Government to Guarantee Car Warranties…And Next

by Michael Lombardi, CFP

I listened closely to President Obama’s speech yesterday about the auto industry twice, once live and the second via a Bloomberg video repeat. But I must have missed something.

The President said that the U.S. is not interested in running General Motors. He also said that 400,000 jobs in and related to the auto industry have been lost and that we cannot let the American auto industry vanish. He said that the government will give more working capital to GM and Chrysler. GM has been granted 60 days to provide a new restructuring plan; Chrysler has 30 days to do a deal with FIAT.

For the first time, I heard the President talk about bankruptcy as part of the restructuring of GM and Chrysler. As a stock market commentator, I believe that the bankruptcies of both companies have already been discounted by the stock market.

But here’s where I got lost in the President’s speech. President
Obama, if I heard him right, said that if you buy a GM or Chrysler car, “starting today the U.S. government will stand behind your warranty.”

The way I understand it, the government has no interest in running GM, but on the other hand, they are guaranteeing that the warranties issued by GM will be honored by the government. Are the two not somewhat intertwined?

I’ve had a career of almost 30 years studying the stock market and the economy. Over the past two years, I’ve seen actions come out of Washington that I would have never fathomed…never even thought possible.

While Washington has only the best intentions for all of us (it wants so desperately to put these poor economic times behind us), at night I sometimes cannot sleep worrying about all the debt the U.S. is accumulating. The fact is that the U.S. does not have the money for all these bailouts and guarantees…it is doing so only by increasing its debt load.

Where will it all end? Unfortunately, I do not believe that it will end well. I’m concerned about the stability of the U.S. dollar against other world currencies given the horrendous debt the U.S. is accumulating.

Michael’s Personal Notes:

I’ve known Anthony Jasansky, a professional engineer by trade, for about 25 years. During that period, Anthony, an avid student of the stock market, has become an expert on technical analysis. While fundamental analysis is concerned with how much a company makes and those earnings related to its share price, a technical analyst studies past stock price charts to forecast future price movements. Anthony has been kind enough to write a special guest column for my PROFIT CONFIDENTIAL readers. You’ll find that column at the end of today’s issue. I think you’ll find it an interesting read.

Where the Market Stands:

A doozy of a day yesterday for the stock market, with the Dow Jones Industrial Average down 254 points! Analysts were quick to blame the auto sector yesterday for the sharp decline. I see it differently. Prior to yesterday, the Dow Jones had marched up 1,200 points (18%) since March 9, giving us one of the best months in living memory. What happens today will be an important answer to the million-dollar question: will the stock market continue on its march to regain all of its 2009 losses? If it does, in my opinion, the market will be giving us one more chance to get out. So far this year, the Dow Jones is down 14%.

What He Said:

“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this coul be a catastrophe for the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, August 2, 2006. “I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael started talking about and predicting the current financial catastrophe long before anyone else.