Best of the Week
Most Popular
1.BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - Nadeem_Walayat
7.Gold And Silver – Insanity Is World “Norm.” Keep Stacking! - Michael_Noonan
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.Gold And Silver: Security, And BREXIT - Michael_Noonan
10.BrExit Vote - "The Trend is Set" -- And What You Should Pay Attention to Next - EWI
Free Silver
Last 7 days
Stock Market Rally Runs Out of Steam - 29th June 16
Rapid Growth:The Financial Trends Of Online Gaming - 29th June 16
FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - 29th June 16
Stock Market Bounce May be Over - 28th June 16
Stock Market Meltdown Likely to Drive Gold Towards $1,500 - 28th June 16
Brexit Victory over the EU Globalists - 28th June 16
Brexit Psyop: Greenspan Falsely Blames the Brits for the Crash and Chaos to Follow - 28th June 16
Greenspan Calls Brexit a ‘Terrible Outcome’ as Euro Area Tested - 27th June 16
Stock Market SPX Below Mid-Cycle Support - 27th June 16
Best Holidays for Summer 2016 - 27th June 16
Another Stocks Bear Market? - 27th June 16
BBC EU Referendum Result Highlights - YouGov, Markets, Bookmakers, Pollsters ALL WRONG! - 26th June 16
Investors Map Post-Brexit Strategies Amid Global Market Upheaval - 26th June 16
Gold Price Weekly COT Update - 26th June 16
First the UK, then Scotland ... then Texas? - 26th June 16
Stocks Bear Market Resumes or Just More Noise - 26th June 16
Gold And Silver: Security, And BREXIT - 25th June 16
Dow, Euro & Brexit Recap - 25th June 16
Resistance Holding Gold Stocks after Brexit - 25th June 16
Venezuela vs. Ecuador (Chavismo vs. Chavismo Dollarized) - 25th June 16
Gold, Silver And PM Stocks Summer Doldrums Risk - 24th June 16
Here’s Why China “Economic Hard-Landing” Worries Are Overblown - 24th June 16
Jubilee Jolt: Markets Crash, Gold Skyrockets as Britain Takes Brexit - 24th June 16
BrExit Morning - New Dawn for Britain, Independence Day! - 24th June 16
LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - 24th June 16
Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - 24th June 16
EU Referendum Shock Results Putting BrExit LEAVE in the Lead Hitting Sterling Hard - 24th June 16
Final Opinion Poll Gives REMAIN 52% Lead, Bookmakers, Markets and Pollsters ALL Back REMAIN Win - 23rd June 16
Does BREXIT Matter? Outlook for Sterling - 23rd June 16
Keep Calm and Vote BrExit - Last Chance to Break Free of EU Superstate - 23rd June 16
Here’s the Foreign Policy Trump and Clinton Really Want - 23rd June 16
Details Behind Semiconductor Stocks Leadership - 23rd June 16
Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - 23rd June 16
BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - 22nd June 16
Proof that the Gold Bears are Wrong - 22nd June 16
Here’s a Trillion-Dollar Investment Opportunity for Those Few with No Debt - 22nd June 16
BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - 22nd June 16
Increase In U.S. Rig Count Will Not Cap Oil Prices - 22nd June 16
Are Copper and China Stocks Set to Rally? - 22nd June 16
SPX May Break Its Trendline - 22nd June 16
Believe it or Not: More Kids Live At Home Now than Since The Great Depression - 21st June 16
EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - 21st June 16
British Pound Outlook - BREXIT, Europe and You - Does your vote matter? - 21st June 16
Fascist Victory Behind the European Union - 21st June 16
EU Referendum Opinion Polls Analysis Shows Strong Momentum in REMAINs Favour - 21st June 16
Is It Time to Dump Gold and Buy Platinum? - 21st June 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Market Volaility

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

© 2005-2016 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

Catching a Falling Financial Knife