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alstry (36.32)

A WMD next week?

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June 27, 2008 – Comments (5)

Autos report sales next week. J.D. Power is estimating that unit sales will come in around 12.5 million units vs. 16.3 million last year.

Just Ford and GM accounted for over $350 Billion in revenues last year....or about 3% of our GDP. A 20 plus percent reduction in revenues will have a huge impact on our economy.

Not only that, Ford and GM have managed to accumulate HUNDREDS of BILLIONS of dollars of debt over the past 30 years. This debt is seated in our retirement plans and pension funds.

 For most of recent memory the US auto industry has been selling vehicles at a rate of about 17 million units per year. Our auto companies built up an infastructure to support selling at that rate.

In addition, they borrowed billions and billions to build that infastructure. Fortunately for the auto companies, gas was cheap during this period and the industry was able to sell millions of high margin SUVs which permitted the auto companies to cover the debt obligations and meet pension requirements.

Now sales and revenues are coming in way below plan but the debt and the infastructure remain. With revenues on track to come in around $100 BILLION below last year, and the mix of sales towards lower margin smaller vehicles, how will the auto companies be able to meet their hundreds of billions of dollars of debt obligations??????

For tbose of you that are old enough to remember, the bail out of Chrysler years ago occured when auto companies had much less leverage than they have today......thus bailing them out was much cheaper.

Today, the debt obligations of Ford and GM are huge. Their bonds make up a material portion of our nations pension plans. The big question now is whether at 12.5 million unit run of a mix trending towards lower margin vehicles.....how will this play out?

Will our government write Ford and GM checks for hundreds of billions of dollars????????

or

Will we force F and GM to restructure the debt and bring it down to levels that can be serviced by current sales levels?

5 Comments – Post Your Own

#1) On June 27, 2008 at 11:25 PM, alstry (36.32) wrote:

According to J.D. Power's forecast, generally accepted as among the most accurate in the auto industry, General Motors Corp. will see a 26.2% decline, Ford Motor Co. a 31.4% drop and Chrysler LLC a 30.1% fall.

http://online.wsj.com/article/SB121459502228711475.html

What is amazing is that the U.S. companies will likely suffer the biggest reduction in unit sales while also sustaining the biggest dollar/margin decline with a shift from SUVs.

At this point, we are contemplating many billions of dollars of debt that may not have sufficient coverage.  If BK is the route of choice, we are looking the biggest corporate debt default in history.

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#2) On June 28, 2008 at 1:41 AM, zygnoda (26.94) wrote:

General Motors Corp. will see a 26.2% decline, Ford Motor Co. a 31.4% drop and Chrysler LLC a 30.1% fall.

ugh..

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#3) On June 28, 2008 at 1:44 AM, hansthered0 (< 20) wrote:

Maybe it's time to invest in bicycle companies.

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#4) On June 28, 2008 at 4:43 AM, alstry (36.32) wrote:

“(Washington) state tax collections have dropped for the third straight quarter, bolstering the likelihood the Legislature will have a sizable budget hole to plug come January. And real estate excise tax collections continue to fall in dramatic fashion with the souring housing market.”

“‘We are forecasting what would essentially be the worst downturn in 25 years,’ said Steve Lerch, the state’s interim chief economist.”

 

The above is for Washington, a state relatively unaffected by the housing/auto downturn....imagine what is happening in states like CA, FL, AZ, NV, MI ect.....

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#5) On June 28, 2008 at 5:32 AM, alstry (36.32) wrote:

Some excerpts from a very interesting article:

"You'd have massive changes going on throughout the economy," said Robert Wescott, president of Keybridge Research, a Washington economic analysis firm. "Some activities are just plain going to be shut down."

How much higher would fuel prices have to go before she quit her job? Already, the 170-mile round-trip commute to her job with Los Angeles County Child Support Services in Commerce is costing her close to $1,000 a month -- a fifth of her salary. It's got the 55-year-old thinking about retirement.

"Throughout our history, we have grown on the assumption that energy costs would be low," said Michael Woo, a former Los Angeles city councilman and a current member of the city Planning Commission. "Now that those assumptions are shifting, it changes assumptions about housing, cars and how cities grow."

"To put things in perspective, today's extra shipping cost from East Asia is the equivalent of imposing a 9% tariff on East Asian goods entering North America," said Rubin of CIBC World Markets.

Although white-collar workers may be able to telecommute, they could also take a serious financial hit because soaring energy prices tend to wreak havoc on the stock market. The explosion of 401(k) plans and similar retirement accounts in the last few decades -- and the decline of traditional pensions with guaranteed payouts -- have tied workers' financial futures more closely to stocks than they were during the 1970s oil shocks. A prolonged Wall Street downturn could mean a no-frills retirement, or none at all.

http://www.latimes.com/business/la-fi-oil28-2008jun28,0,5485259.story?page=1

This article contemplates the effects of $200 per barrel oil.  Many of the issues discussed are occuring NOW!!!! 

I blog the way I do because many of these issues could have been spotted months ago.  Our country is shutting down and few of our politicans seem to care.

They tell us the crisis is over, but states who are relatively unaffected by the housing downturn have seen declining taxes for 3 quarters in a row.  Sequential and deteriorating negative trends are not signs of an improvement.....it is not that hard folks.

Unless we wake up and start talking to each other and our politicans, we as a nation will shut down.  We are shutting down right now and the pace is accellerating.  Few seem to understand the problem and those that do are remaining quiet.

If this trend continues our pensions and 401Ks will be worthless.

Quite frankly, at this point, I am not sure there is a solution.  The head of the NY Federal once said in a speech it was like trying to unscramble an egg....I tend to agree with that analogy.

We built up an entire nation over the past twenty years on a business model of cheap oil and easy credit....now both are gone.  Our nations businesses and assets are failing.....and failing at an ever increasing pace.

Houses in a number of areas in America are down 50% in less than two years....and the rate of decline is ACCELLERATING.  Auto sales were down about 15% in the first quarter, they will be down much more than that in the second quarter.  After the recent layoff notices and rising fuel prices, what do you think the third quarter will look like?

The salient issues are finally coming to the front pages of the main stream press.  My blogging will likely slow down in the future because I will not be able to add a much different perspective that what you will be reading everywhere.

I am confident that one day I will be a bull, and when that happens I am also confident that most will be bears, and maybe that will be a good point when the blogging will pick up again.

I will leave with this....as distress rises, our people will demand changes....nationalize this and nationalize that......if we nationalize too much pretty soon the government owns just about everything.

Every major government change in history has started from the grass roots level....often arising out of distress.  We as Americans have struggled and fought hard to arrive where we are today.  We have done many wonderful things and had our fair share of failures.  When times get tough, people start to behave irrationally and are susceptible to suggestion......as a country, during these times we should be careful what we ask for.....we just might get something we never really wanted.

 

 

 

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