Automaker Update

Ford posted a smaller than expected loss of $1.4 billion in the first quarter and said it doesn’t need more cash in 2009. The car company lost 60 cents a share, significantly less than the $1.23 share loss that analysts were expecting. Ford slowed its cash burn rate down to $3.7 billion from $7.2 billion, as it idled most of its North American assembly plants during the first week of January. The company ended the quarter with a cash hoard of $21.3 billion.

Meanwhile, GM and Chrysler continue to suffer through the steep collapse in demand for new cars. Chrysler is preparing itself for a bankruptcy filing as early as next week, which would allow the company to shed some liabilities and allow Fiat to pick over the carcass of the bankrupt automaker. Apparently, the UAW is on board with the plan and the government would provide crucial DIP financing so operations could continued uninterrupted. Tensions are high between Chrysler’s lenders and the government, as the lenders believe they can receive more in a liquidation than the current deal they are being offered. Chrysler’s lenders are owed $6.9 billion. They are roughly $3 billion apart in negotiations. What’s $3 billion among friends, particularly when the government has thrown multi-billions at the lenders already? Suddenly banks are shrewd negotiators, when two years ago they were tripping over themselves to give everyone with a pulse a no-doc, no-downpayment loan.

Fiat is playing the field and also looking at doing a deal with GM to form some sort of partnership in Europe and Latin America. All of this is in the air, of course, until the Chrysler situation is resolved, which is also very much up in the air. One bankruptcy at a time, please. We’ll get to GM’s bankruptcy in a month or so.

GM and Chrysler Get Government Loans

GM and Chrysler will get $13.4 billion in initial loans from the government in exchange for a restructuring.  The automakers will receive an initial $4 billion in February.  The government loans will have priority over other debts and will come due by March 31st if the companies can't demonstrate financial viability by that time.  As is customary with the government bailouts, the deal is vague as "financial viability" is a somewhat nebulous condition during these highly unpredictable economic times.  Fortunately the loans come with some conditions:  The automakers must provide warrants, accept limits in executive pay, give the government access to financial records and not issue dividends.  The automakers must cut their debt by two thirds in an equity exchange, make half of the payments to a union retirement fund in equity, eliminate a program that pays union workers when they don't have work and have union costs and rules competitive with foreign automakers by December 31, 2009.  

The market likes the news, sort of.  Equity markets are marginally higher, indicating that the market was expecting the news.  Wake me up when something exciting happens.    

Automaker Bailout Falls Apart in Senate, Grab Your Helmets

The Senate put the kibosh on the $14 billion temporary bailout of the U.S. auto industry.  Of course, the temporary bailout was merely a stopgap measure to keep the car makers operating until a more permanent bailout solution could be concocted by the new administration.  What held up the bill?  The sticking point was how soon union employees' pay should be adjusted to parity with employees of nonunion workers' at plants operated by foreign automakers in the U.S.  The Republicans wanted to reach parity in 2009 and the Democrats wanted more time because, according to Sen. Dodd, with the economy in recession, he thought it wouldn't be fair to force auto workers to accept wage cuts in 2009.  Apparently, he thinks it's completely reasonable for a bunch of autoworkers to be unemployed during the worst recession this country has seen in decades.  Without government aid, both GM and Chrysler will file for bankruptcy before the end of the year.  Wave goodbye to what remained of the U.S. manufacturing industry because once the companies go into Chapter 11 bankruptcy, it seems unlikely that they will emerge.  Unless the government is willing to provide DIP financing, they're headed straight for Chapter 7 liquidation, which is great news if you're in the market for a cheap manufacturing plant in Michigan.  Bad news if you happen to live in the Midwest, because the economy is likely to head straight into the toilet.  Although I suppose all of those out of work auto employees can just go work for AIG.  Maybe they can line up a $3 million bonus just for showing up for work.  

I'm not placing the blame solely on the Democrats, of course.  The Republicans didn't support the rescue package because of "concerns about government intervention in the marketplace."  You see, according to the Republicans, it's perfectly okay to intervene in the marketplace as long as you are keeping insolvent financial institutions afloat (i.e. AIG, Citi, Mer) and supporting bonuses for Wall Street employees.  Blue collar union employees are a whole different story.  Amazing, yet not surprising, where our legislators decide to draw the line.    

The market, of course, is officially back in panic mode.  Futures are off significantly, as investors understand that the repercussions of a bankruptcy of the Big Three will be spread far and wide.  If you thought we were out of the woods, you were sadly mistaken.  

 

Can it Get Any Worse For Cerberus?

While lawmakers were busy attempting to hammer out a bailout plan for the automakers, somebody looked up, scratched his head, and said "Wait a minute, isn't Chrysler owned by a private equity firm?  Don't we hate those guys for contributing to the credit crisis by piling on debt to cyclical companies, laying off employees under the guise of "efficiency" and then driving them to bankruptcy because they didn't really know what they were doing and it was just a bubble?  Don't we also hate them for paying themselves all kinds of money and getting favorable tax treatment?  Wait a minute!  Didn't they hire John Snow, a guy who was so bad as the Treasury Secretary that he was forced out by the worst President in the history of the US?  More importantly, isn't Dan Quayle on their payroll????!"  Bailing out the public automakers, GM and Ford, that have been shut out of the capital markets is one thing.  But why should the government bailout Chrysler, privately owned by the three-headed dogs at Cerberus?  Don't the dogs have loads of capital that they can inject?  Details of the bailout plan will be forthcoming, but I hope Cerberus is at least required to pony up some cash alongside the government.

In other Cerberus Sucks news, GMAC's application to become a bank holding company was denied due to insufficient capital.  GMAC is attempting to complete an old-crappy-debt-for-new-crappy-debt swap to restructure. Again.  After the last restructuring didn't work.  So far, only 25% of investors are going for it.  Without the debt swap, the company's prospects are not looking so hot.  Apparently, there are only so many financial engineering tricks investors are willing to fall for before they throw in the towel and decide to take their chances in bankruptcy court.  Did Cerberus really think that guarding the gates of hell would be easy? 

Obama Transition Team Considering Bankruptcy "Prepack" for Automakers

President-Elect Barack Obama's transition team is considering a prepackaged bankruptcy for the automakers as a potential solution.  This may be the answer for the beleaguered automakers.  Although many have been calling for a bankruptcy solution for GM, F, and Chrysler, the implications of a potential bankruptcy have been weighing on the markets like a ton of steel.  A Chapter 11 filing during ordinary markets wouldn't necessarily be catastrophic; the airlines seem to do it every couple of years.  The biggest concern about a bankruptcy filing by the automakers right smack in the middle of the credit crisis has been the lack of availability of debtor-in-possession financing.  DIP financing is crucial during a Chapter 11 in that it allows companies to continue to fund operations while working through complicated negotiations with creditors.  GE Capital, the largest provider of DIP financing, recently announced it was exiting the business.  Without access to this type of financing, the probability of a Chapter 11 bankruptcy leading to a liquidation has increased dramatically for any company seeking protection from creditors.  The thought of all three automakers needing a huge amount of this type of financing during a period of such constrained credit is just too much for the markets to bear. 

A prepackaged bankruptcy with the government providing the interim financing is perhaps the ideal solution.  The automakers could restructure all of their burdensome obligations, allowing them to better compete with the foreign automakers.  If a deal was reached with creditors prior to a bankruptcy filing, with the government's financial support, consumers would not shy away from purchasing vehicles from the companies because a clear exit strategy would be in place.    

AutoMakers Plead For Government Funds as Economic News Worsens

The CEOs of GM, Ford and Chrylser are scheduled to testify for a second day on Capital Hill, this time in front of the House Financial Services Committee after hitting up the Senate for cash yesterday.  I don't have a particularly strong stomach so I only watched bits and pieces of the testimony as the remarkably contrite auto chiefs attempted to make a case for some sort of capital injection.  They repeatedly emphasized that a Chapter 11 filing would be catastrophic and would more than likely push them into Chapter 7 liquidation as consumers fled their brands due to fears that their warranties would not be honored.  Not surprisingly, the Senators bashed the CEOs and accused them of financial mismanagement.  It is hard to stomach, given that this administration that has presided over the grossest financial mismanagement in the history of the free world.  Aside from the billions upon billions that have been thrown at the banking system, let's not forget that AIG just received $150 billion in government money about a week ago.  Why, for the love of god, is okay to grant the giant money-sucking-CDS-selling-insurance-mismanager $150 billion in government funds to prevent systemic risk, but not okay to give the auto-companies a $25 billion injection?  What about Citigroup?  Citigroup, made the front page of the Financial Times today because it is liquidating it's ninth hedge fund due to catastrophic losses.  This is a fund, mind you, that the bank already injected capital into and will wind up costing Citi hundreds of millions of dollars.  The US government had no problem forking over $25 billion to Citigroup so it could bailout its failed hedge funds.  But somehow, because the unions are involved and blue collar workers face the prospects of losing what are viewed as very cushy benefits, it is not as palatable as handing money to an industry that paid out billions in bonuses for years on phantom profits that ultimately caused the collapse of the global economy.  I don't like the UAW either, but seriously, isn't anyone else disgusted by this hypocrisy? 

I definitely don't think our government should've bailed out any of these firms but the systemic risks were viewed as too high and even with government bailouts our economy is tanking, so clearly something had to be done.  The problem is that decisions now need to be made to determine who is big enough and poses enough of a systemic risk to need bailout funds.  Had you asked me a year or two ago if we should bailout the automakers, I would have emphatically said "no."  But I think that the unintended consequences of a Chapter 11 filing right now of the entire US auto industry would be far too catastrophic.  The economy is too fragile, and attempting to settle all of the outstanding debt of the automakers would send the credit markets into a further tailspin.  

Meanwhile, in headline economic news, CPI fell 1% last month mostly due to a plunge in energy prices (good), although food prices rose .3% (not good) and ex food and energy declined .1% (just okay.)  Housing starts plunged to an annual rate of 791,000, the lowest since records began in 1959.  Although economists and the media will focus on the devastating effects of deflation and start comparing the US to Japan in the 90's, I actually think it's positive that builders are slowing down the pace of construction.  Maybe at some point we can finally clear out all of the inventory that is sitting around.  As for paying less at the pump for gas, frankly, I'm a big supporter of that too.  

Equity Futures Unfazed By Lousy Employment Report, Ford Losses

Nonfarm payrolls dropped by 240,000 and the unemployment rate rose to 6.5%.  To add insult to injury, September payrolls were revised sharply lower to a loss of 284,000, bringing total job losses for the year to 1.2 million.  The pullback spanned manufacturing, construction and most service industries and was offset only slightly by an increase in government jobs.  Although economists were expecting a decline of 200,000 in payrolls and a jobless rate of 6.3%, the "whisper numbers" were higher.  This explains, to a certain extent, why equity futures this morning are strangely positive on such disheartening news.  I suspect that two back-to-back days of roughly 5% declines have fatigued even the most fearful investors.

Ford Motor reported a $3 billion operating loss, and announced efforts to cut employment costs by 10%.  The automaker is looking to shed assets and, more importantly, campaigning furiously in Washington for more government loans.  The good news in all of this is that Ford had $18.9 billion in cash on hand at the end of the quarter.  The bad news is that it burned through $6.3 billion in the quarter as vehicle sales plunged 25% and overall revenue fell by $9 billion to $32.1 billion.  What I find amazing about these numbers is just how large they are.  How is it that a company that pulls in $32.1 billion in revenue in a really really bad quarter can't figure out how to trim $3 billion in costs to break even?  I know, I know, union contracts etc.  But still, there's got to be a better way to run these companies.  GM will be reporting earnings later today.  I suspect the only thing about GM's earnings that will be positive is that it may make Ford's earnings look pretty good in comparison.  

Kerkorian Throws in the Towel on Ford Investment

Way back in April, when distressed equity investors were still enthusiastic about huge money-making opportunities for beaten-down companies, one man placed of large bet on the future of Ford.  Kirk Kerkorian, the nonagenarian who, until today, still believed in the future of the US auto industry, began accumulating shares in Ford at $8.50.  The Wall Street Journal is now reporting that Mr. Kerkorian is paring back his investment in the auto maker and is pursuing opportunities in the gaming, hospitality and the oil and gas businesses.

With Mr. Kerkorian perhaps the only "smart-money" investor on the planet that thought Ford still had a shot as an ongoing concern, this is obviously not a vote of confidence for the automaker's future prospects.  In fact, the only bullish case to be made for owning the shares is that our government is in a very giving mood, handing out funds left and right to any company with a pulse, and working desperately to keep the US economy from going into a deep and protracted recession.  Perhaps Ford will use its government loans wisely and restructure its business so that it may be profitable again in the future.  Ford's competitors are also suffering so, if anything, relatively speaking, if Ford can keep from going bankrupt first, it has a shot at outperformance.  Unfortunately, that is little consolation to long-term investors who have watched their investment wither away to nearly nothing.     

Qualcomm, Amazon, and BIDU Reward Investors, NCC and Ford Disappoint

First the good news:  Amazon, Qualcomm and BIDU are partying like it's 1999.  Qualcomm, announced it had settled a legal spat and reached a licensing agreement with Nokia after three years of litigation.  The company also raised its full year guidance by, what looks like two cents.  In June, Qualcomm forecast full-year earnings of $2.09 to $2.13 a share and it raised guidance to $2.11 to $2.13.  This was apparently worth over $10 billion in additional market capitalization.  Go figure.

In other happy technology news, Amazon and Baidu.com (touted as China's Google) both posted solid earnings results.  Amazon's earnings doubled, although some of the boost in earnings came from favorable exchange rates.  Although North American sales grew 35% over the prior year, down from a 38% growth rate in last year's second quarter, international sales jumped 47% compared to 31% last year.  Media sales accounted for 59% of the company's total revenue compared to 64% last year, indicating that the company is becoming more diversified.  Baidu.com said second-quarter profit soared 87% over the year-earlier period on healthy growth in the number of marketing customers and revenue per customer.  Baidu.com, known as China's Google is actually besting Google on its home turf, with 60% of China's internet search market.  Apparently China has 221 million people online.  Potential growth in China, if all the billion or so people decide to come online is clearly awesome.  This is why Baidu.com is such an exciting stock to many investors.  The stock also routinely makes $40 moves, which makes it a favorite among traders with strong stomachs.

In horrible earnings news, Ford posted a second-quarter loss of $8.7 billion as it wrote down the value of truck plants and loans to buyers of pickups and SUV's by $8 billion.  Even excluding the unexpected writedown, Ford lost 62 cents a shares, nearly triple what analysts were expecting.  The company is "confident" it has enough liquidity.  But the company was also confident it would become profitable this year a mere three months ago before vehicle sales fell off the cliff.  

National City, reported a $1.76 billion loss, or $2.45 a share for the second quarter.  The company increased its provision for loan losses due to a surge in delinquencies, charge-offs, and non-performing assets.  You can read the gory details here.   

S&P Puts GM, Ford, and Chrysler on Negative Ratings Watch

As if investors needed another reason to weep on this unhappy expiration Friday, S&P decided it was as good a time as any to contemplate downgrading the US auto sector.  The negative outlook comes on the heels of a warning from Ford this morning that its losses are expected to widen for the full year and that it planned to delay its new pickup truck.  Earlier in the week, GM, Ford, and Chrysler warned that June auto sales are coming in around 20% below already lowered estimates.  Even CarMax, the US used car dealer, warned that traffic at its stores had weakened significantly since late May, causing its shares to get pummeled.  Chrysler lowered its full-year forecast for US car sales from 15.5 million to 12.5 million.  Needless to say, S&P has enough evidence upon which to base its decision.  Perhaps the only thing keeping the auto stocks from going to zero today is the unflappable Mr. Kerkorian, who still wants to pay $8.50 for shares in Ford.  He disclosed earlier in the week that his stake in the firm had grown to 6.5%.  As I mentioned in an earlier piece about Ford, most new car sales are purchased with financing of some sort.  With lenders tightening the reigns, it is much harder to obtain financing whether that is an auto loan from the beleaguered GMAC, a credit card from the struggling Citigroup or a home equity line of credit from Washington Mutual (I wouldn't even bother calling).  The house-as-an-ATM phase in our economy is officially over and now it is starting to be reflected in the economic data.  It appears as if the the message is finally starting to sink in to market participants that the current economic malaise may be worse than originally anticipated.  We will more than likely retest the lows from March when the "worst was over."  I hope everyone is wearing a hard hat. 

Kerkorian Waives Condition Tied to Ford Tender Offer

Taking the concept of dollar cost averaging a bit further than most investors, Kirk Kerkorian's Tracinda investment arm said it would continue with its tender offer despite a more than 10% drop in Ford's stock price. Since Tracinda's initial offer to purchase 20 million shares of Ford at $8.50, investors have punished the stock, causing it to drop below the 10% threshold required by the terms of the tender offer. Apparently, that crazy old coot is still bullish on the US auto industry. While it's true that Ford did post a meager $100 million in profit on about $40 billion in revenue in the first quarter of 2008, the company has recently claimed that it no longer expects to be profitable for the year due to an "unexpected" slowdown in US vehicle sales. The problem with the auto industry is that it is tied to the fortunes of the housing market. Most people who purchase new cars require financing of some kind. Home equity loans were a huge source of financing for purchases of autos during boom times. How huge? Nearly two million new cars were purchased with home equity loans in 2007. In California, 29.83% of new sales were made with home equity loans. In Florida, the percentage was 19.72%. Guess how many people will get to tap home equity loans this year to purchase cars? If you said anything over zero, keep guessing.
Ford Motor's credit unit is suffering, despite largely avoiding the mortgage market mess. While this makes it a safer bet than General Motors, whose struggling mortgage lending operation ResCap just missed a bankruptcy filing by the hair on its chiny chin chin, Ford's credit unit is still facing a bleak environment. Ford used to collect hefty dividends from the unit, but not anymore. The lender is suffering from increases in repossessions, delinquencies, and a dramatic decline in the resale value of used vehicles. Average prices for used pickup trucks were down almost 16% from a year earlier. As a consequence, the loss that Ford Credit took when it resold its repossessed cars was $2,200 more per vehicle than the year earlier period. Ford Credit earned only $36 million in the first quarter, making it extremely unlikely that the financing arm will hit the company's initial estimates of a $1.2 billion profit for the year. The upshot? If you're in the market to buy a used Ford pickup truck, you're going to get a great deal, despite the fact that it may cost you $75 every time you need to fill the tank. However, if you're looking to buy 20 million shares of a beat-up US auto company, you may get a much better deal at a later date.

Kerkorian Accumulating GM Ford

After trying to unsuccessfully enact changes at GM three years ago, Kerkorian has turned his attention to Ford, acquiring a minority stake and bidding for 20 million shares at $8.50. This is arguably even better news than Ford's shareholders received last week when the company unexpectedly reported a meager profit of $100 million. Just the thought of Kerkorian's interest can cause a spike in the stock price, as some hedge funds learned the hard way when Kerkorian wreaked havoc on their bets by bidding for a stake in GM in May 2005. Hedge funds were long the bonds and short the stock in leveraged bets that were skewered when GM's stock unexpectedly spiked on news of Kerkorian's stake just a few days after GM's bonds were downgraded to "junk" by the rating agencies. Imagine attempting to explain to your investors how this "arbitrage" trade went awry.

Investor: How'd you lose all my bleepin' money?

Hedge Fund Manager: Um, So I was long the bonds and short.. oh never mind. We got kicked in the nuts and punched in the head at the same time.

Investor: Ok, yeah. That makes sense.

Kerkorian's interest in the auto industry isn't new or even recent. He was a big investor in Chrysler as well. He's been at this game a very very very long time. In fact, the most bullish part of this story is that Kerkorian is a nonagenarian who still wakes up every morning thinking about his next big deal while drinking his prune juice. I challenge you to find anyone who has more experience chasing auto deals than this guy. What does this mean for Ford investors? At a minimum, a short-term boost for investors that have had very little to cheer about in recent years.