Buy Ford, Short GM 20 comments
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The White House is coming to the rescue, there is no doubt about it. This gives President Bush the opportunity to go out with a bang and the chance to salvage his Presidency to more reasonable levels. It's a bit ironic that his actions are contrary to his party's ideals of laissez faire politics, but he is doing the right thing. Presidents seem to get too much criticism when things are going bad and too much praise when they are going well. In all, President Bush has done a President's most important job exceptionally well: "Keeping us safe in times of war". Thank you Mr. President!
Monday morning quarterbacking: Ford's (F) decision to raise capital two years ago by borrowing against its real estate holdings has paid off in a big way. Its liquidity has improved enough to enable it to fund its operations over the next year despite horrific economic conditions. It has the financial wherewithal to weather the storm and come back again to fight another day. The cycle is nearing a low ebb, and will recover again, as it always has. GM unfortunately didn't do the same thing, and with a dire liquidity situation, it will require government assistance before the year's end in order to continue funding operations.
GM dilution is inevitable: It appears out of the first $14 billion doled out, GM will probably receive $8 billion and Chrysler $6 billion. The cash infusion to GM will represent almost four times the company's current market cap of $2.41 billion. If you do the math, GM's shares outstanding could swell nearly fivefold, from 610 million to 3 billion shares, with the government ending up with an 80% ownership position. If you divide GM's current market cap by its probable new share total, you end up with a disappointing 80 cents per share. Although a GM chapter 11 filing is remote, common shareholders will probably have to endure a very long wait before the share price rebounds (if it ever does), due to its heavy debt load and prospects of further equity dilution.
Ford versus GM: Ford shares are still selling at more than three times their November 1981 lows of about $1.05 per share. GM stock has posted a new sixty year low. The prospects of $1 per gallon gasoline, further UAW concessions and ultimately the end of the recession in 2009, are encouraging developments for the industry. It will get healthy again, and as a consequence, Ford shareholders could end up with some rather handsome returns.
Bottom line: GM shares have already rallied more than 50% from their lows, reaching overbought conditions. Shorting the shares at this juncture seems prudent, with a logical "buy to cover" target price of $1.50 per share. Ford shares are also a bit overbought (they have almost tripled from their lows), so deferring buying, until a correction to the low $2 area, seems a reasonable strategy. In ten years, it would not be surprising to see Ford shares trading near the $15 level. GM is another story, it just has too much baggage to make it a compelling investment.
Disclosure: No positions.
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This article has 20 comments:
December 14, 2008
A “No” vote on the loan package for Detroit’s Big Three was a chance for the GOP senators from the South who led the charge against the legislation to kill two birds with one stone. Not only could they strike a blow to the United Autoworkers, a traditional adversary, but they could also advance the economic interests of their own states. Unfortunately, these senators voted against the economic interests of their own country.
Foreign automakers have spent billions building plants in the states these senators represent. Should America’s automakers go down for the count, Americans would still need cars and foreign automakers would step in and spend additional billions building more plants in, you guessed it, the states of these very same GOP senators.
Christopher Hayes of The Nation magazine was interviewed on MSNBC’s Countdown with Keith Olbermann show last week and pointed out what he called “the worst-kept secret in Washington.” Hayes was referring to the glaring double standard that these Southern senators, Alabama’s Senator Richard Shelby in particular, have displayed.
“They’ve been throwing taxpayer dollars at Toyota for years in Alabama and no one raises a stink about that” Hayes said. In fact, as Olbermann noted, Alabama alone has given more in tax subsides per job to foreign automakers than Detroit was asking for in the bailout plan to save jobs at American companies.
The Big Three haven’t been competing against Toyota and Honda and Nissan; they’ve been competing against Japan. Unlike America, that nation actually has an industrial policy. While our government talked about the virtues of free trade, the Japanese government worked hand in glove with their automakers to help make them the world leaders.
Japan is aggressively trying to do with autos what they did with consumer electronics – undercut American manufacturers, drive them out of business and capture the American market. Japan heavily subsidizes their automakers, they fund their research, they manipulate their currency, and they erect trade barriers that make it virtually impossible for American automakers to export to their country. Think the fact that Pacific Rim nations buy up 80-percent of our government debt has something to do with keeping our government from enacting policies to level the playing field? The bank that holds your mortgage doesn't dance to your tune, you dance to the tune of the bank that holds your mortgage.
I don’t care what you’re manufacturing or if your CEO is Albert Einstein, if you are competing against a country that actually has universal health care, while you’re forced to add $1,200 to $1,500 to the cost to every unit you manufacture to cover your employees’ health care, you’re not going to be competitive. If your country doesn’t rebate the value added tax when you export your product while your competitor’s country does, not only will you be priced out of their market, your foreign competitor’s government subsidy will put them at a tremendous price advantage on your home turf.
Now, thanks to the likes of Senator Shelby, the Big Three are not only competing against Japan, they’re also forced to compete against their very own government.
The fact that nothing is made in America anymore is a familiar lament of Americans. But here’s what Americans don’t seem to get: what little is still being manufactured in America is increasingly being made in foreign-owned plants of foreign-owned companies.
I realize that there is a long history of sharecropping in the South, but I see no advantage to we Americans becoming sharecroppers in our own country.
Hey, Southerners: Detroit 3 helped you to survive
BY TOM WALSH
FREE PRESS COLUMNIST
When Hurricane Katrina slammed into Louisiana and Alabama on Aug. 29, 2005, the automobile companies of Detroit did not harrumph that the gulf coast should have been better prepared.
They didn't sit back and wait for New Orleans to submit a detailed plan for future repair of the ruptured levees.
General Motors Corp., on Aug. 30, donated $400,000 to the American Red Cross 2005 Hurricane Relief Fund, pledged to match up to $250,000 more in employee contributions, and sent more than 150 vehicles to the stricken area for use in relief work.
Ford Motor Co. and the UAW quickly made a joint donation of $100,000 to the Red Cross. The Chrysler Group gave $150,000 to the Red Cross and $200,000 to local New Orleans charities. DaimlerChrysler Services chipped in $200,000 for the Red Cross and pledged to match employee donations up to $50,000.
The three Detroit auto companies together gave more than $18 million in cash and vehicles to the Katrina relief effort in the ensuing months. No strings attached.
The U.S. Senate’s most adamant naysayers about whether Detroit deserves rescue loans should have thought about that before now. It might have made Thursday’s futile wrangling over a compromise to get $14 billion in emergency rescue loans for GM and Chrysler a bit less tortuous.
U.S. Sen. David Vitter, R-La., for one, might have dialed down his earlier rhetoric.
Vitter said Wednesday that he plans to vote against the rescue because, in his words, it is "ass-backwards" to give money to the distressed companies before Congress sees more detailed survival plans.
Sen. Richard Shelby, R-Ala., should think about Hurricane Katrina, too. He has threatened a filibuster against the bill, calling it "a bridge loan to nowhere" and stating that Detroit's automakers should undergo a fundamental restructuring before they ask Congress for money.
None of the logical arguments made by, or on behalf of, Detroit's auto industry seem to resonate with certain congressional critics.
Not the fact that GM, Ford and Chrysler have slashed billions of dollars in costs. Not the fact that they have the nation's top-selling pickups and minivans. Not the fact that they have lots of high-mileage vehicles and more on the way. Not the fact an auto company bankruptcy would have a horrible ripple effect, wiping out scores of suppliers and making hundreds of thousands more U.S. workers jobless.
No, to the most adamant auto-rescue opponents in the Senate, Detroit doesn't make cars people want. It's a dinosaur not worth preserving.
Could the opinions of these senators be colored by the fact that the foreign-owned plants of Toyota, Honda, Hyundai, Kia, BMW, Nissan and Volkswagen -- which compete with the Detroit Three -- are located in their states?
Nah, let's not even go there.
Let's just say that since logic hasn't worked, we should fall back on a simple moral argument.
If you see a fellow American is drowning, gasping for air, do you quiz him for a while about whether he's drunk or why he never learned to swim better? Or do you throw him a life buoy and ask questions later?
That, it seems to me, is where we are with America's car companies.
You have done nothing and failed them, senators.
So now it's up to President George W. Bush and Treasury Secretary Hank Paulson to, hopefully, rush in with emergency aid from the $700-billion Troubled Assets Relief Program.
They could still hold the Detroit Three's feet to the fire afterward, empowering a strong auto czar to bring all stakeholders together to forge business models for these companies that can withstand future shocks.
The only way I might be tempted to buy these companies would be if they somehow managed to shed their pension liabilities, which would require a bankruptcy, and matched the production costs of Toyota, Hyundai, and Honda through other cuts. That won't happen for political reasons, therefore the permanent impairments that led these companies to insolvency will continue to exist and they will continue to whither away. Given the lack of long-term vision or even short-term awareness that I saw during the bailout hearings, it looks like nobody (Congress or executives) has any higher ambitions for these companies than to delay the inevitable and to let them wind down slowly rather than quickly.
Both companies are massive value traps. What excuse could we have for paying too much for them when there are plenty of well-managed companies out there at single-digit PE's? Like RIG, HTZ, LXU?
Yeah, he's done great. Oh, except for that one time when terrorists flew planes into the WTC killing 3000 Americans. Oh, and also that time he attacked a country that had nothing to do with Sept. 11th, resulting in the death of over 100,000 Iraqis and 4000 American soldiers.
Yep, George Bush will be remembered as a great president...as long as everyone has their memory wiped this coming January.
I am ready to pay 20 cents (I am serious ) more than market to short if i get available shares to short. Please let me know if any broker has short shares available for GM .
Even though you can 'sell calls' the best CALL you get is only 80 cents . Iam interested in pure short , appreciate any advise
I've had no luck either with getting a short position in place on GM. I was short in August and closed out when I went on a month's holidays....in hindsight, I never should have closed it. That short would have paid for many more holidays. BTW, I'm also trading with IB. I've had to contend myself with buying Puts but they've worked extremely well so far and the vertical Bear Put Spreads that I used on the Dec and Jan expirys went very well. Good trading!