It's a simple fact: Goodyear Tire (GT:NYSE) lost money last quarter.
We're not looking at the kind of money a major bank or a Wall Street brokerage can lose when they really set their minds to it. If those guys can't flush a couple of billion a quarter down the crapper, then they just aren't trying very hard.
Perhaps GT should look into the 24-karat gold plated office desk Giorgio Armani was pitching at this year's International Furniture Exhibition at Milan? An expense like that for the C-suite could elevate the most prosaic Akron CEO to the same level as such exalted poster children of failure as Bank of America's Ken Lewis (not fired - yet), Societe Generale's Daniel Bouton (finally "quit" his position as Board Chairman), or maybe Bernard Madoff (jailed pretty much forever).
Reversal of Fortune
Still, a $333 million loss is a pretty steep reversal of fortune when you compare it to the $147 million the tire maker brought down a year ago.
The causes of all this pain probably seem pretty obvious to anyone who has been following the situation here in the States. When Detroit can't sell cars, Akron can't sell tires to Detroit. What's more, sales of replacement tires (the source of some 80% of Goodyear's profits) are pretty bad too, right about now. All told, units moved are off 20% and dollar sales are down 28%.
And while the recession may be deeper in some parts of the country than in others, Goodyear's declines were remarkably evenhanded: All four of their sales regions saw marked falloffs.
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Bald, Broken and Out of Control
(Now here's a frightening thought: Not only are a fair portion of the folks around you on the highway driving cars of suspicious mechanical condition that probably ought to have been traded in by now, but their tires are getting bald to boot. Hmmm: perhaps a short play on a car insurance outfit like Progressive Insurance (PGR: NYSE) is in order?)
Goodyear CEO Robert Keegan swears that they did their best to haul back on rising costs. Raw goods like rubber were up 31% in the recent quarter. But the company skimped and saved where it could (that means it fired a bunch of people off the factory floor) and it actually managed to reduce cost of goods sold by 19%. Selling, administrative and general expenses are down 16% (that means it fired a bunch of white collar workers too).
Looking forward, most analysts figure that we have at least three, if not five, more quarters of pain like this coming down the pike. Chrysler's bondholders just decided to take 20 cents on the dollar in cash now, rather than any deal involving stock shares. If GM isn't bankrupt by this time next week, it will certainly be a fraction of its former size.
Heck, even my favorite amongst the former "Big Three," Ford (F: NYSE) (current gains here are up to 300%!) is only looking this good because it cut the fat to the bone a year ago.
A Reflection of the Truth
Simply put: Goodyear won't be selling but so many tires over the next 12 months. As Mr. Keegan put it: "While we aren't satisfied with our results, they generally reflect the difficult market conditions."
So one might imagine that an announcement of a grand old American Blue Chip's slide into loss would cause their shares to slide as well? It's just common sense, right?
Wrong!
GT shares actually shot up nearly 20% on this news.
When Is a Loss Not a Loss?
Why the spike? Various news services are touting that this result is actually not as bad as a panel of unnamed analysts predicted. Bloomberg, for example, notes that the mean prediction of the seven analysts it polled called for an operating loss of $1.33 a share, while Goodyear operations actually lost a mere $1.19 a share.
In the perverse logic of Wall Street spin, this is not actually a 322% decline quarter to same quarter, but rather a glorious 11.8% victory. And how much do you want to bet that next quarter, when Goodyear announces a crushing loss of similar proportions, the spinmeisters try to claim that losses are leveling off because they are no worse percentage-wise than they were the quarter before.
As hair-tearingly frustrating as shams like this are to those of us who still have some kind of preference for such ideals as honesty, decency and common sense, they do represent a bit of an opportunity.
A Ladder to the Moon
This 20% ramp job didn't come on the heels of a generally depressed share price: Rather, GT has been moving up steadily for weeks now. Since hitting its decadal low of $3.73 back on March 6, GT shares had already gained some 181% going into today's clown show.
No player wants to stand in the way of a bus like this. In fact, a good portion of yesterday's run-up problem came when all the wise guys with short positions were forced to buy back shares.
But sometimes it can be a bit of fun buying what nobody wants… and right now nobody wants put contracts on Goodyear. As I sit to write, GT July 10 puts (GT SB) are trading for a mere $90 a contract.
Make 129% When the Ladder Collapses
The GT chart shows genuine support down around $7.50. Even if GT were genuinely good to go (and believe me, it's not), it would still come back to test that node before continuing onward and upward. And at $7.63, those puts would be worth $206, for a gain of some 129% in relatively short order.
Now please understand that in the modern market, betting on common sense winning out is considered pure speculation. 'Cause that's just how twisted this whole deal has become.
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