Van Santos

I’m not so sure what to make of this. Ford, Nissan and Tesla Motors are rumored to be in line for government loans in order to develop “green” technology.

Dozens of auto companies, suppliers and battery makers have sought a total of $38 billion from the loan program. Ford has asked to receive $5 billion in loans by 2011, but it was unclear how much money the automaker would receive. Nissan has applied for an undisclosed amount of assistance, while Tesla has sought $450 million.

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The loans were designed to help the auto manufacturers meet new fuel-efficiency standards of at least 35 miles per gallon by 2020, a 40 percent increase over current standards.

While they are not “bail out” loans I still feel a bit odd about this, especially since Ford had been pushing the whole “we don’t need loans” concept since last fall. It’s the “little engine that could” feeling. I want them to make it and even though this loan isn’t a bail out, per se, the fact they went to the bar for a drink is a wee bit disappointing to me.

Why do I have a feeling Fed Chairman Bernanke’s comments of “green shoots” will haunt him for the rest of his days.  Sure, he was trying to inject confidence in the market but without any real evidence of a recovery.  Economist Nouriel Roubini is once again point out there are weeds in with the “green shoots”

Here are the highlights:

• growing divergence between business sentiment surveys
• and industrial production, which is down sharply and receded another 1.1 percent in May
• U.S. jobless rate, already at a 26-year high of 9.4 percent, would reach 11 percent before it begins to ease
• few engines for growth given that U.S. consumers are tapped out
• Rampant inflation could lead to negative economic cycles like the ones that plagued much of the industrialized world in the 1970s

People continue to cheer when 500K jobs are lost instead of 600K, or when retail sales are down but not a much as the month previous.  Bottom line, we are not in a recovery as of yet.  You can cheer all you want but you are, ultimately, just cheering bad news.

I haven’t posted business bits in the last few days, trying to take care of a few other things made my time limited, but there are a number of things in the financial world to pass along.

GM to sell Swedish unit Saab to Koenigsegg

Frankly, I’m surprised GM managed to pull off the deal. From a U.S. sales and distribution point of view, Saab’s footprint is insignificant compared to other luxury auto makers. When you look at the company that purchased Saab, however, one can see that any footprint is a good footprint:

Saab Automobile, General Motors Corp.’s struggling Swedish unit known for its family cars, was rescued Tuesday by a consortium led by Koenigsegg Automotive AB, a tiny company which produces only a dozen custom-made super cars a year.

GM said in a memorandum of understanding that the sale would include an expected $600 million funding commitment from the European Investment Bank, guaranteed by the Swedish government. Additional funding for Saab’s operations and investments would be provided by GM and Koenigsegg Group AB, it said.

On a dozen custom-made cars a year? Does a company that only employs 45 people and produces 12 cars each year have the ability to take over a company of 4500 with a global presence? Hmm… Why am I skeptical of this purchase? Oh, and take a look here for some facts on both companies.

Saab only sold 93,295 cars last year.  Ouch.

Two notable bankruptcies

To recreational (for lack of better words) companies filed bankruptcy in the last few days. Six Flags Theme Parks went belly up due to $2 Billion in debt. Also, the Extended Stay hotel chain fell to the crushing $7.6 Billion it had on the books.

Further signs the consumer is hurting

Credit Card default rates hit another record high.

Bank of America—the largest U.S. bank—said its default rate, those loans the company does not expect to be paid back, soared to 12.50 percent in May from 10.47 percent in April.

In addition, American Express, which accounts for nearly a quarter of credit and charge card sales volume in the United States, said its default rate rose to 10.4 percent from 9.90, according to a regulatory filing based on the performance of credit card loans that were securitized.

As unemployment continues to rise, so will the default rate.

We are back to 2006/7 gas prices and for what, exactly? It’s not demand. That has fallen by roughly 2 Million barrels a day. It’s not Geopolitical. While tension between Iran and Israel continues, what we are seeing is nothing new. We are now seeing two factors:

1) Oil producing countries need the money to fund government operations, therefore cut production to raise cost. (spoke about that here)

2) Now investors are looking at the economic conditions, see that inflation is coming and are turning to commodities as a way of protecting themselves, as well as hoping that the worst for the economy being over

Oil prices soared above $71 a barrel Wednesday to reach a 2009 high, as investors poured money into crude markets to protect themselves against the inflation risks posed by a weakening U.S. dollar.

Oil, which typically trades inversely to the dollar, has more than doubled in price in three months as traders also cheered news showing the worst of a severe U.S. recession is likely over. They brushed off data — such as a 9.4 percent U.S. unemployment rate in May — that suggest crude demand will remain weak. Even growing inventories have not checked crude’s stellar rise.

The bottom line here: this is Bull! If there was ever a time that the consumer should pay attention to the price of oil it would be now as our current situation shows how vulnerable we are to just about anything. There is no realistic reason oil should be this high. This is purely a profit drive by producers and investors.

Most people questioned the viability of the “Stress test” performed a few months ago. What was the standard used and how realistic was the Federal Reserve in the estimates used. Turns out a big factor in the test was unemployment, and thus far, the unemployment numbers are significantly worse than what was expected as a “worst case scenario”

Take a look at this graph Calculated Risk put together:

Now U.S. regulators are waking up to the fact that “woops, we messed up” and are suggesting yet another stress test.

In a report released Tuesday, the Congressional Oversight Panel for the government’s $700 billion financial rescue effort found that the Federal Reserve used a “conservative and reasonable” approach to assessing the health of the nation’s biggest banks.

But, the panel added, the Fed’s worst-case scenario does not go far enough. For example, the “stress tests” conducted by the Fed were based on the 2009 unemployment rate average of 8.9 percent. Unemployment in May climbed to 9.4 percent.

“While no one should gainsay the potentially positive results of the tests, it would be equally unwise to think that those results reflect a diagnosis of all of the potential weaknesses or create a necessarily sufficient buffer against future reverses for the banking system,” the panel wrote.

Now, here is my big question – if banks are all of a sudden able to pay back their TARP loans, and the financial sector is no longer in collapse (as the Fed would want us to believe), why is it the government is pushing for another stress test?

How about a poor earnings across the S & P and this is a proactive measure. Maybe. What about regulators simply doing their job. Possible. Could it be that the economic situation is much more dire than anyone is willing to admit? Likely.

On Monday Supreme Court Justice Ruth Bader Ginsburg put the future of the Fiat/Chrysler purchase in doubt by issuing a stay on the sale. Three Indiana pension funds are suing, claiming the bankruptcy is unfair to lenders such as themselves, while favoring other lenders who took less risk. Unfortunately for Chrysler, they had until June 15^th to complete the sale or Fiat could walk away.

Today, however, Fiat is sticking to their guns.

Italian automaker Fiat said Tuesday it will not turn its back on a deal to acquire a controlling stake in Chrysler despite a U.S. Supreme Court stay on the sale.

Under terms of the agreement, Fiat has the option to abandon the deal if it is not completed by June 15.

“Fiat won’t walk away from Chrysler,” Fiat spokesman Gualberto Ranieri said.

If Fiat does walk away, then Chrysler will have basically no choice to liquidate. While Fiat seems committed to the purchase, at this point, anything is possible.

UPDATE: Supreme Court will not block the sale.

The actual title of the article I just read was “US loses just 345,000 in May, raises hopes”

JUST 345,000?

Employers throttled back on layoffs in May and cut the fewest jobs in any month since the financial crisis erupted last fall — raising the brightest hope yet that an economic recovery will take hold later this year.

But with companies still reluctant to hire, the nation’s jobless rate rose to a quarter-century high of 9.4 percent, and it likely will keep rising into 2010, possibly within striking distance of its post-World War II peak of 10.8 percent.

“Less bad, yes,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, said, summarizing the economy. “Good, no.”

The press is still in the “Less bad” mood, but this is still significant as the nation is now at 9.4% (reported).  More over, people are starting to revise their end estimates.  Previously economists were saying this wouldn’t go beyond 10%, now it is expected that unemployment may hit almost 11%.

Two large issues are on the horizon - taxes and energy cost.

1) The massive amounts of money spent for a stimulus that hasn’t worked will be coming back to haunt us soon.  As a result, the government will need to find a way to raise money in order to continue paying benefits.  There is only one way this will happen: raise taxes.  If they raise business taxes, that will impact earnings.  In turn, companies will look for cost savings in order to boost their profits.  Where do you think that will start?

Employees.

As such, more layoffs would come back into play.  While, possible, not as bad as 600K per month layoffs none the less.

2) Energy.

Oil/Energy is once again getting out of control for reasons NOT based on demand.  If energy continues to move toward $90, earnings will once again be impacted.  Again, here we go.  Companies will slow spending, construction will diminish, the consumer will cut back which means retail will hurt…  and there we go, layoffs will start once again as companies attempt to rightsize for the market conditions.

This is a bad cycle we are in and, I fear, it is going to be a prolonged cycle.

So many things out there today, let’s take a look.

It looks like the former Countrywide (who’s on your side!) CEO is being charged with insider trading.

The SEC has charged Angelo Mozilo, the former chairman and CEO of Countrywide Financial, with insider trading.

The SEC also charged the company’s former chief operating officer, David Sambol, and former financial chief, Eric Sieracki, with securities fraud for failing to disclose the firm’s relaxed lending standards in its 2006 annual report.

I’d love to see this man pay for running Countrywide into the ground, all the while walking off with a fortune.  Based on all the documentation publicly available I have a feeling this is more of a show trial than a serious attempt to convict him.

California’s unemployment fund short by billions

California is in financial ruin.  Much like GM, the problem existed for years – the economic downturn only made the situation worse. Now it seems the state unemployment fund is underfunded.

California is paying out so much for jobless benefits and collecting so little in payroll taxes that its unemployment insurance fund could be $17.8 billion in debt by the end of 2010, according to a new report from the state Employment Development Department.

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To rebalance the system and pay back the federal loan, lawmakers must raise payroll taxes on employers, reduce benefits for recipients, or both.

The condition California is in will be the template for what the nation will soon be facing.  No one wants to admit it, but it’s coming.  Taxes going up, benefits going down and more people hurting.

Delphi Salaried Retirees to Lose Pension Benefits

Delphi, the largest auto parts maker who also is in bankruptcy, has some very bad news for retirees -  Your pension, much like your career, is history.

For these salaried retirees, and thousands more like them, the latest news from Delphi only adds more insult to injury.  The bankrupt parts-maker now wants to get rid of its under-funded pension plan for former white-collar workers, meaning the Federal Pension Benefit Guarantee Corporation will take it over.

This comes after the retirees had already lost their company health care and life insurance, benefits they were now having to pay for using those soon-to-be-shrinking pensions.  But what has them even more upset, the notion tax dollars are bailing out GM and its workers and retirees, as well as helping the automaker take over some of Delphi’s assets.  Retiree Charles Cunningham of Howland claims collusion is taking place, telling us, “It’s because of the UAW relationship with the current Administration in Washington.”

This is a poor position to be in, no doubt, but the PBGC will be taking over the fund.  This means the retirees will still get – some – money, even if it is just a fraction.  Something is better than nothing, even if it’s just beer money…right?

Another side the consumer is holding back - US retailers report May sales declines

This is no surprise.

According a Goldman Sachs/ICSC tally, overall same-store sales fell 4.6 percent, worse than the 3 percent drop predicted.

The lower-than-expected results did not include Wal-Mart stores, which in recent months has boosted total results but has stopped reporting monthly figures.

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Results are a “clear indication that the consumer is not stampeding back to the stores, they’re still being very careful,” said BMO Capital Markets analyst John Morris. “I think the initial panic is over, but now the tough work begins. We’re entering a slow summer period when there’s not a lot to attract consumers into the stores.”

I’m still waiting for the retail bankruptcies to kick in.

You knew it, I knew it… my hairless cat new it.   China was going to make major headway into the automotive industry by picking through the bones of Chrysler and GM.  The 1st bit to go is the Hummer line.

General Motors Corp. has struck a deal to sell its Hummer truck unit to a Chinese industrial business, the two companies confirmed Tuesday.

Privately owned Sichuan Tengzhong Heavy Industrial Machinery Company Ltd., based in China, will acquire the truck brand, which has been part of GM since 1999. Tengzhong said it plans to keep Hummer’s management team.

“We plan to … allow Humer to innovate and grow in exciting new ways under the leadership and continuity of its current management team,” said Yang Yi, chief executive of Tengzhong.

Yang said the deal “will allow Hummer to better meet demand for new products such as more fuel-efficient vehicles in the U.S.”

The companies said the deal would likely close by the end of September.

This leaves other brands like – Pontiac, Saturn and Saab to be sold off or left to die.  One could easily see how a Eurpoean company could pick up Saab, but what values does Pontiac and Saturn hold for potential buyers?  Saturn has never turned a profit and Pontiac as a razor thing margin… The value – specifically for Saturn – is the dealer network.

If a Chinese company wanted to have a pre-establish dealer network this is the chance – buy Saturn and exploit the dealer network. As I believe Chinese manufactures have the ultimate aim to tap the U.S. market, such a development wouldn’t be a surprise to me.

As pointed out yesterday, the Presidential BS train for General Motors is on a roll. Let’s break it down:

WASHINGTON -(Dow Jones)- President Barack Obama said Monday that General Motors Corp.’s (GM) restructuring plan provides it an opportunity to emerge quickly from bankruptcy as a stronger company, but warned that fixing the troubled auto maker will take a “painful toll” on many Americans.

Me: What about the idea of capitalism? Why should the company even survive?

“Working with my auto task force, GM and its stakeholders have produced a viable, achievable plan that will give this iconic American company a chance to rise again,” Obama said in remarks at the White House.

Me: But what about the fact that this is due to years of mismanagement? How is screwing the debt holders, the investors, going to do anything to help? What about the fact that GM makes products that no one wants?

“I will not pretend the hard times are over,” he added. “Difficult days lie ahead. More jobs will be lost. More plants will close. More dealerships will shut their doors, and so will many parts suppliers.“

Me: Hey, suppliers - get ready for bankruptcy and liquidation as you are not getting a bailout.

The government will inject another $30 billion into GM to help it get through the bankruptcy process, an investment that will pump the government’s ownership position in the company to 60%. Obama repeated that the government is a ” reluctant shareholder” with no interest in running the company’s day-to-day operations.

Me: So the public will have pumped 50 billion into the company for what? If they have no interest in running the day to day why are the dictating what dealerships stay open, what models should survive and talking about price caps?

Obama defended government loans to GM and Chrysler as necessary to stave off a collapse that would have been “devastating” for the U.S. economy.

Me: Bull! The stock market knew GM was bankrupt months ago and reacted in kind. The economy seems to have already factored in the collapse (cause that is what this is). The suppliers are going to get screwed and the initial impact has already been felt.

“Understand we’re making these investments not because I want to spend the American people’s tax dollars, but because I want to protect them,” Obama said.

Me: Protect the tax dollar by not SPENDING the tax dollar, let business sort the problems out on its own.

U.S. Chamber of Commerce President Thomas Donohue said his group is concerned that GM’s new owners in Washington could put politics ahead of sound business decisions.

Me: This is about Union votes, plain and simple.

In addition to the U.S. government’s 60% stake, Canada and Ontario will own a 12% position in GM. The remaining shares will go to the United Auto Workers and bondholders.

Me: And current debt holders get nothing except about 1/10 of what they should be getting (with the option to BUY more of the new company) If the U.S. owns 60%, when will I be getting my dividend check? Where do I sign up to attend the shareholder meetings?

Obama said none of GM’s stakeholders are receiving special treatment, saying that the United Auto Workers is making “painful sacrifices, on top of all that they’ve already done.”

Me: You are joking, right?

He said unsecured bondholders, who agreed to swap $27 billion in debt for up to 25% of GM’s equity, will recover “substantially more” than they would have without government help or if the company had been liquidated.

Me: Pure speculation with no evidence to support said claim.

“I instructed my auto task force to treat all of GM’s stakeholders fairly and to ensure that this restructuring was carried out in a way that was consistent with past precedent. And it was,” Obama said.

If he means “creating a liability for tax payers” then “carried out in a way that was consistent with past precedent” is correct. Oh, and what is that “Viable” plan for GM’s success?  Is it to give every taxpayer 40K to run out and buy a GM car?  You cannot force people to buy something they don’t want.

Seriously - the government should have no role in this.