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It takes a lot of arrows to kill an elephant / What rises like a rocket and falls like a feather?



August 06, 2008 – Comments (8) | RELATED TICKERS: GM , TTM , COST

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As the old saying goes "It takes a lot of arrows to kill an elephant."  Well my friends the General, good old General Motors (GM), may have taken one too many lately.  I came across this great saying while reading the Backseat Driver column in Forbes magazine recently.  The thought of a giant elephant, or in this case oliphant, made me think of this cool scene in Lord of the Rings.

I've been saying for years…and 63+ CAPS points…that General Motors is one of the worst run companies that I have ever come in contact with.  It squandered the recent glory years of auto sales where a booming economy fueled by cheap credit, cheap auto leasing, and low gas prices drove light vehicle sales in the United States to new records year after year.  Even the worst-run companies can muddle along during good times, but now that times are tough the chickens are coming home to roost.  It's no secret that General Motors is in rough shape.  Now there is increasing talk about how one of the "Big 3" (if that isn't a misnomer I don't know what is) will eventually have to file for bankruptcy (see article: Big Three face bankruptcy fears).

CNBC is going to run a special on this subject called "Saving General Motors" tonight at 9:00 PM EST.  It supposedly is an optimistic look at what GM must do to save itself.  I definitely plan on watching it.  After years of disliking the company, I’m now pulling for GM survive this mess that it has gotten itself into.

CNBC: Saving General Motors 


It’s not just U.S. automakers that are having problems.  Even the cream of the crop, Toyota (TM) recently announced that it will take a huge charge to cover residual value losses from leasing at its Toyota Financial Services arm (see article: Toyota Plans Reserves For Losses on U.S. Leases).  This is the residual value issue that I predicted would begin to plague automakers.

Even car manufacturers in emerging markets are having problems.  I have had serious concerns about Tata Motors’ (TTM) recent acquisition of Jaguar and Land Rover from Ford and how profitable the $2,500 car that it plans to introduce later this year (the Nano) could be for some time now.  Now the company has even more problems.

Apparently, there has been a lot of controversy surrounding the new Nano plant that Tata is trying to construct lately which could possibly raise the costs for building or even delay the launch of the new model.  Numerous Indians are staging protests against Tata and the government claiming that parts of the 1,000-acre area that was provided to the company for the plant was taken by force. 

Just last week a manager who was overseeing the construction of the plant was beaten up by a group of thugs, causing many workers fear for their safety and leave the job site.

Scheduled for an October launch of the Nano, Tata has already had to scale back its initial production targets and it has begun asking suppliers to send parts to a different factory.  Tata's managing director Ravi Kant recently said that TTM will remain committed to opening the Nano factory in Singur as long as "our patience lasts."  If the factory plans are scrapped the Nano could face some serious delays. 

These Nano problems come at a time when Tata has been reporting slower than expected results.  Its growth in its commercial vehicles segment, one where it commands a 60% share of the Indian market has slid to the low single-digit range as expensive gas hurts truckers' profits.  Higher interest rates aren't helping the company either. 

Also, as I predicted when the acquisition was first announced, Jaguar and Land Rover sales have been terrible.  The bridge-loans that Tata signed to complete its acquisition of the brands have significantly increased its costs.  It urgently needs to refinance them.  The possible issuance of dilutive new shares could weigh on Tata Motors' stock, which is down nearly 50% year-to-date already.   

Trouble around Nano adds to Tata's difficulties

The Tata Nano


Everyone knows the price of oil has fallen dramatically lately.  Naturally with falling oil prices comes falling gas prices.  However, as the old saying goes price that consumers pay for gas at the pump "rises like a rocket and falls like a feather."  Gas stations are quick to raise their prices when the price of gasoline is rising, but they drag their feet when it comes to lowering it.  This means more money in the pocket of gas station owners. 

This brings me to Costco (COST).  The lack of profit on the sale of gasoline through its stores and higher shipping costs have been a huge drag on the company, even causing it to get hammered by Mr. Market after it lowered its earnings guidance for the year a couple of weeks ago.  If the price of oil continues to fall, or even stays where it is today it would improve the company's gas margins and reduce its shipping costs.  The very same item that hammered the stock a few short weeks ago could actually provide it with a tailwind this quarter that might enable it to beat analysts' new lower earnings estimates.  Here's a telling quote from the company's CFO:

"Primarily, it's rising energy costs and its many impacts....It has impacted our gasoline profitability, although in the very recent couple of weeks that has improved. It's impacted our freight costs at all levels of the merchandise distribution chain. It's impacting the direct cost of merchandise frankly at a faster and higher rate of increase in the past six to eight weeks than before that."

I have added COST to my CAPS portfolio with the assumption that it a temporary fall in the price of oil will help it to beat next quarter’s reduced estimates.


8 Comments – Post Your Own

#1) On August 06, 2008 at 1:13 PM, LordZ wrote:

If you shoot that elephant in the back of its head, it takes far fewer arrows to kill it.

GM is sad, yet many a managers have made many a dollars while debts simply grew and profits disapeared.

Eventually this broken model will cease.


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#2) On August 06, 2008 at 1:29 PM, LordZ wrote:

Well now that you bring up the Lord of the Rings.

I must admit that i'm starving and the little goblins suggestion about eating the hobbits comes to mind.

But they are not for eating.


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#3) On August 06, 2008 at 2:14 PM, GNUBEE (< 20) wrote:

Deej, sorry to nitpick, that's a Smart, not a Nano. Smarts are like a rolls compared to a Nano. And Nano's are much much uglier. (Imagine a dogs face after rolling its back half up like a roll of toothpaste).

Do you think all other independent gasoline retailers will do well right now? Or Will it just be Costco, and why?

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#4) On August 06, 2008 at 2:34 PM, DemonDoug (31.31) wrote:

yeah deej, the blog you got the image from has the smart mislabeled as the nano.

As far as oil, I posted this on your last blog, and I'm slapping myself in the head on why I didn't realize it earlier.  Wondering what you think about this:

China has temporarily shut down a lot of its plants and cars to clean up the air for the olympics, which starts on friday, and lasts about 2 weeks.  Ending date: 8/24.  If oil hasn't started rising by then again, it will after that weekend (8/24 is a sunday).  This is temporarily lowering global demand.

Further, any price reduction in oil and gas will lead to increased consumption again.

It would be nice for my caps score, however, to see oil back up to 150 sooner than later. :)

Price target: 160/bbl by 1/30/09.

What do you think?

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#5) On August 06, 2008 at 2:41 PM, TMFDeej (97.44) wrote:

Excellent catch, Gnubee.  You are absolutely right.  Darn the lack of edit function.  I'll have to post this blog again because I'm not leaving it like that. 

Looking at it quickly, the Smart looks a little like the Nano.  They're both as ugly as sin.  Mercedes and Penske are lucky ducks that gas prices shot to the moon right when they launched the Smart or it would have been a huge dud after the initial order backlog was worked through.  That thing is terrible.  Quite frankly, it's gas mileage isn't even as good as one would think because its transmission stinks.

If oil continues to fall or stays put all gas stations should post much better results this quarter than they did last.


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#6) On August 06, 2008 at 2:47 PM, TMFDeej (97.44) wrote:

Hey Doug.  I think that we are seeing weakness right now for a number of reasons:

- The China theory that you mentioned might be one. 

- Another could be the fact that somehow the U.S. dollar is sitting at a 7 week high even through there's no chance of a rate cut and the government is burning through money faster than ever. 

- Also, everyone is afraid that the global economy will slow down and hurt oil demand.

I don't know about oil hitting $160 again by January.  Just as they were hammering on it on the up side, traders are going to pound this thing on the down side and probably cause it to overshoot. 

It's always tough to call short-term moves.  I would be very surprised if we fell into double digits again, but who know...that's why I have tried to be somewhat conservative in my oil picks.  I still strongly believe that long-term oil is headed much higher because of supply issues, growing demand from emerging markets, and a continued drop in the dollar.


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#7) On August 06, 2008 at 3:03 PM, LordZ wrote:

why not just buy a golf kart ?? and drive that ???


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#8) On February 19, 2010 at 3:41 AM, BrandonPaulChevy (< 20) wrote:

Ehat?Toyota announced that it will take a huge charge to cover residual value losses from leasing at its Toyota Financial Services arm?hmmm..I see. They are now modifying some toyota corolla parts and making parts at a lower quality than the usual.

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