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!