Ford goes "ALL IN" poker style!

On Monday, Ford Motor Company (ticker symbol: F) announced that it had mortgaged its assets for a coporate version of a "home equity loan".  The collateralized terms for the loan, which yields the firm $18 billion, includes nearly all of Ford's domestic assets - its plants, office buildings, patents and trademarks along with equity stakes in Ford Motor Credit and Volvo.  It appears as though they are earmarking these funds to cushion against softer upcoming sales and a potential strike with the UAW.  The key components of the new financing includes an $8 billion five-year senior secured revolving facility, a $7 billion senior secured term loan and a $3 billion issue of convertible debt.  Here are a few more notes:

1. The new liquidity should provide protection against bankruptcy for about 2 to 3 years.

2. Provide a cushion in the event of a strike.  The negotiations with the UAW are expected to begin in 4Q07.

3. Management believes that the company will probably not turn a profit until 2009.

Recently, I was what my thoughts are regarding Ford. Well, in light of the said facts, I certainly feel that you might be best looking for opportunity elsewhere.  Historically, auto stocks have really been a bad investment in terms of capital appreciation.  Union demands, stronger market competition, escalating wages/benefit costs, poor engineering and a host of other concerns make this automaker a stock to avoid.

Did you know?  The average Ford manufacturing line worker gets paid over $55 per hour (pay + benefits) while the average US manufacturing worker gets paid approx $25 per hour (pay + benefits).  Is there a disconnect here?   

How do people like Doug Kass ever make any money?

I have never been a fan of bearish strategies especially short -sellers (short sellers bet that the stocks will decrease in value) like Doug Kass from TheStreet.com.  For the most part, the short side has been a failing proposition.  Let's look at the history of the CSFB Tremont Dedicated Short Bias Index:

Since its inception the Dedicated Short Bias Index has offered an average annual return of -2.36% - in other words, short-selling hedge funds have just had an aweful record.

Further, I wonder if notable short-seller Doug Kass is still shorting Goldman Sachs (GS), in which he probably proclaimed the stock to be vastly overvalued and overtraded.  According to my records, he started short-selling GS at a price of (he initated his position on 09/25/2006) approximnately $168.75 per share - it trades near $200 per share today.  Now that's just bad!  I bet he wish he had a "re-do".

Lesson 1:  Beware of short-sellers and their woeful predictions of doom!

Sidenote:  I wonder if his hedge fund, Seabreeze Partners, uses Goldman Sachs as a prime broker. (Prime brokers are the companies that execute trades for hedge funds - like I do for my own clients)  I'd like to hear him make that call to his Goldman IP saying, "could you please short sell X number of Goldman Sachs shares for me..". I wonder what his IP (Goldman calls their relationship people -"IPs" aka investment professionals) thought?

Lesson 2:  Don't short your prime broker!

Looks like Risk #4 is to blame for when looking at Monday's losses

As I outlined in my last post, the currency instability could cause a slow down in any equity appreciation.  And it appears to have held true in monday's action....

We had a signifcant pullback in Monday's trading session.  Many traders and analysts see the US Dollar as a primary culprit for the decline. The dollar hit a 20-month low against the euro on Friday and was still falling today. A number of traders said that European investors were starting to sell U.S. stocks to protect the big gains they'd seen since the market bottomed in July.  The dollar is down about 10% against the pound and euro and 1.5% against the yen in 2006.

Tuesday's price behavior should be interesting.  Stay tuned!

Will this rally continue? Yes and here's why...

The enviroment remains postive for US financial markets.  The economy is slowing enough to reduce inflationary pressures, but not nearly enough to affect earnings.  And earnings growth continues to surprise on the upside.  In fact, operating earnings for the S&P 500 should rise by 16% in the year to Q3, according to Thomson Finanical.  This would represent the 13th consecutive quarter of double-digit growth and there has only been one other period since 1950 that matches this record (92Q4 to 95Q4).  Quite astounding...

In fact, many question how can earnings growth continue to escalate at this pace?  The obvious answer is stronger productivity growth.  This has also been aided by the fact that corporate executives have been buying shares in their respectuve companies.  Further, it is also widely believed that the Fed will look at cutting interest rates in the first half of next year to enhance economic growth .  These factors bode well for our economy; however, there are a number of risks to this hypotesis of growth that I outline below-

Risk 1: Geopolitical problems in the Middle East trigger a super-spike in oil prices sending a deflationary shock throughout the global economy.  But with oil under $60 per barrel, we appear to be in good shape (in the near term, at least).

Risk 2: Housing downturn turns out to be much more severe than previously anticiapted.  A very high number of mortgage defaults could really put a serious strain on our financial sector.  This could be problematic, but with interest halted at this point I don't see this being a problem in the near term as ARMs (adjustable rate mortgaes) have stopped escalating with a slowing of the Fed.

Risk 3: Inflation proves to be higher than expected and much tougher to combat thus forcing the Fed to re-consider any rate-cutting initiatives. 

Risk 4: Foreign investment flees the country and the US Dollar takes a hit as a result.

The likely hood of any of these risks actually materializing remain tame at this point but it is still worth noting in the event we want to be certain that we are not caught off guard.

Follow the "Smart Money" and stay clear of GM

Tracinda Corp., the investment company controlled by Kirk Kerkorian, disclosed in a regulatory filing today that it has agreed to sell 14 million shares of  GM common stock in a private transaction for $33 a share.  The filing with the SEC said the agreement was made Monday with the purchase to be settled on Friday.  Currently, GM shares are down $1.25 to $31.34 - that nearly a 4% drop today!

It was only a couple of months ago that Kerkorian stated that he would add to his GM position.  But after the proposed partnership with Renault fell apart, Kirk switched gears.  Billion dollars loses in operations just will not cut it.

And just moments ago Merrill reiterated SELL recommendation on GM!

Check out this down-trending chart for the past week...

Avoid GM!

Deals, Deals, Deals and BAC Fails!

We are definitely experiencing a historic tenure in the "dealmaking" business.  To say $60 billion in two days in simply amazing.  Most of the deals today are coming in the form of "leveraged buyouts".  The common denominator in most of these deals is debt.  US corporations have sold $109 billion in "high yield" (junk) bonds and raised an additional $593 billion in junk-related loans so far this year.  Amongst the deals announced in the past 48 hours:

Freeport bought Phelps Dodge for $25B

Blackstone bought Equity Office Properties for $20B

NASDAQ bid on London Stock Exchange for $3.7B

Bank of America picked up US Trust for $3.3B

The BofA deal is rather interesting to me actually. 

Deal Details:  In the all-cash deal, BAC is paying $3.3B which is about 33x this year's UST's earnings and about 27x times next year's.  The transaction is expected to be neutral to next year's BAC EPS. 

Additional Notes:  The US trust purchase that Schwab made in 2000 has been broadly seen as a failure. UST's model, unfortunately, did not coincide with the Schwab culture and business.  The two entities separately represented two entirely different models: one based on inexpensive trading and the other on premium service.  Schwab executives were really never able to get their hands around the UST high net worth mantra.  To validate my point consider the following stat:  At 3Q06, UST has assets under management of $94B.  This is only a slight increase from the $86B it had at the end of 1999, prior to the Schwab purchase.  This represents an increase of only 9% over the course of almost 7 years.  This is ALARMING!  Asset acquisition and retention was absolutely abysmal!  Is it a good deal for BAC?  Absolutely not! 

My View:  If this deal is to make sense for BAC shareholders, an aggressive push must be made to get UST into a better position to attract new clients.  The abysmal pace I noted above cannot continue.  As far as I am concerned, we are really just seeing two mediocre investment arms combine forces to form a larger mediocre firm.  Pure plays such as Merrill Lynch and Goldman Sachs will eat these guys up.  While I believe BAC stock will perform in line with market returns, I think you could see better opportunity elsewhere.  I would avoid BAC shares.

I guess investors weren't thrilled either..the stock closed down 0.33% for the day.

Oil Prices Down, Stocks Go UP!

Oil prices fell to their lowest level in a year yesterday as oil traders expressed doubt that OPEC members would carry out their recent deal to trim procduction.  Crude oil for December delivery lost more than 4% to close the trading day at $56.26.  This drop, the largest single day drop in over 12 months, came as oil and nautral gas inventories increased as a result of milder weather in the US and Europe.  This evidently brought about much pleasure to equity traders that pushed stocks priced higher throughout the trading day.

On the heels of four days of positive gains, the Dow Jones rose 54.11 points (.44 percent) to 12,305.82.  The Dow again set a new trading high of 12325.91 passing 12,300 for the first time.  I would suggest we are still in the middle of the range in terms of advancement.  I would recommend holding equities through the remainder of the year.