Insights & Advice

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Chrysler Bankruptcy is barely a Blip as Markets End their best Month since 2000

If the bankruptcy of Chrysler, one of America’s flagship corporations, didn’t faze the markets then rest assured there is more upside ahead. Granted, it was well-telegraphed and President Obama is assuring us that Chrysler’s bankruptcy will be “quick, efficient and controlled”. Yet, one would think the markets would have dropped at least a little, instead they were up for the week.

Since the future of General Motors will be decided next (in about a month) investors are betting that GM‘s fate will be no worse than Chrysler’s. I would take that bet. You see, like the nation’s large banks, the auto industry is too big to fail in any substantive way. At stake, however, is far more than their silly headquarter companies based in Detroit.

The fact is that the three automakers have long-since moved the lion’s share of their operations outside of the United States, just like the foreign makers have re-established themselves as American manufacturers based largely in our South. And no, the auto makers no longer provide any significant contribution to our defense industry although it is a myth the Big Three like to propagate. The real concern is the protection of hundreds of thousands of jobs (possibly millions) generated both within the assembly plants of the car makers but largely among the thousands of small and medium-sized companies that service and supply the auto industry with parts, electronics, and other manufactured goods.
And don’t forget the American dealerships and their employees. There is scarcely a small or medium- sized town in America that does not have at least one dealership within their borders. These often locally-owned companies supply employment, taxes and generally contribute a great deal to the culture, sports activities and prosperity of their hometowns. They cannot be forgotten.

So Chrysler will file for Chapter 11 bankruptcy this week but at the same time combine with Italian auto maker, Fiat( which will own 35% of the company) in order to stay in business. I believe a similar deal, if necessary, will be worked out for General Motors. Fortunately, Ford seems healthy enough for now to continue in business without the aid of the federal government.

Yet more than a subtle shift will have occurred at Chrysler when it emerges from bankruptcy. The United Auto Workers Union will end up with a 55% majority stake in the company. Karl Marx would nod his head in approval at this turn of events. The worker’s and owner’s interest will now be aligned in ways never experienced before in the history of the U.S. auto industry. The existing shareholders, Daimler Benz and Cerberus, will be wiped out and new management most likely installed.

In order to survive, a down-sized Chrysler will need to be nimble, oriented toward change and able to grasp opportunities in the market place wherever it finds them. Will the United Auto Workers be up to that challenge? Certainly, the history of the UAW does not indicate it is comfortable with radical change. How, for example, will the union handle the conflicting challenges of pensions, healthcare benefits and the need to be profitable? I believe the economic circumstances, the Obama Administration and the realities of a changing global auto industry has created an enormous Petri dish –type experiment. Today, the workers, government and the private sector have a common interest and opportunity: the survival and success of Chrysler. Out of their efforts, a new business model may be developed, one that might be applied to other industries facing similar problems. Given that we are now all in this together, I’m rooting for the new team.

In the meantime, the markets continue to climb a wall of worry. Now that first quarter earnings are out of the way with more companies reporting better than expected results (last week’s market bugaboo) investors will focus on the up-coming stress test event. The banking ‘stress tests’ results will be pushed back to May 6. Readers may recall that these tests are being conducted by the government to determine the financial shape of the nation’s 19 largest financials companies. Investors are nervous about the results and they should be since most financial stocks are 50-60% higher than they were just two months ago. “Priced for perfection” is how one trader described the group. Obviously, bad news would send the sector and the markets down with it.

Understanding how fine a line must be drawn between too little and too much information, the Obama Administration is debating exactly how much detail to reveal about the individual companies and the sector overall. While investors fret, to me, it is just one more hurdle to leap on our way to 940 on the S&P 500. This week we came awfully close to my intermediate target of 900, reaching 888 before retreating like a trout nibbling on bait. I do expect a pull back (as much as 50-60 points) once we reach that 900 level but if I’m right it will only be another opportunity to add to your stock or fund positions. But as I have written before, this is not a buy and hold market so don’t get comfortable. Be careful. In an environment like this anything can happen.

Posted in A Few Dollars More, At the Market