General Motors and Citi Group

General Motors (ticker: GM) and Citi Group (ticker: C) are about to be removed from the Dow Jones Industrials and S&P 500 indexes. Very nice news, and good decision - better later than never. Those companies with lousy management should be removed from the indexes a half of year ago. If it would be done in December 2008 when GM and Chrysler requested bailout money (what a scam...), I would assume the recovery would started much earlier. As I mentioned in my "Automakers Bailout - Good or Bad?" post in December 2008: "this bailout could become a waste of money", it is sad to accept, but it happened. I am still taking the same old position: "Old fat, spoiled, lazy dinosaurs has to die in order to free the way for young, strong, energetic wolves who will lead the pack... " - this what is recession is above - to clean the market and economy, so, it can develop further. If there is a demand on a product and a company producing it go bankruptcy then somebody will fill this place and will lead the economy. If there is no demand on a product then nothing and no bailout money will help.

Automakers Bailout - Good or Bad?

Automakers received what they wanted. I like the requirements that were put on the them in relation to the UAW. I already mentioned last week and today's news and Government action confirmed that UAW is the main reason why the auto business has be become unprofitable. I still afraid that this bailout could become a waste of money. I'm still not convicted that it would not be better to spend these $13B on the development of new productions that would create working places. Example: $1B is required to build a plant for production of Lithium batteries for cars - there is zero of such plants in USA and 14 in China..

It looks like today's market reaction on this bailout was not very happy. Positive sentiment at the market open fainted very fast with DOW below zero by the end of the session. I think many investors are looking at this bailout as just a delay. What is next? GM and Chrysler already told that these money would be enough for a month only. It means that in January 2009 we have to expect them to step forward and start begging and threatening again. The Government attempted to delay bailout and that tells me that the Government considers it extremely risky "investment" after looking at the numbers they have and Bush statement "Preventing disorderly bankruptcy" makes me expect orderly bankruptcy instead.

Recession and Bailout

As I told before one or another way the Automakers will receive the money they crying for. Do they really need them? If their business has become unprofitable the bailout will not help but only will delay the dead end. How to become profitable - almost impossible because for that the wages has to be cut in half and autoworkers union will not let to do it, they would rather let it crush than give their power away. I think that after automakers receive money they will continue to layoff people and ask for more money. It could be the best to let it go. Yes, some companies will crush, yet, if there is a demand on the cars, somebody will replace them. If there is no demand on the cars then no bailout help them - it's simple - then it's only waste of time and waste of money. The excuse that other businesses will be damage is wrong. Only those businesses that oversupplied the market will be damaged. If people stop buying new cars then they will start to repair the old cars, that means that there is still going to be demand on the car's parts and it is going to boost new repair businesses which still will need car parts. Yes, some drillers will be shut down, but do we not need so many of them?

Recession is a process of "natural selection" when overweight animals die. This is not the end of the evolution. When lazy, fat, spoiled animals die it clears pass for new blood, for strong, creative, not spoiled youngest who desire to work and get to the top.

$60 Billions is $10K for 6 million people - it's about 4 million families (about 10 millions people) may survive for a year. Think about that. Instead of helping the dying from extra weight animals these money could be spend to help people to survive the recession, to boost new businesses, to create new jobs.

$25B

By some reason I have high degree of confidence that automakers will receive their $25B. The only thing I think they are doing now is looking for a "wrapping paper" to sell it to taxpayers under an umbrella that it is done for their own good - the same as with finacial sector bailout.

If you have a company and you have to pay your loans and debts and you have a product that you cannot sell then you have to find out how to survive. First thing you have to do is to sell the product you, at least part of it and get cash. If you cannot sell it, then you drop the price and sell it any way. You receive cash and it will buy you some time to restructure your production to make it profitable again. If automakers cannot do it then there is something very bad in their structure of business and $25B will not help them, it will only delay the death sentence… unless they need it for something else… as banks used bailout money to buy other banks…

People do not have money to buy cars and nobody wants to lend to people because they already in too big debt, house foreclosure or without job. You want to sell cars, drop the price.

What government can do beside $25B to help automakers on my opinion is

1. Increase taxes on the cars that are made oversea – you have to protect your own market.
2. Increase taxes on American cars made outside of USA – it is wrong when USA owned companies build plants in Mexico to sell product in USA.
3. Decrease taxes on the cars that are made in USA by American workers even if this is not American cars – it should attract overseas investments
4. Decrease taxes on the cars that are made overseas if 80% of the car is made from the details produced on the plants in USA – invite overseas companies to buy supplies made in USA.
5. "Layoff" union. Here government can make a compromise and give authority to the company over the union with power to close it if company guarantee that 100% of its employee have medical coverage. Union is "business killing" machine that constantly working on production cost increase and development slowdown.

There could be other points, yet, I doubt the government can do even any of above. And it is not only about car. I always frustrated when I see something in a store that is made in China but made from American material. Why is it more profitable for Chinese businessman to buy supply in USA, ship it to China, make product, ship it back to USA, sell it in USA, pay taxes in USA and China. Why does Chinese businessman not buying supply in USA, make product in USA, sell it in USA and pay taxes only in USA? Isn’t there something wrong in this chain?…

Another bailout?

Another volatile week is behind. I did not expect the market to retest third time the 10/10 (October 10, 2008) lows, yet it is forth time when we see rebound from this level. That is why it's important to monitor charts on daily basis, especially in these volatile days - if I made mistake I have time to reanalyze and correct yourself.

I believe there is no doubt that 10/10 high volume stopped the crash and set support level. From that time we have seen volatile swings between October 10 lows and October 14 highs. Some of the indexes dropped slightly below the 10/10 support (Nasdaq 100) and some of the indexes are moving flat on and above the October 14 level (Dow Jones Utilities).

I believe many investors asking the same question "Will automakers crisis push the market into another crash?". This is another political game and I do not know. My opinion is that what we see now is a direct result of financial bailout. We did bailout banks and now we started to discover that the financial sector did not suffer as badly as it was described - they use bailout money to buy another banks. As I understand, if they do it they were not in the need of cash to be saved... They needed the cash because now when the market is in the bottom it's good time to buy... Now automakers started to follow this example. If you do not bailout us we will crash you - doesn't it remind you something????

I was against bailout of financial sector and I'm against bailout of automakers.

This is my word to you automakers: "DO YOU NEED MONEY? DROP THE PRICE ON THE CARS BY 20% - YOU WILL GET WHAT YOU WANT. IF IT'S NOT ENOUGH THEN DROP THE CAR PRICE BY 50%". When I drive on the street I see thousands of cars in hundreds places. It tells me that you have an asset that you may sell to taxpayers and cover your losses caused by your bad management instead of threatening and asking taxpayers to bail you out... But you won't do it... You do not even think what has to be done to save this industry, what you think is how to get easy money...