Bailouts Affect Industry Winners Too

 |  Includes: AIG, CNA, F, GKM, GM
by: Charles Goldblum, CFA

In November, I attended the Loews' Analyst Day, where the management of publicly-traded CNA Insurance (NYSE:CNA) announced that pricing in the property & casualty insurance business is suffering partially because AIG is aggressively price-cutting to keep existing clients. So, AIG implodes due to its poor investment risk management, the government supports them and the effect is deflation which hurts the rest of the property and casualty industry, who presumably pursued a sounder investment policy.

The government and the FDIC is trying to support the housing market by offering loan modifications for delinquent borrowers. If you can pay your mortgage, no help for you... Good behavior punished for the greater good of fewer foreclosures and a supported housing market...

On Monday, GMAC (NYSE:GKM) raises $5 billion from the U.S. Treasury to enable the company to recapitalize itself and offer aggressive new loan terms for new car buyers. So the U.S. Treasury supports the underperformers (GM, and likely Chrysler and Ford (NYSE:F) to follow) to compete against the other car manufacturers, who've been gaining share by offering vehicles that consumers want.

Following this logic, completely hypothetically, if FedEx (NYSE:FDX) got a bailout, UPS would suffer, and if Circuit City got a bailout, Best Buy (NYSE:BBY) would suffer. While I'm guessing we're closer to the end of the bailout-phase of this downturn, it's fair to say if you see one coming to another industry, sell the winner in that industry, because they're sure to suffer, too.