Posted on 08/28/2007 12:22:40 PM PDT by Hydroshock
Yep, you want to make a auto dealer choke, pay cash.
When there is a credit crunch, weak businesses die off, the strong survive. Then the strong spread and take over some of the business from the fly by night operators who died. And new upstarts can get a chance to get in on the action.
I bought Citigroup a week and a bit ago near the lows, thinking it will be one of the strong to survive. Get back in the mortgage game, and be able to charge fat spreads. We will see how it goes!
The autobusiness itself needs a shakeout. Way, way too many dealers for the domestics, and the domestic companies themselves at least one needs to die off. But with cheap credit they keep limping along, undercutting everyone else just to stay alive.. and in the process killing profit margins.
Kudlow is thrilled when companies outsource 20,000 US jobs. But now that some of his buddies are feeling the heat for poor investment decisions, hes screaming for government intervention.
What goes around comes around.
Exactly my point.
I agree that C is a buy down here, with a fat div. I have a spread on C going.
All dependent on whether they will continue their dividend, which I consider the very strongest of likelihoods but not any kind of certainty.
And as Reagan liked to say, an economist is someone who sees what works in practice, and then wonders if it works in theory.
That was the advice Hoover got back in 1929.
Good for them. The rate aint getting cut.
I’d much rather go by the CEO’s than the PhD’s in the Federal Reserve. They were also screaming at Greenspan back in 2000.
I also like C because of big international operations. If the dollar gets beaten up badly, their overseas profits will be even bigger. I’ve been wanting to buy some other companies for the same reason, but many have been stubbornly holding up. I was hoping for intc to come down!
I only took a small position in Citigroup so far.. I’m going to wait to see how things play out, if it goes a lot lower I will probably buy more instead of selling my position. Depending on the reasons it goes lower.
“I asked what was up and he said Ford made more money on the finance.”
I assure you that the dealership got a huge cut too. Ford might be making money, but the dealership is living on those finance deals. Most dealerships sell the vehicles at cost, and make their money on financing and insurance (F&I), as well as rustproofing, service contracts, etc.
I believe the way out of 1929 was to print debt free money into the economy to counterbalance the decrease in loans.. to write off a huge amount of debt by allowing big bankruptcies.. thus keeping that money in the system.
Likewise in this situation I don’t think its a great idea to try to continue a great wave of new borrowing by lowering interest rates to nothing. Thats what they did in 2001.
“That was the advice Hoover got back in 1929.”
That crunch was caused by the depression in post-war Europe, as well as wild margin trading. Neither of those situations apply now.
The closest things we have to that situation now is the wild rise in real estate prices fueled by progressively more daring loan terms.
The cause in this case is irrelevant. The fact is Hoover got bad advice that a big financial crisis was a good thing. He was told the weak would go out of business and the strong would take over.
I think you've got your years mixed up. Had Greenspan not hiked rates too high, and been so slow to correct his mistake, then rates never would have been lowered to 1%.
In our current situation, the damage has already been done. Lowering rates now isn't going to change that. The longer the Fed waits, the more it's going to have to lower rates in the future. It's like the mechanic says, you can pay me now or you can pay me later.
In a credit crunch you want more inflation. So thats simple lower the rates right? Well its not so simple. Because first off it may only slightly increase borrowing having rates lower by a percent. Do tons of new projects suddenly become viable at 4% interest versus 5%? Probably some do, but the number may not be that high. And investors may demand a higher spread anyway to compensate.
The big problem is the more companies limp along but dont’ die.. the more they are paying off debt + interest. So imagine GM with lets use 160 billion in debt for arguments sake. If GM goes bankrupt, its assets are auctioned for say 20 billion, and the first in line creditos get their money.
Then the next 140 billion is gone. And probably all the leveraged garbge borrowed on top of that. But lets just use 140 billion. So then that debt is simply written off. Which means that 140 billion stays circulating in the economy.
Meanwhile if it needs to be payed back, even at 2% interest.. each payment that ends up at the fed removes that money from the money supply. + the additional 2% interest disappears from the money supply. Meaning someone else, somewhere in the economy has to borrow that same amount of money to get it back into the money supply. Say they payed off even 5 billion of it one year.
If companies are paying even just the interest on a mountain of debt they borrowed in the past, that money is disappearing from the economy. And it seems unlikely they are going to borrow new money at this point in time regardless of the interest rates. Afterall we see across this economy oversupply. Too many auto plants.. too many McDonalds and strip malls, etc.. Which is the typical outcome of a credit bubble.
Ironically if we lower rates just enough to keep up these walking half-dead companies, the amount of dollars could shrink. Causing deflation! The dollar could actually rise against foreign currencies in that situation. Well I admit I could be wrong on my evalution of the market, but I know one thing Bernanke has some very difficult decisions on his hand!
It's not just Ford, for I bough a Nissan Titan and got a similar story when I wrote the check.
Happiness is a paid-off mortgage, and no car payments, ever.
That's $140 billion that doesn't get paid back, which leaves the banks with $140 billion less to lend. That's why bankruptcies are deflationary.
Amen.
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