The Long Case for Autos 16 comments
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In the early 1980s, when US car companies faced mandates to increase fuel efficiency, high energy prices soared and, Chrysler faced certain bankruptcy, a silly mistake was made. The US government bailed out Chrysler. I took advantage, buying shares in Chrysler for $2.37 each. The shares went to $80 each in just a few years. But, the bail out was a disservice to the auto industry and to America.
Some 25 years later, history rhymes. The remains of Chrysler are all but bankrupted and Ford (F) and General Motors (GM)are bleeding profusely. Auto executives and union leaders are arm twisting legislators, begging for bailouts. The companies should be forced to file bankruptcy, but will it happen?
The market cap of GM is now $2.7 Billion, chump change for moneyed investors such as Warren Buffett. The market cap of Toyota (TM), that only sells a few more cars, is $106 Billion. Is Toyota really worth 39 times the value of GM? (Numbers provided by 24/7).
Ford has about 18 Billion in cash but it is burning cash rapidly. It has sold Land Rover and Jaguar and it may sell Volvo. Ford can survive without having to file bankruptcy but bankruptcy would allow Ford to get out from under mistakes made more than 25 years ago.
Those who like swinging for home runs should consider buying shares of Ford or GM before Obama's crowd makes bailout decisions. It is likely that Obama will allow Ford and GM to get their hands on some of the bank bailout money. In negotiations with Hank Paulson, GM was unsuccessful. GM wanted to have GMAC registered as a bank holding company, after all it makes car loans, mortgage loans and offers credit cards. Chances are that democrats will go along with bailouts because it will be the union contracts that will be saved.
Those who do not swing for home runs should stand ready to buy Ford and GM as soon as the shares jump off the bottom. Those who wait until after the ink is dry on the deal, assuming there is one, will pay at least 100% more than those who do not.
This morning government officials in England paid visits to banks that were not passing on the 1.5% rate cuts announced yesterday. Since the government there has taken stakes in these banks, it was an easy argument to win. Consumers in the UK can borrow money today at the lowest cost in 53 years. Some of those people will buy cars.
The US unemployment rate jumped again. Unemployment is up to 6.5%. During the 1980 debacle US unemployment was in double digits (as I recall). The important point is that central bankers are loath to stand firm in the face of dramatic job loss. Four months ago, central bankers around the world were joined in battle, fighting inflation. This week the Bank of England dropped rates not .25% or .5% or even .75%, but 1.50%! The new fight is against recession and investors should never fight the FED! If you are short something, you should cover. If you are sitting on cash, you should employ it. You should be especially concerned if you hold long bonds hidden inside mutual funds.
It is amazing but true that the US Central Bank is behind the curve. The market has taken US short rates to .25%. The FOMC will have to cut .75% to catch-up. As the years go by, with one Fed Chairman after another failing to follow the market 99% of the time like it should, the arguments for doing away with the FOMC make all the more sense.
The power hungry find the way to make their jobs more important than they are. As a friend of mine says, we should go back to the system in the days of George Washington, when part-time legislators went home for most of the year. A couple of months ago, the Bush administration could have loosened the screws on the banks with the stroke of a pen. Instead, thousands of banks are still being squeezed. The little guys' ears are being pinned back. The bluest of blue bloods do not want to let others join their private club.
With the powerful allow GM and Ford to go bankrupt? Not likely. Buy now and you will probably hit more than a four bagger. You will hit a grand slam with 10 bases loaded!
Disclosure: None
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This article has 16 comments:
Without one, won't make it.
People are not stupid. The know what's good for them.
Don't try to argue that it is unAmerican to buy foreign products.
It is unAmerican to make low-quality product here. We do that, it will be self-destructive. The Big 3 must know that by now. The unions too, they are the main reason in this mess. No excuses.
The problem with GM is debt. It has way too much of it. GM would have to be as profitable as TM for about 20 years just to reach a book value of $0. I just don't see that happening.
The best thing one could do with GM is laugh at the shareholders, give the senior creditors a few warrants, shut down most of the brands, dealers, and production, and focus on two things: selling the Volt in the western world, and beating Tata to Africa. There isn't really much else for this company to do other than die.
Electric cars have 59 parts !!!
Gas cars have 1000's of parts that means jobs to make each part.
The banks have agreed to alter the headline rate, but the first thing they would order on returning to their offices is to neutralise it.
For the small proportion of loans that they have to make on those terms they will seek to alter the conditions, for instance with much higher deposits and stricter credit checks.
Most mortgages do not come under those terms anyway.
It just means a bit more window-dressing for the banks, the real cost to the customer of their loans will continue to rise, whilst the Banks take money from the Treasury at favourable rates and re-capitalise from the money they have lost in sub-prime, derivatives and developing countries.
Certainly the VOLT isn't the answer. It will cost $45K when and if it becomes available, will be in limited production, have a range of 40 miles, and is at least two years away.
More compacts and NGV's may be the answer, but so far Detroit doesn't see it that way. They are introducing new trucks and SUV's instead.
Maybe if they run out of cash they will begin to restructure themselves as going concerns. But the new Congress has other ideas, and will attempt to use taxpayer financing to keep them afloat as they are.
Even this will have to end eventually. Once this happens, maybe they will become profitable and good investments again someday.
I would think that the real case for buying GM or other domestic auto makers is not just tied to the potential bailout, but to the potential that Obama's energy plan will have a significant amount of relevant to them -- subsidies for them to re-tool their plants, and other financial incentives to make them competitive against Toyta's hybrid monopoly.
It still shocks me that companies like Ford and GM cannot make a legitimate competitor to the Prius in this day and age of superior American technology.
Good luck.
LOL. In your dreams. I can name 59 parts in every car, before even getting to the drivetrain.
If you want to know how simple and easy electric car building is, go check out Tesla's story. Hurry, because they may not be around for much longer.
On Nov 10 01:30 AM James Wilson wrote:
> There is no case here !!!!
> Electric cars have 59 parts !!!
> Gas cars have 1000's of parts that means jobs to make each part.
>>>The market cap of Toyota (TM), that only sells a few more cars, is $106 Billion. Is Toyota really worth 39 times the value of GM?
I have no idea whats going to happen but if you think GM is going to survive your taking much less risk buying the bonds and getting 30% to wait. Either way welcome to the craps table.
On the first point, each of these companies will be bankrupt early next year. If that happens before a bailout bill is passed, or some merger is forced upon them a la Bear Sterns, you can expect that the bailout will be limited to the pensions and union healthcare funds and maybe senior bondholders - not the common stock holders. Otherwise, I can easily imagine a Fannie Mae style government conservatorship that wipes out equity holders and perhaps shaves bond holders. It's risky and unpredictable betting on such events. In the best-case scenerio, one or more of the big 3 survive and continue losing money and producing crappy products for a couple more years.
On the second point - mortgage losses are expected to continue or increase through '09 so lenders will have no ability to finance the subprime borrowers that the big 3 depended on, much less the junk debt of the big 3 themselves. If you think otherwise, you could swing for a home run with certain financial companies without the additional risk of depending on #(1) also occurring.
Wasting time trying to game these shares is about as productive as analyzing the odds of winning at casino games. Why risk losing 100% right now when you can buy GE, DB, RIG, UL, or ERJ at huge discounts? We're talking about insolvent debt-based companies with inferior products and big disadvantages competing in a market with ship-shape leaders such as Toyota and Honda. With so many better investments on sale at bargain prices, why speculate at such poor odds? Why spend the time doing due dilligence when the odds are against you anyway? What is a systematically flawed money pit worth? Nothing, as decades of automaker and airline shareholders have learned.