Rebel Traders – Analysis Without The Hype

Here is the tally of vehicle sales for February 2010 in the United States

Most data figures reference sales on a year over year basis (y/y).

TOYOTA

February US Vehicle Sales (y/y): -8.7% (100K units)

FORD

February US Vehicle Sales (y/y) +43.1%  (142.2K units)

- Total Truck and van sales +36.2% y/y to 46.2K units vs. +14.5% in Jan (39.7K units)
- F series pick-up sales +39.3% y/y to 32.9K units vs. +9.5% in Jan (27.6K units)

GENERAL MOTORS

February US Vehicle Sales +11.5% (142K units)

HONDA

February US Vehicle sales (y/y): +12.7%  (80.6K units)

NISSAN

February US Vehicle sales (y/y): +29% (70.2K units)

CHRYSLER

February y/y sales flat

HYUNDAI

February US vehicle sales 34.0K (no report on y/y change)

MERCEDEZ-BENZ

Reports February US Vehicle sales +8.4% y/y;  (15.3K units)

VOLKSWAGEN

Reports February US Sales +32.6% y/y; (18.K units)

AUDI

Reports February US sales +33% y/y; (6.2K units)

MITSUBISHI MOTORS

Reports February US sales down 1% m/m (4,019 units)

MAZDA

No report yet

GDP comes in hot at a whopping 5.7% and the market was not impressed. And why should it be, a significant part of the GDP was nothing more than a huge inventory gain. It is my view that this GDP print is a ‘one hit wonder’. The stimulus money from the Government played a big role in goosing production which leads me to think of the old saying “hurry up and wait”, in this case a wait (and hope) that the gains in inventory are matched with future gains in sales which I still foresee as tepid for a considerable time to come.

Speaking of production, a report this afternoon off the wires is that General Motors is increasing production of large vehicles (SUV’s and trucks) and is reducing production of smaller fuel efficient cars. I guess General Motors has still not learned the lesson that drove them into bankruptcy in the first place.

A lot of bearish indications on the charts, which I will cover in detail in the weekend video. One particular chart that shows extensive damage is the Nasdaq.

More later…

Even with the the last minute surge in December of buyers taking advantage of numerous incentive programs, it was still not enough to prevent another record year of sales declines. The year 2009 saw an industry wide decline of 21.2% from the 2008 year and the worst total sales since 1982.

Everybody thought that 2008 was the bottom for auto sales, in 2008 record declines were met with hopes and renewed vigor that 2009 would see a stabilization and return to growth. Unfortunately those hopes were dashed today as the final tally of auto sales figures were added up and 2009 was even worse than 2008.

For General Motors, automobile sales in 2009 were 30% lower than in 2008. Chrysler sales were down 36% compared to the prior year which was also the worst sales performance for Chrysler since 1962.

At Ford it was a little bit better, but year over year sales figures still put the auto giant at lower sales than in 2008 with a drop of 15% from last year.

Had it not been for the Government ‘Cash for Clunkers’ program, sales for 2009 would have been significantly worse. Now that the program has ended, the real tell of how well the auto makers are able to do will come through. General Motors is predicting that 2010 will bring an industry sales figure of 11 to 12 million vehicles. To that I say “good luck’ at meeting those figures, that is unless another Government handout is coming.

In 2009 the industry wide sales figures came in at 10.4 million units, down 21.2% from sales in 2008.

Who did do well in 2009? Hyundai and Subaru reported 8% and 10% gains respectively as their vehicles were among the most popular during the ‘Cash for Clunkers’ program.

With the ‘Cash for Clunkers’ program now over, reports of delinquencies still rising, and the unemployment situation my estimate for the 2010 sales figures are for a year end tally of 9.5 to 10.5 million units, much lower than forecast by General Motors and other economists.

Remember the nearly $85 billion of “YOUR” money that was given to General Motors and Chrysler to rescue them from themselves? Yea, that $85 billion. Tax payers awoke one morning and discovered that they owned two car companies that unfortunately has since the mid 1980’s produced poorly designed and manufactured vehicles. It did not matter if you wanted to be part owner of a car company, but you are. And you are also taking a loss on “YOUR” investment.

Washington — The Obama administration will tell Congress Wednesday that it expects to lose about $30 billion of the $82 billion government bailout of the auto industry, two administration officials familiar with the report said today.

The estimate — the first public accounting of losses connected to the rescue of General Motors and Chrysler — is in line with what the Government Accountability Office, the Troubled Asset Relief Congressional Oversight Panel and former auto czar Steve Rattner have suggested. (Source: Detroit News)

While $30 Billion is slightly less than a previous estimate, it is still a loss of 37% of your money and you didn’t even ask to be invested in it to begin with.

… unless there is a last minute buyer.

The breaking news this afternoon is that General Motors attempts to sell the Saturn brand vehicles has failed abruptly when Penske Automotive called off the deal today. General Motors has confirmed that talks have fallen apart and will now ‘wind down’ the entire Saturn name.

This will mean that all production of Saturn vehicles will end very soon and all dealerships in the United States will have to close.

Chuck had already talked about the subject here. But apparently the message is not passing through.

GM (GMGMQ.PK) the delisted stock of the “old” GM is currently trading as a pink sheet and is experiencing extreme price variations for a stock that is worthless. The “Q” indicates the company is in bankruptcy proceedings.

Today for instance its price rose by 36 %!

Chuck mentioned something about people jumping on board based on scam feeders, but I was hugely surprised to see an article published on Seekingalpha that basically maintains this huge confusion by launching the article in this style:

It may take awhile to convince car buyers, but General Motors (GMGMQ.PK) has emerged from bankruptcy with better prospects for a profitable future than virtually any of the automaker’s critics predicted a few months ago. Here’s why:

Mentioning the stock ticker and not warning in any place in the article that the current stock is worthless is a huge negligence… How many poor investors are going to be skinned in believing that this stock really is the “new” GM?

The fact was even compounded by the fact that today it was announced that GM just “exited chapter 11″. The WSJ had buried very far down in its lead article this important information (emphasis added):

Though the new GM will not be a publicly traded company initially, Mr. Henderson stressed that GM will remain transparent in its financial reporting.

The confusion between the “new” GM and the stock traded is thus being unfortunately maintained for the man on the street without sufficient legal or financial knowledge.

Lack  of knowledge about the elementary mechanisms of bankruptcy does the rest and pulls many innocent investors into a deadly trap, allowing swindlers of all sorts to make a profit on their backs.

There is a serious issue with the US stock market authorities that allow the equity of bankrupt companies to be traded even after chapter 11 proceedings are begun.

Even Jim Cramer was yelling today on CNBC in his typical bombastic style about the nonesense of continuing to list GM’s stock…

So, I’ll add in my little stone: avoid trading GMGMQ.PK!

This stock is destined to be definitely delisted and will wipe out any equity. Even after bankruptcy, GM emerges with 48 BN USD in debt.

For more info on what is a bankruptcy in the US legal system check out Investopedia.

Auto suppliers are preparing to make another trip to your wallet. Auto suppliers are preparing to ask the U.S. Government (tax payers) for additional aid.

I guess we will begin to see auto parts manufacturers filing to become ‘bank holding companies’ so they can have a direct line to the tax payers (sarcasm intended).

US car parts suppliers are preparing to ask for more government aid, including incentives to encourage fresh private-equity investment in the sector.

The suppliers are also seeking access to the Treasury Department’s term asset-backed securities loan facility (Talf) and similar loans provided by the Small Business Administration.

The Treasury last month approved up to $5bn in government-backed credit insurance for suppliers to General Motors and Chrysler, the two carmakers being kept afloat by Washington.

Suppliers can also raise cash by selling receivables to the scheme at a discount.

But Neil De Koker, president of the Original Equipment Suppliers Association, said “there isn’t enough money in the programme to take care of all the suppliers. Many, many suppliers are still desperate”.[...]

[...]Delphi, which is GM’s biggest supplier and has been in bankruptcy protection since late 2005, has warned that shareholders are likely to recover nothing from its restructuring.

Source: Financial Times

Bloomberg reports that General Motors is speeding up preparations for a bankruptcy filing.

General Motors Corp. is speeding up preparations for a possible bankruptcy filing even as directors seek deeper savings this week to avoid that outcome, people familiar with the plans said.

The bankruptcy readiness focuses on forming a new company from GM’s best assets if necessary, said the people, who asked not to be named because the matter is private. The cost-cut discussions center on how to go beyond GM’s proposal to slash debt by 46 percent and shed 47,000 jobs in 2009, and will include talks with Treasury officials, the people said.[...]

[...]GM’s board met today and yesterday, and more discussions are planned inside GM and with the Obama administration, the people said. Obama gave the biggest U.S. automaker 60 days to restructure, without specifying what steps were needed to stem $82 billion in losses since 2004.

Planning for a court filing was ratcheted up in February as a precaution against a defeat for GM’s bid to keep its U.S. loans, the people said. Detroit-based GM said it prefers to restructure outside bankruptcy court.

GM’s preparations include looking at a so-called 363 sale, a reference to a section of the Chapter 11 bankruptcy code that would help create a new automaker from the assets and brands of GM, boosting the company’s survival chances, the people said.[...]

Some satire this evening on President Obama’s plan to use tax payer funds to perform warranty repairs on General Motors and Chrysler vehicles.

P.S. – I know, it is ‘kind of creepy’. I only wanted to poke some fun at the ‘auto bailout’ plan. The video may be ‘creepy’ but my view is not. Using tax payer funds to backstop auto warranties is just ridiculous.

Let’s recap the events of the past 24 hours concerning the U.S. automobile industry.

• Last night the U.S. Government released their determination of the restructuring plans submitted by both General Motors and Chrysler. The findings by the auto task force said that both companies’ restructuring plans fall way short of being able to sustain the companies going forward
• President Obama this morning stated that General Motors will have 60 days to submit an entirely new restructuring plan that must be much more aggressive in cuts for employees, bond holders, and other stake holders. In other words.. make substantial cuts or the gig is up.
• Chrysler was given only 30 days to redo their restructuring plan. Additionally, the auto task force suggested that Chrysler must merge with Italy’s Fiat Company.
• The U.S. government will provide tax payer funds to both companies to carry them through their respective new deadlines (30 days for Chrysler and 60 days for General Motors)
• The U.S. Government will create a new entity that will backstop vehicle warranties for both General Motors and Chrysler. This new entity will be funded to 125% of the expected cost of future warranty claims. GM and Chrysler will provide 15% of the funds and the tax payers will provide the other 110% of the cost.
• The Wall Street Journal is reporting that President Obama has told both General Motors and Chrysler that he would prefer to see both companies enter into a Government forced bankruptcy to avoid a long drawn out process of restructuring. [RebelTraders note: This is what I am in favor of, a Government controlled bankruptcy will force the debt to be written down, and allow both companies plenty of time to restructure without more tax payer funds. It is also my opinion that bankruptcy will be the only way to get the UAW to make the concessions necessary to keep these companies alive, albeit crippled until they can completely restructure their broken business model].

It is my view that President Obama should not have provided yet time another extension. Both companies have had enough time to provide a resturcturing plan that would work, and all the while they have been playing around it has been on our tax payer funds.

President Obama has done the correct thing this morning in telling the companies that the public teet will be put back inside the bra. But, giving them another 30 and 60 days to ‘try again’ is ridiculous. It should have been done now.

A collection of headlines and comments off the news wires today relating to this story:

• General Motors Corp – Reportedly dealers will hold meeting regarding comments out of the Obama Administration
• General Motors Corp Spokesperson: Must still address talks with bondholders, unions and stakeholders; prefer completing restructuring outside bankruptcy, but would accept a court supervised process if necessary
• General Motors Corp Reportedly preparing to offer plan for consumers that allows buyer who loses job to return vehicle at no cost
  - this program would be similar to plans offered by Hyundai and other car makers.
• General Motors Corp Bondholders reportedly willing to reduce debt burden through debt-for-equity exchange, provided business plan has chance of success
  - Bondholders note they are “disappointed that the Administration and GM did not discuss restructuring plan with them.
• General Motors Corp Bondholders reportedly offered $0.08/dollar in cash with a 90% stake in GM – unconfirmed report
  - $0.16/dollar offered in new unsecured debt

The U.S. government’s auto task force has just issued their determination concerning the General Motors restructuring effort to date.

According to this document General Motors has “failed” to meet the requirements set out in requirements for the loan. In this regard the loan to General Motors should be “called in” immediately. This would force GM into a bankruptcy immediately.

Instead it looks like the U.S. Government will simply give them more time, set new conditions, and keep giving them more funding. The following was released by the U.S. Government moments ago:

—–

EMBARGOED UNTIL MIDNIGHT – MARCH 30, 2009

Determination of Viability Summary March 30, 2009 General Motors Corporation GM February 17 Plan Viability Determination Summary

The Loan and Security Agreement of December 31, 2008 between the General Motors Corporation and the United States Department of the Treasury (“LSA”) laid out conditions that needed to be met by March 31, including the approval of Labor Modifications, VEBA Modifications, and the commencement of a Bond Exchange (all as defined in the LSA).

As of the date of this memo, the above steps have not been completed, nor are they expected to be completed by March 31. As a result, General Motors has not satisfied the terms of its loan agreement. Additionally, after substantial effort and review, the President’s Designee¹ has concluded that the GM plan, in its current form, is not viable and will need to be restructured substantially while GM operates under an amendment to the existing LSA. It is strongly believed, however, that such a substantial restructuring will lead to a viable GM.

This determination of viability was based on a thorough review, as conducted by the Task Force and its outside advisors and as summarized below, of the Company’s submitted plan and prospects. While there were many individual considerations, no single factor was critical to the assessment. Rather, the ultimate determination of viability was based upon a total consideration of all relevant factors, taken as a whole.

General Motors is in the early stages of an operational turnaround in which the Company has made material progress in a number of areas, including purchasing, product design, manufacturing, brand rationalization and its dealer network. Despite these steps, a great deal more progress needs to be made, and GM’s plan contemplates initiatives that will take many years to complete. In the end, GM’s plan is based on a number of assumptions that will be very challenging to meet without a more dramatic restructuring in which many of its planned changes are accelerated. A few highlights:

* Market Share: GM has been losing market share to its competitors for decades, yet its plan assumes only a very moderate decline, despite reducing fleet sales and shuttering brands that represent 1.8% of its current market share.

* Price: The plan assumes improvement in net price realization despite a severely distressed market, lingering consumer quality perceptions, and an increase in smaller vehicles (where the Company has previously struggled to maintain pricing power).

* Brands/Dealers: The Company is currently burdened with underperforming brands, nameplates and an excess of dealers. The plan does not act aggressively enough to curb these problems.

* Product mix: GM earns a large share of its profits from high-margin trucks and SUVs, which are vulnerable to a continuing shift in consumer preference to smaller vehicles. Additionally, while the Chevy Volt holds promise, it will likely be too expensive to be commercially successful in the short-term.

* Legacy liabilities: In GM’s plan, its cash needs associated with legacy liabilities grow to unsustainable levels, reaching approximately $6 billion per year in 2013 and 2014.

Moreover, even under the Company’s optimistic assumptions, the Company continues to experience negative free cash flow (before financing but after legacy obligations) through the projection period, failing a fundamental test of viability.

In short, while the Company has made meaningful progress in its turnaround plan over the last few years, the progress has been far too slow, allowing the Company to continue to lag the best-in-class competitors. As a result, the President’s Designee has found that General Motors’ plan is not viable as it is currently structured. However, because of GM’s scale, franchise and progress to date, we believe that there could be a viable business within GM if the Company and its stakeholders engage in a substantially more aggressive restructuring plan.

The Loan and Security Agreement of December 31, 2008 between the General Motors Corporation and the United States Department of the Treasury (“LSA”) laid out various conditions that needed to be met by March 31, including:

(a)
Approval of the Labor Modifications (Compensation Reductions, the Severance Rationalization and the Work Rule Modifications) by the members of the Unions;
(b)
Receipt of all necessary approvals of the VEBA Modifications other than regulatory and judicial approvals; provided, that the Borrower must have filed and be diligently prosecuting applications for any necessary regulatory and judicial approvals; and
(c)
The commencement of an exchange offer to implement a Bond Exchange.

As of the date of this memo, none of the above steps has been completed. As a result, General Motors has not satisfied the terms of its loan agreement.

The LSA also requires that the President’s Designee review the Restructuring Plan Report in order to determine whether General Motors has taken all necessary steps to achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries

Since receiving the Company’s plan on February 17th, the Government has engaged in substantial efforts to assess its viability. This work has involved staff from the Department of the Treasury, National Economic Council, Council of Economic Advisors as well as the numerous other Cabinet agencies involved in the President’s Task Force on the Auto Industry. The working group has also worked extensively with several dozen individuals at industry-leading consulting, financial advisory and law firms. Numerous outside experts and affected stakeholders have been consulted. As a result of this work, the President’s Designee has concluded that the General Motors plan, in its current form, is not viable and will need to be restructured substantially in order to lead to a viable General Motors. It is strongly believed, however, that such a substantial restructuring will lead to a viable General Motors.

While the President’s Designee considered many factors when assessing viability, the most fundamental benchmark was the following: for a business to be viable, it must be able – after accounting for spending on research and development and capital expenditures necessary to maintain and enhance the company’s competitive position — to generate positive cashflow and earn an adequate return on capital over the course of a normal business cycle.

Progress to date:

General Motors is in the early stages of an operational turnaround in which GM has made material progress in a number of areas:

1. o Purchasing: GM has organized its purchasing globally, with its purchasing organization taking advantage of GM’s global scale, and has put into place a rigorous, metric-oriented approach to drive supplier quality and cost improvements.

2. o Product design: GM has refined its product design process to create global vehicle platforms, thus allowing GM to reduce engineering costs and improve the content of its cars. These global platforms leverage the scale of the business and allow GM to amortize product development costs over a large range of models. GM has also, since 2005, focused on customer needs, interior designs, styling and quality to provide more attractive products. Examples of successes of this initiative include the 2008 North American Car of the Year Chevy Malibu and the 2008 Motor Trend Car of the Year Cadillac CTS (though they constitute a modest share of GM’s portfolio today).

1. o Manufacturing: GM has worked to create greater flexibility within its facilities, allowing for increased capacity utilization and an enhanced ability to spread its significant fixed costs across a broader car base.

2. o Brand rationalization: The recently announced decisions to divest or shut down Saab, Saturn and Hummer, while late, were important steps in reducing the Company’s brand portfolio and allowing it to focus its financial and human resources on a smaller number of higher quality brands.

3. o Dealer network: GM has been eliminating dealers from markets where it is oversaturated, as well as eliminating dealers who are either unprofitable or create a poor customer experience.

However, it is important to recognize that a great deal more progress needs to be made, and that GM’s plan is based on fairly optimistic assumptions that will be challenging in the absence of a more aggressive restructuring.

o The plan contemplates that each of its restructuring initiatives will continue well into the future, in some cases until 2014, before they are complete.

o o The slow pace at which this turnaround is progressing undermines the Company’s ability to compete against large, highly capable and well-funded competitors. GM’s plan forecasts it to catch up to (and, in some cases, surpass) its competitors’ current performance metrics; however, its key competitors are constantly working to improve as well, potentially leaving GM further behind over time.
* Given the slow pace of the turnaround, the assumptions in GM’s business plan are too optimistic.

o Market Share

GM has been losing market share slowly to its competitors for decades. In 1980, GM’s US market share was 45%; in 1990, GM’s US share was 36%, in 2000, its share was 29%. In 2008, its share was 22%. In short, GM has been losing 0.7% per year for the last 30 years.

* Yet, in its forecast, GM assumes a much slower rate of decline, 0.3% per year until 2014, even though it is reducing fleet sales and shuttering brands which represent a loss of 1.8% market share, of which only a fraction will be retained. Management’s plan to achieve this is driven by a reduction in nameplates and an ensuing increase in marketing spend per nameplate.

* Furthermore, in the current plan, GM has retained too many unprofitable nameplates that tarnish its brands, distract the focus of its management team, demand increasingly scarce marketing dollars and are a lingering drag on consumer perception, market share and margin.

o Price

In 2006 and 2007, GM North America achieved a 30.4% contribution margin. Then, the plan assumes, despite a severely distressed market, that margins increase to 30.8% in 2009 and 30.7% in 2010. These figures remain at 30.9% in 2013 and 30.3% in 2014, despite GM’s plan to increase its focus on passenger cars and crossovers, which have traditionally earned lower margins.

Fundamentally, the lingering consumer perception is that GM makes lower-quality cars (despite meaningful improvements in the last few years), which in turn leads to greater discounting, which harms GM’s price realizations and depresses profitability. These lower price points are an important impediment to enhanced GM profitability and need to be reversed over time in order for GM to bring its margins into line with its best-in-class peers.

Determination of Viability Summary March 30, 2009 General Motors Corporation

1. o Brands/dealers

2. GM has been successfully pruning unprofitable or underperforming dealers for several years. However, its current pace will leave it with too many such dealers for a long period of time while requiring significant closure costs that its competitors will not incur. These underperforming dealers create a drag on the overall brand equity of GM and hurt the prospects of the many stronger dealers who could help GM drive incremental sales.
1. o Europe

GM’s European operations have experienced negative results for at least the last decade with a sharp decline in market share from 12.9% to 9.3% between 1995 and 2008, leaving the Company with high fixed costs and low capacity utilization.

The European business is seeking additional capital beyond the funds requested from the Treasury. These funds have not been allocated and thus represent a risk to the viability of GM’s current plan.

o Product mix and CAFE compliance

GM earns a disproportionate share of its profits from high-margin trucks and SUVs and is thus vulnerable to energy cost-driven shifts in consumer demand. For example, of its top 20 profit contributors in 2008, only nine were cars.

GM is at least one generation behind Toyota on advanced, “green” powertrain development. In an attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt. While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable

Absent the successful introduction of a number of new-generation nameplates, as described in the Company’s plan, GM’s product portfolio is more vulnerable to CAFE standard increases than the portfolios of many of its competitors (although GM is in compliance today with current standards). Many of its products fail to meet the minimum threshold on fuel economy and rank in the bottom quartile of fuel economy achievement.

o Legacy liabilities – cash costs

As GM moves through its forecast period, its cash needs associated with legacy liabilities grow, reaching approximately $6 billion per year in 2013 and 2014. To meet this cash outflow, GM needs to sell 900,000 additional cars per year, creating a difficult burden that leaves it fighting to maximize volume rather than return on investment.

• Even under the Company’s optimistic assumptions, the Company remains breakeven, at best, on a free cash flow basis throughout the projection period, thus failing the fundamental test of viability.

1. o Under its own plan, GM generates $14.5bn of negative free cash flow over its 6 year forecast period. Even in 2014, on its own assumptions, GM generates negative free cash flow after servicing legacy obligations.

2. o Given the highly challenging current market, the Company is already behind plan in its overall volume expectations and market share for calendar year 2009.

3. o Since the Company has built a plan with little margin for error, even slight swings in its assumptions produce significant and ongoing negative cash flows. For example, a 1% share miss in overall global sales, all else being equal, in 2014 would lead to a $2 billion cash flow reduction in that year.

In short, while the Company has made meaningful progress in its turnaround plan over the last few years, the progress has been far too slow, allowing the Company to continue to lag the best-in-class competitors. Furthermore, even if the projected plan is achieved, the cash flow forecast is quite modest, leaving the Company little margin for error in what will be a very difficult turnaround. As a result, the President’s Designee has found that General Motors’ plan is not viable as it is currently structured. However, given the improvements that have been made to date, and the path on which these improvements place GM, we believe that there could be a viable business within GM if the Company and its stakeholders engage in a substantially more aggressive restructuring plan.

The U.S. Government has told Chief Executive Officer Rick Wagoner that if General Motors (GM) is to receive any more funding he will have to resign.

The Wall Street Journal is reporting tonight that administration officials have confirmed that as a part of any new agreement for bailout funding Mr. Wagoner will have to leave.

DETROIT — General Motors Corp. Chairman and Chief Executive Rick Wagoner has agreed to step down as part of an agreement to get a new package of federal aid for the auto maker, people familiar with the matter said.[...]

[...]An administration official confirmed that Mr. Wagoner was asked to step down by the administration as a precondition for ongoing restructuring within the company.

GM has received $13.4 billion in loans from the Treasury so far and said in February it needed up to $16.4 billion in additional aid. The Obama administration’s auto task force was supposed to announce its decision, along with recommendations for reorganizing GM, by March 31.