Category: Auto Industry

Economics Update

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Busy day, so let’s start with the central banks: The Bank of England cuts rates by 50 basis points (½%), and is engaging in quantitative easing (printing money) in the form of buying £75 billion ($US 106 B), and the European cut its benchmark rate by 50 basis points to 1.5%, and is also looking at “further non-standard measures” (see quantitative easing).

Considering that the ECB has no charge except to manage inflation, this is extraordinary.

Unsurprisingly, the rates cuts have driven the dollar up.

As Brad Delong Notes, “It is overwhelmingly likely that the current downturn-in-progress will then surpass the united 1979-1982 downturn as the worst downturn since the Great Depression itself.“

In employment, first time jobless claims fell to 639,000, but the less volatile 4 week moving average rose to 641,750, the “highest since October 1982,” and productivity dropped 0.4% in Q4 of 2008.

Bumpy ride, folks.

On the brighter side Bonddad’s credit indicators show a thaw in lending over the past few months, and February retail sales beat expectations, though the numbers are still pretty bad.

In autos, GM is saying that there is “substantial doubt” about whether it can survive in an SEC filing, not a surprise, and implies Chapter 11, which further implies liquidation for Chrysler.

Mortgage rates rose last week.

Oil, meanwhile fell in response to the generally anemic economic news.

Economics Update

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Will the last entity leaving making cars in the US please turn off the lights?

Toyota’s U.S. sales are down 39.8% to 109,583 units in February – MarketWatch, Ford and GM fell 48.2% and 51.6%, and Chrysler fell 44%.

In real estate, pending home sales fell, but realtors are hawking “affordability,” because, well, otherwise they would have nothing to hawk at all.

Meanwhile, the Federal Reserve is rolling out its Term Asset-Backed Securities Loan Facility (TALF), a lending facility geared toward business, auto, and consumer loans.

It’s buying more more sh%$pile from desperate people, but they have decided that they will ignore the compensation limits, even though some of the money from the $700 billion dollar bailout fund.

Bastards.

We also have some mixed signals with recession indicators, with a record number of cargo ships idle, but over the road trucking showing a slight bump.

Oil is above $41/bbl, and the dollar is a bit weaker, largely on the fact that Australia has not dropped its rates.

Europeans Want 50% Stake in Opel for GM Aid

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It looks like GM May divest itself of something around 50% of Opel in exchange for €3 billion in aid.

Note that this is a loans and loan guarantees primarily from from German federal and state governments, not a sale, but these nations are demanding that GM give up a significant proportion of its ownership shares.

I think that this comes down to the European governments believing that GM would otherwise use Opel as a unwilling organ donor.

Ford Is Going Bankrupt

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And existing shareholders will be wiped out.

How do I know this?

Because Ford has concluded negotiations with the UAW to allow them to fund their health care trust fund with stock.

If there is anything that I am sure of, it is that when equity in a company is used as a benefit for rank and file workers, they will be wiped out, along with other share holders, in a bankruptcy.

Call me a cynic, but just ask the United Airlines pilots.

Auto Industry Update

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To get a perspective on just how bad the auto industry is hurting right now, look at this graph from Calculated Risk.

It’s monthly the total auto fleet in the united states divided by auto sales, which gives you the turnover rate, basically a measure of how long it would take to replace every car on the road right now.

It’s gone from 10 years to 23.9 years, meaning that if this were baseline sales, the average age of the auto fleet would reach 29.9 years.

It’s clear that something, either auto sales, or the number of cars on the road, or both, will have to give, but this is just nuts.

It’s not surprising then that unions for GM subsidiaries in Europe want the car maker to spin-off of Opel and Saab. They know that they are viable, but that they will be sacrificed by the folks in Detroit.

So, while all this is going on, GM and Chrysler have to make their pitches for their recovery plan today, in order to get federal money.

At this point, there is only one thing that I know, any bailout should make Cerberus pay. The private equity firm that now owns Chrysler were looking for a quick flip on their investment, and they are unwilling to put any skin in the game.

As a first step, Cerberus must open its books to regulators.

Economics Update

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To no one’s surprise, the Federal Reserve has extended its multi-trillion dollar so called liquidity facilities another 6 months, better known as the sh$tpile for cash program:

In addition to prolonging the currency swap lines that were due to expire on April 30, the U.S. central bank said it would extend through October 30 a host of other programs providing liquidity to the U.S. commercial paper and money markets, and to large Wall Street firms.

They’ve already spent in excess of 8 trillion dollars bailing out insolvent banks, but they think that more of the same will help.

The Federal Reserve is broken as an institution. It is run by and for the banks.

We also have aggressive stimulus programs ramping up in Australia and Japan.

Meanwhile, real estate and construction continues to be a disaster with US construction falling 1.4% in December and 5.1% for 2008, the largest drop since records began being kept in 1993, and the Homeownership rate has fallen to the 2000 level, so much for Bush’s “Ownership Society….In stead of owning, we got pwn3d.* With current equity losses of US home owner pegged at $3.3 trillion, a new record on vacant homes 19 million.

Even alleged good news in real estate, that the Pending Home Sales Index rose in December is pretty hollow, because, money quote from CR, “The biggest gains were in areas with the biggest improvements in affordability.”

So, if your house prices have dropped by 40+%, as they have in parts of California and Florida then homes might be moving…Otherwise, not so much.

Still real estate is not as bad off as the auto industry, with GM and Chrysler offering buyouts to all of their hourly workers, Ford posting 40.2% drop in January U.S. sales, and GM dropping 49%, Chrysler down 55% LLC, with the Japanese car makers seeing their sales dropping about 30% each

BTW, it appears that China may be headed for a period of economically induced social unrest, because more than one in seven rural migrant workers, more than 20 million, are unemployed.

In a nation that has systematically eliminated its safety net, 20 million pissed off unemployed people can make a lot of trouble.

In energy, I’m not sure if $40/bbl is the bottom, or if OPEC cuts are working, but oil was up today, and it appears that we have found a bottom there.

In currency, there dollar was down as there was less “flight to safety.”

*Leet speak for “owned”.

Economics Update

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Well, the jobless numbers are out, and they are not pretty with initial claims running at 588,000,continuing claims rising 159,000 to 4.776 million, which is the highest number recorded since the 1967, when they started collecting the data, and the 4 week moving average rose by 24,250 to 542,500.

Additionally durable goods orders fell by 3.7% in 2008.

And if you are wondering if there is a segment of the banking industry that won’t need a bailout, stop wondering.

There isn’t a segment of the banking industry that is not in trouble, as regulators are not moving to inject capital into credit unions, which are traditionally the most conservative, and the safest of the bank like institutions.

The fact that new home sales have fallen to the lowest level ever recorded (recording started in 1963) probably has a lot to do with this.

Also, freight truck tonnage is cliff diving. (H/T Calculated Risk)

Meanwhile, the most healthy of the Big 3 (Big 2½) auto makers, Ford, just reported a larger-than-expected $5.9 billion loss in the last quarter.

In international finance New Zealand is aggressively dropping its benchmark interest rates too, with their central bank 150 basis points (1½%) to the record low of 3.5%.

About the only good news is that it appears that deflationary expectations are easing, as the spread between 10 year Treasury Inflation Protected Securities (TIPS)and 10 year nominal securities has risen about 1% for the first time since November 10.

Meanwhile, the dollar was mixed today, and oil fell on the housing news.

Fiat to Get 35% Chrysler Stake for Magic Beans

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We have the rumor that Fiat will be paid to take a stake in Chrysler:

Fiat, the stronger of the two, wouldn’t immediately put cash into Chrysler. Instead it would obtain its stake mainly in exchange for covering the cost of retooling a Chrysler plant to produce one or more Fiat models to be sold in the U.S., these people said. Fiat would also provide engine and transmission technology to help Chrysler introduce new, fuel-efficient small cars, they said.

Fiat is been trying to get back into the US market for years, and now they are getting a domestic factory for free.

If Fiat can get their Diesel model 500 or Panda into the US, both of which get something north of 50 mpg, they would have a real winner.

Update: the Freep confirms the deal.

H/T Calculated Risk.

Economics Update

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Umm….Holy excrement?

The payroll firm ADP Employer Services just released its report as to job losses in December, 693,000 jobs lost…..In one month…..The ironically named Challenger, Gray & Christmas is also saying that layoffs reached a 5 year high in 2008.

The BLS will release its numbers on Friday, but I rather expect them to hew pretty closely to ADP’s numbers, particularly since ADP has been working to make its survey match the government numbers.

It’s no wonder that late loan payments are higher than at any point since 1980, there are a lot of people out of work.

In retail, we saw U.S. retail sales fell 0.8% YOY in the week following Christmas, and mall vacancies are at a 10 year high, rising from 6.6% to 7.1%, the highest quarterly jump ever recorded, and the highest vacancy rate ever recorded.

We are also seeing mortgage applications down for the first time in 4 weeks, though that could people waiting for the Federal Reserve’s purchase of mortgage backed securities to drive rates lower.

We are seeing similarly grim economic data in Europe too.

About the only bright news is that GM is saying that it does not expect to need more in the way of loans…After $13.4 billion in tax dollars to GM and $6 Billion to GMAC, I would certainly hope so.

The jobs number drove the dollar down, and traders are starting to go long on the Canadian dollar, which implies that they expect commodities, oil and timber come to mind for Canada, to start going up again.

That being said, expectations were not met today, with oil falling by 12% on reports of large inventories…..They are literally running out of tanks to store the stuff.

Retail gasoline, however has risen for the 9th straight day, and is now higher than it was a month ago…..My thinking here is that there was an overshoot on the way down, and (assuming that oil stays around $50/bbl) we will be looking at $2/gal gas.

Economics Update

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Just so you know, the whole auto industry is in a tailspin.

All the auto manufacturers are seeing sales fall by more than 30%, with Chrysler falling by a whopping 53%, year-over-year.

My guess as to Chrysler is that the American public realizes on some unconscious level that Cerberus is a pump and dump operation that cannot be trusted.

In real estate, construction spending was down by 0.6% from October to November, which was better than the consensus estimate of 1.4%, which to my mind is a serious WTF number. 1.4% a month is Sta-Puft Marshmallow man time.

In central-bank land, we have reports that the Federal Reserve and the ECB are working together to avoid deflation, which indicates that central bankers on the both sides of the pond are scared.

The ECB’s only charter is to control inflation, but now they are trying to figure out how to get inflation back into their economies.

No surprise that we are still seeing a flight to safety that is driving the dollar up against both the Euro and Yen.

In energy, oil is up again, largely on concerns about the Middle East, and retail gasoline was up 1.4¢/gal, the 6th straight day in a row, which seems to indicate that gas prices will be rising in the near future.

Finally, here is a pretty picture:

It’s a measure of the ISM Manufacturing index (I mentioned this last week). The graph is courtesy of The Bonddad Blog, and he accurately describes this as “cliff diving”.

Another Innovation Setback from the Financial Crisis

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It looks like Toyota may be making changes to its just in time inventory system as a result of the credit crunch.

They are worried that bankruptcies and liquidations of suppliers may leave them with no parts to make cars with.

The Japanese company may work with more partsmakers and increase inventories to mitigate the effects of a collapse among its U.S. suppliers, at least half of whom also work for Detroit automakers, Goss said. U.S. vehicle sales at a 26-year low have forced GM and Chrysler to seek government aid and left as many as a third of North American component-makers at risk of bankruptcy, according to consulting company Grant Thornton LLP.

(emphasis mine)

Basically, they are going to put up some warehouses and get a few weeks to a few months of parts to handle potential disruptions. This amounts to an abandonment of just-in-time, at least in the short term.

On the bright side, the increase in inventory will provide a small boost to the economy.

Three Heads, All of Them Firmly Planted Up Their Ass

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I am referring to, of course, Cerberus Capital Management LLC, which is now showing signs of distress.

It appears that their plan to buy Chrysler for some beans, and then flip it for a profit has run into some snags, so the good folks named after the 3-headed dog that guards the gates of hell are experiencing some cash flow issues.

So, they are
placing limits on redemptions their hedge fund, because they had been forcing them to liquidate assets at bargain basement prices to generate the cash.

Additionally, one of the big roadblocks in the now completed transition of GMAC into a bank holding company was the feeling that bond holders were being asked to take a haircut while Cerberus wasn’t.

While that has now been resolved, it is unclear what, if anything Cerberus put into the transition.

Additionally, it now appears that they are attempting to cut a deal that will allow them to simply walk away from Chrysler.

There are increasing indications that Cerberus would like to simply dump Chrysler on its creditors, because with flipping an increasing distant option, they simply want to flee.

Bush to Make Emergency Auto Loans

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A quick look at the proposal, and it looks to be remarkably non-punitive.

Politico has the bullet points:

Binding Terms and Conditions: The binding terms and conditions established by the Treasury will mirror those that were voted favorably by a majority of both Houses of Congress, including:

  • Firms must provide warrants for non-voting stock.
  • Firms must accept limits on executive compensation and eliminate perks such as corporate jets.
  • Debt owed to the government would be senior to other debts, to the extent permitted by law.
  • Firms must allow the government to examine their books and records.
  • Firms must report and the government has the power to block any large transactions (> $100 M).
  • Firms must comply with applicable Federal fuel efficiency and emissions requirements.
  • Firms must not issue new dividends while they owe government debt.

Targets: The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:

  • Reduce debts by 2/3 via a debt for equity exchange.
  • Make one-half of VEBA payments in the form of stock.
  • Eliminate the jobs bank.
  • Work rules that are competitive with transplant auto manufacturers by 12/31/09.
  • Wages that are competitive with those of transplant auto manufacturers by 12/31/09.
    • Note that wages here means all forms of current and past employee remuneration, or at least it does to Bush and His Evil Minions™,and so would have the effect of competing the Big 3 (Big 2½) with their large number of retirees against the transplants who have basically no retirees, which if strictly enforced, would mean not paying much more than minimum wage.
    • Note also that these are “targets”, and not “binding terms and conditions”, and so will be subject to some level of sanity.

In any case, meeting the terms has a deadline of March 30 of next year, which kicks everything to Obama.

I think that this is why Obama has said very little here, because if he were engaged, it would give Bush the cover to do something much worse.

Auto Industry Update

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Just so you know, I am aware how scummy the auto manufacturers are, case in point:

GM is expanding its Mexican plants as it is asking for a bailout from the US government.

It appears that the Republican Party Apparachicks who operate Cerberus have decided to shut down all Chrysler plants at least until January 19. Additionally, they are instituting draconian new fees to dealers on unsold inventory:

Starting Jan. 1, Chrysler’s financing arm will impose large fees on dealers holding new cars and trucks that are unsold after more than 360 days, and will require the payment of all remaining balances on any used vehicles unsold after more than six months.

Some dealerships could incur charges totaling hundreds of thousands of dollars over the course of 2009 at a time when many are already losing money and battling to stay in business, according to dealers familiar with the plans.

The reason that they give is that:

Chrysler’s financing arm recently has warned dealers it may have to temporarily stop providing loans for dealers to stock vehicles on their lots because of a wave of withdrawals from a fund used to pay off those loans.

In a letter dated Dec. 12, Chrysler Financial Chief Executive Tom Gilman said dealers have been withdrawing up to $60 million a day from the fund. A copy of the letter was reviewed by The Wall Street Journal.

Dealers put their own money into the fund and use it to pay off loans that they take out to stock their lots with new vehicles. But since July, dealers have pulled $1.5 billion from the account on worries that Chrysler could go bankrupt.

They are not worried that Chrysler could go bankrupt, they are worried that flip and flee artist Cerberus, LLC will steal their money and that they will be left holding the bag, because that is how flip and flee artists work.

Additionally, GM has the Chevy Volt engine plant in Flint, MI on hold to conserve cash.

On the brighter side, it appears that GMAC is getting closer to being able to qualify as a bank holding company, which will allow them to get the bailouts from the Fed.

Auto Update

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So, Bank of America suggests that GM might need $30 billion to survive, which is still about 1/10 of what AIG has gotten.

In any case, Bush and Paulson and their Evil Minions™ are considering a Car Czar who would have the power to force bankruptcy on the automakers, and an auto analyst is predicting that the Bush Administration will use this for crass political gain, and demand concessions, which Obama would likely overturn, because not all the stake holders are involved in those concessions.

Particularly in the case of GM, one issue is concessions from the local dealers, and that scares every member of Congress, because auto dealers have always been extremely aggressive political donors and political forces in the districts.

In any case, as more reports emerge that Bush and Paulson are close to a deal, I am again compelled to make the repeat the wisest thing that I’ve read this century:

But it does inspire in me the desire for a competition; can anyone, particularly the rather more Bush-friendly recent arrivals to the board, give me one single example of something with the following three characteristics:

  1. It is a policy initiative of the current Bush administration
  2. It was significant enough in scale that I’d have heard of it (at a pinch, that I should have heard of it)
  3. It wasn’t in some important way completely f#$@ed up during the execution.

Seriously. I’ve yet to see anything wiser yet, and I’m using the loose definition of the 21st century which includes the year 2000.

Automaker Updates

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Well, it looks like George W. Bush is throwing a hissy fit, and dragging his feet on an auto bailout. My guess is that he wants to show that he still has relevance….Even though he doesn’t.

In any case, Toyota just signaled its displeasure with the Senate filibuster by delaying the completion and opening of a new plant in Mississippi indefinitely, which is a pretty clear indicator about how the transplant automakers feel about having their supply chain cut too.

I imagine that they are getting some frantic calls from state officials, and I imaging that potential supply chain issues if GM goes under have come up.

In the mean time, it appears that GMAC swap holders have agreed to changes that may allow it to become a bank holding company, which means that they can sign up for one of the 11 new Federal Reserve sh$#pile for cash programs its offering banks.

Quote of the Day..

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Well, it appears that David Vitter has been doing celebratory dances about his role in killing the auto bailout, and some people beg to differ:

“I don’t know what Sen. Vitter has against GM or the United Auto Workers or the entire domestic auto industry; whatever it is, whatever he thinks we’ve done, it’s time for him to forgive us, just like Sen. Vitter has asked the citizens of Louisiana to forgive him, ” said Johnson [Morgan Johnson, president of the UAW local for GM in Shreveport], president of Local 2166. Otherwise, Johnson said of Vitter, it would appear, “He’d rather pay a prostitute than pay auto workers.”