Government owned General Motors bails out Dealers stalled by Government [Update]

This little gem of a news story is making the rounds recently as General Motors dealerships across America are on the verge of closing shop due to cash flow issues relating to the Cash For Clunkers program.

The program itself has been a huge success for the Automotive Industry, specifically the car makers, with not only General Motors, but American rival Ford (F) announcing increases in production to keep up with demand. So far reports indicate that about 450,000 vehicles have been sold in the US qualifying for the program, with recent statistics showing Toyota (TM) vehicles holding 3 of the top 5 spots. Nearly half a million vehicles is not an insignificant number in the fight to increase average American fuel economy but herein lies the rub. The wildly successful program has already run out of money once, gotten an infusion of cash to extend it, and still is so far behind the 8-ball on the administration side of things that dealers around the country may have to shut their doors. While this program is expected to bump vehicles sales past the 1 Million mark for the first time in longer than a year, the under-pinnings of and bureaucratic red-tape within this program still have a ways to go.

Cash For Clunkers, which gives up to $4500 in rebates to car purchasers, provided they buy fuel efficient vehicles and trade in gas guzzlers or old piles of road junk, is leaving dealers holding the bag when it comes to running operations. It is now reported just how far behind the Government is in issuing rebates to dealers, with 37% of rebates having been processed, but the percentage of payouts still unknown. The articles flying across the news wires lately have been full of quotable frustrations from dealers. One company is apparently looking out and stepping in to help.

General Motors is that company, 60% Government-owned General Motors following the structured bankruptcy that is. The company, err Government, is lending money to dealerships in an attempt to keep them operating until the Government can process their sales and send the appropriate rebate dollars. GM will take the money back from dealers within a month's time if the Department Of Transportation has issued funds to that specific dealer, so this plan is wildly considered an operational stop-gap measure. General Motors is on the right track here as in the market share game, it can't afford to have its dealership network crippled during the busiest car buying spree in over a year. The irony of it all, especially for Uncle Sam is something else entirely!

Update: Press updates regarding 37% of rebates process with unknown % having been paid out.

Disclosure: Author owns TM, holds no position in any other companies mentioned

GM is finished as Bankruptcy nears, shares slide below $1

Shares of General Motors (GM) are off about 20% today as all signs are pointing to the inevitable bankruptcy filing on Monday June 1st. The struggles in Detroit continue to drag down domestic Automakers but GM's well-publicized cash flow problems and stand-offs with the Federal Government have led to its demise.

Unlike Motor City brethren Ford (F), GM was unable to reign in enough the costs that had been spiraling out of control as deals with the UAW and CAW only go so far. The cost-cutting pacts with the Canadian union and the ownership agreements with the US Union could not in the end support the business model without an infusion of outside help that wasn't in sight. Italian car maker Fiat is still interested in GM's European operations to the tune of a merger with the Opel brand, but without a leg to stand on, General Motors as this generation has come to know it, no longer exists.

The electric Volt will not save the company now, far too little and far too late, all that will happen now is a sell-off of assets to anyone willing to buy. Perhaps GM can pick up the pieces and re-emerge as a brand in-tune with a new generation of motorist, but as a company and especially as a stock in today's market it is.

Turmoil at GM can only mean good things for competitors, with the company distracted by the slashing of assets, the brokerage of deals & spin-offs and the necessity of brazen survival for workers up and down the corporate chain, the only winners will be other car-makers.

Names like Ford, Toyota (TM) and Honda (HMC) should emerge with a stronger competitive advantage while luxury European brands continue to fight for the affluent customer throughout North America. Auto Stocks are all marginally higher today signaling that although one of the Titans of the industry has fallen, the car business will not go away and the remaining horses in the race will not slow down to pick each other up. What sometimes seems like a 0-60 sprint in the car business actually is and I expect the other big automotive companies to not pull any punches when it comes to advertising their strengths, and as is always prudent advice when it comes to investments: Stick with the strong.

Disclosure: Author owns TM

A Tale of Two Cities: Easter News and Notes

A tale of two cities, screams to be profoundly appropriate in describing the current climate of the American markets. Those two cities of course would be Detroit and New York. Symbols representing two pillars of the American workforce and economic prosperity. Both the auto and financial industries have been decimated by losses, layoffs, and market indifference, producing for some, the biggest market fall since the crash associated with the Great Depression.

Detroit's auto stocks are still in tatters, and the news did not get much better. The US Treasury has provided General Motors (GM) with a specific set of instructions for the preparation of Bankruptcy on June 1. It looks less and less likely that GM will be able to avoid that scenario and Investors showed no confidence in any alternative as Monday's trade saw GM give back 16% to the $1.70s.

To counter that, New York was having a fantastic session as the optimism from the Wells Fargo Corp (WFC) pre-announcement of profitability sustained financial momentum. With important earnings announcements upcoming, Goldman Sachs (GS) and Citigroup (C) Investors are seeing a renewed confidence in not only profitability, but the ability of the government to do what it has set out to do. Rid the financial books of terrible assets.

Analysts estimate Goldman to earn about $1.30/share, but the street has begun its whisper-practice and with Goldman still seen as the strongest of the Wall Street brands the company is expected to beat its own number and handily. Citigroup, having alerted the market to profitable months in January and February is looking to continue, despite the accumulated average estimate of a $0.37/share loss (according to Yahoo finance). Goldman will likely set the tone for the banks, and if others in the sector can surpass their estimates it will go a long way to support this current market rally, and instill the type of institutional confidence that is needed to make the latest gains sustainable.

Also in the news over the weekend, besides a thrilling Masters golf finish, was reporting from the Wall Street Journal (Link) that Apple's (AAPL) iconic CEO Steve Jobs, is in fact still very much in the picture and involved in design and business decisions. Word is that Jobs was very much involved in the interface of the latest iPhone OS, version 3.0, and is also involved in the creation of the much-heralded Mac tablet/netbook device. The return of Steve Jobs, from a 6-month medical leave has been a cloud over Apple's stock despite sales growth and product innovation from the company. The recession may have curbed consumer spending habits severely, and Apple's premium brand did suffer, according to market research statistics, but with the company continually improving its Mac Computer and iPods lines recently and an upcoming iPhone announcement surely in June, Investors have begun to set aside worries about Jobs.

Should Jobs return on schedule and lead the next phase of iPhone evolution, expect resonant cheers and analyst upgrades on the anticipation of the next phase of Apple's product road-map. In fact Kaufman Bros. Shaw Wu conceded Apple's value in his latest report, bumping his price target to $150/share.

News reports of the rally's sustainability have been mixed, with some expecting negative trends to overshadow any glimmers of recovery. Thsoe glimmers however, are due to get brighter if the financial sector continues on this path of pre-announced profitability.

Bad News Bears economy continues to crush Automakers

Customer pessimism continues unabated in the United States leaving big ticket item sales near lows not seen in half a century.  For Automakers, this combined with the lack of credit for leases, means car sales are still plummeting. Detroit's problems have been well documented of late but even Japan's best saw US sales slump dramatically in December.

General Motors (GM) sales were down 31% in the last month of 2008, which pegged US sales over the year at a 49 year low. The American recession and consumer unsettling fears were the main culprits of blame, however with the company needed Federal bailout funds, it can't be stated that all is right with the biggest name in Michigan.

Ford (F) sales were almost a mirror image of its American brethren, down 32% in December, which netted total sales volume at a 47 year low.  Chrysler for all intensive purposes fared even worse according to analysts, who estimated 48% declines in December for the privately held American Automotive firm.

The United States car sales picture wasn't just bleak for domestic brands. Japan's best, Toyota (TM) and Honda (HMC) suffered sales drops 37% and 35% respectively in December.  At this point in the American economic cycle the consumer isn't discriminating, he's simply not setting foot into any dealership.  

This sales slump has taken a substantial bite out of the market capitalization of all automakers. 

GM, despite today's +4% day, sits down 58% over 3 months. Market Cap: $2.3Billion

F, up almost 5% today, down 36% over 3 months. Market Cap: $6.1Billion

TM, down 16% over 3 months. Market Cap: $103Billion

HMC, down 20% over 3 months. Market Cap: $38.7Billion

Despite the fact that the Japanese car companies have market caps that dwarf their American counterparts the sales slumps pose a potential opportunity. Amazingly, I think this bodes well for the American automakers, assuming of course all 3 get enough aid to keep afloat into any economic recovery.  The sentiment remains that Japan's best cars are still far more attractive to consumers on value for money and fuel economy but with car sales slumping across the board, it gives the struggling domestic makers more time to design, build and market attractive products in their local markets. Those consumers who today and tomorrow will not be buying the latest Honda Accord or Toyota Camry could potentially be swayed in 6 months time by a flashy, small, affordable and efficient Ford of Chevy vehicle.

All this still leaves one big if, can these companies build that attractive vehicle and turn around market sentiment? Recent history has shown the answer to be an emphatic no.  But, with recent government lifelines, the hope exists for a Detroit resurgence in 2009 and beyond.

Disclosure: Author holds no position in above mentioned companies

Ironic Headline of the day: GMAC's Here we go again

Today's Ironic Headline of the day comes via the New York Times and their humorous and insightful take on GMAC. Granted this is the first 'headline of the day' post ever written for WC Power Tech Fund Investment Blog but reading the NYT article (Link) the irony was too pronounced to ignore.

Here's the New York Times Headline: "With Needed Cash, GMAC Will Ease Lending Rules"

Seriously?? GMAC, whose automobile financing business has been in utterly dire straits as the credit crisis unfolded in the 2nd half of 2008 in step with domestic auto maker General Motors (GM) own struggles on its way to the brink of bankruptcy, now starts back on the same path? Let's hope these firms learned a few lessons along the way.

It was the ease of lending restrictions that got infamous mortgage houses Fannie Mae (FNM) and Freddie Mac (FRE) into such a mess in the first place. Armed with $5Billion of Government Bailout money the auto lending business can get back into full swing, or so thinks GMAC. According to the New York Times, the company is lowering its credit score from 700 to 621 for Americans to qualify for financing in order to stimulate business and expand the current potential customer base.

Credit scores of 620 or below are considered by the credit bureau to be "higher risk transactions" so at the very least GMAC is steering clear of those for the time being. It has been a tumultuous few days for the financing company, which is jointly owned by GM and private Cerberus Capital Management, its last second win or approval to become a bank opened the possibility for bailout funds in order to keep the company afloat. The Federal Reserve gave tentative approval for GMAC to become a bank holding company and thus allowed it to tap into a portion of the $700Billion bailout passed by US Lawmakers those months ago.

Clearly the infusion of cash gives GMAC invaluable time and monetary room in which to conduct and grow a broken business, but for investor sake, the company had better not be on a path of 'Here we go again'.

Disclosure: Author holds no position in above mentioned companies.

Markets let down by Washington as Lawmakers delay auto bailout for American Carmakers

For the second time a needed bailout that was, wasn't. Yesterday's market session traded higher by mid-day as Traders were looking for US lawmakers to outline a plan to bail out the American automotive industry. Instead they got grand-standing and lecturing from US senators bent on making automotive executives look foolish in the political spectrum.

A $25Billion package for the big 3 American automakers seems like small peanuts compared to the $700Billion package passed to bail out banks and mortgage lenders, however Ford (F), General Motors (GM) and Chrysler were forced to beg hat-in-hand at the feet of Washington's might.

It doesn't take a rocket scientist to see trends that had been developing in America. Big Trucks and SUVs selling furiously taking up all showroom space, and more importantly development time and dollars within American factories. All the while strong smaller Japanese and European models made their imprint within the buying habits of American consumers.

Then oil spiked higher and credit froze. The big 3 were unable to resell virtually any of their gigantic fleet of leased vehicles, mainly because even Americans were not buying Trucks with gas at $4/gallon. This led to substantial write-downs and quarterly losses, and a situation where the companies were burning through cash so quickly they are unable to sustain themselves any further. To complicate matters more, Union contracts that have been crippling the business slowly for years are now coming to the forefront showcasing just how much money is spent on pensions, insurance and benefits for American Autoworkers. Oh and then of course Americans went into full out Recession mode in October and stopped buying cars at all.

Chevrolet's answer to the problems, the Volt, coming in 2011, could be too little too late. Ford is trying to put "hybrid" on just about every model and seemingly can not find the wisdom to bring some of their more successful small European cars into the American market. All the while Toyota (TM) and Honda (HMC) continue to lead in fuel efficient vehicles while Germany's big 3 dominate mind-share in the luxury segment.

So Detroit went to Washington for help and got smacked around by lawmakers trying to look political as markets around them fell further with every word. The United States Auto Industry is broken, everyone knows it, Senators in a special session will not have uncovered the Lost Ark by saying so. The grand-standing under the guise of "protecting the tax-payer" is all well and good but wouldn't those tax payers be more concerned if their retirement packages, employee stock plans and investment accounts were worth half as much as they were last year?

Did these not people learn anything the first time around when the initial banking bailout failed to pass? Senators and Congress made a lot of speeches about concerned citizens calling worried about their tax dollars going to bailout Wall St. Then the market dropped 700 points in the span of a couple of hours and Joe Q. Public started calling not about his taxes but about his retirement account.

Now Lawmakers have every right to ask Detroit for a turn-around plan before they give them any handouts but this type of thing can not be all or nothing. Authorize an influx of $9Billion to keep the companies and all their workers solvent till the end of the year and then reconvene later to authorize another $16Billion contingent upon seeing evidence of new company direction in the face of a changing industry. And like everything political in America, of course the $25Billion in question had already been set aside for the Auto Industry to use for other means.

But Lawmakers did a lot of shouting and finger pointing but little else thus leading the S&P to an almost 50% decline year-to-date. Amonst the trillions in market losses already sustained by economic and recessionary pressures what's another $25Billion if it will instill some hope to the millions of workers employed by the industry, the markets and the US economy in general.

But then again gas prices fell below $2/gallon so maybe Trucks will sell again. Once this pesky recession subsides that is.

Disclosure: Author holds no position in any aforementioned companies

Stock Gains from China Economic Plan evaporate in Afternoon Trade

In this continuing seemingly unprecedented global crisis the next stimulus injection attempt is being carried out by the Chinese. China announced a $586Billion US stimulus package it will use to try to guide that nation through the perils of today and tomorrow's economic pressures. The package, which was designed to boost business and consumer confidence, and hence bolster the economy was seen as a light for Asian markets.

US stocks began the day climbing about 2% at the open, but those gains were short lived as the realities of the harsh conditions facing many of America's most fundamental and historic firms flew across the news wires.

AIG (AIG), which was the recipient of an already large bailout from the Government, got a revamped agreement that bolstered it's rescue package up to $150Billion. This coming on the reports that AIG's quarter swung from $3Billion in profit last year to a $24Billion loss in the current frame. Not to be outdone by the atrocious market conditions and poor financial performance of its peers the now-infamous mortgage house Fannie Mae (FNM) posted a $29Billion loss for its quarter and reported the need to tap into the Government funding that it had earlier received.

Things are just as rosy for the American Automakers, with Ford (F) struggling operationally, posting a quarterly loss of $3Billion and having its financial future in jeopardy. Economic pressures are keeping buyers away from big ticket items, and Ford's formerly successful fleet of gas-guzzling SUVs and Trucks now sit on lots unable to be sold at today's gasoline prices.

If Ford's troubles were the only problems facing GM (GM), management may be able to crack a smile or two, however General Motors is much worse off from an operational standpoint. The company says it may run out of cash by the end of the year and it just had a Deutsche Bank analyst downgrade the stock and set a price target of $0. The analyst projected a path for GM that ended with little option other than bankruptcy. GM stock fell to its lowest levels in over 60 years after getting trimmed by nearly 30%.

The American consumer is facing tremendous pressure and these type of headlines flying through the business pages just add to the hurt. With unemployment in the US at its highest in 14 years and the election behind the Country a new direction is needed, and needed quickly in order to restore some confidence and needed stability to the markets.

Disclosure: Author holds no position in the above mentioned companies.

Is anything worth owning in the Auto Industry?

In short, with today's high Oil prices and report after report from the big automakers cutting production, the answer's a resounding No! There's simply nothing compelling out there valuation wise in the Automotive space.

Ford (F)? Virtually slashing it's popular Truck line in half with delays and production cuts, and the only car worth talking about, besides police departments contracts, is the Mustang which now has been stagnant for almost half a decade.

General Motors (GM)? $40Billion in the hole and counting... Not to mention probably the ugliest set of cars in America goes to Chevrolet. Truly incredibly uninspiring automotive design.

Toyota (TM)? Actually the only compelling value out there with a P/E of 9. However, whispers of US sales expectation management are seeping through the proverbial cracks, which will put some serious pressure on upcoming earnings reports. The company has the clout of being the "leader" in the Hybrid segment going for it but could the Prius possibly look any worse, and if the respectable Jeremy Clarkson of Top Gear is to be believed, in a race the Prius provided worse fuel economy than a BMW M3! (*Obviously the car was not run under normal conditions*)

Toyota at levels below $100 is one to put on the watch list, however times will continue to be rocky in the Automotive segment as a whole until Oil speculation subsides and consumers instill in themselves a renewed confidence to go driving again.

Of the companies traded in the US, the only one continuing to do reasonably well is Honda (HMC). Is it a big secret that it is up 4% Year to Date while others are off significantly? F (-20%) GM (-40%), DAI (-30%), TM (-10%).

Honda's secret sauce? Fuel efficient well engineered cars, that have very good engines, are impressively reliable and most importantly, don't make you loathe getting into them every single morning. It isn't hard to understand that successes like Accord and Civic, year after year show up on best lists and best seller lists. The Acura luxury line continues to produce winners as well, but a watchful eye on the headlines is a necessity in this sector.

With Toyota starting to whisper statements that US sales targets will be "tough to meet" it doesn't require multiple graduate degrees to surmise Honda may be in for some dry spells to come. While at this stage Honda is a Hold in this book, closer to $30/share is an attractive entry point for an innovative car company, that yet sees almost none of the corporate stumbling blocks faced by its US peers and has a big enough worldwide presence to funnel out good small cars all over Europe and Japan.

Disclosure: Author holds no position in the above mentioned companies.

Update: Thursday June 26, 2008. Statement to clarify Chevy as a division of GM

Markets Stumble out of the gate in December, Automaker sales Struggle

The month of giving and receiving started on a bumpy note for North American Markets as major indices were all lower. Nasdaq was the biggest loser on the day with an almost 1% drop, compared with the Dow, S&P and Canadian TSX, all losing between 0.3 and 0.6%. Today's selling was in part due to lackluster Automotive sales numbers.

General Motors (GM) reported a decline of 11% in sales numbers, while its major competitors Ford (F) and Toyota (TM) reported flat month-over-month sales. The only increases were seen in Honda (HMC) and Nissan (NSANY). It is clear that high oil prices are skewing buying towards smaller and more fuel-economic vehicles and that's putting a hefty dent in truck sales for the American brands. Punctuated by GM's 15% drop in Truck Sales.

The big story that is oil keeps rumbling around in the head of the average consumer and it is most evident in consumer spending on cars. In fact demand for smaller cars, more efficient cars, and even hybrids is remaining strong, according to Toyota. Seemingly though, what hope do big time car makers have in the United States? Their consumer is witnessing a de-valuation in home equity, gas prices that make it more than $50 to fill a tank, and a currency that worldwide is eroding faster than the Dolphins chances of winning a game this NFL season.

Truth be told, its a tough time for the car makers, and the executives are well aware of the difficulty. The trick will be, which company can provide the most incentives and the most practical products going forward into next year. From my view owning the automakers is a tough call right now but I like the path of Toyota and Honda, as those companies seem to follow consumer trends better and more nimbly than their American counterparts.

Disclosure: Author does not own any of the companies mentioned above

Markets up Wednesday, Dow gains 99 led by General Motors

American Markets enjoyed another positive day with the Dow Jones finishing to the plus side by 99 points. The big push was provided by General Motors (GM) as it enjoyed a 9% gain. GM and the United Auto Workers Union reached a deal to renew auto worker contracts and restructure GM obligations to workers and the union. The threat of a long-term strike was lifted from the shoulders of GM and the stock jumped accordingly.

Also enjoying positive sentiment were the Investment Banks as Bear Stearns (BSC) jumped over 7% on reports that the big man himself, Warren Buffett is eyeing a stake in the company. These reports went on to say that several big banks are also interested in purchasing as much as 20% of the company. This news had investors feeling pretty good about the potential for these companies, specifically the investment banks, to overcome the losses and the mistakes that were made during the sub-prime credit situation.

In technology stocks, momentum for Research In Motion (RIMM) kept going strong as the company continues to defy gravity and bloated P/E valuations. The rule of 80-leads-to-100 was in full effect for the BlackBerry maker as it hit a high of $100.75 before settling to close at $99/share. Apple (AAPL) this morning opened to an all-time high and continued to $155 before drifting down and closing slightly lower just under $153. The recently opened Amazon (AMZN) DRM-Free MP3 store is making its rounds and while there hasn't been much of an effect on Apple's stock yet the consensus has been that this can emerge as a true competitor to iTunes.

With the quarter coming to a close investors will be keen to be placed in the right companies as the earnings season kicks into high gear.

Disclosure: Author is long AAPL

GM Posts Surprise Sales Increase but the Better Auto Investment is in the Far East

Worries over consumer spending due to the shake up in the credit markets spilled over into the automotive segment as analyst estimates called for lower sales virtually across the board. The big US Automakers: Ford (F), DiamlerChrysler (DAI) and General Motors (GM) have been pressured by International producers Toyota (TM) and Honda (HMC) among others.

August numbers proved to be lower for most of the Automakers with only GM posting an increase that was seen higher due to rental car sales deals. GM posted a 6% sales increase but that included an unsustainable 24% increase in sales to rental companies. Ford posted a 14% decline while Toyota declined 3%. Chrysler, now separate from Daimler-Benz also suffered decreases. Can the auto industry provide decent returns in the long term? It's an industry that is now seen almost in the same light as the airlines and that's not a good look for the stocks of these companies. GM had its share of problems but recovered and Ford has its own share or problems and seen continued pressure as a lack of innovative vehicles are crossing the Detroit assembly lines.

Buyers are looking toward smaller, more fuel efficient vehicles due to the continued high price of gasoline and its Toyota, Honda and Nissan (NSANY) that benefit the most. In fact Honda and Nissan posted sales gains in the month. That's a promising sign as the overseas markers are capitalizing on not only American consumer trends but worldwide trends as well. The US automakers are struggling to find areas of growth and have shown that the innovative nature of American Car Design is all but dead. I personally can not remember the last American made vehicle that brought upon any kind of positive response except for the retro-styled Ford Mustang.

That's not to say that Toyota or Honda or Nissan make the prettiest cars either. The difference is though, that the luxury lines of these automakers are renowned for innovative breakthroughs and design promise. Honda's Acura line and Toyota's Lexus line are terrific positives for brand and design image and are one of the reasons that these auto makers deserve a slight market premium, in terms of a higher P/E ratio. Honda stands at 11, Toyota at 12 while GM sits at around 10 and Ford is trying to get back in the black after being plagued by losses.

To really turn the US automakers around a grass roots design reinvention has to take place and this is no easy task. The overseas players have the brand power (luxury lines), the incentives (cheaper more fuel economic cars), and the worldwide manufacturing to compete with and overtake their American counterparts. Toyota has some work to regain its highs close to $140/share but with its strategy well in place the sales growth should continue and barring an American miracle should emerge as the Car Maker of the world. Honda is a third the size of TM in terms of market cap and has room to grow its plant and model base.

The era of the great old American car maker is over for the time being as Japanese manufacturing strategy becomes more entrenched and the vehicles become more affordable and practical for the average consumer.