Things They Don’t Teach You

For those of you who read this blog, you know I am an event trader.  I keep a stockpile of cash, waiting for the right event to make me some moola.

Typically, it’s when panic occurs; those are the best times.  Unfortunately, it usually involves people dying. Now we have a mini-panic that involves people dying:  Toyota Motors; symbol TM.

They have recalled millions of vehicles throughout the world.  AND they have stopped sales of eight of its most popular models while they are working to fix the faulty gas pedals.  This is a nearly devastating blow to the #1 auto maker (or at least thats the public perception).

The crisis revolves around faulty accelerators that have caused gas pedals to stick.

The announcements Thursday come one day after the company announced an additional recall of 1.09 million vehicles in the United States covering five models:

• 2008-2010 Highlander
• 2009-2010 Corolla,
• 2009-2010 Venza,
• 2009-2010 Matrix
• 2009-2010 Pontiac Vibe (both the Matrix and the Vibe were joint ventures between Toyota and General Motors)

Thats on top of the recall issued last week affecting eight models, including 270,000 vehicles in Canada and 2.3 million in the U.S. That recall included Toyotas:

• 2009-2010 RAV4, Corolla and Matrix
• 2005-2010 Avalon
• 2010 Highlander
• 2007-2010 Tundra
• 2008-2010 Sequoia
• some 2007-2010 Camrys

This results in a roughly 4.2 million vehicle recall. Lets say this costs Toyota $100 per car (conservatively), thats $420 million dollars. Add in the lawsuits and bad press, and we’re easily approaching half a billion dollars!

I believe they will come back. But to do so, they will have to offer incentives, buy back customer faith, etc. This means marketing and incentives of another $500 million (they sell a car every 6 seconds; 1.8 million in N.America alone) to win back customers.

So roughly a 1-2 billion dollar hit. And another $13 billion hit in market capitalization in just 2 days.

BUT, Toyota had roughly $90 billion in cash reserves a few years ago. With their rapidly growing debt (and bad economy), they may be down to $18.5 billion. Its short term liabilities are now equal to its assets. So its on financial par with Ford.  Expect layoffs and cost-cutting measures as well as incentive plans to come.

Overall, Toyota has had a sterling reputation. And I believe it will come back from this PR disaster.

Toyota insists that the problem being reported with accelerator pedals and floor mats are rare.

“They are absolutely safe to drive,” Toyota spokeswoman Sandy de Felice told CTV Toronto.  “Its a very gradual condition that occurs over long usage of your driving in the vehicle.”

Again, I’m putting my money where my mouth is:

• I bought 100 shares yesterday
• 100 shares today
• and will buy another couple hundred on any signs of weakness.

I could be making a horrific mistake. But, this is how I make extra cash. 30 seconds after I bought my shares at $77, I put in my sell orders for $100; and my stop loss at $65.

We’ll see how Christmas looks.