In some respects GM and Ford were tempting targets for the short sellers on Wall Street on Thursday, but in the end the sharp falls in their share prices had as much to do with the deteriorating fundamentals of the car industry in the US and globally than with any market activity.
The shorts merely put the boot in at the end of a miserable day’s trading. GM shares ended at $US4.76, their lowest level since the early 1950s. That was a fall of 31% on the day. They were $40 a year ago. Ford Motor slumped 22% per cent to $US2.16.
But the outlook in the two reports from JD Power and Global Insight helped lay the groundwork for some receptive sellers when the shorts decided to have a go.
JD Power reported that 2008 was turning out to be worse than thought
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As the U.S. new-vehicle retail market continues to deteriorate, new-vehicle retail sales are projected to end 2008 at 10.8 million units, which is 2 million units below 2007 sales, according to J.D. Power and Associates.
Approximately two-thirds of the decline in retail sales—which are reflective of actual consumer behavior in the new-vehicle marketplace—can be attributed to consumers delaying vehicle purchases. On average, consumers are keeping their vehicles 4 months longer in 2008 compared with 2007—up from 67 months to 71 months. The remaining one-third of the volume decline comes from reduced leasing activity. Additionally, fleet sales are expected to decline to 2.8 million units in 2008, which is well below the 3.3 million unit level achieved in 2007.
Power’s director of forecasting, Jeff Schuster, added that “any truly pronounced recovery appears to be more than 18 months away.”
Standard & Poor’s placed GM’s credit rating, already deep in junk territory, on review for a further downgrade.
Bob Schulz, an S&P analyst, said that while GM had adequate liquidity for at least the rest of this year, “the accelerating deterioration in industry fundamentals will be a serious challenge to liquidity during 2009”.
GM is set to be overtaken by Toyota this year as the world’s biggest carmaker. It is burning through around $US1 billion cash each month and that is expected to continue well into 2009, if not longer. The carmaker’s cash reserves have dropped from $US27.3 billion last December to $US21 billion on June 30. It drew down a $US3.5 billion credit line last month. And if it and Ford run out of money, the huge pension and health costs will either disappear for hundreds of thousands of current and former workers, or they will go to a cash-strapped US Government.
Another House of Cards!
Concerns about the company have been compounded in recent weeks by weakness in some key overseas markets, such as western Europe, Russia and China. The company said European car sales fell 1.9% in the first nine months of the year with a strong rise in eastern Europe offset by an 11% drop in the west. It’s cutting output in Europe and in countries like Australia.
Global Insight, an American economic forecasting and consulting firm said US auto sales are hitting recession levels this year and will sink further in 2009.
The FT reported Global Insight as saying: “We won’t get back to where we were in 2006 until 2013.” The firm is forecasting sales of 13.8 million units this year and only 13.4 million in 2009, compared with 16.1 million in 2007. (That includes fleets as well as private sales).
Whereas rising oil and fuel costs deterred buyers earlier in the year, now its financing costs with leasing collapsing thanks to a plunge in unwanted cars and a drop in resale values. Credit is being denied to more and more buyers by banks and the finance companies Ford and GM set up to feed buyers into their system.
GMAC, the GM finance arm, now owned 49% by the car group and 51% by the Cerberus private equity group that owns Chrysler, lent heavily on subprime mortgages and lost over $US4.3 billion. But it and other car financiers also lent poorly to car buyers, the auto equivalent of subprime car loans, so to speak.
Global Insight said that lenders dramatically cut standards for credit worthiness at the beginning of 2008 and now delinquency rates have been shooting up to levels not seen in 30 years.
And no relief offshore: If you look at the performance of the Japanese car groups, they are cutting production at home and offshore. China’s growth has more than halved to less than 10% by some estimates. It rose by more than 24% last year.
In Europe the unwinding of house prices will hit demand hard in Spain, Ireland and France as a result, JD Power sees European sales down 7.5% in the west and 3.1% for the continent as a whole.
“While the global automotive industry is clearly experiencing a slowdown in 2008, the global market in 2009 may experience an outright collapse,” said Schuster. “While mature markets are being impacted more severely than emerging markets, no country or region is completely immune to the turmoil.”
And that includes us here in Australia, so should we continue with the green car and other assistance packages that Steve Bracks dreamed up? or bow to the inevitable that sometime in the next couple of years, Ford, and perhaps GM will shut?