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Auto Loans And Credit Cards On Cliff's Edge

By Roger Wiegand      Printer Friendly Version
Oct 21 2008 4:23PM

www.webeatthestreet.com

Precious Metals Offer The Only Place To Hide.

In 2003, we forecast the bankruptcy of Ford Motor Company with other auto manufacturers to follow. In 2006, Ford’s visionary Chief Financial Officer assembled $23 Billion in new cash and credit for his company. These funds will extend Ford’s life but cannot prevent the inevitable. Meanwhile, GM and Chrysler lead in the race to the courthouse.

Across town in Detroit, General Motors and Chrysler are failing even faster. GM has little cash remaining; probably enough for only a few months. They are running everywhere in a panic selling assets and working feverishly to hock their remaining stuff. Chrysler has more cash with the latest news reporting near $11 billion. They are privately held and need not provide public financial statements. GM is frantically trying to buy Chrysler to get their badly needed cash. Basically, all three of these companies are among the Zombies; the walking dead.

We’ve not been able to get a total count on the billions or, trillions of credit card debt at risk. However, we’ve seen several reports explaining exposed banks are furiously writing-down this sector setting-aside millions to cover both current and potential losses.

What Happens Next Will Rock Markets World-Wide.

We suggest the combination of derailed auto sales and auto loans along with the crashing manufacturers’ mammoth payrolls will smash markets with a vengeance. Additionally, bank losses from the credit card industry should have a more gradual fall but with a distinct impact on global credit over months. Cards and their high interest earnings are a large portion of banks’ income.

Previously, the new and used housing industry and all related employees were struck down by derivatives and credit troubles. That bubble peaked in 2006. Next, we envision auto related credit and general use credit cards soften dramatically until next spring when it all turns into a massive failure land-slide.

Let’s Elaborate And Review

Ford Motor Company has essentially been kept alive with their million sales per year from Ford pick-up trucks and SUV’s. When the recession arrived along with skyrocketing gasoline prices, this effectively killed this market sector. Consumers for over 20 years moved into trucks as a primary family vehicle as truck cabs were extended and amenities added. The SUV craze was an outgrowth of the mini-van market as it became ‘cool’ to drive a truck instead of a car. This cycle is over.

Now, spending $400-$500 per month for fuel driving a cool truck is very un-cool and very expensive. Ford has lost their primary golden calf and today has no product to sell with any great popularity. Auto branding is a tricky business sometimes taking years to reverse these problems. Ford and their competition do not have years’ but perhaps only months in some cases.

In light of Ford’s improved cash position, we now forecast they last 12-18 months without a major adjustment. This does not preclude major changes sooner.

A major adjustment might be selling–off more market lines or, merging them with others. Another consideration is Chapter 11, to reorganize while closing several lines and factories. This event would severely hurt company public relations but might help dumping health care, pensions and high-pay jobs partially or, entirely.

GM has far too many models. Last we counted they had at least 85 but some are being closed or, sold to other auto companies. Oldsmobile has been long gone and Hummer is for sale. We think Hummer will be sold to a primary, large truck manufacturer building military vehicles. GM will be forced to sell at a major loss.

Chrysler has only two viable products remaining out of several. Those lines with good potential are Jeep, Chrysler’s only reason for buying American Motors, and the still popular mini-van, which they originated in 1984. Millions of these vans have been sold over the years. We drive one right now. They are not cool nor are they fancy or, pretty. However, they are as light in weight and as smooth to drive as any sedan while getting decent gas mileage and offering extra interior room.

GM wants to retain the 49% of GMAC they still own. The other 51% was sold to Cerburus Capital, the owner of Chrysler. Cerburus wants all of GMAC, which is a huge lender for not only cars and trucks, but a major player in the home loan mortgage business. Historically, lending-finance divisions of these automakers have earned good money when car-truck divisions of these companies were in the red. This is why GE expanded their manufacturing business into lending, which, over time, became over 40% of the entire corporation. Subsequent bad loans, however, hurt them during the recent down-turn.

GM wants Chrysler mostly for their $11 Billion in cash and secondarily for the Jeep and Chrysler-Dodge minivan units. We wonder how GM could pay for Chrysler without selling their remaining stake in GMAC to Cerburus.

Several major roadblocks are in the way of this merger-sale. The UAW is against it and would probably file suit in Federal Court with numerous complaints. There are also concerns about GM-Chrysler being too large within this industry smothering competition. We say fat chance on that one. The dominant global player in cars is Toyota with a cash position, last we heard, over $44 Billion. Better yet, they have the desired, correct models fitting markets and being a leader in cars and hybrids.

What Would A GM-Chrysler Merger Mean?

  1. The Detroit News reported today that a “Chrysler sale could chill Michigan’s economy.? We say this would only delay the inevitable as both companies come crashing down. This mess is beyond chilled destined for tragedy. The impact on Michigan would finally put The State of Michigan into bankruptcy where it’s headed over time anyway. Michigan refuses to take proper steps to balance its budget even though it must do so by law.

  2. First, over half of all 66,000 Chrysler employees would be fired.

  3. Second, the Michigan housing market, already one of the worst in America would be hammered again, driving already rock-bottom re-sale prices further into the dirt. One auto job lost equals 3-5 associated jobs lost.

  4. Third, the City of Auburn Hills (Chrysler’s office headquarters with 1 million square feet) faces a major tax reduction. Chrysler’s fancy new building would be closed. Associated nearby support offices and suppliers would fail along with Chrysler.

  5. The City of Sterling Heights (A Detroit suburb) faces similar huge tax losses as Chrysler’s presence in that community is a dominant one.

  6. Dodge trucks are built in a refurbished Detroit factory that would probably close. GM has the GMC-Chevy pickup models they would surely retain.

  7. The Detroit News worried today about Michigan’s image as an industrial power should these events transpire. We say Michigan has no remaining image with all those years of auto layoffs, decimated housing industry and internationally known scandals in Detroit. Michigan is widely perceived to be a no-growth, stagnant, high tax state discouraging business-industry.

  8. There are few new things being built except by companies needing tight associations with our better universities. But, for the most part, business- lookers run the other way. This is why southern USA states get new jobs.

  9. The News went on to report 21,000 of Chrysler’s 36,000 hourly workers are in Michigan. Also, 15,000 of their 17,000 salaried workers are here. Should the buyout-merger be accomplished, we suspect most all would be fired and GM workers, would take-over the few remaining jobs. Jeep is in Toledo, Ohio in a brand new facility and Dodge mini-vans are built in Windsor, Ontario, Canada. Canada’s national health care plan covering the Windsor installation provides a favorable price on the minivan bottom line. Those factories could survive with all the rest going down the drain.

  10. One of the other suitors for Chrysler is Renault. This company was re-energized by Carlos Ghosen, who brought Renault’s Nissan back from near death in record time. He fixed a series of nasty problems in a short time cycle. He has a reputation of being one of the best auto managers in the world. Chrysler would be better served with that alliance than with GM. We suggest the outcome will be swift. There is little maneuvering time for GM.

Where Are The Big Three Going Next?

Considering the cash emergency at GM, we think the Chrysler-GM deal will be approved. GM should get most of Chrysler’s $11 Billion in cash, Jeep, and the minivan division. By using the courts, the rest of Chrysler is gone along with 36,000 high paying jobs. Renault would be a better fit for Chrysler but the profile of those discussions in Michigan has been largely hidden.

GM can finish off Chrysler and the unions using Chapter 11 and eventually leave the USA for a Europe-Asian business, with dual world headquarters operations. With only Ford left in Michigan, they can use up their cash and file Chapter 11. Then, Ford can easily move to Europe or, perhaps South America where sales are better and health care and pension obligations probably more manageable.

In Summary

We forecast President Bush’s Working Group On Financial Markets, more popularly called the Plunge Protection Team, will be able to levitate the shares’ markets until all votes are counted November 4th.  This means new support for stocks and selling of gold futures. From November 5th forward, precious metals could do better following earlier rallies in shares. PM shares based on 10-17-08 and yesterday, on 10-20-08 as new, spectacular rallies were underway.

For the longer term, we suspect the next two or, three years will be the worst period for our current recession-depression. Never mind that these things have not been publicly acknowledged. In our view, this is just a fact.

By April of 2009, it will become obvious to all that inflation, credit and the national budget is totally out of control. Unemployment, and business failures in autos, housing and consumer goods will place the USA and other nations in the middle of an unprecedented disaster. The world is changing and could change more so than anyone might imagine; permanently.

We think with October market dangers the PPT will continue to prop their little hearts out not permitting the Dow and S&P 500 to get out of control. Volatility remains wild, but the very short term trend for big index shares is bullish until November 5th.  In our newsletter, Trader Tracks, we provide weekly guidance and extra e-mail alerts to report our best new trades and offer suggestions for trade management. Visit our website at (webeatthestreet.com) for more information on our spectacular futures and commodities trading record.

Whatever you do, make a concerted effort to stay with the trend and hang onto your core holdings of favorite shares, cash, and coins. Physical gold should never be sold or, traded but rather accumulated steadily on a monthly savings plan.

Recent news says you cannot find any coins or, others. We see delays and back-orders but some dealers have goods in hand right now. Go shopping. Should you have difficulty buying physical metals, we suggest placing an order and being patient. Big traders are always ready to buy the dips and normally never sell their gold and silver. You would be amazed how quickly your physical gold and silver will accumulate using this strategy.

In our conversations at conferences, several readers and others have shown interest in attending a futures and commodities trading-training seminar. Please contact our offices with this request as we plan a private conference for our traders to help them.

Roger Wiegand
Editor Trader Tracks Newsletter
& The Rog Blog at webeatthestreet.com

 

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Roger Wiegand is Editor of Trader Tracks Newsletter for gold, silver and energy traders. Roger provides recommendations for short and longer term traditional stock shares, futures and commodities trading with specifics for individual trades. See webeatthestreet.com for more information

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