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Friday, June 20, 2008 6:38 PM

GM Death Watch

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GM sunk to new all time lows on news S&P puts automakers on watch list.

Standard & Poor's Ratings Services has placed the corporate credit ratings of automakers General Motors (GM), Ford Motor (F) and Chrysler on CreditWatch with negative implications. A negative CreditWatch means ratings have a one-in-two chance of being downgraded in the next three months.

S&P suggests that the companies' sales will continue to be hurt through 2009 by "deteriorating U.S. industry conditions," largely the result of high fuel prices.
GM Monthly Chart

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Ford Delays New F-150 Pickup

MarketWatch is reporting Ford delays new F-150 pickup, cuts truck production.
Ford Motor Co. (F) said Friday that it is delaying the launch of its new F-150 pickup and is cutting its truck production amid rising demand for smaller, more fuel-efficient vehicles. The automaker also pared its 2008 U.S. industry sales forecast to a range of 14.7 million to 15.2 million cars and trucks, down from its previous projection of 15 million to 15.4 million vehicles. Ford cut its third-quarter production plans to 475,000 vehicles, 50,000 units lower than prior targets and a decline of 25% from a year ago. Ford plans to produce 550,000 to 590,000 vehicles in the fourth quarter, down 40,000 units from previously announced plans and off 8% to 14% from a year earlier.
Ford Monthly Chart

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U.S. sales plummeting

The Detroit Free Press is reporting U.S. sales plummeting, Chrysler's chief says.
After months of confident talk that Chrysler LLC anticipated the economic downturn better than other automakers, Chairman and Chief Executive Officer Bob Nardelli told employees Tuesday, in a memo obtained by the Free Press, that the last few months -- and this month in particular -- have been even worse than Chrysler anticipated.

Industry-wide sales so far in June have been about 20% worse than Chrysler's expectations for the year, according to the memo.

When Chrysler announced plans to cut 12,000 jobs in November -- on top of 13,000 over three years -- executives were assuming Americans would buy fewer vehicles in 2008 than in any year in a decade, only about 15.5 million. Nardelli said that "conservative estimate" was pretty close for the first three months of the year.

But sales were 7% to 8% below that rate in April and May. And so far in June, he said, J.D. Power and Associates and Citigroup are seeing a sales pace that is almost 20% lower -- only 12.5 million vehicles per year.

"This is the lowest sales level in 16 years and indicates a significant and continued softening of the U.S. automotive market," Nardelli wrote.

A Chrysler spokeswoman declined to comment on the memo.

U.S. car and truck sales are down 8.4% so far this year; sales of Chrysler's three brands are down 19.3%.

If J.D. Power's forecast for June -- an annualized rate of 12.5 million sales -- continues for long, Erich Merkle of IRN Inc. said, it would be "Armageddon. Doomsday."

"I don't think there is anyone out there prepared for 12.5" million annual U.S. sales, he said. "I know it is only one month, but still that would show some signs that there is some real deterioration in the market, that would mean the economy is really slowing down significantly."
10 Million Anyone?

Ford, Chrysler and GM are all geared to produce just what nobody wants: SUVs and trucks. Toyota seems to have more flexibility in switching production.

Just to show how far wrong GM was let's flashback to April 2 when I wrote March Auto Roundup And Retail Sales Forecast.

Here is a clip:
General Motors Corp still expects the U.S. economy to recover in the second half of 2008, pulling industry-wide auto sales higher, an executive said on Tuesday. GM sales analyst Mike DiGiovanni, speaking to reporters and analysts on a conference call, said he saw "early signs" that the U.S. market was steadying.

My Comment: Is this some kind of April Fool's Joke?

Separately, GM North American sales chief Mark LaNeve said GM's inventory of full-size pickup trucks was "more than adequate" despite a five-week-old strike at supplier American Axle & Manufacturing Holdings Inc that has idled 30 GM plants.

My Comment: And it will be more than adequate if the strike lasts another 15 weeks. Who wants full sized pickups? GM ought to be thankful for that strike or they would be ramping up for a nonexistent second half recovery.
There was more nonsense in that post like GM blaming presidential candidates for telling everyone how bad things were.

GM In Fantasyland

On June 19, GM awoke from its fantasyland dream world with this announcement: GM to halt major overhaul of pickups, SUVs.
General Motors Corp. is indefinitely halting a major overhaul of its full-size pickup trucks and sport utility vehicles as it deals with a drastic drop in sales of those products.

GM spokesman Tom Wilkinson said Thursday the automaker instead will work on more modest updates and enhancements as it shifts resources toward higher-mileage vehicles. The move has been largely spurred by skyrocketing gas prices that have radically changed customers' buying habits, he said.

"We're delaying it -- at least until we have a better sense of where the market is going," he said. "There's now so much uncertainty of where the full-size truck market is going, primarily because of the increase in fuel prices."
My Comment: GM is waiting for "A better sense for where the market is headed". Good Grief. The market has spoken. It spoke in spades in April when GM was talking absurdities about a second half recovery. The writing was on the wall years ago and GM is still waiting for direction.

GM has moved from fantasyland to blind stupor. I guess that's progress.
"This allows us to shift resources to other programs that we think can generate more business for GM," he said. "One of the challenges is we need to be able to get a good return for our cars."
My Comment: One of the challenges will be to get any sales period. The biggest challenge however, will be staying in business.
He said the strategy has started to pay off with strong sales of cars such as the Saturn Aura and Chevrolet Malibu.
My Comment: Excuse me but this is complete nonsense. GM just announced the shift in resources. On the announcement itself GM is saying the strategy has paid off in Saturn sales. Is this a joke?
Aaron Bragman, an auto analyst with Global Insight, calls the shift a "prudent" move that doesn't jeopardize GM's competitive position.
My Comment: Competitive position? The only reason why GM has a competitive position is that Ford and Chrysler are worse than GM.

The Big Revamp

MarketWatch is reporting GM stalls plans for future big trucks, SUVs.
GM is reportedly considering cutting down its brand lineup, which includes Cadillac, Saab, Chevrolet, GMC, Hummer, Saturn, Buick and Pontiac.

"Our intention is to continue with seven or eight brands, depending on what we decide to do with Hummer and we're still assessing that," Wilkinson said.

CEO Rick Wagoner said GM is also mulling a revamp or sale of the Hummer line. A sale could prove difficult considering the appetite for what has become the iconic gas-guzzler. Hummer sales were cut in half in April compared to a year earlier.
GM Blows Another Opportunity

The Hummer line is now worthless. In fact it's less than worthless. GM cannot sell it, and it will cost GM more to produce those turkeys than they can possibly sell them for.

The Hummer was some sort of status symbol. There is no other possible explanation for that dog. It was the ugliest car in production on the planet. Nonetheless the Hummer line sold.

How times change! Status symbols are out frugality is and and although that was 100% guaranteed to happen, called here long in advance, GM as usual had its blinders on.

GM Debate

I have been in a long running debate with "Chris" who frequently comments on my blog. I have stated many times that GM should have dumped Ditech and GMAC. Chris disagrees. The argument from Chris is that GM needed GMAC to finance cars.

Sorry Chris you lose. GM needed GMAC to finance cars in the same sense that addicts need the next fix. The "profits" that GMAC provided were an illusion, just as the negative amortization profits at Wachovia (WB) and Washington Mutual (WM) were an illusion.

GM is not really a manufacturer. GM is a subprime lender disguised as a manufacturer. And as long as the junkie could get its fix, the game could go on. GM could have and should have dumped its subprime lending scheme when it had the chance. It would have fetched top dollar.

GM did not need those businesses, there was plenty of financing available numerous other places. GMwould have sold as many cars as it did, whether it had GMAC or not.

Ironically, the same holds true today. GMAC is bleeding badly and will have to tighten lending restrictions. Lending restrictions have tightened elsewhere. Now GMAC and Ditech are like lead weights on GM's neck. Things are so bad, GM might have to pay money to get rid of GMAC. That is exactly what GM should do. Instead, it continues to fund it.

Toyota vs. GM

GM is revamping efforts. Lovely. Toyota is not exactly standing still. Please consider Toyota's Drive Beyond Oil. Is there any doubt who will win this race?

No Laughing Matter

I joked about the incompetence of GM above. The reality is it is no laughing matter. GM is on a deathbed. Yes, I have said this before. Yes I was wrong. The reason I was wrong is that GM has been able to go back and get ponzi financing after ponzi financing, while losing money on every car it makes.

However, once those credit lines dry up, it is lights out for any company that does not have operating cash. I discussed operating cash in GM's Last Fatal Mistake.

When GM settled with its unions and the stock soared over $40, that was the lats chance GM had to raise cash to weather this recession. GM blew it. I did give credit to GM for settling with the unions but that is one of the few things GM has done right for decades. They failed to capitalize on it.

"Chris" thinks GM can still raise money. I say "fat chance". Furthermore, given all the recent glaring errors at GM, including a laughable prediction at a second half recovery, it is debatable that GM even understands how dire this situation is.

GM is about to get downgraded. Cost of raising money will go up. That is IF money can even be raised. I suggest money at 13% right now for GM would be a bargain. Yes it would crush the stock. So GM won't do it. They will wait, just like the financial companies waited (see Regional Banks Spiral Towards Zero).

This is it for GM.

GM either needs to raise enough cash to weather this recession now or they may not make it. I suggest they will not make it whether or not they raise cash now or not.

In the meantime, one can see the foolish stubbornness in GM management. It is the same stubbornness we see in Citigroup management. I am talking about dividends. It is pure insanity for both GM and Citigroup to pay dividends while bleeding cash.


There is over $1 trillion bet on whether or not GM survives. That is an enormous amount and the Fed (or Congress) may intervene to rescue GM. IF GM survives it will ONLY be because some Fed sponsored nonsense (just as we saw with Bear Stearns) intervenes to prevent an outright bankruptcy from happening.

Therefore, off the top of my head, some combination of credit default swaps (betting GM survives based on blatant manipulation to protect banks) balanced with PUTs betting the share price goes to zero is a hugely winning bet. Given that I do not play the swap market at all, I could be extremely off base. One more point: If everyone rushes into this trade, it won't work.

I have no position in GM.

Mike "Mish" Shedlock
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