Should we spare a dime for Detroit? Part 2

No one becomes overweight overnight, and the Big Three weren't always in critical condition. It's hard to believe, but these companies were once world leaders and innovators to boot. Where once they were the exemplars of American industrial might and prosperity, they are now regarded as bloated, expensive, slothful anachronisms. So what happened?

Have you ever heard that admonition, "you have to be able to handle success?" Well the Big Three failed to do that. They had a comfy oligopoly on the North American market. It's hard to remember this, but GM once had 50% of the North American market. They got fat and lazy. They handed out contracts that they shouldn't have. Quality began to suffer. If you want to read a good tale about Detroit's fall from grace, than read The Reckoning by David Halberstam. It was published in 1986, but the Big Three are no more fit to compete than they were then against foreign car companies.

To use a crude analogy, the Big Three are like a professional athlete or musician who was a superstar who supported his extended family and an enormous entourage as well. He is now no longer making millions of dollars, but it doing pretty well as an announcer. The problem is, he's still supporting a small army.

GM is the product of a bygone era defined by corporate paternalism and defined benefit plans. Instead of riding the bull of globalization, the bullis goring them.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan is rather morose on the topic of specifically GM's prospects for survival. "Every one of the Big Three faces a problem right now of about $2,000 to $2,500 per vehicle produced cost disadvantage. If that plays out over time, they're all dead," says Cole. "It's change or die. Everything is driven by a profitable business. If you can't be profitable, you can't be in business. That is, I think, recognition that everybody is aware of."

Asked two years ago on 60 Minutes, how this happened CEO Rick Wagoner said:

"We have a long history, almost 100 years. We have a lot of employees. We have a lot of retirees, a lot of dependents. … Promises were made about benefits to those people that weren't very expensive when they were made. And it's really given us some financial challenges."

Some have gone so far as to say that GM's health care costs are higher than those for steel and glass. If that's true, than they are in the wrong business.

Have you heard of the Jobs Bank? Read and weep. I hate to use this word, but this is downright un-American. Hopefully, this sort of largess will be cut in order to save the industry.

There's also the fact that they don't make cars that Americans want to buy. In most Americans minds, foreign cars represent greater value, both in terms of reliability and the secondary(used car) market. However, there's a cognitive dissonance at work here. Despite the continuing improvement of American cars in quality surveys, Americans' just don't want to eat the home cooking.

So does that mean if Detroit got its cost structure under control and started making cars that people wanted, that there problems would be solved. No. The business landscape isn't static. The Japanese, Koreans, and Europeans won't go down without a fight. Furthermore, the Big Three would still face nascent and potentially lethal threats from China, Brazil, and India. All these actors have the implicit backing of their governments who will spend whatever it takes to create and expand their domestic auto industry.

In part 3, I'll discuss the various options on the table, their likelihood, and investing strategies.

Should we spare a dime for Detroit? Part I

Sal: "Tom, can you get me off the hook? For old times' sake?"
Tom: "Can't do it Sally"
Tessio and Tom, The Godfather

I don't know where I stand on this, so I'm going to try to think about it as I write. There will be times where I might contradict myself, so please forgive me ahead of time. First of all, let me say that my brother is an autoworker, so I'm not completely impartial.

I shall try to ignore their three private jets, or their false concerns about safety(who would recognize these men that would want to kill them), or the alarmist tenor of their rhetoric. Try as hard as you can to stomach the fact, that only Nardelli would work for $1 a year.

To quote Tom Hagen from The Godfather yet again, "don't get personal. Keep it business."By the way, this is great stock picking advice.

I think that anyone who saw last week's testimony in front of Congress, came away with little sympathy for the automakers. I came away not only unsympathetic, but slightly incredulous. Rick Wagoner claimed that their current woes were not "our product lineup, or our business plan, or our long-term strategy. What exposes us to failure now is the global financial crisis, which has severely restricted credit availability, and reduced industry sales to the lowest per-capita level since World War II." This was not an unsubstantiated claim. He provided numerous supporting facts in his statement. I just don't buy it though. I feel that he was offering convenient facts and half-truths in attempt to lessen his audience's anger. This is the crux of the argument though, at least for me. If you believe that this is a temporary measure needed to help the Big Three get through a tough time, then by all means, giving them this money and averting the loss of 3 million jobs is an easy decision. If, however, and this is the side of the fence where I currently stand, you think this is nothing short of throwing good money after bad, then there's no way you give them one red cent.

As is usual in Washington, this has become a partisan political football. Republicans hate the idea. Democrats, although critical of the automakers, seem far more open to the bailout. In fact, Chris Dodd(D., Ct.), called the industry's wounds "largely self-inflicted."

Richard Shelby(R., Ky.)asked the question that is probably most on people's minds. "Is this the end, or just the beginning?"

Congress wants a plan for how to turn thsse business around. Have they not been paying attention to the last thirty years? The automakers haven't lacked for plans. Maybe they are playing a game at which they can't win? Maybe it's a fool's errand. No one in that room was willing to even contemplate that. I think that's a problem.

On Friday, I'll talk more about their problems and how this all happened.

Top 10 stupid things you'll hear on CNBC

Let me first acknowledge a debt that investors owe to CNBC. Since it's launch in 1989, it has provided up to the minute business news and commentary. It has several international versions if you want to follow markets outside the United States. It provides a valuable service that makes following the market easier. That said...

The financial media might be the most biased, most dependent on the industry it covers, of all media. Consequently, their coverage of business is rarely if at all hard-hitting or critical. It is only after the fact, that they become incensed, as if they were betrayed(by their masters).

1. This is a stockpicker's market.
2. Are we seeing capitulation?
3. This stock has a great chart.
4. Don't fight the tape.
5. There's a lot cash on the sidelines.
6. Is now a good time to put money to work?
7. This market is looking for leadership.
8. The market rose on bargain-hunting/The market fell on profit-taking.
9. We may retest the ______ lows
10. _________ is being caused by the selling or buying of big hedge fund X.

Through the looking glass

No, not because,as Lindsay Lohan recently said, we've elected the first colored president. America has gotten away from its roots. I'm not talking about our Christian roots or manufacturing roots. I'm not talking about America descending into communism a la Red Dawn(don't worry, we're not). I'm talking about how we've become hostile to success and coddling of failure.

Parading rich hedge fund managers before Congress will not solve our current problems. Why only the top five moneymakers? Why not the top ten? I can see wagging your finger at Dick Fuld(who feels so sorry for helping destroy the company, but think that he shouldn't have to give back any of the $384 million in compensation he raked in), but Soros had been talking about this before it happened. Soros doesn't even really trade anymore, he just collects fees and manages his philanthropic enterprises.

Does anyone feel better if a rich person gets shamed for a few hours before their limo takes them to their Gulfstream and back to their pile of money? More importantly, there used to be a time in the country when we venerated people who made money honestly. Now we look at them with suspicion. Nowadays, we hand out billions to failures, hoping to prop up sad companies that should go bankrupt. I am all for a perp walk, just let it be the right guys not the most obvious targets. It's funny how for years hedge funds were supposed to be the danger to the financial system, but in the end, it was the "respectable" institutions like Citi, Lehman, WaMu, Merrill, etc.

I guess you can get an STD from an All-American cheerleader.

Goldman Sachs ans dollar-cost averaging

Readers of this blog know that I've been salivating over Goldman Sachs for about a year. The stock was over $200/share back then. I wasn't buying then, but I was eyeing it, waiting for it to get below $140. As I write this, it's trading at roughly $69 a share. Shouldn't I be ecstatic? I'm not.

Why? Fear plain and simple. Every investment book that I've read has spread the gospel of dollar-cost averaging and how simple, yet powerful a technique it is. The books never mention that it's much easier to do when the stock is appreciating.

I'm not scared so much by the falling stock price, but because I'm not sure how to evaluate this company anymore. Earnings don't work because I don't know if they'll be around next quarter. Normally, I would rely on book value, but that could be equally ephemeral.

Book value is the net asset value of a company, the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. It's a good metric to compare against the market value. If you really want to be a stickler, than you can use the tangible book value, which takes out the value of intangible assets. Be careful though when doing this. Some companies, such as tech companies, are built on intellectual property and so have a lot of intangible assets. Book value wouldn't be a good metric for measuring them.

Furthermore, think about the assets the company holds; just because it's a physical asset doesn't mean that it's liquid. Have you ever tried to sell an outdated automobile factory in Gary, IN? Another thing with assts, pay attention to the quality of the asset(s). Look at the housing and banking sectors. They still can't bring themselves to properly impair bad loans and distressed land.

I refuse to buy the stock on my faith in the Goldman franchise alone, so why should I buy? I should only add to my holdings if I believe that the government will do whatever it takes to keep the bank afloat and I can stomach another 50% haircut.

Exploit the election rally

The market has been rallying recently. There's been a lot of talk about whether or not the market has hit a bottom. The C-word(capitulation, not the other one) is on everyone's lips. Perma bears are turning bullish. In boardrooms across America, the phrases "inflection point" and "paradigm" shift are being bandied about like a volleyball by people paid enormous sums and venerated for occasionally outperforming the indexes. As a little red-haired orphan once said, "the sun'll come out tomorrow."

I see the rally and don't believe my lying eyes. I think it's an election-related and typical bear market sucker rally. Still, I'm participating. I'm not smart or agile enough to buy the SPY for a quick gain. I'm also not confident enough that this is a sucker rally to go short the market in any meaningful size. So what am I doing? I'm using the rally to raise cash, rebalance, and reasses.

Speaking of that last verb, I specifically mean E*Trade. I first started touting E*Trade in the low 2s back in November. It went as high as 5 and change, then settled into a a range of the high 2s and low 3s. As I write this, ETFC is trading at $1.95 and is down 50% YTD. It still lessing for less than book value and now for less than the cash on the balance sheet as well.

I'm debating whether or not to buy more. I would like to, but there are less risky bets out there that I'm eyeing. Excel Maritime Parners(EXM)is still selling for 1x earnings with a 14% yield. Altria and Philip Morris has single digit P/Es and juicy yields as well. Rick's Cabaret(RICK), which I think has on the best business models around period, is selling for under book value. The oil services sector has never looked so good. For a long-term value investor, this is better than being a kid in a candy shop. This is like being put in charge of Mars or Hershey.

Decisions. Decisions. I've got a lot to think about.