The Chinese stock index, the Shanghai Index, dropped almost 9% yesterday. This drop was the most in 10 years. In reaction, the rest of the world’s indices plummeted. This development highlights the growth in global trade and the economic links we have with each other. If one country sneezes, it will be felt worldwide. For the portfolio manager, there is really no place to hide. If the United States slows down, major exporting countries such as China and Japan could be affected also. Not too long ago, it used to be that if one country’s economy slows down, the fund manager invests in another country with better economic prospects.

Ever since the end of the Cold War, globalization of commerce has exploded. Just look at the relationship between China and the United States. The Chinese produce competitively priced goods that Americans want. In return, the Chinese purchase American issued debt so Americans can continue buying Chinese made goods. What China gets out of this relationship is they create much needed jobs for their citizens. Whether we like it or not, we are joined at the hips.

It seems that every week, there is a private equity firm buying out a major publicly traded company. The latest is TXU Corp, a Texas based utility for $45 billion. Thanks to willing investors and creditors, private equity firms have the cash to take out public companies at a premium. There is even talk of Chrysler being targeted by these investment firms. From an operating point of view, there are certain advantages. These companies no longer have to pay millions of dollars for meeting listing requirements. The Sarbanes-Oxley act has pushed up considerably the accounting costs. Instead of trying to meet quarterly profit targets to please shareholders, these companies can focus on building up its value over the long term.

For now, the hot money is with private equity firms and hedge funds. Like any good investor, there is an exit strategy. Some of these companies will go public again if the price is right. Because these companies do not have to disclose to the public, there could be problems that we are not aware of. Some of these companies will blow up. Remember, markets always go in cycles.

Airbus was suppose to represent the emergence of a united Europe as an economic and technological tour de force. This airplane maker is a partnership between France and Germany. These two countries were suppose to lead a united Europe into the new era, becoming a global counterweight to world’s only superpower, the United States. Not too long ago, Airbus was winning orders against its arch rival, Boeing. It seems that this European vision will play out.

How times have changed. Airbus is expected to go through a painful restructuring that could result in a layoff of 10,000 jobs. Product delays of the key Airbus civilian aircraft is resulting in lost sales and cancelled orders. Lost profits are forecasted to be more than U.S. $5 billion. The latest blow to this European consurtium is British Airways is buying Boeings. Needless to say, Boeing is right now eating Airbus’ lunch. They have the products that the market wants and can deliver.

The needed corporate restructuring is being delayed by political wrangling between the French and German governments. Nobody wants to suffer disproportionate job cuts in their countries. Airbus employs 57,000 workers in these two countries.

The U.S. may still be the world’s only super power but they should be checking their rear view mirror. The Chinese are coming. For any major economy to continue to prosper, there must be access to natural resources, particularly energy. China understands this very well. As a result, the Chinese have been very active in establishing political and economic relationships in Africa. Africa is abundant in natural resources ranging from copper to uranium.

Where as the West avoids doing business with African leaders who brazenly abuse human rights and where their governments are corrupt, the Chinese are more than happy to do business with these people. For these leaders, when dealing with the Chinese, you don’t get lectured on social and economic issues, you get weapons to support your army, you have an ally at the United Nations who will veto any sanctions proposed against you and you get money no questions asked.

Not suprisingly, Western companies are finding it difficult to compete with the Chinese in some of these African nations. They simply cannot match what the Chinese are offering. The United States is becoming less of an influence in this continent.

As the saying goes, two wrongs don’t make a right. If the rumour of GM interested in buying Chrysler is true, what is GM management thinking? Of the big three, GM at the moment is the most promising. They are in a middle of a turnaround. The products they have actually look like it could be hits with the market place. Looks like GM finally figured out how to make vehicles that the public actually wanted.
But why buy Chrysler? It will be a massive distraction for GM managment. This purchase could take years to resolve if ever. Besides trying to integrate operations, they have to deal with the UAW and the workers’ medical liabilities. GM was already criticized for having too many divisions. If they buy Chrysler, they will have more divisions to contend with.

Meanwhile, don’t expect the competition to stay put. Besides Toyota, Hyundai is growing sales too. GM cannot afford to be distracted with a time consuming acquisition. They should forget about this madness and focus on profitably building reliable vehicles that people want. It seems they’re more than halfway there. Don’t risk it now.

After Chrysler’s Valentine massacre of jobs, today Hershey is announcing cuts to their work force of 1,500. The jobs instead will be re-located to Mexico. Normally, I would be outraged at American jobs going offshore. With the economy going strong despite the housing weakness and the unemployment hovering close to 5%, I cannot be too angry at what these corporations are doing.

Think about it. These companies stay strong and profitable because they make the hard choices to remain competitive. Short term, many Americans and their families will be displaced because of these job losses. Longer term, these companies continue to thrive and re-invest back into the U.S. economy. Americans are known to move where the opportunities are. In the end, the markets correct itself. It’s because of this flexibility demonstrated by Americans and the businesses that allow the U.S. to overcome many economic challenges. Despite the housing slowdown, despite Katrina and despite the Iraq war, the United States continues to thrive.

On the side of the spectrum, France has extensive labor regulations designed to protect the worker. It is hard for companies to shed employees. They have a mandatory 35 hour work week. Are these rules helping the French citizens and their economy? Not likely. Unemployment is running around 10% and economic growth is almost zero. With these regulations, companies are simply not hiring workers. Many of the French corporations are instead investing outside of France due to the better business climates. Guess which country is one of their top destinations, the United States.

Thanks to management incompetence, Chrysler is slashing 13,000 jobs. Despite the changes in consumer tastes, Chrysler was still pumping out gaz guzzling trucks for the markets. I guess somebody forgot to tell the executives that the price of gasoline was no longer at a buck a gallon. As a result, the dealers’ lots are brimming with unsold Chrysler trucks. Worse still, Chrysler does not have many small cars that are currently in hot demand. Their smallest is the Caliber. What the company needs right now are sub compacts to go up against the Japanese imports.

The current auto star Toyota is no angel when it comes to the environment. They are not shy about producing gas guzzlers like the Land Cruiser either. At least they build products across the spectrum from full sized trucks right down to the mini cars. The problem with Chrysler is they put the bulk of their product development money into trucks. The worst part is Chrysler already went through a corporate restructuring. It’s obvious they haven’t learned from the past. For the sake of American jobs, I hope they pull it through.

There are rumors circulating this morning that the world’s largest aluminum company could be a takeover target. The reported buyers are the global mining giants BHP Billiton and Rio Tinto. Thanks to strong demand from developing Asian countries, base metal prices have been very healthy and is expected to stay strong in the forseable future. Because of the healthy pricing environment, the major mining companies are flushed with cash. Funding the purchase will not be an issue for many of these companies.

The only thing that can upset this optimistic scenario is the world suddenly veers into a recession. The current economic cycle is lasting longer than most people have expected. Strong growth from China and India, companies flushed with cash and investors (particularly private equity money and hedge funds) are fueling mergers and acquisitions activity. Like anything else, there will be an end. Enjoy the good times while you can.

Talk about the sign of the times. Regardless of political stripe, it seems all politicians are going green. Everybody is talking about using more biofuel to lessen dependence on foreign oil, particularly from the volatile Middle East region, and of course to fight climate change. The reality is more biofuel usage is probably harming the environment.

Biofuel comes from organic material such as sugar cane and corn. To produce these crops, a lot of energy is expended. In some cases, producing biofuel could require more energy than producing a barrel of oil. Furthermore, these biofuel initiatives could encourage more deforestation. To create more farmland, more forests are razed. This is what happening in Indonesia. Who can’t say that the Amazon forests won’t be chopped down so farmers can grow more sugar cane. So net net, the world will end up with less carbon absorbing forests, higher emissions from burning forests for farmland and more emissions from the energy expended to produce the needed crops. This doesn’t take into account that the world does not have enough clean water. Water is needed to grow crops.
The notion that biofuel is a reliable clean source of energy is pure fantasy. To clean up our environment and cut our reliance on foreign oil, we need to conserve. We need to adjust the way we live. This means switching to more fuel efficient vehicles and living in smaller  homes.

BHP Billiton is an Australian based resources company. They are involved in almost all the natural resources. They operate in energy, energy coal and base metals. The big news is the company is announcing that they are buying back $10 billion US of stock, three times more than what the market was expecting. Significant news for a company whose market value as of yesterday’s close was $130 billion US.

Even after the big purchase of shares, the company still has enough cash to fund and expand current operations and even make possible acquisitions. BHP’s actions means that they expect the markets for commodities to remain strong. Even if the prices of commodities do correct, it will still remain near historically high prices.

BHP expects the economies of the developing countries such as China and India to remain strong. Due to billions of people looking to improve their standard of living, the company’s outlook for commodities is still positive. So far, the naysayers have been proven wrong about a major slowdown in the global economy. Thanks to the increase in global trade, more and more countries and its citizens are reaping the economic benefits.