THE CAR BUSINESS AND CHEAP MONEY: “HOW MUCH YA GOTTA PUT DOWN? HOW MUCH YA GOT IN YOUR POCKET?”

12/19/13

Ford (F) took the proverbial dump yesterday, falling $1.05, or 6%, to $15.65, and, so far, the carnage continues today.  Most of the drop was attributed to the company’s warnings of problems in Europe and South America along with the weakening yen and the attendant fierce competition in the North American car business.   Ford has already cut back on production of its Focus and Fusion models, so there is doubtless something to the latter argument.   Some analysts piled on and talked of Ford’s “stale” product line, but the same people are currently falling all over themselves lauding GM’s “terrific” product line.  (See my 6/7/13 post, “I BETWHEN YOU BUY THIS CAR YOU GET FREE MAINTENANCE…LOOKS GOOD ON YOU, THOUGH” for an earlier counterargument.)  A Malibu or a Fusion?  A Cruze or a Focus?  While you might make the Ford stale, GM terrific when discussing the pickup truck market or the luxury car market, the former will soon be rectified with the new F-150, leaving the latter the only area in which one could make that argument with a straight face.  GM’s product line is fine, but it’s not terrific; Ford’s remains the better of the two, or at least is far from “stale.”  The lesson here is don’t assume that all Wall Street car analysts know anything about cars.   But I digress.

Who knows what makes a stock go up or down on any given day?   Certainly not the people who make a living telling us why a stock, or stocks, go up or down on any given day.  But since everyone seems to want to get in on this artificially lucrative fun, I may as well chime in, at least partially.

I have been saying for a long time, incorrectly, as it has turned out, unless yesterday is indicative of a trend (See, for example, my 5/23/13 post THE CAR SALES BUBBLE:  “JUST TELLME WHAT YOU WANT AND THEN SIGN THAT LINE AND I’LL HAVE IT BROUGHT DOWN TO YOU IN A HOUR’S TIME”), that the car stocks have gotten way ahead of themselves.  Why?  Because no industry, other than housing, is more dependent on cheap money than the automobile industry.  So the industry has naturally benefited from the force feeding of cheap money that yours truly calls Ben Bernanke’s War on the Elderly.   All this talk of “pent up demand” is largely bullroar; all that pent-up demand would remain pent up if money weren’t so cheap, given that the modern car, with reasonable maintenance, can give hundreds of thousands of miles of reliable and more than satisfactory service.

Two days ago, we received proof of my thesis:  Trans-Union reported that the average car loan currently shows a balance of $16,942, an all time high and only slightly less than I paid for my current car, a 2007 Honda Accord approaching 100,000 miles and still running like the proverbial top.  The average amount “financed” (the somehow respectable term for “borrowed”) on a new car is $26,719, obviously a heck of a lot more than I paid for my current terrific and running like new automobile.

Simply put, it’s cheap money that’s making the car business seem like such a money machine.  If the cheap money somehow gets cut off, the car business is going to head south and rapidly so, especially given the sales numbers put up in the last few years.

Of course, if we are to believe SuperBen and his disciples, and they are half as smart as everyone supposes them to be, maybe we can have cheap money, at least at the short end of the curve, forever, so we can drive cars we otherwise can’t afford in which we can drive our parents to the supermarket so they can buy the cat food Mr. Bernanke’s policies will make the staple of their diets.  The intergenerational transfers that have supposedly enriched our generation are now running in two directions, but, again, I digress.

CHRYSLER’S IPO: ARE WE SUPPOSED TO TAKE THIS SERIOUSLY?

9/24/13

Chrysler filed for an initial public offering (“IPO”) yesterday, but the whole exercise is something of a sham.   As loyal readers remember (See, for example, my 4/25/13 piece IMPORTED FROM DETROIT:  MARCHIONNE BETTER BE AS FAST AS ACHRYSLER 300 SRT8), Fiat and Chrysler CEO Sergio Marchionne is trying to buy for Fiat the 41.5% of Chrysler that it doesn’t own, which is currently is owned by a United Auto Worker (“UAW”) health care trust.  Then he plans to merge the two companies, giving Fiat access to Chrysler’s cash and fully integrating the two companies’ operations and financial statements.  Once that merger is completed, Mr. Marchionne would like to do an IPO of the new company.

The problem has been the price that Fiat would have to pay the health care trust for its 41.5% stake in Chrysler.   The trust wants $4.3 billion.  Fiat wants to pay less than half that amount.  The trust, trying to move things along, insisted on filing for the IPO, hoping to put some pressure on Chrysler and perhaps establishing a price for its stake in Chrysler.  The smart money is indicating that the IPO will be pulled when Fiat feels the heat, a price is established, or both, but, at any rate, before the IPO is actually consummated.

A few thoughts come to mind.

First, today’s (Tuesday, 9/24/13’s, page A1) Wall Street Journal reports that Mr. Marchionne is in an “awkward” position, having to go on a road show for the IPO to persuade investors to pay big bucks for Chrysler while he is trying to buy Chrysler for a lower, perhaps far lower, price.  But it is worse than that.  As I explained on 5/1/13 (CHRYSLER’S QUARTER:   HOW DO YOU SAY “POOR MOUTH” IN ITALIAN?), even if the IPO is not done, Mr. Marchionne must first argue to the health care trust that its shares are cheap and then, when the Chrysler and Fiat are merged and he prepares to IPO the new company, he must then persuade the public that the new company is worth far more, or at least more, than the price Fiat paid for Chrysler would indicate.   This is possible, but it certainly looks like Mr. Marchionne will have to go on the road and tell investors that he really hornswoggled the UAW.   This is not great labor relations and, in any event, would strain his credibility.  

Further, as I said back on 4/25, Mr. Marchionne better move quickly.   Much of the “pent up demand” we are seeing for cars is only pent up because money is so cheap.   If and when the Fed decides that bizarro world is not such a great place in which to live and interest rates return to reasonably “normal” levels, whatever that is, the car market is in for trouble.   Perhaps, however, Mr. Marchionne doesn’t have to move all that quickly; he only has to move more swiftly than the Fed.  If last week is any indication, that shouldn’t be difficult.

Second, how much genuine effort are money managers going to expend on this IPO if they believe it is all a dance designed to quicken the negotiations between Fiat and the UAW health care trust?  I’ve been out of the professional money management business for a long time, and perhaps I am so hopelessly old school (I hate using such trite expressions as “old school,” but this might be one situation when the trite expression sounds better than the alternative, “old fashioned.”  But I digress.) that my opinions matter very little.  But I wouldn’t be expending much time or expensive talent looking at an IPO that will never come.  If I were still in the business and had any authority, I wouldn’t waste my shareholders’ money doing the bidding of Mr. Marchionne and/or the UAW trust.

If the money managers’ hearts are not in this, how much real price determination will be done?

Third, how does Mr. Marchionne legitimately argue that the UAW trust’s stake in Chrysler is worth only a couple billion dollars?   Perhaps, again, I am a troglodyte, hopelessly out of touch with modern finance, but let’s look at simple multiples of earnings, a quaint old concept that maybe they don’t teach at Harvard any more.

Chrysler earned $1.6 billion in the twelve months ending 6/30/13.   Ford’s multiple of lagging earnings is about 11 times.  GM’s multiple of lagging earnings is about 13.  Let’s agree, or at least assume for these purposes, that Chrysler is neither Ford nor GM and assign it a multiple of, say, 8 times.  That would make Chrysler worth $12.8 billion.  The UAW owns 41.5% of Chrysler.  That would make its stake worth $5.3 billion. 

I must be missing something because the UAW is only claiming its stake is worth $4.3 billion and the highly paid car analysts on Wall Street value the company at $10 to $11 billion.  But even assuming those analysts are right, the UAW has it just about right when it claims its stake is worth $4.3 billion.  No coincidence that, but, again, I digress.  So how can Mr. Marchionne say the UAW stake, and by extension Chrysler, is worth only half that much?   This is, to be sure, a negotiating tactic on Mr. Marchionne’s part, but how can he keep a straight face when making this argument?

Fourth, perhaps Mr. Marchionne can make such an argument while resisting the temptation to burst into laughter because he knows what yours truly and other car enthusiasts know…Chrysler’s product line is, er, woefully lacking and Chrysler therefore will need to put a LOT of money into product development.   The Chrysler Grand Cherokee is a big hit.  The new Dodge Durango is quite a vehicle as well.   The Ram pickup line is pretty good…especially for a third place finisher in a three truck competition.  The good news ends there.  The Dodge Dart is something of a disappointment and is not up to the competition…the Honda Civic, Ford Focus, Toyota Corolla, and Mazda 3.  As much as yours truly salivates over the Chrysler 300, it and its cousin, the Dodge Charger, are getting long in the tooth and are lagging the competition.   Finally, Chrysler needs a lot of help in the mid-sized car segment…the Chrysler 200 and the Dodge Avenger (See THE DODGE AVENGER:   CHEAP AND WORTH EVERY PENNY, 6/4/13) are pathetic and sell well only because they are being virtually given away by Chrysler dealers.   No one mentions these cars in the same breath as the Honda Accord, Toyota Camry, Ford Fusion, Nissan Altima, or even the Chevy Malibu.

This “IPO” will be entertaining to watch…but not as entertaining as the dance Mr. Marchionne will have to do to buy Chrysler cheap and then sell it rich...before the car market takes a dive.

IF YOU WANT TO GET PEOPLE CHARGED UP, WRITE ABOUT TESLA (TSLA)

5/30/13

Writing about and/or commenting on Tesla (TSLA) is a lot like writing or commenting on Apple (AAPL).   Neither of these appears to be a stock; both instead appear to be religions.   People have decided they love one (or maybe both) of the company’s products, and therefore the stock, and no one can talk them out of that position.   Not surprisingly, then, my 5/23/13 post TESLA (TSLA):  THE GREENIES ARE CHARGED UP, BUT… in which I questioned (Some who aren’t used to reading my material said “bashed,” but I thought I was quite balanced in my assessment.) the Tesla Model S and expressed my misgivings about the stock at a much lower price ($92.71) than that at which it closed today taught me that if you want to draw attention to your writing, write about TSLA. 

The big announcement today from Tesla Chairman Elon Musk, the announcement on which people had been anticipating for weeks, was that Tesla will triple the number of supercharging stations by the end of next month.  Within six months, Tesla will have covered most of the country’s major metro areas with superchargers and will enable people to cross the country diagonally from New York to LA without fear of losing power…and all, presumably, on Tesla.  By a year from now, the whole country should be covered…no more range anxiety.   Also, the charging network will have some kind of solar backup so Tesla owners will be able to charge their cars even if the electrical grid goes down.

A supercharger, by the way, enables drivers to, within twenty minutes, charge their cars to the point at which they can be driven three hours.   Twenty minutes is longer than it takes to fill a conventional gasoline tank (about four times longer), and if I fill my tank in five minutes, I can drive five or six hours before having to stop to refill.  But Tesla’s getting close to being practical with their supercharging systems…and that’s impressive.  And, lest I draw even more brickbats than I anticipate, I will also add (again) that most of the buff books, especially Motor Trend and Automobile, and Consumer Reports LOVE the Tesla Model S.  Yours truly has not driven it; despite my love of test driving (See my already seminal 5/20/13 post, I TEST DROVE A KIA TODAY…), I cannot in good conscience go into one of the few showrooms in the area and test drive a car I could not possibly afford.

The first reaction of the suitably skeptical and cynical investor (or car buyer) should be to question whether Tesla can pull off such a feat.  A nationwide system of superchargers that can be conveniently accessed would be a titanic accomplishment.   And even if it can be achieved, 20 minutes for three hours of driving, while impressive, still adds a lot of time to long trips and renders the Model S not the vehicle of choice for anything but driving around town.  At $70,000 (Okay, $62,500 after tax credits.), one would like to not have to buy a second car for long trips. 

A few more questions.

According to reports, the juice that Tesla owners get from the superchargers will be free, provided by Tesla.  That can’t be right, can it?   Why not charge the drivers for the relatively cheap electricity?  It would seem that people who are rich, and/or silly, enough to shell out $70,000 for a car should have no problem paying for the electricity necessary to power their status symbols.   But if Tesla is indeed picking up the charge for the charge, if you will, how much will that cost Tesla?  A wise guy answer would be something like “at the volumes TSLA is looking to sell, not much,” but it is something to think about.

And, on a broader scale, if I am wrong and this electric car fad really catches on with the Tesla, the Nissan Leaf, and various other pure electrics capturing the American imagination, how will our electrical grid handle it?   One could answer that if we reach that point, Tesla will have been a resounding success, but not only do stocks discount the future but also the country will have to do something about increasing electrical supply, in a relative hurry, in a nuclearphobic world.  No mean task.

Even if we assume that TSLA can fulfill its promise of covering the country with superchargers by a year from now, which is quite a brave assumption even for someone as widely and justifiably admired as Elon Musk, questions remain.  And it still looks like TSLA is a company selling cars that use a transitional technology, cars that only a few people want and even fewer can afford.   And, yes, I realize that TSLA is a luxury car maker (Its lower priced models, which still won’t be cheap, aren’t supposed to come out until 2017 (See today’s announcement.) and, right now, at least, TSLA doesn’t have the money to develop and produce them (See my aforementioned 5/23/13 post.)) and not everyone can afford luxury cars.  But TSLA is a luxury car producer, indeed, a boutique luxury car producer, aiming to sell 20,000 cars this year in a 15 million car market, with a market capitalization of $12 BILLION!   By contrast, other car companies’ market caps are as follows:

Ford                             $61 billion

GM                              $48 billion

Daimler                        $67 billion

Toyota                         $191 billion

Honda                          $70 billion

Nissan                          $47 billion

Volkswagen                 $76 billion

The comparisons are not perfect, but they are a lot more apt than the comparison the bulls are throwing around to AAPL’s $426 billion market capitalization.   Does it make sense that a company that might sell 20,000 cars this year is trading at ¼ of the value of GM, which sells ten times as many cars, in the U.S. alone, in a month?   Again, this is not the best metric around, but just think logically here.

Is this the time to sell TSLA?   Though I’ve taken a small put position, just to focus my thinking, I don’t know.   And to prove that I don’t know, I bought my July puts on May 21 when the stock was trading at $88.24; it’s now trading at $104.95 and I am down well over half on my position.  The stock has doubled in the last month and has tripled in the last six months.  Somethin’s gotta give.  But, as I’ve said before, markets, and stocks, can stay rich a long, long time.   See my 5/9/13 post, OF 10 YEAR TREASURIES AND STEAMROLLERS:  RICH MARKETS CAN, AND DO, STAY RICH.  And perhaps stepping in front of this freight train is not advisable; note how TSLA has defied, so far, the old “buy on rumor, sell on fact” adage in the wake of today’s supercharger announcement.

As for yours truly, I’m going to wait around a little while before I dump my puts.   Even trading, like investing, should be done with patience, understanding the relative nature of that term.   And, as a further warning, I am a far better investor than I am a trader; accordingly, I have so little in this trade it won’t make much difference one way or the other.

TSLA:              $104.95

S&P 500:         1,654.41

Dow                 15,324.53

GM:                 $34.64

F:                     $15.90

THE CAR SALES BUBBLE: “JUST TELL ME WHAT YOU WANT AND THEN SIGN THAT LINE AND I’LL HAVE IT BROUGHT DOWN TO YOU IN A HOUR’S TIME”

5/23/13

I’ve said it before (CAR LOANS:   TAKE MY MONEY…PLEASE!,  5/6/13 and  IMPORTED FROM DETROIT:   MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8, 4/25/13), this car market scares me, even as we approach a 15 mm unit year for U.S. light vehicle sales.

What I have long referred to as Ben Bernanke’s War on the Elderly, but what most people call QE III or “unconventional” monetary loosening, has created plenty of bubbles, and not all of those bubbles are in financial assets like treasuries, corporate bonds, and dividend paying stocks.   One of the most dangerous, though not quite as salient, bubbles is car sales; nothing moves cars like cheap financing.   With the economy still just dragging along, and the prices of cars continuing to go up, especially as incentives are being reduced, affordability is only being sustained, and enhanced, through cheap credit.  It is this artificial affordability that is driving car sales.  All this talk of pent-up demand has some justification; the fleet is indeed old.   But, as I said in my aforementioned 4/25/13 post, just about all of that pent-up demand would stay pent-up if money weren’t so cheap; cars last, and run like new, a long, long time nowadays; yours truly knows this from personal experience.  And while all the latest geegaws are nifty, impressive, and nearly awe-inspiring (See my already seminal 5/20/13 piece, I TEST DROVE A KIA TODAY…), people can, and would, do without them if cheap money didn’t make them even more tantalizing.

With the “domestic” car companies ramping up production by canceling the longstanding Detroit tradition of summer shut-downs, it’s hard to be sanguine about the car business.  At some point, credit has to get more expensive and/or less available.  Even without Fed action, long rates are up; the ten year treasury is up 35 basis points (“bps”) since the end of last month and the five year, a more relevant benchmark for car loans, is up 22 bps.  Without all this cheap credit floating around, what look like tight inventories might suddenly become fulsome as people decide that what was a necessity at one monthly payment is a luxury at an even slightly higher payment.

This post concerns the state of an industry more than the relative cheapness or richness of the “domestic” car company stocks; I don’t follow the car company stocks like I used to, though I am considering starting to do so again quickly.   That having been said, most of the experts are telling us that Ford (F) and General Motors (GM), despite their rather stunning increases of the last few months, are still very cheap with forward price/earnings ratios (“P/E”s) of about 10 times while prospects in the black hole of Europe improve, Chinese sales remain strong, and there is so much upside in the United States.   While 10 times forward earnings certainly look attractive, especially relative to an S&P 500 P/E roughly 50% higher, I might want to challenge at least two, and probably all, of the assumptions behind the earnings projections that form the denominator of that P/E.  

As long as Ben Bernanke’s punch bowl, composed largely of the sweat and the blood of those (especially the elderly) who’ve been prudent, or, in the Bernanke bizarro world, foolish, enough to save, remains full, car sales in the United States should remain strong, or at least respectable.   But as soon as Obsequious Ben takes away the punch bowl, or the markets get wise to him, car sales have nowhere to go but down.

While I’ll leave, for now, ruminations on the attractiveness of GM and F to the self-proclaimed experts, I’m not enthusiastic about investing in an industry that is flying high on the economic and financial equivalent of crack cocaine.  You can see how this argument could easily be extended to the entire stock market, but, again, calling markets is, as I have said so many times in the past, nearly impossible.  

GM                  $32.84

F                      $14.86

S&P 500:         1,652

Dow:                15,308

IMPORTED FROM DETROIT: MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8

4/25/13

This morning’s (i.e., Thursday, 4/25/13, page B1) Wall Street Journal reports that Fiat is considering buying from the UAW Retiree Health Care Trust (“Trust”) the 41.5% of Chrysler Fiat doesn’t already own, effectively merging the companies.

The idea seems to make sense…use Fiat’s cash horde to buy out the Trust, merge the companies, do an IPO of the new company and list it in the States (presumably on the New York Stock Exchange) and get a higher valuation as a U.S. car company than Fiat does as a European car company. 

There is a problem here, though.   Fiat’s $14 billion cash horde would be run down considerably by buying the company; Fiat would be left with about $10 to $12 billion after buying out the trust.  That sounds like a lot of money, but designing, manufacturing, and marketing cars is a capital and cash intensive exercise.   The bet is that money raised in the IPO, along with being able to borrow more cheaply as a presumably more financially sound merged company, would allow Fiat to replenish its cash horde.   To win this gamble, however, Fiat would have to show especially adroit market timing.

U.S. car companies, and their stocks, are doing quite well, thank you, of late.   European car companies and their stocks are not doing nearly as well, to say the least.   And to the extent the Big Two publicly traded U.S. car companies are having problems, those problems emerge primarily from Europe, for obvious reasons.   Given that GM and F are doing well, it would seem at this juncture that Fiat would have to pay the Trust top dollar for its stake in Chrysler.   Valuations on the stake range from $1.75 billion to $4.27 billion (How’s that for a spread?) and presumably will be settled in court, but one has to think that the final price tag for the stake, should this deal go through, will be much closer to the top of that range than to the bottom.

That would be fine for Fiat since it plans to turn around and sell some shares in the IPO and establish a higher valuation.   But the new company might have to move very quickly to effectively immunize itself buy both buying and selling at high prices.  

While I’m not the expert on the car companies and their stocks that I used to be, I get the distinct impression that both profits and stock prices are being artificially inflated by what I like to call Ben Bernanke’s war on the elderly, i.e., the artificially low interest rates designed to encourage spending, borrowing, and taking financial risk to solve a problem born of too much spending, borrowing, and financial risk.   (See, inter alia, my 1/29/13 post, BEN BERNANKE VS. THE DOLLAR AND THE ELDERLY.)  What industry, other than housing, benefits from lower interest rates more than the car business?   All this talk of pent-up demand and the age of the fleet has some surface validity, but you can be sure that if money were not so cheap and readily available for vehicle financing, and payments thus so low, people would be able to satisfactorily, and perhaps happily, drive their old cars for many more miles, given how well cars are built nowadays.  In other words, if financing cars were not so cheap and readily available, so called pent-up demand would stay pent-up.

So yours truly suspects that, once (if ever?) the low interest rate punch bowl is taken away, car sales will plummet.   And such sales may fall even if we are stuck in a Twilight Zone of cheap money more or less forever; even artificially juiced demand gets satisfied eventually and, the way cars have been selling of late, that day may come sooner than later.   So if the very talented and clever Fiat CEO Sergio Marchionne is to pull off this financial maneuver, he better move quickly.   He doesn’t want to pay a high price to the Trust for Chrysler and then be left holding the hot potato when car company valuations deflate; he has to buy at a high price and nearly immediately sell at a high price and/or borrow based on the higher valuations that result from an artificially inflated price.    

Also note that Chrysler may be especially susceptible to artificial inflation and to the resultant corrective deflation in car company prices because of the relative weaknesses in its product line.   See my 1/31/13 piece, CHRYSLER’S PROBLEM:  IT’S (MOST OF) THE PRODUCT, STUPID!   This situation is like anything else; a rising tide lifts all boats, but when the tide goes out, the leaky boats sink first.

I sincerely hope that Mr. Marchionne can pull this one off; Chrysler is one of the bedrocks of American industry, has a substantial presence in my home state of Illinois, and, as I recounted in my 1/31 piece, I may be a Chrysler owner again some day relatively soon.   But if this deal is done, Mr. Marchionne will be going in at a rich price and must move quickly to get out, or established, at a rich price.