Liquidity Fuels M&A, Autos' Revival

Ford just completed $26 billion in fund raising, and no one really knows what it plans to do with all that money. It has also cut costs this year, but it has a less-loved roster of vehicles. The automaker is struggling for relevance in the marketplace, and it has a new man in charge. Former Boeing (BA Quote) CEO Alan Mulally took the reins at Ford in September. Ford's stock has fallen 8.9% year to date, while its benchmark bonds have returned about 25%.

With Delphi emerging from bankruptcy, the two struggling automakers in the big three, Ford and GM, stand slightly better off, having bided their time in the liquidity rainstorm. DaimlerChrysler(DCX Quote) completes the trio.

So as investors seem willing to give these companies and the overall market the benefit of the doubt, their finish line is 2007. All three must renegotiate their contracts with the United Autoworkers Union, and they really need to be different this time.

"This isn't the regular, standard we'll-give-you-a-little-and-take-a-lot,'" says Gregg Klein, fixed-income analyst at BNP Paribas. "This time the big three have to right the ship, or they're going to face bankruptcy."

The deadline for the UAW's contract is Sept. 30, 2007. The talks are likely to start in June or July, says Klein.

As many strategists and analysts start to turn out the lights in their office having caught the liquidity wave, they've raised their forecasts for 2007. But there are plenty of skeletons in the closet. The automakers' success in the markets and their ability to buy time may have been somewhat driven by fundamental improvements, but much of it was likely investors chasing yield. That impulse could disappear in a heartbeat -- just like it could for the entire stock market and other riskier asset classes. No one knows exactly how liquidity might dry up, but everyone worries about it, and everyone thinks he'll be first to get out. For the time being, though, no one denies that the wave makes for a pretty good trade.