GM bonuses and bids for Chrysler

3/24/07

A friend of mine is a GM retiree. He periodically forwards me the GM Retiree newsletter, which I find very informative and enjoyable both as an investor in the car stocks and as a car buff.

I always try to make a few comments in the “Thank You” reply I send to him. After I sent him these latest comments, it occurred to me that I have not yet commented on cars or the car stocks, which is one of my major areas of interest and provided much of the source material for the Insightful Irregular Commentary, my former means of pontificating to a broad audience, at all so far, other than a short piece on car safety, in the Insightful Pontificator. So, due to the absence of car commentary, or ANY commentary at all of late, in the IP, here are a few very brief comments on the car business. (Notes added to the response to my friend have been placed in parentheses.) The first comment, of course, has nothing to do with cars, but, rather, with Treasury Inflation Protected Securities, which are currently my largest investment.



Our TIPs are having a pretty good year, up 2.5% YTD and we're only a quarter into the year. I bought some more the other day.

GM's paying those stock bonuses to the Wagoner, Lutz, and crew might come back to bite them. The UAW is very understandably restive and negotiations are coming up.

(I find the comments of Rich Vargesko, head of UAW local 544 in West Mifflin, PA, very representative, enlightening, and certainly VERY justified:

“Why do they deem it necessary to reward these executives with exorbitant bonuses? I thought we were in this together. Are we saving the company or not?”

Note that negotiations on a new contract, a contract in which GM will ask for big concessions, especially on the JOBS bank, are imminent. The timing of corporate America is, once again, as graceful as Smokey Burgess. This is rather surprising, given that the execs at the car companies have not been as egregious on the pay package front as have their corporate brethren. Perhaps the “Investors and workers be damned, this company is run for the exclusive benefit of the executives in charge” mentality is spreading to Detroit. I hope not. )

Who in his right mind would pay $4.8 billion, let alone $6 billion, for Chrysler? I don't think it's worth anything, given its huge PORB liabilities and its woeful, out of date, exciting as tapioca line. DCX (or maybe Magna, if they end up owning Chrysler) has to be the greatest short in the world right now. Unfortunately, I thought that 20 points ago...and I still think I'm going to be proven right.

(Jeep is completely out of sync with the industry, making truck based SUVs when consumers are abandoning them en masse for car based and crossover SUVs. I had high, or at least not dire, hopes for the Compass, Jeep’s first attempt at a crossover (perhaps out of a desire to give Jeep at least some credit), and it has bombed. The Patriot, a brand new crossover built on the same frame at the Compass, might do better, but there is no compelling reason to think so. The third platform mate, the Dodge Caliber, started with a bang, but sales are starting to cool as competition heats up and, perhaps, because consumers are opening their eyes and taking a good look at this homely beast. (“My God, what have I bought?”)

The Chrysler 300, Dodge Magnum, and Dodge Charger have seen their day and are getting long in the tooth, though the 300 seems to still sell well. The Chrysler Sebring and Dodge Avenger are adequate cars when adequate doesn’t cut it in the marketplace and Chrysler badly needed a home run. And has anyone noticed that a fully optioned out Sebring stickers out at about the same price as a fully optioned Accord? Unless one is a die-hard Big 3 customer, one would have to be crazy to buy a Sebring over an Accord or a Camry, given the resale bath buying a Sebring will inevitably entails. And even if one insists on buying a US nameplate, the Aura and the Fusion are fabulous, if not spectacular, products that put the Sebring to shame in every imaginable category. The Sebring commercials, which point out that the Sebring comes standard with STAIN RESISTANT FABRIC interiors while the Camry does not, are pathetic. How far down did Chrysler have to reach to come up with stain resistant fabric? Look for big incentives on the Sebring and the Avenger, which will make them good buys but will have their predictable impact on Chrysler’s profitability.

The Dodge and Chrysler minivans still sell well—with heavy incentives. They are a generation behind the Toyota and Honda offerings. The new vans, planned for 2008, offer little new besides a trick picnic table set up in the back two rows. Big deal.

Perhaps the hedgies that are bidding for Chrysler, being of the type who would sooner be caught shopping at WalMart than driving a Chrysler, think product is unimportant. But I am of the quaint notion that a company is more than a collection of numbers (which, in Chrysler’s case are not that good anyway) and one should take the time to learn something about product. Chrysler’s is abysmal.

It is instructive that one of the bidders for Chrysler, Magna International, which is in the car business and thus is in a position to know more about it than the hedgies that are bidding on it, looks like it will bid low, about $4.6b vs. the $6b bandied about on the Street. $4.6b is too high, but note that the lowest bid is coming from the bidder in the best position to evaluate the company.

NOTE THAT I AM SHORT DCX AND LONG THE PUTS—FULL DISCLOSURE. BUT I HAVE BEEN FOR THE LAST 20 POINTS ON THE UPSIDE—THE HONESTY THAT PERVADES MY APPROACH TO LIFE.)