An Analyst’s Conviction and Chrysler LLC

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.

Chrysler’s Non-Event

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.