General Motors (GM)

General Motors Corp., battered by the slowest U.S. sales market in 15 years, faces the possibility of bankruptcy and may need to raise as much as $15 billion, a Merrill Lynch & Co. analyst said. The ``dramatic drop-off in sales probably will continue through 2009, forcing GM to find additional funding, analyst John Murphy, who cut the Detroit-based automaker's shares to ``underperform from ``buy, said in a report. ``Bankruptcy is not impossible if the market continues to deteriorate.

Deutsche Bank came out this morning with a pretty bold call, that is almost certainly right, slapping a sell rating on General Motors (GM) and a $0 price target. They forecast that GM might not have enough cash to operate the business into 2009. GM shares are off about 25% and trading at levels not seen since 1946.

Even if GM implements the planned operating actions that are substantially within its control, GM’s estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business. Looking into the first two quarters of 2009, even with its planned actions, the company’s estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs, or some combination of the foregoing. - GM 3Q Earnings Release, 11/7/08

The situation is extremely dire. They have $16 billion in cash on hand. They burned through $7 billion last quarter - though they say that was an aberration due to one time events. They owe $43 billion and have massive pension and other retirement obligations. North American car sales dropped 45% in October from the year ago period.

If you read between the lines, it seems like either the government props them up or they go under.

GM's dependence on the UAW in North America and on unionized labor around the world (especially in Europe) makes it much harder for the company to either cut costs or turn itself around. Crippling legacy costs will also be a difficult burden for GM to continue bearing.

The number of retired UAW members plus surviving spouses PER active UAW member at the Big Three (data here from the UAW) stand at 4.61 for GM, 2.11 for Ford and 1.60 for Chrysler. Doesn't this go a long way towards explaining the financial troubles of the Big Three, especially GM, because of the crippling legacy costs? In other words, GM has become "a health care benefits management firm that sells cars for a loss as a side venture."

GM is seeking federal aid to avoid collapse as a result of slowing auto sales and a weakening US economy. On Nov 7, 2008, the company reported a $4.2 billion third-quarter operating loss. Its available cash fell to $16.2 billion on Sept 30 from $21 billion at the end of June. Merger talks with Chrysler were suspended.

The 300 bankers gathered at New York's Waldorf-Astoria Hotel last month faced a stark choice: Accept Sam Ramsey's plea to restructure $60 billion of GMAC LLC's debt or risk pushing the lending arm of General Motors Corp., the largest U.S. automaker, to the brink of insolvency.

``There was not room for slippage, said Ramsey, 49, a former Bank of America Corp. executive who joined Detroit-based GMAC in September and became chief risk officer two months later. He pulled it off as banks led by New York-based JPMorgan Chase & Co. and Citigroup Inc. provided GMAC and its Residential Capital LLC mortgage unit with the biggest restructuring package since the credit-market rout began a year ago.

Whether that's enough to ride out the worst housing slump since the Great Depression remains in doubt. 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.

``ResCap presents a very significant risk, said Mark Wasden, the lead GMAC analyst at Moody's. ``There is no easy exit from their difficulties right now. We think the company will yet again find itself in need of additional cash.

The rising price of steel and oil mean that GM will have to spend substantially more on raw materials and energy costs. Until early 2007, a good deal of GM's steel was purchased at prices that had been locked in three years ago--at half the current market price. This means slimmer profits for GM, even after the introduction of hot new products.

GM is the worst performing stock on my USA watch list

Why is it so ?

Although CEO Rich Wagoner said GM has enough cash to continue operating through the end of 2008, GM will need to raise more cash to continue operations through 2009 and beyond, as it is not expected to return to profitability for some time. This could mean a reduction in the dividend, issuance of new stock which will dilute the value of current shares, or loans backed by GM's facilities in North America. All three alternatives would likely make GM's shares less attractive.

In a note sent to investors Friday, June 20th, JPMorgan analyst Himanshu Patel blamed the loss on falling residual values for leased pickups and SUVs.

High gasoline prices have caused pickup and SUV values to tumble during the past year. Patel said they dropped 16 percent to 18 percent from May 2007 to May 2008.

Ford will have $1 billion in lease depreciation costs, and GM will have $600 million because it shares risk with its GMAC financial arm, Patel predicted.

He wrote that the price pressure on used pickups and SUVs has been aggravated by "generally more affluent customers' ability to `bail out' early." That further worsens the used vehicle market's supply and demand imbalance

Ford Motor Co. and General Motors Corp's financial arms may need to write down $1.1 billion and $1.5 billion, respectively, said a Lehman Brothers analyst, who expects U.S. auto credit to be pressured by a weakening used-car market.

The weakening used-vehicle market creates a growing problem for the financial arms of GM and Ford as residual values of lease vehicles are likely to be significantly lower than originally expected, analyst Brian Johnson said.

"This is especially true for traditional trucks, which have been disproportionately hurt by the accelerating mix shift towards more fuel-efficient cars," Johnson said.

Surging oil prices are driving the U.S. auto market to near-decade lows and forcing Americans to avoid trucks and sport utility vehicles in favor of more fuel-efficient cars.

The chart above shows average hourly compensation for the Big Three ($73.20) and Toyota (TM) ($48.00), compared to average hourly compensation for Management and Professional Workers ($47.57), Manufacturing/Goods Producing ($31.59) and all workers ($28.48), data available here.

Should U.S. taxpayers really be providing billions of dollars to bailout companies (GM (GM), Ford and Chrysler) that compensate their workers 52.5% more than the market (assuming Toyota wages and benefits are market), 54% more than management and professional workers, 132% more than the average manufacturing wage, and 157% more than the average compensation of all American workers?

Maybe the country would be better off in the long run if we let the Big Three fail, and in the process break the UAW labor monopoly, and then let Toyota, Honda (HMC) and Volkswagen (VLKAY) take over the U.S. auto industry, and restore realistic, competitive, market wages to the industry. It might be the best long-run solution.

The reality is more losses now. More charges today. Investors should stop living in " hope " for profits years away.

General Motors is planning to cut thousands of white-collar jobs and is considering whether it should sell or stop production of more of its brands, The Wall Street Journal said July 7th, citing people familiar with the matter.

Both moves are part of a broader re-evaluation of the company's strategy and of its ability to meet an internal projection of returning to profitability in 2010, the people told the paper.

The job cuts are likely to be approved when GM's board of directors meets in early August, the people said. The reductions would be in addition to earlier announced cuts.

Management may also present the board with options for raising additional cash, they told the paper

Sales of new cars and trucks plunged to their lowest level in more than a decade in June, as high gas prices and a weak economy kept American consumers away from dealer showrooms

Detroit automakers were hit hard. Ford Motor was down 28 percent in June, General Motors was off 18 percent, and Chrysler dropped 36 percent

Prospects are dim :

While sales had been steadily declining since the spring, the June totals, announced Tuesday, marked a low point in what is shaping up as an abysmal year in the car business. The sales last month were further depressed because there were three fewer days when dealerships were open compared with a year ago.

“We’re looking at an industry sales rate that is the lowest in over a decade, probably in 15 years,” said George Pipas, Ford’s chief market analyst.

CIBC World Markets said in a report Thursday , June 26 that gas prices in the U.S. will hit US$7 a gallon - - two summers from now. That marks a 70 per cent increase over today's record levels.

As a result, there will be about 10 million fewer vehicles on U.S. roads by 2012 and average kilometres driven will drop 15 per cent, the report said.

"Over the next four years we are likely to witness the greatest mass exodus of vehicles off America's highways in history," chief economist Jeff Rubin wrote.

The meteoric rise in crude oil prices, which hit a record US$140 a barrel on the New York Mercantile Exchange Thursday, has been a major factor in soaring pump prices. CIBC predicts crude will hit $200 a barrel by 2010.