The auto bailout

ESPN's Tuesday Morning Quarterback Gregg Easterbrook has some great discussions on the economy and bailouts spliced into his football column. My favorite part is at the end of the column regarding the government's negotiations with the auto companies.

Based on how poorly Washington has negotiated with General Motors and Chrysler, here's what it might sound like if Nancy Pelosi was buying a car:

DEALER: Yes sirree, I can let you have this cherry-red baby for $19,999.99! Plus undercoating and dealer prep.

PELOSI: I'll pay $50,000.

DEALER: For a limited time only, I can throw in remote-controlled eight-way power cupholders, for another $999.99.

PELOSI: I'll buy them at $75,000.

DEALER: Do you want the extended warranty?

PELOSI: No. But I'll pay another $25,000 for it.

DEALER: Aren't you worried something will go wrong?

PELOSI: If it does, I'll just send the bill to the taxpayer.

DEALER: So you are willing to pay $150,000 for a $20,000 car? I'll have to go ask my manager! (Disappears into back, pretends to talk to manager, returns.) Lady, you drive a hard bargain. He says that for $31 billion, we will give you absolutely nothing at all.

PELOSI: Sold.

Its funny and cynical and probably close to the truth. Earlier in his column, Gregg mentions it would have been better for the government to buy cars from GM and Chrysler, rather than just give them the money outright. Besides helping Detroit immensely, this is the kind of out of the box thinking that we desperately need.

How does this relate to investing? Well, over the past month, we've been looking at auto companies and their suppliers as potential short term investments; buy them low, hope for good news to drive stock up temporarily, and then sell. Obviously risky, but potentially very profitable. However I can't really see any of these stocks rising in a manner worth the risk, unless the bailout (or any major event) truly does something to improve the long-term fundamentals of the company. I could be wrong, but right now I will be looking elsewhere for short-term profits.

Dried Supply

In an excellent article, Forbes.com probes the financial woes of the other half of the Detroit auto disaster--the suppliers.

To engineers living in Metro Detroit, names like TRW, Lear, Federal-Mogul are common. We all know people who work at these places and in some cases have worked or interned for them ourselves. These automotive parts suppliers are huge employers and even bigger supporters of local engineering colleges within universities such as Lawrence Tech, University of Michigan Dearborn, and Kettering.

It's good to see that the Obama administration understands the importance of keeping an eye on these suppliers--so that all of the efforts going towards keeping GM and Chrysler afloat don't have the rug pulled out from under them.

All local Detroit pride and empathy aside, Forbes illuminates an ugly group of shares that have been de-listed (Visteon), may be de-listed (American Axle), and have lost more than 98% of their stock price from their 52 week high (Arvin Meritor, Dana Holding, Hayes Lemmerz).

Johnson Controls piqued my interest with its 27% long term debt/total capital ratio (low for this group). A further look at their financials show that they actually posted a $1.63 earning per share in 2008--another rarity for this group--and they are a company with a long history of posting profits.

Can anyone see a diamond in the rough here that will survive all of the turmoil and emerge on the other side? If you can you might have a winner.