Wednesday, February 18, 2009

GM and Chrysler: No Light at the End of the Tunnel/ Treasury Prices/ DE, GT/Obama's Foreclosure Plan

The bailout being requested by Chrysler and General Motors is close to be open ended request for government money. I know that both companies have a price tag on what they want from the government but it will end up costing more just like everything else.  GM needs another 2 billion in March and 2.6 billion in April on top of the 13.4 billion just given to it.   Yahoo! Finance  Before you know it, the government will be assuming liability for at least part of GM's 47 billion price tag for retiree health care.  GM said that it might seek an additional 16 billion if conditions worsen. Once we start down this path, and 13.4 billion is more than just a start, the commitment will end up being a great deal more and lasting for much longer than currently anticipated. Included in the 16 billion request, GM requested a 7.5 billion dollar line of credit from the government, noting that it had a 4.5 billion dollar revolving line of credit due in 2011 from the banks.  GM apparently does expect the banks to renew it   So, I would anticipate that the government will end up paying off the line of credit to the banks under this GM request.   GM claims that it will end up costing the government more in the event of a bankruptcy.  GM says it might need as much as 100 billion in government financing to go through bankruptcy. Chrysler is even more hopeless than GM.   GM predicts that it will start to pay the loans back in 2012 and to pay them off by 2017.  MarketWatch

If no debtor in possession loans are made or guaranteed by the government, then I would expect a Chapter 11 bankruptcy filing to turn into a Chapter 7 liquidation since no bank is going to lend the auto companies any more money.  I suspect that millions of Americans are going to be furious with any additional money thrown down this rat hole including many independents that voted Democratic in the last election.  This auto bailout is going to be one nasty tar baby for the Democratic party but W did the republicans a favor by kicking the can down the road.  While I am certainly not pleased about our current path, with the moniker "bailout nation" richly deserved, I would at least say, that from my perspective, GM and the UAW are receiving less Chinese money than Citigroup and AIG who I view as more undeserving.  So it is all relative now, relative in how one views the degree of undesirability.  

I really did not understand the flight to U.S. treasuries yesterday.  It is almost like some fear reflex action built deep into the subconscious of many investors.  You run from the bogeyman to the safety of the U.S. dollar and treasuries because that is where you always run and hide. Maybe that made sense for many decades after WWII.  However, the fiscal situation of the U.S. is without a doubt becoming significantly worse.  The amount of new debt that will have to be issued to fund the deficit will be truly staggering.   The U.S. deficit was projected to be at least 1 trillion dollars for the fiscal year ending in September even before the passage of the stimulus bill.  While I recognize that institutions and foreign governments may continue to fund our insatiable desire to consume other people's money, I simply find it difficult to believe that they would be stupid enough to do it at 2.6% for 10 year paper.  The budget deficit,  moreover,  is likely to be worse than projected due simply to a significant decline in tax revenues caused by a deepening recession. And, to make matters worse, with an increase in interest rates that will ultimately have to paid to attract a trillion here and a trillion there, the increased payments due solely to higher interest rates will have to financed with more government borrowing, making matters even more dicey.  I have discussed these issues in prior posts and my personal views on the subject explain why I look for opportunities to short the treasuries as a hedge to my corporate bond holdings. 

For those with good credit and an existing mortgage, refinancing to obtain a lower interest payment without increasing the debt balance would make sense for a lot of people, as evidenced by the data showing a 45.7% increase in mortgage applications.    MarketWatch   One way to repair a balance sheet is simply to lower the debt service obligation.  This option is not available to the millions of homeowners whose current mortgage exceeds the value of their homes.   I personally have no interest in taking on any debt.  Construction of new homes and apartments dropped a worse than expected 16.8% last month. Yahoo! Finance

I did mail yesterday another form initiating a partial Roth conversion which will probably be finalized by Friday. 

Deere (DE) missed estimates by 15 cents with earnings falling 45% and it cut its outlook for the next fiscal year.  MarketWatch  At some point, the stock will fall enough that I may develop an interest, provided of course I am under no self imposed restriction prohibiting buying any common stock as I am now.  But,  DE would have to fall much further to even start to perk my interest in the current environment.

I own a senior bond of Goodyear Tire so I reviewed its 4th quarter report which was not good.  The company is cutting 5000 jobs and reported a loss of 330 million with sales falling to 4.1 billion from 5.2 billion. Yahoo! Finance  While the loss was expected, the amount was greater than expected on worse than expected sales. MarketWatch

The reports yesterday from Capital One and American Express on the rising levels of delinquencies and charge-offs connected with credit card debt demonstrates that the problem has gone far beyond mortgages.  All kinds of consumer loans are going bad for the banks on top of an accelerating default rate on commercial mortgages.  Bloomberg had a story today that defaults on commercial mortgage pools may increase threefold in 2009. Real Estate

When I reviewed Obama's homeowner mortgage assistance program this morning, I do agree with the critics that it will primarily assist individuals who made irresponsible or foolish decisions.   MarketWatch   I do not see any reason to summarize the details of the plan except to say that it will lower the monthly payments of several million homeowners.  I do not agree with, or believe Obama's rhetoric that the plan focuses on rescuing families who have played by the rules and acted responsibly.  I would classify that assertion as political palaver. The banks will have to take a hit to bring down the monthly mortgage payment to 38% of the borrowers pre-tax income.  Why was money lent above that level?  I would hope the banks have already taken that hit by writing down the value of the loan. Then the government would be responsible for reducing it further to bring the payments down to 31% of the borrowers pre-tax income, which is where it needed to be at the start.  Taxpayers who behaved responsibly by refusing to bite off more than they could chew, and who, like myself, have no mortgage, or for millions of others, a mortgage within their means to pay, will receive nothing-directly- but the bill.  I understand how this angers many people and their anger is palpable reading the comments to the Marketwatch story.  I am more sanguine about it because I recognize that the nation is in a great deal of trouble because of the irresponsible and frequently greedy actions of a few million individuals, with about 5000 or so in need to a rendition to a Saudi Arabian prison to spend the remainder of their sorry lives  with a sign hanging around their head saying in Arabic "I Love George Bush".  I am not talking about the homeowners who took the loans granted to them but those responsible for making, funding and rating them. 

So, I have come to accept the fact that I am going to pay a price for other people's irresponsible and/or greedy behavior.  I generally rate plans along a scale of badness.  For example, the aid to Citigroup and AIG would be either a 9 or a 10, with 10 being the worst badness possible or even imaginable by me prior to 2007.  Obama's foreclosure plan is more like a 4 on that badness scale.  Aid to the auto companies would be about a 6 or a 7.   Obama's foreclosure plan will at least slow the rate of foreclosures which will in turn help to stabilize home prices.  Stabilization of home prices is just one of many ingredients to a successful recovery.  I do not look at this plan narrowly as many critics do, focusing on direct benefits to me since there are none.  Instead, I view it as one of the many necessary evils that have to be undertaken to avoid a repeat of the Great Depression II. If people like Eric Cantor and Marsha Blackburn were in charge, we would already be well into a depression. Those politicians whose policies led to the current crisis refuse to even acknowledge their responsibility for it and are making it even more difficult to solve the current crisis. 

What is there to learn?  If the Democrats believe that no more than 31% of pre-tax income is the correct amount to service a mortgage, then they need to drill that into the head of Barney Frank.  In fact, this needs to be a regulation for the future.  If you want to buy a house that requires more than 31% to service the mortgage, then you have to put up non-borrowed cash as a down payment to bring the total cost needing financing down,  so that the mortgage payments fall under 31%-no exceptions for anyone, a hard and fast immutable rule.    If this is not done, then the Democrats need to pay a price in the next election.   Those that favor laissez faire, freedom from regulations, do whatever I want to do when I want to do it, will oppose this kind of idea but the failure to heed it is one of the main reasons that we are in this pickle. 

I have raised a fair amount of cash in the last week by selling some bonds and bond ETFs.  I will spend some time now trying to figure at where to deploy that five figure sum back into bonds or preferred stocks. 


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