Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Amazon Black Friday vs Prime Day vs Cyber Monday, Which are Real or Fake Sales - 1st Dec 20
The No.1 Biotech Stock for 2021 - 1st Dec 20
Stocks Bears Last Chance Before Market Rally To SPX 4200 In 2021 - 1st Dec 20
Globalists Poised for a “Great Reset” – Any Role for Gold? - 1st Dec 20
How to Get FREE REAL Christmas Tree 2020! Easy DIY Money Saving - 1st Dec 20
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

General Motors and Ford Increasing Probability of Permanent Meltdown

Companies / US Auto's Jul 17, 2008 - 02:18 AM GMT

By: Mike_Stathis

Companies The recent Merrill (MER) research report on General Motors (GM) should not be treated with any urgency, although I agree with the overall assessment of a potential bankruptcy. But I would also add Ford (F) into that picture. As you will recall, we heard the same thing from analysts less than three years ago only to see GM's share price more than double over the ensuing two years.

However, much like a sustained bear market, both GM and Ford continue to make lower highs and lower lows, both in their business performance and stock price, increasing the probabilities of a permanent meltdown unless radical changes are made soon. Due to the difficulty and timeliness of needed changes, I am doubtful that each of the Big 3 players will be around in eight years without government assistance, which appears likely. I stated some of the most critical issues faced by this industry in a May 13 article, “Industries to Avoid, Industries to Buy.”

Part of the problem is that US auto makers no longer rely much on sales driven by REAL consumer demand. A very large portion of sales from the Big 3 come from the combined orders made by police departments, other government entities, corporations (drug reps and other sales reps), and car rental companies. These are virtually guaranteed sales so there is not much pressure to make the best, most desired autos possible, as defined by consumers. In response to diminished quality, rather than promoting the appeal of their auto lines as the main selling point, they emphasize “lucrative” financing deals to exploit the consumption epidemic that has infected most US consumers. As a result, the Big 3 now resemble financial companies more than auto makers.

This focus on consumer financing helped keep the Big 3 afloat for many years. But now the effects of the credit crunch are causing much of the stress on performance. While this recession is still in the early stages, we already see cost-cutting measures for government entities at all levels. Corporations are keeping cars for longer periods. And consumers who have the money (or available credit) for auto purchases are seeking out more reliable and more fuel-efficient Japanese autos. The Big 3 continue offering cheap gimmicks to lure customers – hybrid SUVs, $2.99/ gallon gas for three years, $0 down, 0% interest, etc. In contrast, Japanese auto makers surge forward to address consumer demand. They continue to give consumers what they want. That is precisely why there are waiting lists for the Prius and other fuel-efficient autos. When you view the prospects of the Big 3 from these considerations alone, the picture looks frightening. Of course, labor costs are another, much bigger issue.

Early in the decline of the US auto industry, ridiculous demands of the UAW set up cost issues that would haunt the Big 3 for many years to come. Over the past several years, as the globalization trend has strengthened, the effects of UAW demands have magnified –

US auto workers want and expect too much, while the overseas labor market does same job for less money with very few if any COMPANY-SPONSORED benefits.

This represents the core disconnect found within US manufacturing. Current free trade policies, by necessity force manufacturing overseas due to the much lower labor costs offered by foreign competition. US companies are simply unable to compete with foreign competitors who do not bear the high costs of healthcare and pensions. In most nations, the government pays for healthcare and pensions. Until healthcare is made universal and free trade is made FAIR TRADE, America will continue to lose what little manufacturing jobs that remain. Otherwise, US companies will have no choice but to send jobs and entire manufacturing facilities overseas to escape the enormous costs of healthcare. This is NOT a political issue. It is an economic issue. If America wants to stop its gradual and permanent economic decline, these issues must be addressed with real solutions.

America must produce more of what it consumes rather than sending money overseas, creating huge trade deficits.

Ultimately, leveling the playing field through some type of REAL healthcare and free trade reform will not ensure long-term viability of the US auto industry. The Big 3 have faced a tremendous amount of brand name destruction for many years, and deservedly so. Among many of the changes needed, a radical management shakedown must occur if the Big 3 expects to survive. And I mean radical. The management and board of these companies must be replaced, not by some insiders who are accustomed to bureaucratic waste and phony inspiration. The industry needs younger, motivated, experienced and creative minds with a track record of REAL success in virtually any industry. These would be business leaders willing to take the majority of payout in stock rather than cash; guys who are willing to hold the stock for at least 10 years instead of dumping it in 2. They should seek out sharp, entrepreneurial visionaries, similar to Lee Iacocca, Steve Jobs, and Michael Dell.

While private equity firms might look to purchase GM and/or Ford, I cannot see this happening under the current credit crisis unless they are sold very cheap. Even then, these deals would be difficult to consummate. Investors are shying away from the hidden risks of the highly leveraged credit bubble. Very few institutions would have interest in a buyout because the risk exposure is in the tens of billions and expected to worsen as the economy weakens. We already see a meltdown of private equity and leveraged buyout deals over the past two quarters.

I could only see a potential sale to foreign companies (or US firms looking to broker the deal) willing to take on these risks in exchange for immediate positioning in the auto market. Such risks could be justified by a trade-off resulting from the cost savings realized by a cheaper labor market and the desire to elevate their market position overnight (such as Tata Motors or a Chinese auto maker). While some type of foreign carve out is possible, I would say the more likely outcome will be a government bail out. A bailout could also occur once GM or F was taken private as well, but only if manufacturing jobs were guaranteed to remain on American soil. The US auto industry is, has been, and will continue to be one of the worst industries to invest as long as America continues to support policies that result in unfair trade.

For those of you who feel prices for GM and F look like a great deal at current levels, I'd like to remind you of the tremendous liabilities faced by each company. Remember, they resemble banks more than auto makers, with huge amounts of unknown liabilities. High oil prices, high inflation, muted median wage growth, and consumer stagnation are certain realities over the next few years, at minimum. That said, do GM and F represent any short-term trading opportunities? That is certainly a possibility. But I for one would not want exposure trading fundamentally miserable companies with potentially huge liabilities, especially during the high market risk that remains. We must remember that analyst downgrades typically come in masses just prior to capitulation. At the very least, I would need to see a few more Wall Street analysts issue Sell signals before I would even consider GM or F for a trade. Given the latest sales figures from June, we just might see more downgrades soon.

Disclosures: None

By Mike Stathis

Copyright © 2008. All Rights Reserved. Mike Stathis.

Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.

The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.

Restrictions Against Reproduction: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the copyright owner and the Publisher. These articles and commentaries cannot be reposted or used in any publications for which there is any revenue generated directly or indirectly. These articles cannot be used to enhance the viewer appeal of any website, including any ad revenue on the website, other than those sites for which specific written permission has been granted. Any such violations are unlawful and violators will be prosecuted in accordance with these laws.

Requests to the Publisher for permission or further information should be sent to

Books Published
America's Financial Apocalypse: How to Profit from the Next Great Depression . Condensed Ed. Copyright © 2007.
Cashing in on the Real Estate Bubble . Copyright © 2006.
America's Financial Apocalypse: How to Profit from the Next Great Depression . Copyright © 2006.
The Startup Company Bible for Entrepreneurs: The Complete Guide to Building Successful Companies and Raising Venture Capital . Copyright © 2004 and 2005.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Mike Stathis Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules