The US automakers have a debt problem.

music selection:  “The Finer Things” — Steve Winwood

Each Friday at the Raptor, I cover investing ideas that come from my bond research.  There is a lot of money to be made in bonds and at lower risk than equity investing.  But there is also a lot to be learned about the prospects for a company’s equity.  Especially when the bond market and the equity markets are in disagreement (Hint: The bond money will almost always be proven right!)

Today I have two short ideas that come from my review of the indebtedness position of the two largest US automakers.  I’ll start with General Motors (GM).  It wasn’t so long ago that General Motors had to be bailed out by the government.  The same problems they faced back then are still around.  Huge legacy pension and healthcare costs, crushing debt load, and exposure to the riskiest subprime borrowers.  Chief among those is the threat from the inevitable turning of the credit cycle.  It will become more expensive to service a crushing debt load at the same time sales flat-line due to tightening lending standards on their customers.

Domestic auto sales have already shown weakness in the face of rising interest rates.  With over a one trillion in outstanding consumer debt (the highest ever) the American consumer is already tapped out.  When the credit cycle finally turns, GM’s sales will crater at the time it is already most vulnerable.  Profit margins for this company are already below 2%.  I am betting against GM.  I bought long dated puts at the 37 strike.  I got in at 5.35 on GM210115P00037000.  Pay no more than 5.50 for these puts. Put no more than 2% of your invest-able capital into this trade.

The situation at Ford (F) is similar but more dire.  The company is paying 5.5% to acquire capital.  But it is earning less than 1% on that capital.  The company is rapidly destroying shareholder value.  They know they are in trouble and are taking desperate measures such as abandoning the passenger vehicle market.  I really don’t see have ceding market share and scale improves their ability to cover enormous fixed costs. I’m excited about the opportunity to bet against Ford.  I bought puts again.  This time I paid 93 cents a share for F210115P00007000.  If you are playing the “home game” version, pay no more than 98 cents for these puts.  Put no more than 2% of your invest-able capital into this trade.

Devour your prey raptors!

 

Sharing is caring!

Bond Research Uncovers Short Opportunities in GM and F

Never miss another opportunity to devour prey!

7 thoughts on “Bond Research Uncovers Short Opportunities in GM and F

  • January 26, 2019 at 2:41 pm
    Permalink

    The concept of looking into bond and stock market discrepancies is really cool and innovative. What was the initial catalyst to head down this rabbit hole of betting against GM and F? Did the bonds sell off or was it screening high debt companies with poor margins or just a macro play? For example, with NWL, the bonds didn’t crater 4Q2018 which told you the stock may be oversold. Nice pick by the way and keep doing what you’re doing.

    Reply
    • January 26, 2019 at 5:24 pm
      Permalink

      I started with the car rental companies and exploration of what is about to happen in the used car market. GM and F are highly exposed to a large number of vehicles coming off lease in the next few years. They will have a glut of inventory, mark downs on the books and suppressed sales of new cars. Interest rates at that time are a double whammy. Their bonds are remarkably resilient for companies that have negative catalysts on the horizon.

      Reply
      • January 28, 2019 at 5:00 pm
        Permalink

        Seems like selling bear spreads on these turds could provide reoccurring monthly income while not suffering as much time decay, vega, etc. How did you decide on long puts vs. spreads?

        Reply
        • January 28, 2019 at 9:12 pm
          Permalink

          Chris,

          I have no way of knowing when the credit cycle will finally turn. It seems like “soon” but the cycle has been remarkably resilient so far. I want as much time as possible to be right. I’d expect lots of 100% losers on short term spreads although you could mitigate by buying in the money.

          Reply
  • January 28, 2019 at 2:30 pm
    Permalink

    I know that existing dividends are already priced in to the option, but that special dividends are added in to the option later if they occur. I’m wondering what will happen to the option when Ford cuts its dividend. It’s a bit unlikely, given that the Ford family lives off the dividend, but anytime a struggling company is paying a fat dividend, there’s always a chance. In theory, cutting the dividend would raise the stock price in the long run, since the company would be retaining that cash, though it might cause the price to decrease in the short term as unhappy investors sell.

    Reply
    • January 28, 2019 at 4:50 pm
      Permalink

      Dividend cuts do not result in adjusted options. A distribution cut would be a huge catalyst for my position. Time will tell.

      Reply
    • January 28, 2019 at 4:56 pm
      Permalink

      I think regular stocks paying 5-6% dividends are largely held by naive investors and their “dividend funds”. Their error lies in thinking of a stock like a high yield savings account. Buy F, make 6% forever. What could go wrong? A dividend cut will send them running away, and then who is left to buy?

      IMO, high dividends are a good screening tool for short opportunities. Such payouts represent the final gasp of wealth extraction before a strategic bankruptcy that wipes out everyone. But it was coming anyway so why not extract the dividend, they reason. Why not sell, I reason.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.