Detroit bankruptcy: Be prepared buy on the news
Today's Financial News - Posted December 17, 2008
The odds of a Big Three bankruptcy filing are increasing by the minute. Be prepared to buy shares of suppliers like BorgWarner (NYSE:BW) and Tenneco (NYSE:TEN) on any news of an impending filing. It could turn out to be the best trade of your life.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): I wonder how well the folks at the Big Three sleep at night. The last few weeks must have been torturous for Mullaly, Nardelli and Wagoner on their big, cushy beds, but the past five days have got to have topped them all.
After Congress hung the automakers out to dry last week, Detroit has been curled up in front of the Oval Office’s door waiting to hear their fate. Inside the office, President Bush is answering calls with mixed demands. Southern representatives are demanding union concessions. At the same time, northern leaders argue it is Washington’s obligation to rescue the domestic manufacturers.
It is like the 1860s all over again.
While our lawmakers argue politics, their constituents have had time to think the matter over a bit. As each day goes by, more and more Americans believe bankruptcy is a viable option. Even the press is leaning that way these days.
Backing bankruptcy
As I have told anybody that would listen over the past three months, I stand by my belief that a pre-packaged, government-backed bankruptcy is the only route to success. It allows General Motors and Chrysler to dump their impossibly heavy burdens and start from scratch. No banks will fund the measure, but Uncle Sam certainly can.
The Big Three have their product lineups where they need to be. Now they need to get their balance sheets in order. They only way it is going to happen is if we crumble up the old books and start with a new set (and keep the UAW out of it).
Moody’s announced the findings of its recent research yesterday. It helps prove my point. It says there is a mere 25% chance of a rescue plan that does not involve a near-term bankruptcy, and there is only a 5% chance of a “freefall” Chapter 11 filing (one with no pre-set terms). That means Moody’s believes there is a 70% chance of a government-backed prepackaged filing.
For investors in Ford (NYSE:F), this is no big deal. The company’s balance sheet shows enough cash to get it by for at least another year. But for the folks that have an equity stake in General Motors (NYSE:GM), it means your shares could be worthless in a matter of weeks, even days. Get rid of those things while you still can.
Cut and run
If you want to reinvest the cash, put your money in the suppliers feeding Detroit. They will be able to survive a bankruptcy with some short-term pain but little permanent damage. Best of all, you will be able to get them dirt cheap following any news of a bankruptcy filing. Initially, shares will plummet.
So take this as a call to action. Be prepared to buy shares of Detroit suppliers like Tenneco (NYSE:TEN), TRW Automotive (NYSE:TRW) and BorgWarner (NYSE:BWA) on any news or even rumors of an automaker bankruptcy.
Detroit is in a state of purgatory. Its fate is in the hands of the lame-duck Bush administration. As each day goes by, chances of a pre-packaged bankruptcy grow larger. Play the situation right and it could be a very profitable opportunity.
Be prepared to take action between now and the New Year.
Next Article: Dump your shares of Take-Two Interactive (TTWO)
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