December 3, 2008
As Congress combs through the business plan of the automotives - why should we trust the business acumen of Congress?
by MrArbitrage
Marketwatch.com quoted Dana Perino who said “We are sticking to our guns that the companies have to prove that they are viable before the taxpayer dollars should be given to them." The Senate Banking Committee is holding a hearing about the plans Wednesday, while the House Financial Services Committee has scheduled a hearing for Friday.
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This is outrageous. Although I agree with the sentiments expressed by the congenial Dana Perino, it would be the epitome of credulity to believe that the elected idiots on this "House Financial Services" Committee would recognize whether or not a business plan had "viability". What would these schleps in Congress know about viability? The only difference between the executives at the Big 3 and the elected idiots is that the latter have the luxury of plundering the Treasury.
One thing with which I have difficulty is listening to the politicians and the hindsight journalists who tell us how the big 3 got into this mess. Everyone is talking about this story and offering their two cents. Most of the people on the business networks are “posers”. They may have great legs or nice hair but WHY should we value their opinions? Where is their ACTIONABLE market intelligence from years ago where they sounded the alarms, saving investors from losing their shirts on these stocks?
For anyone who asks the question – WHY – “WHY should I value YOUR opinion?” Here’s my time-stamped actionable intelligence on the automotives from seven years ago.
GM is so strapped in debt that it wouldn't even put a dent in it. (GM’s sale of Echo Star) It's SCARY how much debt they have. Looking at the balance sheet, one would think they were a damned utility, not a car maker. – MrArbitrage 8/7/2001 http://boards.fool.com/Message.asp?mid=15523185
“It is amazing to me how short sighted analysts and many investors are. What about 2002? Does anyone think that the price ought to bare some correlation to more than 1 quarter worth of "projected" sales? These are cars people, CARS. Should the stock price reflect DECLINING market share and declining profit margins?
How much blind faith are you going to invest into the notion that some CFO can read into the minds of the average consumer and into the future in order to accurately predict what is going to happen to the auto market next year and the year after that? If they have that kind of talent, they certainly are wasting it working for auto companies when they could easily rule the WORLD by amassing great fortunes trading their own stock portfolios. Perhaps if they have such infallible abilities to predict the future, THEY should be Wall Street analysts.” – MrArbitrage 8/22/01 http://boards.fool.com/Message.asp?mid=15611414
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“Would someone who is bullish on the auto sector kindly give me a compelling reason why I should be willing to pay over three times the long term average earnings multiple for GM, F or DCX while: Jobs are being slashed aggressively, sales are slowing, the dollar is strong and making it hard to compete with the Japanese who subsequently make a superior car and are gaining market share, profit margins are disappearing, the companies are lending money to people who are not credit worthy (according to reliable sources) and they themselves are loaded with debt?
I want to know what I am missing here. I want to hear some substance. Instead of “Ford is a great company” or GM is a great company” tell me why it should be selling for this high price. Go back over the past 20 years and look at how frequently these auto stocks traded between 4-8 times earnings. Go back to the most recent recession and look how GM lost money in the years 1990, 1991, 1992 consecutively and how Ford lost money in 1991 and 1992 (Chrysler most likely did as well however I am having difficulty finding independent data for them because of the takeover). Given the highly cyclical nature of the auto business and the very undesirable factors currently working against them, tell me why I should be a buyer at THIS PRICE. Give me compelling reason why they should be anywhere but bellow their 52 wk lows at this time.
To quote Gordon Gekko (from the movie Wall Street) :) “Tell me something I don't know”. I'm not trying to be arrogant; I just don't see the correlation between price and value here.
The most substance I've been able to elicit at the GM board lately is “There can be no doubt that GM is a $90 dollar stock" or
“gas has come down a few cents a gallon, making SUV's more attractive”. Well, the Japanese are moving in on that business too and I'm sure they will improve upon it as usual. – MrArbitrage 8/28/2001 http://boards.fool.com/Message.asp?mid=15648594
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The problem with GM is not only the Pension accounting issue about which we have been hearing.
Other problems include the fact that they are giving the things away in order to move inventory. Just last week on the way to my office I heard a radio commercial by a local dealer proclaiming that Detroit is in trouble and need you to bail them out... "too much inventory..." We all know the dubious tactics of auto-dealers but this is one I haven't heard in years and this dealer was actually saying the manufacturers are in trouble. There could be an element of truth to that based upon the expansion of ZERO percent financing.
The way that cars have been selling the past few years, it simply can't go on forever. We're not talking pancakes here. People only need so many cars. Anyone who believes the optimistic pabulum of the manufacturers is very naive. Are they as good and OPTIMISTIC at projecting future auto sales as they are at projecting future returns on their pension plans?.
The last major concern I have is that they are making too many sub-par loans to people who are much more likely to default, especially in this economy as people get their pink slips. It's much harder to make a car payment on a car with an unemployment check. They make these loans to "undesirables" in my opinion, in order to delay the inevitable. The pressure is strong to keep moving cars, especially with the heat on them regarding possible pension shortfalls.
I think this will be the next big controversy. I can see the useless blowhards at CNBC a year from now doing another special on this one. Remember, you heard it here first. - MrArbitrage 1/8/2003 Blog titled “The Worst is Yet to Come” http://boards.fool.com/Message.asp?mid=18399834&sort=whole&terms=mrarbitrage&vstest=search_042607_linkdefault
To be sure, speculative fervor with the help of analyst manipulation, a weak dollar and low interest rates have had a major effect on the price of oil. Those are problems that can and should be rectified. Unlike many columns calling for more government intervention, I am laying out a proposal for private sector adaptation that could be profitable to the oil industry, automotive industry and beneficial to the finances of consumers.
My proposition was born as I sat back and asked myself the question “how do you know when oil is over-valued?” The answer came to me as follows: When the gasoline costs more than the average consumer’s vehicle, I think it’s a fairly good sign that something is askew.
For example, my profession doesn't require me to travel much and I don’t live more than 25 miles from my office; yet this month I find myself spending about the same amount as an average car payment, about $400 on gasoline. So if oil stays at these levels for a few years, and I own an average priced car, I am essentially paying more for my gas than I can expect to pay for my car.
This led me to the opinion that with the price of oil being this high, it would be a great move for a company that produces , refines and retails much of its own oil to go into this market and acquire General Motors or one of the other “Big 3”.
The business model would be like that of the cell phone companies. I know there are phones for which people pay hundreds of dollars now but once they reach “critical mass”, no matter how high tech, they all eventually become commoditized and wireless service providers end up giving them away for free or close to free - in exchange for a 1-2 year service contract. That of course is because it makes sense to do so as the real money is in the monthly annuity created by the service contract, which guarantees them a minimum amount of revenue.
Naturally, as consumers we hope that oil will eventually settle down in price but the present situation could create an opportunity for the oil companies to “lock in” customer’s patronage on multiple levels.
I know that Exxon mobile has announced plans to shed its retail outlets over the next few years but for example, they could buy out GM, currently selling at around a $6 billion market cap, which is a fraction of Exxon’s 1st quarter’s profits of $10.89 Billion. Plus, the market cap of Exxon is almost a half of a TRILLION dollars – so an acquisition of GM at 2X the current price would be a blip when considering a partial stock/cash deal. Advantages for oil companies: A company like Exxon could sell or lease the automobiles at regular price to consumers who want the car with no strings; however, they could also offer to sell or lease the cars at deep discounts to consumers and businesses that contract to buy their gasoline from Exxon stations and/or retail gas stations that are SUPPLIED by Exxon. To protect the consumer, the contract could assure them that they won’t pay more than a specific percentage above cost so if gasoline drops 50% a year later, they won't be stuck paying a substantially higher price but rather a lower price, yet still guaranteeing the specific price over cost to the oil company. It could be structured like an adjustable mortgage (Prime+ whatever percent). With current technology, this could be easily accomplished. The major companies like Exxon, Chevron, Shell and BP are virtually everywhere. GPS navigation systems could point out the locations of all eligible gas stations around the country for the consumer. Credits for the monthly gasoline payments could be sent to a card, like a pre-paid phone card and used at any eligible station. If the customer needs to pay cash, they can do so and while at the station, have the cash transaction recorded toward their minimum monthly required gasoline purchase (which would be agreed to at the purchase or lease of the automobile). Because gasoline is a commodity, it has always been difficult for oil companies to maintain consumer loyalty. They have tried to do so by issuing credit cards and even running national television commercials to try to sell us on the virtues of their higher octane or cleansing properties. Most people don't buy into that; most people look for the lowest price even if it's by a penny. By essentially bundling the automobile with a gasoline service contract like a cell phone package, the oil company could essentially guarantee itself 99% loyalty. Because oil prices fluctuate on the world market, they couldn't necessarily guarantee a specific price over the contract years, unless they wanted to hedge, but the oil company could guarantee a specific price over the cost of producing, refining and transporting the fuel, guaranteeing a profit from each contract. The advantages to the consumer: They could buy or lease the automobile at a substantial discount, which would depend upon their average fuel consumption. They could lock in a price range on fuel, knowing they won't have to drive all over town looking for the cheapest gas station. If stations in some markets are charging them more than the percentage over the agreed profit margin in the contract, the difference could be credited to their account so it would average out. No matter where they go in the country, as long as they buy their gasoline from the Exxon supplied or owned station, they will not have to pay attention to which station is selling for the lowest price in that market. Somebody - is going to bail them out. Better the private sector than the government, because if the government does the bailing, they're going to take it out of "big oil" anyway. Big oil might as well OWN it if they're going to pay for it and pay they will with Democrats in power. QUICK SUMMARY By bundling into transportation packages, everyone can benefit. Benefits to Consumers: Benefit to Automotive companies:
It would also be a nice hedge since more fuel efficient vehicles will eventually cause a major decline in gasoline consumption. So if “big oil” were to act now and acquire these auto companies while the autos are dirt cheap and oil stocks have enormously strong currency in their stock, when the day comes that oil is less valuable, the automotive segment can offset their loss of oil profits.
Times are bad for the automotive sector and congress knows that we have a major problem if the
I used the example of Exxon & GM but the same could work with Chevron, Shell or BP with Ford and Chrysler. The big oil companies have “economies of scale” so they could make it work, make it profitable, make the combined proposition of buying a car and fueling the car significantly less expensive for the consumer – and they could do it more effectively than the scheme of any prodigal congressmen could ever fathom.
Benefits to Oil Companies:
Contact: mrarbitrage@tableofwisdom.com
