A GM type of market

[gosh]

A GM kind of market

by gosh

I have heard many explanations about why the US markets are have been tanking, but one i haven't heard is the relation to GM's woa's and the US market.

In 2001 the US economy was in recession, and with the terrorists attacks it seemed the concessious was the automakers were doomed. The market was flooded with used cars and people defaulted on loans and lost their jobs.

Because of the hostile environment, GM offered lucrative promotions on there vehicles, such as 0% financing or $3000 cash back. These incentives coupled with 40 year low interest rates caused many people who were on the sidelines thinking about buying a car to buy a car (including me).

The problem though is by "greasing the wheels" to increase demand, GM was sacraficing future growth. People who might have bought a GM vehicle in 2003 instead bought one in 2001 and 2002 because of the deals. This meant there would be less demand over the coming years. GM knew this at the time, but continued to offer steep discounts on there vehicles, because if they didn't sales would majorly drop because of lack of demand.

The problem GM faced was they were producing too many vehicles and the only way to sell these vehicles was by sacraficing future demand. GM's union contract states that if they idle a plant, GM still has to pay all workers full wages, as if they had worked. This forced GM to overproduce to keep there plants going.

All of this led GM to be dishonest to the public. They knew they were over producing and eating future demand, but they continued to do so because any admission of problems would cause the stock price to tank.

Then in 2005 things climaxed. Things were so bad that GM was forced to announce the bad news. Lots of people were laid off, plants were closed. The stock hit 30 year lows. GM lost 12.8 billion in just 2005.

The problem was GM had too much supply and was discounting there product too much, often at a loss. So GM closed plants, and ended (for the most part) steep discounts. And so far the plan has had some success. GM is making money again. Eventually demand will pick up and GM will be in good shape.

I think GM's story mirrors the US market.

In 2001 because of a recession and terrorist attack, interest rates were lowered to 40 year lows. This caused anyone who was thinking of buying a home to buy a home.

The only problem was by 2003 interest rates started rising again, and future demand was eaten by the low interest rates. Instead of being honest about the problem and seeing there stock price plunge, the real estate sector bought growth by lowering standards to the people with the worst credit. These people didn't buy a house in 2003 because they couldn't afford it or because they had risky credit.

This fueled the growth from 2003-2005. The real estate industry ran into the same problem as GM: by lowering standards and severly discounting the product and not addressing rising supply, the real estate industry grew at the expense at future growth.

What we are seeing in the US market today is what GM experienced in 2005. The real estate companies are finally being honest and saying how bad things really are, because they have no choice.

The bad news is there will be negative growth over the coming years, and real estate companies will have to stop giving mortgates to people with bad credit with no money down - the standards will have to be raised. No one can stay in business by flooding the market with severly discounted product. You have to reduce supply, you have to decrease promotions.

However, there is a bright spot. Many people are just refusing to buy anything with "real estate" in it, but i think that's a mistake. Just like foreign auto makers made money in 2005 (such as Toyota) when GM was losing $12.8 billion, there are going to be companies today making money while other lenders go bankrupt. The market panic really opens up opportunities if you'll willing to see not all real estate is created equal.

I've been putting my money into health care REIT's. REIT's have alternate sources of funding other than banks. The whole point of a REIT is to get financing when the real estate market is bad. Also, health care REIT's typically don't invest in residential housing. They invest in commercial and retirement homes. Commercial real estate hasn't seen a major drop, and retirement homes have a lot of room to grow. Commercial real estate should be unaffected by subprime. Next year baby boomers will become eligible for social security. I think you'll see a huge demand for retirement homes that health care REIT's have. There's a lot of potential.

The REIT i like is HCP. It has a market cap of $5 billion, making it one of the biggest. This size advantage will allow HCP to be able to pounce on any opportunities that come up. There's a chance interest rates will come down soon, usually that benefits real estate. It's size also makes it more liquid, since most health care REIT's have market caps at $1 billion. HCP will be around long after other health care REIT's go bankrupt. It's price has also come down about 20-30% during this correction, limiting the risk. And let's face it: no matter what state the economy is in, old people need retirement homes.

(I own shares in HCP in case you didn't notice, i also own PFE)

So that is gosh's take. It'll take a couple years for demand to get back to historic levels for real estate, just like it took GM 2 years to get back to profitibility. There will be a lot of pain as companies go bankrupt and good people lose there jobs, just like Gm downsizing plants. However, not all real estate is created equal, just like not all car companies are the same. Everyone is avoiding real estate stocks like the plague; there has to be money made in investing in the right company.

-go$h

[tain]

I'm not qualified to comment on most of your excellent insights, but I would like to say that I have a friend in Detroit whose union is currently in negotiations with their plant. A walk-out seems imminent, followed by many lost jobs. Just my $0.02.

[MAVERICKS CHOICE]

Well here in Aus everyone reckons our leader's s*** don't stink & all. But I reckon we are in serious trouble for the future. The Gov has all but sold most assets, Interest rates are up, peoples right @ work are @ risk. Our Gov says everything is in the black but overseas debt is escalating. How much does the US owe to external sources?