Yeah I am taking it back to the old school and hitting you up with a little MC Hammer. Back in the day, Hammer had a little assistance from his buddy neon Deon Sanders with this anthem To Legit Too Quit. And with the latest bailout money being tossed around for the auto industry it seems like Congress is saying that Ford, GM and Chrysler are to legit (or to big) to quit! And we have stronger evidence this weekend, with a report written by the Wall Street Journal that indicates that the Big 3 get big dough from a bailout plan that is currently in the works. What does this sound like?!? Well it sounds an awful lot like the bailout deal that was struck for financial firms on Wall Street. However, there is a slight difference and that difference is there are definite strings that it appears will be attached to the Big 3. How odd Congress didn't choose to place these same type of strings on the 700Billion dollars that was given to the Wall Street firms but hey who's counting, right!?!
My job is to capitalize on this new development, dubbed the Auto Bailout and figure out how we can make a trade on it. I am going to argue that you may see some of a bounce in Ford and GM's stock but there is still too much risk in investing in these commpanies, because just like AIG, the only financial firm to have signficant strings attached to their bailout deal, strings in your deal mean that the common stockholders get crushed in the process. They get sent to the back of the payment priority line and have nothing to look forward to in owning the stocks for the next few years as the government moves into the pivotal number 1 slot of receiving its payments first. Say goodbye to fat dividend payments to common shareholders. So whats the trade YOU ASK!
I say buy the beaten down auto parts makers!!! BUY: Lear (LEA), TRW Automotives (TRW), Johnson Controls (JCI), and Borg Warner(BWA) because of this reason:
A buy on auto parts manufacturers make sense here because we have a high probability that the auto bailout will be approved. While it is unsure whether the bailout will wipe out shareholder value for GM and Ford...it definitely gives the auto part makers a huge boost in the short term because their worst case scenario, which was priced into the stock, its now of the table because the Big 3 are saved for the time being. In plain English, no bankruptcy means these guys actually survive and that should be great news for the stocks!
And I am adding these bad boys to the STOCK TRACKER to see how this trade would work out.
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