MoneyNews
Friday, June 17, 2005

GM Still a Healthy Bet

In a recent MoneyNews article "Riding It Out With GM," analyst Andrew Wilkinson illustrated the relative value to be found in diving headlong into some short-dated bonds issued by the renowned automaker.

Citing an accelerated wave of bad news surrounding the company – and the auto sector as a whole – in the aftermath of credit agency ratings downgrades for auto sector bonds, MoneyNews pointed to the abnormally high yields available to those willing to step up to the plate and take a chance on General Motors.

That advice panned out very well and would have netted readers a profit, as bonds snapped back shortly afterward. Bond prices rose, forcing the yield on the September 2007 note to drop from 6.52% to 4.65% in early June. Of course as prices rise, yields fall.

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GM recently saw its shares rally when Kirk Kerkorian's Tricinda bought a major stake in the carmaker.

Soon after, GM officials sat down with auto worker union representatives to thrash out a plan detailing how management can work with the union to help cut company costs in the coming years.

Recently, CEO Rick Waggoner announced that the company would reduce the workforce by one in six by 2008 – much of that the resulting from expected retirements and resignations.

This is one of several measures that management has taken to streamline the company as it struggles to stave off foreign competition in its domestic market.

Now GM bond prices are once again under the spotlight, as management claims that the union has not made sufficient concessions to help the company salvage its health care system.

GM wants to cut retiree benefits starting in 2007. Of course, the unions are not willing to accept such measures. Now bond traders fear that unless the two sides can come to an agreement, blood will flow auto giant.

In the worst-case scenario for GM, the union would call workers to arms, instructing them to go on strike – and that would bring about a serious cash crunch for the company.

The question is: Will the workers' union really be short-sighted enough to strike after considering the gravity of the situation?

We don't think the United Autoworkers' Union will put its workforce at risk with the stakes so high.

While GM is still holding on to a nice little cash pile, a short-term internal battle is unthinkable when the real war is being conducted on the outside against rival global auto manufacturers.

Our conclusion: Despite the knee-jerk reaction that has led to lower short-term bond prices, investors should continue to buy near-term GM debt.

• These Bonds Will Hedge Against a Shaky Market – Go Here Now

Templeton Guru: Look Abroad for Hottest Buys

Investment guru Mark Mobius is managing director at Templeton Asset Management, where he oversees $17 billion in emerging-market assets.

The 68-year old recently forecast a resurgence in developing nations following a hiccup during the first quarter – and he believes this will lead to gains for emerging markets.

His is firmly focused on three specific areas: Brazil, South Korea and Turkey – where he points to increased company earnings underpinning gains in share prices.

Those countries have enjoyed powerful gains in their respective benchmark indices:

• Brazil: up 26%
• South Korea: up 32%

AND

• Turkey: up 57%

Plus Mobius points to low price-to-earnings multiples for those stock markets: Shares in South Korea and Brazil trade at single-digit earnings multiples.

Now compare that to an astounding 19.9 P/E ratio average for the S&P 500 index!

With 30 years of emerging markets experience behind him, Mobius doesn't mince words.

He calls Brazil and South Korea "the cheapest markets in the world today," and he makes a strong argument for investment there, insisting that those countries' consumer markets are absolutely booming.

Mobius holds shares in Banco Bradesco SA – and that company's shares are up a whopping 89% in the last 12 months.

It's no wonder – considering the company has enjoyed ten consecutive quarterly profit increases, which are currently rising at their fastest pace in five years.

In South Korea, Mobius retains shares in that nation's largest oil refiner, SK. That company's stock has risen 21% in the past year, making tremendous gains from high gas and oil prices coupled with strong Chinese consumption.

In short, Mobius is already taking advantage of the major opportunities he has located in emerging foreign markets.

And all this is based on his firm belief that shares in developing nations are set to spike again after the longest downturn since 9/11.

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