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Bailout Cowboys To Detroit: No Bailout For You!

Bailout Cowboys To Detroit: No Bailout For You!
By Simon Maierhofer, Co-Founder
November 20, 2008

SAN DIEGO (ETFguide.com) - Forgive me for quoting Seinfeld the second time in one week. Following Detroit’s struggle to get a slice of the bailout reminded me of Seinfeld’s classic episode, the “Soup-Nazi”. For those not familiar, here’s what you have to know about the Soup Nazi.

The Soup Nazi made the best soups in town and knew it. He would serve his coveted dish only to customers willing to follow a strict ordering process and reserved the right to refuse service to anyone he didn’t like (Elaine and George).

Introducing: The "Bailout Cowboy"

General Motors (NYSE: GM), Ford (NYSE: F) and Chrysler must feel like Elaine and George. No approach, whether with reasoning, begging or threatening seems to soften the “Bailout Cowboy” and his crew (Paulson and Congress).

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Understandably, Congress is suffering from bailout fatigue. We all are painfully aware that the markets have been in a tailspin since the Dow Jones (AMEX: DIA) peaked in 2007. The bailout only accelerated the downfall. If it was fire, you’d call it (the bailout) an accelerant. The S&P 500 (AMEX: SPY) is down about 35% since the bailout bill was approved. That’s a 35% loss in less than 36 trading days.

The bailout on the fly

Even worse, the purpose of the bailout can be changed on the fly. Paulson abandoned the initial plan to buy bad assets to focus on credit cards, car and student loans. Mr. Paulson said he dropped the plan to buy assets because of changing market conditions.

I don’t mean to rub it in, but in our ETF Profit Strategy Newsletter we outlined very specifically why the bailout won’t work. We published this special newsletter the same day the bill was approved.

Throwing good money after bad obviously hasn’t worked. None of the many billions stuffed down the throat of financial institutions has prevented the Financial Select Sector SPRDs (AMEX: XLF) from falling to new lows. This makes you wonder, “Hey, why not give Detroit a shot?”

The purpose of the bailout

An estimated $150 billion of the $700 billion package was allocated to Congress Member’s personal agendas (pork), such as: transportation fringe benefits to bicycle commuters, exemption from tax for wooden arrows and tax incentives to keep TV producers in the US (I'm not making thus up). Why not send $25 billion to Detroit?

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I guess from Paulson’s point of view, it’s easier to answer a “friends” call for help. As former Goldman Sachs executive, all of Paulson’s buddies are in the financial field. When AIG (NYSE: AIG) calls, not only are the conditions of the previous $85 billion loan quickly improved, AIG also gets an extra $60 some billion for good measure.

A piece of advice for the “Big Three”

This doesn’t mean that the execs at the Big Three are without fault. Creating an entire line-up of cars around gas prices is like gambling for corporate profits in Vegas. How come US carmakers are at the brink of bankruptcy while German, Japanese and Korean car makers simply just absorb slower sales?

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Here’s my tip for the Big Three (keep in mind that this is just simple advice from an outside novice): The Japanese have always been good in copying successful concepts, something that hasn’t caught on in Detroit. For decades, German car makers (BMW, Mercedes and Audi) have been following a simple formula.

They all offer three basic product lines. BMW has the 3, 5 and 7 series. Mercedes has the C, E and S Class while Audi features the A4, A6 and A8 line up. With the three main lines, each car maker covers different segments of buyers. From small to big from fuel efficient to gas guzzler. If one doesn’t sell, the other will.

The big three have been jumping from one fancy model name to the next. Chevy Trailblazer, Pontiac Bonneville, Buick Skylark are no more while Camaro and Thunderbird were simply resurrected.

New models are created, old models are resurrected and other models become extinct. There is no consistency. BMW, Mercedes, Audi, Toyota and Lexus revamp their existing line-up every six years or so consistently attracting drivers that want to own the newest set of wheels.

BMW, Mercedes and the likes, to put it in investment terms, rely on asset allocation while GM and cohorts are more like market timers. A few months ago they asked for money to retool their factories to build more gas efficient cars. Today, gas prices (AMEX: UGA) are lower than they were in the summer of 2005.

To sum it up: You are on your own

To sum up, the bailout cowboys don’t really know what to do. Detroit execs obviously mismanaged three of the biggest U.S. ventures and the markets are tanking.

Where does that leave the average Joe investor? You will have to take matters in to your own hands and stop relying on Capitol Hill or corporate executives to rescue your 401(k), IRA, brokerage account or wherever you stash your money. If you want objective research that cuts to the core, consider the ETF Profit Strategy Newsletter.

Oh, what ever happened to Seinfeld’s Soup Nazi? From my recollection, through one of Larry David’s classic chain of events, the soup recipes become public knowledge, driving the Soup Nazi out of business. Only time will tell what happens to the Bailout Nazi and his “tasty recipes”.

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