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 Investor’s Daily Edge:

In early June, CNN Radio called and asked me about gas prices and autos. The first question was more like a statement. The radio host said that people were forsaking big cars and flocking to smaller models. And wasn’t that great? He added that the American consumer should be congratulated for being so willing to save on energy.

He couldn’t see me shaking my head in disagreement. I told him we haven’t turned into a nation of tree-huggers yet. And congratulations are a little early. Consumers are simply responding to price. When gas goes up, smaller cars look more attractive.

I told him it works in the other direction too. When gas goes down, bigger cars start looking better.

Since then, gas prices have fallen by more than half in most parts of the country. So what has happened?

People have begun buying pickups and SUVs again. You couldn’t give them away earlier in the year. See more of my thoughts on this in the IDE issue from December 9, “Can It Really Get Worse Than This?”.

The economics of buying a hybrid no longer makes sense. You’d have to keep your car for about 10 years to make up the extra money you spent on the car.

The ones buying these cars now are really tree-huggers.

So should auto companies spend tens of millions of dollars on R&D for cars that nobody is buying right now? Or should they keep making the bigger cars that Americans seem to love?

First off, it’s not a question of doing one or the other. It’s more a question of how fast U.S. auto makers should reduce their reliance on bigger vehicles.

A so-called “car-Tsar” would quicken the process.

Putting a “car-Tsar” in charge of the auto industry would put the government in the driver’s seat. The auto industry would be effectively nationalized. Say good-bye to the free market. It’s road kill.

But the triumph of the government didn’t happen overnight. The current auto crisis may have cemented the government’s victory. But the government has been telling the auto industry what to do for a long time.

Safety regulations date back decades. As do the Corporate Average Fuel Economy (CAFE) regulations.

CAFE regulations are already forcing auto makers to make more fuel-efficient cars. They call for auto companies to make vehicles that get at least 35 mpg by 2020. And every couple of years between now and then, U.S. auto makers will have to produce cars with better mileage.

So by 2018, for example, to reach 35 mpg will only require a small jump.

Will the American consumer want more fuel-efficient cars or not? It doesn’t matter. They don’t get to decide. The decision has already been made for them.

A nationalized auto industry may not be good for the economy. It may not be good for the auto industry. But it’s a gift from the government to you as an investor.

Markets are hard to predict. Government policy isn’t. Government policy is literally an open book.  You want to know what the government is thinking? Go look it up.

As investors, what more can you ask for?

So this is what I can say about the future of the auto industry with complete confidence…

• Cars are on the fast track to going hybrid
• By 2020 nearly all cars will be hybrids
• The dominant hybrid technology will be lithium-ion batteries.

Why lithium-ion? They have two times the capacity of the currently used nickel-cadmium batteries. They have half the weight. And, unlike nickel-cadmium batteries, they perform superbly in very hot or cold weather.

The problem is nobody is making them. And companies that are planning to make them will need at least two years to achieve full-scale production.

But, actually, there is one company making them right now. They are already supplying a European car maker with these batteries under a $70 million contract.

The company I’m talking about is Ener1 (AMEX:HEV). And while the S&P 500 lost almost 20 percent over the past year, Ener1 gained 40 percent.

It’s a small company. Its market cap is $750 million. Once finished, its facilities could generate revenue of over $300 million.

Ener1 is talking to about 30 car companies interested in their battery technology. The company has an awesome future. And it’s practically guaranteed by the U.S. government. That is why HEV is my top stock pick for 2009.

Source: The Future of the Auto Industry Is Already Written

As of 2007, when gas prices were on the rise, the price premium for a hybrid (a gas-electric vehicle) was about $5,000 versus a conventional gas-burning vehicle. Even at those higher gas prices, the break even for a hybrid compared with gas was six to 10 years. Today, with gas down 2005-2006 levels, we can only estimate that the break even for a hybrid would be extended to 10-15 years.

These numbers don’t compute for a country in the throes of recession. Since the start of the recession in December 2007, as recently announced by the National Bureau of Economic Research, the number of unemployed people surged by 2.7 million, and the unemployment rate rose by 1.7 percentage points.

With people out of work, the argument that higher prices at the pump would translate into more sales of hybrid and electric cars is on the verge of crumbling. We can see it today. Gas prices at their lowest in years, but no one is spending money on anything — simply because they don’t have it. And it will likely take consumers years to get back on their feet.

The brilliant Dr. Chu, director of the Lawrence Berkeley National Laboratory, has flogged the notion that it takes a combination of regulation and higher prices to rein in energy consumption. He advocates that the U.S. tax gas to the levels of Europe and Japan, forcing American consumers and the auto industry into a green lifestyle.

But the underlying assumption here is that consumers have money to spend, and that they’re willing to spend it on the green-car premium.

While the Big 3 surrender, waving the green flag in the halls of Congress, Detroit still hasn’t proven that it can make a red cent on small cars. And even if they can pad in a modest margin, they still find themselves in the quality battles they have consistently lost to German and Japanese car makers.

Now we’re seeing a return to higher gas prices as drillers cut back on exploration.

Oil and gas drilling activity in the U.S. in the wake of falling energy prices.

In its weekly accounting, Baker Hughes Inc. reported Friday that the number of drilling rigs working in the U.S. had fallen to 1,790, down 12% from the September peak and down 2% from the same time last year.

Given that rising gas prices are in the cards, it seems that consumers will now be forced to stay home rather than try to conserve fuel through green vehicles for years to come.

This from Investor’s Daily Edge:

Consumers drive the American economy. Give them confidence in their jobs and they work hard, create value, make money and exchange it gladly.

Take away their jobs, and it all stops.  The flow even stops when people who still have jobs become worried by the trouble they see around them. And that is exactly what is happening today.

This week, the Institute for Supply Management released numbers that should frighten consumers and freeze the economy even more. The ISM’s monthly index of manufacturing activity fell to 36.2 for November. Any reading below 50 means the economy is shriveling, and these numbers are extreme. It gets worse. The new orders index fell to the lowest level in 28 years.

And jobs… The ISM employment index fell to 34.2. It has fallen four months in a row, without a sign of improvement anywhere in sight.

Meanwhile, financial pundits and columnists who should know that two-thirds of the U.S. economy is rooted in consumer spending applaud every layoff and plot for more… they think this creates shareholder value.

Worse, they invent plans to save the world by inflicting more pain and job loss.

I’m not sure where they think consumer dollars come from, but it’s a crazy idea to kill the golden geese if you expect them to spend their nest eggs. And they promote this nutty notion by repeating crazy or outright false facts…

For instance, they think they could save Detroit if it weren’t for those $70 an hour autoworkers.

Aww, gee… The problem with their plan is that union autoworkers don’t make $70 an hour. Not even close. Do you want to know the real numbers?

In 2007, the United Auto Workers union renegotiated the base union wage to $14 an hour for new “second tier” hires. That was a full 50% cut from what pre-2007 (first tier) workers got.

This is old, old news—the pundits with the plans should know this. I’m not sure whether they missed the news or they just prefer to overlook it because it doesn’t fit their philosophy that labor is always the problem.  In the military, spreading stuff like this is called disinformation. In politics, it’s called propaganda. Out here where I live, it’s called stubborn.

But you still think that $70 an hour number must have some truth if everybody is spouting it? Well, it must be those fabulous benefits, then, huh? Sure… but if you think a blue-collar $28 an hour bolt tightener is really making $70 an hour, let me show you how to prove a $7 an hour burger flipper really makes $18.

You start with your actual base pay of $7.25 an hour at Hamburger McHeaven. Then you add the national average for benefit expenses such as health insurance, retirement and vacations. That would be 29% of his base pay (U.S. Department of Labor, Small Business Administration data). Now you’re up to $9.35 an hour in wage costs (not all pay!).

We still have a long way to go… but we can use the “evil autoworker” ploy—we’ll include the pensions for four ancestors in the burger flipper’s salary.

That’s how you get a $70 an hour autoworker. You take his salary, plus his benefits like Social Security, FICA, workers comp, and health. And then you add full benefits and pension costs for four retired workers to the total.

That’s the germ of the “truth” in the $70 number, even though UAW workers don’t personally make anything close to that figure.

True, pensions are a big overhead. In 1962, GM (NYSE:GM) employed 460,000 American workers, and provided retirement benefits to about 40,000 former employees. But by 2005, GM had about 140,000 employees and 450,000 retirees.  Their past success and size led to this upside-down mess.

But the current worker’s pay? Truth: the actual average for manufacturing workers in Big Three auto plants is $67,480 a year. Turnover is very low. Half of these workers are over 45 and have been on the job more than 20 years. So they’re up to $32.44 an hour, just a 16% raise from what a new worker hired in 2006 would get. (Source: Center for Automotive Research data, 2008.)

And what does a retiree get? The average is $31,000.

These numbers, by the way, include both skilled and production workers… the designers, engineers, programmers and mechanics as well as the bolt-tighteners.

Detroit and other auto towns may lose hundreds to thousands of jobs. We may not be able to avoid it. But don’t imagine for a minute it’s good.

Fire ‘em, furlough them, poison them or ship them to the moon and you are still not going to save $145,000 every time you get rid of a GM, Ford (NYSE:F) or Chrysler worker.

But you will lose a consumer, who might lose a house, who will pay less in taxes at state, local and federal levels.  You will gain a family that doesn’t buy a new car, take a Disney vacation or eat steak and go out to Red Lobster once in a while. Why the media propose that creating massive sudden unemployment is going to fix Detroit’s mess—or ours—is a mystery to me.  Maybe they don’t like blue-collar workers who make more than they do.

That’s just the obvious example of the day. Ditto the same in a dozen other industries and states.

Job losses eventually harm us all indirectly. Maybe even your own city’s budget—even if you live in Maine or California instead of Detroit. The New York Times reports that in October alone, 20,000 employees of auto dealerships lost their jobs nationwide. The auto dealers association estimates that new-car dealers produce a $54 billion annual payroll for 1.1 million workers. These dealers bring in nearly 20% of the retail sales and sales taxes in small and large communities alike, according to the Times.

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And there’s something else you should know about those autoworkers if you think the middle class matters. They’re college grads, too

That’s right, as of 2007, over 74,000 of the Big Three’s 129,000 manufacturing workers in Michigan had college degrees. The ratio is continually rising. Unskilled positions are becoming very hard to find in the industry.

Even among skilled workers with no college degrees, attaining their skilled job status required 8,000 hours of on the job training, plus 700-800 hours of classroom time. If you were applying for a US government job, that would constitute the “equivalent” of a bachelor’s degree at the very least.

“They” are us. Different part of the country, different industry, different work, but real, true middle class people. That was Henry Ford’s plan. And Henry Ford was a heck of a capitalist.

Ford paid his autoworkers $5 a day back when a machinist’s pay was 22 cents an hour and less skilled workers made 15 cents to 20 cents an hour. Ford wanted his workers to reach middle class and buy cars.

We’ve lost his vision. He understood that good jobs led to widespread prosperity. Trying to hire U.S. workers at mythical pay scales of Third-World countries that sell third-rate cars within their own borders, or even their Japanese counterparts over here is not the solution.

In fact, non-union autoworkers at the foreign carmakers in the U.S. now make just about the same as the Big Three’s union workers.

Of course they do. Supply and demand, baby. If they didn’t, every Toyota (NYSE:TM) plant in the country would vote to go union tomorrow. Why don’t the media know this? Are they eating the magical mushrooms?

But the disinformation campaign rages, and you should ignore it. These people got their theories from books, and think they are better than average working people, because as long as the AC is working they don’t sweat while sitting at those desks.

It’s simple. The economy will not turn around while unemployment is rising. We may have to lose jobs, but it’s like losing a leg to prevent the spread of gangrene. It’s a deterrent; it’s not a blessing.

So, let’s not be so quick to applaud every time we read about layoffs.

And let’s not be too high-minded about preferring desk-bound white-collar jobs to production-line jobs. Only some of those white-collar jobs are truly skilled, and most are learned on the job just like in factories—except the training period is shorter in the white-collar world.

These days, companies hire college grads to be customer service order takers, salesmen and marketing assistants—none of which truly requires 16 years of education. College grads are a dime a dozen. The average machinist is far more explicitly job-skilled and has much greater direct job training than the average new bank teller or loan officer.

And just look where all those loan officers got us, anyway.

We may not bring back the housing bubble that sent the economy into overdrive, and we don’t want to. But we do need to put most of the people who lose jobs in this recession back to work as quickly as possible. Only then can we get the momentum to create real, new jobs once spending unlocks again.

My only hope is that if state or federal governments do create jobs with infrastructure spending to get things going the money will be tightly managed. I’d suggest two criteria:

• Funding only projects that are “shovel-ready,” not in planning.
• Earmarking for projects that serve security needs, high-density areas, major shipping routes or critically worn infrastructure such as old water and sewer systems.  We don’t need more outer-outer beltways, airport parking lots, stadiums, or highways through nowhere.

And by the way, give those autoworkers some credit for a lot of good things the rest of us enjoy. If you are going to screw them, at least snap off a respectful salute first.

Because you owe a lot of benefits to organized labor–paid vacations, 40-hour standard weeks… and your health insurance. Almost nobody had it till unions fought for employee health insurance when President Harry Truman’s plan for national healthcare failed in the 1940s.

Source: A Consumer Economy Can’t Run Without Consumer Income

This from Daily Reckoning:

The automakers are still haunting Washington. They don’t have any money of their own, so they’re looking for taxpayer’s money. GM (NYSE:GM) says it needs $18 billion – bad.

If they don’t get taxpayers’ money, they say they’ll be forced to turn to the Swedes or worse…the Chinese!

We suspect they’ll get a bailout. But what do they deserve?

Here are companies that have been around for an entire century – plenty of time to learn their trade. And they’ve been in the center of the best auto market in the world – the United States of America. If you couldn’t make it in the car business in the US…you had to be hopeless. Nobody bought more cars than Americans.

And these companies had every advantage – they had capital, they had the sales and service networks reaching into every Middlesex, village and farm in the nation. They knew their customers better than any of their foreign competitors. And they didn’t have to ship their cars across an ocean to sell them.

For a half century, it was downhill driving for America’s automakers. But it’s very hard to recover from success. And Detroit couldn’t quite do it. They squandered their money… they missed their market target…they saddled themselves with costs that gave them a disadvantage and hobbled them so greatly it was almost impossible for them to compete – even with the playing field tilted in their favor.

Then, even when asking for a handout Detroit’s executives couldn’t seem to get its signals straight. They flew into Washington on their private jets…apparently unaware that anyone would notice.

What do they deserve? They deserve to go broke.

Source: Going Broke Is What Everyone Deserves

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

Congress tells us, if General Motors (NYSE:GM), Ford (NYSE:F) or Chrysler want any federal money, they had better be able to produce a strong plan to show how the cash infusion will save their companies.

Again, that is what Congress tells us.

In reality, we know the Big Three can show up with a plan scribbled down on a cocktail napkin and the money will be theirs. Washington is merely politicizing the whole ordeal. It is all but certain that a sizeable check will be written, but nonetheless, Detroit has to put on a dog and pony show to make all of us taxpayers feel better about the ordeal.

Part of the show is coming from Ford today. It announced it is discussing the notion of unloading its Volvo stake, one of the strongest brands in the company’s product portfolio. A few years ago, the brand was valued at several billion dollars. Today, however, analysts estimate Volvo is worth somewhere around a billion dollars.

Do you really think Ford is willing to take the hit? Or is this merely pandering that makes the company look like it is taking action before it heads to Washington this week?

One big, expensive chess match

Volvo is simply a pawn in Ford’s political chess game against Washington. It has absolutely no intent on unloading one of its strongest brands.

While these games are important for shareholders to watch, what is more important is watching what share price does during these so-called news events. Today’s news about Volvo barely moved share price.  Wall Street knows it is a sham.

We know Detroit will get its cash. We know Ford will remain the nation’s strongest automaker. And we know the debate surrounding the industry will continue for a long, long time.

In late October, when shares of Ford were trading for just about $2, I recommended buying shares of the company. After all, it was a chance to buy a Blue Chip company at penny stock prices.

Shares of Ford are still cheap, but they are selling for a 50% premium over my original recommendation. Take today’s news as an invitation to sell your shares for a profit.

Ford still has an opportunity to make significant long-term gains, but right now the risk outweighs the potential reward. It is best to lock in these significant gains and wait out the storm.

There are better ways to make money while Washington and Detroit play their games.

Source: Making money: Ford (NYSE:F) hands us 50% gain

Detroit seems to be suffering from decades of reliance of fuel-guzzling behemoths that fell out of popularity as oil hit historic highs. The champions of green, including big media, now say that if only Detroit could follow in the footsteps of Toyota, Honda and other hybrid pioneers, then American buyers will return to the showrooms in droves.

This is not entirely true.

The issue is not confined to high mileage. The other factor ignored in this green wave of propaganda is quality. After all, what if Detroit did manage to turn around the old battleship in enough time to build green cars – but those cars were just as junky as the cars coming out of Detroit today?

While green is certainly top-of-mind in shell-shocked American consumers, it seems that no one is talking about the lagging quality of American automakers in this new generation of smaller, thrifty vehicles.

After all, don’t Americans buy foreign cars not only for better mileage but for their superior quality?

In looking at the Consumer Reports Most Reliable Cars of 2009, only three American cars made the cut in a grand total of 47 vehicles.

Detroit didn’t even make a decent showing in it’s traditional stronghold of trucks and SUVs. Only the Lincoln MKX ranked in the category of Mid-Size SUVs. The categories of Large SUVs and Pick-up Trucks were a clean sweep by the Japanese.

When the CEOs of the Big Three came hat-in-hand to Congress last week, they talked about payroll reductions, discontinued pensions and plans to build greener cars. They even had the audacity to ask Washington for R&D subsidies for new battery development.

But to the best of our knowledge, they never promised to build better, more reliable vehicles.

Yes, the green flag wavers can climb onto their soap boxes and pontificate about Detroit’s bad karma. While it’s certainly true that Detroit must compete with the Japanese and Koreans on fuel economy, the Big Three also need to make these new smaller cars better than ever before.

If we don’t see Detroit’s new, green vehicles showing up in Consumer Reports Most Reliable Cars of 2011, then Washington and American investors are wasting their money.

Not every auto manufacturer wants charity, you know.

While Detroit’s CEOs were up on Capitol Hill whining and begging like street junkies for a mere $25 billion to tide them over until spring, salesmen from Bentley, Lamborghini and Maserati were working the floor of the Los Angeles Auto Show like madmen in an attempt to stem their stateside sales losses.

Now don’t let their $500 suits and smooth manners fool you. These guys are hurting too. Lambo’s down 15% (pretty much a match to the whole biz’ 2008 decline). And Volkswagen AG’s Bentley (VLKAY) group has slipped a whopping 30%.

No Pain Here

Perhaps the folks who buy BMWs and Mercedes are up against it right now. But this class is truly different than the rest of us.

While we might go so far as to flaunt a new E-Class as a token of our survival in dark times, to them, it just seems imprudent – or maybe even rude? – to show up at the club in a sparkling new “Azure” or “Reventón,” when the board has just voted to fire the gardener’s assistant. Better to make do with last year’s. After all, it’s not like the leather seats are soiled or such.

Still, despite these losses, these giants of gentility will not beg, not from you and not from Washington either. Aston Martin’s Ulrich Bez has even reputedly been overheard admonishing his people to actively pursue buyers with tales of grandeur (and maybe even hints as to a Vantage’s potential increase in value during these rough times).

The Man Who Saved the Planet

But of one thing you can be sure: the above persuasive admonitions do not come with discounts or “deals” of any sort. Aston Martin may indeed be staring at a 20% shortfall in 2008. But they do not beg.

Speaking of folks who could afford one of Mr. Bez’ prize stallions, those fine folks who own Major League baseball teams have been flying in to New York City for their quarterly confab. Commissioner Bud Selig thought they might be entertained (and possibly informed) by a guest speaker, so he asked his old friend Paul Volcker to stop by.

The once (and perhaps future?) Fed Chairman is a favorite of many of the league’s owners. Tampa Bay Rays owner Stuart Sternberg (who knows Volcker from the days when he was on the board of the American Stock Exchange) has described him as “the man who saved the planet.”

Eight More Years of Drought

Unfortunately, Mr. V. had nothing but dour pronouncements for the group. As Lew Wolff (owner of the Oakland A’s and Chairman of Sunstone Hotel Investors) put it, “He was pretty much alerting us that this is not over yet.”

On second thought, perhaps it is impolitic (or even imprudent) for gentlemen of this high caliber to be seen browsing in the Bentley show room. The League is reputed to have brought down some $6.6 billion in 2008. No on-the-record official, however, wants to guess whether 2009 will be anywhere near as kind.

Now, I am not a member of that rather exclusive club. (At best I occasionally kick in to help fund our local little league franchise.) Nor am I “The Hero of 1979.” But I will gladly hazard a guess as to how long this recession will last: Eight more years.

The Printers’ Devil (Look It Up)

Sound a little draconian? Don’t let it worry you overly much. First off, there’s not a damn thing you can do about it. Secondly, it’s not like the stock market will tank the entire time.

In fact, I do believe that President-elect Obama will be able to re-inflate American blue chip stocks reasonably quickly. He had pretty much promised to print as many dollars as it will take to float the markets, secure the middle class, cure poverty (and cancer too for that matter), and fight a war or three on the side.

The real question won’t be whether this is achievable – with an infinite source of dollars it most certainly is – but whether it is sane.

No, wait, I am wrong.

Ride Both Sides of the See-Saw

Since there appears to be absolutely nothing we can do to stop this juggernaut, perhaps the only real question is: “How do we make so much money off it that they can’t possibly tax and inflate away our whole net worth?”

The answer is smile, nod, appear to be a team player… and play puts and calls on the whole damn mess as the market inevitably twitches and writhes thousands of points each way.

Source: These Upper Crust Automakers Are Too Proud to Beg

This from Today’s Financial News:

Detroit is once again on its knees in Washington begging for help. The nation’s automakers are desperate to paint a dire picture of their financial woes.

Whether their pleas are founded or are merely lame attempts at grabbing some free advertising is up to you to decide. To me, it is all a show. After all, the Big Three have not had this much free TV time since the last time they were begging for a handout.

Today, Ford (NYSE:F) is tugging on the economic hearts of Americans by releasing a report that shows if it fails over 3,000 workers in at least 25 states will lose their jobs. It is a disheartening failure, but last I heard Ford claimed it was not in danger of failing.

The company’s latest figures show Ford has a cash horde of over $18.5 billion and is planning to increase that position (through cutbacks and sales of assets) by as much as $17 billion in the near future. What’s more, Ford has ready access to a $10 billion line of credit.

If Ford has enough cash to keep its creditors at bay and its operations running, why is it on Capitol Hill begging for money?

Simple answer: easy money.

If somebody were to offer you an ultra-cheap loan that would increase your profit potential, wouldn’t you take it? As long as the interest rate (Congress is proposing a 5% rate) is lower than what Ford is currently paying, which it most certainly is, the loan is a good idea.

But Washington is not in the business of loaning corporations money, or at least it is not supposed to be. Congress needs to ensure it only intervenes in the most serious cases.

General Motors (NYSE:GM) with its dangerously low liquidity may truly need help, but Ford does not. If Ford gets a piece of the bailout action, Congress will unleash an avalanche of cries from major companies across the country searching for similar help.

Invest in the supply chain

Washington has the potential to send a handful of auto-related stocks soaring. While Wall Street is focusing on the Big Three, their suppliers are the ones truly getting a bailout. Many companies depend solely on the health of Detroit to fund their profits. If General Motors were to disappear, so would they.

That is why smart investors are not focusing on whether or not Ford, GM, or Chrysler will get a loan from the Treasury Department. They are looking to see which companies will benefit the most from a Washington-induced cash infusion.

Check out companies like American Axle and Manufacturing (NYSE:AXL) and its $1.50 share price. Or Magna International (NYSE:MGA). And you cannot miss Dana (NYSE:DAN) and its recent credit downgrades.

All three of these companies would likely see a strong surge in share price if news of successful bailout package leaks out of Washington. But you must not get carried away with your profit expectations. Analysts are already expecting some sort of industry relief, so government assistance is already priced into share price to a degree.

Anytime I find a stock that is about to make a big move in one direction or the other, I instantly think of a straddle opportunity. This options strategy (an investor buys call and puts options on the same strike price and expiration) will profit as long as the underlying stock makes a significant move in either direction.

This strategy may be unknown or confusing to many investors, so let me know if you would like more details. If I get enough demand, I will create a strategy for you to follow and post it on the site.

A desperate situation

There is no doubt that Washington has its work cut out. Detroit is begging for help. Americans know it is wrong to intervene with the free markets, but do not want to see their fellow citizens lose their livelihoods.

As investors, we must stand back and take an objective look to it all. When we do, the profit opportunities begin to shine through quite clearly.

Take a look at the automotive supply chain and the companies upstream of Detroit that will profit from Washington’s blank check.

I will leave you with this as food for thought: Obama’s economic aides are telling us any new economic stimulus must focus on the middle-class and not the nation’s rich elite. Their reasoning is that average Americans are better at spending their money than the nation’s upper class.

Source: Profit from Washington’s bailouts