GM Death Watch

[TRS]

http://www.thetruthaboutcars.com/editorials.php

GM is up about 19% in the last couple of weeks, BUT fundamentals IMO have not changed.

http://www.thetruthaboutcars.com/editorials.php

[HenryTo]

Re: Gas incentives for SUVs being sold in California and Florida

I guess one needs to do what one needs to do in other to move inventories sitting on the dealers' lots. As a "responsible capitalist" (if there is such a word), however, this has to be the last option, as doing this artifically keeps gas prices high, encourages more pollution, and as it puts your company in a synthetic short position in oil.

Indonesia did this on a much grander scale until last year, and look where it got them (the government nearly ran out of money).

My guess is that GM will ultimately pay for this "lack of responsibility."

[rffrydr]

Here's an "American" answer:

http://media.ford.com/newsroom/release_display.cfm?release=22295

Tight.

[TRS]

It's bizarre how two top institutions have pumped GM in the last week.
Any big summer rebates will mean the lots are full.

http://www.thetruthaboutcars.com/content/1148666130634673931/

[rffrydr]

You buy a fullsize truck in CA (and FL?) GM's capping your gas at 1.99!

[HenryTo]

Wildcat strike at Oshawa Parts Supplier:

http://www.autoserviceworld.com/issues/ISArticle.asp?id=56301&issue=05242006

[HenryTo]

Heard on the streets in Houston:

http://finance.messages.yahoo.com/bbs?action=m&board=7077666&tid=gm&sid=7077666&mid=290959

Just checked the websites of a couple of local dealerships - and there is a huge inventory of both 2007 Suburbans and Tahoes - not to mention huge savings:

http://www.machaikchevy.com/en_US/frm_index.chtml?pageName=MiscPage_1&noc=1&overrideUrl=f_MiscPage_1.chtml

http://www.munday-chevrolet.com/

Bottom line: The 2007 lineup of GM SUVs are not selling.

[HenryTo]

Following is from the Gulf Times - the Persian Gulf, not the Gulf of Mexico, that is. This story tells you the actual action at the dealer level - which obviously is much more reliable than what GM is trying to spin. This story also makes perfect sense - GM SUV sales should have a bump up because of its new lineup but as long as gasoline prices are close to $3, they are still going to take a hit going forward.

When Texans fall out of love with their trucks, you know something is seriously wrong.
--------------------------------------------------------------------------------
Texans fall out of love with trucks, SUVs as gasoline soars
Published: Sunday, 21 May, 2006, 10:36 AM Doha Time

HOUSTON: Soaring gasoline prices are coming between Texans and their trucks. Trucks and sport-utility vehicles account for three of every four trade-ins at Gillman Honda and Gillman Mitsubishi in San Antonio, said Mike Basham, a used-car manager.

Customers want fuel-efficient cars instead, he said. “It’s staggering the impact this is having,’’ Basham said. “I’m not seeing any cars in trade.’’
Many residents are buying economy cars, including gasoline-electric hybrids, as gasoline approaches the record reached last year after Hurricane Katrina.

The shift in Texas, where pickup-truck ownership is the highest among the eight largest US states, may hurt the country’s automakers as well as dealers.

“If you look at trends with trucks, Texas sets the tone,’’ said Craig Eppling, a Dallas-based spokesman for General Motors Corp, the largest US automaker.

GM, Ford Motor Co and the Chrysler unit of DaimlerChrysler AG make a profit of $3,000 to $8,000 on each full-sized truck and SUV they sell, said Dennis Virag, president of Automotive Consulting Group Inc in Ann Arbor, Michigan. They are lucky to break even on economy cars, he said.

One in four Texas drivers owns a pickup, according to Census Bureau data from 2002. The state accounts for one in every seven sales of Ford’s F-Series pickups, the top-selling vehicle in the US

“It’s a large, heavily populated state, and consumers there like their trucks,’’ Virag said. “They like big trucks.’’

Texas is the second-largest state by area and population, with 268,581 square miles and 22.5mn people, according to US Census Bureau data.
The price of fuel is cutting into demand, said Jerry Reynolds, a former owner of Prestige Ford in Garland, Texas. “It’s on everybody’s mind,’’ he said in an interview on May 11, four days before selling his stake in the dealership.

Prestige was once the largest US retailer of F-150 pickups.

Gasoline at US pumps has jumped 32% since February 20 to an average of $2.947 a gallon in the week ended May 15, the US Energy Department says. The record was $3.069, set in September after Katrina flooded Gulf Coast refineries.

In the five months after Katrina struck, full-sized SUVs sat on Texas lots for an average of 132 to 147 days before they sold, according to the Power Information Network of researcher JD Power & Associates. The average climbed from 89 days early last year.

For all vehicles, the average has fallen to about 60 days from 70 early in the year.

GM’s Chevrolet, Ford and Chrysler’s Dodge had declines of 6.5% to 13% in Texas truck sales last year, RL Polk & Co data show. Across all nameplates, sales fell 4.3% even as total new-vehicle sales rose 1.5%.
Trucks and SUVs accounted for 61% of new-vehicle sales in Texas last year and through the first two months of 2006, down from 64% in 2004.
Smaller vehicles are on an upswing. Sales of Toyota Motor Corp’s Prius hybrid and Yaris subcompact helped lift sales at Fred Haas Toyota World in Spring, Texas, to a record in April, said Vic Vaughan, general manager.
The Prius, a mid-sized sedan, has more than tripled its market share in Texas since 2004 to 1.2%, according to the Polk data. The Yaris, a top seller in Europe that gets 40 miles (64km) per gallon on the highway, arrived in March at US dealerships.

“When you’re getting your nose bloodied at the gas pump the way Texans and Americans are right now, it makes it easier to debut a car as fuel-efficient as the Yaris,’’ Vaughan said.

Honda Motor Co added a small car, the Fit, to its US lineup in April.
“I just barely got a glimpse of one,’’ said David Kemp, Gillman Honda’s general manager. “I’ve gotten in 10 or 15, and they sold right when they hit.’’ Nor has he been able to keep Civic and Accord hybrids on the lot. “I don’t have enough of them and can’t get enough of them,’’ he said. “I don’t think anybody was ready for $3 gas.’’

Texans who still want a full-size pickup or SUV have choices among the current hybrids and others due soon. More buyers are likely to favour them as the technology is added to other vehicles and improves to yield fuel savings of 30% to 50%, Automotive Consulting’s Virag said.
GM sells hybrid versions of its Chevrolet Silverado and GMC Sierra pickups. Two-wheel-drive models get a reported 18 mpg in city driving and 21 mpg on the highway, above the 16 mpg and 20 mpg with gasoline engines.

Hybrid versions of GM’s Texas-made Chevrolet Tahoe and GMC Yukon SUVs are scheduled to debut in 2007, and the automaker promises a 25% increase in fuel efficiency.

Chrysler’s Dodge Durango, using the same technology, is due in 2008.
At the smaller end of the hybrid-SUV scale are the Ford Escape and Mercury Mariner. The Escape boasts 31 mpg on the highway, best in the US for an SUV.

GM introduced a redesigned Tahoe this year. The pickup’s sales suggest that larger vehicles still attract Texas buyers, said Michael Maroone, president of Fort Lauderdale, Florida-based AutoNation Inc, the nation’s largest auto retailer.

Not Helen Hales, a pharmacy technician in Willis, Texas. She swapped her Dodge Caravan for a Toyota Corolla, cutting her fuel use by almost half.
“There are times when I miss my van,’’ Hales said. “I have a grandchild, and we could spread out and do what we wanted, but now we can go farther.’’ – Bloomberg

[HenryTo]

The Truth About Cars website is also making a connection between AlixPartners and the world "bankruptcy."

http://www.thetruthaboutcars.com/content/1148142465484771235/index.php

Signs of huge desperation as confirmed by the Detroit News:

http://www.detnews.com/apps/pbcs.dll/article?AID=/20060518/AUTO01/605180398/1148/BIZ

[HenryTo]

The members have spoken: 95% of all UAW members have authorized a strike at Delphi and folks are still now calling that a strike "is not likely" at Delphi? Utterly amazing:

http://www.detnews.com/apps/pbcs.dll/article?AID=/20060517/AUTO01/605170337/1148

GM not only stockpiling parts, but have been working a lot of overtime to stockpile cars as well.

And from December, a negotiator stating that a strike "appears more likely than not" (officials at the UAW also confirmed recently that talks have not gone anywhere in the last few months):

http://www.detnews.com/apps/pbcs.dll/article?AID=/20051207/AUTO01/512070424/1148

This is another interesting "article" from December. There is a lot of tension right now:

http://www.pww.org/article/articleview/8230/1/298

Quote: But a JP Morgan investment broker was in attendance. Outing the infiltrator from the podium, Greg Shotwell proceeded to tell everyone how JP Morgan had given Delphi a $2 billion line of credit so it could purchase Motorola Electronics Division during the bankruptcy proceedings.

The anger rose as Shotwell stated that JP Morgan had tried to infiltrate all three rank-and-file meetings to date so they could keep an eye on how their investment was doing. The undercover investment broker was then chased from the room by the shouts of angry workers.

[HenryTo]

Check this out:

"GM said it has retained an outside financial advisory firm, AlixPartners, to assist the corporation with a broad range of accounting, financial reporting and related matters."

http://www.alixpartners.com/EN/NewsMedia/PressReleases/tabid/129/PressReleaseID/18/Display/Detail/Default.aspx

Then go to the menu, look under services, and see how many times the word "bankruptcy" and "litigation" is mentioned. A notable list of clients includes Dana, Silicon Graphics, Kmart, Worldcom, and Enron:

http://www.businessweek.com/magazine/content/02_38/b3800099.htm

[HenryTo]

Hello Prospero,

You are right that most companies use some kind of smoke and mirrors to juice up their quarterly results. The remaining question is: To how much of an extent has GM done this in the 1Q and can this continue?

1) The fact that it is so blatantly obvious (but which was only mentioned by the Motley Fool) suggests to me that there is no more room to juice up earnings. Companies usually try to hide these things if they can help it - to me, it is obvious that there is not much further things that GM can do for the 2Q.

2) From what I've been hearing, GM has shipped as much as possible they could to the dealers in the 1Q - thus booking early sales. Gas prices have so far refuse to go down. They're also hurting in Europe during April. The specter of another Fed Funds hike on June 28th hangs overhead, and this will continue to do damage not only to the consumer, but to GMAC's house and auto loan division as well.

And then, you also now have this as well, contrary to what everyone else is saying about the unions:

http://www.just-auto.com/article.aspx?id=87804

I read the full article on another site but I could no longer find the full article.

[Prospero]

I guess you're right Henry. One swallow certainly doens't make a summer, and GM has had a bad time for a while now.
On the other hand, the fact that the last quarter's improvement was aided by 'smoke and mirrors' seems fairly irrelevant to me. As I see it, most companies use smoke and mirrors all the time to ameliorate their results. Since that is the norm, it's not fair to deduct points when a particularly good quarter (relatively) is the product of tricky accounting. Having said that, I'm sure it's true that some quarters have abnormal accounting 'potential'.

More to the point, I suppose the people in charge at GM are well aware of the quality of their earnings, and are using whatever methods they can to buy time and liquidity to avoid bankruptcy.

[HenryTo]

The only good news that have come out of Detroit in recent months has been the consistent and amazing performance of the Pistons - but the Cavs just won game 5, and the Pistons is now just one game away from being eliminated in the playoffs. At the same time, Honda is now also going in for the kill. Following is courtesy of the WSJ:
-----------------------------------------------------------------------
Honda Steps Up
The Pressure on Detroit

Plans Call for New Facilities in North America
And Ramped-Up Production World-Wide
By JATHON SAPSFORD in Tokyo and STEPHEN POWER in Frankfurt
Staff Reporters of THE WALL STREET JOURNAL
May 18, 2006

Honda Motor CO. unveiled plans to build new North American facilities and ramp up production world-wide, highlighting the ambitious growth strategies of Asia-based auto makers while their Detroit-based competitors move to cut jobs and close plants in North America and Europe

Honda, the maker of the Civic and Accord model sedans, said its plans include new production facilities in the U.S., Japan and Canada, enabling the auto maker to tap strong global demand for Honda cars and motorcycles. It also said yesterday it will develop a new gasoline-electric hybrid car model.

President and Chief Executive Takeo Fukui said Honda planned to boost world-wide annual car sales to 4.5 million by the year 2010, up from 3.4 million in the fiscal year that ended March 31. About one-third of that anticipated growth, or 350,000 vehicles a year, will likely come from North America. "Considering changes in the level of demand, we have decided to expand capacity," Mr. Fukui said.

Separately, General Motors Corp. yesterday said it would eliminate roughly 900 jobs at its Ellesmere Port manufacturing plant in the United Kingdom, in the latest sign of the pressure on auto makers to slash costs in high-wage Western Europe.

The latest cutbacks at GM Europe come as the Detroit auto giant is pushing ahead with plans to cut more than 30,000 jobs in its unprofitable North American operations, which continue to lose market share to Asian and European rivals.

"Our industry simply cannot afford to stop continually improving productivity in its Western European car plants," GM Europe President Carl-Peter Forster said. "This is essential to compensate the higher cost base in Western Europe and to secure the future, given today's competitive environment."

The move is the latest painful cutback for GM's European operation, which hasn't posted an annual profit since 1999 and last year cut its European work force by roughly 12,000 people.

GM's cuts come despite efforts by Britain's ruling Labor party to stem the loss of manufacturing jobs.

The growth plans at Honda, Japan's No. 3 car maker by volume behind Toyota Motor Corp. and Nissan Motor Co., follow news earlier this month that Toyota will invest a record $14 billion in capital expenditure during the current fiscal year, through March 2007. That money will be spent on similar moves to develop new models and ramp up production, much of it in North America. Honda's capital expenditure for the current fiscal year will total roughly $5 billion.

Nissan, meanwhile, says it is readying a blitz of new products to hit the U.S. market this fall.

These moves contrast with plans at GM and Ford Motor Co. to eliminate a combined 60,000 jobs and close a number of factories. GM and Ford, of Dearborn, Mich., also are burdened with speculative, or junk, debt ratings that limit their financial flexibility at a time when their rivals are flush and able to spend billions on new factories and new models.

Negative Perceptions

Overall, the repeated news of strong growth plans at Japan's car makers, plus that of the travails of GM and Ford, tend to reinforce a perception among consumers that the momentum is with the Japanese.

"The car is the second-largest purchase for the average person" after a home, said Kurt Sanger, an analyst at brokerage Macquarie Securities in Tokyo. "If all you read about from certain companies is closing factories and bad balance sheets, and at the other ones all you read about are record sales and new factories, which ones do you have more confidence in?"

Mr. Fukui said Honda plans to spend $400 million to build a new assembly factory in the U.S. that will have the capacity to make an annual 200,000 vehicles after it comes on line in 2008. The move will expand the number of Honda assembly plants in North America to six from five, and increase production capacity to 1.6 million vehicles, up from the current level of 1.4 million.

Honda executives in the U.S. said the new car plant will be located in the Midwest but declined to elaborate. Company officials said they expect to announce the location sometime in July.

Honda will also spend $140 million on a new plant in Canada that will produce four-cylinder engines. In addition, Honda said it is considering more production capacity in China and will speed up its expansion plans in India. Meanwhile, the company will boost motorcycle production in markets from the Philippines to Pakistan.

Moving Targets

Such investments mean that any efforts by rival auto makers to match the Japanese expansion are an exercise in hitting a moving target.

"If you aim for where the Japanese are right now, and hope to get there in three years, the target is going to be long gone by then," said Christopher Richter, an auto analyst at CLSA Asia Pacific Markets in Tokyo.

Honda provided few details about the planned new hybrid, of which it hopes to sell about 100,000 units, but did say that it will be more affordable and smaller than the Civic and will likely provide industry-leading fuel economy when it hits the market in 2009.

The move underscores a growing focus on fuel-efficient models at a time when rising gas prices threaten the sales growth of at least some models of sport utility vehicles and pick-up trucks, both of which are staples of the U.S. auto industry.

John Mendel, a senior American Honda sales executive, said that more U.S. consumers are now "equating hybrid to high fuel economy, not to performance" in response to firm gasoline prices.

The company recently slowed production of a V6, performance-oriented hybrid version of the Accord car because of sluggish demand.

In addition to the new hybrid, Honda said it plans to launch over the next three years new diesel-engine-powered vehicles in North America. Honda provided few details but noted that it is looking to introduce four-cylinder diesel engines.

Honda said it will spend $640 million on a new plant in Japan that will be able to make 200,000 vehicles when it comes online in 2010. Honda also plans to build a new research and development center in Japan by 2009.

[HenryTo]

Prospero,

I was also troubled by the widespread prevalence of the bankruptcy story when GM was at $19 - but since the 1Q earnings report, many folks have now gone into the "GM is recovering" camp and so from a sentiment standpoint, the bear's argument isn't as shaky as before.

I can name many different reasons, but from a long-term standpoint, GM's operations from a relative standpoint have deterioriated for the last 30 years and show no signs of stopping. GM's troubles have been 30 years in the making - and no single quarter can fix this downward spiral. GM has shown some recovery in its Tahoe and Suburban sales, but that is to be expected given that they are revitalizing this line for the first time in seven years.

The latest "good quarter" required all kinds of magic tricks and smoke and mirrors from both Bob Lutz and the financial accounting folks (with some help from the SEC). Capital spending was cut to the bone, and loan loss reserves at GMAC was cut significantly (even as interest rates rise and even as revenues at GMAC continued to increase) in order to goose up earnings. For all intents and purposes, GM also "channel stuffed" their dealers - a tactic typically employed by manufacturers that are showing signs of desperation.

In the short-term, the survival of GM all depends on liquidity - and any bad news here (such as a less-than-expected 2Q earnings report, a strike at Delphi, an $80 oil price, or a consumer slowdown) will result in more rating cuts for GM debt - which could quickly tank the GM common. Is it any wonder why there were not many more bids for GMAC? And the fact that the banks are now potentially requiring collateral for a new $5.4 billion credit line is saying a lot - and I mean, A LOT.

The "GM is going to go bankrupt" folks are mostly in the 2007 or 2008 camp. I am slightly different. I think GM can even go bankrupt this year - especially if the consumer slowdown accelerates in the next few months.

[Prospero]

Henry, I enjoy reading your newsletters immensely because among other things, you're not a stopped clock. I know you're DJIA timing system is short now, but I also remember a few months back when you were bullish, correctly anticipating a rise past 11000.

You've clearly got much more market experience than me. On GM however, you seem absolutely convinced it's going down the tubes. To me that says either

a) Henry's view is normally so balanced that when he's this bearish it really must be going down.

b) The 'GM bankruptcy' story is so alluring even Henry is taken in. Let's go long!

What is the best single reason you can suggest for believing a) rather than b)?

(As it happens, I'm long GM right now. But I'm only interested in the short term - pretty much irrelevant to the debate.)