Shuttin’ Detroit Down

by Michael Lombardi, CFP

There are two general sides of opinion forming in the General Motors and Chrysler debacle: Those that believe both should file for Chapter 11 Bankruptcy and those that believe both should be saved by the government.

Writing about this subject is sensitive, as I have executives at these companies that receive PROFIT CONFIDENTIAL. In the past, when I have written about the auto industry, I’ve received criticism from these executives. Hence, I’ll go soft, but be truthful.

The group that believes that GM and Chrysler should not get more money is right. Why should taxpayer money help companies that were mismanaged? Why should the auto industry be singled out for bailouts while other large industries are not getting government bailout money? Case in the point, the newspaper/publishing industry, which employs hundreds of thousands of Americans, is in a tailspin…but they are not getting government bailouts.

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The group that believes GM and Chrysler should be saved is right. You work 35 years in a factory with the promise that, when you retire, you will get a pension. That promise forms part of the reason you stay at the company. Now the company you worked for files for Chapter 11 and your retirement promise is in jeopardy. Is that fair? Toyota has already surpassed GM as the world’s number one automaker. The U.S. manufacturing base deteriorates every passing day. Isn’t it important that America maintain a strong domestic car marker as opposed to increasing our trade deficit even more via foreign imports?

The big news this weekend was the resignation of the CEO of GM, Rick Wagoner, believed to have resigned due to pressure from the White House. Over the weekend, the Obama Administration said neither GM nor Chrysler had submitted acceptable plans to receive more money from the government.

Here are the numbers: combined, GM and Chrysler employ about 150,000 people just in the U.S. and thousands more are employed by the two throughout the world. Together, their balance sheets show debt of over $200 billion. GM alone lost $30.0 billion in 2008. The profit picture has not improved so far in 2009. One report issued early this year stated that two million direct and indirect jobs throughout the world are related to either GM or Chrysler.

After the public outcry over the government bailout of AIG and the subsequent bonus fiasco, it is logical that the government may be wary of more public outcry if it bails out GM and/or Chrysler. Together, they have asked for $21.6 billion more in government money.

And that brings me to the point of today’s article. I’m not an expert on the auto industry and I won’t try to be one. What I do know is economics and a little about the stock market. To me, the U.S. is following the same path Japan did in the 1990s during its “lost decade.” There were seven identifiable steps in the Japan crisis. I have summarized them below:

  • First, a real estate bubble got out of hand and burst.
  • Second, the domino effect brought down the banking industry.
  • Third, the government tried monetary stimulus/cash bailouts.
  • Forth, public outcry stopped the government bailouts.
  • Fifth, banks were allowed to either go bankrupt or were nationalized.
  • Sixth, investor faith in the banks that survived was restored.
  • Seventh, the economy started to turn around.

Today, the Obama Administration, when comparing our current economic crisis to that of Japan, is at point number four: public outcry is threatening to stop the government bailouts. Unfortunately, this is a big negative for both GM and Chrysler. For those who have e-mailed asking if either stock should be bought amid their historic lows, please remember the 10-foot pole principle.

Michael’s Personal Notes:

Have you heard the new song “Shuttin’ Detroit Down” by John Rich? In the midst of the auto sector crisis, Rich’s song is climbing the charts fast. Could it be that Rich and the short sellers are the only ones making money on GM and Chrysler’s woes these days? In all seriousness, I had dinner last night with a 30-year GM retired plant employee. He is terrified of losing his pension, as are thousands of GM retirees. It was a very sober evening.

Where the Market Stands:

The Dow Jones Industrial Average futures are pointing markedly down this morning in the wake of the deepening auto industry crisis. If the market closes up today and tomorrow, it would be very significant for the continued bear market rally. On the other hand, is the scapegoat of the auto crisis enough ammunition for an end to the bear market rally and a continuation back down to the lows? These two trading days, Monday and Tuesday, will be very important for determining short-tem market direction. The Dow Jones is down 11.4% for the year.

What He Said:

“Bonds could now be a buy: bonds rise in price when interest rates fall as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates that the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. Government bonds were one of the best performing investments from mid-2006 to late 2008, early 2009, as they rose in price sharply, as the Fed reduced interest rates back to one percent in October 2008, then to zero in early 2009.

Shuttin’ Detroit Down
by Michael Lombardi, CFP

There are two general sides of opinion forming in the General Motors and Chrysler debacle: Those that believe both should file for Chapter 11 Bankruptcy and those that believe both should be saved by the government.

Writing about this subject is sensitive, as I have executives at these companies that receive PROFIT CONFIDENTIAL. In the past, when I have written about the auto industry, I’ve received criticism from these executives. Hence, I’ll go soft, but be truthful.

The group that believes that GM and Chrysler should not get more money is right. Why should taxpayer money help companies that were mismanaged? Why should the auto industry be singled out for bailouts while other large industries are not getting government bailout money? Case in the point, the newspaper/publishing industry, which employs hundreds of thousands of Americans, is in a tailspin…but they are not getting government bailouts.

The group that believes GM and Chrysler should be saved is right. You work 35 years in a factory with the promise that, when you retire, you will get a pension. That promise forms part of the reason you stay at the company. Now the company you worked for files for Chapter 11 and your retirement promise is in jeopardy. Is that fair? Toyota has already surpassed GM as the world’s number one automaker. The U.S. manufacturing base deteriorates every passing day. Isn’t it important that America maintain a strong domestic car marker as opposed to increasing our trade deficit even more via foreign imports?

The big news this weekend was the resignation of the CEO of GM, Rick Wagoner, believed to have resigned due to pressure from the White House. Over the weekend, the Obama Administration said neither GM nor Chrysler had submitted acceptable plans to receive more money from the government.

Here are the numbers: combined, GM and Chrysler employ about 150,000 people just in the U.S. and thousands more are employed by the two throughout the world. Together, their balance sheets show debt of over $200 billion. GM alone lost $30.0 billion in 2008. The profit picture has not improved so far in 2009. One report issued early this year stated that two million direct and indirect jobs throughout the world are related to either GM or Chrysler.

After the public outcry over the government bailout of AIG and the subsequent bonus fiasco, it is logical that the government may be wary of more public outcry if it bails out GM and/or Chrysler. Together, they have asked for $21.6 billion more in government money.

And that brings me to the point of today’s article. I’m not an expert on the auto industry and I won’t try to be one. What I do know is economics and a little about the stock market. To me, the U.S. is following the same path Japan did in the 1990s during its “lost decade.” There were seven identifiable steps in the Japan crisis. I have summarized them below:

  • First, a real estate bubble got out of hand and burst.
  • Second, the domino effect brought down the banking industry.
  • Third, the government tried monetary stimulus/cash bailouts.
  • Forth, public outcry stopped the government bailouts.
  • Fifth, banks were allowed to either go bankrupt or were nationalized.
  • Sixth, investor faith in the banks that survived was restored.
  • Seventh, the economy started to turn around.

Today, the Obama Administration, when comparing our current economic crisis to that of Japan, is at point number four: public outcry is threatening to stop the government bailouts. Unfortunately, this is a big negative for both GM and Chrysler. For those who have e-mailed asking if either stock should be bought amid their historic lows, please remember the 10-foot pole principle.

Michael’s Personal Notes:

Have you heard the new song “Shuttin’ Detroit Down” by John Rich? In the midst of the auto sector crisis, Rich’s song is climbing the charts fast. Could it be that Rich and the short sellers are the only ones making money on GM and Chrysler’s woes these days? In all seriousness, I had dinner last night with a 30-year GM retired plant employee. He is terrified of losing his pension, as are thousands of GM retirees. It was a very sober evening.

Where the Market Stands:

The Dow Jones Industrial Average futures are pointing markedly down this morning in the wake of the deepening auto industry crisis. If the market closes up today and tomorrow, it would be very significant for the continued bear market rally. On the other hand, is the scapegoat of the auto crisis enough ammunition for an end to the bear market rally and a continuation back down to the lows? These two trading days, Monday and Tuesday, will be very important for determining short-tem market direction. The Dow Jones is down 11.4% for the year.

What He Said:

“Bonds could now be a buy: bonds rise in price when interest rates fall as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates that the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. Government bonds were one of the best performing investments from mid-2006 to late 2008, early 2009, as they rose in price sharply, as the Fed reduced interest rates back to one percent in October 2008, then to zero in early 2009.