Two Fridays ago, I took a long position in Citi, assuming that the government was going to take measures to prevent their failure. So far, that trade has worked out incredibly well. This week, I see a similar opportunity in American automakers, especially Ford. Thursday, auto executives will attempt to woo Congress, asking for a rather large “bridge-loan” (do any of the sides really believe that?). Based on the romanticized importance of the industry on the surface, and the hundreds of thousands or millions of irreplaceable manufacturing jobs at stake underneath the happy memories, I think the bailout is coming.
Unlike the Citi rescue last Monday at the hands of the Treasury, I predict Congress will administer a slap to the automakers. My guess is there will be forced management changes, divestment to shareholders/debtholders, and hopefully federal fleet standards with teeth that give the companies something admirable to shoot for. At the end of the day, there will be big changes, but the companies will continue functioning. There will also have to be major sacrifices from the UAW, which I believe will come without a prepackaged bankruptcy.
I took a long position in Ford this afternoon and hope to have my theory supported tomorrow. Ford has significantly less downside risk compared to General Motors, they appear to have enough cash to continue immediate operations, and they are shopping brands like Volvo opposed to GM’s ill-fated Hummer. If there is no bailout progress made tomorrow, Ford shares will still trade in the dollar digits for the time being, unlike their once perennial rival. In my opinion, all Ford needs to do tomorrow is drive to the hearing (preferably in Escape Hybrids without mentioning Toyota), complain for a bit about the UAW, apologize for the Excursion, and mention a plan to sell their current world market vehicles in the United States. Cars like the Mondeo and Focus (the non-US version, which is apparently on the way already!) are attractive, small, and get fantastic milage compared to their bloated stateside siblings. I was astonished with Ford when they did not attempt to sell a few Mondeos in the states after placing the vehicle in the Bond franchise, immortalizing the car in young and old children alike. Honda brought the Euro-market Accord to the US, slapped an Acura badge on it, and laughed all of the way to the bank. The beautiful Mondeo in place of the slumber-inducing Fusion series would have sold some cars (I drove a Fusion for a weekend around Seattle, and it was a fine car, but completely unmemorable save for the speedo robbed from a work-series F-150, evidence that the right people in development are still not talking to each other). If there is a bailout, Ford shares will pop almost as much as GM in a me-too rally, resembling Citi’s partners in crime last week.
This is my first auto equity bet, and will be a good barometer for the accuracy of my data, models, and ramblings. Here goes…
Update (20:40, December 1, 2008): It looks like Mulally is playing ball. One down…
Also, here is a photo of a Mondeo Titanium X interior. Compare to the Fusion. Which one do you find more exciting? It almost seems like they have been trying lose in the states.
