Analytical Wealth

It's no secret to anyone who has read this blog on a regular basis that I've been pushing for GM to declare bankruptcy for months now. The reason being that I felt that the bailout and restructuring efforts were just prolonging the inevitable, and because I believed that it was the fastest way to separate the good parts of GM from the bad. While some may see this as a dark chapter in GM's history, I personally feel that it's really just the first step towards the company's rebirth.

However now that the bankruptcy is moving forward the question offered is: will GM be used to service the interests of the various stakeholders in the company, or will they instead work together and focus on what needs to be done to make the company profitable again?

Just think about it: GM's problem as a company was never it's ability to sell cars, as for nearly all of its history prior to the bankruptcy it always sold more cars than anyone else in the U.S. if not the world. Instead their problem was that their overall operating and capital structures prevented them from being able to sell cars efficiently, due to having service a myriad number of liabilities, labor costs, excess dealer capacity, costs related to unneeded manufacturing capacity, etc. The problem was never cars that people didn't want, fuel efficiency, reliability, styling, etc, instead it was always efficiency. This is not to say that fixing those problems wouldn't help, but to say that the company would've been profitable in spite of them if it had been structured properly.

Money can hide a multitude of sins and the problems that destroyed GM were problems that always existed, but were simply being hidden/subsidized by the company's hey day when it had a multiple of its current market share, SUV sales were higher, the economy was stronger, etc.

In other words the Obama Administration and the UAW have to make profitability their ONLY objective, not green cars, saving jobs or any other socio-political goals. Because only when the company is profitable will it have the muscle to focus it's efforts on green cars, higher fuel efficiency and job creation. Otherwise GM will turn into a de facto GSE that is used to service a myriad number of social-political interests, and the end result will not be pretty.

After all just look at what happened with the mortgage GSEs.

When tackling the problem of fixing GM the Obama Administration and the UAW need to ask themselves the following: companies like Honda, VW, Subaru and others have run profitable automaker operations in the U.S. despite selling a fraction of the number of cars as GM, so how do we structure GM in such a way that it doesn't need to have 40% market share to be profitable, and could instead be profitable with say 7-10%?

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 11:59 AM | Permalink | Comments (0) | TrackBacks (0)

Some quick thoughts on Toyota and their recent profitability issues:

Toyota's profitability issues seem to be a classic case of "money hiding a multitude of sins", as their success caused them to abandon some of the company's key values with respect to efficiency, keeping things simple, etc. A WSJ article I blogged about a few months ago covered some of these issues, especially with regards to various aspects of the manufacturing process that  were really instances of "engineers at play", more so than adding value and efficiency. All of this leads me to believe that the economic downturn will actually benefit Toyota in the long-run, as it's forcing them to confront various internal issues before they become even bigger problems down the road.

Overall Toyota's problems seem to be more of a case of needing to remove some bad apples from the system, as opposed to widespread systemic problems that require a re-visioning of how they company does business. In short: I view Toyota's problems as nothing more than short-term hiccups, which will probably benefit the company by forcing them to adopt a more disciplined decision making process moving forward. As a result I think that they should be able to return to profitability relatively quickly.

Toyota may very well be a classic case of a company's short-term problems allowing investors to pick-up their stock on the cheap.

Disclosure: while the author didn't own a position in any of the companies mentioned in this article at the time of publishing, he is considering investing in the companies or sectors mentioned in this article. In keeping with the typical rules around investment timing and disclosure, any potential investments would occur 10 trading days after the original publishing date and the position would be disclosed in future articles discussing the relevant companies. The ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 07:20 AM | Permalink | Comments (0) | TrackBacks (0)

The usual mixture of news stories and other tidbits I think you may find interesting, today's edition is primarily composed of item from last week with only a couple of items from this one. 

Let's start off today's mix with some humor, namely Stanley Bing's offer to sell some of his toxic Assets to the Treasury. In keeping with this theme I would like to sell the treasury some of my used cassette tapes from the 80s that I feel are simply undervalued in the current economy, for I am confident my Bon Jovi, Def Leopard, and White Snake tapes will all be worth billions some day. At least that's what my valuation models tell me.

Here is a look at the news that the Treasury is instructing GM to prepare for a "surgical bankruptcy". I won't say much about this one since nothing is official yet, except to say that the old model is dead, the Government can't support GM indefinitely and the company would be wildly profitable if it could free itself from its myriad liabilities. At this juncture bankruptcy is the only option that will allow the company to make this happen, and while it may be unpleasant it's better than keeping the company on life support while waiting for their ill fated restructuring plans to work.

Despite a law that was designed to curb bankruptcies, filings have been surging in recent months. I suspect that the reason for this is that creators of the law didn't quite understand why people file in the first place, in terms of it being more driven by unfortunate life events than irresponsibility with debt per se. The other issue is that some people are so overburdened with debt that they are probably able to file in spite of the law, even if the primary cause is in fact the very irresponsibility the law was designed to prevent.

Here is a look at the some of the changes Chase is going to make to their WAMU branches , in particular they're removing the "customer friendly" elements of the branches and implementing a more traditional branch layout.

As a WAMU customer I can't say I support this move, as the customer orientated layout and the overall emphasis on customer service was something I liked about WAMU. When a Chase executive claims that the traditional layout is superior in every way, I think he's missing the point as far as what WAMU a leader in customer service. In an era where people generally hate banks, I think it would be wise for Chase to find a happy medium between WAMU's friendlier branch layout and the more efficient traditional layout.

In general the banking industry needs to stop acting as if it's doing its customers a favor, and start acting as if they truly want our business.

Looking at car sales woes across the pond: there is a recent trend in Britain where used cars sometimes cost more than new ones, due to the amount of incentives that are being used to sell new cars. I know I keep harping on this but the Auto Industry needs to step back for a minute an ask itself a fairly simple question: "Has any other industry gotten itself out of trouble by selling its products for deep losses, especially during a time of economic difficulty?"

Here is a look at a NY Times sector snapshot for the Insurance Industry.  

A NYC lawyer has committed fraud that while a fraction of the size of Madoff's, was undoubtedly several times more "Brazen" according to Fortune Magazine. It's definitely an interesting read, particularly as we enter an era where more and more of these types of frauds are going to be discovered.

Here is a link to a section of the Financial Times web site that is dedicated to the situation in Detroit. I don't have much more to say on the subject for now I just hope that the Chapter 11 plans move forward, and that everyone involves recognizes the fact that GM & Chrysler can be very profitable if you are able to separate the good parts of the company from the liabilities that are dragging them down.

Speaking of Detroit: here is a look at the real life economics around the proposed government plan to pay bonuses to people who trade in their gas guzzlers/clunkers/older cars, for newer more fuel efficient American cars. It turns out that in many cases it's cheaper for the person to keep their current car, either due to the bonus being less than the trade-in value and/or it being cheaper to keep the old car than to take on the debt from a new car purchase.

In the end I think that this program's success will hinge on people buying into it more from a psychological perspective than a mathematical one. Still, I have to say that it's a bit disturbing to see a government program that is basically trying to incent people to make bad financial decisions.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 02:41 PM | Permalink | Comments (0) | TrackBacks (0)

A recent Bloomberg article discussed how GM and Chrysler have been using government aid to "open-up lending" and mitigate the slide in automotive sales: 

(From Bloomberg): "April 6 (Bloomberg) -- U.S. sales are “starting to open up” as $7.5 billion in aid to the lending arms of General Motors Corp. and Chrysler LLC eases a loan logjam for buyers that helped drag the industry to its worst slump since 1981.

The automakers’ sales declined less than analysts expected in March after GM affiliate GMAC LLC received $6 billion from the U.S. Treasury in December, allowing it to loosen lending standards, and Chrysler Financial Corp. got $1.5 billion in January to foster borrowing for retail transactions.

Tight credit had combined with low consumer confidence to slash new-vehicle purchases. While it’s too soon to expect a robust recovery, dealers and others say, the federal support is helping stabilize the industry.

“It’s starting to open up,” said Alan Helfman, vice president of River Oaks Chrysler Jeep in Houston, who estimates he lost a quarter of his November and December sales to rejected loan requests. “We’re starting to be able to sell more cars. It’s not like it used to be yet, but it’s getting better.”

U.S. auto sales tumbled 37 percent in March as record incentive spending and the availability of credit to higher-risk buyers helped mitigate the effect of the highest unemployment since 1983 and consumer confidence near a 42-year low…

...Late in March, GMAC began lending again to buyers with credit scores of less than 621, after stopping in October.

Helfman, the Houston dealer, said about 25 percent of buyers had loans rejected last month, a decline from roughly 40 percent in the fourth quarter of 2008. The usual rate is about 10 percent to 15 percent, he said.

‘Perfect Paperwork’

“You still have to have perfect paperwork: All the facts had better match up,” he said. “At least they’re lending.”

Auto sales last month ran at an annualized rate of 9.86 million, an improvement from the 9.1 million rate in February that was the worst since December 1981. The March total also beat the 8.8 million estimate of 8 analysts surveyed by Bloomberg. U.S. sales were 13.2 million in 2008 after averaging about 16 million this decade."

A couple of things about this:

Halting the Slide : turning in abysmal results that are slightly better than the analysts expectations does not a positive trend make, anecdotal evidence aside it's far too early to call this a positive trend just yet. Especially when it's quite likely that the economy will continue to worsen through the end of the year, especially with respect to unemployment.

Lending : I have to admit that I cringed when I read the passage about  GMAC ending its prior moratorium on lending to consumers with FICO scores below 621, call me crazy increasing your loan originations to those with bad credit (especially in a weakening economy) sounds like a recipe for future disaster. This is especially true when you factor in GM's new "payment protection plan", which will cover the loans of people who lose their jobs for a period of nine months. Just think about it: lending to people with FICO scores below 621 (let alone 650 or 675) + a worsening employment situation = GM taking it on the chin with this one.

If you're going to cover people's payments if they lose their jobs you need to start lending to higher quality customers, not lower.

Overall while this is undoubtedly good news for the dealers, I'm not sure that it's truly good news for GM in turns of contributing to the company's turnaround. Just think about it: GM was losing money per car sold during the credit boom when sales volumes were much higher, and the company wasn't offering the same level of incentives. How do you think GM's profit potential per car looks now, in the era of greater sales incentives, low interest rate financing, payment protection and the new program that protects your car's resale value? The company isn't exactly giving cars away right now, but it's getting closer and closer by the minute.

While the company's various cost cutting initiatives will mitigate the financial impact of the above, the fact remains that no company ever turned things around by selling their products/services for a loss. Detroit needs to understand that it's better to sell fewer cars for a profit, than a greater number of cars for a loss. "Making it up with volume" isn't going to work in an environment where volume is rapidly decreasing.

You can read more here.

Sources:

Bloomberg.com: "U.S. Sales 'Open Up' on Aid to GM, Chrysler Loan Arms" -- Jeff Green, April 06, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 09:29 AM | Permalink | Comments (0) | TrackBacks (0)

In light of some of the recent news on GM I figured it would be a good time to clarify some of my comments around GM needing to become more efficient to survive, because they could easily be misconstrued as simply advocating for more cost cuts.

Despite all of the posturing around new restructuring plans, the fact remains that GM's basic strategy (for the last 9+ years) has been to do the following when they get into trouble: cut costs, lay off workers and slash prices/offer incentives in an effort to maintain market share/sales volume. The problem with this strategy is that all of these activities arguably cancel each other out, in that they're cutting costs while simultaneously slashing revenues at the same time.

The other issue is that when GM was losing money in '05 (for instance) why didn't they institute some of the more recent (and more drastic) cost cuts, attempt to drastically restructure their debt, etc?

Answer: GM wasn't really trying to change their entire business model to one that is a better fit for the market, they were simply trying to find the cost savings that would enable the company to survive until things "got better".

See the difference? At the moment GM seems more focused on trying to find a way to keep the old model alive, than they are on trying to build model all together. Management needs to confront the reality that the market can longer support the old way of doing business.

Simply put: if Honda can be profitable with less than 1/2 of GM's market share, than the only thing stopping GM from being profitable is their business model.

However getting there means a significant mental paradigm shift in terms of moving from thinking in terms of saving the old model, and thinking in terms of scrapping it and building a new one.

One of the main pillars of this model would have to be an emphasis on making a profitable sale, as opposed to the current model of selling cars at a loss just to get them off the lot/to maintain market share. At this juncture there is no point in buying market share because it doesn’t get you anything in the long-run, aside from positioning the company as the low cost provider, and hurting your brand. GM has to change the way it does business so that selling cars at a loss is no longer the best alternative.

When I say "GM needs to become leaner more efficient" I'm not really talking about cost cuts per se, I'm talking about revisioning their entire business model to one that can actually be supported by the market. At the moment GM is operating in an automotive market place where it's dominate market share isn't translating into profits, whilst smaller competitors are still profitable and viable despite the rough conditions facing the entire auto industry right now.

GM (and Detroit's for that matter) future survival isn't dependent on making the right cost cutting decisions, it's dependent on moving to a business model that can actually be supported by the marketplace. At the end of the day all of the domestic automakers sell enough cars to be wildly profitable, the trick is in changing the way they do business so they can actually reap the benefits of those sales.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 12:58 PM | Permalink | Comments (1) | TrackBacks (0)

The usual mixture of news stories and other tidbits I think you may find useful, this edition is a mixture of items from today and earlier in the week.

The Obama administration's automotive task force will announce their plans to save Chrysler and GM on Monday. For now I won't comment much further until the plan comes out, but I will say this: Chrysler & GM need to start thinking in terms of sizing themselves to a smaller market, as opposed to the current strategy of reactionary cost cutting. The former strategy positions them for long-term success, whilst the latter strategy is only a temporary band-aid.

Here are some details related to the treasury's new plans around regulating the financial sector:  first here is some coverage from the WSJ, and here is a look at the full text of the Treasury Secretary's comments.

For now I'll just say that having a great plan is one thing but being able to actually execute on it is another, let's not forget that our current regulatory framework was more than capable of preventing a lot of the problems our banking system is facing. As a result it's not so much the powers given to regulators and the framework they have to work within, it's a question of whether or not they'll do the right thing when the opportunity presents itself.

In any event I'll dig into the proposal over the weekend and provide some additional analysis next week.

Here is an interactive graphic from the FT that provides some details on the treasury's plan to buy up toxic assets with the help of private investors.

Instead of worrying about the bonuses being paid to various AIG executives, perhaps the government should pay more attention to the fact that the executives who "managed" the risks that got the company in trouble still have their jobs.

If you ask me this is one of the biggest problems facing the banking sector: that aside from a few high-profile resignations and/or firings, many of the people who made the bad decisions are still in power. The situation is even worse when you look at Congress, as no one on the various banking committees have gotten the sack for not doing their part to prevent this problem from happening in the first place.

Here are some additional tidbits related to the launch of the Tata Nano:

Video from the FT discussing a recent test drive of the car , and another video related to the car's launch.

Here is a short article on the plans of BOA and other institutions to pay back TARP funds once the results of the "stress-tests" come out, with the key motivation being avoiding populist anger and keeping the government out of their affairs. The risk here is that the Bank's desire to get the government off their banks could drive them to return the money before they're ready, especially given that it's possibility  that they'll need additional funds in the future.

Here is a look at a story from NPR's marketplace that looks at how the Treasury's plan to purchase toxic assets could make it harder for the banks to hide their weaknesses. This situation could be a double-edged sword because while increased transparency is a good thing, it's likely to reveal problems that could constrain lending even further and/or require more capital infusions into the banks.

Still at the end of the day increased transparency is always a good thing, even if creates more short-term problems.

Here is some additional information related to the launch of the Tata Nano. As the company is anticipating a wave of orders that will exceed production capacity, the company is planning on using a lottery to determine who receives the first 100,000 copies of the car.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:48 PM | Permalink | Comments (1) | TrackBacks (0)

The usual "Mixture" of news stories and other items I think you may find interesting; as I didn't publish a mix-tape last week this version will be  mixture of the old and the new.

Here is a look at the "Nano" from Tata motors AKA the world's cheapest car, which is about to go on sale in India today.  To be sure the car has a lot of challenges ahead of it, in the form of slim margins, production issues, unknowns around product adoption and the debt load of Tata itself. Still the car stands a good chance of catching on, as 3rd world citizens used to scooters and motorbikes will probably be quite interested in a similarly priced car that can seat 4-5 people.

Staying on the subject of the Nano here is a look at their plans to launch the car in the U.S. In my view the car has be a significant step up from the Indian version to make it here in the U.S., because a Hyundai Accent is practically a luxury car compared to the Tata Nano. Especially when more established companies are probably going to be marketing their own subcompacts here in the U.S., and will be doing so with the benefit of well established brands.

Speaking of small cars here is a look at the recent trend of their being a glut of small cars at dealerships, as people once again turn to larger cars as gasoline prices continue to fall. I think the other issue here is that as cars in general have become cheaper in the wake of the economic downturn, the cost savings from having smaller car has decreased substantially.

Still this is only a temporary trend as oil is a finite resource for which the demand will exceed production capacity once the economy recovers, so any automaker who behaves as if the trend towards smaller cars is over will face a rude awakening in the next 18-24 months. 

Checking in on the row over the AIG Bonuses: it appears that 75% of the bonuses were returned by their recipients, perhaps now our government can stop pretending to be clued into the public and can get back to work on the big picture. Speaking of which most of the politicians pretending to be upset about the AIG bonuses knew about them well in advance, thus making their so called outrage nothing more than a manufactured reaction to the populist rage on same.

After all can we really expect an organization that happily votes in raises for itself to be fiscally responsible, and/or truly upset over what down at AIG?

Here is an amusing yet useless little data point courtesy of the WSJ: on CBS Sports' March Madness web site the boss button (makes the page appear to be a data point) was used 1,500,000 times on the first date of the tournament.

While Spain's publically traded banks have held up fairly well during the credit crunch, the same can't be said for their unlisted banks that are owned by various regional banks. Here is a look at the struggles facing those institutions, and the steps the Spanish government is considering taking to rectify the situation. 

Here is an interactive graphic from the NY Times that looks at how the Biotech and Pharma sectors have been performing vs. the S & P 500, it's a pretty cool widget as you can manipulate the time periods and get total return over the course of the past week, month, quarter and year.

Here is the formal criminal complaint and the SEC complaint related to last week's arrest of Madoff's auditor, I anticipate several more of these arrests as you cannot engineer a fraud of this magnitude without help. 

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 02:56 PM | Permalink | Comments (0) | TrackBacks (0)

Here is the latest on GM's attempt to convince bond holders to swap debt for equity, at present many of the bond holders think the plan is too risky and have written a letter to the treasury articulating their position on the matter. Their main point is that GM's survival plan seems to be predicated on car sales recovering to previous levels in the near-term, a prospect that looks less and less likely as the days (let alone weeks and months) pass on.

Personally I think that the key to GM's survival shouldn't be to gear up for a recovery to the car sales of old, but to become lean and efficient enough to be profitable despite having smaller market share and operating in a less robust market for car sales. If Honda can be profitable despite having 7% of the U.S. market than so can GM. The real challenge is in shifting GM's thinking from being the biggest, protecting market share, etc, to one where they realize that selling far fewer cars for a profit is smarter than selling a larger number of cars for a loss.

GM (and Detroit for that matter) needs to think in terms of profit share as opposed to market share, because focusing on the former is what will lead them down the path to recovery. Each domestic automaker already sells enough cars to be profitable, the problem is that they're not efficient enough to be profitable at their current sales levels. Fix the efficiency problem, make their manufacturing operations more agile, adaptive to market demand, etc, and Detroit can easily survive.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 02:34 PM | Permalink | Comments (0) | TrackBacks (0)

Here is a quick look at a plan to offer government funded discounts to people who trade in old cars for new:

(From the WSJ) : "DETROIT — An Ohio congresswoman unveiled another iteration of a cash-for-clunkers plan, a bill aimed at spurring car sales by giving buyers $3,000 to $5,000 to turn in their old wheels for something new and greener.

"This is a very comprehensive bill with multiple beneficial effects that I think will make it palatable to enough of the Congress that we can enact it," says Rep. Betty Sutton, D-Ohio, who introduced the bill Tuesday. "It not only assists consumers who need a lot of help in this economic downturn, but it will stimulate our economy, reduces emissions, and reduces our dependency on foreign oil."

An earlier attempt to pass such a plan failed to gain broad support throughout Congress. But European car sales are benefiting from such efforts. A recent analysis by CSM Worldwide showed vehicle sales in the several nations with such plans will be 400,000 more this year than they'd be without the bonus.

The bill would give $3,000 to consumers trading in cars more than 8 years old if they buy a new car that gets more than 27 miles per gallon or truck getting more than 24 mpg. The rebate would rise to $4,000 to $5,000 for cars getting more than 30 mpg and for commercial trucks getting better mileage than their older counterparts.

Ford Motor (F) , with sales down 44.1% in the first two months this year, favors such a plan. "By providing incentives to purchase a new vehicle, the legislation would help reduce consumer costs, jump-start the economy and help support millions of good jobs in every state across the nation," says Ziad Ojakli, group vice president for government affairs. A Ford analysis shows it has 10 cars that fill the bill, General Motors (GM) has 12, Chrysler, 10, Toyota, nine and Honda, five.

Though the bill has automaker support, the potential cost could doom it, says Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable. "The bill could become the victim of its own success. If everyone takes advantage of it, then the costs shoot up."

Although Talbott says he supports the bill's goals, he's not sure if many legislators are willing to sign on for another costly stimulus bill."

To be sure it's hard to perform a detailed analysis on this plan until it's finalized because so many things can change between the proposal stage, and the time the bill passes. However based on the proposal's high-level concept, I think it will benefit the foreign automakers more than it will the domestic ones.

Just think about it: domestic cars are already heavily discounted and in some cases are selling for 50% off, while the foreign automakers aren't offering discounts of anywhere near the same magnitude. Based on marketing practices that began back around '01 the domestic automakers have already established themselves as the low cost provider, while the cost of foreign cars has slowly increased. As a result the vouchers may be more attractive to consumers for us in purchasing a foreign car than a domestic one. Especially since there is more demand for many of the foreign models in the first place.

A quick look through autotrader.com revealed that brand new Chevy Malibus often sell for less than the cost of a used Accord or Camry, which seems to support the idea that consumers who are already ignoring the heavy discounts from domestic dealers may be more interested in using the vouchers on foreign cars.

Another issue is that people who drive cars that are 8+ years old may not have the financial strength to buy a new car, and/or may be enjoying life without a car payment. Considering the state of the economy they might be unwilling to take on a new expenses,  or may find that getting a used car that's 3-4 years old may still be cheaper.

Still it's hard to assess the potential impact of the plan until it's finalized, and there is still a good chance that it won't get passed in the first place.

I personally hope the proposal dies because I don't like the idea of subsidizing car sales with taxpayer dollars, and I think the long-term impact could be fairly negative in terms further cementing the role of the Detroit automakers as low cost providers. It's really hard to put the genie back in the bottle when it comes to pricing.

You can read the original article here, and the web site of the Congresswoman who proposed the plan can be found here.

Sources:

USA Today : "$3,000 - $5,000 incentive for car buyers proposed" -- Sharon Silke Carty, March 18, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:41 PM | Permalink | Comments (0) | TrackBacks (0)

Here is a quick look at the latest on Saab's attempts to find a buyer and/or become independent from GM:

(From The WSJ): "GENEVA -- General Motors Corp.'s flagging Saab division will accelerate talks this week with "a number" of potential buyers, the unit's top executive said Monday.

Saab Managing Director Jan Ake Jonsson, in an interview at the Geneva auto show, said Saab is working with Deutsche Bank and has begun discussions with potential investors from the auto industry and outside it. He declined to name any of Saab's suitors, but said it is possible a deal could be completed by next year.

Mr. Jonsson also said Saab needs €500 million ($628.8 million) in aid from the Swedish government to survive amid the deep downturn in global auto sales. Saab recently sought to reorganize under court protection in Sweden, a process similar to Chapter 11 bankruptcy protection in the U.S.

The reorganization was prompted by GM's decision to turn Saab into an independent company. Saab will be challenged to survive on its own, however. GM and Saab have asked the Swedish government for financial aid, but the request hasn't yet been granted.

Without aid, Saab could run out of money, Mr. Jonsson acknowledged.

Mr. Jonsson added he is confident Saab can attract government support thanks to its importance to Sweden's economy. Saab and its suppliers employ 15,000 people in Sweden, and it has more than 1,000 dealers world-wide.

Saab is committed to reaching profitability by 2011, Mr. Jonsson said. That commitment is at the core of its discussions with the Swedish government concerning the need for loans to keep it afloat.

"The Saab brand at this point is very relevant," he said. Saab's vehicles are known to be fuel-efficient and sporty, a combination that appeals to certain consumers in the U.S. and Europe.

Its sales fell to fewer than 100,000 vehicles in 2008, down from a peak of 130,000 in 2006, mainly because it has only had three vehicles in its lineup and GM hasn't updated its main models. The Saab 9-5 sedan has been on the market for 12 years and the 9-3 sedan for seven."

First off the paragraph above drove me nuts, as it was, well, bloody clueless.

Saab has nearly always had only around 2-3 vehicles in its line-up, and while the model designations 9-3 and 9-5 have been around for some time the cars have been updated several times during the span the author mentioned. In fact the author mentions last year's launch of the near 9-3 later on in this very same article.

As for the 2006 I would hardly refer to the year as a sales peek when so many Saab dealers were closing during that time, and Saab sales in the U.S. have been in decline since 1989.

Regardless Saab's struggles have nothing to do with its small line-up and everything to do with GM's brand mismanagement, and assembling Saab's from the Opel spare parts bin. Everything you need to know about why Saab is struggling to survive can be found on Saab fan sites, which celebrate the older cars and rarely mention the new ones.

I used to drive an Audi that I purchased from dealership that also sold Saabs. I can't tell you how many times a fellow customer would tell me above their beloved Saab from the late 80s/early 90s, and how they now drive an Audi because the new cars aren't as good relative to the competition.

I.e. there are quite a few Saab fans left that are just waiting for the company to get its act together.

In any event I hope that Saab finds a buyer soon as it would be really sad to see the brand die, because if the new 9-3 is any indication the company definitely has something to offer the automotive marketplace. I just hope that whomever buys the company has something to bring to the table besides a checkbook, in terms of engineering prowess, branding expertise, etc. As I mentioned in a prior article I would love it if VW took over the brand, and I I think Subaru and maybe even Honda would be a good match as well.

In fact Subaru might even be a better choice than VW because both companies seem similar in terms of being "independent and quirky", and it would give Subaru a more upscale brand that would enable the company to expand the range of customers it sells to. As I think about this more and more I'm starting to lean towards Subaru as a better suitor than VW, as Saab wouldn't have to compete against Audi within the VW product portfolio.

Still the thought of Saab bringing back the 9-3 Viggen on the same platform as the Audi A4 is a rather intriguing proposition that I would definitely consider purchasing. The last Viggen suffered from excessive torque steer, despite the fact that Saab purposely limited the torque for certain gears in an effort to make the car easier to handle. An updated version with more power and a true sports sedan platform could be just the thing to bring the bring the brand back from the dead.

Basically: I have no problem admitting that I really liked the last Viggen despite its faults, and would probably buy an updated version built with engineering help from Audi or Subaru sight unseen. A Saab that could run with the M3, RS4 or C32 AMG would be ultimate stealth machine.

So, perhaps my wanting Subaru or VW to buy Saab is  touch self-serving.

You can read more here.

Sources:

The Wall Street Journal: "Saab Speeds Up Talks With Suitors" -- John D. Stoll, March 3, 2009

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 11:31 PM | Permalink | Comments (0) | TrackBacks (0)

Just a few days after I suggested that GM would require more money than they're currently asking for, comes this story of a "higher than expected " Q4 loss of $9.6 billion. 

(From The Financial Times): " General Motors on Thursday said it expected its auditors to study whether there was “substantial doubt” it could continue as a going concern, as the US carmaker revealed a full-year net loss of $30.9bn

It said it expected the auditors to give their opinion when the GM files its annual report with the Securities and Exchange Commission next month, since the company plans to take advantage of a 15-day extension to the deadline for filing.

The top executives at America’s largest carmaker are due to meet later on Thursday with an auto industry task force headed by Timothy Geithner, US Treasury secretary, and Larry Summers, President Barack Obama’s chief economic adviser, to discuss their request for more aid.

The company is seeking to avoid a bankruptcy filing on grounds that its failure would put hundreds of thousands of jobs at its suppliers at risk.

GM, which made a larger-than-expected $9.6bn net loss for the fourth quarter, is surviving thanks to a $13.4bn US government emergency bridge loan. It burned through $5.2bn in the fourth quarter and confirmed that its cash holding had fallen to $14bn as of end-December – it has said it needs a minimum of $11bn to $14bn to stay in business.

“GM and its auditors must determine whether there is substantial doubt about GM’s ability to continue as a going concern... GM requires [funding from governments] in 2009 to continue operations until global automotive sales recover and its restructuring actions generate benefits, resulting in the company being able to fund its own operating requirements,” it said in a statement .

In a report to the Treasury last week, GM asked for up to $16.6bn of additional emergency government aid, saying that auto demand and credit market conditions had deteriorated in the two months since its initial bail-out request.

It projected that because of “tough industry conditions” it would burn through $14bn of cash this year.

GM says it needs $2bn of bail-out funds in March and another $2.6bn in April to stay in business…

...GM lost money in all of its global regions in the last quarter. Its pre-tax loss including special items was $3.5bn in North America, $1.9bn in Europe, $181m in Latin America and $917m in Asia."

(From the WSJ): "...The results represent the second-worst financial performance in its 100-year history and push the cumulative net loss to $82 billion since GM Chief Executive Rick Wagoner began an intense restructuring of the auto maker in 2005...

...Mr. Young, the CFO, warned investors that GM may not be able meet its auditors' "going concern" requirements, meaning the  company could break covenants on billions of dollars in debt in coming months. These defaults could increase the amount of bailout funds the government would have to deliver to GM.

GM's auditors must make a decision on the company's "going concern" status by the end of March. Mr. Young said further government funding would help the auditors reach a positive conclusion."

Here is a key thing to take away from the above: GM has lost $82 Billion since 2005, their problems are not new/a function of the credit crunch and are a function of problems that have existed for years if not decades. In the state GM is now even if they can cut their losses by 1/2 (in comparison to '08) for 2009 and half again for 2010, they still stand to lose $22 billion more dollars over the next two years.

OF course it goes without saying that it's not very likely that GM will be able to pull that off, not when you consider rapidly declining sales, the costs from shuttering brands, etc.

At this juncture I think the government has two choices:

Choice A: they can continue to support GM and hope that the company is able to turn it around, without shedding a lot of its liabilities and more or less keeping the same bloated, inefficient model intact. This "solution" effectively amounts to not only subsidizing the company, but hoping that it can solve it's problems by treating symptoms as opposed to root causes.

Sounds like a non-starter to me, there is no point in investing into that which is futile. 

Choice B : they can work with GM and its suppliers to execute as painless a bankruptcy proceeding as possible. While I understand that there will be some fallout and damage from this process, the alternative doesn't make sense if you're going to either delay the inevitable or subsidize 11 figure losses for the foreseeable future. In other words: the company is destined for collapse without continual government subsidies, so doesn't it make sense to take decisive action that will fix the company as soon as possible?

Yes bankruptcy is painful, difficult and will be (quite frankly) a national embarrassment, however the benefits of separating the good parts of GM from the bad outweigh all of those negatives. The old model died years ago, it's time to pull the plug and remake GM into something viable again.

You can read more here(FT), and here(WSJ).

Sources:

The Financial Times: "GM future in doubt after $31bn loss" -- John Reed, February 26, 2009

The Wall St. Journal: "GM Posts $9.6 Billion Loss, Burns Through $6.2 Billion in Cash" -- Sharon Terlep, John D. Stoll, February 26, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:26 PM | Permalink | Comments (0) | TrackBacks (0)

A common refrain within the discussion of what to do about Detroit is: "Buy American" or "This wouldn't have happened if everyone bought American" . Aside from being a bit simplistic if not communist in terms of not allowing people freedom of choice with respect to their buying decisions, it begs another question: "What does buy American even mean in a global economy that is becoming more interconnected on a daily basis?".

After all many foreign cars are not only built in the U.S. but they come with significant domestic parts content, while many so called American cars contain significant foreign parts as well. The Toyota Tundra and Toyota Sienna both made the top ten list of Cars.com list of vehicles with the most domestic content (to qualify a car must contain at least 75% domestic content), whilst popular Japanese cars such as the Accord, Camry and Civic are 60-70% domestic. Technically speaking a Dodge Ram is no more American than a Camry or a Civic if you go by the % of parts sourced domestically,  and Explorers, Rams and Chevy Silverados are all actually less American than a Toyota Tundra.

Find below a listing of various cars by % of domestic content; you can read more about Cars.com ratings here, and find the top list here.

(From Cars.com):

Ford F-150: 80% domestic content, down from 90% for '07

Chevrolet Silverado 1500: 85% for '08, down from 90% for '07

Toyota Camry/Solara: 68% for '08, down from 78% for '07

Honda Accord: 60% for '08, down from 65% for '07

Toyota Corolla: 50% for '09, down from 65% for '08

Toyota Matrix: 65% for '09, down from 75% for '08

Dodge Ram: 68% for '08, down from 72% for '07

Honda Pilot: 70% for '09, same as '08

Honda Civic: 70% for '08, up from 55% for '0

Furthermore even f car that's built outside of the U.S. are still sold at American owned dealers and service centers, my car may be Bavarian but I bought it from an AutoNation dealer and get it serviced at a locally owned business that specializes in BMWs. I also spent money on various after-market upgrades, and all of those parts came from American manufacturers and retailers. The car may be German but I still buy my tires from Sears.

While the buy American only crowd may get irritated if they see someone driving a Toyota Tundra, the fact remains that it's the 5th most American car on the market, and it's built in San Antonio, Texas. Between the parts suppliers, factory workers, U.S. owned dealerships, etc, the overwhelming majority of the money generated by a Tundra sale goes into American hands. 

So buy American in this case really means buy from the Americans who work for Detroit as opposed to buy American in general, because millions of American jobs depend on foreign auto makers. 

Something else to consider is that competition from the Japanese pushed Detroit to improve quality, design better cars, etc, what would the domestic auto industry be producing if it weren't for that competition? What would the business model look like if we were all subsidizing the bloated, inefficient model of old by all of us deciding to buy American?

Mind you I'm not saying that there isn't any value in supporting American companies, I'm just saying that it's not as simple as buying domestic supports American jobs and buying imports destroys them. Furthermore foreign competition is healthy as far as spurring innovations that benefit all consumers.

At the end of the day it's more productive to push Detroit to develop a viable business model and work on their efficiency issues, than it is to attempt to solve the problem by removing consumer choice. Considering that Honda could out earn GM (even when they were profitable) despite having a fraction of their market share, perhaps the real problem isn't total cars sold as it is an efficiency problem within the domestic automakers.

Detroit already sells more than enough cars to turn a profit, so perhaps the focus should be on their efficiency problem as opposed to the cars our neighbors are driving.

Sources:

Cars.com: "The Cars.com American-Made Index" -- Kelsey Mays, July 1, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 02:10 PM | Permalink | Comments (0) | TrackBacks (0)

Let's take a look at some of the changes in store for Toyota as a new CEO takes the reigns:

(From The WSJ): "TOKYO -- Toyota Motor Corp.'s incoming president, Akio Toyoda, has a sobering message for the giant company founded by his grandfather: It has gotten too fancy for its own good.

On Monday, three top executives who helped lead Toyota the past four years -- including Mitsuo Kinoshita, one of the primary architects of the company's global expansion -- announced their retirement. The departures clear the way for Mr. Toyoda's planned makeover of the world's biggest auto maker.

He is expected to focus, most of all, on abandoning kakushin, or "revolutionary change," current president Katsuaki Watanabe's term for changing the way Toyota designed its cars and factories. It spawned technological advances, but led to cars that were often costlier to produce.

The 52-year-old Mr. Toyoda is also working to fix a pricing strategy that put the company at odds with some U.S. dealers, who felt its cars were getting too expensive, according to people familiar with the situation.

Auto makers world-wide are in pain, and Toyota is much stronger than rivals such as General Motors Corp., which is flirting with a bankruptcy filing. Still, Toyota is expecting its first annual net loss in 59 years.

Mr. Toyoda may shutter factories in North America and Japan, where Toyota bulked up in recent years and is now stuck with too much manufacturing capacity. It might also be faced with its first layoffs in Japan since 1950, when 3,000 workers were let go.

Mr. Toyoda blames more than the recession, according to people familiar with the matter. He is sending the message that his predecessors worsened the problem by straying from core ideas of thrift and efficiency.

Among other things, there's a move away from technologically sophisticated in-car gizmos like a solar-powered cooling system designed for the new Prius. In addition, an expensive new assembly-line technique of dipping car bodies into a vat of paint and swirling them around -- nicknamed shabu shabu, after a popular Japanese hotpot dish -- is under the microscope."

Graphic courtesy of the WSJ

From the looks of the article it appears that Toyota may have been a victim of its own success, in that it engaged in certain "excesses" that were easily funded by the company's growth and profits. While it gives them obvious targets as far as where to cut back, I hope that the company doesn't go overboard and cut back in ways that stifles innovation. The key will be differentiating between the "kakushin" that enables you to produce a better product, vs. the "kakushin" that added more cost to the manufacturing process.

Mr. Toyoda's mission will be to reign people in and direct their efforts towards innovations that support the company's core values, as opposed to innovating for innovation's sake.

Overall I'm not especially concerned about Toyota's future as the company is only in need of a few tweaks around production capacity, methods and pricing, as opposed to the full fledged restructuring that many of its competitors are trying to execute. I also think the goal of "reasonable profits" seems to suggest that they have a fairly good handle on what the market will look like over the coming years, and that they'll be adjusting both expectations and the company appropriately.

I.e. I have more faith in a company that is reducing its medium term outlook and accepting lower margins moving forward, than I have in a company that is placing its bets on a market recovery.

As I mentioned earlier the old market isn't coming back, truck and SUV sales aren't going to fully recover and people earning $40k/yr aren't going to be able to finance $50k vehicles on a go-forward basis.

I would also caution people from lumping all automakers in the same boat, because there is a temptation to say: "Well if mighty Toyota is struggling, than maybe Chrysler isn't doing so bad". Because while all the automakers are suffering from a declining market, they're all in drastically different boats with respect to how they're positioned to recover. Latter day struggles aren't as important as the challenges the company faces on its road to recovery, and the resources it has to effect same.

In other words the combination of having relatively small short-term challenges (in comparison to their competitors), coupled with one of the strongest balance sheets in the auto industry should enable Toyota to get back on track relatively quickly.

You can read more here.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:13 PM | Permalink | Comments (0) | TrackBacks (0)

A quick mix-tape  comprised primarily of things I was reading over the weekend, with some additional things from this week.

Here is a look at how Honda's Motorcycle business is continue to grow despite the world-wide recession, with 2009 sales expected to grow by about 7% YoY. Powered by their strong motorcycle sales, Honda will be the only one of the 3 largest Japanese automakers to show a profit for 2008. Assuming the company remains profitable over the course of the recession, it will be interesting to see if the company continues along their independent path or uses the opportunity to invest in (if not acquire) other automakers.

Here is a look at a Car & Driver list of the "Ten Most Embarrassing Award Winners" in automotive history, two words sum up the list perfectly: "Cadillac Catera ". Yes, at one time the car was an award winner.

Hard to believe, no? 

The owners of the Philadelphia Inquirer and the Philadelphia Daily News filed for bankruptcy on Sunday, in what is likely a sign of the times as newspapers struggle to survive. As I mentioned before the issue isn't so much a failure on the part of newspapers to adapt to the current environment, it's the fact by the time the newspaper arrives at your door you could've read everything in it online the night before.

The question offered is: if newspapers start disappearing what's the impact on the online world, since so many online sites depend on them for their content? Some sort of partnership needs to be worked out because the online world is dependent on the very medium that it's killing off.

Staying on the topic of newspapers the Hearst Corporation may sell off or close the San Francisco Chronicle, if it's unable to implement significant cost costs.

Apparently Citibank missed the memo where they were told to ignore certain e-mails from Nigeria, as they fell for an updated version of the scheme where the fraudster pretended to be an official from the Ethiopian central bank. Even though they figured it out in the end and were able to get the money back, this still lends itself to so many jokes that I don't know where to start.

After the R. Allen Stanford debacle I figured it would helpful to point you towards a NY Times article that examines the different types of Certificates of Deposit; needless to say they're not all created equal and come with various degree of risk. The other thing to realize is that an investment like the ones offered by Mr. Stanford's "bank" aren't necessarily CDs in a traditional sense, so it's also important to read the fine print (and between the lines for that matter). 

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:01 PM | Permalink | Comments (0) | TrackBacks (0)

Here is a bright spot in the auto industry: sales of "lightly-used" luxury cars is actually increasing. Lexus reported a 19.5% YoY change in used cars sales from January '08 to January '09, Mercedes reported a YoY increase of 86%, and the segment overall has seen an increase of 31.5%.

Overall this is more indicative of people shifting their buying preferences from new to used, as opposed to any real change in the total number of luxury cars people are buying. Of course this is a doubled edged sword as it's good for the dealers, but not so good for the manufacturers who are trying to sell new cars.

However I don't agree with the idea that affluent consumers are trying to play down their wealth in the current economic climate, because if that was the case they'd buy American to support Detroit or just buy a mainstream car like a Honda Accord or a Camry. I say this because the people who get upset by such things aren't "less upset" because you have a 07 Mercedes instead of a '09, instead all they see is a luxury car they can't afford, especially if the car is of the current body type.

At least that's been my experience with such things.

What's actually happening (in my view at least) is that affluent consumers are just finding ways to cut back while still maintaining their lifestyle, you want a new car to replacing your aging Lexus  and decide to save some money by buying slightly used over brand new. If the behavior of the banking industry is any indication, I seriously doubt the majority of those in the top 2-5% are all that concerned with what the rest of the nation thinks of them. Especially when you consider the fact that affluent people spend most of their time with other affluent people.

Still it does suggest that there is some degree of resiliency among the truly and/or remaining affluent, a shifting of spending priorities rather than a broad-band pull back.

It's also worth noting that not only are luxury manufacturers facing a change in the spending priorities of the affluent, but that they're also suffering form the loss of non-affluent consumers who used credit to "spend-up". Once the luxury companies adjust to these two factors the luxury good segment should begin to stabilize a bit, however the loss of the poseurs will continue to cut into profits on an on-going basis. The days of people with middle class incomes using credit to buy Coach Purses and $50k SUVs are gone for the foreseeable future. 

Sources:

The Wall St. Journal: "Sales of Used Luxury Cars Rise" -- Joseph B. White, February 23, 2009

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:23 PM | Permalink | Comments (0) | TrackBacks (0)

Here is a look at the cost of the various restructuring plans GM has put before the Government:

Graphic Courtesy of the WSJ

While the non-bankruptcy restructuring plan looks attractive due its lower price tag it's important to remember that the $27 billion is the minimum cost, which means that the plan could easily cost more on top of not coming with any sort of success guarantee. Especially when at its core the plan is an attempt to fix GM within the context of the current roster of liabilities and legacy costs that are holding the company back.

I really don't see the point of giving GM $27 billion and hoping that they fix the company over the next 24 months, especially when the economy will continue to worsen for at least 1/2 of that time period. Not to mention the fact that it's all but guaranteed that the company will need even more money.

The Prepackaged and Cram-Down bankruptcy options make more sense because even though they have a higher baseline price tag, you could unlock the valuable parts of the company within a space of 2-3 months. While this would undoubtedly cause some short-term pain and loss of sales, both plans come with a much higher guarantee of GM being positioned to be efficient and profitable again.

As I've said in the past it really comes down to whether or not GM and the U.S. government want to partner up to truly save the company, vs. figuring out a way to preserve as much of the old GM and all of things it subsidizes.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 12:43 PM | Permalink | Comments (0) | TrackBacks (0)

The usual mixture of news stories and other tidbits I think you may find interesting:

The trustee in charge of liquidating Madoff's investment firm hasn't been able to find any evidence that he actually bought securities for his clients; this is beginning to look more and more like a run of the mill Ponzi scheme with a fancy wrapper.

Apparently the SEC wasn't the only one questioning how R. Allen Stanford's companies were able to offer such high returns on their CDs, not only were employees who asked to many questions given the sack, but they were also trained to deflect such questions from their clients.

For more on Mr. Stanford here is an interactive graphic from the FT that provides an "anatomy of his empire"; suffice it to say it's going to take a while to unravel things due to both the complexity and the sheer lack of information on how things work, where money is invested, etc.

As if the banking industry didn't need anymore negative publicity, it appears that many of them are charging fees to out of work people who receive their unemployment benefits via a debit card. Understandably the bank probably charges a fees on its regular debit cards, but charging fees to the unemployed, especially when they have no choice but to receive their benefits via the debit cards is a bit low.

While I understand that banking is a business, you'd think that the banks would be smart enough to realize that charging people fees to receive their unemployment benefits would just generate negative publicity they don't need right now.

881 Car Dealerships closed their doors in 2008, and 80% of them were for the Detroit Automakers. I wouldn't be surprised if that number were to double (or even triple this year) between the plans GM (and others) have to shutter dealerships, and the fact that car sales will probably decline by 3 million total units in comparison to last year.

Here is a quick look at Car & Driver's editor's choices as far as the top five cars in various product categories; as is no surprise the lists are largely dominated by the foreign automakers but the Pontiac G8 GXP, Caddy CTS and the Chevy Corvette were all represented in multiple categories.

Finally let's close this one with a humorous look at the "Seven Lies" we all tell ourselves about Facebook; warning: this article may not be humorous to people who can't laugh at themselves or take themselves too seriously.

Sources:

Reuters: "Record 881 U.S. auto dealerships closed in 2008: data" - February 19, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 12:44 PM | Permalink | Comments (0) | TrackBacks (0)

It's official: Saab has declared bankruptcy and is working towards separating itself from GM

(From the NY Times): "Saab, the Swedish automaker owned by General Motors , filed for bankruptcy protection Friday and asked the Swedish government for help in making it an independent car company again…

...Saab went to a Swedish court for protection from its creditors, and said the company would — with assistance from the Swedish government — reorganize to pave the way for private investors to buy all or part of the company.

“We explored and will continue to explore all available options for funding and/or selling Saab, and it was determined a formal reorganization would be the best way to create a truly independent entity that is ready for investment,” the managing director of Saab, Jan-Ake Jonsson, said in a statement.

Saab also said that the company “would continue to operate as usual.”

But government assistance is not a certainty. Swedish officials have repeatedly resisted efforts to nationalize Saab, which came to life as part of the Svenska Aeroplan AB, a company founded in 1937 to build military planes. The first Saab cars were built after World War II. G.M. has used the slogan, “Born From Jets” in its recent advertisements for the Swedish brand, although its most recent ad campaign features the tagline, “Move Your Mind.”

Swedish government officials seemed Friday to rule out financial assistance as part of what Saab said would be a three-month process of retrenchment.

“Support in the form of money is not on the agenda,” a spokesman for the industry ministry, Hakan Lind said, according to Reuters. Without assistance, Saab would need to find a buyer.

Saab lost about 3 billion Swedish crowns, or $343 million, in 2008 and said it would lose a similar amount this year. It has about 4,000 employees in Sweden

G.M. executives have struggled to make a profit on Saab almost from the start. It bought Saab in the wake of Ford Motor ’s purchase of the British luxury carmaker, Jaguar, and once considered selling the cars alongside those in its Saturn division.

Saab, long known for quirky looking cars with an ignition in the floor and a griffin insignia, became a more conventional brand under G.M. It borrowed the underpinnings from some of G.M.’s Opel cars for its lineup , which includes sedans, wagons and a Sport utility vehicle.

  ...Saab is G.M.’s worst-selling brand in the United States, selling 21,383 vehicles in 2008, down 34.7 percent from 2007. Its best-selling vehicle is the 9-3, of which G.M. sold just over 10,000 cars last year."

Separating itself from GM is exactly what Saab needs to do in order to regain its former glory and win some of its former customers back, many of whom believe that Saab stopped being Saab when GM took over and began building the cars from the Opel spare parts bin.  All you have to do is perform a quick Google search and you can find many a fan site that celebrates the old Saabs and lament the latter day models. The fact that GM once considered selling Saabs alongside Saturn more or less sums up the fact that GM simply didn't understand the Saab brand, let alone know how to manage it properly.

While it's not a given that an independent Saab can win back some of its old customers, removing GM's influence is good first step.

If Saab is able to successfully navigate its restructuring and emerge as an independent company I think the company can definitely make a comeback. The current generation 9-3 (especially the 280HP AWD Aero variant) is a vast improvement over previous models, and is arguably the company's first legitimate contender in the premium sports sedan category in some time. While I wouldn't choose it over an Audi or a BMW, I do think it's a more of a driver's car than an Acura TSX, TL or the Lexus ES.

The new 9-5 looks to be more of the same, and should give the company two cars that are legitimate contenders in their respective categories.

That being said the company has some rather significant challenges ahead of it:

Saab dealerships are dropping like flies. The dealership I test drove a 9-3 at this past summer closed about a month or so later, and at the moment I'm not sure if there are any remaining dealerships left in the Seattle area. It's a similar situation in other parts of the country, with many metro areas no longer having any Saab dealerships left.

Mindshare: people who are currently shopping for sports sedans within the entry-level luxury/premium segment don't usually think of Saab, instead they're considering the usual suspects: Audi, BMW, Infiniti and Lexus, not to mention offerings from Volvo and Acura. Saab's challenge will not only be to produce great cars, but to get people into the dealerships to test drive them in the first place.

A lack of mindshare coupled with a rapidly shrinking dealership network make for a very difficult road ahead for Saab.

The key(s) to Saabs survival are to first separate itself from GM, and then to find a partner who can provide manufacturing/engineering assistance, in addition to a dealership network that the company can leverage to rebuild itself. An newly independent Saab that is still building cars from Opel spare parts is just more of the same, even if the company is better able to manage the brand without GM's influence.

As I mentioned earlier I really like VW as a potential partner because Saabs that share parts with Audis and VWs will definitely make many customers feel more confident, and leveraging the existing Audi/VW dealership networks to sell Saabs makes a lot of sense. Furthermore I think that VW would prove to be better brand managers than the crew at GM, who are barely able to avoid destroying their own home grown brands.

You can read more here.

Sources:

The NY Times : "Saab Moves to Separate Itself From G.M." -- Carter Dougherty, Micheline Maynard, February 20, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 11:34 AM | Permalink | Comments (0) | TrackBacks (0)

Here is a look at a NY Times article discussing the demise of Pontiac, with a focus on how GM's brand strategy of just selling the same car under different names is largely responsible for the brand's demise.

(From the NY Times): "DETROIT — With its history of building muscle cars like the GTO and the low-slung Firebird, Pontiac had good reason to take pride in its best-known marketing slogan from the 1980s, “We Build Excitement.”...

...when General Motors asked the federal government for more bailout money, it also announced a reorganization plan that included demoting Pontiac to a “focused niche brand,” signaling that its lineup of vehicles would shrink and that it would no longer be a separate division.

To industry analysts and Pontiac’s longtime fans, the downgrade provides a case study of the product missteps that helped put G.M. in its precarious state, and a reminder of the dangers in straying from a successful formula.

“When you deviate too far from it, that’s when you run into trouble as a brand and a company,” said Jack R. Nerad, executive editorial director at Kelley Blue Book, whose 1968 Firebird made him feel “as cool as I could be.”

More than any other G.M. brand, Pontiac stood for performance, speed and sex appeal. Its crosstown rivals followed with similar muscle cars, giving Detroit bragging rights over the cars that Japanese automakers were selling based on quality and reliability.

Though still G.M.’s third-best-selling division, behind Chevrolet and GMC, Pontiac’s sales peaked in 1984, when it sold almost 850,000 vehicles, roughly four times as many as it sold last year…

...It gave Pontiac vehicles like the TransSport minivan, and the Sunbird, Sunfire and Phoenix cars that were barely distinguishable from models sold by Chevrolet and Oldsmobile.

Pontiac also garnered unwanted publicity in 2001 with the Aztek, whose tag line declared, “Quite possibly the most versatile vehicle on the planet.” Its bulky looks landed it on lists of the world’s ugliest cars. Indeed, Aztek won top honors in that category from The Daily Telegraph of London last year."

I can't say I disagree.

I'm a big fan of Pontiac, only the Pontiacs I love haven't been made in well over two decades or more. Like many of my fellow car enthusiasts who currently drive foreign cars, I still fondly remember the Pontiacs of old and still drool over early 80s/late 70s era Trans Am and the venerable Goat.

The company went wrong when it started selling minivans, SUVs, gussied up Chevy Cavaliers and boring family sedans. The company started to fall when GM believed it could sell driving enthusiasts cars from other divisions, yet claim they're "exciting" because they said "Pontiac" on them.

Even when they company built cars that had decent driving dynamics they often ruined them with the plastic cladding they throw on the cars, and the gaudy interiors that looked like a cross between Fisher Price and the 1950s Batmobile. The last round of Pontiac Trans Ams were fantastic from a driving dynamics perspective, but they looked god awful and the interior ergonomics were arguably worse. I drove many a Pontiac Grand Am (and it's cousin the Olds Alero) as rental cars whilst traveling for work, and both cars were fun to drive (for vehicles in that segment at least). The problem was that when compared to the Accord or the Camry, they were deficient in the areas of space, refinement, comfort and reliability.

It was a situation where you only liked the car when you got to flatten the gas pedal on a twisty country road.

The space the Nissan Altima and Mazda 6 hold in the mid-sized family sedan world as far as being mid sized cars that are sporty and fun to drive, could've been held by Pontiac if they hadn't made certain missteps that drove customers away. 

It was almost as the company would start building a great car, and would then decide to sabotage itself. Pontiac should've spent the last 25+ years building cars that lived up its legacy, instead of selling rebadged minivans and SUVs from other GM divisions.

All of that being said I think the future for Pontiac is actually quite bright (provided GM survives of course), because a Pontiac that is purely focused on high-performance cars can potentially regain its former glory. At the moment the new Pontiac G8 GXP is getting rave reviews in the automotive press, and is just the kind of car Pontiac needs to produce in order to get its old swagger back.

Pontiac doesn’t need to be a full-fledged division of GM to thrive, instead it needs to build the kind of cars that attracted many a car enthusiast to the brand in years past.

I.e. if Pontiac focuses purely on sports cars there might come a time when car enthusiasts are just as interested in new Pontiacs as they are Pontiacs from the 60s, 70s and very early 80s.

You can read more here.

Sources:

NY Times: "Its Muscle Car Glory Faded, Pontiac Shrivels Up" -- Micheline Maynard, February 19, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 10:11 PM | Permalink | Comments (0) | TrackBacks (0)

The usual "mixture" of news stories and other tidbits I think you may find interesting.

There is still no sign of Mr. Stanford, and there are now reports that not only has he been on U.S. law enforcement's radar for over 15 years, but he may have also been involved in laundering drug money. This is quickly turning into the type of crooked criminal enterprise that you'd normally only see in the movies.

Continuing on the above: several years ago the SEC found numerous violations at the Stanford group and let the company off with a small fine, this despite the fact that said violations were indicators of much deeper problems. I know that hindsight is 20/20 but I'd like to reiterate my earlier question: "shouldn't organizations like the SEC be on top of things to the point of providing advance warnings and shutting these things down in their early stages?"

A WSJ Op-Ed provides a brief history of the national debt; it's an interesting read and a topic that needs to be given more focus in the coming months. Especially when you consider that the government has ways of "cooking the books" in order to make our debt appear less than it actually is.

Here is an update on the negotiations GM is in with some of is bondholders to swap debt for equity. The main sticking points are that the restructuring plan is insufficient, with perhaps the larger issue of GM effectively exchanging public debt for government debt. I think the latter is probably a much bigger problem because de-leveraging is one of the keys to GM's survival.

Here is a link to an interactive graphic from the WSJ that depicts light vehicle sales for GM, Ford, Chrysler, Toyota and Honda from January 2005 through last month.

Here is a look at a Car & Driver review of the Fiat F00 Abarth. Based on the review it appears as if the car could have a potential market in the U.S., assuming Fiat's partnership with Chrysler works. IF the tie-up with Chrysler doesn’t work out a dark horse option for Fiat could be to partner with the potential Saturn spin-off. If Fiat was able to rebuild Saturn's brand to what it was in the early 90s, it would be quite synergistic with their current product line-up.

For some automotive humor let's take a look at Car & Driver's list of the greatest automotive flops of the past 25-years. These cars aren't the usual suspects like the Gremlin, more like cars that should've been good but failed to deliver. Think: the Maserati designed Chrysler TC.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 12:35 PM | Permalink | Comments (0) | TrackBacks (0)

Now that GM has announced plans to scale back on its brands, there are concerns that the company risks not only a loss of market share but of surrendering its top spot in the U.S. market to Toyota. The problem with this line of thinking is that it's more sentimental than mathematical, in that there is a greater perceived value in being #1 in the U.S. market than there actually exists from a P/L perspective.

Just think about it: what's the point in worrying about GM losing market share if the alternative is hanging on to money losing brands?  What's the point of GM keeping market share by selling cars at a loss/with huge incentives, dumping cars via low margin fleet sales? Better yet: over the past 10-15 years how has GM benefitted from being #1 in the U.S. market, when you consider GM's profits vs. the profits generated by its allegedly smaller competitors?

Profit per car sold is far more important than market share, and it's the reason why Honda can generate a multiple of GM's profits despite having a fraction of their total market share.

Profits per car sold is what will win the day not market share; both GM and the media need to let go of this sentimental focus on GM's share of the market and focus entirely on the efficiency aspect. It's ludicrous to claim that GM is "#1 in the American Market" when Toyota left GM behind years ago as far as profits generated from same.

Yes phasing out Hummer, Saturn and Saab will cost GM some market share, but it will also remove billions worth of losses from their balance sheet.  In the end GM will be a stronger and more efficient company despite the loss of market share, so all things considered losing market share is a positive in this instance.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 08:57 AM | Permalink | Comments (0) | TrackBacks (0)

Staying on the topic of the Auto Industry here is a look at the global decline in automobile sales:

Graphic courtesy of the Economist

(From the Economist): " NO COUNTRY or company has been immune from the collapse in car sales. Figures released last week confirmed that the last half of 2008 saw the most savage contraction in demand for motor vehicles since the second world war. In America sales of cars and light trucks in December fell by 33.5% compared with a year ago, and in Spain they crashed by nearly half. Even in Brazil and China, where sales increased on an annual basis compared with 2007, saw sharp declines in the last quarter of 2008. Of the world's big carmakers, Chrysler is in the most trouble, thanks to poor products and a reliance on the American market, where its sales dropped by more than any other carmaker. "

There isn't much you can say here as the image more or less speaks for itself, other than that it will be interesting to see what the global automotive industry looks like just three years from now let alone 5-10. Perhaps even more interesting will be the likely new partnerships and/or mergers between various manufacturers, and to see what effect that has on new cars in the future.

Not to mention the future for brands like Aston Martin, Land Rover and Jaguar, how will those brands fare now that they're longer part of Ford? Will Tata be able to manage a luxury car brand effectively? How will Aston Martin fare now that it's owned (more or less) by a private equity firm as opposed to a car company?

No matter what happens,  the next 3-10 years are going to be very interesting indeed for the automotive industry. 

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 04:11 PM | Permalink | Comments (0) | TrackBacks (0)

Here is the usual mixture of news stories and other tidbits I think you may find interesting:

Here is a breakdown of the various items that are included in the stimulus bill. There are so many different things included in the bill that it's hard to view it as a cohesive stimulus package, it's a mixture of funds to shore-up social service programs, money for the states, grants, loan guarantees, money for federal agencies,  tax cuts, etc. 

It's also important to remember that a lot of things need to happen before monies are released, persons and organizations have to apply for grants, businesses need to first feel that the marketplace can support expansion, internal investments, etc.

I suspect some of the bigger impacts will come from the money towards extending unemployment benefits, the tax cuts, spending on social service programs, support for the states and the oft touted infrastructure projects. However it's important to note that some of impact will be more along the lines of keeping things from getting worse, more than they will be in the form of driving growth.

Staying on the topic of the stimulus package: here is a look at what various economists suggested we citizens do with the $8/week we're getting from the tax cut in the stimulus package. So you're aware some of the economists gave very serious answers, whilst other's responses were very tongue in cheek.

If I had a suggestion? Buy a finance textbook and learn how the financial system actually works, people who understand what an annualized return means, can put together an amortization schedule, and can understand the true mathematical nature of their financial decisions, etc, are much less likely to get into trouble.

Here is a link to a FT special section on the Robert Stanford fraud containing a collection of various articles and blog posts on the topic.

  John Gapper write an interesting column on Madoff, Stanford and other fraudsters, noting how their egos led them down the wrong path.

Here is a look at how the Florida is handling foreclosure cases with a veritable "Rocket Docket", where homeowners often hearings that consist of "20 seconds and two questions" , an interactive graphic with accompanying audio can be found here. The reason for the "judicial velocity" is the fact that many judges are hearing over 1,000 court cases per day, so there just isn't time to hold a more thorough hearing. This despite the fact that in many instances less 1/2 of the homeowners even show up in court in the first place.

If the number of foreclosures is any indication Florida's real estate market may not recover until well into the next decade.

Finally let's wrap this up with a look at Chrysler's restructuring plan; nothing really more to say beyond what I've said before: bankruptcy is probably the best option, otherwise the company will either die or have to be supported by the government. The other aspect of this is that a post-bankruptcy Chrysler might be more attractive to Fiat as far as actually putting some cash on the table. The investment makes more sense when you're not buying into a slew of liabilities the company can't service.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 04:09 PM | Permalink | Comments (0) | TrackBacks (0)

Let's look at the Brand Consolidation aspect of the GM Restructuring Plan:

Hummer is going to be phased out by the end of the year. Nothing much to say here: shoot this one, it's dead. 

Pontiac will be scaled back and refocused as a "niche automaker", no doubt with a focus on the company's high-performance automobiles. This makes perfect sense as it makes more sense for Pontiac to sell high-powered G8s than it does for it to compete against Chevy with run of the mill mid-sized family cars as well.

Saturn will be phased out by 2011 unless "no alternatives arise ", one of those alternatives is a proposal by a group of Saturn dealers to spin the brand off into an independent company. One of their ideas is that they would eventually sell "Saturns" that were produced by Chinese and Indian manufacturers. 

The situation with Saturn is truly a shame as it was a brand that was building up a solid following in the early 90s; after all can anyone name a domestic car brand that had people showing up for an annual festival? While I'm sure there are festivals around niche products like the Corvette or the Mustang, a festival for a domestic car brand is rare. Normally that's something you only see for brands like BMW or Porsche.

Even if the spin-off occurs I don't see how Saturn survives. Having to depend on no-name foreign OEMs to produce your product may work for DVD payers at Wal-Mart, but it's a different story in the auto industry. Because not only do you have to sell people on spending money on "Saturn", but you have to also sell them on trusting a manufacturer they've never heard of, and it's not like Saturn currently has any brand equity you could leverage in the proposed scenario. 

It's not the same as when VW bought the rights to the Bugatti name, and high-end enthusiasts that the same company behind such brands as Audi, Lamborghini and Bentley would be producing the cars.

Saab will be sold off and may even have to file for bankruptcy by the end of the month, either GM plans is for Saab to be an independent company by the end of the year. The support of the Swedish government would be needed to complete a sale, but initial reports seem to indicate that the Swedes aren't especially interested .

I concerned about Saab's survival as well because nearly all of the potential suitors are dealing with their own issues around declining sales, losing money, etc, not to mention the fact that it's a massive turnaround project. GM has to both find someone who is interested in buying Saab, in addition to finding someone who can afford to make the investment. Chances are if Saab is sold it won't be a real "sale", more like someone taking the company over in exchange for future considerations if the deal turns out to be profitable.

Here's hoping that my earlier fantasy of VW buying Saab comes true, if VW can resurrect Bugatti from the dead I'm sure they can save Saab.

While the above is definitely a good start I would've liked to have seen GM drop Buick as well, and either kill the cars in the brand's current line-up and/or rebadge a few of them as lower-end Cadillacs. Think: Cadillac's answer to the place the Audi A3 and the Acura TSX serve in the respective carmakers lineups.

It's probably not a bad idea to drop GMC as well, because all marketing speak aside they're just allegedly higher-end versions of Chevy trucks. Not to mention the fact that anyone buying a GMC knows that they're getting a GM product, and that their purchase isn't markedly different from its Chevy Cousin. Popular GMC vehicles should be able to be marketed as higher-end entrants in the Chevy line-up with any problems. 

You can read a PDF version of GM's restructuring plan here, and WSJ coverage of it here.

As for the plan itself I figure you can either go all in or make baby steps, and while the company has made some significant progress I'm still firmly in the bankruptcy camp. It seems to me that the company's management (and our politicians) are focused more on saving/propping up the old GM, then they are in remaking the company into something all together new and successful.

Sources:

The Wall St. Journal: "GM Seeks $16.6 Billion More in U.S. Aid" -- John D. Stoll, Sharon Terlep, Alex P. Kellogg, February 18, 2009.

General Motors Corporation: "2009 -- 2014 Restructuring Plan" -- February 17, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:54 PM | Permalink | Comments (0) | TrackBacks (0)

The usual mixture of news stories and other tidbits I think you may find interesting:

An update on the Sirius-XM Radio situation: it appears that there is a proposal on the table whereby John Malone's liberty media would invest into the company in exchange for an eventual 50% stake. Nothing is definitive at this point but it does appear that Sirius-XM may not only be able to avoid bankruptcy, but avoid having to accept an investment from/being taken over by Charles Ergen. In truth this is sort of becoming a battle between Malone's Direct TV and Ergen's Dish Network, as both are eying Sirius-XM as a valuable addition to their respective empires.

For now it appears that Sirius-XM will either by rescued by one of two moguls, as I can't see the company turning down an investment from either one of them if the only other option is bankruptcy. The larger question is: how will the two companies be eventually integrated? While neither Malone or Ergen have said anything such plans, it's rather obvious that their end game is to leverage synergies from owning both a Satellite TV and a Satellite radio company.

Here are two updates related to R. Allen Stanford a Texas billionaire who runs multiple companies as part of a wealth management business:

Multiple federal agencies are looking into R. Allen Stanford's offshore bank in Antigua, their suspicions raised by the fact that the bank offers yields on CDs that are twice the national average. As a result several depositors have gone to Antigua to withdraw their money from the bank, which may serve to hasten the revelation of any fraudulent activity and/or simply cause the bank to fail altogether if the run on the bank gets large enough.

I won't comment as to the veracity of the allegations as I don't have enough information to make a judgment one way or another, I'll just say that it's about time the Feds started looking into things that are "too good to be true" before they come a problem.

Here is a look at the struggles likely to be faced by various Luxury Car Makers, according to the article all of them stand to lose money in the coming months as decreased demand in markets like the U.S. and the U.K. eat into profits. However their losses are likely to be mitigated by a combination of low debt and high cash reserves, especially when compared to their more mainstream peers.

The challenge for these companies will be to resize their operations to meet demand from the "truly affluent " as opposed to the "Poseur Class ", who used faux wealth from easy credit, housing appreciation or just plain overspending to live above their means. Think: individuals earning $50-$70k who used good credit, bad habits, etc, to finance luxury cars that were out of their realistic price range. 

For my fellow entrepreneurs here is  piece from the WSJ on how small business owners can cut their costs by renegotiating with vendors, landlords, etc.  In the current environment every dollar of savings helps, so you might as well find out if your partners are willing to work with you.

Here is a look at how the City of Charlotte, NC (AKA Wall St. South) is suffering from the fallout caused by the decline of Bank of America, and Wachovia's effective failure and later sale to Wells Fargo. How the city will fare in the future and/or it's status as a banking hub is hard to determine at this point, because we don't yet know how the dust is going to settle in the banking world in general. However I wouldn't be surprised if the city effectively loses Wachovia, but is able to mitigate some of the talent/job losses by other banks moving in to take advantage of talent, office space, etc.

But like I said it's anybody's guess what the banking world will look like ten years from now, so it's all speculation at this point.

Speaking of struggling cities here is a look at "America's Emptiest Cities" as in the cities with the highest rental and homeowner vacancy rates, in addition to having lost the most residents on a % basis. I would anticipate that there are going to be a lot of outlying suburbs that are going to suffer as well, as these areas tend to be more comprised of hastily constructed sub-divisions as opposed to being legitimate communities. Even if that's the case for a particular area, it stands to reason that the trend of "ghost town developments" will only get worse as the year rolls on.

The other thing to think about here is that a lot of condos, housing developments, etc, were built based more on demand from speculators (who purchased 25-33% of all homes during the boom) than they were from people who were looking for housing.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 07:30 AM | Permalink | Comments (0) | TrackBacks (0)

Here is a quick update on Chrysler and GM's restructuring plans as they head towards the February 17, 2009 deadline:

It appears (for the moment) that both are sticking with an attempt to restructure their way out of trouble as opposed to filing bankruptcy. While any attempt to cut costs and restructure operations is a step in the right direction for these companies I think it's just delaying the inevitable, as only bankruptcy offers the needed agility as far as breaking old commitments, shedding dealerships, cutting back on debt, etc.

The other issue is that avoiding bankruptcy in the short-term not only delays the inevitable, but it wastes precious resources that could be better utilized if put towards revitalizing a post bankruptcy GM or Chrysler.

However if the rumors are true GM's bid to avoid bankruptcy may be helped by a group of bond holders who are willing to swap debt for equity in a newly restructured company. Considering that these bond holders own 62% of GM's debt ($28 billion), it would be a significant step towards turning GM around.

In my view the potential deal with the bondholders is just one leg (albeit a very significant one) of a stool that includes restructuring labor agreements, shedding dealers, consolidating brands and removing other long-standing liabilities. Still, while I would prefer to see this deal as part of a bankruptcy restructuring I can't deny that it would be a rather positive step in the right direction.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 04:24 PM | Permalink | Comments (0) | TrackBacks (0)

I figured this story was important enough to suspend my usual moratorium on Saturday blogging…

…although nothing is official yet and the bulk of this information comes from "unnamed sources", it does at least appear that GM is seriously considering a bankruptcy filing as a path to profitability, as opposed to the current strategy of creating a "viability plan".

(From the WSJ): " General Motors Corp., nearing a federally imposed deadline to present a restructuring plan, will offer the government two costly alternatives: commit billions more in bailout money to fund the company's operations, or provide financial backing as part of a bankruptcy filing, said people familiar with GM's thinking.

The competing choices, which highlight GM's rapidly deteriorating operations, present a dilemma for Congress and the Obama administration. If they refuse to provide additional aid to GM on top of the $13.4 billion already committed they risk seeing an industrial icon fall into bankruptcy.

Some experts and members of Congress say bankruptcy reorganization is the surest way for GM to cut costs and become viable. But it could be a politically unpalatable development during a recession that already has thrown millions of workers out of jobs.

Treasury Department officials believe GM needs at least $5 billion more in U.S. loans to keep operating beyond the first quarter, said people familiar with the situation.

The call for additional funds will be a key part of the revitalization plan GM is required to file with the Treasury by Tuesday, though it is unclear whether GM will furnish a dollar amount, said people familiar with the matter. The plan is supposed to describe how the company will become self-sustaining and better compete with foreign rivals.

But it's increasingly unlikely GM will have a finished plan in time. Negotiations with GM's unions and bondholders haven't yet produced commitments to concrete concessions as required by terms of the federal loans; talks are expected to continue over the holiday weekend. People involved in the talks say progress has been slowed by the fact the Obama administration has yet to appoint a "car czar," as envisioned by the bailout program…

...GM's board began more seriously considering bankruptcy in November as the company's liquidity headed toward unsustainable levels. In early December, at the board's prompting, Mr. Wagoner hired bankruptcy lawyers and advisers to begin preparing a contingency plan, said people familiar with the matter.

In the months that followed, these bankruptcy experts worked alongside advisers Evercore Partners and Morgan Stanley , both of which previously worked for GM, to develop multiple options for GM's future.

One plan includes a Chapter 11 filing that would assemble all of GM's viable assets, including some U.S. brands and international operations, into a new company. The undesirable assets would be liquidated or sold under protection of a bankruptcy court. Contracts with bondholders, unions, dealers and suppliers would also be reworked."

Graphic courtesy of the WSJ

Personally I believe that this is the best news to come out of GM since the announcement that they're bringing back the Camaro. There is actually a good car company under the morass that is GM, and a Chapter 11 filing could allow that company to breathe without being crushed by the weight of liabilities and debts the company can't possibly service. Even if GM was able to create a viability plan that keeps the company (as presently structured) more or less intact, they're still going to be at a competitive disadvantage to companies who are significantly more operationally efficient.

Bankruptcy is the best option because it gets to the heart of the problem: GM's operational inefficiencies. As I've noted dozens of times companies like Honda are able to generate multiple of GM's profits with a fraction of the market share, GM's woes aren't a function of a lack of market share they're a function of a lack of efficiency. 

My only concern is that there may not be enough political will within GM and (more importantly) in Washington to make this happen. In an era when the government is considering paying a portion of people's mortgage payments in order to prevent foreclosures, it's not hard to imagine a reality where the government would refuse to support a bankruptcy. The job losses within GM, at car dealerships, the loss of payments to local municipalities, etc, might be too much for the government to stomach.

I suppose the question of the day is: are the Government and GM ready to partner-up and remake the company into one that's right sized for the age, or are they going to continue to try and prop up the old model due to the large number of people, organizations, municipalities, et al it supports and/or subsidizes?

If they choose the former GM survives and becomes a profitable car company that is better positioned to innovate and compete against it's foreign competitors, if they chose the latter than GM will inevitably fail and cost the taxpayer 10s of billions along the way.

Sources:

The Wall St. Journal: "GM to Offer Two Choices: Bankruptcy or More Aid" -- John D. Stoll, Sharon Terlep, February 14, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 04:47 PM | Permalink | Comments (0) | TrackBacks (0)

Recently a J.P. Morgan analyst put forth the idea that a GM Bankruptcy makes more sense now then it did a few months ago, because the consumer has probably been desensitized to the idea after the recent government rescue of Chrysler and GM.  He also estimates that GM can reduce their debt by 65% by declaring bankruptcy, as opposed to only by 25% via an out of court restructuring.

When it comes to a GM bankruptcy I think the important metric is the magnitude of debt reduction, rather than the damage done to the public's perception of the company. At the moment GM sells enough cars to be profitable, however their debts, labor agreements, bloated infrastructure, etc, don't provide them with the efficiency needed to turn a profit. . Conceivably the company could cut their debts by 25% and still have trouble turning a profit, so it just makes sense to declare bankruptcy in order to get the maximum cost savings.

A 65% reduction in debt would go a long away towards making the company more efficient, and is probably worth the loss of market share

Furthermore I think the amount of damage to the GM brand from a bankruptcy is moot at this point because GM's brand value is in the toilet anyway, how much brand equity can GM have when they're selling cars at employee pricing, with heavy incentives, at a loss, etc, just to get them off the lots? Once you've established yourself as the low cost provider you don't have much in the way of brand equity, because the marketplace won't pay a premium for your product.

As a result now is probably a good time to declare bankruptcy and reap the savings from a major debt restructuring as the public's perception of GM can't fall much lower, and the company could probably leverage the bankruptcy related cost savings to be the low cost provider AND make a profit.

There is nothing wrong with GM being the Wal-Mart of the car industry as long as their operations are structured in a way that supports that business strategy, and bankruptcy seems like an avenue that can get them there.

Sources:

Reuters: "GM bankruptcy could seed restructuring: analyst" -- Jui Chakrovorty, February 09, 2009

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 06:48 PM | Permalink | Comments (0) | TrackBacks (0)

Speaking of nonsensical proposals to encourage car purchases:

(From the WSJ): "The persistent slump in the U.S. auto industry promises to take center stage once again as car companies report January sales today, and the big question continues to center on what is needed to jump-start demand.

John Bergstrom, an auto dealer with a substantial collection of stores in Wisconsin, has a potential solution. Uncle Sam should dole out $5,000 discounts.

“If the government, manufacturers, the financial institutions, and the dealers all work together, we could give our economy a huge positive jolt,” he wrote in a letter to President Barack Obama late last week. “If for 90 days, February 15 through May 15, everyone who purchased a new vehicle in America (no matter where it was built) will be given a government voucher for $5,000; and the manufacturer would match it with another $5,000 voucher…we could get this industry rolling again in a hurry.”

Mr. Bergstrom’s plan assumes that dealers would agree to sell vehicles at the invoice price, and that auto finance companies would finance qualified buyers with a 72-month loan at a 5% interest rate. “We could eliminate the stranglehold inventories of new vehicles piled up across the country, and we would generate new vehicle orders…

...The initiative has generated some support among Mr. Bergstrom’s peers in the auto retailing sector, but it would be costly. In order to get sales back to a more robust level — 15 million annually — or nearly 4 million sales during the three-month period in the plan, the government would need to spend about $19 billion, and the auto makers would need to match with $19 billion in discounts.”

In all honesty I would normally ignore something like this but considering some of the proposals that are floating around congress, I think I have to take this seriously as this proposal doesn't seem so far-fetched anymore.

However when some car dealers are already offering cars at 50% off, selling cars at $10k less than invoice isn't that much of a deal anymore (if at all). Not to mention the fact that heavy discounting and incentives didn't exactly prevent Detroit from losing money during the credit boom, which suggests that it's unlikely to show positive dividends now.

But aside from the specifics of the proposal, it's really more of an example of how disconnected some in the auto industry are from the financial realities many households are dealing with. While some are trying to portray the decline in car sales as being merely due to a loss of confidence and tighter credit standards, the real truth is that consumers are pulling back for some very valid reasons and their loss of confidence didn't occur in a vacuum.

There is nothing the government (or automakers) can do to give people confidence, when the reason they've lost their confidence is rising healthcare costs, strapped budgets, high debt loads, and risk of job loss (if they haven't lost them already). Not to mention the fact that banks are no longer able to originate auto loans that enable people to spend above their means, an ill-advised practice in the first place. 

I think automakers, industry leaders, politicians, etc, need to wake-up to the fact that many consumers have decided to make decisions that are in their own economic best interests, as opposed to the interests of those that want them to spend their households into financial oblivion.

The way to save the economy is to figure out a way to adjust to being a nation of savers (or a nation that saves more at least), as opposed to trying to figure out how to make bad financial decisions.

You can read more here.

Sources:

The WSJ: "Dealer Suggests $5,000 Government Vouchers To Boost Sales" -- John D. Stoll, February 3, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 12:09 PM | Permalink | Comments (0) | TrackBacks (0)

Here is a look at some of the recently announced additions to the ever growing stimulus package:

(From the Associated Press): "WASHINGTON – The cost of President Barack Obama's economic recovery plan now exceeds $900 billion after the Senate added money for medical research and tax breaks for car purchases.

It could go higher Wednesday if a tax break for homebuyers is made more generous, even as centrists in both parties promise to clear away spending items that won't jump-start the economy immediately.

In an interview on CNN, Obama signaled a willingness to drop items that "may not really stimulate the economy right now." He also signaled he'll try to remove "buy American" provisions in the legislation to avoid a possible trade war.

In a victory for auto manufacturers and dealers, Sen. Barbara Mikulski, D-Md., won a 71-26 vote to allow most car buyers to claim an income tax deduction for sales taxes paid on new autos and interest payments on car loans. The break would cost $11 billion over the coming decade but could mean savings of $1,500 on a $25,000 car.

"Just as we need to get the housing market going, we need to get auto sales going," said Sen. Debbie Stabenow, D-Mich.

Wednesday's session could produce even more generous savings for homebuyers.

Sen. Johnny Isakson, R-Ga., is pressing for a tax credit of up to $15,000 for everyone who buys a home this year, at a cost of $18.5 billion. The pending measure would award a $7,500 tax credit only to first-time homebuyers."

So the first thing I thought of when I read this is the fact that you can only deduct medical expenses that exceed 7.5% of your AGI. Furthermore you have to itemize these deductions, so you only see a benefit if your expenses exceed both 7.5% of your AGI AND your standard deduction amount ($10,900 married couples, $5,450 for single people in 2008). For a household earning $50k/yr this effectively means that your medical expenses have to exceed $14,650.00 (7.5% of $50k = $3,750), for you to see any benefit from deducting them.

Considering that $14,650.00 is 29% of $50k, it stands to reason that the married couple in the example above would be near destitute prior to being able to deduct any of their medical costs.

Finally self-employed people and/or people who have private health insurance plans cannot deduct the cost of their health insurance, thereby adding a veritable extra tax on the self-employed and other individuals who don’t have insurance through their jobs.

Doesn't correcting the situation around the deductibility of health insurance and medical expenses make more sense than giving people tax breaks for buying cars? Especially when medical expenses are one of the leading causes of people having to declare bankruptcy? Correcting the situation around deducting medical expenses would do a lot more to put cash in people's pockets, than would tax incentives that encourage people to buy things.

Perhaps the thing that bothers me the most about this is the fact that many analysts, pundits, politicians, industry leaders, etc, are unwilling to accept the fact that after years of overspending the consumer is finally doing the smart thing and pulling back. Debt laden consumers who are dealing with higher payments on their mortgages, miniscule savings, rapidly rising healthcare costs, on top of potential job loss (if they haven't been laid off already), don't necessarily need to run out and buy new cars.

While it's easy to say that Joe & Jane consumer should purchase new cars for the sake of the economy even if their current cars are running just fine, who is going to pay Joe & Jane's bills if they lose their jobs, are hit with an economic shock, have sudden medical expenses, etc?

Perhaps instead of encouraging people to continue (or revisit) their bad habits our government should be thinking about how to incentivize savings, and re-vision the economy for a nation of savers as opposed to a nation of irresponsible spenders. Putting incentives in place to encourage people to spend like the days of old may provide short-term dividends, but it will only lead to a long-term disaster as overspending is not a sustainable situation.

Finally the numbers at play here are ridiculous: the proposed tax break would cover single individuals who earn up to $125k and married households earning up to $250k, for cars that cost up to $49,500.00. In my view it's nonsensical to think that households that earn more than 2-5% of the population need the taxpayer to subsidize their luxury car purchases. If the government is going to go through with this idea they should cap  the car's value at $25k, and make it available only to people earning the median income for their respective metro area. 

Mind you I say this even though it goes against my own self-interest, however I just don't think a middle income family in Peoria should be subsidizing the cost of my next BMW.  

Call me crazy.

Sources:

The Associated Press: "Obama economic plan now tops $900 billion" -- Andrew Taylor, February 4, 2009.  

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 11:11 AM | Permalink | Comments (0) | TrackBacks (0)

With all of the talk about Fiat & Chrysler there is one thing we can be certain of, the company is looking both to market it's fuel efficiency technologies outside of its home market and to expand into the U.S. So, I figured it would be a good idea to take a look at their product line-up:

First, here is a link to their web site for the U.K, not saying we'd get the same line-up in the U.S. but it is an English Language site and it appears to be probably fairly representative of their product line.

Next a couple of photos: *All Photos Courtesy of Fiat

The 500

The Qubo

The Grand Punto (5 Door)

Bravo

Linea

Looking through the cars they remind me of Ford Focuses (or is that Focui?), Honda Fits, Scions and Minis but with much nicer interiors than your typical compact car, and while these cars aren't exactly my taste they do sell quite well here so there is probably a market for Fiats in the U.S. I think it's going to be a matter of finding the right strategic partner, as well as providing the right branding message to American consumers.

If were to suggest an approach it would go same route as BMW took with the Mini when it was introduced to American market: something hip, quirky and generally different, which just happens to be cost effective and fuel efficient. The idea for this is that you can't build a brand around just being cheap, and since the cars do fit into the same general "appearance genre" as other cars with hipster appeal you might as build your brand around that. The idea would be to build a sense of cachet around the cars, so that they're something people will still want even if they can afford something more expensive.

E.g. they should be trying to compete with the Mini, Scion and VW Jetta as opposed to Corollas, Civics and Focuses, by selling premium versions of the cars they sell in Europe.

At the end of the day marketing Fiats as Italian Scions and Minis as opposed to Italian Kias will probably generate more sales, and build more brand loyalty over time, as your competitive edge is something beyond being simply being low cost. Plus if you have a customer base that includes people who wouldn't normally be in the market for an economy car, it provides you with an opportunity to make extra revenue/inflate your profits by selling various accessories and add-ons.

Part of Toyota's success with the Scion models is that they're heavily customizable, which allows Toyota (and their Dealership network) to make a lot of extra cash per car sold thus making the cars significantly more profitable then your typical compact car.

Still, it's still a couple of years before Fiat hits the U.S. market and we'll just have to wait and see how they're going to market their cars, position the brand in the marketplace, etc.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 03:53 PM | Permalink | Comments (0) | TrackBacks (0)

Here is a quick run down of Ford's results for 2008:

(From the NY Times): "DETROIT — After closing the books on a $14.6 billion loss in 2008 — the worst annual result in its 105-year history — Ford Motor Company said Thursday that it would draw the last $10.1 billion from its lines of credit to add to its cash hoard so that it could survive the increasingly bleak vehicle market.

Ford ’s chief executive, Alan R. Mulally , said the company, which tapped credit markets to build its cash reserves well before the economy soured, remained determined to finance its operations without the federal aid that was extended to its crosstown rivals, General Motors and Chrysler .

“I think there’s more awareness than ever that Ford is on a very different path,” Mr. Mulally said in an interview.

He added that it had become a marketing advantage for Ford with consumers shopping for an American car. “Our dealers have told us that people know that Ford is in a better place,” Mr. Mulally said.

Ford joined G.M. and Chrysler in December in asking Washington for a combined $34 billion in loans, but has since backed away from seeking its portion of the request. G.M. and Chrysler, however, needed $17.4 billion in emergency loans from the Treasury Department to avoid filing for bankruptcy...

...Ford’s miserable sales in 2008 worsened sharply in the fourth quarter, with nearly $6 billion of the total $14.6 billion loss coming in the fourth quarter. It was a year in which Ford’s revenue declined almost 20 percent, and its cash reserves declined by $21 billion.

The automaker ended 2008 with $13.4 billion in available cash, which it will augment by tapping into its credit lines for another $10.1 billion.

Ford’s financial health owes considerably to its decision in late 2006 to mortgage its assets and arrange long-term borrowing before the credit markets dried up.

Now, with more than $23 billion in hand, Ford can keep spending billions of dollars on new products during what promises to be another tough year for vehicle sales around the world.

Ford said Thursday that it expects the United States market to total 11.5 million to 12.5 million vehicles in 2009. Last year, industry sales fell 18 percent, to 13.2 million vehicles.

The company is also forecasting lower sales in the already depressed regions of Europe and South America, and little if any growth in Asia. "

While Ford has established itself as the "healthiest" of the Detroit automakers in terms of available cash, let's not forget that the company's relative health comes with a heavy price. Namely: Ford effectively mortgaged the entire company to raise cash in 2006, and as a result has nearly 3 1/2 times the debt load of GM (as of 9/30/2008), $156.8 billion vs. $45.2 billion.

In other words Ford's relative health comes more from having greater access to credit than GM, as opposed to having had stronger sales, more efficient operations, etc, etc.

All that being said: while I have more faith in Ford's ability to survive than say Chrysler, I'm still rather skeptical overall because of the size of their debt load and the fact that they weren't making money when car sales were at record highs (for the market overall at least). Furthermore the "recovery" the automakers are waiting on isn't going to be like the old market in terms of SUV/Truck sales, and the ability of consumers to finance vehicles that are well above their means.

The days of Ford selling $35k Explorers to people who earn $40k/yr are over.

At this stage it just remains to be seen whether or not Ford can introduce the necessary operational efficiencies, on top of having a better product strategy around bringing stateside some of the cars designed by their European subsidiaries, cutting back on product overlap, etc.  Having greater access to credit than GM is meaningless if the money is spent funding the old way of doing things, and they aren't able to become efficient enough to be profitable.

Let's also not forget that despite Ford's stronger cash position relative to GM and Chrysler, Ford dealers are still offering cars for 50% off. I'm actually considering an SUV at the moment and the Explorers are tempting because I can get a decked out one with low mileage for under $16k, whilst a 4-Runner with similar content would cost me well over $20k. However this isn't necessarily an advantage for Ford because they won't make any money off of me buying an Explorer at their 2 for 1 sale, while Toyota WILL make money if I buy a vehicle from them.

Furthermore being the "strongest" of the Detroit Automakers isn't a competitive advantage when it comes to the Japanese manufacturers, as being less "functionally bankrupt" than GM & Chrysler isn't going to help them sell Fusions to potential Camry buyers.

I suppose the question offered is: is this still the Ford that doesn't even sell some of its best products in the U.S., or has the company woken up and realized that many of its prior assumptions, strategies, etc, for the American market were patently fatuous? Finally, are they going to be capable of introducing the cost efficiencies needed for their survival, especially considering the $156 billion (and growing) worth of debt they need to service?

You can read more here(NY Times), and  about Ford's plans to draw down their credit lines here (FT).

Sources:

The NY Times: "Ford Reports a Record $14.6 Billion Loss for 2008" -- Bill Vlasic, January 29, 2009.

*All Data related to total debt provided by Yahoo Finance.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:42 PM | Permalink | Comments (0) | TrackBacks (0)

The usual mixture of news stories and other tidbits I think you may find interesting:

Santander is offering $1.8 billion to individual clients that were ripped off by the Bernie Madoff fraud in a move that's probably designed to both maintain the bank's image and avoid lawsuits, I hope other banks and money managers follow suit but with the current state of things there is no guarantee that they will or can even afford to.

Either way the Madoff fraud is indicative of the fact that regulators and money managers are all too happy to look the other way as long as everything appears fine, as opposed to their true role/purpose: to keep a vigilant eye on things even when things are going well, so as to head off any future problems before they become a major crisis.

The potential for the Obama administration to create a "bad bank" that will absorb the bad assets held by other banks led to a rally in the US financial markets today. Personally I'm not too keen on the idea because even if the banks are able to dump their bad assets they're still going to have capitalization problems, the debts they owe on these assets will still be around, etc, etc. Furthermore if the original vision for TARP was a bad idea, how is doing the same thing via an giant bad bank any different?

Perhaps someone in the Obama administration should remember that calling a foul smelling rose a different name won't make it smell any better.

Not to mention the fact that creating a financial institution to hold these toxic assets is nothing more than massive theft of taxpayer dollars, because all it will do (ultimately) is allow the banks to dump bad assets at inflated prices (in all likelihood) and transfer their mistakes onto the backs of the taxpayer.

CNET provides an inside look at a Circuit City liquidation sale , suffice it to say the discounts weren't very good in many instances and it appears the general model is to offer 10% off MSRP as opposed to a large discount on top of an already normally discounted (vs. MSRP) price.

I'm not especially surprised by this as this was pretty much the case during the CompUSA liquidation sales, and at the end of the day the company running the liquidation is trying to make as much cash as possible and is effectively using the lure of extra cheap prices as a marketing gimmick.

In labor news here is a link to an interactive graphic displaying the YoY change in unemployment rates in various parts of the country, the graphic comes from a larger article from the WSJ discussing unemployment rates reaching 10% in certain states, which you can find here.

The thing that concerns me the most about the layoffs isn't so much the short to medium term impact, it's the potential longer term impact if companies find ways to return to old productivity levels with fewer workers (as they did during the last recession), people in high paying manufacturing jobs who are now forced to go work at the local Wal-Mart, or situations where a company disappears and its competitors are able to "pick-up the slack" whilst only needing to hire a fraction of those who lost their jobs.

For instance, think about the Circuit City situation: Best Buy, Costco and other electronics retailers aren't going to need to hire a similar # of people as were laid off from CC to deal with the increase in business caused by Circuit City's demise. They'll probably only need to hire a fraction of that number, and will probably be able to absorb the increased volume with their existing employee base.

On a somewhat related topic here is an article from the WSJ around the potential Auto Dealer shakeout (primarily for the Detroit brands), this is another instance where some jobs will be gone for good as the surviving dealers will be able to handle the demand from customers.

The other side of this is that the Detroit brands undoubtedly have way too many dealers vs. their sales volume, and so some level of scaling back will be needed in order to make the overall organization (Automakers & their dealers) more efficient. Here is a quick anecdote to illustrate this, within 10-15 minutes from my home (a close in Suburb of Seattle) there are about eight Ford Dealerships (over 20 in the metro area), and about two Toyota dealerships. Expanding it to include the larger metro area yields a similar ratio.

Thing is it goes without saying that Toyota sells more cars than Ford especially in the import happy Northwest, so who is getting the most bang for the buck as far as the cash they're investing into their dealer network?

Moving forward Detroit really needs to think in terms of bang for the buck, as opposed to the current model that (or at least appears to) seems more concerned with size then overall efficacy.

In lighter news there is a support group in for the wives and girlfriends of bankers who feel neglected (either emotionally or financially) as a result of the economic downturn. While I can  definitely emphasize with families who suffer from former, I think it's a sad statement on our society that people are forming support groups to deal with the "hardship" of fewer luxury items, and it's no wonder that our country has spent itself into a near depression.

IF anyone should be forming support groups over the loss of financial strength it should be the families of autoworkers, and other middle class workers who may very well find themselves working at Wal-Mart and making a fraction of their former wages.

Call me crazy

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:10 PM | Permalink | Comments (0) | TrackBacks (0)

Staying on the topic of the Auto Industry, here is a great little tidbit about the CEO of AutoNation speaking out against the Detroit automakers offering "wholesale incentives" in order to get dealers to carry more inventory during a time when sales are declining:

(From the WSJ): "...Mr. Jackson is at it again, this time railing against “wholesale incentives” — financial bonuses auto makers pay if dealers agree to take additional inventory. Chrysler just announced a program this week to get dealers to stock up at a time when vehicle sales at sagging.

At a J.D. Power & Associates conference in New Orleans, Mr. Jackson said the use of wholesale incentives is “a dangerous new development.” He said this is “not in the best interest of the manufacturer” because the extra vehicles any dealers order will most likely languish on dealer lots and the car maker will only end up slapping big rebates on them later to clear them out.

“To me,” he said, “it’s a little bit like being in winter storm and p—— on your boot to keep your foot warm.”"

While Mike may have used some rather harsh language you really can't argue with his point, Detroit needs to learn the difference between making a sale at any cost and making profitable sales. It's better to have a profitable 10% share of the market then to have a money losing 20% share of same.

In other news I don't know much about Mr. Jackson but I have to say I find his candor refreshing, as a consultant I deal with so much corporate double speak, spin and sugar coating that it sometimes makes me feel quite ill. Needless to say I'm the guy who sometimes ruffles feathers for being blunt, but what they call being blunt, I call being honest and objective.

But perhaps that's a topic for another post.

You can read the original article in full here; the WSJ's Auto Industry tracker is a great little blog on the auto industry and you can find it here.

Sources:

WSJ - Auto Industry Tracker: "AutoNation's Mike Jackson Calls New Incentives Dangerous" -- Neal E. Boudette, January 23, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 11:11 AM | Permalink | Comments (0) | TrackBacks (0)

As I've discussed before I was a fan of Saab in the 80s and early 90s, an enthusiasm that has waned over the years as Saabs turned into Frankenstein assemblages of what was once Saab and the GM spare parts bin.

That being said I do rather like the new Saab 9-3 and have high hopes for the next 9-5, which leads me to a question: assuming that GM has to dump Saab in order to focus on its core brands, who would be a good suitor for the company? Better yet: who is a synergistic fit with respect to technology, a dealer network and the right sort of mindset to guide the company back to prominence?

As I'm more interested in seeing the company thrive as opposed to simply being absorbed into another automaker's product portfolio, I'm looking at this purely from the perspective of a company whose technologies could take the product to another level.

I.e. whose power trains, suspensions, interiors, etc, would I like to see mated with Saab?

After mulling it over for a bit VW seems like an obvious choice to me, as they seem quiet adept (in my eyes at least) with collaborating technology wise across their various brands, and with Porsche (AKA the company's frequent development partner and likely future overlords). The collaboration skill is of particular importance, as technologies, design skills, etc, which benefit Audi could also be used to benefit Saab as well. Finally they pulled off arguably one of the greatest automotive brand resurrections of the last 20-30 years, when they took Audi from a place that wasn't that much better than where Saab is now to being a major player in the luxury sports sedan world.

Once you accept that whomever takes over Saab is likely to use a lot of their spare parts bin to produce the cars, it doesn’t take a genius to realize that a 9-3 built on a similar platform (and with similar technologies) as an Audi 9-3 is likely to be an instant player. A Saab built on an A3 (or A4) platform, utilizing a form of Audi's Quattro AWD system, sharing engines, transmissions, etc, and leveraging Audi's interior design expertise would undoubtedly be a marked improvement over the current vehicles. Plus these technologies could conceivably be introduced without ruining the little quirks that make Saab, well, Saab.

At the moment Saab is producing a solid car but one that just lags behind its key competitors in the areas of performance, refinement, luxury, etc, a collaboration with VW/Audi could be just the thing to get the company into a position where it's competing with the big boys.

Plus VW and Saab dealers would probably go quite well together as people who are willing to pay over $30k for a Passat might also be interested in giving a 9-3 or a 9-5 a once over before making a decision, especially if they know the car is full of the German DNA they already love as opposed to being a weird offspring of Saab and the GM spare parts bin. 

Of course this is all speculation and dream work at this point, because with Saab sales in the cellar and dealerships disappearing on a regular basis (the Saab dealership I mentioned over the summer is now defunct), the question offered is: who would want to invest in Saab in the first place, especially in the current climate? Not to mention the fact that the people who bought those Bavarian-Swedish Saabs may very well be the same people who would buy Audis anyway, as opposed to winning sales away from BMW or Lexus.

So the key to an existing luxury car company revitalizing Saab would be not only to endow the company with technologies from its existing products to dramatically improve the car, but to do it in a way that allows them to either compete within a new price point or pursue the customers that tend to pick their competitors cars.

This idea (of course) suggests that BMW might be a better choice than VW because even though their existing technologies aren't as synergistic a fit, a very competitive yet lower priced sports sedan could conceivably allow them to pursue customers who would like a BMW but find them too expensive, or need something more practical as far as trunk space, passenger room, etc.

No matter what happens I think the key to Saab's long-term survival is to pare up with an automaker who already has very competitive products within the segments they aspire to, thus giving Saab the extra push it needs (from platforms, engines, etc) to make the company competitive again.

Still, only time will tell, I sincerely hope that 10 years from now that Saab hasn't gone the way of the Packard.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 03:30 PM | Permalink | Comments (0) | TrackBacks (0)

Just the usual "mixture" of news stories and other tidbits I think you may find interesting.

A quick follow-up to the earlier post around the Chrysler/Fiat tie-up, apparently the deal is contingent on Chrysler receiving an additional $3 billion in government loans ;

Update:   according to a Fiat Spokesman the deal is not contingent on Chrysler receiving a $3 billion loan from the government.

(From the Associated Press): "ROME – A Fiat spokesman said Wednesday a deal for the Italian auto company to take a 35-percent stake in Chrysler is "absolutely not" contingent on the struggling American carmaker getting an additional loan from the U.S. Treasury Department.

Spokesman Gualberto Ranieri denied a report in the Wall Street Journal that quoted people familiar with the deal as saying the alliance would go ahead only if Chrysler received a $3 billion loan in addition to the $4 billion granted last year.

Ranieri said the agreement is contingent mainly on approval by the Treasury, which should come when Chrysler presents its industrial plan, including Fiat's contribution, next month.

He said the $3 billion would come as a "consequence" of the plan and that the loan "concerns only Chrysler."

Well….

…if Chrysler doesn't receive the $3 billion loan from the government than the company will disappear and the deal becomes moot, so while it may not be a specific term of the agreement it's still a key part of it. Either way, felt it would be remiss of me not to include the latest update as part of this post.

Staying with the Chrysler/Fiat topic for a bit here is a WSJ blog post that shreds the deal calling it a taxpayer financed takeover of Chrysler by Fiat.

Aside from the financial concerns and the risks being born by the shareholders I think Chrysler is just a poor candidate for Fiat to partner with, if they want to enter the American market they would be better served by joining forces with a company that has both a profitable presence here AND a product line that's synergistic with their own. Still considering the fact that Fiat isn't risking anything with this deal, I thinking that they figure that if things work out they get Chrysler for next to nothing and if it doesn't it just buys them time to identify a more suitable strategic partner while they get some of the prep work out of the way.

Apparently the cable and telephone industries are both desperate to retain customers, and are offering some rather steep discounts to customers that threaten to cancel their service, ask for discounts, etc. The basic story is that it's better to retain customers at greatly reduced prices, then it is lose them all together. Long-term there could be significant margin pressure impact if a large enough % of customers seek out these discounts, but for the time being I suspect the discounts will have an impact akin to slightly increased marketing costs.

The WSJ's Deal Journal has an update on the Bank of America situation and how BOA's acquisition of Merrill Lynch is looking like a dog, a dead one at that. Probably the best thing to consider when looking at the BOA/MER deal is to remember Merrill Lynch's shenanigans from this past summer,  which you can read about here(a break down of former MER CEO John Thain's comments) , here(an April Forbes interview with John Thain) and here(a post noting the utter lack of transparency/honesty from MER).

Considering the above isn't it any wonder that the Merrill Lynch acquisition is dragging Bank of America down a Rat Hole? Considering that Bank of America is also dealing with the Countrywide Acquisition in addition to the Merrill Lynch debacle, don't be surprised if we hear more bad news from them in the coming weeks.

In tech industry news Nortel Networks is filing for bankruptcy , from what I've read so far the company still had enough cash to operate for 18-months or so but filed for bankruptcy in order to give it room to restructure while it could still function.

Here is some more on the newspaper industry , namely the theory that private ownership and/or functioning as part of a large, diversified media conglomerate may be the only way that many newspapers will be able to survive.

Sources:

The Associated Press (via Yahoo News): "Fiat: Chrysler deal not contingent on loan" -- January 21, 2009.  

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 11:43 AM | Permalink | Comments (0) | TrackBacks (0)

Today's big Auto Industry news is the announcement that Fiat is taking a 35% stake in Chrysler:

(From the WSJ): " Fiat SpA, planning to take a 35% stake in Chrysler LLC, faces a race against time to get their joint operation working well enough to satisfy the U.S. government, investors and customers.

The companies on Tuesday announced a non-binding agreement that could lead to technology sharing and the manufacture in the U.S. of Fiat's small cars. Such an arrangement would allow Chrysler to add low-emission, fuel efficient models to its fleet by using Fiat technology. It would also give Fiat access to Chrysler's U.S. dealership network, giving the Italian maker better access to American customers.

Under the terms of the deal, Fiat is also likely to gain three of the seats on Chrysler's seven-seat board, two people familiar with the matter added.

If Fiat meets certain goal for improving Chrysler's operations within 12 months of the agreement, Fiat would also have the option buying an additional 20% of Chrysler for about $25 million, people familiar with the matter said.

Details of the conditions are not yet clear.

The price is a small sum for a 20% stake in company the size of Chrysler. In 2007, private equity group Cerberus Capital Management LP was required to put $5 billion in cash into Chrysler's auto operations as part of its acquisition of the company from Daimler AG.

If Tuesday's agreement leads to a legally binding deal, however, both Fiat and Chrysler will quickly find themselves under pressure to demonstrate that the alliance can make the ailing US automaker viable…

….Whatever the commercial objectives, the two companies will struggle amid the global financial and economic crisis. This has already dragged down car sales as potential car buyers struggle to gain access to credit to finance new purchases. In Europe, car sales in 2008 reached their lowest level since 1993, according to the European Automobile Manufacturers' Association.

Even in more hospitable economic climates alliances on this scale can take years to get off the ground, and sometimes never work. Fiat and General Motors Co. took stakes in each other in the past as part of a broad strategic alliance in 2000. It quickly soured and GM eventually had to pay Fiat $2 billion to end it…

...Tuesday's non-binding agreement calls for Fiat to let Chrysler use its engine, fuel efficiency and powertrain technologies to make Chrysler brand cars. It also calls for the sale of Fiat models in Chrysler's U.S. dealerships.

However, it could take a few years for Fiat to adapt its small car designs to meet crash-test safety standards in the U.S., say some analysts. Kevin Rich, sales manager of a Chrysler dealership in Winona, Minnesota, said his sales staff could faces challenges in convincing customers that Chrysler models made with foreign technology are up to US standards. Still, he said, Chrysler doesn't have time to develop the new technology on its own, he said. "Chrysler desperately needs attractive fuel efficient cars that have some curb appeal to a large market," he said."

From a Chrysler perspective this looks like a desperate attempt to show the U.S. Government that it's doing "something" to return the company to profitability, as part of an effort to get additional financial assistance. What else do you call a tie-up that will probably take years to bear fruit, and could potentially sell a 20% stake in the company for next to nothing? This is also probably a sign of Chrysler looking to effectively outsource the development of passenger cars to other companies, whilst they either focus on trucks or become an veritable reseller of other manufacturer's vehicles.

From a Fiat perspective this seems like a fairly low risk proposition, because even if Chrysler fails before they're able to prepare any of their existing cars for the U.S. market, the investments made will be ones they'd have to make anyway in order to expand into the U.S. Therefore no matter what happens to Chrysler they're still going to be better positioned to enter the U.S. market then they are now, plus having part ownership in Chrysler might allow them to take over certain manufacturing facilities in the U.S. if Chrysler does indeed fail. If instead Chrysler survives and is able to return to profitability in the future, Fiat will have gained a controlling interest in a profitable auto manufacturer for next to nothing.

After all it's important to note the following from a statement issued by both companies:

(From the FT): "“The alliance does not contemplate that Fiat would make a cash investment in Chrysler or commit to funding Chrysler in the future,” the companies said in a joint statement "

In other words, Fiat's contribution is in the form of technology and management resources, as opposed to putting real skin in the game.

All that being said this move seems largely symbolic to me as it won't matter much if Chrysler isn't able to survive past the fall let alone 2010, so at this juncture it's best to wait and see if Chrysler is able to survive in general before handicapping the outcome of this tie-up.

You can read more here (WSJ), and here (FT).

Sources:

The WSJ: "Fiat to Take Stake in Chrysler" -- Stacy Meichtry, John Stoll, January 20, 2009

The Financial Times: "Fiat to take 35% stake in Chrysler" -- Vincent Boland, Julie MacIntosh, January 20, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 04:29 PM | Permalink | Comments (0) | TrackBacks (0)

Today's mix tape covers a  more diverse range of topics than usual, and includes stories related to the auto industry and science fiction, in addition to the usual stuff on business. 

This weekend's WSJ had an interesting story on a "gullibility expert" who lost a significant % of his life savings to the Bernie Madoff fraud, thus suggesting that the so called experts can just as easily be seduced the allure of quick money even when there is reason to be suspicious.

  I suppose it goes back to something I touched upon yesterday, the tendency for people to mold reality to fit preconceived notions/conclusions instead of looking at things objectively.

If you want more examples of how intelligent and seemingly savvy people can fall for scams, you should check out CNBC's "American Greed" a television program that chronicles the misdeeds of various fraudsters, financial scam artists and the like. In every case people are offered something that they should know is too good to be true, but they fall for it anyway because of the guise in which it it's offered. The show isn't particularly interesting for the scams themselves, but for the reasons that people fell for them.

Speaking of objectivity here is a link to a post from last January where I discussed (or quite frankly loudly derided) a WSJ op-ed that proclaimed that the economy was better in January of '08 then it was in January of '07, and 2008 was going to be a great year. To be sure I'm not posting this to get in an "I told you so" but to sort of share a warning on overly rosy outlooks, namely:

At the end of the day there will always be risks, negative trends, etc, that will impact the markets, the economy, your businesses, investments, etc, and in order to combat those things you have to first recognize them for what they are. Therefore it probably makes more sense to listen to those who recognize those negative things and providing mitigations (or counterbalancing positive trends) for them, as opposed to those who completely ignore them, dismiss them, spin them as positive, etc.

Think: the difference between those who said that the mortgage melt down didn’t really exist, was overblown, a non-problem, etc, vs. those who accepted the problem and the impact it could cause and then provided ideas on how to contain it/mitigate the impact.

Today's WSJ had a story discussing the latest car industry sales numbers and as you can imagine they were positively abysmal. At this point it's not so much a question of by what % sales will drop, but a question of the quality of the remaining sales, and which automakers are going to be agile enough to adjust to  changing market. It's going to be interesting to see which automakers focus on making profitable sales (quality of sales) vs. the companies that get desperate and start trying to make sales at any cost.

Needless to say that Hyundai with their new sales promotion of covering $7,500 of negative equity on a trade-in has chosen the route of sales at any cost; it doesn't take a MBA to figure out that Hyundai has just signed up to sell cars for a loss since it's probably rare occurrence (if it happens at all) for them to earn more than $7,500 per sale. 

Finally when I look at the % decline in Chrysler's sales it leads me to believe that some of the company's brands are more likely to survive than the company itself.

The heirs of a British Doctor were recently greeted by an amazing surprise when they opened his garage: an exceedingly rare supercar from the 1930s, which is estimated to be worth in excess of $4 million dollars. The car in question is a 1937 Bugatti Type 57S Atalante of which only 17 were ever made, and includes all of its original equipment thus making the job of restoring it much easier.

Needless to say this definitely beats the time my mother tricked me into cleaning out her garage (under the premise of helping her move, "just pack the garage for me"), and I found a bunch of my old Matchbox cars from the 1980s.

Sticking around in Britain for a second, the BBC recently announced that Matt Smith will become the eleventh actor to play Dr. Who. While I have enjoyed the performances of the current actor in the role (David Tennant) and will withhold any judgments on the new Time Lord until I see him in action, for me the only "real" Doctor Who will always be Tom Baker.

As my mother says: "He just looks like he's supposed to be Doctor Who".

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 12:56 PM | Permalink | Comments (0) | TrackBacks (0)

To give you an idea of how tough things are for the Auto Industry right now, Toyota is projecting a loss for the present fiscal year:

(From The NY Times): "TOKYO — Toyota Motor , the Japanese auto giant, said Monday that it expected its first operating loss in 70 years, underscoring how the economic crisis was spreading across the global auto industry.

On Monday, Toyota said it expected an operating loss in its auto operations of 150 billion yen, or $1.7 billion, for the fiscal year ending March 31. That would be the company’s first annual operating loss since 1938, a year after the company was founded, and a huge reversal from the 2.3 trillion yen, or $28 billion, in operating profit earned last year.

Analysts said Toyota’s downward revision, its second in two months, showed that the worst financial crisis since the Depression was threatening not just the Big Three but also even relatively healthy automakers in Japan, South Korea and Europe. Many other companies will also soon be reporting losses.

Worse, analysts said that they expected next year to be even more painful, amid forecasts that the global economy would continue to slide until at least the summer. This could cause a significant shakeout, driving smaller and weaker companies into the arms of a smaller number of bigger, richer players.

“It is just a matter of time before all major automakers are losing money,” an auto analyst in Tokyo for Credit Suisse Securities, Koji Endo, said. “And things will just get worse next"

For the record I'm not posting this to say that things are so bad that we should go easy on Detroit, OR to support the idea that giving them enough cash to buy time will allow them to recover when the market recovers. Instead I post this in order to provide some perspective on the auto industry overall:

Detroit was losing money/struggling to turn a profit during the height of the credit boom, an era when companies like Toyota were reporting record profits.  Now that market conditions are abysmal, well run companies with no debts (or the myriad liabilities of Detroit) are losing money, losses they may or may not be able to mitigate with various cost cutting initiatives/adjusting the scale of their operations to fit the market.

Chances are the multi-year downturn in  auto sales will force some of the healthy manufacturers to make some severe changes in the form of cutbacks, merging with competitors, etc, etc.

I.e. if companies like Toyota are facing a multi-year period where they'll lose money, imagine how bad it's going to be for Detroit.

Considering the above it's practically a given that Detroit is going to continue to lose money (and/or need Government support) for all of 2009 if not 2010, even if they're able to magically fix all of their efficiency issues within the next quarter or two. This means that they're probably going to require government of support of some kind well into the foreseeable future.

As a result if the government is going to help Detroit they need to not only force feed a bankruptcy (or a similar form of restructuring), but also force some business changes around shedding brands, ending product overlap (sell 1-2 versions of each car as opposed to eight), etc, etc. If they're going to wind up supporting these companies no matter what, they might as well attempt to limit the resources needed to get Detroit healthy again.

IF sometime down the road it makes sense for companies like GM to bring back various brands that they shut down, restore old strategies around replicating the same car across multiple brands, etc, then fine.  But for the immediate future they need think in terms of a "bare bones, lean and mean" strategy, that's more aimed at helping them survive as if an outright collapse and failure is imminent, because even with government help that's exactly the situation they're in right now. 

You can read more here.

Sources:

The NY Times: "Toyota Expects Its First Loss in 70 Years" -- Martin Fackler, December 22, 2008.  

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:00 PM | Permalink | Comments (0) | TrackBacks (0)

Today's big news is a new plan unveiled by the White House to pump roughly $17.4 billion into Chrysler and GM in order to save them from slipping into Bankruptcy:

(From WSJ): "The White House announced a $17.4 billion rescue package for the troubled Detroit auto makers that allows them to avoid bankruptcy and leaves many of the big decisions for the incoming Obama administration.

Speaking from the White House, President George W. Bush said the administration decided against forcing a bankruptcy to compel cost-cutting, in order to avoid the risk that consumers would desert one or more of the companies and touch off an industry collapse, deepening the current economic downturn.

"In the midst of a financial crisis...allowing the U.S. auto industry to collapse is not a responsible course of action," Mr. Bush said.

"Under ordinary economic circumstances, I would say 'this is the price that failed companies must pay' and I would not favor intervening to prevent the auto makers from going out of business," the president said. "But these are not ordinary circumstances."

The deal would extend $13.4 billion in loans to General Motors Corp. and Chrysler LLC in December and January, with another $4 billion likely available in February. It also would provide the government with non-voting warrants, although the exact amount was unclear immediately. Ford Motor Co. has said it doesn't need short-term assistance.

The deal is contingent on the companies' showing that they are financially viable by March 31. If they aren't, the loans will be called and all funds must be returned, officials said.

The deal generally tracks key provisions of the bailout legislation that nearly passed Congress earlier this month. But it is relatively lenient in allowing the companies to show their viability. It defines viability as having a positive net present value -- a way of gauging the companies' worth, taking into account all their future obligations.

Notably, it provides significant flexibility to the companies in showing their viability. It sets out targets for the companies to hit in determining their financial health, such as reducing debt and current cash payments for future health care obligations.

But according to a White House fact sheet, the targets "would be non-binding in the sense that negotiations can deviate from the quantitative targets...providing that the [company] reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations."

One potential move that could help the companies achieve some savings: the companies will be required to reach new agreements with major stakeholders, including dealers and suppliers, by March 31.

Determining viability apparently will be up to the Obama administration. The agreement designates a person to oversee the government's effort, although officials stopped short of referring to that as a "car czar." For the outgoing Bush administration, that person will be Treasury Secretary Henry Paulson. President-elect Barack Obama will choose his own point person later."

I think this whole concept of "viability " is all together spurious since so much leeway is given to how viability can be defined, coupled with the fact that it's arguably mathematically impossible for Detroit to be financially viable by March 31, 2009 when you consider their current burn rates on top of the sheer size of their debt loads and other liabilities. The whole idea that GM (for example) could reduce it's debt by 2/3 via exchanging it for their non-existent equity is all together nonsensical in my view.

After all this is a company that has a market cap of less than $3 billion, total debt of $45.2 billion (as of 9/30/2008), and their total losses over the TTM period are nearly $23 billion, a number that's sure to grow as Q4 '08 and Q1' 09's numbers are added in. 

Does this sound like a company that is capable of retiring a significant amount of debt any time soon?

To be blunt I think the provisions around retiring debt, viability, etc (in the White House plan and the rescue package that failed last week), were included to appease angry voters more than they are provisions that anyone (with a clue at least) believes that Detroit will be held to. Of course it goes without saying that if Washington actually believes that this is possible, then we have much bigger problems to worry about.

Anyway let's look at the numbers: 

Per the term sheet GM is slated to receive $4.0 billion by 12/29/2008, and another 5.4 billion on 1/16/2009 for a total of $9.4 billion, with another $4 billion available in Feb contingent on Congressional action.

At the end of Q3 GM had $16.2 billion on hand and had burned through $6.9 billion during the quarter, while we won't know Q4's exact burn rate for several weeks it's safe to say that it was significantly higher than Q3's since the company is currently flirting with bankruptcy. 

When we consider the amount of time it takes cost cutting measures in the auto industry to take effect, it's pretty obvious that all the money will do is help to finance current and/or future losses and probably delay bankruptcy by a quarter or two (if that). Reducing debt and/or making significant investments in the company's future isn't even on the table right now.

In the end all the White House has done is to not only delay the inevitable with respect to a collapse or bankruptcy, but they've also delayed the real change that's needed in Detroit by helping to perpetuate a broken system.

Looking at the bankruptcy issue for a second: there are many who believe that bankruptcy isn't even an option as it would cause consumers to abandon Detroit en masse. The problem with this line of thinking is that the American Public (in general) already has a rather dim view of Detroit, has been aware of their financial problems going back to '05,  knows that they're currently flirting with bankruptcy, and yet still purchases their cars.

If confidence in the financial viability of a car company was a deciding factor in a purchase decision, Detroit's market share erosion should've been markedly more significantly over the past couple of years. Especially when you consider that the prevailing wisdom in the marketplace is that foreign cars are markedly superior.

This is not to say that some customers won't think twice before buying an American car, just that due to a myriad number of reasons (cost, utility, preference for American cars, etc), some consumers will continue to purchase American cars. Especially in many areas of the South and the Midwest where Detroit has the greatest market penetration, and foreign cars (trucks especially) are sneered at by many. 

I don't see Texans giving up their American trucks even if the companies are in chapter 11.

The other thing to consider is that customers who are wary of purchasing an American car due to a bankruptcy filing could be plied with government guarantees on warranty repairs, the fact that many repair shops are currently profitable, etc, etc. There are many ways to backstop customer confidence so that people who purchase a Malibu from bankrupt GM, won't have to worry about product support.

However the most important thing to realize here is that Detroit could easily be profitable at current sales levels if it were more efficient, and a properly structured Detroit should be able to turn a profit even if sales dropped by 50% over current levels. Therefore the opportunity offered by bankruptcy to restructure various debts and liabilities, significantly trim down the number of dealers, close plants, get out of old leases, etc, greatly outweighs the risk of declining sales.

If you think about it the real problem here is that the Government is effectively thinking like Detroit, in terms of trying to find a way to prop up sales and/or perpetuate the new model, as opposed to thinking in terms of efficiency and how to be profitable at current and/or lower sales levels.

The rescue package that failed last week and the current one offered by the White House are nothing more than the government's version of Detroit's "generate sales at any cost" strategy, where they'd offer huge incentives, discounts, sell cars at a loss, etc, in an effort to maintain market share and/or because it was cheaper than idling plants/reducing production capacity. 

I.e. a different version of the same failed thinking.

Instead of thinking of all the ways why a bankruptcy won't work and/or insisting on maintaining a broken system, our Government and Detroit should be working together to come up with solutions that WILL make it work.

You can read the original article here, a fact sheet on the bailout here(WSJ), as well as Chrysler's term sheet, and GM's term sheet.

In other news: I suspect many people will read the term sheets and think: "wait a minute my mortgage and/or car loan had more paperwork than that" . 

Sources:

WSJ: "Auto Makers to Get $17.4 Billion" -- John D. McKinnon, December 19, 2008.

Financial Data provided by Yahoo Finance & WSJ

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 09:55 AM | Permalink | Comments (0) | TrackBacks (0)

Here is another update on the status of the automaker rescue bill:

(From the WSJ): "WASHINGTON -- A frantic, last-ditch attempt to forge a relief package for the auto industry collapsed in the U.S. Senate, dealing a giant blow to the immediate hopes of the Big Three.

Senate Majority Leader Harry Reid of Nevada suggested the $14 billion wouldn't be revisited until January. "It's over with," he said.

The talks, which appeared close to a deal several times, broke off due to a sharp partisan dispute over the wages paid to workers at the manufacturing giants.

General Motors Corp. and Chrysler LLC, which have said they can't last the year without federal aid, both hope the White House will now relent and allow the Treasury to provide emergency loans from the $700 billion Wall Street fund, people familiar with the matter said. Mr. Reid also urged that option.

To date, the administration has resisted the idea. But "that may be where they go next," said Sen. John Thune (R., S.D.). There is always a chance Congress will act sooner if one of the companies totters on the brink, although that possibility appears remote.

GM, in a statement, said it is "deeply disappointed" that an agreement couldn't be reached. GM had told Congress it needs $4 billion by the end of the month or it might not be able to keep its operations going. The company added that it will "assess all of our options to continue our restructuring and to obtain the means to weather the current economic crisis."

GM's European division Friday said it was very disappointed that Congress failed to reach an agreement, but said it is continuing to operate as normal while cutting costs aggressively."

At this point all I can say is that I hope that the bill's failure will be the impetus GM & Chrysler needs to move forward with a bankruptcy filing, and that the Government provides the  financial support necessary for both companies to continue to operate while they're restructuring.

It goes without saying that losing our Auto Industry would be a massive blow to the economy, so it's not a question of whether or not we save it, it's: "how do we save it in a manner that's both effective and fiscally prudent?". Based on the aforementioned criteria neither the rescue bill or the idea of using TARP funds to prop up the automakers prior to a bankruptcy passes muster, here is hoping that the automakers and the politicians finally show the courage and fortitude necessary to move forward with a solution that will likely to be unpopular, frightening and un-appealing is really the only way to save the U.S. Auto Industry.

You can read more on the bill's failure here(WSJ), and an article on the possibility of using TARP funds to bailout the automakers here(FT).

Sources:

WSJ: "Rescue Bid for Detroit Collapses in Senate" -- Gregg Hitt, Jeffrey McCracken, John D. Stoll, December 12, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 11:02 AM | Permalink | Comments (0) | TrackBacks (0)

Here is the latest on the automaker rescue bill, first a quick summary of the key points of the plan that recently passed the house:

Source: The WSJ

(From the WSJ): WASHINGTON -- The House of Representatives approved a wide-ranging rescue Wednesday of the nation's auto makers, sending the plan to the Senate where Republican critics could endanger the initiative.

The White House and top Democrats on Capitol Hill hoped to hasten passage of the package this week and clear the way for release of billions in federal aid in an effort to avert a collapse of one or more of the troubled Big Three.

But the compromise bill, forged over five days of negotiations among top presidential aides and the Democratic congressional leadership, is proving a difficult sell among Republicans, despite high-level arm twisting. Their backing wasn't so important in the House, where the package passed on a 237 to 170 vote, with Democrats providing most of the support. But Republican backing will be crucial in the narrowly divided Senate to give the measure the 60 votes needed to ensure passage.

"Not so fast," said Sen. John Cornyn (R., Texas) after a closed-door meeting with Vice President Richard Cheney and Josh Bolten, the president's chief of staff, who were dispatched to Capitol Hill to rally support among Senate Republicans.

Mr. Cornyn voted for the $700 billion rescue of financial-industry companies, but he suggested he and other Republicans have concerns about whether the proposed "car czar," an official who would oversee the industry rescue, would have the power to force concessions needed to return the industry to sound financial footing….

….Pulled down by a steep drop in sales, General Motors Corp., Chrysler LLC and Ford Motor Co. are seeking $34 billion in loans or lines of credit to weather the recession. Ford says it needs taxpayer-backed financing only for the long-term. GM and Chrysler say they need the cash before the end of the year to avoid collapse."

You can read the article in full here.

I think Senator Richard Shelby from Alabama summed up my thoughts on the issue perfectly when he said:  "I'm going to oppose the package because I think this is just the down payment on billions and billions to come," he said. "These are failed or failing companies."

In other words any Government money sent towards Detroit should be an "Investment " into re-visioning of Detroit into a group of companies that can sell cars as efficiently/profitably as their foreign counterparts, as opposed to funding the perpetuation of ill-conceived restructuring plans and business models, in addition to auto industry red herrings (see more fuel efficient cars, alternative technologies) that will only delay the inevitable collapse of the American car industry. Please don't get me wrong on the latter point as I tend to side with environmentalists on many issues, however until Detroit is structured in a way that allows them to sell compact (and other fuel efficient cars) profitably at current levels pushing them to sell and/or produce more won't help them.

Not to mention the fact that we're still several years away from a time when "green" auto technologies will be commercial viable, even now Toyota claims that it isn't making any money from selling the Prius (despite its popularity). So considering Detroit's current efficiency issues a "Chevy/Ford/Chrysler Prius" isn't likely to be profitable either.

I.e. if we want Detroit to make more fuel efficient and/or Green cars, we have to first position them to profitable as they are first.

Methinks that Congress is trying to put the Cart's wheels before the Horse, when the Cart hasn't been built yet and the Horse hasn't even born.

Another problem I have with the current plan is the idea of a Car Czar as its currently envisioned, instead of putting in place a team of the best and brightest turnaround experts who could lead Detroit's turnaround plans, the Car Czar will ensure that Detroit operates per political Agendas and Congress' misperception of the Auto Industry's problems. Many of the decisions Detroit will have to make in order to turn things around are going to be rather politically unpopular, and I don't think a Car Czar that was put in place by Congress during a major recession will allow these decisions to be made.

Let's not forget how Congress behaved when it came to managing the mortgage GSEs: during a time when their investment activities should've been reigned in, Congress continued to authorize expansions as that was the politically popular thing to do.

I sincerely doubt that not even the most optimistic person believes that Congress learned its lesson with the Mortgages GSEs, especially when the people who made the bad decisions with the GSEs are now at the controls for the Auto Industry rescue.

Better yet, despite the fact that the many of the banks receiving TARP funds need the cash to avoid becoming insolvent and/or to ensure against future loan losses, many in Congress are demanding that they increase their lending even though it would actually hurt our banking system to do so. Either through the need to push political agendas or sheer ignorance, our politicians are basically asking our banks to lend themselves back into trouble again.

If that's not an indicator of a group of politicians who should be nowhere near American businesses, than I don't know what is.

The problem with the current plan isn't that it's a rescue in of itself (I think the Government should rescue Detroit), it's the fact that due to items mentioned above the current plan will only delay the inevitable. There is no point in wasting Taxpayer money on a delay tactics.

Sources:

The WSJ : "House Passes Rescue Plan for Big 3" -- Greg Hitt, December 11, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 12:39 PM | Permalink | Comments (0) | TrackBacks (0)

The above pretty much sums up my feelings on the recently announced agreement for the government (I mean the Tax Payer) to lend $14 billion to GM and Chrysler, it does nothing but delay the inevitable as the cash will be used to prop up a broken model instead of being invested in the much needed operational improvements necessary for the companies to flourish long-term.

I just don't understand the point in wasting tax payer dollars in propping up a broken model in hopes that things magically change, instead of forcing them to declare bankruptcy or engage in some other sort of wholesale restructuring that will actually enable the companies to thrive again.

At the end of the day the fact remains that Detroit sells more than enough cars to be wildly profitable, the real problem is that the American car companies are badly run and grossly inefficient. SO instead of wasting time talking about technological advances, design changes, etc, which will take years upon years to develop and implement, the conversation needs to focus on how to introduce more efficiency into Detroit.

It's time to talk about operational and cost improvements that can be deployed over the space of several months, as opposed to currently non-existent technology and design advances that will take years to bear fruit/become reality.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 11:50 AM | Permalink | Comments (0) | TrackBacks (0)

When discussing the Auto Bailout I think it's important that we frame the discussion properly, and recognize the fact that the Detroit is asking for the government for a loan (a loan they might've been able to get from the Private Sector if it weren't for the credit crunch), meaning that they're alleging that they'll be able to pay the loan back.

Meaning: that we shouldn't view this in the same manner as the original TARP program (buying toxic assets from the bank that may or may not increase in value some day), nor should we see this as a gift to auto executives per se as any funds received from the government will undoubtedly save the jobs of taxpaying citizens.

BUT

The fact remains that they're still asking to borrow money to prop up not only a broken system but arguably THE most broken system in American Business ;  any funds received will be used to buy Detroit time and enable business as usual more than it will be used to completely revamp the way these companies operate.

At the end of the day Detroit's problem isn't the quality of the cars, the way the cars look, etc, etc, as GM and Ford are still #1 and #3 in terms of market share in the U.S., the true problem is that Detroit is bloated and inefficient, hence the reason that they can lead in market share and yet make a fraction of the profits (if they even make money) of competitors with a fraction of the market share. Close the efficiency gap between Detroit and its foreign competitors and GM, Ford and Chrysler would all be profitable right now, even with the current economic downturn.

Can you name any other industry where the companies that are #1 and #3 in terms of market share are struggling to survive, whilst significantly smaller competitors have no problems generating several fold more in profit? Detroit sells more than enough cars to be profitable, they're just not structured in a way that allows them to be.

Detroit isn't asking for a loan to fund a major operational paradigm shift they're asking for a loan to maintain their status quo of ineffective turnaround plans and bad overall management, and from a mathematical perspective it appears that the amount being asked for will only delay the inevitable for a couple of quarters (at best).  Just think about it: Detroit had a collective burn rate of $17.6 billion in Q3 of this year and is probably going to burn through a similar amount this quarter, so even if Detroit were to receive a $25-$35 billion cash infusion in January it's quite likely that any cost cutting measures (current and future) would be too little too late to prevent them from running out of cash sometime in 2009.  After all the economy is likely to worsen in 2009, these are companies that were losing money during the credit boom, and it's rather unlikely that demand will "return" to credit boom levels after the economy recovers.

Any efforts to save Detroit should be focused around closing the efficiency gap, and lending Detroit money to perpetuate or "tweak" their broken system will not accomplish this goal. Detroit isn't asking for this money to make key investments into their companies, they're asking for  money so they can buy some time while they struggle to come up with a solution for their problems or the market "magically improves".

In short my objection to Detroit's request for a loan from the Government is that all it will do is delay the inevitable, and there is no point in pumping money into a drainage ditch just so we can keep Detroit "alive" for another quarter or two.

The discussions in Washington shouldn't be focused on the terms of a loan package they should be focused on how to facilitate some sort of "gentle bankruptcy" for Detroit, which minimizes the impact on the economy and Detroit's workforce. At this juncture Bankruptcy is the only way that Detroit can truly restructure and free itself from the myriad liabilities that are a impedance to profitability. Anything less than this wholesale restructuring will only delay the inevitable at best, and waste precious resources at worse. It's time for Detroit and Congress to collaborate on a solution that fixes the underlying problem, as opposed to wasting taxpayer money on a delay tactic. 

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 11:26 AM | Permalink | Comments (0) | TrackBacks (0)

Here is a graphic from the WSJ that depicts the Q3 burn rate for each automaker vs. their current amount of cash on hand:

Graphic courtesy of the WSJ

Something that worries me (between the graphic and some of the stuff I've read on the issue), is that Detroit seems to be operating under the premise that they can survive if they can drum up cash to get by until demand returns. Now this would make sense if their woes were as simple as not having enough demand and/or revenue to turn a profit, but in this particular case things are significantly more complex:

Detroit's current woes started during the credit bubble: more specifically they started losing money during the credit bubble, the bankruptcy talk first started during this time, the turnaround plans were initiated, Ford mortgaged themselves to the hilt to raise cash, etc. So even if one could magically turn back the clock to '06, Detroit would still find themselves in dire straits and would still be in need of a massive revamp to survive.

More important than the above is the fact that in the future Detroit is not going to be able to depend on (to the extent they did in the past) on leasing,  people using the housing ATM to buy Lincoln Navigators, people with $40k/yr salaries being able to get loans to buy $50k SUVs, etc, etc.

The last point is an especially interesting one to consider: I applied for my last 2 car loans online and was able to get approved just on the basis of my credit history with ZERO income verification. Doesn't that sound suspiciously like the NINJA loans of the housing boom? It stands to reason that with auto lending losses escalating that many banks won't be engaging in this practice in the future.

The medium to long-term changes in auto credit, consumer spending, etc, as a result of the current environment suggests that even if the aggregate demand in terms of total units increases,  people will be spending less per car.

Oil Prices: at the end of the day the overall situation hasn't changed: oil is a finite resource for which demand will only continue to increase over time. Meaning that while the current economic has depressed demand to an extend that oil prices have decreased, the decline in oil prices is only a temporary one.

The other thing to consider is that consumers have been suffering under the weight of depressed oil prices for several years now, have plenty of other economic pressures to worry about, and will no longer be able to depend on credit to cushion the blow of higher energy costs. All of these factors are likely to influence some permanent changes to consumer behavior.

Something else to be considered is that as economics force people to adopt smaller and more fuel efficient cars it may also influence a change in consumer preferences, where people who could afford an SUV may decide that it doesn't make much sense to purchase a larger vehicle when a smaller one can suit their needs.

I.e. think of all the single people, urban dwellers and other individuals we all know who own/used to own SUVs, yet never used the space, off-road capabilities, etc.

I suspect that it's going to be harder and harder to sell trucks on a go-forward basis, because even an "Escalade Hybrid" burns significantly more gas than your typical midsized car, and well,  let's just be honest, many of the people who own Escalades are usually in the vehicles by themselves. 

In short Detroit shouldn't be making plans around demand recovering, they should be figuring out ways to be profitable (more efficient) with the demand that exists today, as well as the likely  less profitable demand that will exist in the future.

After all not only are their foreign competitors managing to turn a profit in the current environment, but these same companies sell their compact cars for a profit, something that Detroit struggled (and often failed) at doing even when things were going better for them.

The graphic comes from a larger article around the Big Three's efforts to receive a government bailout that you can read here.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:20 PM | Permalink | Comments (1) | TrackBacks (0)

Mitt Romney wrote a  Op Ed in Today's NYT on the Auto Industry that is a must read; I won't say much about the specifics other than to say that I agree with him 100%.

I will say that he brings up a point or rather a "way of thinking" that should be applied to all other bailout efforts, rescues, etc, etc, namely that the architects of such solutions must ask themselves: "are we investing in change or are we simply maintaining the status quo?

Whether it's homeowners or corporations it doesn't make much sense for the Government to inject funds into the maintenance of situations that are either broken and/or unsustainable, as all you're doing is throwing good money after bad and delaying the inevitable. Instead the Government should be in the business of making investments as opposed to providing hand-outs, investments that enable the party(s) receiving assistance to turn things around, repay the taxpayer and emerge stronger than ever.

There is no point in using taxpayer money to fund delay tactics.

Better yet look at it from the "Main Street" level: would you lend money to a fiscally irresponsible friend/relative/individual who was having trouble making ends meet, if they were just going to use the money to meet short-term needs, weren't going to change their habits, look for a higher paying job and you knew they had no real means of paying you back?

Then why are some folks calling for the Government to do the same for various companies and individuals who are in analogous situations?

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:34 PM | Permalink | Comments (0) | TrackBacks (0)

The usual mixture of news stories and other tidbits I think you may find interesting:

First a story on the auto industry in Britain, which discusses how a car dealer used a two for one deal to get rid of excess stock; lest we get too smug whilst reading about Britain's automotive retail woes let's not forget that many dealers in the U.S. are doing the same thing , they're just not advertising it in the same way.

Staying on the subject of the automotive sector here is a story from the WSJ that illustrates the stark differences between the foreign auto manufacturers and the domestic ones. The basic story is that while companies like Honda, Toyota and BMW are using the LA car show to unveil new green technologies, new models, etc, GM and Chrysler aren't even attending; this is on top of the fact that foreign manufacturers are opening up new plants whilst Detroit is closing them.

Looking towards the future I think the best solution is for Detroit to declare bankruptcy so that they're able to get out from under their various liabilities, Dealer agreements, etc, and then for the Government to step in and provide the necessary financial assistance for the companies to get back on their feet. As I've said numerous times on this blog Detroit's primary problem is that it's too inefficient to sell cars profitably, how else do you explain the positive financial performance of rivals who have a fraction of the market share yet enjoy a multiple of the profits?

Better yet: GM would be wildly profitable if it were just say 25-33% as efficient as Honda, so a true "bail-out plan" has to involve activities that move the company towards that level of efficiency. Merely lending the company money won't necessarily help them achieve those goals, but freeing them of the billions worth of financial obligations that are currently crushing them will. 

Without first some form of bankruptcy or a cancellation of many of the company's financial liabilities, all the proposed bailout package can do is merely prolong the inevitable.

Granted bankruptcy isn't an ideal solution and does offer some challenges in the realm of buyer confidence, damage to the brand, etc, however when you consider that the alternative merely delays the inevitable I don't see how Detroit has any other options.

Speaking of which here is a WSJ Op-Ed that outlines many of GM's financial liabilities in more detail and comes to a similar conclusion as my own.

It looks like Steve & Barry's isn't going to survive and is headed towards liquidation; normally I'm loathe to blame the current environment for a business' problems, but in this case it's hard to argue against the fact that turning around a retailer in this economy is an exceedingly difficult task. After all you have to not only fix the problems created by past mismanagement, but you also have to try and generate sales in an environment where consumers are cutting back on spending.

Long-term there may need to be a significant number of changes, adjustments and resetting of expectations within the retail space, because the current crisis is likely to influence some long-term changes in the way that people approach spending, saving and the usage of credit. At the very least retailers are going to adjust to consumers who from having credit bubble era access to credit to access that's more in line with the levels seen in the mid '90s.

Here is a story from the WSJ discussing how some banks are rejecting TARP capital, and how others whose requests for capital are rejected are probably only a week or two from failing. It's going to be interesting to see how things work out for the banks in the former category, as their rejection of TARP capital could conceivably put them at a competitive advantage. Still the fact that these companies were intelligent enough to manage their loans in a way that didn't make them so vulnerable to the credit crisis, suggests that they many of them will emerge from the crisis stronger than ever.

I mean which group of executives do you want to place your faith in: the group that ran over-leveraged and undercapitalized institutions that would lend to anyone with a heartbeat, or the group that managed their balance sheets properly?

Let's not forget that while we're all suffering from the crisis, it's something that was created by the actions of people who let greed override their common sense/sense of financial self-preservation. At the end of the day it's ridiculous that we're in this mess because our largest banks unilaterally decided to lend money to those who couldn't pay it back, over-leverage themselves and allow themselves to be undercapitalized.

I.e. we're in a crisis that was created by a legion of clowns who decided to throw the rules for smart banking out of the window.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 01:42 PM | Permalink | Comments (0) | TrackBacks (0)

The usual round-up of interesting news stories and other tidbits I think you may find interesting:

Let's start off with something lighthearted: 15 reasons why Mr. Rogers was the best neighbor ever; while I'm not exactly a shiny happy optimist but in times like this it's nice to read something like this considering everything that's going on right now.

Here is a listing of the banks that are participating in the TARP program, it includes the date the capital infusion was announced and the amount received by the bank through 11/3/08. The list is sortable by bank, state and amount.

Generally speaking the best way to look at this list is to think about the amount received Vs. their market cap, P/L for '07 and '08, and loan losses & write downs; the reason for this is that it can help you to differentiate between the banks that are using TARP as a cheap way to raise capital/not to lose a competitive advantage and those that are taking TARP money to remain solvent.

Looking at the car industry for a second, here is a listing of the top 20 vehicles sold last month as well as the YoY change in sales from '07. Ironically despite Detroit's troubles the Chevy Malibu and the Ford Focus are the only cars to show double digit increases from last year (no doubt driven by a combination of a new model (Malibu), extra deep discounts and the Focus being a popular small car); still any cause to celebrate is undoubtedly negated by the fact that the vehicles it's competitors sell in similar volumes are sold for an actual profit.

Still it's a faint ray of hope.

Putting the results above into better perspective let's look at a graphic depicting auto sales from GM, Toyota, Ford and Chrysler over the past three months:

Graphic courtesy of the WSJ

While these short-term trends are definitely interesting, it's probably better to look at trends the span the course of 6-18 months, because the economy is so volatile right now that it's hard to tell if we're seeing the beginning of at least a medium term trend or a short-term anomaly.

However looking at the data puts GM sales of the Chevy Malibu into better perspective: they may be selling a lot more Malibus but they're selling far fewer of their other models, it's even quite possible that their Malibu sales are just cannibalizing sales from their other brands. Overall GM can't survive many more months of sales dropping as precipitously as they have over the August to October time period.

Additionally it's rather interesting to note that Chrysler's sales have suffered the least over the past three months, whether or not this is a strength that Chrysler can leverage long-term remains to be seen.

Here is a piece from the WSJ around Retailer expectations of a gloomy holiday shopping season; I think this has to be one of the more obvious "calls" this year, especially when you consider that last year was pretty abysmal despite the best efforts of some to spin things to appear otherwise. In my view the changing world of consumer credit (from the perspective of banks and consumers) is going to cause some long-term changes in the retail arena, as consumers are forced to cut back on the hyper-consumption of the last 25+ years and manage their finances more conservatively.

I think that over the medium to long-term there needs to be a resetting of expectations around retail results, consumer spending, etc, because the world is changing and we can't use the metrics of old anymore. So much of our economy is built on credit that it's going to take some time for all of the effects of our changing economy to be noticed/discovered, and coming  period of expectation setting may last for quite a few years.

In a somber economic indicator, Utility Companies across the nation are reporting a surge in the number of disconnects and past due bills, indicating that many people are struggling to make ends meet and are probably choosing food and gas over paying their utilities. I suspect that if you were to talk to the collection departments of cell phone companies, cable companies, etc, you would see a similar trend.

In my view this trend is a function of rising unemployment, general economic struggles and lack of access to credit (nearly every electric company takes credit cards these days), and is something that will probably get quite a bit worse before it improves.

Like I've said in the past whether or not we're in an "official recession" matters little to many folks on Main Street.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 07:56 PM | Permalink | Comments (0) | TrackBacks (0)

In the prior post we discussed the problems with the automakers, now let's discuss the problems faced by Car Dealers:

(From the WSJ): "With credit drying up and new-vehicle sales slumping to a 25-year low, car dealerships from New Jersey to California are going out of business at an accelerating pace, threatening greater economic pain for communities around the country.

Graphic courtesy of the WSJ

The National Automobile Dealers Association estimates 700 new-car dealerships will close this year, up from 430 last year, and taking with them an estimated 37,100 jobs. That is a heavy blow to a key piece of the U.S. economy. The country's 20,700 dealerships accounted for $693 billion in sales last year, or 18% of all retail sales, according to NADA. Dealership wages and salaries make up 13% of the nation's retail payroll.

The rapid disappearance of dealers could also complicate the challenges facing General Motors Corp., Chrysler LLC and Ford Motor Co. After years of market-share losses, each has been left with more dealers than they need, and have been pushing dealers to consolidate. But a sudden loss of some of the bigger players could make it harder for the Big Three to maintain sales. GM, for example, suffered a setback recently when Bill Heard Enterprises Inc., one of the largest sellers of Chevrolet-brand vehicles in the country, filed for bankruptcy-court protection and closed its chain of 14 stores.

"The most serious concern for dealerships at the moment is liquidity," said Paul Melville, a partner at consulting firm Grant Thornton LLP. "That's worse for the Detroit Three because of the high amount of lease sales." Auto dealers tied to Detroit have struggled amid falling sales and leases of Big Three vehicles. Tightened credit in the past few months has made it difficult for many to stay in business."

Let's see: the automakers themselves haven't been able to make money from producing cars for a couple of years running, it's no longer profitable to lease the cars (and that's where a large % of Detroit's sales came from) and now the Dealer's are having trouble making money from selling the cars.

You can read more here.

As if the sudden surge in dealership closings wasn't enough, many of the big car dealership holding firms have written down the value of their Domestic franchises to zero.

(From the WSJ): "DETROIT -- Two big auto dealership chains delivered more bad news for domestic car makers: Many Detroit auto franchises have become practically worthless.

In third-quarter earnings reports Tuesday, Group 1 Automotive Inc. and Sonic Automotive Inc. announced charges of a combined $51 million reflecting declining "franchise value" for stores that sell brands from General Motors Corp., Ford Motor Co., and Chrysler LLC. Franchise value is a measure of the potential profit a company can make from holding the right to sell new vehicles and to provide warranty repairs for a certain make of automobiles.

Group 1, the fourth-largest dealership chain in the U.S., took a write-down of $30 million related to its Detroit-brand dealerships. Sonic, the third-largest chain, reported a write-down of $21 million.

In a telephone interview, Group 1 Chief Executive Earl Hesterburg said Group 1's charge means the company has essentially written off the value of its GM, Ford and Chrysler stores. "We have a Ford store in Lubbock, Texas, that is very profitable, but that tends to be the exception," he said.

The charges pushed both dealership chains into the red. Group 1 reported a net loss of $20.6 million, compared with a profit of $20.8 million a year ago, while Sonic lost $25.3 million in the third quarter, compared to a profit of $26.1 million a year ago.

More similar write-downs could be coming from other dealership chains in the next week or so. AutoNation Inc., the largest U.S. chain of auto dealerships, reports its third quarter earnings early next month. The company declined to comment ahead of its announcement"

You can read more here.

So on top of the 37,100 jobs that have already lost to dealer closings, it appears inevitable that we're going to lose thousands more as the companies that own the franchises that have "zero value" aren't going to keep them open forever. Furthermore 2009 is nearly upon us and it's quite likely that this is a trend that has escalated over the course of 2008, suggesting that 2009 will be even worse (or at least equal) in the realm of dealer closings and/or franchise write downs

At the moment Detroit is facing a 1-2 punch of an economic climate that's making it hard for their dealerships to be successful on top of simply having too many of them in the first place, as a result it's likely that there will be too many dealership closings (in relation to demand) and they'll face an issue where they won't have enough dealerships to sell new cars and/or provide service to existing customers.

Needless to say this will only make it harder for the Domestic Auto Manufacturers to recover, especially since entrepreneurs aren't exactly going to be too keen on becoming dealers for a Detroit Brand. Especially when the foreign manufacturers simply aren't suffering to the same degree as Detroit (declining sale sure, but they can lease cars profitably, aren't facing a rash of dealer closings, etc), which will only make foreign nameplates more attractive to the companies already in this business and those looking to enter it.

Sources:

The WSJ: "Big Car Retailers Write Off Domestic Brands" -- Kate Linebaugh, Neal E. Boudette, October 29, 2008.

The WSJ: "More Car Dealers Shut Down" -- Kate Linebaugh, October 28, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 11:58 AM | Permalink | Comments (0) | TrackBacks (0)

A recent FT article discussing a study by the NY Federal Reserve that estimated that each job within NYC's financial industry was responsible for generating 2.5 additional jobs within the city, got me thinking about the number of jobs that are dependant on the American auto industry. I started to do some research on the subject and wasn’t to find anything tremendously concrete, I found numbers as low as two for specific communities and recall a range of 7-9 being thrown out during a NPR story a few year's back but wasn’t able to find it to confirm.

Still while a specific Wall St. job may carry a higher salary, it's quite possible that auto industry jobs may have a larger economic impact due to the large number of actors involved in producing, selling and maintaining a car, the fact auto industry layoffs occur in large bunches, and are indicative of economic problems (e.g. eroding demand) impacting the industry as a whole.

You don't need to be an economist to realize that a single automotive plan probably has more support staff and ancillary industries dependent on it, than your typical banking office, not to mention the fact that Wall St. layoffs aren't usually the result of the closing down an entire operation the way auto industry plant closings are.

Just think about it:

Eroding demand hurts sales at various dealerships around the country who are then forced to cut back on sales staff, repair staff, etc, less demand means less need for a particular plant, and closing that plant hurts parts manufacturers, the shipping companies that deliver parts, food services, grounds keeping, etc, etc.

You could very well have a situation where a specific community loses two jobs per job lost at the local plant, multiple jobs are lost elsewhere and the whole thing is reflective of job losses (say from dealership closings, demand erosion) that occurred prior to the plant needing to be closed in the first place.

It's also worth noting that the loss of a single job at a company like GM very likely has an adverse effect on people who may not lose their jobs, but may suffer a negative economic consequence just the same. 

So maybe nine (albeit an unconfirmed anecdotal data point) isn't so ridiculous after all.

Detroit has on aggregate (based on the most recent data* I could find) about 581k employees, which means that the potential for job loss (if Detroit crumbles) within the larger economy is anywhere from 1.1 million to as many as 4.5 million, in addition to the jobs lost  at the actual automaker. As a result the baseline "job risk" is about 1.7 to 5+ million, and that doesn't take into account the people who would keep their jobs but suffer negative consequences, the jobs dependent on the additional jobs lost, etc, etc.

The job loss issue isn't one to be taken lightly, because at the end of the day these are some of the only people who are actually making money within the American auto industry.

I don't know about you but considering the magnitude of the risk (job loss), on top of the jobs, businesses, etc, that have already been lost (or stand to be lost in the future), I think the Government has to be looking at Detroit as a crisis on part with A.I.G., the Mortgage GSEs, etc. So while I hate to even write these words out, I think that at this point the Government has no choice but to step in and Nationalize Detroit.

When GM's only solution to their problems is desperate ploy to try and merge with Chrysler just to have access to their cash and credit lines, even though it will only exacerbate their medium to long-term problems of too many brands, too much debt, a bloated infrastructure, etc, etc, then you know the end is nigh for Detroit, especially when GM has to beg the Government for money to even pull the deal off in the first place.

The only solution is some combination of bankruptcy and nationalization that allows Detroit to get out from under its debts, continue to operate (and not cause massive damage to the American economy), while they find a way to cut down the bloat, produce better products and refashion themselves as competitive companies.

I would love it if there was another solution but at this point I just don't see one, the Government either has to step in and guarantee that these companies continue to operate for the good of the economy, or allow them to keep mucking around and delaying their inevitable doom.

I think that on an emotional level no one wants to suffer the Black eye to the American business psyche that would occur if Detroit was nationalized, I think that our national pride wants us to believe that Detroit will find a way.

But here is the thing: we simply cannot continue to allow these companies continue to crumble before our eyes based on hope and nationalism because the risks are just too great, especially in light of the current economic crisis. 

Sources:

Employee Count Data from Yahoo Finance & Google Financ e as of 10/29/2008.

The Financial Times:   "Wall St faces up to 78,000 job losses" -- Daniel Pimlott, October 23, 2008.

Posted by M at 10:41 AM | Permalink | Comments (0) | TrackBacks (0)

(From the WSJ): "The steady stream of bad news coming from the U.S. automotive industry prompted one Texas dealer to take some creative license on its latest incentive: Buy a new car, get 50 shares of General Motors stock.

Frank Kent Motor Co., based in Fort Worth, will give away the shares to the first 100 customers who buy a Cadillac, Buick, Pontiac, GMC or Hummer. The stock gift, currently valued around $325, would be in addition to any incentive offered on the vehicles.

"We thought this would be a way for us to break through the clutter that is out there, give back to our customers and hopefully create some more faith in America and GM," said co-owner Will Churchill.

Dealers and auto makers have been pushing incentive boundaries all year amid a souring economy that has kept consumers out of showrooms. Earlier this year, Chrysler offered a gasoline card that locked in costs for buyers of new vehicles at $2.99 a gallon for three years. Volkswagen offered to deposit $1,500 into a college account for customers who make a down payment on the new Routan minivan. A few dealerships have even offered half off their pickup-truck inventory.

The stock gift could raise some eyebrows since GM shares are at their lowest levels in six decades. The dealership has already spent $30,000 to buy about 5,000 shares in preparation for the offer, Mr. Churchill said...

...October is shaping up to be one of the worst sales months for U.S. dealers this year. Sales of cars and light trucks in September dropped 27% from a year earlier to 964,873 vehicles, the first time since February 1993 that monthly sales fell below one million.

Ford Motor sales have dropped 17% through Sept. 30 while GM has declined 18% and Chrysler has fallen 25%. The declining sales have fueled speculation that there could be a U.S. auto maker consolidation with GM acquiring Chrysler."

The fundamental problem with the incentive and promotional programs offered by Detroit is that by establishing themselves as the low cost provider, they're actually cementing the idea(s) in the minds of customers that they're products are lesser/inferior/not as valuable as those offered by the competition. In other words when Consumers elect to spend more money on a Honda Accord vs. a Chevy Malibu they feel like they're getting more value for their money, so offering a Chevy Malibu for less (or selling it with deep discounts, incentives, etc) simply validates the consumer's original opinion.

E.g. discounts aren't going to work in a marketplace where the consumer has explicit stated that they would rather pay more for the competitor's products.

Better yet who has the more valuable product: the company that has to give away part of the company and bribe you with heavy incentives to buy their cars, or the company that offers minimal incentives and sells more cars despite having higher prices? Detroit cannot sell the American consumer on the value of their products when they have to damn near give them away in order to get them off the lots.

Not to mention the fact that the foreign automakers are often a more attractive array of products; no one cares if a product they're not interested in is on sale/offered at a steep discount. It's hard to sell people on the idea of "Buy American/Have Faith in Ford/GM/Chrysler", if the consumer question feels as if they have to choose between the foreign car they want and a domestic one they think is inferior/they're not especially interested in. At least, that's often how I feel when I get ads in the mail from the local domestic dealers.

Mind you I understand the potential economic damage that would be caused by one of the Big 3 failing, but what average consumer can afford to make a $20-$30k sacrifice just to save Detroit? 

Discounts aren't the solution, Detroit has to rebuild their brands, sell the consumer on the value of their cars and simply build world-beater products so that the guy with the Accord feels like he got a raw deal compared to his neighbor with the Malibu.

Admitted the above is easier said then done and it's a hard think to think about when you're just trying to product market share and halt sliding sales, but it's the only thing that will save Detroit in the long run.

Of course for the time being Detroit has to worry about its immediate survival and at this point (recent merger deals notwithstanding) I think the American car companies my have to become GSEs to survive, it's fatuous to think that two failing companies that are burdened with product duplication, weak brands and debt up to the stratosphere can survive by joining forces. GM already has too many brands and buying Chrysler's (with what money?!) isn't going to solve anything; it's nothing more than a desperate shot to get at Chrysler's credit lines and is only a very short-term solution that creates significantly larger medium to long-term problems.

You can read more here.

Sources:

The WSJ: "Buy a Car, Get a Stake in Company" -- Jeff Bennett, October 20, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 06:46 PM | Permalink | Comments (0) | TrackBacks (0)

A quick mix tape of the usual types of things, with this one heavily slanted (for obvious reasons) towards issues related to the bailout, financials, etc:

First off a graphic looking at consumer spending over the past quarter, it comes from a WSJ article discussing the high probability that consumer spending will be down for all of Q3.

Graphic courtesy of the WSJ .

Now I (and others) have been arguing that consumer spending numbers have been inflated by higher grocery and gasoline prices for well over a year now, and that spending has been negative over that time period when you account for inflation. But perhaps the more striking argument is that consumer spending is still down on a nominal basis in spite of the inflationary pressures.

Here is a WSJ op-ed discussing the need and strategies to recapitalize the banks , as the bailout plan moves forward I think the need to recapitalize the banks will become more glaring, it will be interesting to see how this is accomplished at the bank level (raising capital from investors) and at the government level (bailout plans, TARP V2.0). With respect to raising cash from investors it goes without saying that the government will have to be more receptive to allowing SWF to take huge stakes in our banks, and/or takeovers by foreign banks.

Needless to say it's unlikely that we've seen the last of the major sweeping changes to our banking system.

In a story that wasn't followed much Farmer Mac (a GSE focused on the farming industry) was rescued by a consortium of lenders; while the scale of this rescue was rather small by recent standards ($65 million) it does beg the question: in instances where we see the need for a GSE to be created, do we really want the government managing them? I'm not sure if private sector oversight boards are the way go to either (it's not like they do a great job in corporate America) but some other method of providing oversight is obviously needed.

Here is a look at an interesting way to approach FOREX: the Big Mac Index , it's a method used by The Economist to compare the relative value of various currencies to one another based on the cost of a Big Mac. Not sure I completely agree with using something as unappetizing as a Big Mac to determine the relative value of various currencies, but it's rather interesting nonetheless.

Here is a look at the way in which auto lenders are being effected by the credit crunch and the impact it's having on auto sales; I find this one interesting because one hand the auto lenders are facing some very real funding issues and on the other many of them have a history of bad lending habits (in my opinion at least).

Just think about it the average term and amount for auto loans had been steadily increasing until recently (per data from the Federal Reserve ), at a rate that far outpaces the typical increase in people's incomes. For example for the year 2000 the Avg. car loan was for $20,923.00 and the average term was 54.9 months, in 2004 it was $24,888.00 loan with a term of 60.5 months and in 2007 it topped out at  $28,287 and 62.0 respectively.

Furthermore I'm sure that on an anecdotal basis we all know of people who have financed cars whose value far exceeded their income, when it comes to cars it appears as if people were basing their affordability assessment based on what someone would let them finance.

On a go-forward basis both auto lenders and auto manufacturers are going to have reset a lot of their expectations, because the days of easy credit (even after the economy recovers) have gone for the short-medium term.

Paul Kedrosky has a humorous post compared Credit Default Swaps to the Rodent's of Unusual Size from "The Princess Bride" , all kidding aside he makes some very valid points around how the CDSs are likely to wreck havoc on the credit markets and often when people aren't expecting them to.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 03:28 PM | Permalink | Comments (0) | TrackBacks (0)

Here is a quick at various news stories and other items I think you may find interesting:

You can read a revised copy of the bailout bill here,   the biggest changes to the new bill appear to be a measuring raising FDIC insurance to $250k (meaningless to all but a small % of U.S. citizens) and raising the ceiling (it's now unlimited) on the amount the FDIC can borrow from the treasury.

While many are touting the raising of the FDIC limit as a way to prevent runs on banks I have to say I'm rather skeptical, because I suspect that the people who get scared the most are folks of average means that can't risk losing a cent or having access to their funds interrupted. Raising the limit to $250k isn't going to stop scared consumers with more pedestrian account balances from running scared from troubled banks.

You can also read additional coverage from the WSJ on the revised bill here.

A story in the FT around the dollar breaching $1.40 against the Euro, and how many analysts are thinking the dollar will continue to gain strength in the future. While I don't think the analysts arguments are totally invalid per se, I think the combination of the bailout plan and Bernanke flooding the world with dollars will combine to deflate the dollar past the short-term. You can't just flood the world with dollars and expect them to increase in value at the same time.

You can get up to date currency rates from Bloomberg here.

Speaking of which here is an article that suggest that Oil Prices are going to skyrocket as a result of the above, and while I think many will balk at his argument you can't ignore the supply and demand issues and the inflationary scenario caused by a weakening U.S. dollar.

Warren Buffett is continuing to take advantage of depressed stock prices by injecting $3 billion into GE shares; something tells me that when he was predicting this crisis back in '02 he was also researching potential investments he could snap up for cheap once the market tanked. Don't be surprised if you see him making some more high profile investments in the near future.

Auto Sales plummeted in September due to usual/expected problems around credit, higher gas prices, economic worries, slumping demand for SUVs, etc.

I suspect that the auto industry won't quite "recover" even when the economy does, because the hey day of the SUVs is over and an economic crisis of this magnitude is likely to influence customer behavior for decades, meaning many people who used to buy a new cars long before their current one needed replacing may decide to instead keep their cars for a few years longer.

I'm thinking of scenarios where a household decides to delay their usual car upgrade/replacement cycle due to the economy, realizes along the way that the current vehicle is perfectly fine and that good economic times or not they're not losing anything by hanging on to the car for a few more years, thus leading to a change in behavior where they start hanging on to their cars for longer periods of time.

While this is somewhat anecdotal and based on my own experiences around delaying my planned new car purchase due to worries about the larger economy (it felt irresponsible to be honest) as opposed to issues with my own finances, it still stands to reason that the current crisis could effect significant changes in consumer behavior and  the car industry could suffer as a result.

In an era where a well maintained car can easily last for 7-10 years with minimal losses in performance, aesthetics, etc, the usual 3-5 year replacement cycle isn't exactly necessary. 

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 12:06 PM | Permalink | Comments (0) | TrackBacks (0)

In a move that isn't likely to get much attention due the current row over the banking industry bailout, Congress approved $25 billion worth of low cost loans for the auto industry today:

(From the FT): "The House of Representatives on Wednesday approved a $25bn package of low-cost loans to help hard-pressed carmakers and their suppliers finance plant modernisation at a time of restricted access to public capital ­markets.

The automotive loans are separate from the proposed $700bn bail-out for the banking sector, which is still being debated in Congress. The House approved the measure 370-58, setting the stage for Senate approval within days.

The industry’s case has been helped by the fact that Michigan and Ohio, the two states most dependent on the car industry, are key swing states in the November 4 presidential election.

Executives of General Motors, Ford Motor and Chrysler and their suppliers have lobbied heavily for the loans. Both presidential ­candidates, John McCain and Barack Obama, have expressed support…

...The loans were originally authorised in an energy bill passed last December to finance the retooling of plants for more fuel-efficient vehicles, especially hybrid and electric cars. But they have become a crucial prop for Detroit carmakers.

The continuing resolution provides funding for $7.5bn, which is the estimated subsidy on the loans – in other words, the cost to the government of providing them at well below market rates.

The loans will not take effect until the energy department has written detailed regulations dealing with, among other issues, which investments will qualify and conditions for repayment. Congress has directed the department to begin writing the regulations quickly and will provide any extra staff required to do so. One lobbyist said he hoped the regulations would be completed by early 2009.

All carmakers and suppliers with operations in the US are theoretically eligible. However, the energy bill restricts benefits to plants that have been in operation for at least 20 years, thereby excluding most foreign carmakers.

A Toyota spokesman said his company was agnostic on whether it derived any benefits. It has kept a low profile in the debate on the loans."

At some point we (as a nation) are going to have to abandon the idea that we're  free market capitalist society, and just admit that we're "convenience economy" we're socialist when its convenient and blow the free-market horn when that's convenient as well. Or perhaps we have a free market economy when it works, but the government is always ready to step in and help Corporate America clean up its mistakes.

Mind you I'm not disputing the sheer economic value of the domestic auto industry or the need for them to retool, I would just rather any help from the government come with some sort of penalty, higher cost or a more tangible benefit to taxpayers at large. For instance if the auto industry has to borrow money from the government to operate, than they should be required to provide low cost auto loans to low income people, or provide job training, employment, etc, to same. Additionally a % of their future profits should be kicked back to the taxpayer as well.

For me it's not so much the value of any benefit I receive personally if/when the government has to bailout or help a particular company it's the overall principle of the thing, it's a lot easier to support bailouts (and trust the politicians making the decisions) when they treat the taxpayer with respect and outline the direct benefits we'll receive as opposed to saying: "do it for the economy".

You can read more here.

Sources:

The Financial Times: "House clears $25bn for carmakers" -- Bernard Simon, September 25, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice

Posted by M at 09:32 AM | Permalink | Comments (0) | TrackBacks (0)

The usual sampling of various stories on business, economics and other topics I think you may find interesting; this edition is a mixture of old and new links as I've had some of these laying around for a week or three.

The FT's John Gapper writes about how the GSE bailout is tremendously beneficial for foreign investors but may pose severe risks for the regional banks.

A link to the WSJ's coverage of the GSE bailout can be found here.

T Boone Pickens has a web site touting his energy plan, which you can find here.

In lighter news, here is a link to an interview with the engineer who designed the McLaren F1. 

The BOJ Chief states that the global slowdown is a good thing in terms of it being a necessary economic adjustment; not saying I agree with all of his comments but it was refreshing to hear a central bank governor acknowledge the fact that downturns are often necessary parts of the economic cycle. As opposed to the usual commentary that gives one the impression that some of these individuals are trying to manage the economy like a children's soccer game where no one loses.

Here is an interesting column from the FT discussing how one should be wary of "Bear Rallies"; perhaps what's most interesting about the article is that it was written in January. After all I'm sure you remember January, AKA the time when many were proclaiming the market bottom was here like it was going out of style.

Here are some interesting reads related to the banking crisis, bank failures, et al:

One that attempts to put recent bank failures in their proper context in terms of the aggregate size of the failed banks vs. the size of the overall banking system, and in comparison to the S & L crisis.

The second article is bit more bearish and discuss pending failures of commercial and retail banks, the explosion in the number of banking start-ups, etc.

Here is a link to an interactive graphic summarizing economic activity across the country, it's part of a larger discussion around the Fed's "Beige Book".

Here is an article discussing the declining % of equities held by institutional investors, and the role institutional investors are playing in corporate governance. I have to wonder if individual investors truly own a smaller % of equities, or if what's really happening is that more individuals own stocks via 401ks, mutual funds, etc, than they did in the past.

Here is a link to the web site for the I.O.U.S.A. movie; and a link to NPR coverage on the movie as well.

A Financial Times story discusses the relationship between retail failures and REITs that own malls, shopping centers, etc; the whole thing is fairly simple really: retail stores are the customers of the mall/shopping center REITs and as stores close they find it hard to locate new tenants.

As for the fate of Boscov's (the retailer that's the primary focus of the article), their situation sounds more like a weak retailer for whom the economic downturn was the final nail in the coffin rather than a retailer that was truly "taken down" by economy. The retailers I've read about (over the last six months or so) that are either going of business, declaring bankruptcy, on the brink, etc, were always retailers that were having problems when the economy was strong. As a result I think it's a little intellectually dishonest to try and make the claim that they're truly victims of a bad economy.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 09:05 AM | Permalink | Comments (0) | TrackBacks (0)

While reading through a summary of the August auto sales numbers I began to think about the need for a better set of metrics to gauge the monthly sales performance of auto makers (from one year to the next and in comparison to each other), because the current set is often misleading and doesn't provide much insight into a respective automaker's financial health.

First off there is my usual gripe that total units sold isn't an especially good predictor of profitability, due to the existence of a significant number of car companies that sell fewer cars than GM or Ford yet generate significantly greater profits. I.e. the issue isn't total cars sold, it's total profits and profits per car sold.

The business media is stuck on the idea of Toyota pursuing GM for the sales crown and GM's market share, when by the metric that matters (profits) Toyota left GM in the dust ages ago.

The other issue is that focusing on total units sold doesn't account for pricing differences between automakers: the average selling price (and profit margin) for a Porsche is significantly higher than that of a Hyundai, so within certain volume ranges Porsche can sell fewer cars than Hyundai yet generate significantly more revenue and earnings. As a result it wouldn't really make sense to call Porsche a "smaller" automaker than a higher volume competitor that generates fewer profits.

Another example is the American manufacturers using heavy discounts to prop up car sales, GM's 20% YoY drop is undoubtedly worse than advertised when you realize that for the month of August they were mostly selling cars at employee discount prices. Car companies should report any changes in their average selling price from one year to the next, so that investors are better able to judge the overall quality of their sales.

At the end of the day I'm not saying toss out the total units sold metric, I'm merely saying that it would make more sense to also include the following (at minimum):

YoY change in Avg. Sales Price

Avg. Sales Price

Total Revenue Generated

Total Incentives per car

Having a typical profit earned per car metric would be useful as well.

If automakers provided the metrics above investors would be better equipped to determine the quality of a particular month's sales, as opposed to the current situation where we're comparing GM's money losing apples to Honda's profitable oranges.

Finally in terms of judging the relative size of a car company it would probably be better to use profitability, and profitability per car sold as the key metric, so you're looking at the relative size of various companies based on their respective ability to generate profits.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted by M at 12:56 PM | Permalink | Comments (0) | TrackBacks (0)

Reading about Hyundai's plans to break into the Luxury Car market reminds me of the days when Acura first launched and the parts under the hood still said "Honda" on them, it was a mistake that slowed down Acura's initial progress towards being recognized as a legitimate luxury Automaker. I'm also reminded me of the launch of the VW Phaeton which was a failure despite the Phaeton being a great car, the problem was never the car but the fact that the shoppers VW was pursuing don't shop at VW dealerships. The car probably would've been a success if it had been marketed as an Audi 

(From the WSJ): "ANN ARBOR, Mich. -- Hyundai Motor Co. is aiming to