The car companies are not “turning a corner,” and Wall Street is not “healing.”  And yet that is what I keep hearing and reading.  The price of cars went up a few percentage points after falling for years.  This points to better management?  Hardly.  Wall Street firms are back to business as usual, using low interest rates as their piggy bank to roll the dice on the next trade.  That’s health? Both of these economic areas have only one person to thank for the fact that they are alive and kicking at current levels today - the taxpayer.  There is no reform, no new way of doing business, no nothing that could possibly come close to the largesse shown by me and you.

 We gave - yes gave - the car companies $70 billion dollars.  We gave Wall Street firms, through payments to AIG and then back-stopped lending facilities, over $4 trillion dollars.  Who can’t “make do” on that kind of money?

Ford Motor just announced quarterly profits of nearly a billion dollars.  So, that’s it.  The recession must be over.  Time to pop open the champagne bottles.

You no doubt detect more than a hint of sarcasm in my words.  Yes, Ford’s results are good news for the company’s shareholders.  Ford managed to claw some market share away from its domestic rivals — both of whom were distracted by their respective bankruptcies.  Ford also had a better lineup of  fuel-efficient cars, allowing the company to better take advantage of the Cash for Clunkers windfall.

But this is where the celebration stops.  As you can see from the WSJ chart below, even with Cash for Clunkers, car sales are FAR below the levels of the early and mid 2000s.  And now that Cash for Clunkers is finished, sales are beginning to falter again.

The WSJ writes: “Clunker-driven sales peaked in August at a 14.1-million-unit pace, but payback was rough: Sales tumbled in September to a rate of 9.2 million units… Auto makers sold, on average, 17 million cars annually from 1999 to 2007. It might be years, or another credit bubble, before sales get anywhere near such levels.”

The Journal has taken to calling this mild recovery — in which expectations are lowered — the “New Normal.”  This is a term we’ve used quite often of late in recent posts.   And we expect to be using it quite a bit going forward.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

The NYT reports that July car sales were up, proving the value of the Cash For Clunkers program.  Look a little bit deeper and you find the joy wasn’t so evenly spread.

Of the 10 most popular cars purchased under the program, the distribution goes like this:

3  Toyota

3  Ford

2  Honda

1  Nissan

1  Chevy

So what do we know?  That 6 of ten were Japanese, confirming my suspicion that the fruits of the program are in large part going to Japanese car companies (although many of their cars are made in the US), but we also see that GM, w/ what was 20% of market share, is getting crowded out.  Chrysler didn’t make the top 10 cut.

It seems that there are people like me out there who are looking at GM and Chrysler in a different light after their bailout binge, and it’s not very flattering.

We have to admit, the Camaro is a hot car.  We wouldn’t mind having one ourselves.  But unfortunately for General Motors, the Camaro — no matter how powerful its V8 might be — will not be enough to pull the company out of the abyss.

If all goes as planned GM will come out of bankruptcy today, in record time.  We won’t revisit the details of the bankruptcy here, as we’ve fairly well beaten this topic to death in prior posts.  Instead we want to comment on an article in today’s New York Times:  ”GM Flexes a Muscle Car Again“

Amid the gloom of bankruptcy and a miserable market for new vehicles, G.M.’s new Chevrolet Camaro muscle car is winning over consumers looking for a little excitement in a bland landscape of look-alike sedans and watered-down sport utilities…

G.M. sold 9,300 Camaros during the month of June — more than either its entire Buick or Cadillac divisions could muster on their own.

That last sentence is worth repeating.  GM sold more Camaros in June  than their entire Buick and Cadillac lines! Read the rest of this entry »

Last spring there was an email going around about the stimulus plan.  The logic was that instead of spending $787 billion on “stuff”, we instead send $250k to every man, woman, and child in America.  The spending that resulted from such an influx of cash would surely result in a revival of the economy.  The problem was that the math was off a bit.  $787 billion divided by 312 million people is not $250k apiece, it’s $2,500 (roughly) apiece.  Not very stimulative.

Now let’s look at GM. 

GM has roughly 285k employees as of 2008, per wikianswer.  Let’s assume that is still correct.  Divide $70 billion by 285k, and you get a whopping $245,000 apiece that we could have paid to every employee of GM.

However, we have already spent $20 billion.  Ok.  Make it $50 billion.  That’s still $175,000 apiece.  Not a bad gig for giving up your day job.

But this leaves retirees in the lurch for healthcare (the unfunded healthcare liability, or VEBA).  Ok.  Say that’s $20 billion.  That still leaves $30 billion, or a whopping $105,000 per employee AFTER taking the retiree healthcare into account.

So instead of this nonsense about saving jobs, which is dubiously based on a return to profitability through a sudden bout of American car buying, lower cost structure, and a jolt of engineering and design prowess, we could have paid for the VEBA, sent everyone a check for $100k, and then sold the business to whomever wanted to operate it as an ongoing, streamlined concern.

As we’ve been writing about for years, GM is now headed into bankruptcy.  It owes a lot more than it’s worth.  Our problem internally is that we severely underestimated how much GM owes because we had no idea that the US government would pony up $20 billion BEFORE the bankruptcy and agree to be on the hook for at least $50 billion during/after.  Wow.  That’s a lot.

Now consider that GM is worth less than $1 billion today.  It loses money every month.  Its costs (even with a restructuring) are out of whack and will not make it profitable.  In order to “make money”, the company would need to sell a lot more cars than it is.  And now there aren’t those other business lines like GMAC to add to the bottom line.  Or excess earnings from the pension fund that were swept into general profits.  So we are left with a company that is worth less that $1 billion, going nowhere fast, but the US government is giving it another $50 billion.

In total, we will be “into” GM for $70 billion and the US government will own 72% of the company.  At today’s most likely inflated valuation of just under $1 billion, that means we as taxpayers are consciously trading $70 billion for $700 million, or an immediate loss of 99%.

Let’s hope we can make it up on volume.

The Government won.  The last holdouts from the group of secured lenders to Chrysler threw in the towel late Friday and early Saturday.  This group, who held contracts in their hand which clearly stated they would be paid ahead of any unsecured claims, gave up their rights to billions of dollars in the face of political pressure so that the outcome of the Chrysler deal would fit the mold prescribed by the Obama administration.  This was not Congress.  This was a Car Czar and task force appointed by the sitting President.  There was a clear goal of what this group wanted, including which interest group would end up with what in terms of money, control, and ownership.  They won.

As the WSJ reports, it was a game of hardball, and the lenders eventually couldn’t take it. 

But this is not the end.  This is the beginning.  Every investor should be paying very close attention to how this deal evolved, because it clearly indicates a willingness to change the law midstream, picking clear winners and losers.  As the journal reports:

Senior secured lenders usually get paid in full before lower-priority creditors get anything. Not this time.

Read the rest of this entry »

The Big 3 automakers have long been viewed as “sacred cows.”  Their storied histories as icons of American industry, their political connections, and the shear amount of unionized labor their employ make them all but untouchable.  This has become painfully obvious to General Motors and Chrysler lenders and investors in recent weeks.  The government prescribed “cure” for these two companies is almost certainly worse that the disease because in the process the government is damaging investor confidence in contract law and property rights–the fundamental building blocks of the capitalist system itself. Read the rest of this entry »