Sunday, May 10, 2009
So here is the next handout to the UAW. This time it is masquerading as a "Cash for Clunkers" program.
Here is how it works. People who bought vehicles with half-way decent gas mileage give their tax dollars to people who did not buy cars with good mpg who then in turn give them to the auto industry to buy vehicles with slightly better gas mileage.
This is not anything new: you are already paying for other people's housing via Fannie "we need another 19 billion" Mae and Freddie Mac, the FHA, the HUD, all the implicit and explicit taxpayer guarantees, and who knows what else. Just imagine doing away with all of them. Should not be hard to do. But I digress.
The gist of the program is:
Existing car under 22 mpg = $3,500 voucher for 4 mpg+ improvement (laughable) and $4,500 for 10 mpg+ improvement
Light-duty trucks and SUVs under 18 mpg = $3,500 for 2!!!!! mpg + improvement and $4,500 for 5 mpg improvement.
Large-duty trucks under 15 mpg = same for 1 mpg and 2 mpg
Work truck (over 8,000 punds) = $3,500 for 2002 and older; no mileage improvement
Lets think about this for a second...second...by now you should be saying "this is absurd!"
It is. First off, you are saving a lot of energy and finite resources by not buying a new car. It is as simple as that. Newer models can easily run to 200k miles without major problems.
Second, the required improvements are laughably low. But there is a reason for this.
Finally, there is more than meets the eye. The line-ups of the UAW-owned manufacturers have been, and still are, heavily tilted towards trucks, SUVs and larger trucks; they also dominate the heavy truck segment (think F-250, F-350). By placing laughably lower improvement requirements on the mpg improvement, Congress is in fact handing out this money to the UAW-owned manufacturers. This is even more so clear when you ask yourself how many Honda and Toyota cars get 22 mpg or under. Add to that taxpayer-based financing via GMAC and Chrysler Financial, and heavy loyalty incentives, and you get the picture.
This is a scheme designed to ge the core GM/Ford/Chrysler owners to roll over their older SUVs and trucks into the new models with slightly better mileage.
America, thank you for investing in Chrysler, again.
HT to treehugger.com for the pic
Update: I decided to use the 2009 model year as a proxy for the auto park mpg distribution. So I went to Yahoo Car Finder just to see how many 2009 year mass-market model cars would be eligible for these vouchers. According to the Finder, there are 806 vehicle models available. I define mass-market by MSRP under $25k. So I searched for sedan, price under $25k. There are a grand total of 8 models available. This is under 1% of the vehicles listed. If you increase the max price to $35k, you get 27 models. This is under 3.5%. 29 models if expanded to coupe/hatchback/sedan/wagon.
This proxy supports my view that this program is designed simply to sell new SUVs and trucks, and NOT designed for a real average mpg improvement. If they really wanted to improve average gas mileage, they should have just raised gas taxes. As simple as that.
There are about 240 mm passenger vehicles in the US. This program is supposed to last one year, and support the purchase of 1 mm vehicles. So the taxpayer is funding $4 bn to change less than 0.5% of the auto park to what would probably be an average improvement of 3 mpg for that 0.5%. And the replaced vehicles stay around in the market.
Another great job by Congress.
Late update: so the program required that the cars be junked (hm, if we break all windows and replace them, are we better off?) and the big winner is... Toyota Corolla. Made in Canada or Japan. Great work, folks. And Toyota is cutting back while GM is ramping up production. Someone will be very wrong, and my bet is not on Toyota.
Thursday, May 7, 2009
Now that Chrysler is safely in the hands of the workers (GM creditors, did you see that?) and the rule of law cancelled till further notice, I think it is time to move on and hope that Ronnie Gettelfinger has a vision for its glorious future. But I should note some details that stick out in my mind.
Let's start with Chrysler's soon-to-depart CEO, Mr. Nardelli. As you might recall, he was in the running to replace Jack Welch at GE, along with Immelt and McNerney. The cherubic Immelt won, so McNerney went on to run 3M and now Boeing. Nardelli rolled down to Atlanta to run, and almost ruin, Home Depot. For the duration of his tenure, HD's return was negative vs. LOW, which returned over 200%. I'd classify this as EPIC FAIL but HD's board did not think so, and Nardelli walked with a $200 mm package: a great example of value transference. I do not blame him: it was the board's fault for hiring him, for letting him ruin the company and for agreeing to such a comp deal. There is plenty written about Nardelli's management style and failures at HD. I am sure GE, 3M and Boeing are feeling lucky.
Then he lands at Chrysler after the Cerberus buyout. See, there was a time when buyouts happened only with companies that had a good visibility on EBITDA and required little cap ex. But in the era of easy money and "everyone is doing it," many shops strayed away from that: there were simply no good deals left at one point. Part to pocket fees, and part not to look lame in front of the L.P.'s, the funds started doing dumber deals. Chrysler- the automotive operation- already ended up as one of the dumber deals. Nardelli proceeds to run this place into the ground as well, this time no comp figures are available.
What bothers me about this guy is this: after the first (of the recent) Chrysler bailouts, he takes out full-page advertisements in major papers to say "Thank You America for Investing in Chrysler". One, I never wanted to invest in your [adjective] company so please do not rub it in, and, two, could you not find a better use for the bailout money than to take full-page ads rubbing it in? Just another show of poor discretion from the former marine.
The final twist of the knife (final as of now) came today, when it became clear that the US taxpayer will NOT recover ANY of the $8 bn given to this trainwreck thus far. This "investment" was a gift from the taxpayer to the constituents in the Chrysler bankcrupcy case. Thanks, guys. And our elected representatives... cheer on. Oh, yeah, and we will support your gas-guzzling product line by keeping gasoline taxes as low as possible.
Back to Cerberus. A case of why one should be careful with the written word: in January 2008, in his letter, the "secretive"- back then- Stephen Feinberg wrote "We believe we bought (Chrysler) very cheaply, and we do not need to be heroes to earn a good return on the investment." Fast forward to May 2009, and thanks for playing. It should be noted that Cerberus is not quite done yet, so there might be some recovery. I think they still have Chrysler Financial, which I am sure has taxpayer backing. They also separately own the Chrysler HQ and collect rent from there, so what appears to be a total loss may end up being not so bad in a few years. Cerberus are not stupid, as also seen with the United Rentals situation, if you remember that one.
To summarize, there is no reason why Chrysler should exist. It is a sub-scale manufacturer with a sub-par vehicle line-up with a sub-par geographic foot print. If it were not for the taxpayers, the company would have been gone in 1980, and the US would have been a better place. The US still has a competitive successful autoindustry, it just does not happen to be in Michigan and it does not happen to be unionized. Think swing states vs. non-swing states. No one rushed to save the shoe factories in Maine or the furniture factories in SC. The taxpayers, and the future taxpayers, are feeding the dinsaurs when we should be feeding the mammals. The mammals, by the way, will likely come from abroad as the US descends into a banana republic mode (see my earlier posts).
P.S. Sunday, May 10th. Now Chrysler is apparently walking away from Lemon Laws. Ah, tha gratitude. Thanks to the same site for the pic above.
Tuesday, May 5, 2009
So we've had quite a rally recently. There are two points that I think are very relevant. One is insider selling vs. insider buying recently.
May 1-4 Jeff Bezon Chairman, CEO and President of AMZN: sold $247+mm of AMZN; surely it was all estate planning
Apr 28-30: David Novak Chairman, CEO and President of Yum Brands (KFC/PH/TB): $82+mm; surely he still eats there every day
Apr 30: John Doerr (top VC) Director GOOG: $30 mm; surely he still uses it for search
Apr 27-28: Steven Rales Chairman Danaher Corp: $58 mm
Apr 27-May 4: Joe Ricketts Director TD AMeritrade: $49 mm; surely still using their penny counting machines
Apr 29-30: Bill Gates, whatever he is now at MSFT: $22 mm; surely still uses internet explorer
Apr 23: Tom Ward Chairman, CEO and President of SandRidge Energy: $22 mm
Apr 29: Wade F.B. Thompson, CEO Thor Industries: $11 mm
April 17-29: Robert Fisher (the founder I think) Director Gap Inc: $29 mm; surely still has a closetful of khakis
Top Buyers (ex- one possibly M&A related transaction):
1. Director of Cullen/Frost Bankers Inc.: $2.2 mm
2. Chairman of First Cash Financial: $0.807 mm
3. CFO/VP Finance/Admin Cavium Networks: $0.640 mm
A sucker rally, just looking at the relative size/volume, and more importantly, both the personal and the corporate brands of the sellers. If there ever were the perfect time to avoid asymmetric information transactions, now might be it. If Bezos is selling, should you be buying? Do you know AMZN better than he does? Thought so.
The second point is a view on the quality of the rally. This summarizes a lot of stocks and how they have fared since early March. My attempts to figure out the logic of the run are in parenthesis. There are some legit reasons for those (overall market correlation, index inclusion, credit agreement renegotiation, "less bad" results) but as a whole, I think it is a low quality rally.
Chiquita Brands (Obama is mandating bananas for every UAW lunch bucket) 52-week low $4.32, now + 131%
Bare Escentuals (people are now stocking up on make-up) low: 2.45, now +287%; Ulta +115%
Helen of Troy (people are now stocking up on curling irons) low: 8.55, now +86%
RC2 Corp (people are now stocking up on toys) low: 3.22, now +252%
Gildan (people are now stocking up on t-shirts) low: 5.66, now +98%
Hanes Brands (people are now stocking up on underwear) low 5.14, now +237%
Caretrs (OshKosh brand is now hot again, 10 years later) low 11.94, now +95%
Philips Van Heusen (people are now stocking up on dress shirts): now +122%
True Religion (more believers now): now +125%
Lululemon (Yoga studios enrollments through the roof, I am sure): now +245%
Liz Claiborne (because apparel stores SSS second derivative is less bad): now +332%
American Apparel (every legal dep't nightmare)" now +392%
Coach (bagging it): now +123%
Sketchers: now +121%
Iconix Brands: now an iconic +204%
Steve Madden: now a callus-free +126%
Crox, because everything eventually comes back in fashion: +311%
Ethan Allen (home interior retail is back in vogue because foreclosure sales are up): +93%
Sealy, because after the market fall, people have been soiling their mattresses at night, so they need replacements: + a bedwetting 947%
Movado Group: +107% based on today's high; hoards of tourists are crowding Canal Street again
Nautilus, because fit people are more likely to get a job: +124%
Central Garden and Pet: +341%. No word if the fertilizer was natural or artificial.
Dillards, a bedrock of proper governance: +237%
Retail Ventures (this is DSW, because people have been wearing out their shoes looking for work: +233%
Abercrombie: +100%, The Buckle +183%, JCrew +187%, StageStores +250%, Jos A Bank +170%, Ann Taylor +222%, Zumiez +156%; Hot topic +165%
Office Depot + 375% Office Max + 334% because small business is roaring back
Carmax + 124% because car sales are primed to jump, we're well below autopark replacement rates, and Obama will cut us a good deal on a 12 mpg Dodge truck
Compucredit +119% because subprime borrowing is hotter than ever
Publicly-traded pyramid schemes: Prepaid Legal +47%, Usana +42%, Herbalife +89%. Now everyone gets to be a sphynx.
Royal Caribbean +186%, Carnival +99%: because cruise vacations are hot; Vail Resorts +99%, Cedar Fair +91% because ALL vacations are hot, Orbitz: +101%, so vacations really must be hot
Restaurants are also full with people so they have had to raise prices across the board to deal with the crowds stampeding through the doors: Cheesacake factory +258%, Cracker Barrel +206%, Buffalo Wild Wings +175%, Dominos +256%, Cal Pizza Kitchen 195%, Dennys 151%, Steakn Shake +302%, Dine Equity (+557%, not a typo, this is IHOP and Applebees!), Einstein Bagel +347%, Krispy Kreme +300+%, Ruby Tuesday +839% (again not a typo), Carrols +351%, CHUX +385%
McCormicks +381%, Ruths Chris +421%, Mortons +215%=== steak dinners on expense accounts are baaaack, with bigger and jucier slabs of beef and a more exclusive wine cellar collection than ever; even the lowly side, the down-home creamed spinach is now 50% saffron by weight; reseravations 30 days in advance everywhere.
So, there you have it. When is it going to end? Don't know. There may not be a new nominal bottom if inflation expectations keep rising.
Monday, May 4, 2009
In part: "How is private credit supposed to “start flowing again” if the United States of America morphs into a caudillo-run kleptocracy whose explicit policy is to “empower the workers,” chasing ever higher poll numbers by demonizing the very people whose job it is to provide credit?
The fate of Chrysler and its workers pale in comparison to the wrecking ball that would be taken to economic order if bankruptcy judge Arthur Gonzalez approves the administration’s plan to give Chrysler’s secured creditors the shaft. And what prize will we-the-people get in return? A doomed third-rate car company majority owned by its militant union run by Italian management building congressionally designed “green” cars no one wants to buy financed by taxpayers into perpetuity because no private investor in their right mind will touch the company with a ten foot pole. Is this supposed to be economic policy or comic opera?
How many more billions do you think will be flushed down this rat hole before the fat lady is allowed to sing?"
Friday, May 1, 2009
"The U.S. government's restructuring plan for Chrysler LLC is sounding alarm bells for those in the business of lending money who worry that the plan could subvert decades of standing legal precedent and investing principles.
Banks, hedge funds and other investors that hold $6.9 billion in secured loans are being asked to release their contractual claims over Chrysler's assets in exchange for a fraction of what they are owed. Many lenders see that as a raw deal, because in the bankruptcy code's priority scheme, secured creditors are supposed to get paid before unsecured creditors such as employees."
What is truly disturbing is that we have a president (Harvard Law, mind you) who shows an absolute disregard for contract law. He either does not understand or, more evil, ignores the simple legal fact that senior lenders get first dibs in a BK case because they paid for it by accepting a lower rate of return on their capital!!!
This has been a well-established contractual practice for many, many years. Now his rhetoric might work for his core electorate in the Cambrini Green or for some union photo-op in Flint, MI, but, boy, would I be scared if I were deploying capital, or if I were saving for retirement.