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By William Patalon III
Executive Editor
Money Morning/The Money Map Report
By the time investors read this today (Monday), embattled U.S. automaker General Motors Corp. (NYSE: GM) Motors Corp. could be operating under the protection of the U.S. bankruptcy code, a strategic move made in an effort to transform the once-dominant firm into a leaner and more competitive player.
GM has lost an aggregate $82 billion in the past four years even as it slashed production capacity, nameplate brands – and more than 100,000 U.S. jobs. It needs to cut another 19,000 workers by 2012 to bring its domestic employment down to 72,500 jobs.
GM on Saturday passed a major milestone ahead of a bankruptcy filing planned for today (Monday) as the deadline passed for bondholders to accept an exchange offer brokered by the Obama administration.
As of late Saturday night, GM would not comment on how many investors had tossed in their support for the debt-for-equity swap that would have them surrender $27 billion in corporate bond debt in return for as much as 25% of a restructured GM. However, the company did say this enhanced deal already had the support of investors who held 35% of GM’s bonds. The deadline passed at 5 p.m. Saturday.
Fund managers and analysts told Reuters that that it was possible that this enhanced bond offer could have attracted a majority of the GM bond investors by the deadline. Under the new offer, bondholders would have a recovery of around 9 cents on the dollar, up from an estimate of zero to 5 cents under the previous offer. GM bondholders last week rejected a proposal that would have given them a 10% stake in a reorganized GM.
“The warrants and the improved capital structure make for an improved recovery for bondholders," Brian Johnson, an analyst for Barclays Capital PLC (NYSE ADR: BCS), told the news service. "In terms of the bankruptcy process, we expect the likely bondholder assent to smooth the process."
The United Auto Workers union (UAW) on Friday cleared the way to the bankruptcy filing when it overwhelmingly approved a new labor pact that lets GM slash costs.
GM has struggled in recent years to compete, hurt by its truck and SUV-dominated vehicle line-up and a deep plunge in U.S. vehicle demand.
Market Matters
In the holiday-shortened work week, investors searched for the tonic needed to escape the “excessive” volatility that still exists in the markets. How did that cure-all work out? In three consecutive sessions, the Dow Jones Industrial Average jumped 193, plummeted 173, and finally rebounded 104 points. Meanwhile, the yield on the 10-year U.S. Treasury, the perceived safe-haven for risk-averse investors, soared by 30 basis points during the week and its declining value prompted many to rethink their “flight-to-quality” strategies. After the recent talks that Standard & Poor’s Inc. may cut its rating on UK debt, investors began speculating that the mass domestic borrowings (to rescue virtually every industry and near-bankrupt company) will take its toll on US debt ratings as well. While Moody’s Investors Service Inc. (NYSE: MCO) offered a bit of confidence by proclaiming the Aaa rating remains “stable,” it did leave the door open for a future downgrade. Fortunately, the week’s treasury auctions were generally well-received, though investors remain cautious that demand may subside in the future as the deficit balloons. Stocks followed bonds for a change as traders unloaded equities on weakness in fixed income, only to buy again after the favorable auctions (among other news). And the volatility continued.
With its bankruptcy filing, GM is merely taking a step to following in Chrysler LLC’s footsteps. Chrysler hopes to move beyond its own bankruptcy as a judge considers its restructuring via the Fiat SpA (ADR OTC: FIATY) deal.
A Federal Deposit Insurance Corp. (FDIC) report showed that banks earned $7.6 billion in profits in the first quarter, rebounding from the first quarterly loss for the industry in 18 years. Before executives could award themselves (excessive) bonuses, the report added that the number of institutions considered “problem” climbed from 252 to 302 and said that delinquencies rose across most loan types.
In other corporate news, Microsoft Corp. (Nasdaq: MSFT) is set to launch “Bing,” its upgraded search engine on June 3 and Yahoo! Inc. (Nasdaq: YHOO) remains open to a partnership (after last year’s failed buyout) if offered a “boatload of money.” Costco Corp.’s (Nasdaq: COST) earnings fell by more than analysts expected; Dell Inc. (Nasdaq: DELL) continued to struggle from a decrease in IT spending; Time Warner Inc. (NYSE: TWX) plans to spin-off AOL by year-end. The Organization of the Petroleum Exporting Countries (OPEC) met and held production levels steady, though crude prices surged above $66 a barrel for the first time in six months and prices now stand almost twice as high as its mid-February level.
| Market/ Index |
Year Close (2008) |
Qtr Close (03/31/09) |
Previous Week |
Current Week |
YTD Change |
|
Dow Jones Industrial |
8,776.39 |
7,608.92 |
8,277.32 |
8,500.33 |
-3.15% |
|
NASDAQ |
1,577.03 |
1,528.59 |
1,692.01 |
1,774.33 |
+12.51% |
|
S&P 500 |
903.25 |
797.87 |
887.00 |
919.14 |
+1.76% |
|
Russell 2000 |
499.45 |
422.75 |
477.62 |
501.58 |
+0.43% |
|
Global Dow |
1526.21 |
1347.38 |
1,604.53 |
1,653.06 |
+8.31% |
|
Fed Funds |
0.25% |
0.25% |
0.25% |
0.25% |
0 bps |
|
10 yr Treasury (Yield) |
2.24% |
2.68% |
3.45% |
3.47% |
+123 bps |
Economically Speaking
A recent survey by the National Association for Business Economics showed that 93% of the respondents believe the recession will end in 2009, with almost 75% of them seeing a third-quarter recovery. Still, most feel the rebound will be slow to develop as unemployment continues to climb (the survey says it will average 9.1% this year). The results also predict gross domestic product (GDP) to contract by 1.8% in the second quarter, before turning positive (though ever-so-slightly) over the latter six months of the year. By comparison, the first quarter GDP revision was reported as down 5.7%, a modest rebound from the 6.1% initially released, though weaker than many prior forecasts and still reflective of some pretty dire domestic economic conditions.
Since the consumer accounts for two-thirds of the activity within the economy, analysts point to some favorable sentiment data as further proof that the recession is nearing an end. In May, the Conference Board said that consumer confidence experienced its best showing in eight months, while the Reuters/U of Michigan Index also posted stronger results. Renewed activities should be welcome news to retailers and manufacturers alike, some of whom will be counted on to resume hiring over the next few months as they reap some rewards to their bottom lines.
April housing data also highlighted the week’s economic releases as both new home (+0.3%) and existing home sales (+2.9%) posted gains.
However, the inventory of unsold properties continued to climb and the median sales prices fell from already weak levels. Delinquencies remain on the rise as 12% of all homeowners have fallen behind on their mortgages and foreclosures rates on even the prime borrowers (with decent credit) have surged in recent times. Even though housing still has a way to go before the “worst of times” officially will be considered over, some early signs of a rebound in activity may be emerging.
Weekly Economic Calendar
| Date |
Release |
Comments |
|
May 26 |
Consumer Confidence (05/09) |
Best showing in 8 months |
|
May 27 |
Existing Homes Sales (04/09) |
Better than expected increase, though rise in inventory |
|
May 28 |
Durable Goods Orders (04/09) |
Sharp April increase offset by March lower revision |
|
|
Initial Jobless Claims (05/23/09) |
Surprising drop in new weekly claims |
|
|
New Home Sales (04/09) |
Slight increase through below consensus expectations |
|
May 29 |
GDP – Qtr 1 (revised) |
Revised to reflect slightly slower contraction |
|
The Week Ahead |
|
|
|
June 1 |
Personal Income/Spending (04/09) |
|
|
|
ISM – Manu – (05/09) |
|
|
|
Construction Spending (04/09) |
|
|
June 3 |
Factory Orders (04/09) |
|
|
|
ISM – Services (05/09) |
|
|
June 4 |
Initial Jobless Claims (05/30/09) |
|
|
June 5 |
Unemployment Rate (05/09) |
|
|
|
Non-farm Payroll (05/09) |
|
|
|
Consumer Credit (04/09) |
|
News and Related Story Links:
- Reuters:
Deadline passes for GM bondholders. - Money Morning Hot Stocks Feature:
Hot Stocks: Microsoft Takes Aim at Google’s Web Dominance With New Search Engine - Money Morning:
Business Economists Predict Recession Will End in Third Quarter
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.
The new lighter unencumbered GM will do well once the latest high profit margin low cost low retail priced Chinese models debut in America. Buick's from Shanghai may seem strange at first, but remaining dealers will soon be in the full swing of shystering and shylocking the poor Yankee Doodle Dandies into laying down good American dollars, earned at lower American wages, and harder come by dollars for Chinese scrap metal! GM is and old cancerous corporation, filled with all the problems that come with old age for companies. They will flog crap for the remaining years of brand loyalty to the fools with hearts bigger than minds, then, like Microsoft, fade into the history books, with Kaiser, Studebaker, Chrysler and Cord. Capitalism is shedding its old folk and Tesla and Aptera, the new kids on the block are spreading their wings. We witness historical events, a failure today of a once great American company!
I believe that GM should have gone bankrupt last fall before their previous gift of free money from the public money trough. I guess that GM will not give back any of the money that the US Government took from me previously and gave to GM.
Is there anything of value going to be left after the auto industry executives and the auto union members have bled their companies to death (bankruptcy)? The banks probably have mortgage lien on the title to most of the remaining factories and other assets anyway.
If they are allowed to continue to go to the public feed trough again and again, they will never stand on their own two feet. Should we continue Auto Industry bad behavior and outright theft of company money with taxpayer funds? Who is going to buy a vehicle from a bankrupt auto manufacturer when the bankruptcy court will allow the manufacturer out of their warranty contracts with the vehicle purchaser? It is too late for Chapter 11 reorganization.
The additional $50billion of Taxpayer funds proposed to be given to the US Auto Industry will only encourage the continuation of the arrogant, stupid, and selfish bad business policies of both the US Auto Industry executives and the UAW members. Why are these same highly paid incompetent executives and the overpaid union workers continue their featherbed deals, job banks, perks, private jet airplanes, stupid business decisions, and etc. with taxpayer money. These are the same selfish people that are responsible and should be fired, unless they know something about making cars instead of finance. Let other parties buy their assembly plants and re-start these plants. Maybe we have to let the GM Executives disappear with the large amounts of money that they took from the US Auto Industry, but do not let them have another $50billion of Taxpayer Funding to continue their bad business practices and personal thievery.
GM is probably already in debt up to their ears. Let GM disappear, especially as a lesson to all of the other financial geniuses that caused these problems. If these financial geniuses that caused these problems disappear then the UAW feather beds that they created will also disappear with them. Are these Taxpayer Billions for the Auto Industry going to fund the golden parachutes and bonuses of the auto industry executives that caused the crisis?
Should taxpayer money pay off the bank loans that occurred when these financial geniuses borrowed money to pay stock dividends, in order to artificially drive up the stock prices, which personally enriched themselves through their stock option plans? How can we get rid of these financial geniuses and the UAW feather beds that caused these problems without costing the taxpayer some of his/her hard earned tax money? They do not need any more Financial Genius Master Type Criminals to manage their affairs. Are there any more "Lee Iacocca" type people in that industry that could revive these sick Auto Manufacturing companies from their impending deaths?
I believe that GM is managed financial geniuses that know how to drain company assets into their own pockets, and know very little about making automobiles.
"Under the new offer, bondholders would have a recovery of around 9 cents on the dollar, up from an estimate of zero to 5 cents under the previous offer."
Really…so I give you 1 dollar and I get 5 cents in return? Tell me, what's the inflation adjusted profit for this investment?
Seriously, this company will NEVER TURN A PROFIT AGAIN.
They easily had the technology to make cars profitable, but like most companies, they sat on their asses and keep the technology on the low and assumed that foreign companies couldn't touch them.
Just another example of the arrogance of the U.S. Corporate world.
President Obama fails to recognize that he just wasted over 100 billion on GM and Chrysler and somehow thinks that a dumbed-down America will continue to back his economic policies.
Meanwhile, smart investors saw this coming a long way out. The govt., and especially 99% of CONgress is still shocked that this happened!
This bailout is totally mind boggle to me. Does anyone understand what this mean!!!. GM, Chrysler chose this route by wasting money and producing car's that could not stand up to foreign competition. By choice, they took this route. If they can send a man to the moon, of course they can build a car that is competitive. Because of this bail out, generation after generation will be in debt for this.. For the love of God, let them sink like anyone else that mishandled money. Who cares that they are an considered an American icon. Not in my book. Ive never puruchased an American car because I know that the car would not outlast the loan.
Despite the recession having many negatives, such as unemployment, debt levels soaring, saving levels plummeting and the general gloominess that surrounds a financial downturn, things are starting to improve.
Credit card firms have invented a programme called ‘Blueprint’, which will give consumers an interest free grace period with their debts, on every day products, just as long as they know in advance what they want and they can pay the bills off in full at the end of each month.
Unis are also helping students struggling with debt, such as the hardship fund and even some uni’s paying for student’s rent.
Consumer confidence is also on the up, with credit card applications increasing by 5%.
So although it may seem that debt is hanging over the world – debt help is there and is working.
Trackbacks
[…] 11 manufacturing plants. GM was the world's biggest automaker for 77 years, but the company has lost an aggregate $82 billion over the past four years even as it slashed production capacity, nameplate brands, and more than 100,000 U.S. jobs. The […]
[…] However, there's also a good chance that labor-cost pressures – combined with tightening margins – will take the likes of JPMorgan and Goldman Sachs Group Inc. (NYSE: GS) down a path similar to that of General Motors Corp. (NYSE: GRM) and Chrysler Group LLP, both of which earlier this year declared bankruptcy. […]
[…] makes sense in view of the U.S. carmaker's significant progress since it filed Chapter 11 bankruptcy last June, analysts […]