Floor Talk: Taking a look at the auto industry in light of recent news

With so much focus on the automaker bailout recently and a possible decision on an agreement possible in the coming days, we decided to take a closer look at the current status of the plan and the companies that have the most exposure to the big three automakers (GM, F and Chrysler)... To recap, last Thursday night the Congressional relief package for the auto industry collapsed in the Senate due to a dispute over the wages paid to workers at the manufacturing plans. Then on Friday morning, the White House said that it is willing to consider use of TARP funds for automaker aid, which sent stocks soaring. This morning, WSJ reported that the Bush administration is weighing a much larger rescue effort for US automakers than originally envisioned and is discussing a rescue totaling $10-40 bln or more... It is widely known that a bankruptcy among one of the Big Three would lead to a financial mess among the suppliers and other related companies. If that were to occur, there is a high likelihood that some of the major suppliers could follow suit, wracking up millions of potential job losses... It is well known that GM and F will be the most impacted by any potential bailout, but the reaction in their stocks will depend on the terms of any agreement that is reached. If there is a significant equity stake in return for funds (which we would think is likely if TARP money is used), a bailout may not have a positive impact on the automaker stocks. If there isn't a dilutive stake taken, then the automaker stocks could see a relief rally, as the imminent threat of bankruptcy will be eliminated... The related suppliers may be the place to look for volatility. These stocks have seen varying degrees of recent weakness, with some getting hit especially hard over the past few months (AXL, LEA, TRW, VC, TEN, ARM all are down over 50% since Sep 15). Most of these stocks have recently seen a significant bounce off their November lows, but they would likely react to any decision on the automakers