Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Learning from Money Supply of the 1980s: The Power and Irony of “MDuh” - 20th Nov 17
Trump’s Asia Strategy, Goals and Realities - 20th Nov 17
Crude Oil – General Market Link - 20th Nov 17
Bitcoin Price Blasts Through $8,000… In Zimbabwe Tops $13,500 As Mugabe Regime Crumbles - 20th Nov 17
Stock Market More Correction Ahead? - 19th Nov 17
Universal Credits Christmas Scrooge Nightmare for Weekly Pay Recipients - 18th Nov 17
Perspective on the Gold/Oil Ratio, Macro Fundamentals and a Gold Sector Bottom - 18th Nov 17
Facebook Traders: Tech Giant + Technical Analysis = Thumbs Up - 18th Nov 17
Games Betting System For NCAA Basketball Sports Betting - Know Your Betting Limits - 18th Nov 17
Universal Credit Doomsday for Tax Credits Cash ISA Savers, Here's What to Do - 18th Nov 17
Gold Mining Stocks Fundamentals Q3 2017 - 17th Nov 17
The Social Security Inflation Lag Calendar - Partial Indexing - 17th Nov 17
Mystery of Inflation and Gold - 17th Nov 17
Stock Market Ready To Pull The Rug Out From Under You! - 17th Nov 17
Crude Oil – Gold Link in November 2017 - 17th Nov 17
Play Free Online Games and Save Money Free Virtual Online Games - 17th Nov 17
Stock Market Crash Omens & Predictions: Another Day Another Lie - 16th Nov 17
Deepening Crisis In Hyper-inflationary Venezuela and Zimbabwe - 16th Nov 17
Announcing Free Trader's Workshop: Battle-Tested Tools to Boost Your Trading Confidence - 16th Nov 17
Instructions to Stop a Dispossession Home Sale and How to Purchase Astutely at Abandonment Home - 16th Nov 17
Trump’s Asia Tour: From Old Conflicts to New Prospects - 16th Nov 17
Bonds And Stocks Will Crash Together In The Next Crisis (Meanwhile, Bond Yields Are Going Up) - 16th Nov 17
A Generational Reset That Will Redistribute Wealth to the Bottom 60% Is Near - 16th Nov 17
Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - 16th Nov 17
Gold’s Long-term Analogies - 16th Nov 17
Does Stripping Streets of ALL of their Trees Impact House Prices (Sheffield Example)? - 15th Nov 17
The Trump Administration’s IP Battle Against China - 15th Nov 17
5 Ways Bitcoin can Improve its Odds of Becoming the Future of Money - 15th Nov 17
These Headlines Say Gold is Building a Base for Something Big - 15th Nov 17
Protect Your Savings With Gold: ECB Propose End To Deposit Protection - 14th Nov 17
Gold on the Ledge, Trend Forecast - 14th Nov 17
The Unbearable Slowness Of Fourth Turnings - 14th Nov 17
Silver Sign’s Confirmation & More - 14th Nov 17
Could This Be The End for Tesla? - 14th Nov 17
Harry Dent’s Fourth Cycle: More Evidence of Stock Market Downturn - 14th Nov 17
Why Having Good Credit Is Important If You Want to Invest - 14th Nov 17

Market Oracle FREE Newsletter

Traders Workshop

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

© 2005-2017 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