circuit during the bankruptcy filed by Chrysler LLC.  The second judicial circuit encompasses Gerber’s court.

But in the end, Gerber concluded that the government’s plan was the only one that makes sense.

“GM cannot survive with its continuing losses … and without the governmental funding that will expire in a matter of days,” Gerber wrote.

The ruling marks the second big victory for the Obama administration’s auto task force, which will be charged with supervising the liquidation of the remaining assets.  The task force had previously engineered the sale of Chrysler to a consortium headed by Italy’s Fiat S.p.A. (ADR OTC:FIATY).

Source: GM Bankruptcy Judge Approves Obama Administration’s Exit Plan ]]> http://www.contrarianprofits.com/articles/gm-bankruptcy-judge-approves-obama-administration%e2%80%99s-exit-plan/18801/feed 0 http://www.contrarianprofits.com/articles/investment-news-briefs-wednesday-july-1-2009/18621 http://www.contrarianprofits.com/articles/investment-news-briefs-wednesday-july-1-2009/18621#comments Wed, 01 Jul 2009 14:00:26 +0000 Money Morning Staff http://www.contrarianprofits.com/?p=18621 Ten More to Be Charged in Madoff Case; British GDP Suffers Highest Drop in Half a Century; Housing Price Drops Slowing; GM Attempts to Emerge From Bankruptcy; Corn & Soybean Planting Up; AIG Gets Government-Backed Board; Japanese Memory Maker Gets Bailout

• Declining manufacturing and construction sectors contributed tothe United Kingdom’s gross domestic product to fall…

Mention Japan and many people think of Geisha, castles and samurai. Mention investing in Japan and the image of an impenetrable wall comes to mind.  I’ve been extremely fortunate to have seen all of this firsthand – and not just once, but on a pretty consistent basis for the past two decades, when I’ve been here as a businessman, a resident, and – most recently – as a husband and a parent.

Like anyone who’s lived as an expat anywhere for an extended stretch, my powers of observation have tuned into specific aspects of the Japanese culture that I find fascinating.

For instance, since the days of the samurai, rarely has anyone ever questioned anybody’s authority directly – let alone openly. To do so was to risk the loss of one’s head – literally. But for the first time in several hundred years, that reticence to challenge authority is ebbing, and it could be the change that prospective investors have long been looking for.

I recall watching in rapt fascination the whole T. Boone Pickens/Koito Manufacturing battle during my first years here. In case you don’t recall, Pickens became Koito’s largest shareholder by accumulating more than 20% of the company’s stock and then was refused a seat on the board.

The battle came to a head during an annual meeting whose audience was filled with ruffians, embarrassed executives and a crowd of professional hecklers. I didn’t understand until years later that there was nothing “random” about that day 20 years ago: The crowd had been stirred up intentionally and professional hecklers had been hired to deliberately break up the meeting. In fact, it was their job to keep Koito Manufacturing’s senior executives from having to answer Pickens’s pointed questions (although to outsiders, it would just look like some ne’er do wells had gotten out of hand).

Pickens would not be put down.

Much to the chagrin of my Japanese colleagues, I stood up and cheered when the American tycoon picked up his things and famously stormed out with a collection of Japanese media crews in hot pursuit.

Fast forwarding to the present, I find myself reliving those memories, for I’m watching a repeat performance unfold. The cast of players is a bit different – this time it’s the Japanese investor, instead of a U.S. corporate raider, that’s trying to buck the system – but the plot is much the same.

The normally reticent Japanese investors – long accustomed, or even resigned, to public subtlety and backroom wheeling and dealing – are becoming fed up with this system and are becoming quite brazen in their protests. And very direct, as well.

Pickens would probably love it. In fact, I’m virtually certain that he does, though I’ve not spoken with him in years.

According to a Nomura Securities Co. Ltd. research report cited here by several news media outlets, more than 70% of individual shareholders intend to vote against management in upcoming elections and on specific issues. Normally, shareholder votes are essentially “rubber-stamp” affairs, pretty much signing off on whatever management wants, so this is an earth-shattering change.

Western institutional investors have picked up on this cultural about-face, since it means they may finally have the voting clout they crave when it comes to obtaining board seats and operational input on how the trillions of dollars they’ve invested here over the years is put to work. I’m fascinated, because it means that the Japanese executives who up to now had only themselves to answer to must now answer directly – and publicly – to their own investors.

And there are many questions to be answered. Japan’s stock market is at 26-year lows and recent economic reports continue to portray poor business conditions here. The so-called “green shoots” of economic recovery that are being written about in the United States look a lot more like weeds here Japan. And barring something miraculous that surfaces in response to the upcoming legislative elections, it’s clear to me that Japan’s elected leaders learned absolutely nothing from that country’s so-called “Lost Decade” – a slowdown that’s actually lasted the better part of two decades.

In fact, current Japan Prime Minister Taro Aso has an approval rating is only 19%, the lowest recorded level in history. Primary-schoolteachers are actually admonishing their students not to become like him. Can you imagine?

Openly angry investors I’ve talked with here in the last few weeks want to know why the return on equity has been so low for so long. They’re asking how Japan’s once-glorious companies have just fallen off the face of the earth? And then there’s capital usage, investment spending and, gasp, the global financial crisis. Who knew what and when did they know it? This is going to get ugly. My father in law, who’s normally calm about these things, wants them all lined up and thrown out – after he gets a chance to personally chew them out!

According to the Nomura study, executive compensation and skipped dividend payments are hot buttons, too, for individual investors – and with good reason. For the year ended March 31, about 38% of listed Japanese companies have skipped their dividends or have cut them entirely. For the typical Japanese citizen – who has accepted benevolent leadership for centuries — this is not only a stunning breech of public trust, but a callous slap in the face that must have been similar to the waning days of the samurai, when various lords called “daimyo” could no longer meet the public obligations of their retainers.

To borrow an old expression, it’s clear that the “natives are restless.” And it’s not just the natives. Such relatively recent Western “imports” as hedge funds and institutional money-management firms are feeling militant, as well.

Southeastern Asset Management Inc. is on the warpath over investments it’s made in Nipponkoa Insurance Co. Ltd. The Tennessee-based fund manager owns approximately 17% of Nipponkoa and wants some answers as to why the company’s shares have plummeted 19%, when the benchmark Topix Insurance Index has dropped only 6% in a comparable time period.

Twice now – in each of the last two years – Southeastern has attempted to oust Nipponkoa Insurance Co. President Makoto Hyodo for allegedly having run the ship aground.

In a similar fashion, Brandes Investment Partners LP sought a shareholder vote that would have forced Kyoto-based electronics manufacturer Rohm Co. Ltd. to buy back $157 million worth of company stock. Brandes, which owns about 6% of Rohm, felt that the $3.24 billion (311 billion yen) worth of cash and securities Rohm held was excessive, and presumably was a drag on the performance of the company’s stock.

On Friday, shareholders sided with Rohm, and with Nipponkoa, in separate company meetings, and voted down the proposals of the two U.S. investors. But the fact that two U.S. institutional investors were brazen enough to launch these shareholder offensives in the first place says a lot about the new tenor of the times – and is clearly a sign of the things to come.

Things have gotten so bad that even Toyota Motor Co. (NYSE ADR: TM) – held out as the “gold standard” of Japanese business practices – is doing the unthinkable. Honorary Chairman Shoichiro Toyoda recently summoned 400 senior executives to a red-brick building in Nagoya – the very same building where his grandfather had manufactured textile looms a hundred years ago, according to a report last week by Bloomberg. The managers had likely expected a typically perfunctory update. Instead, the 84-year-old company patriarch berated the assemblage and scolded them for making some of the same mistakes that steered two of their U.S. counterparts into bankruptcy.

Shock amongst attendees doesn’t begin to cover the reaction. “How many times have you made a mistake?” Shoichiro said to Katsuaki Watanabe, the Toyota president who the month before had been told he was being moved aside earlier than planned so that Shoichiro’s son, Akio, could assume command of the carmaker.

Shoichiro suggested that Watanabe was so anxious to boost sales and profits that he’d emulated General Motors Corp. (OTC: GMGMQ) and Chrysler Group LLC – both of which are now bankrupt. Toyota, like the two American carmakers, allowed itself to become “addicted” to big expensive cars and trucks and forgot about the customer’s needs to save money, added Shoichiro.

But as aggressive and “un-Japanese” as the actions illustrated by these few examples seem to be, they potentially don’t hold a candle to the most pressing of all investor groups demanding action right now: Millions of angry Japanese housewives want to know where their husband’s retirement funds went.
So what does this mean for the typical investor?

In the overall scheme of things, perhaps not much – at least, not yet. But stay tuned: Chances are good that if this “rebellion” continues, we could see true change here in Japan for the first time in centuries. And that may open the doors for some real investment opportunities and true forward-looking vision.
For those opportunities – and for the many lessons U.S. leaders (both corporate and elected) should take the time to learn from Japan’s experiences – it’s worth continuing to watch Japan.

You can be certain that we will. And we’ll keep you updated.

Source: How Japan’s Unlikely Shareholder Rebellion Could Lead to Profit Plays for Western Investors

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