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The Fear is Well Founded

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October 11, 2008 – Comments (11)

I am reading
"Dow's Worst Week Comes to an End"

 "Mr. Baer, who was a Treasury-futures trader on the floor of the Chicago Board of Trade in 1987, said, "I've never seen a credit market like this one. The fear has gotten way ahead of the fundamentals," including an unprecedented round of coordinated central-bank rate cuts this week that would normally prompt banks to increase their lending to one another."

This may be true for some stocks, but there are so many pink elephants out there that are so well hidden the fear is well founded.

Take the automotive industry.  I am hardly an expert on it, but a very quick look at it and what I see is debt that has little hope of ever being repaid.  In order to move forward they need massive amounts of new capital to retool more economically efficient vehicles.

Here's what should happen, plain and simple.  Any money they borrow should have a 3 year plan to pay back 100% of the money. 

By allowing excessive and an poor business model workers have managed to demand wages that ensure that debt never gets paid back.  On top of it, there is the expectation that pensions larger then average wages be paid to these people.  There is nothing to enable this industry to survive short of going bankrupt, selling off the pieces and starting new with a sound business plan.  As long as this industry continues under the existing unsustainable financial burdens it simply pushes the death of the industry closer.  It enables competition to gain a larger market share.

I truly have no idea how many businesses are run like this with morons being taken as experts saying that the credit markets are essential to roll over debt rather then any effort to pay the debt back.

That's my take on the bigger picture.  Like I said, I'm not an expert, but I do think my take will prove to be true.

This is all about 25 years of easing credit blowing up.

11 Comments – Post Your Own

#1) On October 11, 2008 at 4:58 PM, dwot (40.10) wrote:

I just blog about the auto industry, which I only look at very occasionally, and I see mish has a post on how dire their situation has become.

 

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#2) On October 11, 2008 at 5:11 PM, dwot (40.10) wrote:

I am reading mish's post closer and this part gets me...

Credit Default Swaps at Lehman, GM

Contributing to the meltdown this week was the Settlement of Credit Default Swaps on Lehman.

Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.

More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly who has what at stake because there's no central exchange or system for reporting trades. For comparison purposes, the payout on those swaps was $270 billion. There is over $1 trillion bet on GM credit default swaps.

I think the turmoil in the markets will continue for some time...  There may be a rally coming up, but I don't think the down is over.

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#3) On October 11, 2008 at 6:05 PM, dwot (40.10) wrote:

Here's a NC post about Metlife.

Insurance is a mature business.  I am of the opinion mature businesses ought to have the capital resources to sustain themselves through a downturn.  So what's the issue with the share price and the ability to raise new capital?

Another f--ked business model.

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#4) On October 11, 2008 at 7:25 PM, MarketBottom (29.37) wrote:

I can assure you that credit was not loose or cheap in 1983 in  the US as the prime rate was around 20 percent and Volker was on a rage to stamp out inflation.

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#5) On October 11, 2008 at 7:53 PM, Pandrota (< 20) wrote:

I don't study the auto industry anymore, but I I was an analyst in that industry in the 90's. Besides the obvious challenges, they were unable to make small, fuel efficient cars profitably. If that's changed, I suspect it hasn't changed much. They can't rely on trucks and SUVs for the deep profits anymore. Now their critical European market is sinking, so that won't help them. Finally, the world of auto technology is about to transform, and Ford and GM are poorly situated to be technology leaders. Loaning money to these companies seems very risky to me.

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#6) On October 11, 2008 at 8:51 PM, dwot (40.10) wrote:

MarketBottom, I think we are both off a couple years.  I worked in banking from 79 to 84 and it was around 80-81 that rates skyrocketed.  It was more like 87 that rates started their stepping down, just over 20 years ago, not 25.

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#7) On October 11, 2008 at 8:53 PM, dwot (40.10) wrote:

The problems with these letters of credit and the global trade are being mentioned more and more...

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#8) On October 11, 2008 at 8:55 PM, MarketBottom (29.37) wrote:

Dwot, How well I remember as banks would cut their customers legs off to save their butts. Mine grew back.

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#9) On October 11, 2008 at 9:34 PM, barman8 (45.12) wrote:

DWOT  congrats on Top Fool!!   i own AIG at 5$ and RODM at 1.74,  i am still in, any help would be appreciated.  Barman8

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#10) On October 12, 2008 at 12:25 AM, dwot (40.10) wrote:

I am a total bear barman, which is why I am not in the market right now. 

As an insurance company, isn't AIG on the hook for the greater losses?  That just seems yuck to me...

Don't know RODM.

MarketBottom, I was 17 when I started working in the bank in 79, right out of high school.  Seeing people struggle like that made me form strong beliefs about eliminating debt.

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#11) On October 12, 2008 at 4:17 PM, jgseattle (29.88) wrote:

GM, F will go bankrupt.  They have to much in legacy costs assocated with the UAW contracts for healthcare and pensions of retirees.  I think the pension and healthcare cost add on average $1500/car. (not sure of that number so if you have a better one let me know) 

Additionally, the volume to average these costs over is dropping so that is a bad trend.  They have to high of other fixed costs that will need to be addressed along with a very difficult dealer issue.

What will happen.  Bankrupcy will put the pensions onto the federal government agency that backs them.  The companies will emerge and be more competative but never regain the glory of yester year.

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