Friday, November 07, 2008

Make Money Off the Historical Rhyme

In the early 1980's, when US car companies faced mandates to increase fuel efficiency, high energy prices and, Chrysler, faced certain bankruptcy. A silly mistake was made. The US government bailed out Chrysler. I took advantage, buying shares in Chrysler for $2.37 each. The shares went to $80 each in just a few years. But, the bail out was a disservice to the auto industry and to America.

Some 25 years later, history rhymes. The remains of Chrysler are all but bankrupted and Ford and GM are bleeding profusely. Auto executives and union leaders are arm twisting legislators, begging for bail outs. The companies should be forced to file bankruptcy, but will it happen?

The market cap of GM is now $2.7 Billion, chump change for moneyed investors such as Warren Buffet. The market cap of Toyota, that only sells a few more cars, is $106 Billion. Is Toyota really worth 39 times the value of GM? (Numbers provided by 24/7)

Ford has about 18 Billion in cash but it is burning cash rapidly. It has sold Land Rover and Jaguar and it may sell Volvo. Ford can survive without having to file bankruptcy but bankruptcy would allow Ford to get out from under mistakes made more than 25 years ago.

Those who like swinging for home runs should consider buying shares of Ford or GM before Obama's crowd makes bail out decisions. It is likely that Obama will allow Ford and GM to get their hands on some of the bank bail out money. In negotiations with Hank Paulson, GM was unsuccessful. GM wanted to have GMAC registered as a bank holding company, after all it makes car loans, mortgage loans and offers credit cards. Chances are that democrats will go along with bail outs because it will be the union contracts that will be saved.

Those who do not swing for home runs should stand ready to buy Ford and GM as soon as the shares jump off the bottom. Those who wait until after the ink is dry on the deal, assuming there is one, will pay at least 100% more than those who do not.

This morning government officials in England paid visits to banks that were not passing on the 1.5% rate cuts announced yesterday. Since the government there has taken stakes in these banks, it was an easy argument to win. Consumers in the UK can borrow money today at the lowest cost in 53 years. Some of those people will buy cars.

The US unemployment rate jumped again. Unemployment is up to 6.5%. During the 1980 debacle US unemployment was in double digits (as I recall). The important point is that central bankers are loath to stand firm in the face of dramatic job loss. Four months ago, central bankers around the world were joined in battle, fighting inflation. Yesterday, the Bank of England dropped rates not .25% or .5% or even .75%, but 1.50%! The new fight is against recession and investors should never fight the FED! If you are short something, you should cover. If you are sitting on cash, you should employ it. You should be especially concerned if you hold long bonds hidden inside mutual funds.

It is amazing but true that the US Central Bank is behind the curve. The market has taken US short rates to .25%. The FOMC will have to cut .75% to catch-up. As the years go by, with one Fed Chairman after another failing to follow the market 99% of the time, like it should, the arguments for doing away with the FOMC make all the more sense. The power hungry find the way to make their jobs more important than they are. As my friend Lamar says, we should go back to the system in the days of George Washington, when part-time legislators went home for most of the year. A couple of months ago, the Bush administration could have loosened the screws on the banks with the stroke of a pen. Instead, thousands of banks are still being squeezed. The little guys ears are being pinned back. The bluest of blue bloods do not want to let others join their private club.

With the powerful allow GM and Ford to go bankrupt? Not likely. Buy now and you will probably hit more than a four bagger. You will hit a grand slam with 10 bases loaded!