Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Gold And Silver – Elite Supernova Death Dance In PMs? - 1st Nov 14
Pretium - Canadian Golden Elephant - 31st Oct 14
What USA Today Got Wrong About the Stock Market Fear Gauge - 31st Oct 14
Election Result - Labour Wins South Yorkshire Police and Crime Commissioner - 31st Oct 14
Gold Price Falls, Stocks Record Highs as Japan Goes ‘Weimar’ - 31st Oct 14
EUR/USD - Double Bottom Or New Lows? - 31st Oct 14
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Free Forex Forecasts

Can Battery Technology Save General Motors

Companies / US Auto's Jun 25, 2008 - 10:39 AM GMT

By: Mike_Shedlock

Companies Best Financial Markets Analysis ArticleThe saga at GM continues. On Monday I spoke of GM's Ridiculous Bluff to raise prices on the 2009 line of autos.

GM and GMAC were in the news again on Tuesday on cash burning concerns. Let's take a look. Bloomberg is reporting GMAC's $60 Billion Deal Loses Traction as Cash Burns .


Moody's Investors Service cut GMAC's credit rating one level to six rankings below investment-grade last week as ResCap burns through cash after losing $5.3 billion in the past six quarters. Credit-default swap prices give ResCap a 100 percent chance of default within the next five years, based on a JPMorgan model. It was 98 percent before the debt agreement was announced.

Separated from the automaker, GMAC's credit rating was supposed to rise from junk, which would have lowered borrowing costs. Instead, the ResCap unit was hit by a cash crunch as subprime home loans started to default. The Minneapolis-based housing unit lost more than $4.3 billion last year, contributing to a $2.3 billion loss for GMAC. ResCap's subprime loans totaled $32.8 billion in March, compared with $36.8 billion at the end of 2007, according to a company filing.
GM and Cerebus are both throwing away money on GMAC. Subprime debt is a sinkhole and GM management still cannot seem to figure that out. GM is wasting money it does not have and cannot afford to lose in this bottomless pit.

GM Seeks To Raise $8 Billion

After wasting billions on GMAC, GM May Seek To Borrow $8 Billion .
General Motors Corp., the world's largest automaker, may seek to borrow as much as $8 billion as deteriorating sales in North America shrink the company's cash flow, Bank of America said.

GM probably will spend $13.9 billion in cash over the next 2 1/2 years, leaving the Detroit-based company with reserves of $10 billion, Douglas Karson, a New York-based analyst at the bank, said yesterday in a note to investors. The carmaker may seek a secured term loan of as much as $6 billion and issue up to $2 billion of bonds convertible into stock, he said.

"Pressure is mounting for GM to raise cash," Karson said. "Even though the bank loan market remains very tight, we think that GM has enough unencumbered collateral to successfully issue a secured term loan."

Repeat Performance

GM is going to have to pledge assets as collateral. This is a repeat of the November 2006 play: GM and Ford pledge assets to secure loans .
Facing a deep financial crisis, Detroit's two top auto makers have had to pledge some of their most essential assets -- such as factories and equipment -- as collateral to win badly needed new loans.

GM, which posted a $10.6 billion loss last year, in July extended a credit line from a syndicate of banks under new terms that give the company a $4.6 billion revolving loan backed by North American assets including inventory, plants and property.

On Monday, GM used equipment in some of its U.S. plants to secure a $1.5 billion loan to be arranged by J.P. Morgan Securities Inc. and Credit Suisse Securities. Since secured loans are less expensive than unsecured financing, they are now a more attractive option for GM.

Repossessions Soar

The Boston Globe is discussing The Repossession Lane .
When lenders sent a tow truck to repossess his silver 2001 Lincoln LS last month, Myles Chilcot eagerly handed over the keys. "I ran around smiling for 20 minutes when they took the car away," Chilcot said. "It was a relief."

"The suddenness with which we saw repossessions hit the market at the beginning of the year has been unusual and appears to reflect not only the general economic slowdown, but some spillover from the mortgage crisis," said Tom Kontos, chief economist at Adesa Inc., which runs 58 car auctions across North America.

GMAC Financial Services, the country's largest auto-finance operator, late to see the problem is now raising its lending standards. It will be too little too late.

Like a junkie, GM and GMAC both need more cash. Again and again, the story is the same. Eventually there will be no more assets to pledge.

Dividend Fiscal Insanity

To raise cash, GM will end up paying a high rate for the loan, and that is even if the lenders like the collateral they receive. The convertible will likely be at a much higher yield. Meanwhile, GM is paying shareholders a dividend rate of 7.3% or so. Borrowing money at 10%+ and paying dividends of 7.3% is simply fiscal incompetence. Citigroup (C) does the same thing, and so do many other financial institutions.

Why do they do it? The only possible reason is they think shareholders will dump the stock if they cut the dividend. Well shareholders are dumping the shares anyway. The stock is sitting at $13, and GM is wasting money it does not have on GMAC, still more on dividends, and it is expected to lose $13.9 billion over the next two years. I am willing to bet it will be more than that.

Everyone is underestimating how bad this recession is going to be. Unemployment is going to soar. I am sticking with the call I made in Case for an "L" Shaped Recession .

Unemployed people do not buy cars, and many will be struggling to make payments on the cars they have. Repossessed SUVs are not going to command a very good price. GM is bleeding cash badly and will continue to bleed cash badly, and at a rate far greater than the industry expects in my opinion.

Can Battery Technology Save GM?

Some people think that GM's battery technology will save it. It won't. It can't. Whatever lead GM has in battery technology (if indeed any), will quickly vanish. Toyota is not standing still. See Toyota's Drive Beyond Oil for more discussion of this idea.

Hoofy and Boo Weigh In

Inquiring minds may wish to consider what Hoofy and Boo have to say about the hummer.



SUVs were supposed to be the savior of GM. The Hummer was supposed to be the savior. Now battery technology and the Volt, a car not scheduled to be off the production line until the end of 2010 is supposed to be the savior.

Will GM have any cash left then? Will it matter even if it does? The only thing that can save GM is if it can consistently produce cars that people want at a price high enough for GM to make a profit.

Nothing else matters, not concept cars, not batteries, not superior technology, not good looks and apple pie. Can GM management deliver? Forgive me for being skeptical, but I doubt it.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014