Best of the Week
Most Popular
1.Will UK Interest Rate Rises Crash House Prices? - Nadeem_Walayat
2.Full on Crash Alert for Major World Stock Markets... - Clive_Maund
3.Gold And Silver Market Bottoming? Big Rally Imminent? Reality Check Says NO - Michael_Noonan
4.The Coming Silver Price Rally Will Outperform All Previous Ones - Hubert_Moolman
5.The Trigger For The Upcoming Stock Crash - Harry_Dent
6.Imploding Department Store Results - James_Quinn
7.Dr. Copper is Speaking, are you Listening? ... - Rambus_Chartology
8.Pandemonium in the Stock Market, Dow falls 1,000 points in a week - EWI
9.Asia's Whirling Dervish of Devaluations Has Encircled China's Exports - Keith_Hilden
10.China Weakens the Yuan; Rattles Global Stock and Financial Markets - Gary_Dorsch
Last 5 days
Independant Scotland 1 Year on, UK Civil War If the SNP Fanatics Had Succeeded - 30th Aug 15
Gold’s 7 Point Broadening Top - 30th Aug 15
The Day the Stock Market Shook the Earth: Takeaways From the Dow’s 1,000-Point Drop - 30th Aug 15
Gold Price Rally Marked by Short Covering - 30th Aug 15
Aging Stocks Bull Market - 29th Aug 15
Economic Destabilization, Financial Meltdown and the Rigging of the Shanghai Stock Market? - 29th Aug 15
The Stocks You Should Be Buying After the Market Drop - 29th Aug 15
How I Learned to Stop Worrying and Love Market Fluctuations - 28th Aug 15
China's Yuan Devaluation: Why It Was "Expected" - 28th Aug 15
Stocks Go Nuts But the Question Remains – Will the Rally Stick? - 28th Aug 15
Fed’s Stock Market Levitation is Failing - 28th Aug 15
The Eight Energy Systems Driving The Stock Market Rout - 28th Aug 15
Silver Sold, then Squeezed - 28th Aug 15
U.S. Economic Fundamentals 'Look Good' - Bullard of St. Louis Fed - 28th Aug 15
Stock Market Margin Calls Mount - 28th Aug 15
Einstein, Physics, Gold and The Formula To End Economic Decay - 28th Aug 15
The 10 Best Stocks for Options Trading Plays in This Market - 28th Aug 15
Economics of a Stock Market Crash - 28th Aug 15
Currency Wars Detonate; Gold Refuses to Budge - 28th Aug 15
UK Immigration Crisis Hits New Record, Trending Towards Becoming a Catastrophe - 28th Aug 15
The Ultimate Cash-Management Guide - 27th Aug 15
Why a Fed Rate Hike Could Be a Blessing for Gold Prices - 27th Aug 15
Why Devaluing the Yuan Won't Help China's Economy - 27th Aug 15
Stock Market Trend & Trade Signal Of the Decade - 27th Aug 15
Keep Your Eye On the Gold and Silver Bear - 27th Aug 15
Refugees Expose Europe’s Lack Of Decency - 27th Aug 15
How to Profit from China's Currency War - 27th Aug 15
How China's Currency Policies Will Change the World - 27th Aug 15
Chinese Medicine not Impressing Dr Copper - 27th Aug 15
Novel Biotech Novel Technology Platforms with Dramatic Growth Potential - 27th Aug 15
China Stocks Bear Market Crash, Are We Near the Bottom Yet? - 27th Aug 15
Stock Market Crash Black Wednesday Rally Crushes the Bears - 26th Aug 15
VIX Shorts Being Squeezed While SPX Prepares for Another Decline - 26th Aug 15
Why China's Economy is Deteriorating - 26th Aug 15
Citizenship as a Weapon: Travel Controls and What You Can Do About It - 26th Aug 15
Gold and Silver - How To Manipulate a Market - 26th Aug 15
How to Make a Quick 20% When the Stock Market Crashes - 26th Aug 15
Why We Can’t Handle A Stocks Bear Market - State Budgets Will Implode - 26th Aug 15
Stocks Bear Market, Is This 1929 All Over Again? - 26th Aug 15
The One Trading Strategy You Needed for Stock Market Crash - 26th Aug 15
Second Chance To Buy Cheap Gold Mining Stocks - 25th Aug 15
Gold Facts and Gold Speculations - 25th Aug 15
The Stock Market Crash Season is Here… - 25th Aug 15
Liftoff Setback Leads to U.S. Dollar Pullback - 25th Aug 15
The Stock Markets Are Extraordinarily Volatile, Here's What to Do - 25th Aug 15
Israel: The Case Against Attacking Iran - 25th Aug 15
Saudis Could Face An Open Revolt At Next OPEC Oil Meeting - 25th Aug 15
How to Calmly Weather This Stock Market Downturn - 25th Aug 15
Stock Market Sound the Alarm - 25th Aug 15
Stock Market Meltdown - Dow Monday 1000 Point Crash then Rebound, What's Next? - 25th Aug 15
El-Erian: Stock Market Sell off Is Not 1998 or 2008 - 25th Aug 15
Gold the Ultimate Financial Crisis Insurance - 25th Aug 15
Stock Market Black Monday Crash Fizzles Out, Next Black Tuesday? - 25th Aug 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Stocks Slide

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

© 2005-2015 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

Biggest Debt Bomb in History