This from Today’s Financial News:

It is only day number two for the Obama administration and already the economic pressure is growing. It looks like his pick for Treasury Secretary, Tim Geithner, may not get confirmed as quickly as many would like. And cries that the new president’s stimulus package will not be nearly enough are getting louder and louder.

So far… no change. But we are hopeful.

What’s more, the latest round of economic data shows no signs of economic rebound. New jobless claims rose by a surprising 62,000 claims to reach 589,000 for the week, the highest level since 1982.

Do not expect a sudden wave of hiring from the construction industry. After its worst year in history, the new-homes market continues to hit new lows. Housing starts dropped by over 15% to break November’s low and set a new record with just an annual rate of 550,000 started last month.

That is not the kind of news that lights a fire under Wall Street.

But it is the kind of news that forces us to glance a critical eye towards the investing world. With the equities market once again embarking on a wild up-and-down ride, investors absolutely have to know which stocks are safe and which ones will destroy what’s left of their portfolio.

Yesterday, I revealed the three companies that offer the best shot at market-creaming rewards during the first 100 days of Obama’s presidency. Today I will list the three stocks that likely will not be around to see the end of his reign.

If you think it was tough to find three picks with the potential of handing investors double-digit gains over the next three months, try narrowing the field of losers to just three.

The only way I could do it was by limiting my search to the companies that stand a good chance of seeing their share price hit zero. Invest in these companies and you may not lose just a portion of your money, you may lose every single penny of it as an unprecedented wave of corporate bankruptcy plagues Wall Street.

Stop “hogging” the bailout line

The first company is a tough one for me as I have personal ties to Harley Davidson (NYSE:HOG). I grew up just a few miles from its largest factory, spent numerous nights discussing the world of business with some of its high-level engineers and operations managers and many of its union production-line workers are good friends of my family.

Needless to say, it is tough not to be an emotional investor when it comes to the motorcycle maker. But we cannot let our feelings get in the way, especially if we know it will cost us money.

Harley is affected by the same phenomenon destroying Detroit’s chances of success. Its union labor costs are higher than its competitor’s costs, demand for its products is plummeting, the company is riddled with over-capacity and the few folks that still want to buy a bike cannot get the credit they need.

Harley Davidson sells the ultimate discretionary item, coolness. It is one of a few products in history that allows a person to walk into a showroom a stiff, old square and walk out a leather-wearing, fear-inducing, badass.

But when the economy shrinks, fewer and fewer folks can afford to buy their coolness. That means Harley’s sales are dropping and its earnings plummeting.

We will see evidence of this tomorrow when the company releases its fourth-quarter earnings. After two quarters of disappointing results, there is no reason to believe the last three months were any better.

Analysts predict sales were down by 6% to just $1.3 billion. But thanks to high overhead and investment losses that drop in revenues will translate to a 26% decrease in quarter profits to just $0.58 per share.

With more than two million Americans losing their jobs last year, Harley will not see a quick turnaround in sales. Even worse, it will not get the federal aid like its headline-worthy big brothers in Detroit.

Finally, if it is considered a bullish signal when company insiders buy shares of their company, it is a horribly bearish sign when they jump ship. Investors should have seen the writing on the wall when two of Harley’s top officials, including its CEO, recently packed their saddlebags and rode their iron horses out of Milwaukee.

There is a strong chance that Harley’s future is far more bleak than its automotive brethren. That means its shares have even more room to drop.

Unless you take a short position, stay far away from this hog. It is headed to the slaughterhouse.

A hog goes… Winnie

If buying a Harley Davidson instantly makes you cool, I do not even want to think about what buying one of Winnebago’s (NYSE:WGO) aluminum homes-on-wheels makes you.

If you thought selling an overpriced motorcycle was hard in this economy, try selling an expensive, gas-guzzling vacation maker. Millions of Americans now have the extra time they need to take a road trip, but they are using it to send out their resumes, not touring from campground to campground

At the risk of sounding like a broken record, I have to tell you once again if you think the problems in Detroit are nauseating, you will have a seizure digging through Winnebago’s recent earnings reports. It is amazing the company has made it this far.

The company offers a wide range of motor homes that come with a price tag of $50,000 and up. If you want a half-decent touring unit, you better have a six-figure checking account or darn good credit.

Unfortunately, right now, few folks have either. And the folks that do are buying the discount yachts flooding the market, not “Winnies.”

Just about one month ago, Winnebago announced its fiscal first-quarter results. The figures were not pretty. In fact, the company’s CEO, Bob Olson, said, “This downturn has been one of the most difficult downturns that I have been associated with.”

Olson’s company announced a quarterly loss of $9.3 million after revenues fell by a whopping 68% to just $69.4 million.

Winnebago has already done just about all it can to prevent even larger losses. Over the last few years, it cut its workforce by 60%, it recently forced all workers, including C-level execs, to take a weeklong unpaid leave and it shutdown its production for two weeks.

All that is left to do is hope and pray there is a sudden revival in demand. But even with Obama’s stimulus package, which will likely put just a $500 tax rebate in consumer pockets, the likelihood of a Winnebago craze is not very high.

More likely, Winnebago will be forced to start piling up debt. Unfortunately, in this credit-tightened market, that debt will not come cheap. It may be enough to push the company’s head under water.

Industry-competitor Coachmen (NYSE:COA) recently bailed out of the RV business. Now it just manufactures housing and busses. Winnebago does not have that option. It has a very narrow product lineup.

That means you must steer clear of this company as its shares drive off a cliff. The stock is above $5 right now, but it will not stay that way for long.

Satellites dropping from the sky

Finally, if there is one company with shareholders desperately fearing the “B” word, it is Sirius XM Radio (NASDAQ:SIRI). The company’s debt threatens to bring it to its knees within the next month, yet so many investors continue to throw their money into the company.

They are making a huge mistake.

Sirius has an incredible debt load. It started with over $300 million in debt due in February. But thanks to converting that debt into dilution-inducing equity stakes, that figure is down to about $190 million.

If the company somehow manages to convince its remaining debt holders to convert their stake into stock (which is losing value by the second), Sirius still has nearly $600 million due later in the year.

If the company has to pull out all of the stops just to get through February, what can it possibly due to get itself out of the jam it faces later in the year? There are few options.

One option would be to increase revenues by raising prices, but the FCC says no way. The inability to raise its basic prices was part of the package that allowed Sirius and XM to merge last year.

The only way forward for this company is to renegotiate its expensive talent contracts and its incredible debt burden. The best way to do it is in bankruptcy court. That means today’s shareholders will see their position reduced to nothing.

Shares are already down to just $0.11 each. For investors that got in when they were trading for much more, the bottom does not look so far away. But if you get in at today’s prices, hoping for a rescue, you better be able to afford to lose your entire stake.

Sirius, in its current state, will not be around to see all of Obama’s first 100 days. It simply has too much debt and not enough options.

The nation’s economy is in rough shape. Investors are reeling in pain after last year’s losses. Avoid these three stocks like a mean dog with an attitude and take another look at the three companies I told you were worth buying. If you do, you have a very strong chance to avoid the incredible losses the market endured last year.

Obama promised us change. Act now or that is all you will be left with… pocket change.

Source: The three best – and worst – stocks of Obama’s first 100 days (PART II)

This from Today’s Financial News:

It is do-or-die time in corporate America. If companies do not get their finances in line and make a turnaround during the first quarter of 2009, their days as a going concern are over.

Indeed, the bankruptcy courts will be busy as we countdown President Obama’s first 100 days in office, but that does not mean we will not see long lines of investors cashing in their market-creaming gains. This is a time of great flux in the American markets, which requires savvy, well-researched investing techniques.

Make the right choices and the next 100 days will be like no other. Make the wrong choices, and you will be begging for the good ‘ole days of the Bush administration.

When the final closing bell of 2008 rang, the Dow closed the year with a price/earnings ratio of 13.27. While that figure is about 10% below the historic average of 15, you will quickly realize it is quite high if you have been tracking the amount of 2009 earnings forecasts that have been dramatically slashed.

Scores of companies across all industries, including bellwethers like Johnson & Johnson (NYSE:JNJ), have cut their 2009 earnings forecasts. That means P/E ratios, the most basic of financial measurement tools, are screaming that shares of many companies remain intensely overvalued.

While the bears are raising hell on Wall Street, there are a few straggling bulls roaming free – more than enough to give investors a very real shot of actually smiling the next time they open their 401(k) statement.

Over the next few minutes, I want to share three dangerous companies you should keep your distance (and your savings) from and three that you should be socking every spare dollar you can find into. All of them will make significant moves during the first 100 days of Obama’s presidency.

Let’s start with the companies that will be around to see all of Obama’s presidency. There may be less than you think.

The winners…

No matter what happens to the economy or who is leading the government, Americans are always going to get sick and they are always going to get old. Granted, how much we pay for our healthcare and who pays for it will always be a hot debate, but we all know Obama is not going to revolutionize the nation’s healthcares system in just 100 days.

That means The Ensign Group (NYSE:ENSG) is worthy of your investing dollars. The company specializes in nursing and rehabilitative services in the western section of the nation, an area that attracts the company’s target demographic like moths to a streetlight.

While so many other companies are contracting, Ensign is expanding at an exciting clip. Not only is this $330 million company using some of its $56 million in cash to buy its competition (it finalized two deals earlier this month), it is increasing the amount of its earnings it sends directly to its consumers by 12%.

That’s right, while countless companies were cutting their dividends, Ensign raised its investor reward. With an annual payout of just $0.18, which represents just 1% of the current share price, the dividend is not much, but the folks that have studied signaling theory known this is an extremely bullish signal from the company’s management team.

In fact, the company’s CEO, Christopher Christensen, recently said of the increased dividend, “ It reflects our continued confidence in our operating model, and in our ability to return value to our shareholders in a difficult economy.”

He is not lying.

Some other important things to know about this company:

- It has a current ratio of over 2, meaning it will have no problem paying its bills even in this shaky credit market.

- It is expected to post earnings growth of over 15% over the next five years.

- Its share price performance has beaten the pants of the major equities over the past six months (look at the chart.)

The Ensign Group is a well-managed company with a high-demand product that does not suffer at the mercy of consumer demands. Its books are squeaky clean and its management team is signaling that things are only going to get better.

That is all the reason you need to put shares of this company in your portfolio.

Spinoffs are good

Wall Street does not like General Electric (NYSE:GE) right now, but it since the market reached its lows in November, one of its former subsidiaries has surged by more than 35% and shows no indication of slowing down.

In 2005, Genpact (NYSE:G) was spun off of GE Capital, with equity investments from General Atlantic and Oak Hill Capital Partners. The public did not get a shot at the new company’s revenue stream until 2007.

Since going public less than 18 months ago, Genpact’s earnings made significant gains. During its first quarter as a public company, the company lost $8 million. Last quarter, it showed investors its true potential with earnings of nearly $34 million on just $270 million in sales. That’s a 12% profit margin.

Genpact makes these profits by maximizing profits for other major companies spread throughout the world. It specializes in providing process and analytical insight that allows companies to squeeze every penny of potential profit from their operations.

Have you read the stories lately of companies refining their process, working to increase their margins and eliminate operations waste? If not, I can tell you I could wallpaper my office in the articles printed just this week.

When the economy is on the rocks, consumers are not spending and revenues are plummeting, companies must do everything they can just to stay in business. That is why they turn to Genpact.

If the company started under the eye of Jack Welch, you know it contains his core values to this day. What could possibly be a better investment in a time of economic contraction than a company that specializes in helping companies get back on track?

Genpact is a $1.8 billion company with $315 million in cash, just $113 million in long-term debt and has seen its earnings rise by an average of 30% per quarter since becoming a public company.

If Genpact can get the rest of the nation’s businesses to look so appealing, the economy will look better in no time.

Buy what you know

So far we have looked at companies that are considered growth investments. Any well-managed portfolio has a proper allocation of growth and value prospects. That means we need a company that is selling for pennies when it should be selling for dollars.

Prestige Brands (NYSE:PBH) may not be selling for less than a buck a share, but it is definitely trading for a fraction of its true value. A single-digit P/E multiple of 9 proves it.

This company is all about the value of its brand. You may know the company through its Comet, Spic and Span, Cutex or its Chloraseptic brands. Chances are, if you open any bathroom or below-sink cabinet in your house, the company’s products will be right there in your face.

Investing in this company is the definition of investing in what you use, the strategy Warren Buffet used to get rich.

But it takes more than a few powerful brands to make a winning investment. It takes a strong set of books and an undervalued share price. Of course, Prestige has both.

Let’s go back to that single digit P/E. In this economy, financial figures from the past mean very little as earnings can change with the wind. But Prestige is expected to announce quarterly earnings that are down by just a few pennies per share even in the heat of a nasty recession. That means, unless share prices rise (my bet) we will continue to see a rock-bottom ratio.

When it comes to managing its debt, the mature company does quite well. Over the next twelve months, Prestige has just under $38 million in bills. With nearly $89 million in short-term assets and anticipated continued positive cash flow, the company has more than enough in reserves to see it through these economic doldrums.

Shakespeare asked, “What’s in a name.” Prestige proves there is a lot more than a shot at love riding on its brand names.

Check out Prestige Brands and the two other stocks I mention and see if they fit your portfolio.

As for the three stocks you absolutely must avoid over the next 100 days, well, you will just have to check back in here tomorrow afternoon.

Source: The three best (and worst) stocks of Obama’s first 100 days

This from Today’s Financial News:

They are falling like dominoes these days. Without help from Uncle Sam, many of the nation’s top businesses do not stand a chance. They are taking investors with them.

When Circuit City ( filed Chapter 11 bankruptcy in November, investors believed there was an opportunity to restructure. They thought if they could find temporary protection from their creditors, holiday sales just might bring their company back from the brink of total collapse.

It didn’t happen.

Holiday sales across the board turned out to be as dismal as expected and today, Circuit City is paying the price. It is liquidating its assets and disappearing for good.

A short circuit blows the fuse

After negotiations between two potential buyers, creditors and what was once the second-largest specialty electronics retailer in the country failed, 30,000 employees are left without a job and four liquidation companies are charged with unloading the company’s inventory and assets spread throughout the 567 stores that remain open. The company already announced closures of nearly 160 of its outlets.

The New Year is just over two weeks old and the list of companies that will not see the year through is growing longer by the day. Earlier this week,  and Gottschalk’s entered bankruptcy protection.

Who is next is anybody’s guess.

I would keep a close eye on Bon-Ton Stores (NASDAQ:BNT). Since its headquarters is about four miles from my front door, I will let you share my front-row seat. Another company to watch is Borders (NYSE:BGP). Its debt load is starting to shake the company’s foundation. A lot of analysts are wondering how long it can take the stress.

What does this all mean? How are investors to react?

In the short-term, not a whole lot. You would have had to been living in an underground bunker to have not seen these headlines coming. The long-term outlook is where the big money will be made.

Over the last five years, “Big Box” retailers have been popping up one after the other, sometimes within a few miles of one another. In my home town, for instance, a new Best Buy (NYSE:BBY) was literally built right behind a Circuit City store, which was right beside an older family-owned electronics shop.

What this mean (or exemplifies, really) is the fundamental rules of economics and business are still at work, no matter how hard Washington tries to eradicate them. The strongest will pounce on the weaklings and dominate the marketplace.

Mother Economy will take care of business

A bubbly economy may have allowed the weak to thrive for a few years, but when things got tough, their lack of strength became obvious and now they are dropping one after the other.

For the companies that survive, today’s news is fantastic. Imagine what power Best Buy will have with one of its major competitors out of its way. Sure, the next few quarters are going to reek of decaying corpses as Circuit City’s inventory floods the market, but after that, I would love to see the competitor that can knock Best Buy off of its leadership perch. There is nobody in sight.

No matter how hard we try to force the rules of economics in our favor, Mother Economy always wins. She told us months ago things were getting too big. Instead of forcing consolidation ourselves, we waited until the economy did it the natural and most painful way. Now we are paying the price.

The situation will get better and the pendulum will swing in the opposite direction. They always do. When it happens, the survivors of this retail death march will be sitting atop a big pile of profits. Make sure you are one of them.

Source: Mother Economy wins: Another one bites the dust

This from Today’s Financial News:

One of the most important rules of investing is to never get emotionally involved with your portfolio. Your positions must represent fundamentally sound companies with a strong potential to generate positive cash flows and growing earnings.

Unfortunately, too many Sirius XM Radio (NASDAQ:SIRI) investors are not heeding this advice. They have their hearts tied to the failing company and are paying desperately as Mel Karmazin rides the company into bankruptcy.

A quick glimpse at the comments following nearly every columnist’s bearish thoughts on Sirius prove my point. Judging by the amount of name calling, twisted facts and just plain lunacy present on so many Sirius-based message boards, it is obvious tensions are high and hopes are dim. Either that or fifth-graders are investing more than ever.

Let me get you a tissue

Unfortunately, with the value of their shares down to just $0.12, it is too late for many Sirius investors to find a path towards profitability. After all, when you are down 95% on the year, what is another couple of percentage points?

To blame the company’s problems on anything but poor capital structure, a weak management team and an upside-down business model is ludicrous.

Short sellers, analysts and hedge funds did not drive Sirius’ share price to where it is today. Instead, a lack of liquidity and huge amounts of dilution are taking money straight from the pockets of once-loyal investors.

If you want to make money off of this company, your best bet is to sell. Sell your satellite radio receiver on eBay and unload what is left of your shares. Both of them will be worthless soon enough.

Converting debt into worthless stock will do nothing for current shareholders but dilute their positions even further. Why do you think Moody’s just cut the company’s rating another notch? It was not because the rating agency thought Howard Stern was not funny.

If Wall Street thought the company had a viable plan to get rid of its billion-dollar debt load, shares would not be plummeting.

Sirius is a trap that emotional investors are pushing each other out of the way to fall into. Do not join them. Wall Street is no place for emotions, especially in this market.

Source: Don’t get all emotional on me

This from Today’s Financial News:

I wonder how well the folks at the Big Three sleep at night. The last few weeks must have been torturous for Mullaly, Nardelli and Wagoner on their big, cushy beds, but the past five days have got to have topped them all.

After Congress hung the automakers out to dry last week, Detroit has been curled up in front of the Oval Office’s door waiting to hear their fate. Inside the office, President Bush is answering calls with mixed demands. Southern representatives are demanding union concessions. At the same time, northern leaders argue it is Washington’s obligation to rescue the domestic manufacturers.

It is like the 1860s all over again.

While our lawmakers argue politics, their constituents have had time to think the matter over a bit. As each day goes by, more and more Americans believe bankruptcy is a viable option. Even the press is leaning that way these days.

Backing bankruptcy

As I have told anybody that would listen over the past three months, I stand by my belief that a pre-packaged, government-backed bankruptcy is the only route to success. It allows General Motors and Chrysler to dump their impossibly heavy burdens and start from scratch. No banks will fund the measure, but Uncle Sam certainly can.

The Big Three have their product lineups where they need to be. Now they need to get their balance sheets in order. They only way it is going to happen is if we crumble up the old books and start with a new set (and keep the UAW out of it).

Moody’s announced the findings of its recent research yesterday. It helps prove my point. It says there is a mere 25% chance of a rescue plan that does not involve a near-term bankruptcy, and there is only a 5% chance of a “freefall” Chapter 11 filing (one with no pre-set terms). That means Moody’s believes there is a 70% chance of a government-backed prepackaged filing.

For investors in Ford (NYSE:F), this is no big deal. The company’s balance sheet shows enough cash to get it by for at least another year. But for the folks that have an equity stake in General Motors (NYSE:GM), it means your shares could be worthless in a matter of weeks, even days. Get rid of those things while you still can.

Cut and run

If you want to reinvest the cash, put your money in the suppliers feeding Detroit. They will be able to survive a bankruptcy with some short-term pain but little permanent damage. Best of all, you will be able to get them dirt cheap following any news of a bankruptcy filing. Initially, shares will plummet.

So take this as a call to action. Be prepared to buy shares of Detroit suppliers like Tenneco (NYSE:TEN), TRW Automotive (NYSE:TRW) and BorgWarner (NYSE:BWA) on any news or even rumors of an automaker bankruptcy.

Detroit is in a state of purgatory. Its fate is in the hands of the lame-duck Bush administration. As each day goes by, chances of a pre-packaged bankruptcy grow larger. Play the situation right and it could be a very profitable opportunity.

Be prepared to take action between now and the New Year.

Source: Detroit Bankruptcy: Be Prepared To Buy On The News

This from Investment U:

Value investors, consider this your warning… With thousands of stocks down 50% (or more), investors are salivating over the bargains. But for every true deal, there are at least three “value traps” – stocks destined to languish at depressed levels indefinitely. Or worse, get cheaper still.

Think Kmart here. In late 2001, it became the poster child for value investors. They argued it was dirt cheap based on countless metrics like book value and sales. And it was destined for a historic turnaround.

Sure enough, the stock went from the bargain bin to the trash heap, as the company filed bankruptcy in early 2002.

So before you go bargain hunting in this market, arm yourself with this list. It could be your only chance to avoid getting snared by the countless “Kmarts” begging for your investment…

Value Stocks & Value Traps

In theory, a value stock is a beaten-down company that’s:

• 1. Cheap compared to its earnings, its competitors and/or some other relevant benchmark
• 2. Poised for a turnaround.

In contrast, a value-trap is simply:

• A beaten-down company that’s cheap compared to its earnings, its competitors and/or some other relevant benchmark
• That never quite turns around.

Unfortunately, no formula exists to calculate when, or if, a turnaround will ever occur.

10 Questions To Help Value Investors

These 10 questions should help any value investor. And ultimately, keep you out of most value traps…

1. Is there a near-term catalyst? First things first, if there’s nothing on the horizon – like a new product launch, key marketing arrangement, a shake-up of the executives, the conversion of a massive order backlog, etc. – we shouldn’t bother. Companies and stocks need catalysts in order to advance. If none exist in the next 12 to 18 months, chances are the stock will be stuck in neutral, or worse, reverse.
2. What are insiders doing? Nobody knows the company – and its future prospects – better than the insiders. If they’re not salivating over the “cheap” prices and backing up the truck, we shouldn’t either.
3. Is the company addicted to debt? Too much debt magnifies the impact of tough times. As sales decrease, interest payments take up more and more of the company’s earnings. Not to mention, unwinding leverage is a time-consuming process. So even if the company boasts new, fiscally responsible management, beware. Or as Warren Buffett observes, “When a management with a reputation for brilliance takes on a business with a reputation for bad economics, it’s the reputation of the business that remains intact.”
4. Does the dividend yield seem too good to be true? Value investors love to tout they “get paid to wait” for a turnaround. Granted, many stocks do maintain their dividends through a downturn. But countless others don’t. They slash or cancel them altogether, just to stay in business. No matter how tempting, tread carefully when the dividend yield hits double-digit levels.
5. Is the company just as “cheap” based on the future? At first glance Eastman Kodak (NYSE: EK) appears dirt cheap, trading at a price-to-earnings (PE) ratio of 2.96. But don’t be fooled. Or get too easily excited. Remember, the PE ratios cited on most financial websites are historical. And as investors, we don’t care what a company was worth… we care about what it will be worth. So before you buy, make sure the stocks forward PE ratio is similarly attractive. (FYI – Eastman’s is not. It trades at 27 times forward earnings. Hardly cheap.)
6. Which direction is the company’s market share headed? A general economic slowdown is one thing. But when a company’s losing market share, too, that’s an indication that a competitor has a better mousetrap. And while economic growth is cyclical, market share is not. Even if the economy or industry turns around, chances are the company’s market share won’t.
7. Does the company operate in a highly cyclical or moribund industry? If you go hunting in a highly cyclical industry (like semiconductors) you’re asking for trouble. Same goes for industries destined for obsolescence (like print media). To win with these stocks, you need both the company’s misfortunes and the industry’s to reverse course.
8. How’s the free cash flow? Earnings can be massaged, manipulated or completely fabricated. But cash cannot. So make sure free cash flow is stable, or growing. If nothing less, it provides management with a little wiggle room, or margin of error when considering ways to speed up a turnaround.
9. Is the stock liquid enough? Just like insiders provide support to share prices, so do institutions (mutual funds, pension plans, hedge funds, etc). Both groups can move stocks prices quickly and significantly. However, many institutions can’t or won’t buy stocks trading for less than $10, with a market cap below $1 billion and/or that don’t trade several million dollars worth of shares each day. Without the potential for institutional ownership, a quick rebound in prices becomes less likely.
10. Does the company have a sustainable competitive advantage? For a stock to turnaround we need the company to thrive, not survive. That’s not possible without a sustainable competitive advantage. So stick to companies like Apple (Nasdaq: AAPL) that are light-years ahead of the competition in terms of design, market share, new product offerings and/or technology.

In the end, don’t kid yourself. Detecting a value trap is no easy task. Even the best investors occasionally get snared. Think Bill Miller (with Countrywide and Freddie Mac (NYSE: FRE)) and Carl Icahn (with Yahoo! (Nasdaq: YHOO) and Advanced Micro Devices (NYSE: AMD)).

But at the very least, these 10 questions will ensure you never buy blindly, or on price alone.

Source: Value Investors – Beware The Value Traps

This from Money Morning:

With America’s “Big Three” automakers all due to submit turnaround plans to Congress today (Tuesday) – a requirement if General Motor Corp. (NYSE:GM), Ford Motor Co. (NYSE:F), and Chrysler Corp., are to receive $25 billion in government loans – I couldn’t help but recall the moment eight years ago when I realized the U.S. auto industry was skidding toward a financial collapse.

I’ve been thinking about that market call of mine a lot of late, particularly after recently reading that JP Morgan Chase & Co. (NYSE:JPM) credit analysts had rated GM’s distressed debt as a “Buy,” noting that the company was likely going to survive.

It was October 2000, and I’d just joined a multi-billion-dollar asset management organization as its head of credit. While most of my experience before this was with very risky and fast-moving emerging markets, this new position was focused on the top tier of the investment market, since the group I was joining had a marked risk aversion and was managed with capital preservation as its main mantra.

“Piece of cake,” I thought to myself.  After decades of deciphering volatile emerging economies, I had “graduated” to analyzing strong companies in the top economies in the world. These credits were all rated “A” or better. And the proportion of our holdings that were not rated “AAA” was a rounding error.

WorldCom Inc., Enron Corp., and the U.S. “Big Three” carmakers were among the companies I had to analyze, as well as some 208 structured investment vehicles (SIVs).  The curious asymmetry was that while companies like Enron and WorldCom were rated “A,” and had tremendous – yet officially unrecognized – risks to the downside, their commercial paper was rated “A1” and “P1,” the highest possible rating offered by leading rating agencies.

The SIVs, Enron, and WorldCom did not resist even minimal analysis. I axed the two companies, as well as the SIVs that did not offer a full guarantee from the sponsor. So I ended up starting with the corporate bonds, by first addressing the largest exposures we had.

A Debt-Focused Tour of America’s “Big Three”

Since the three U.S. carmakers – all carrying “A” ratings on their bonds, and “A1” to “P1” on their commercial paper – accounted for about one-third of all investment-grade paper outstanding, I analyzed them first.  I had a large advantage over my peers in the investment grade industry:  Since emerging-market credits – both sovereign and corporate – were overwhelmingly in junk bond territory, I had seen over years how late the rating agencies were in adjusting their ratings to the credit reality of the issuers in general.

The foregone conclusion in “junk land” was that the rating agencies provided lagging indicators of credit risk.  In addition, having analyzed credits in Argentina with 1% inflation a day, as well as massive, surprising devaluations, I knew how distorted financial statements can become and was highly skeptical.

When I downloaded the balance sheet for General Motor back in the third quarter of 2000, I was stunned. Something just wasn’t right. These numbers I saw just couldn’t be correct.

“Surely I had made a mistake and downloaded the wrong one,” I thought to myself.  “I must have downloaded a subsidiary’s or maybe the parent company’s unconsolidated balance sheet.”

I checked and re-checked.  I had the right one.  The company’s equity-to-assets ratio was only about 2%  – and that was before counting its under-funded pension liabilities. With that deficit factored in, GM had negative equity.

In other words, the leading U.S. carmaker was technically bankrupt.

Now, I wouldn’t even lend money to a bank with such high leverage. And a bank diversifies the risks in its lending portfolio, is highly regulated, and secures a huge amount of its lending with hard assets.

But an industrial company sitting on hoards of car inventories and loans backed by used cars … that nobody particularly liked?  Not a chance.

With such low levels of equity, the ability of a company to withstand an economic shock is almost nonexistent.  So, I searched around for any possible redeeming qualities that I could be missing.  But after a very thorough review, I concluded that we had to drop all three of the U.S. carmakers – GM, Ford and Chrysler.

When I brought my decision to the firm’s chief investment officer, a portfolio manager with years of experience in the investment-grade debt market, and a person I’d known back during my days at Merrill Lynch & Co. Inc. (NYSE:MER), he was unnerved.  He trusted my judgment, but he, like the rest of the market, was confident that each of the Big Three was “too big to fail.”

Nevertheless, with our firm’s overarching commitment to capital preservation, we negotiated a fast wind-down of exposures: We would sell all the long-term exposure immediately, freeze any new exposure and we would not roll over the commercial paper – most of which was due to mature within a couple of weeks.  In this way, all of our Big Three exposure would be gone within weeks, and we were confident each of the three had the cash and near-term liquidity to pay us back.

A couple of weeks later, at a charity function, I happened to bump into the former head of one of the premier asset management organizations in the world.  In a short conversation, I mentioned my private concerns. The gentleman draped an arm across my shoulders and essentially told me that “the Big Three are not going to go bankrupt.”  That was it.  Another too-big-to-fail advocate.

The Too-Big-to-Fail Myth

Evidently, there were reasons beyond mere creditworthiness that led this very smart man – and others – to keep ignoring the fact that the automotive emperor had no clothes.  The pre-eminent one is the “too-big-to-fail argument,” and those who make that argument are trafficking in the moral hazard trade.  Yet, even today, GM on its website ardently contends that it is indispensable to the U.S. economy, hoping to persuade U.S. taxpayers to throw good money after bad.

(We’ll find out how Congress feels about that argument after GM, Ford and Chrysler submit their plans today. It certainly won’t help that today we’ll also likely find that November sales from the major automakers show only a limited bounce from 25-year lows.)

The other argument is that the auto industry is “strategic” to national interests.  That is to say: How can a country defend itself if it produces no vehicles?  And what about advanced transportation and classified technologies research?

But that argument does not hold up under scrutiny, either.

As eminent economist Martin Feldstein has reminded us, giving the Big Three $25 billion will last less than a year. The reason: They are burning through about $7 billion each a quarter.

Clearly, forcing the three carmakers to restructure will be in everybody’s interest.

Through bankruptcy – with some, minimal government intervention – we should force the inevitable restructuring to take place. As a result of that restructuring, worker compensation levels will be brought into line, employee and retiree health benefits will be reduced to lower-but-still-competitive levels, any dividends will be eliminated, and executive payouts and perks will be capped. How far must this go?

That’s easy – keep cutting until the companies are restored to health and, most important of all, to a state of long-term viability.

This does not mean that the Big Three will disappear. What will disappear is corporate waste. The companies will restructure/continuing profitable activities and liberating resources from unprofitable ones to expand future development.  This has been done successfully – and en masse – in many “strategic” industries, such as the steel business in the United States, and telephony, utilities, energy, aerospace, and many others that were restructured in the 1990s in Argentina, Brazil and South Korea.

There is no reason why each of the Big Three – each currently the laughingstock of the global auto industry – should not regain their leadership positions, as measured by profitability and technological prowess. In this way, GM, Ford or Chrysler – or even all three – can create good, secure jobs and contribute to the U.S. economy, rather than detracting from it.

To be fair to GM and the others, they all have attempted to restructure. They’ve secured agreements with the United Auto Workers union that were designed to control costs. And they’ve tried to launch newer, better vehicles.  But those agreements are too little/too late, and the sands have run out of the hourglass.

Union leaders from GM, Ford and Chrysler have now scheduled an emergency session for tomorrow (Wednesday) in Detroit as the companies plan to seek concessions from the United Auto Workers to help land those win $25 billion in government loans, Bloomberg News reported yesterday (Monday). Participants will be asked to reopen a 2007 labor agreement to consider concessions. GM, which has said it may run out of cash to meet its obligations, wants to stop paying union workers when plants are closed and there isn’t any other work for them to do. Now Ford and Chrysler are expected to ask the UAW for similar concessions as part of their bid for the government aid package, Bloomberg said.

All three of the American carmakers were technically bankrupt since at least the time of my first analysis near the end of 2000, and the union agreements still did not bring compensation down to levels comparable to that of their competitors. Now the U.S. automakers are on life support.  There is no time left for gradualism.  They missed that window long ago and the costs imposed on all U.S. taxpayers figure to be huge.

The current predicament in which GM, Ford and Chrysler now find themselves is not only their own fault, as we’ve now already been subsidizing the unions for far too long.

Are Unions to Blame?

One of the biggest reasons Detroit’s Big Three have run out of capital is the extraordinary compensation that has been paid out to unionized workers in the United States.

Even in the last reported quarter, when the economies of Europe and Asia had slowed dramatically, GM was almost breakeven in those two regions and actually had 10% profit growth in Latin America, Africa and the Middle East, where GM also has unionized work forces. But the company is losing money in the United States.

That’s because the GM pays about $75 per hour – $156,000 a year – to its assembly line employees.

And because of that, the Big Three are lagging far behind in technology investment. That has not only damaged the auto-related technology industry, but has decreased productivity and innovation, delaying the shift to more fuel-efficient technologies.  And because they have jointly held the market leadership, they set prices high, allowing foreign competitors to undercut them.

These phenomena have increased the costs of transportation for all Americans for decades.  Americans have overwhelmingly voted with their dollars by buying foreign brands, which has contributed to our growing trade deficit.

Ultimately, inefficiencies in the auto industry have imposed huge costs on the rest of the economy, putting the Big Three at a competitive disadvantage that has hurt profits, cost the economy jobs, and opened the door to foreign companies to export U.S. dollars back to Germany and Japan (and now South Korea and China).

GM lost $21.3 billion in the third quarter and burned through about $7 billion in cash.  It has only about $16 billion in cash left, and already its liabilities are $60 billion larger than its assets, which means that GM has negative equity.

And the current quarter will be worse.

The bottom line is that GM is essentially bankrupt – and has been for years.

At this point, GM should – like so many companies before – have to restructure its costs to a point that allows it to be competitive before receiving a single taxpayer dollar.  Otherwise, we are just throwing good money after bad and it won’t be long before GM comes crawling back for more.

I just hope that the politicians and government officials in Washington are wise and determined enough to control the situation, and force the bitter medicine down the company’s throat.

To Buy, or Not to Buy

In this environment of high uncertainty, I would not go near any GM securities.

However, highly sophisticated players may consider making a very small bet, in one of several ways. With GM’s bonds and credit default swaps trading at near-bankruptcy levels (15 cents on the dollar), it may be attractive (albeit highly speculative) to buy GM’s bonds, in the hope of converting these debt securities into the debt-and-equity of a newly restructured General Motors. Over the course of a couple of years, this could turn out to be extremely profitable, but only if GM’s work-force wage-and-benefits costs are brought into line with the company’s global rivals – and if the U.S. economy recovers. Among the many financial scenarios under review, GM’s board of directors is reportedly considering an option that would grant current bondholders equity in a restructured company in return for maneuvering room, according to media reports.

Reuters reported that GM’s bonds fell nearly 12% early yesterday (Monday) as investors waited for the automaker to submit a new turnaround plan that might actually have a chance of winning lawmaker support. GM’s 7.125% notes due in 2013 fell to 23 cents on the dollar, down from 26 cents on Friday, according to MarketAxess. As we noted earlier, GM is due to submit that plan by today.

When JP Morgan’s credit analysts made their market call last month, GM’s benchmark 8.375% bond due 2033 has dropped to 25.75 cents on the dollar, which was down from 36.5 cents at the end of October, MarketAxess said. The bonds had traded at more than 80 cents on the dollar at the beginning of the year and currently yield 32.5%.

In the case of selling credit default swaps, an investor would get paid some 80% to 85% of the value they are “insuring” up front. If GM gets bailed out, which is an increasingly likely scenario, that investor would keep the full premium and walk away.  And in the case of default, that investor would have to pay the buyer 100%, therefore losing some 15% to 20% after the default, but getting the bonds he is insuring in exchange for that loss.  We would then take the bonds into the restructuring as noted above.

I would not buy the actual GM shares, even though I have friends in high places in finance that still believe in the too-big-to-fail theory. My concern with GM’s stock is that there would be a very strong chance the company’s equity gets totally wiped out in a bankruptcy, or at least heavily diluted as a result of any government infusion the company receives.

GM’s shares closed yesterday at $4.59 each, down 65 cents each, or 12.4%. They have traded as high as $29.95 in the past 12 months. The company right now has a market value of only $2.8 billion.

Source: Buy, Sell or Hold Insight: GM Remains a High Risk Profit Play – Even as it Files its Turnaround Plan Today

This from Today’s Financial News:

For satellite radio investors, these are the times that everybody knew was coming. Financial pundits have been writing about the industry’s certain doom for years. We all knew the notion of satellite radio was based around a shaky-at-best business model.

Not only did the industry’s originators have to shoot multi-million dollar satellites into the sky, they also had to convince millions of Americans to pay for something they were already getting for free.

XM and Sirius were vicious competitors at first, but quickly realized they could not survive without permanently joining forces. They petitioned the FCC for permission to merge and waited for nearly two years before they received a verdict.

Eventually, the airways regulator gave its blessing and Sirius XM Radio (NASDAQ:SIRI) was born in July of this year. The company may not make it out of its infancy.

Build it and they “may” come

It turns out the pundits were right. Few folks are willing to pay to listen to the radio. Sure, subscribers at Sirius grew like wild grass for the first few years, but the novelty quickly subsided and the supply of early adopters that propelled the industry through its first few years quickly dried up. Now, the burden of an immense plunge in consumer spending is about to force the company into bankruptcy.

The subscriber growth figures tell the whole story. In 2006, Sirius saw its subscriber base grow by 82%. In 2007, that figures was 38%. This year, it will be lucky to lock in growth of 10%. And next year, the company optimistically expects to expand its base by just 8%.

Those are the kinds of growth figures you would expect to find in a mature industry, not one with less than 20 million subscribers.

What is worse than the company’s declining revenue base is its monumental debt load. In the next twelve months, Sirius has over $1 billion in debt coming due. $210 million of it must be paid in February. Unfortunately, the company’s balance sheet shows no way for it to find the liquidity needed to pay its bills.

Combine huge debt, incredible talent contracts (Howard Stern has a $500 million, five-year deal) and a consumer base that is going broke and it is easy to see why shares of the company are trading at all-time lows.

With share price at just $0.15, shares of Sirius XM have plunged by more than 90% this year.

Bankruptcy and an equity valuation of zero should be a serious concern for investors. Unless the company can re-structure, find the investors and subscribers it needs and can lower refinance its debt, there is no way it is going to stay in business for more than a year or two.

Finally… some potential

But speculative investors finally have a shot at rewards with the company. In late December, Sirius shareholders will get together to vote on some very important issues.

First, executives are asking investors to approve a major dilution of their positions. The company wants to boost the number of shares outstanding from 4.5 billion to 8 billion in an effort to bring in much-needed capital. The move, while essential to the company’s future, would hammer the valuations of today’s shareholders.

To help make shares more attractive to potential shareholders, management would also like voters to approve a major reverse stock split, ranging from 1 for 10 to 1 for 50. If approved, shareholders would own dramatically fewer shares of the company, but those shares would be worth much more.

With so much negativity priced into this company, it is hard not to be at least a tad optimistic.

For investors getting in at today’s prices, the upcoming shareholder meeting could lead to profits. After all, it is bound to bring increased press coverage and any good news could lead to short-term price spikes.

Volatility will be the key to this stock over the next few months. If you can stomach the ride and the very real threat of bankruptcy, there will be some shots at fairly large profits.

I will let you decide if such a risky play is for you.

Source: Sirius XM (NYSE:SIRI): Is this a buying opportunity?

This from Today’s Financial News:

Just like most of the nation, I too view General Motors (NYSE:GM) as one of America’s great corporations. The company epitomizes every thing that made this country great, at least over the past few decades. Right now, on the other hand, it represents some of the nation’s greatest problems.

GM, just like its union-fed employees, wants something for nothing. The American taxpayer did not get the automaker into this trouble. Its management and its union concessions did.

You and I are not the ones that promised to pay defined retiree benefits for hundreds of thousands of past workers. We are not the ones that promised to pay wages to a “bank” of workers we no longer need. And we are not the ones that produce inferior products few consumers demand or are proud to own.

We all know, if you or I ran our businesses the way GM is run, we would have been on our butts a long time ago. And most certainly, there would be no congressman pulling strings to hand us huge sums of money to fix our senseless mistakes.

In America, we have two choices that must be made today. We can take the easy route and write a check to Detroit and its supply chain, essentially putting off the auto industry’s problem until the next recession.

Or we can make the hard choice and let GM fight for its life in bankruptcy court, just as the free market is dictating. Yes, this would propel America into a deeper recession and unemployment would almost certainly reach double-digit proportions. But most importantly, it would ensure that 10% unemployment, like Europe has become used to, does not become the accepted norm in America.

Temporary pain, permanent improvement

If we cut GM loose, we will endure a lot of temporary pain, but the nation’s future will be much brighter. The wounds will heal. The job market will rebound. And a new, much more profitable industry will emerge from the ashes.

We already have a huge segment of the nation’s population trapped in the gutter thanks to overly ambitious social welfare. Now America is about to make an even larger mistake and embark on what will essentially be permanent corporate welfare.

It is a mistake that will haunt this country and its growth potential for generations. If Bush signs any legislation into law, the corporate nation will never look the same.

Life support is for bodies that have a chance at healing and getting stronger, not for fat ladies that will continue to eat themselves to death.

It is time to pull the plug on GM and see what happens.

Source: General Motors (NYSE:GM): Let the fat lady sing

More from The Sovereign Society:

In 1955, U.S. manufacturing was approximately 55% of the nation’s GDP. Today, manufacturing is barely 15% of GDP as the United States and other industrialized countries continue to transition to service-based economies. Unfortunately, the backbone of American industry is now coming apart at the seams and desperately hungry for a government bailout.

In 2004, I predicted that one of the Big Three auto companies would fail in a few years. Though not a bold forecast by any measure – the autos were long bleeding before 2004 – my target back then was Ford. At the time, I plugged put options on Ford Motor and made a profit on that trade; now I wish I had purchased long-term LEAP put options. Ford in July 2004 traded north of $13; today, Ford Motor (NYSE:F) fetches just $1.76.

Ford’s stock price chart starts to resemble everything else…

Detroit is home to America’s Big Three auto companies. It’s also home to one of the worst contractions in manufacturing activity accompanied by seemingly never-ending losses.

General Motors (NYSE:GM), Ford and Chrysler are bleeding profusely and need emergency cash funding right away. Of the three, General Motors is headed into bankruptcy first unless the government comes to the rescue.

The world’s second largest car company (Toyota is now #1), GM has just enough cash to last until January at the latest. Chrysler and Ford probably have enough funding for another 6-12 months. Beyond that period, it’s Game Over.

Bailout Bonanza

The scope of Washington’s bailout reach is now extending: mortgages, banking, investment banking, insurance and now auto manufacturing. Pretty soon it might extend to the airlines, real estate companies and who knows, maybe even every industry that comprises the S&P 500 Index. This whole bailout thing is totally out of control.

Should the government let the Big Three fail? Combined, these three goliaths employ more than 300,000 people worldwide with most of that total in the United States. The pressure is on the government to bailout the autos. Paulson isn’t too keen on extending TARP to the auto companies but Obama certainly is. I reckon Detroit’s odds of obtaining a bailout are pretty good.

With the economy showing no signs of bottoming as we shortly conclude a miserable 2008 for investors it would only seem prudent to remain underweighted stocks. The market shows no convincing ability to bottom; every major rally is met by big selling as investors eagerly grab short-term gains to raise cash.

This recession will be a long, drawn out affair, probably lasting throughout 2009, possibly 2010. Housing is at the core of this secular bear market. I don’t see housing bottoming or at least stabilizing until at least mid-2009 with inventories still rising in Q3. Mortgage rates, which declined following the initial Paulson Fannie Mae and Freddie Mac government guarantee in September, have since risen again. Mortgage rates must come down.

It’s now time for America to become thrifty again. The correlation between a rise in the savings rate and corporate earnings growth is negative. Earnings expectations remain too bullish for 2009 and must still be revised lower. Earlier this fall I had expected a rally following the post-October 9 crash; thus far, the Dow is up just 7% off its low for the year or 42% off its October 2007 high. Now I’m beginning to think we might test fresh lows and soon.

Equity Markets in line for another Beating

The Dow will test its October 2002 low of 7,286. In my mind, there’s no way this bear market is not as severe as the 2002 debacle. It’s much worse.

Should stocks decline another 15% from current levels the Dow would sit 57% off its best level in October 2007 but still about 30% above the trough of the 1932 lows. From October 1929 until late 1932, the Dow collapsed a cumulative 86%. I doubt we’ll see that sort of spectacular decline; yet it’s pretty likely that a 42% peak-to-trough loss thus far won’t kill this bear.

If one of the Big Three is allowed to fail, watch out. That would trigger another crash. The market is drunk, expecting another industry bailout. Let’s not disappoint Mr. Market.

Source: The Beginning of the End for U.S. Auto Manufacturing