The Great Auto Bailout?
Nov 17, 2008
Posted by admin | Filed under Uncategorized
The automobile industry is now in the news every day. The so called “Big Three” (GM, Chrysler and Ford) are all in financial difficulty. These stocks have lost most of their market value this year on the back on mounting losses. The industry is now claiming that if the government does not bail them out, they will all face chapter 7 bankruptcy, which will result in massive job losses and an economic disaster. Critics of this bailout claim that the American auto makers are paying over $70/hour in labor costs, compared to only $48/hour at Toyota. Thus, the critics claim that until the business model changes, all the bailout will do is postpone the inevitable, as they will continue to lose money.
My take is this: To a great extent, the automakers brought this problem on themselves. First of all, why did they agree to such an egregious labor contract? Second of all, according to Consumer Reports, American cars are very lowly rated compared to their Japanese counterparts. For example, in their ratings of sedans priced between $20-25,000, the first six highest rated are Japanese made. For sedans between $25-30,000, seven of the top eight are Japanese. In sedans between $30-45,000, Consumer Reports rate only one American car in the top ten. The funny thing about this is, when I was growing up in the 1960s and 1970s, Japanese cars were considered to be cheaply made and of poor quality. Today, most people feel just the opposite is true. While Japanese car manufacturers figured out how to deliver quality product at an affordable price, the Big Three got fat and lazy, and now they are paying the price. However, although I think some of what the automakers claim is probably an exaggeration, I would still try to structure a bailout under the condition that union concessions are part of the deal. Clearly, writing a blank check makes no sense if the business model no longer works. All that will happen under that scenario is that the auto makers will probably be facing the same problem somewhere down the road. Therefore, one must restructure these companies by copying the Japanese and making quality lower cost cars. Of course, changing their cost structure must be involved. Although the unions are quite vocal, the fact remains that auto union membership has dropped by over 2/3 since 1979 according to Investor’s Business Daily. Clearly, even most auto workers don’t feel that union membership is all that important. Why should the government feel any different?
In the equity markets, stocks continued their decline after the Thursday rally. For the month of November, the US stock markets have now fallen for 8 out of the 11 trading days. The Dow and NASDAQ closed today no far from their yearly lows. Although there is no question that being short has been the way to make money for most of 2008, I am now seeing signs of capitulation in the market. It is very hard to find anyone out there who is positive on the markets. Generally, that means we could be close to at least a temporary low. However, economic news continues to weigh negatively on the market. Layoffs continue to grow. Citicorp announced an amazing layoff of over 50,000 of their employees worldwide. Retail sales dropped dramatically in October. Until we see some positive news, I believe these rallies will continue to be short lived.
