5/27/07

It's not exactly breaking news that the once-vaunted and venerable US auto industry is now a bit rusty, to say the least. Earlier this month, private equity hellhound Cerberus bought a majority stake in the crumbling Chrysler jalopy for $7.4 billion (http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1455392120070514),
with newly liberated Daimler division happily motoring off into a strong Euro-tinged sunset
(http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1537748220070516).

(The strong Euro may prove a mixed blessing. Legendary automotive gran sasso Ferrari is having trouble keeping up with demand for its fabulously cool, extraordinarily expensive products in nations with currencies trouncing our own [see "How to Slow Down a Ferrari: Buy It" by Gabriel Kahn, Wall Street Journal p.B1, 5/8/07], while the Bavarian bouncer ramps up its US-made production lines to keep Das Overhead down [http://www.reuters.com/article/tnBasicIndustries-SP/idUSL1540108020070515]).

Even the once Jolly Green GM isn't feeling the flush flow, having reported a $1.1 billion Q1 loss this year. In the general motoring scheme of things, said Washington Post scribe Greg Schneider on 4/20, "A generation ago, half of all the vehicles Americans bought each year were made by GM; today it's just over a quarter." (You can get the opening salvo at http://pqasb.pqarchiver.com/washingtonpost/access/824304831.html?dids=824304831:824304831&FMT=ABS&FMTS=ABS:FT&date=Apr+20%2C+2005&author=Greg+Schneider&pub=The+Washington+Post&edition=&startpage=A.01&desc=Industry+Giant+Falling+Behind%3A+GM+Reports+%241.1+Billion+Loss
but you'll have to pay the ferryman at the WP archives to read the whole thing.)

Where did the wheels come off?

Once again, the bunny tries to see the big picture.

In the post-bellum US, trade unionism became a social and economic necessity, to correct managerial abuses. Up to and during WWI, unions (more than government) played a leading role in this struggle.

Following WWII, unions (which by this point represented the majority of big industry labor) deviated from the path taken by European unions (which were more willing to accept lower wages in exchange for a greater spectrum of benefits, such as guaranteed employment, longer vacations, maternity leaves etc.). Stateside, unions pressed industry leaders and politicians into a "get more, give less" position. Given their position of power in US industry, management (along with government) caved in.

The business model created from this dynamic can no longer support the modern automotive industry. To begin with, modern US auto manufacturers are no longer manufacturers in the sense that they build cars from blueprint to turnkey all by themselves. Rather, they function as large-scale assemblers of components made by other companies. These others (Delphi? Navistar? American Racing--what's more quintessentially American than a set of Torq-Thrust Ds on granny's Maverick?), having built plants around the Big Three auto makers, face the same labor problems as they do, and consequently must pass on the related costs.

Another problem was the Big Three's egocentric thinking. They didn't go overseas looking for new markets (like,say, those in the oil industry). Foreign plants making American cars (to exploit lower local labor costs) were built primarily to export back to the US. It was an "all about us" mentality, a corporate hubris that considered itself above the pit of collapse lurking beneath all companies that don't make the cut.

For GM, the latest body blow came from within. Its financing arm GMAC (of which it owned 49%, the other 51% held by mortgage company Ditech, a large supplier of ARMs and annoying television commercials) was yet another casualty in the subprime lending fiasco.

American car makers have become bloated bearers of ballooning insurance costs, pension liabilities, and IOUs that will never be collected (and incidentally also make cars). How will the automotive industry, once a pillar of the US economy, survive the 21st century?

Enter Rick Conte and Jim Kaplan, a couple of engineering grads from Clemson University. They are the president and CEO (respectively), of a bold start-up called the Southern Motor Company, based in Liberty, SC (http://www.southernmotorcompany.com/).

Kaplan (who is president of electronics manufacturer Cornell Dubilier [http://www.cde.com], a maker of capacitors nearly a century old), saw the trend in retro car design of recent years as falling short of the mark, and so decided to make his own clean machine, one which would be fully compliant with all Federal safety standards as well as those for emissions (with both California and Canada providing the benchmarks--nothing on the EU as yet).

To do this, Kaplan devised a plan whereby a small facility seeded by his capacitor company would design and build the tools necessary to produce a custom superstructure (cab, panels, bed, and exterior parts), to be grafted onto aftermarket running gear. The entire production procedure would be supervised by another American startup, Panoz Auto Development (http://www.panozauto.com), a maker of high-performance sports cars, to insure a vehicle that's fully compliant for US roads.

Just like that? The bunny was dubious. So he called the good Mr. Conte, who was gracious enough to school him on Southern's genesis and its pilot product, the 358 truck (pictured at top).

"The real strength in this whole company is its business plan," he said in a telephone interview. "Jim Kaplan came up with the concept. We’ve been working on this for over two years now, so he’s put a lot of thought and energy into the program. We’ve identified not only a product that has a huge demand, but taken it through the whole development phase, doing the marketing research, building the prototype, and designing the facility."

Kaplan and Conte's vision of the 358 derives from an existing 1954 Chevy 5-window pickup, tweaked by computer for the 21st century. "We stretched the cab to give more legroom, we tapered the hood to give it a sleeker look, we redesigned the grille, we raised the bed, other subtle changes here and there," he explained. "The exterior will be custom designed and tooled. We’re going to the expense for the body panels, the cab, all the exterior body parts, the bed—all of that will be tooled from the ground up custom for this program." The equipment or "tools" used at this stage will serve throughout the 358's low-volume production, which Conte reckons will be a large savings over the life of the program. The truck's running gear will be based on Ford's aftermarket S-197 platform and 330-horsepower small-block V8 (the heart of the current Mustang GT).

Since Southern Motor has only four employees including Conte, the 358's production will be entirely outsourced to Panoz, which will put the pre-production prototypes of the 358 through their paces. "We contracted with them to design and certify our vehicle," Conte said. "They’ll help us build the pre-production vehicles, and take us through the full safety and emissions certification program. There’s a lot of give and take with them on the design, but they have total responsibility to take this vehicle to full compliance. There are literally hundreds of Federal regulations that have to be satisfied. So we’ll take our prototype and build about six pre-production vehicles, and they’ll take them through all the tests, from EPA to front, rear and side impact, rollover, fuel leakage, visibility, lighting, they’ll take those pre-production vehicles and use those to get us through the certification process."

That satisfied the bunny's perennial paranoia for safety, but why build a new vehicle now, in this climate?

"Because the timing is right," Conte said without hesitation (really, check the tape!). "One, the technology is there, you can design efficiently both the vehicle and the tooling. There’s simulation programs that let you do a lot of the work up front without actually having to build and test. Secondly, there’s the aftermarket. Ten years ago, you didn’t have the aftermarket you have today. You can purchase components, you don’t have to design and build them yourself. You can piggyback on existing technologies."

Kaplan and Conte looked before leaping, a most rabbit-like reflex. They commissioned market research from Automotive Insight, Inc. (http://www.automotiveinsightinc.com) to test consumer response to the 358. "At first we thought it would be mostly male baby boomers with excessive income," Conte said (Arlene Brunner, president of Automotive Insight, specified heads of 3-car households with six-figure incomes). "We're learning though the segment is much wider. 10% of our pre-sold vehicles are from women, 10% from retirees, and another 10% from under the age of 40. We're also finding at that we are seeing a large segment from individuals who aren't necessarily into classic vehicles, they simply love the look of our truck."

The Liberty, SC facility was designed to keep two vehicles in production over their respective sales cycles, which will pay off the cost of tooling and design. "That’s what makes the program feasible. We’re going to produce the same truck over and over, we’re not going to have an extended-cab version, four-door version, or multiple engine choices. Every vehicle gets the same options." Said options are primarily color (which spans a glorious PPG spectrum, viewable on the SMC website). Most of the "options" will actually be standard--no plastic on the interior, unlike the Big Three's heaps, just leather and sheet metal, the way the hot rod god intended. Automatic or manual (6-speed stick) about covers it.

According to Conte, the company has pre-sold 58 vehicles at a cost of $55K apiece. A truck purchased today would be delivered in 2009. "We’re going to start off real slow," he continued. "We’re only going to produce about 40 vehicles in the first six months, to make sure we get it right, make sure we can track new vehicles in the field, evaluate their performance, resolve any issues we may have, feed that back into the process. In ’09 we’ll start focusing on increasing our capacities." Conte said the company aims for a target of 1500 vehicles over a 5-7 year sales cycle, during which another vehicle prototype, possible a sedan, will be explored as Southern's next possible product line.

All this does not exactly make Southern Motor a threat to the Big Three, although the bunny considers it an intriguing alternative. "We consider ourselves a niche, low-volume producer," Conte said. "We’re targeting about 1500 vehicles per year, which is a very small number, when compared with the larger-volume programs that have to sell hundreds of thousands of vehicles per year to make a profit. We’re going after a small niche of semi-luxury vehicles (it’s not too high priced), there’s a demand for the product, we did our marketing analysis, and the results proved that even if this were a full-volume project, the demand would be there. American auto manufacturers may be struggling, but they’re still selling millions of vehicles. We’re just a blip on their screen."

(For readers interested in more on the Southern Motor Company and the 358 truck, the bunny recommends reading Dan Carney's fine feature "Retro Miracle in the Making: Southern Motor 358 Pickup" on Edmunds.com Inside Line (http://www.edmunds.com/insideline/do/Features/articleId=116863), as well as Mark Krzos' News-Press.com business article "New High-End Automaker Seeks Investors in Bonita Springs" (http://www.news-press.com/apps/pbcs.dll/article?AID=/20070328/BUSINESS/70327077/0/SS08)

4/29/07

Good ol' Alan Abelson.

The BARRON'S columnist managed to tickle the bunny's funny bone in the 4/30 issue (vol. LXXXVII no.18, p.6). The bunny would like to show it to you, but he can't, because BARRON'S Online is members only, not even open to WSJ subscribers, which tells him that not only are they serious about security, but also about making money in the wired world of e-freebies.

However, you can read it for free starting tomorrow in the periodicals section of your local library (does anyone remember those?).

In this issue, double-A, whose trademark dry wit can (and probably does) round out the perfect gin martini, harps on the case of a disgruntled Iowan who, perhaps because he felt his own portfolio to be lagging while the market was leaping, expressed his displeasure by sending pipe bombs to the HQs of mutual funds in Denver and Kansas City. (In this case, "going postal" would refer to the probability that the highest casualty rate would not be in the boardroom, but the mailroom.)

The would-be Munabomber motives were not disclosed, and the FBI (like the Porsche Engineering division and Rajiv Chandrasekaran at the WASHINGTON POST before them) did not return the bunny's messages. (He is beginning to think he needs an agent.)

"That someone would indulge in so hostile an action is unequivocally reprehensible," AA writes. "But to do so while not only the Dow and the Russell 2000...were setting all-time highs and the market generally was in full roar, connotes an extraordinary degree of frustration. Anyone unfortunate enough to own shares that have been left behind by this historic rally can't help but experience a touch of empathy for the tormented soul."

That's what got the bunny going, because he thinks it portends a rash of stock market manipulation by force, a proud tradition going all the way back to the hoary 1990s. That bull market attracted all sorts of sundry unsavory types, including the unmanicured classes such as foreign and domestic crime syndicates (okay, the latter, at least, probably do get regular manicures). For a quick 'n dirty summary, try Gary Weiss' plain brown wrap-up for BUSINESS WEEK all the way back in, good gravy, 1996: http://www.businessweek.com/1996/51/b35061.htm

The bunny puts any shock and awe you may be experiencing down to cultural amnesia, but really, he thought you might've remembered. After all, this was the stuff of a Sopranos episode, and he knows that humans are primarily visual creatures who believe that TV mirrors reality (what else would you call all that voyeuristic video-mongering about noncompliant dogs and junk food factories, "fantasy" shows?).

If one screwed-up college kid can become the high scorer in his very own first-person shooter game, then surely some enterprising entrepreneurs with a little savvy and a couple of semiautomatics can go well beyond the venerable pump-and-dump scheme? At a time when low volume amidst gloomy GDP and record fuel prices mean that the slightest bit of financial flatulence can push markets well beyond the pendulum of more peaceful times, such bold initiatives may be just what the doctor will have to patch up later after the markets go turbo down the road, across the divider, through the guard rail and over the side of the burning Bay Bridge.

The bunny knows that humans can't resist an offer they can't refuse.

---

4/23/07

What else is troubling me, thinks the bunny as he gnaws his way through a huge bunch of kale. Dark greens are good for you.

These days, what makes the bunny's jaws grind even more than congressmen and presidential wannabes are hedge funds.

Like most prey animals, the bunny does not like taking risks. But he is truly baffled by how much faith (and money) humans place in these freewheeling, cowboying crap shoots in suits.

Originally thought up as a means to balance out risk, hedge funds' original goal of "hedging" is defunct in all but name. There are now over nine thousand of these funds, financed heavily by high net-worth private investors and free from much of the regulatory pressure which define the conduct of peer investment organizations. Basically, these self-styled financial gurus lock up capital for a period, with their investments leveraged on the order of about 20 to 1. The formula usually goes 2% annual charges to the investor--and 20% of the profits to the hedge fund manager.

This kind of gig sorely tempts the young, for it can rapidly enable any nitwit to parlay someone else's money into a Nolita condo and one of the various foreign status-mobiles the bunny always sees double-parked in front of Pastis. (Along with the obligatory and unfortunately-termed coke bunny in the front seat--the bunny views this slur as an affront to lagomorphs everywhere.)

For those of you who read history, the bunny would like to remind you to read up on the investment pools of pre-1929. Former Fed fuhrer Greenspan didn't slap tighter controls on hedge funds for fear they'd flee offshore--which they did anyway, many of these funds having incorporated outside US limits.

The bunny hopes tighter controls will be enacted to rein in the crazy trading and wild capital surges of the hedge funds (or at least the banks that work with them). Their wild ways make for volcanic volatility, and one bad day (as opposed to, say, a bad month for stock markets) can bring disaster down on the whole warren. Bayou Management or KL Group, anyone?

The bunny is not alone on this. On 4/12 Ben Bernanke at least tried to ring the bells, though few besides the bunny seemed to notice. "The failure of a highly leveraged fund holding large, concentrated positions could involve the forced liquidation of these positions, possibly at fire-sale prices, thereby imposing heavy losses on counterparties," he intoned. ("Counterparties" in this context would be everybody else, starting with commercial and investment banks, then their depositors; after that, the pellets roll downhill.) "In the worst scenarios, these counterparty losses could lead to further defaults or threaten systematically important institutions." (For more of Bernanke's long answer, check out this short article, http://select.nytimes.com/search/restricted/article?res=F20911FB395B0C718DDDAD0894DF404482)

In other words, the style and volume of hedge fund activity is enough to spill the whole cauldron (and scald the cook to death.) Look up, look up, greedy primates, warns the bunny. Pouring money into hedge funds in hopes of quick enrichment is tantamount to baring your cheeks to the buzzards.

4/16/07

Gresham's Law states that "Bad money drives good money out." This maxim came back to the bunny as he waited out the most recent cold spell in his customary fashion--plopped on the couch for his umpteenth viewing of WATERSHIP DOWN. (Yes, he still chokes when Hazel croaks; no one does death scenes like bunnies. Kudos to that Richard Adams feller.)

The US dollar plungeth; if you don't believe the bunny,try Euronews://newsclip.ap.org/D8OHUDL00@news.ap.org. This is not merely to say that it has lost value against other global currencies--other nations are losing their faith in it. Aside from the enormous ownership of US debt by foreign governments, this is measurable in the spike in commodity prices--most notably gas and oil.

Typical responses of the wizards in Washington to this situation have been either to A) print more money, with the consequent inflation requiring exceedingly high interest rates to correct, or B) a realignment of the currency [read: a further, planned devaulation], such as took place with the 1985 Plaza Accord (the legacy of which, for all you 1980s bunnies, included the purchase of Rockefeller Center by Japanese interests).

The bunny knows that when the green upon which one depends has lost its nutritional value, it's better to hold out for greener pastures. The devaluation of the dollar which continues as of this writing is a primary reason for US capital flight. This, in turn, disrupts global trade patterns. There is no neat and clean way to rectify the problem, but curbing expenditures is at least a partial remedy. A slowed slide in the US dollar can at least buy time until said pattern disruptions present difficulties to trading partners which may (and historically, have) reversed the slide in the dollar's strength. Not until then would the "good money"--investment from other nations with greater currency stability--return, thus making lean pastures green again.

A good thing, from the bunny's point of view.

POSTSCRIPT: the bunny is far too freaked out by Jeffrey Ball's article on renewable diesel (http://online.wsj.com/article/SB117669276713570908-search.html?KEYWORDS=jeffrey+ball&COLLECTION=wsjie/6month)

but his loyal staff has braved its messier implications to conduct further research.

3/25/07

The bunny thinks he is losing his mind.

He thinks this because he has lately heard a mantra on CNBC increasing in volume and frequency: buy high, sell higher (and borrow cash to do it).

The first time he heard this he thought he had ear mites.

An era of historically cheap money has yielded rampant speculation across the board. Its legacies are a real estate bubble, the subprime lender meltdown, the carry trade, and an explosion of loosely-regulated hedge funds, all of which carry much more water than needed to rock the boat.

And humans are still not satisfied. Woe betide you, greedy bipeds, thinks the bunny. As ye sow, so shall ye be reaped, prison-shower style.

The bunny thinks thinking an interest rate cut is baked in the cake derives from copious cranial/culinary confusion. A rate cut would be akin to squirting gasoline on a barbecue, with increased borrowing to fund increased speculation the messy result. As if things weren't volatile enough.

Watching the self-styled seers on television or eating their words from the periodicals he shreds, the bunny is reminded of the famous Joe Kennedy story, in which one of America's most successful crooks beat the Great Depression by selling all his stocks after being questioned on the market by a shoeshine boy just before the crash. (A close personal acquaintance of the bunny's experienced the same thing in the fall of 2000, when a Haitian cab driver asked him in broken English for that day's closing price for Microsoft.) The moral is clear and straightforward--rampant speculation Bad.

An interest rate cut (which may yet occur as we slouch toward another election sludgefeast) would only intensify volatility and inflate future bubbles. Not good with an incumbent legislature that does not even call "letting current tax cuts expire" a "tax hike".

And just as overly cheap money is financial nitroglycerin, so too is unchecked media harping on the subject. Incessant round-the-clock yammering about rate cuts fans the flames too. As Max Frankel said when writing on the Scooter Circus in the NYT magazine (http://www.nytimes.com/2007/03/25/magazine/25Libby.t.html?pagewanted=10&_r=1&ref=magazine), "Back off. Butt out."

The bunny would add the following corollary to the good folks inside Media Moloch: "Shut up and shut down."

3/11/07

The bunny loves it when the president takes trips. Thanks to television, it seems to the bunny that he goes along too.

This president, however, seems to have a fly in his suntan ointment. Said fly, is, of course, his oddball ethanol policy, which has Latins screaming and throwing things from Mexico City to Rio de Janeiro.

Corn is the flavor of the moment in Washington, and as a dedicated herbivore that suits the bunny just fine. It's just that politics is spoiling all the prime vacation spots. There's no way for him to check out all the hot beach bunnies and their Brazilians in Sao Paulo as long as the US maintains high duties on their ethanol to protect US ethanol makers. Nor can he munch mami's tortillas south of the border, since their price has jumped 40% to .35 a pound, in a country where the minimum wage is less than $5 a day. (See Elisabeth Malkin's article on Mexican protests and food prices in the NEW YORK TIMES, 2/1/07.) Poor President Calderon--his buddy the Texan has caused the price of corn, Mexico's staple grain, with ethanol embrace.

Massive US subsidies of ethanol producers are having all sorts of unintended consequences--the price of animal feed, for instance, which spiked thanks to the corraling of corn for ethanol, which took 20% of last year's corn crop and is expected to take 25% of this year's. Which means that the price of meat and poulty rises, natch. (See AP 3/9/07, or just read the latest report from the USDA, http://www.ers.usda.gov/Briefing/Baseline/livestock.htm.)

The bunny is all for cleaner, more efficient technologies. But being a prey animal makes him an expert on cause and effect, and this one's shaping up to be a doozy. Screaming Brazilians, man, screaming Brazilians. These are the people who redefined languor, in Portugese no less! The bunny dreads what the politics attending the biofuel craze will lead to next. If somebody comes up with a way to run cars on semolina, the president better cross Italy off his list, for someone will surely take a shot at him.

3/5/07

If the bunny had opposable thumbs, he'd be sticking them in his eyes by now. Sticking them in his ears wouldn't hold out all the nonsense that's clogging up the networks, airwaves and bandwiths these days--those long lepine ears, perfected by listening for the slightest hint of danger for millennia, are far too acute for such crude measures.

One newsbomb has his whiskers in a twist, however. The bunny cannot believe that Congress is seriously pushing the H.R. 800 bill, which would enable union certification with just the flash of a card. Goodbye secret ballot, goodbye worker choice, goodbye oversight. Picture the scene, the bunny asks you: one fine morning, you hop to the front door of your work-warren, where six gorillas are waiting for you. Carry this card from now on, they say, Or Else. Implicit in the "Or Else" suffix is the unspoken understanding that your "vote" will reflect the union party line. It better, since the results will be made public to your co-workers, union reps and the bosses. The potential for coercion is immediate and unmistakeable. It is a mafia pipe dream.

Steve Pfister, a head flack for the National Retail Federation's government relations arm, said as much in a letter to House Speaker Nancy Pelosi on 28 February. "There are many examples where card check elections have been challenged on the basis of coercion, misrepresentation, forgery, fraud, peer pressure and promised benefits." (PR Newswire, 3/1/07).

Such self-segregation of unions from Federal regulatory bodies would be "throwing away half a century of labor law in a single month," warned Pfister's co-flack Rob Green.

This, the bunny thinks, could make unions much easier to manipulate for particular agendas. Strikes could be crushed from within, whistle-blowers would end up in dumpsters with the evening trash.

All of which has happened before. This, the bunny thinks, is what happens in a major port city where the ports are now largely for tourists. Albert Anastasia got his start running the Brooklyn waterfront; the Westies ran the Hell's Kitchen piers. Again, again, all over again.

The bunny shudders and goes back into his box.

2/25/07

The bunny is currently indulging one of his rarely witnessed hobbies: media mastication.

Like all prey animals, the bunny lives in a constant state of Yellow Alert, scanning his surroundings for any hint of impending danger. Having survived this long, part of a species that was old before glaciers gouged great gashes across Westchester, Duchess, and Orange counties, he is highly adept at reading the warning signs.

And occasionally, perhaps in a spirit of vengeful mammalian malevolence, he likes to shred them.

Take, for example, Jennifer Ablan's whistle-blowing analysis of record margin buying of both domestic and foreign equities (Reuters, 2/22). Margin debt has cleared its record high of $285 billion, and just seems to keep rising. Any similarities to 2000, 1991, 1987, or even 1929? Say it ain't so, Jen! SHRED! The bunny makes all gone in a fit of lagomorphic mayhem.

Then there's Wil Hylton's aping of the Constitution's Articles of Impeachment in the March issue of GQ (hang the designer!), for the accurate but woefully unpatriotic listing of Vice President Cheney's gross violations of Federal law with respect to the cherry-picking of intelligence and his ongoing, lucrative and highly questionable relationship with Halliburton. Shred!

Don't forget the gleeful expose in VANITY FAIR by Don Barlett and Jimmy Steele on SAIC, the shadow contractor hawking "expertise about weapons, about homeland security, about surveillance, about computer systems, about 'information dominance' and 'information warfare' (p.344) to a government too downsized to deal with such trivial matters itself. Too insidious, too suggestive, too manga? Shred, shred, shred!

And let's not overlook Byron Calame's troubleshooting Op-Ed piece in today's NYT, in which the Public Editor gamely runs interference for all the nay-sayers among us (not even counting the bunnies) "who believed the TIMES was again serving as a megaphone for the White House" (E14) in its reporting of US arrangements for air strikes on Iran. Shred! Craig Unger's more detailed reporting on same? Shred! Seymour Hersh, The Man, with even more details on this from the region, due to spurt from newsstands in tomorrow's NEW YORKER? Shred, shred, shred!

If the bunny could find a way to get his mighty mandibles around TV broadcasts, he certainly would, what with CNN's saturation coverage of Anna Nicole's meltdown and Jim Cramer's braying about a Dow at 16,000 all over CNBC. A triumph of Cenozoic design, the bunny's jaws would make short work of such troublesome fodder, all of which points to carnage on a blood-red horizon.