Markets let down by Washington as Lawmakers delay auto bailout for American Carmakers

For the second time a needed bailout that was, wasn't. Yesterday's market session traded higher by mid-day as Traders were looking for US lawmakers to outline a plan to bail out the American automotive industry. Instead they got grand-standing and lecturing from US senators bent on making automotive executives look foolish in the political spectrum.

A $25Billion package for the big 3 American automakers seems like small peanuts compared to the $700Billion package passed to bail out banks and mortgage lenders, however Ford (F), General Motors (GM) and Chrysler were forced to beg hat-in-hand at the feet of Washington's might.

It doesn't take a rocket scientist to see trends that had been developing in America. Big Trucks and SUVs selling furiously taking up all showroom space, and more importantly development time and dollars within American factories. All the while strong smaller Japanese and European models made their imprint within the buying habits of American consumers.

Then oil spiked higher and credit froze. The big 3 were unable to resell virtually any of their gigantic fleet of leased vehicles, mainly because even Americans were not buying Trucks with gas at $4/gallon. This led to substantial write-downs and quarterly losses, and a situation where the companies were burning through cash so quickly they are unable to sustain themselves any further. To complicate matters more, Union contracts that have been crippling the business slowly for years are now coming to the forefront showcasing just how much money is spent on pensions, insurance and benefits for American Autoworkers. Oh and then of course Americans went into full out Recession mode in October and stopped buying cars at all.

Chevrolet's answer to the problems, the Volt, coming in 2011, could be too little too late. Ford is trying to put "hybrid" on just about every model and seemingly can not find the wisdom to bring some of their more successful small European cars into the American market. All the while Toyota (TM) and Honda (HMC) continue to lead in fuel efficient vehicles while Germany's big 3 dominate mind-share in the luxury segment.

So Detroit went to Washington for help and got smacked around by lawmakers trying to look political as markets around them fell further with every word. The United States Auto Industry is broken, everyone knows it, Senators in a special session will not have uncovered the Lost Ark by saying so. The grand-standing under the guise of "protecting the tax-payer" is all well and good but wouldn't those tax payers be more concerned if their retirement packages, employee stock plans and investment accounts were worth half as much as they were last year?

Did these not people learn anything the first time around when the initial banking bailout failed to pass? Senators and Congress made a lot of speeches about concerned citizens calling worried about their tax dollars going to bailout Wall St. Then the market dropped 700 points in the span of a couple of hours and Joe Q. Public started calling not about his taxes but about his retirement account.

Now Lawmakers have every right to ask Detroit for a turn-around plan before they give them any handouts but this type of thing can not be all or nothing. Authorize an influx of $9Billion to keep the companies and all their workers solvent till the end of the year and then reconvene later to authorize another $16Billion contingent upon seeing evidence of new company direction in the face of a changing industry. And like everything political in America, of course the $25Billion in question had already been set aside for the Auto Industry to use for other means.

But Lawmakers did a lot of shouting and finger pointing but little else thus leading the S&P to an almost 50% decline year-to-date. Amonst the trillions in market losses already sustained by economic and recessionary pressures what's another $25Billion if it will instill some hope to the millions of workers employed by the industry, the markets and the US economy in general.

But then again gas prices fell below $2/gallon so maybe Trucks will sell again. Once this pesky recession subsides that is.

Disclosure: Author holds no position in any aforementioned companies

Is anything worth owning in the Auto Industry?

In short, with today's high Oil prices and report after report from the big automakers cutting production, the answer's a resounding No! There's simply nothing compelling out there valuation wise in the Automotive space.

Ford (F)? Virtually slashing it's popular Truck line in half with delays and production cuts, and the only car worth talking about, besides police departments contracts, is the Mustang which now has been stagnant for almost half a decade.

General Motors (GM)? $40Billion in the hole and counting... Not to mention probably the ugliest set of cars in America goes to Chevrolet. Truly incredibly uninspiring automotive design.

Toyota (TM)? Actually the only compelling value out there with a P/E of 9. However, whispers of US sales expectation management are seeping through the proverbial cracks, which will put some serious pressure on upcoming earnings reports. The company has the clout of being the "leader" in the Hybrid segment going for it but could the Prius possibly look any worse, and if the respectable Jeremy Clarkson of Top Gear is to be believed, in a race the Prius provided worse fuel economy than a BMW M3! (*Obviously the car was not run under normal conditions*)

Toyota at levels below $100 is one to put on the watch list, however times will continue to be rocky in the Automotive segment as a whole until Oil speculation subsides and consumers instill in themselves a renewed confidence to go driving again.

Of the companies traded in the US, the only one continuing to do reasonably well is Honda (HMC). Is it a big secret that it is up 4% Year to Date while others are off significantly? F (-20%) GM (-40%), DAI (-30%), TM (-10%).

Honda's secret sauce? Fuel efficient well engineered cars, that have very good engines, are impressively reliable and most importantly, don't make you loathe getting into them every single morning. It isn't hard to understand that successes like Accord and Civic, year after year show up on best lists and best seller lists. The Acura luxury line continues to produce winners as well, but a watchful eye on the headlines is a necessity in this sector.

With Toyota starting to whisper statements that US sales targets will be "tough to meet" it doesn't require multiple graduate degrees to surmise Honda may be in for some dry spells to come. While at this stage Honda is a Hold in this book, closer to $30/share is an attractive entry point for an innovative car company, that yet sees almost none of the corporate stumbling blocks faced by its US peers and has a big enough worldwide presence to funnel out good small cars all over Europe and Japan.

Disclosure: Author holds no position in the above mentioned companies.

Update: Thursday June 26, 2008. Statement to clarify Chevy as a division of GM

Earnings season continues, Markets head higher Thursday

As the earnings numbers continued to be reported, several bell-weather names were in focus Thursday. The markets shrugged off early selling by turning into "mid-day rally mode" before closing the day with between .6% and 1% gains for the major indices.

North of the border, the selling in commodities and industrials was somewhat offset by a rally in the banking sector but the TSX found itself lower by 3 quarters of a percentage point.

Starbucks (SBUX) was slashed after-hours Wednesday after coming out and lowering full year profit expectations, the company lost over 10% as a weakening US economy is plaguing sales of its gourmet coffees.

Amazon (AMZN) reported another strong quarter, with over 30% earnings growth, but the stock was lower by 4%, as expectations for growth going forward were highly over-valued. The company sits with a 35 Forward P/E for 2009 earnings, at 51 Forward P/E for 2008 and an almost 70 trailing P/E ratio. The company is poised to deliver significant growth still, but Investors needed to for the moment, pause the momentum.

Biggest news of the trading day however, was Ford's (F) shocking profitable quarter. Automotive sales were strong worldwide, and the turnaround plans for the automotive giant seem to be going ahead of schedule. Analysts were expecting another quarterly loss, and as such Ford shares rose almost 12% on the posted $100Million profit.

Disclosure: Author owns SBUX

GM Posts Surprise Sales Increase but the Better Auto Investment is in the Far East

Worries over consumer spending due to the shake up in the credit markets spilled over into the automotive segment as analyst estimates called for lower sales virtually across the board. The big US Automakers: Ford (F), DiamlerChrysler (DAI) and General Motors (GM) have been pressured by International producers Toyota (TM) and Honda (HMC) among others.

August numbers proved to be lower for most of the Automakers with only GM posting an increase that was seen higher due to rental car sales deals. GM posted a 6% sales increase but that included an unsustainable 24% increase in sales to rental companies. Ford posted a 14% decline while Toyota declined 3%. Chrysler, now separate from Daimler-Benz also suffered decreases. Can the auto industry provide decent returns in the long term? It's an industry that is now seen almost in the same light as the airlines and that's not a good look for the stocks of these companies. GM had its share of problems but recovered and Ford has its own share or problems and seen continued pressure as a lack of innovative vehicles are crossing the Detroit assembly lines.

Buyers are looking toward smaller, more fuel efficient vehicles due to the continued high price of gasoline and its Toyota, Honda and Nissan (NSANY) that benefit the most. In fact Honda and Nissan posted sales gains in the month. That's a promising sign as the overseas markers are capitalizing on not only American consumer trends but worldwide trends as well. The US automakers are struggling to find areas of growth and have shown that the innovative nature of American Car Design is all but dead. I personally can not remember the last American made vehicle that brought upon any kind of positive response except for the retro-styled Ford Mustang.

That's not to say that Toyota or Honda or Nissan make the prettiest cars either. The difference is though, that the luxury lines of these automakers are renowned for innovative breakthroughs and design promise. Honda's Acura line and Toyota's Lexus line are terrific positives for brand and design image and are one of the reasons that these auto makers deserve a slight market premium, in terms of a higher P/E ratio. Honda stands at 11, Toyota at 12 while GM sits at around 10 and Ford is trying to get back in the black after being plagued by losses.

To really turn the US automakers around a grass roots design reinvention has to take place and this is no easy task. The overseas players have the brand power (luxury lines), the incentives (cheaper more fuel economic cars), and the worldwide manufacturing to compete with and overtake their American counterparts. Toyota has some work to regain its highs close to $140/share but with its strategy well in place the sales growth should continue and barring an American miracle should emerge as the Car Maker of the world. Honda is a third the size of TM in terms of market cap and has room to grow its plant and model base.

The era of the great old American car maker is over for the time being as Japanese manufacturing strategy becomes more entrenched and the vehicles become more affordable and practical for the average consumer.