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Monthly Archives: May 2009

I recently read a piece in one of the CFA Institute publications about the dangers of “conviction” levels.  Warren Buffet talked abut the need to constantly challenge one’s own convictions and outlooks as an excellent measure to keep thinking fresh, timely and accurate.  It was with this in mind that I recently stumbled across an amusing pair of headlines in the May 11th issue of Automotive News.

Let me first say that the auto sector fascinates me for three reasons.  First, it is extremely important to the US economy.  One statistic everyone has heard is that roughly 1 million people (read as consumers) depend on GM’s post retirement health benefits.  Second, it is a huge consumer of resources.  Approximately 30% of steel consumption goes to the auto sector.  The plastics sector depends quite heavily on automotive as well.  Finally, it is a microcosm of many problems facing the US – healthcare, retirement benefits, environment, reliance on  fossil fuels, new fuel technology and demographics.

So I opened up the May 11th issue of Automotive News and found this curious headline: “Chrysler shoppers shrug of Chapter 11”. The article goes on to say that Kelley Blue Book’s survey of consumers showed that people care little if at all about the bankruptcy.  Sure, cars were junk before, they’re junk now.  But another survey by Edmunds.com ntoed that the percentage of respondents who said they would consider a Chrysler for their next purchase increased 30% in the 7 days after bankruptcy was declared. 

Now, I was convinced, along with many others, that once an OEM filed, buyers would flee out of concerns that the warranties would become worthless.  We were in good company, in conclusion, if not in reasoning.  In a sidebar to that same Automotive News article was the following headline “Residuals tumble after Chapter 11 filing.” Apparentlythe Automotive Lease Guide slashed residuals on Chrysler products after the Chapter 11 filing.  Now that makes sense.  And this fits my previous conviction. 

The bit about consumer acceptance really shook my conviction, however, so I paid close attention to the Chrysler Financial lenders call.  One bit of info that came out was that auction sales in May decreased (i.e. more fleet and lessor purchasers) and prices at auction actually rose.  Apparently, Chrysler cars and minvans became more valuable and desirable after bankruptcy.  These result more reflect the Kelley Blue Book and Edmunds.com findings in the main article than the sidebar leasing information.

One big take away for me was that conviction levels must always be tested and tempered.  Even an obvious outcome may not be so obvious, so we as analysts must be careful and humble in taking a view on anything.  This sounds obvious, but I know I often claim a high level of confidence in an outcome.  Quite possible that confidence could be greatly shaken.

But that’s just one credit analyst’s opinion.

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Brad DeLong posted on his blog this piece from the FT.  I normally try to come up with original stuff, but this really scared and fascinated me.

Reading in the Philadelphia Inquirer today a quote by a hiring manager from Wal-Mart caught my eye.  What struck me about this was that the brief piece noted that he worked at a “hiring center”.  That sounds interesting, because one might normally expect hiring to occur at the store level, not at a separate, specially designated center.  A quick google search unearthed an article noting that WMT had recently opened a hiring center, in Woodbury, NJ to help find 550 workers for a new facility in Deptford, NJ.  According to the New Jersey CAFR,  back in 2006 (as former state budget analyst, trust me, the wheels of government grind slowly and its hard to get very up to date information) WMT was the 6th largest employer in NJ after Shop Rite, Verizon, UPS, Harrah’s and J&J.  So here we have one of NJ’s largest employers actually expanding operations to hire new workers in the ninth most populous state next door to the nation’s sixth largest city.

Naturally, the people mentioned in the article appear to be looking for sympathy, but again, we see who WMT helps to employ.  One of the interviewees is a former real estate salesman.  Even money would bet that this gentlemen came to the real estate game during the recent bubble lured by the promise of quick riches with low barriers to entry (rumour has it that a typical real estate exam requires a pulse and little else).  None of this is made explicit in the article, but one can’t help but wonder. It seems as though WMT tends to catch individuals who have made mistakes in the past, whether that may be banking on a ethereal industry like real estate or having several children out of wed-lock that makes it difficult to find permanent work.  The members of one family of three interviewed have been unable to find work since October 2007. These individuals are normally supported by the social safety net.  However, in some instance, this breaks down.  In the case of the real estate agent, health benefits for him and his wife run to $1,300.  In other G7 nations, that is provided by the state.  Here, it will be provided by WMT, either directly or through a salary that helps to fund that cost.

So, while we don’t have a government safety net that provides employment or benefits to the family of three or health benefits for the Mr. and Mrs. Real Estate Agent, we have WMT.  More interestingly, WMT’s revenue stream this day appears more robust than that of the US or local municipalities!

As part of my work, I rely on statistical analysis to guide my thinking and broader analysis.  Lately Ive seen correlations go haywire, as can be expected in times of stress.  Just to give a flavor of the industries that have been hit: oil rigs in the US and Canada, furniture manufacturers, RV manufacturers, auto manufacturers, even GDP (mainly consumption and residential investment).  For a credit analyst, the all time most worrying of these is the path of recovery rates, which are tightly tied to default rates, as default rates rise to unprecedented levels.  These trends and their correlation to other indicators no longer follow historical patterns.

As a result, our models can only be used if we extrapolate trends, which is very risky.  So as I regress variable on variable on variable in an attempt to at least define the contours of a pattern or a trend, I find myself forecasting/predicting beyond the reach of applicable historic data. If anyone has an idea how to handle this, then please share it.  I have some ideas, such as adjusting predicted outcomes by the lower of the error terms (assuming that tings cant REALLY get as bad as as the model usually predicts), but I would love to hear from the blogoshphere.

I’mreally going to go out on a limb here.  Ive been trying to get excited and worked up about this bankruptcy, but can’t seem to get too exercised.  I have exposure to Chrysler Financial, which surprisingly rallied on news of the filing. I also have exposure to the auto supply chain, which does worry me.  So I should be a bit rattled. But it seems like this will be well managed and “surgical”, a term which sounds really silly.

I was a bit discomfited by the plans for the UAW to hold 55% of the equity, which immediately appeared to me to be a case of the lunatics running the asylum, or my like the unions, running business.  Right, uh, that is exactly what we have.  But a colleague laid out the excellent logic of handing the mess to its creators.  Perhaps now the unions will have a greater incentive to manage the company to profitability and not to employee benefits.  I would that it were that clear.  I still despair that the UAW will not in fact be any different.

At any rate, I cant get too exercised. perhaps because there is a measure of inevitability in it all.  I do wonder if Chrysler was the first because of its private equity ownership. I cant help but think that this has something to do with it.  We’ll see how it all rolls out.