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Chrysler Déjà vu All Over Again The DaimlerChrysler Saga

January 6, 2001

In the 1980s Chrysler was on its last leg. Automotive market sales had soured and Chrysler's Profit/Loss Statement was awash in red. Consequently, its stock was hammered mercilessly down to 4 bucks a share.

Only through 'superman' efforts of its newly elected CEO, Lee Iaccoca, was Chrysler able to survive. Mr. Iacocca, who hat in hand and with his silver tongue was able to sweet talk the US government to give Chrysler a bailout by providing operational financing until the auto manufacturer got on its feet again. The rest is history…it grew, prospered and paid off the government financing.

In the late 1990s IRRATIONAL EXUBERANCE was nearing its peak, the giant German car manufacturer Daimler-Benz acquired Chrysler, paying a pretty "penny" indeed. Daimler-Benz probably had the financial backing of banking powerhouse Deutsche Bank, because today the German bank is the largest stockholder of the merged company, now called DaimlerChrysler (symbol DCX)

But the relentless economic cycle has the bad habit of going full circle every so often. Hard times are upon the auto industry again. And DaimlerChrysler appears to be the most badly hit car builder.

The following news communiqué is from the German press.


FRANKFURT (Germany)- The head of Deutsche Bank AG, DaimlerChrysler AG's largest shareholder, reiterated that the bank aimed to dispose of its stake in the carmaker eventually but ruled out doing so at the current price (the loss would be too horrific)

Deutsche Chief Executive Rolf Breuer told German news magazine Der Spiegel that the bank had a general policy to sell its industrial shareholdings, including DaimlerChrysler, of which it owns 12 percent.

``The current share prices are not suitable for that however,'' Breuer said in the interview published on Saturday (December 29).

DaimlerChrysler's share price has fallen sharply in recent months on investor concern about losses at its U.S. Chrysler division. Breuer also repeated that Deutsche Bank supported the management at DaimlerChrysler and said the 1998 merger that created it had been a good idea despite the current problems.

DaimlerChrysler's shares came under renewed pressure the last week of December, hitting a four-year low. They ended trade in 2000 at 44.74 euros, down from 74.05 euros at the start of the year.

``There is another notion that I have never hidden from the management of DaimlerChrysler nor from the general public: Deutsche Bank wants to say goodbye to its industrial shareholdings in general. That is a policy we have announced and one which also applies to DaimlerChrysler.''

Subsequently, the German press issued another news release.

Chrysler Restructuring to Take 2-4 Years

FRANKFURT, Germany (Reuters) - DaimlerChrysler AG (DCX) will take two to four years to restructure its loss-making U.S. unit Chrysler and will one day reinstate a U.S. team to head Chrysler, Chief Executive Juergen Schrempp said.

Schrempp told German newspaper Stuttgarter Nachrichten it would be a ``criminal'' mistake even to think about selling Chrysler, which was indispensable to its global strategy.

Schrempp said the revamp at Chrysler ``is now the task for the next two, three, four years. But I have always said it is the goal to have an American management again at Chrysler one day.''

Schrempp installed a German management team, consisting of Dieter Zetsche and Wolfgang Bernhard, at the head of Chrysler in November and forced out key U.S. executives. Zetsche replaced James Holden as chief executive at Chrysler.

Explaining the management reshuffle, Schrempp said he had asked Chrysler's previous management how it proposed to tackle problems at Chrysler, and had not received satisfactory answers.

``That made us decide to send experienced people to the U.S. Dieter Zetsche and Wolfgang Bernhard have done what is necessary before,'' Schrempp said.

The U.S. unit lost $1.25 billion in the fourth quarter of 2000 amid a continuing downturn in the U.S. car market, and faces a difficult 2001 as well, DaimlerChrysler has warned.

Chrysler Déjà vu All Over Again

Exactly the same occurred in 1929: International banks got into sundry businesses totally divorced from their forte (i.e. outside the realm of their expertise). As a result many banks went belly-up in the 1929 aftermath.

In the late 1990s many banks, especially European banks again bit off more than they could chew. And NOW they are choking on it with 'acute financial indigestion.'

But it will not ONLY be the erring banks who will suffer as they divest themselves of incompatible acquisitions (as will Deutsche Bank with DaimlerChrysler). To pare its losses and get back to traditional banking business, Deutsche Bank will dump millions of DaimlerChrysler shares on the an already falling market. Inevitably, this will put further downward pressure on the ENTIRE MARKET - casting an even blacker pall over the global financial environment.

Indeed 2001 will conjure up shades of 1929 as major world banks throw off the 'ugly-ducklings' in their investment portfolios. Just witness what has already happened to DaimlerChrysler in the last 12 months. DCX is down 62%, but in a deadly kamikaze dive, which will surely CRASH its target…USS Wall Street. Take a gander at this menacing chart:

It happened in 1929...and again 70 years later in 1999

In late December 1928 Chrysler soared to its all-time peak of $140/share (just as DaimlerChrysler did in December 1999). Subsequent to the GREAT CRASH beginning in 1929, Chrysler was mercilessly hammered down 96% to a mere $6/share, reaching its nadir in mid-1932. Imagine, in only four years it lost 96%.

If the Irrational Exuberance of the Roaring 1990s is valid reminiscence of the Roaring 1920s, then one might expect a similar sell off of DaimlerChrysler stock. One would look to see DaimlerChrysler going for $4 and small change, sometime in 2003 (from $107 to $4.28/share).

Although DaimlerChrysler is already down substantially ($107 to $41), methinks it is still a safe SHORT for the following reasons.

  • Wall Street bear market is only now starting. Yes, the Nasdaq has been hit hard. And although the Dow suffered its worst year in the last 18 (up about 6%), it shows signs of going much lower in the near future, since its P/E ratio is still far above its historical level of 12 times. Recall the Dow plummeted about 55% in the mini-Crash of 1973/1974.
  • The economy has only just begun to slow. The rash of poor earnings and revenue reports in the last quarter of 2000 will become a torrent in 2001 – as the ripple effects worm their way to all affiliated industries.
  • More and larger corporations forced into Chapter-11. Only last week we saw 128-year old Montgomery Wards and 3rd ranked steel manufacturer LTV bit the bullet. Between the two they will lay off about 40,000+ workers.
  • A RECESSION looms at least the size of the 1973/74 debacle.
  • The greenback is in a steep death dive with no "pullout" in view.
  • The US Balance of Payments is the greatest in history, worsening DAILY.
  • P/E ratios in ALL markets remain outrageously lofty. As more and more poor EPS are announced, the market will decline as will investor expectations.
  • Gold appears to have bottomed. Consequently, investors worldwide will flee to safety from the deluge of crashing stock markets.
  • Just as it happened in the Great Depression of 1929-1934 real estate will be especially hard hit.
  • All the above will generate an environment of panic and desperation, prompting investors to dump stocks au masse.

Nothing can avert the onslaught of the coming Market Crash in equities. Only a ruthless wringing out of all vestiges of IRRATIONAL EXUBERANCE in stock prices will allow prices to finally bottom. My best guess the market will bottom when the following P/E are reached:

Dow P/E ratio: 10
NASDAQ ratio: 20

Finally, I would expect the market averages to languish at the bottom for 9-12 months to allow the investing public to regain its confidence after suffering such horrific losses. YES, we are talking a long drawn out BEAR MARKET, where only forms of gold investments will be king.

The decline in Wall Street stocks in 2000 will seem like a Sunday school picnic in comparison to what lies lays ahead. We have only heard the " Prelude to Act I of this tragic opera.

(save himself who can from the looming rout)

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