Ultimate Bottom Lies Far Below

Because we never shared investors’ wild enthusiasm for Cerberus, its near-collapse in recent days hardly came as a shock. The once-huge private-equity firm specialized in distressed assets at a time when even the bluest of blue-chip companies – the name Lehman Brothers springs to mind – have fallen into mortal peril literally overnight. Cerberus’s biggest gambles were in GMAC and Chrysler. The latter company’s future looked as bleak to us five years ago as it did in May, when the automaker went belly-up. What could Cerberus CEO Stephen Feinberg have been thinking?

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Chrysler’s death rattle coincided with the supposed comeback of the hemi-head engine, an older technology that made it possible to achieve higher fuel economy without re-inventing the engine. Just before the Big Three went careening off the road, Chrysler’s top sellers were big, powerful and, arguably, ugly.  Is it possible Cerberus thought the well-hyped cachet of Chrysler cars with the hip-hop crowd would revive America’s love affair with muscle cars?  In any case, $4 gas doomed the affair before it even warmed up. In fairness to Cerberus, it should be noted that someone even smarter than they, namely Kirk Kerkorian, got seduced by Chrysler. However, Kerkorian and his partner, Lee Iacocca, miraculously avoided losing their shirts after making an abortive $4.5 billion bid. Cerberus evidently thought it had the white knight role down pat, but instead found notoriety as a greater fool.

 East Side Benchmark

The surprise is that Cerberus still has any assets left. Clients reportedly plan to withdraw $5.5 billion, or 71 percent of the company’s funds, but that will leave an estimated $2.2 billion to gamble with. We don’t envy Cerberus the task of picking winners from amongst the many investables available these days at seemingly attractive prices. If Cerberus does live to fight again, we wouldn’t be surprised to see the firm make the same mistake again, buying assets that have fallen in value by perhaps 30%-40%  but which still have a great deal further to fall. Into this category we would put high-end residential real estate, mall-heavy REITs, and the shares of any retailer selling goods other than survivalist staples. We hold to our prediction that East Side co-ops that once sold for $10 million eventually will change hands for $250,000 or less. To any investor looking to buy the bottom, that is one possible benchmark we would suggest applying. By that time, the very idea of investing in anything is likely to induce nausea in the relative handful of potential stakeholders who remain. If they buy anyway, they’re the contrarians we’d bet on.

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  • Market Sniper September 5, 2009, 5:22 am

    I would suggest to Cerberus that they wait to go on a buying spree when a New York City taxi cab medallion is on par with a seat on the New York Stock Exchange in cost. Sure sign of a bottom in the past. There you go, Cerberus, and I won’t even charge you a consulting fee.

  • Chris September 1, 2009, 8:08 am

    Thread’s done, but one should point out, that for once Daimler Benz made up for its foolishness in taking on Chrysler a decade ago, by pulling the rip-cord just in time, and finding that greater fool!

    Going short Chrysler when they did was a great move on DB’s part.

    “What could Feinberg have been thinking?” Hubris surely, because if even one of the great car companies (give or take a misstep) couldn’t make it work, why would a financial spingeneer be able to? These guys know so much about cars, that they don’t hesitate hiring creeps like Nardelli…
    Or else mega-fees, banked by SF long ago off-shore?

    BTW, I like the 300!

  • Rich August 31, 2009, 8:08 pm

    Speaking of bottoms, the Economist did a surprising summary of 14 countries with depressions in the last century, including Germany in WWII and 1929-32, Japan in WWII but not the last two decades – tell that to the new winning Opposition Party, Russia 1989-98, USA 1929-32, Saudi Arabia 1981-85, Argentina 1998-2002, Poland 1978-82, Hungary 1989-93, Chile 1981-83, Venezuela 2001-03, Czech Republic 1989-92, France 1929-32, Indonesia 1997-98.

    Although Rothschild-owned E genuflects to the ideas of neoKeynesians, they do acknowledge depressions and recessions have different fixes, monetary and fiscal, and they admit policymakers may make mistakes.

    One of theirs is to not recognize the USA is in Depression, GDP having fallen 16.5%, more than the -10% threshold.

    Clearly, depressions and hyperinflations are not always linked, eg Asia.

    They more often involve strong men and war…

    http://www.economist.com/businessfinance/displayStory.cfm?story_id=12852043

  • Rich August 31, 2009, 2:28 pm

    In his 18 August 2009 New York Times Op Ed, The Greenback Effect, WEB quoted Cambridge Don mathematician turned economist, Fabian Socialist JMK:

    “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

    This is the last war, since the creation of the Fed and IRS in 1913 (except for 1929 to 1949) many are still expecting.

    However, today the issue is more that of 1929 to 1949, and we paraphrase:

    “By a continuing process of deflation, bankers can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

    The three-headed dog keeping souls in Hades got hit by something it did not expect or recognize. What else might we expect of a former Treasury Secretary Chair, Vice President Partner, Defense Secretary client and two Bernard Madoff Ponzi feeders adding to the excess of unserviceable debt?

    Jefferson, who went bankrupt, warned us of both:

    “Banking establishments are more dangerous than standing armies… The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered… If we run into such debts as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, and give the earnings of fifteen of these to the government for their debts and daily expenses; And the sixteen being insufficient to afford us bread, we must live, as they do now, on oatmeal and potatoes, have no time to think, no means of calling the mismanagers to account; But be glad to obtain subsistence by hiring ourselves to rivet their chains around the necks of our fellow sufferers; And this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for a second, that second for a third, and so on ’til the bulk of society is reduced to mere automatons of misery, to have no sensibilities left but for sinning and suffering…and the forehorse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression. ”

    William Crapo Billy Durant and Rick Wagoner’s GM was just another victim of bankers who loaded GM with debt to repo it…

    Regards*Rich

    ps: And what happened to GM can happen to Uncle Sam…

    http://www.jubileeprosperity.com/

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