Detroit's Bailout and You: Invest in the Supply Chain

by: Andrew Snyder November 18, 2008 | about stocks: AXL / DAN / F / GM / MGA    

Andrew Snyder

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Detroit is once again on its knees in Washington begging for help. The nation’s automakers are desperate to paint a dire picture of their financial woes.

Whether their pleas are founded or are merely lame attempts at grabbing some free advertising is up to you to decide. To me, it is all a show. After all, the Big Three have not had this much free TV time since the last time they were begging for a handout.

Today, Ford (F) is tugging on the economic heartstrings of Americans by releasing a report that shows if it fails over 3,000 workers in at least 25 states will lose their jobs. It is a disheartening failure, but last I heard Ford claimed it was not in danger of failing.

The company’s latest figures show Ford has a cash hoard of over $18.5 billion and is planning to increase that position (through cutbacks and sales of assets) by as much as $17 billion in the near future. What’s more, Ford has ready access to a $10 billion line of credit.

If Ford has enough cash to keep its creditors at bay and its operations running, why is it on Capitol Hill begging for money?

Simple answer: easy money.

If somebody were to offer you an ultra-cheap loan that would increase your profit potential, wouldn’t you take it? As long as the interest rate (Congress is proposing a 5% rate) is lower than what Ford is currently paying, which it most certainly is, the loan is a good idea.

But Washington is not in the business of loaning corporations money, or at least it is not supposed to be. Congress needs to ensure it only intervenes in the most serious cases.

General Motors (GM) with its dangerously low liquidity may truly need help, but Ford does not. If Ford gets a piece of the bailout action, Congress will unleash an avalanche of cries from major companies across the country searching for similar help.

Invest in the supply chain

Washington has the potential to send a handful of auto-related stocks soaring. While Wall Street is focusing on the Big Three, their suppliers are the ones truly getting a bailout. Many companies depend solely on the health of Detroit to fund their profits. If General Motors were to disappear, so would they.

That is why smart investors are not focusing on whether or not Ford, GM, or Chrysler will get a loan from the Treasury Department. They are looking to see which companies will benefit the most from a Washington-induced cash infusion.

Check out companies like American Axle and Manufacturing (AXL) and its $1.50 share price. Or Magna International (MGA). And you cannot miss Dana (DAN) and its recent credit downgrades.

All three of these companies would likely see a strong surge in share price if news of a successful bailout package leaks out of Washington. But you must not get carried away with your profit expectations. Analysts are already expecting some sort of industry relief, so government assistance is already priced into share price to a degree.

Anytime I find a stock that is about to make a big move in one direction or the other, I instantly think of a straddle opportunity. This options strategy (an investor buys call and puts options on the same strike price and expiration) will profit as long as the underlying stock makes a significant move in either direction.

This strategy may be unknown or confusing to many investors, so let me know if you would like more details. If I get enough demand, I will create a strategy for you to follow and post it on the site.

A desperate situation

There is no doubt that Washington has its work cut out. Detroit is begging for help. Americans know it is wrong to intervene with the free markets, but do not want to see their fellow citizens lose their livelihoods.

As investors, we must stand back and take an objective look at it all. When we do, the profit opportunities begin to shine through quite clearly.

Take a look at the automotive supply chain and the companies upstream of Detroit that will profit from Washington’s blank check.

I will leave you with this as food for thought: Obama’s economic aides are telling us any new economic stimulus must focus on the middle-class and not the nation’s rich elite. Their reasoning is that average Americans are better at spending their money than the nation’s upper class.

Disclosure: None

Related Articles

This article has 3 comments:

  •  
    Nov 18 03:57 PM
    so we give loans every day to banks, who don't employ many people, but can't seem to give 1/200 of that to car companies who do? so far banks have gotten around a TRILLION dollars in loans, never mind just giving them cash (250-500 billion and counting), and then there is that one insurance company (AIG) thats has gotten 140 BILLION dollars. so why are we quibbling over this now?
    Reply | Link to Comment
  •  
    Nov 19 01:38 PM
    ah, banks employ huge numbers of people. WFC alone employs over 150k (in the US).
    Reply | Link to Comment
  •  
    Dec 11 04:15 PM
    Nothing bothers me more than people who dog on the Big Three and know nothing about it. Ford went to capitol hill to support Chrysler and GM in their bid for a "loan". They told congress, they were asking for 9 billion, or whatever it was, line of credit. They said they do not need access to this line of credit unless Chrysler or GM file bancruptcy. Anyone who knows anything about the automotive sector knows they share a large amount of suppliers. If GM goes bancrupt, then Ford will be hit hard as their suppliers will likely go belly up due to GM not paying them what they owe etc.

    Another point....since everyone is so quick to let our manufacturing sector disappear, I must ask this. Who will you ask to build your military equipment like tanks etc. during the next world war? Because the USA wont be able to due to all of our manufacturing base going to China, Japan, Thailand, India, etc. Hey wait...maybe we can ask them to build our weapons to attack them with!
    Reply | Link to Comment
More Comments on F ยป
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Andrew Snyder

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Autos
Aircraft & Parts
Airlines
Rail Transport