GM's Last Fatal Mistake

Truck Trend is talking about GM's and Ford's inability to spot trends.

Detroit's automakers might not have been able to predict today's $4 to $5 per-gallon gasoline and diesel prices, but sales of truck-based SUVs have been sliding for the past three or four years. In its heyday, Ford sold something like 450,000 Explorers per year. Last year, it was about 179,000. Last month, Ford sold 8,122 Explorers, which is an annual rate of about 97,000 units. I'm guessing it won't sell as many as 8k Explorers this month.

SUV sales have dropped so much that CNW Research's Art Spinella says finance companies (I'm looking at you, GMAC), banks, credit unions and independent lessors will lose billions on leased truck-based sport/utilities returned over the next few years because they won't meet their residual values. The tab, he says, will approach $4.9 billion in 2008, $5.24 billion in '09 and $4.74 billion in '10, thanks to residual values off by more than $6,000 per SUV. That means General Motors, which owns 49 percent of GMAC, will continue to lose money on its non-automotive operations. It also will affect Chrysler's private equity owners, Cerberus, which owns the other 51 percent.

SUV And Truck Residuals Plunge

There is no surprise in this corner but Residual Values Tumble For Trucks and SUVs.

High gas prices and economic uncertainty have hurt sales of large vehicles that have long been the profit centers for the U.S. auto industry. Recent developments have also wreaked havoc on residual values for pickups and SUVs, which are worth far less than had been assumed just a few months ago.

Stuck holding the bag are dealerships and auto finance companies such as GMAC and CitiFinancial Auto – the auto finance unit of Citigroup. They’re trying to sell inventories of thousands of these vehicles as they come off leases, or are repossessed from owners unable to keep up with their car payments.

Dealerships must either cut prices on the used inventory or dump it on the wholesale market, cutting profit margins and pressuring the dealers to lower prices on new pickups and SUVs to pique the interest of consumers.

With vehicle values falling and economic pressures on consumers rising, auto finance companies "are extremely vulnerable", says Matt Traylen, a senior director of economics and portfolio services at Automotive Lease Guide. The downward pressure on prices "increases loan-loss severity dramatically, and lenders need to be aware of the potential risks in their portfolio from the severity point of view," he says.

It will be interesting to see if Citigroup puts CitiFinancial Auto on the block and what price it fetches should that happen. Citigroup could have gotten a great price 18 months ago for this asset. Not anymore. And with Citi's need to raise cash, this turkey may have its neck on the block at a time when it will fetch little cash.

Hidden Cost Of SUVs

AutoWeek is talking about the Hidden Cost Of SUVs.

If you thought $4 per gallon was a hit to the wallet, wait until hundreds of thousands of off-lease sport/utility vehicles are returned to dealerships. That's when the whammy of inflated residual values of off-lease sport/utes will hammer the market.

According to Oregon-based CNW Research, with some 800,000 truck-based sport/utility vehicles coming off lease this year, residual values projected three and four years ago will be missed by as much as $6,000 per unit.

Whom will this hurt? Those who lend the money--banks, credit unions, car companies' captive finance arms and others who write leases--will face a tab of nearly $5 billion just in 2008. That number rises to $5.24 billion in '09 and $4.74 billion at the end of the decade.

A 2008 Suburban 2500 with a 6.0-liter V8, four-wheel drive, automatic transmission and leather sells new for $43,235; a two-year-old model with 24,000 miles in excellent condition can be yours for less than $20,000.

A new-generation 2008 Toyota Land Cruiser with a 5.7-liter V8 that gets 13 mpg city and 18 mpg highway runs for $64,785; a two-year-old model similarly equipped goes for between $34,120 and $35,975, depending on its condition.

Money To Burn

You either have money to burn or you are a complete fool to pay $43,235 for a 2008 Suburban. If you did pay up, poof... you just pissed away $23,000+ in two years. For what? For someone who makes enough money, who cares? Not me. On the other hand, two such SUVs over 10 years is over $80,000 that could have instead gone to a house.

Look at all the SUVs on the highway the next time you drive. Is it any wonder people have no down payments for houses and are struggling with bills?

I am not attempting to tell people what to drive or what to do with their money. Rather, I am saying that if you drive an SUV that you paid over $30,000 for and you are struggling to make bill payments, then look in the mirror to see where the problem might be. There are exceptions such as those with unexpected medical problems and the like, but for the most part the truth will hurt.

GM Shares Hit 26 Year Low

Buckingham Research sees Higher GM Cash Burn, Risk To Dividend.

Buckingham Research Analyst Joseph Amaturo cut his stock price target to $10 from $13, and reiterated his underperform rating, saying production declines are likely to widen loss expectations and accelerate the drain on liquidity.

GM's stock, a component of the Dow industrials, shed 0.6% to $16.02, and has now lost 31% since the end of April. It hit a low of $15.76 earlier in the session, the lowest price seen since August 1982.

Amaturo said he now expects a 2008 loss of $6.53 a share and a 2009 loss of $7.73 a share, wider than his previous forecasts of a 2008 loss of $4.57 a share and a 2009 loss of $6.14 a share.

He also said the automaker's cash and equivalents balance is expected to fall below $20 billion by the end of the second quarter, and raised his 2009 cash burn projection to $17 billion from $14 billion.

"We believe it is becoming evermore likely that GM's current cash dividend could be eliminated or cut as the company likely has to raise capital to remain solvent beyond 2008," Amaturo said in a research note. "We believe management could raise capital as much as $7 billion to $10 billion, which will result in significant dilution for the current equity holder, in our opinion."

Separately, Credit Suisse Analyst Chistopher Ceraso said GM's third-quarter production schedule appears to be "way to aggressive," and could leave trucks about 50% overstocked at the end of September.

GM missed a golden opportunity to raise cash when Captain Kirk Kerkorian temporarily lost his mind attempting to be a "white Knight" in rescuing GM (see What is GM worth?, July 2006). GM managed to hit $37 when that love affair was on and more amazingly approached $42 after Captain Kirk bailed.

GM could have raise money at $40, $35, $30, $25, or $20. This is a slow replay of Ambac (ABK) that had uncountable chances to raise money at $80, $70, $60, $50 etc, but now sits at $2.14 on its way to zero.

Some might argue that I am making this seem easier than it is. Not really. Credit conditions were extremely easy a year ago. The opportunity was there, then. Now, is another matter. Right now it is costing Citigroup and Lehman 9%+ to raise cash. Perhaps it would cost GM 15% or more.

Furthermore, I do not think Citigroup goes bankrupt. It could, but I think the Fed would force it to be busted into pieces or taken over first. All bondholders care about is if they get paid back. They do not care one iota if the share price plunges 90% or more as Bear Stearns did from the top. On the other hand, GM is far less likely to survive. One should expect its bonds to be priced accordingly.

The most interesting thing about GM is the fact that there is $1 trillion in credit default swaps speculating on the demise or lack thereof of this dog. To put things into perspective, the market cap of GM is $9 Billion and over $1 trillion is bet on whether or not it survives. Anyone who tells me these bets are hedged, please tell me how. There is not enough stock or bonds to hedge with. By the way, that $1T figure is over a year old. Anyone with a more current number, please send it my way.

Assuming Buckingham Research is correct about GM's cash burn rate, GM will be out of cash in 18 months. However, please remember that GM is a company that has had 27 lives. I thought it would go bankrupt six years ago. Yet, somehow it has repeatedly been able to go back to the bond markets and raise cash. That is the only reason why it exists today. The difference this time is that GM blew a golden opportunity to raise cash a year ago or so. It also blew a golden opportunity to unload GMAC and Ditech.

With credit conditions being what they are now, I suspect GM will delay raising capital. This will be another mistake in a long series of serious mistakes at GM. Credit conditions will likely be worse a year from now, just as GM will be down to its last few billion. This means it's increasingly likely that GM has made its last fatal mistake. And with all those swaps, someone has to be on the losing end of a huge bet, regardless of what happens.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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