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Op-Ed:
Obama Versus Buffett in Detroit |
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President-elect
Barack Obama thinks Detroit's big three auto-markers (Ford, Chrysler, and
especially
GM) are not only salvageable, but worth saving - he asked President
Bush to send a few billion bucks Detroit's way. Warren Buffett, on the
other hand, has never been ambiguous about taking the opposing stance.
The Oracle of Omaha suggests that GM is merely a huge annuity and health
insurance company attached to an auto company... an unsustainable situation.
And Obama tapped Buffet to be one of his top economic advisors? Hmmm.
Maybe they should have talked amongst themselves first.
 OK,
it's not like they're completely at odds with each other. Obama
is mostly concerned about preventing the collapse of an entity that provides
retirement and healthcare benefits for a few hundred thousand former employees
of GM. Buffett looks at things first and foremost through an investor's
eyes.
Still, you
have to wonder why Barack Obama isn't at least wondering why Warren
Buffett has a problem with the century-old auto manufacturer.
In short (though
from an investor's viewpoint), we think Buffett's right. That's
not to say GM's retirees need to be thrown under the bus, but what's
the point of pouring water into a leaky tub? Fix the tub first, then
pour water into it.
What prompted
our rant? The White House pledged $25 billion to auto makers in September
to help keep them afloat. Yesterday, Barack Obama asked George Bush
to send over another $25 billion, citing the industry's pension
and healthcare obligations.
In our opinion,
the pension and health coverage should be protected by the government.
However, the business itself may be a sinking ship, which leaves one to
wonder when these companies will need more cash to fill the pension coffers
again; the car business doesn't appear able to do it alone anymore.
The right
goal?
Get GM (and Ford and Chrysler for that matter) off life support,
which means overhaul the business model ...completely.
It's
entirely possible to be an auto manufacturer in the U.S. and still
remain solvent. Lots of foreign manufacturer's plants have done so, even
in the midst of a recession. To throw money at the symptom without
treating the illness though? That's just throwing away good money after
bad.
In a perfect
world, the President-elect would use this as an opportunity to turn Detroit
into a green-friendly, energy-conserving kind of manufacturing hub....in
line with Obama's agenda anyway. It looks like getting it done fast
has become more important than getting it done right though.
Maybe Deutsche
Bank has it right. Yesterday they set a price target of $0.00 for GM shares.
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Lending
Market Nearly Thawed Out |
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In late October
we threw our hat into the credit market analysis ring by taking
a detailed look at its barometer - the TED spread. Since it indicates
just how willing (or unwilling) banks are to make or take loans,
the reason for our interest was clear.
 At
the time, the TED spread was still at a crippling 3.0. That wasn't as high
as the October peak of 4.6, but still well above the longer-term norm of
1.0.
As of Tuesday,
the TED spread is back to 1.80...the lowest reading since mid-September
when the upheaval really began. Though we'd still like to see it closer
to 1.0 than 2.0, this is a huge step in the right direction. We
doubt it will affect stocks immediately, but loosening the purse
strings a little couldn't have happened at a more critical time.
None of this
is intended to imply all is perfectly well. We've mentioned our stance
a couple of times....we think the bear market is over, but we think
the recession is still on. There's an addition to the opinion though
-
just because the bear market is over doesn't mean a new bull market
has begun. We've been flat for over a month, so it's not like buying
opportunities are popping up all over. But, the economy has a few bright
spots like the new and improved TED spread.
With that in
mind...
If it seems
like the market is spinning its wheels, you're not crazy - it
is. The S&P 500 closed on Tuesday right where it closed October
10th, though the average daily move (up or down) has been greater
than 2% since then.
 Though
it's become a test of patience, the market was at least kind enough to
draw a couple of lines in the sand we can use as make or break points.
The nearby chart
of the S&P 500 plots a resistance line at 1005, and a support line
at 850. Both are previous highs or lows, respectively, made since early
October. And, both have been tested twice. It's now clear the market is
just bouncing around between these levels, so until the 'zone' is breached
it's difficult to justify taking a stance on either side.
However, it's
also worth mentioning that the longer the market stays range-bound,
the faster and bigger the move is once it finally breaks.
Will we end
up making a triple-bottom at 850? It's still too soon to say, though
if the market does find support there and then rebound for a third
time, the bears may be convinced to give up and just let the next bullish
phase begin. Of course, only a move above 1000 would confirm such a recovery.
By the way,
though the market has been taking pretty big hits the last few days, the
volume
behind those dips has been nowhere near commensurate with the size
of the selloffs. In other words, it wasn't a case of a boatload of sellers...it
was just anemic buying. It obviously doesn't set up bullishness yet,
but it also doesn't suggest there will be any real longevity to
a downtrend. That's why we're not too concerned about more downside just
yet.
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Updated: 9:18 am PST (17:18 GMT), January 5, 2009
