Here’s a headline to warm your cockles, “US car giants ‘laugh at Aussie suckers.’” The Australian newspaper tells us that “former managing director of Mitsubishi Australia Graham Spurling said the car companies would get a “free ride” from the Rudd Government on research and development.”
Obviously having a domestic manufacturing industry is important. And it is preferable that it is an Australian business so that investment and profits remain on shore. If that isn’t possible then the next best thing is for foreign businesses to invest in Australia. At least that way it creates jobs for the economy which means employees will spend their wages domestically.
The third option is that the manufacturing is done offshore and delivered to Australian distributors who then mark up the price for a profit so then again at least some of the profits remain on shore.
Finally - and this has increased thanks to the internet - products are manufactured and sold from offshore direct to the end consumer in Australia. All money flows out of the Australian economy into a foreign economy.
But, that is what happens with free markets. And that is why you see in developed economies the shift towards service based industries which are much harder to move offshore.
The government throwing $6 billion at the three local car manufacturers is going to have next to no impact on the viability of the companies. Especially Ford and General Motors.
GM and Ford on Life Support
We wondered yesterday why anyone would bother investing in the likes of GM and Ford. As we noted, GM has revenues of about USD$180 billion. Yet it cannot turn a profit.
Investors usually look at either capital growth or income when choosing an investment. Or sometimes a combination of the two. What growth opportunities does General Motors have? It has been losing market share gradually for the last twenty years to the Asian auto manufacturers.
What income potential does it have? At the moment it looks pretty good. It is paying a USD$1 annual dividend which at the current share price gives it a 23% yield. We don’t need to tell you that means there is a lot of risk built into that yield.
Will the dividend be saved? Of course not. Not if we look at what has happened to other companies caught up in the current financial problems. The dividend is the first thing to go. For GM it will probably involve shareholders losing everything as it goes into chapter 11 bankruptcy protection.
One of its biggest problems is the underfunded pension liability, which if GM does go bust will probably leave the fund even further in the red and require an even bigger bail out by the US government. How so? Well, typically company sponsored pension funds will invest a big stack of the fund in the company’s own shares. Nothing like not spreading the risk around!
We do remember a few years back during our previous incarnation as a stockbroker when a client decided he would like to invest $10,000 in each of Ford and General Motors. The rationale being that the government wouldn’t allow them to fold and go out of business and that in twenty years they would come good.
Fortunately we managed to talk him out of it on the basis that GM and Ford may continue to produce cars but it doesn’t mean that the shareholders would still be in the game. You only have to look at the US airline industry to see that.
Short Selling Debate to Go On, And On, And On…
The short selling debate continues to drag on. Now the federal opposition wants to have a full scale review according to the Australian Financial Review. We won’t rehash completely our views on this, but thanks to the government, ASIC, ASX, investor groups and now the opposition, a simple and logical solution is being caught up by indecision and red tape.
The restriction on short selling is supposed to be lifted next week with the exception of financial stocks. Those will remain restricted until January.
We seriously wonder whether the restrictions will ever be lifted or whether it will just go on indefinitely with everyone hoping that it gets forgotten about. Short selling is predominantly the realm of sophisticated and institutional traders and so there will be zero political fallout for any of the protagonists if the restriction is not lifted.
In fact it creates a great opportunity for them to argue they are looking after the ‘battlers’ by preventing the ‘big end of town’ from driving the market down.
Of course they will forget to mention that the market has fallen significantly since the restriction came into force anyway.
Cheers.
Kris Sayce
