So Why Is Ford Smiling?

Source: Marijan Murat/European Pressphoto Association

For the past few months, I’ve been getting e-mail messages from Ford public relations, alerting me to the new Fusion Hybrid’s excellent fuel mileage and its Facebook campaign for the upcoming Fiesta. Ford is pushing both cars hard, especially the Fiesta, which won’t arrive in America until next year. But it’s tough getting good news out when there’s so much desperate news out there. So it doesn’t surprise me that Alan Mulally, Ford’s chief executive, and Bill Ford, the company’s executive chairman, wanted to get their word out on the same day that President Obama issued an ultimatum to G.M. and Chrysler.

Read more here.

rp

Challenger Weighs In On Job Cuts

This past Wednesday, Challenger, Gray & Christmas released their much anticipated job cut data. The results were not too pleasing with terrifically awful trends.

Reaching levels not seen in nearly five years, 112,884 jobs were taken off the table in October. Leading the pack for the month of October were the following industries: financial, automotive, pharmaceutical, industrial goods, computer, and consumer products with each cutting 17,949; 15,692; 8,956; 8,252; 7,548; and 6,946 jobs, respectively.

Data: Challenger, Gray & Christmas
Charting: rp

October’s total is nearly 20 percent higher than September’s job cuts – that is huge! One question I am wondering is, how much worse will it become before it gets better?

After bouncing up and down this summer, it appears as though job cuts are trending upwards since August. This is tremendously disturbing, especially when year-over-year we see that cuts decreased steadily from August to December. With the economic contraction in full swing, it is likely cuts for November will remain above 95,000 for the month.

Data: Challenger, Gray & Christmas
Charting: rp

Looking at this year’s leaders, we see that finance holds the crown, automotive is trailing and picking up steam, while government/non-profit jobs remain at an arm’s length in a distant third.

Cuts in the finance sector, which have slowed down, will most likely continue on their deceleration while I expect the automotive sectors cuts to pick up tremendous steam.

Today, General Motors reported their quarter with an astounding net loss of $2.5 billion. What struck me was the $1.7 billion non-cash charge for the settlement concerning the elimination of post-65 salaried retiree healthcare coverage – ouch. You better believe there are more cuts coming down the line.

Ford, on the other hand, reported a mind-numbing $7.7 billion cash burn for the quarter. This is the kind of thing that makes you slam your head against a desk, full speed. Problem: efforts to counter this mounting burn is being offset by reduced sales. More cuts, more cuts and more cuts are in store for the near-term.

According to Federal Reserve policy-maker Dennis Lockhart, "The U.S. economy in September and October appeared to weaken dramatically ... Problems are now broad-based."

With this knowledge we can only expect auto sales to weaken further, continuing the downward trend and increasingly sputtering GM and F into further trouble. More on this later…

Data: Challenger, Gray & Christmas
Charting: rp

**2008 data is a prediction based upon the author's calculations

Now, assuming that all of that news was absorbed into your skull, let us move onto something which may be considered good news.

Considering the scale of the current economic retrenchment, we see that 2008 will likely not yield over 1.2 million job cuts. According to my calculations we will hover somewhere between 1.04 and 1.1 million cuts for the year. Essentially, we are living 2005 all over again.

The spin on this is it could be much worse, for instance, 2001 which had over 1.9 million job cuts. Only time will tell as November and December send 2008 on its merry way and into the history books.

rp

Automakers Face Catastrophic Week

It is the first week of the month and you know what that means.

New data.

Unfortunately, November's data has shed light into some of the worst numbers in years. That's right; the automakers have officially fallen off a cliff. Believe it.

The US SAAR Total Sales came back atrocious. The Challenger jobs data is disappointing, albeit, it was not expected to be an uplifting report.

Although many were hoping that Obama's victory would spur the markets, it appears after today's close that may not be the result. Granted, it is one day into Obama's victory -- do not jump to conclusions.

GM and F report Friday. I would not be surprised if one of the firms file for Chapter 11 and restructure themselves accordingly. The choice to be made is wait and prolong the pain or make this short and sweet. Kind of like taking off a band-aid.

More detail and predictions to follow.

rp

What Happened to Free Markets?

Another bailout? Again? Could it be possible?

Yes. Unfortunate but true, it is becoming more common talk that we could see another bailout with the automakers stepping into the batter’s box.

As my prior write-up noted, sales remain to struggle even taking into account August’s seasonality. Not very positive looking charts, down below. Year-over-year the “Big three,” have taken on serious debts and have managed to align themselves in an unfavorable position regarding their model offerings.

Now, the United States government has aided in two bailouts - namely Bear Stearns and the Fannie/Freddie debacle – and this has the auto industry feeling as though they deserve their fair share. Thus, this has raised the chatter on a possible automotive industry bailout due to the sizeable losses which have been reported from the domestic builders.

This is a tough situation.

On one hand, the government has to look to protect the workers of the automotive industry and guard the US economy. Remarkably, the US economy has managed to prevail relative to the damage already done. It is a wonder if this could be the final straw.

The other hand paints a different picture, depicting the government star-gazing as the manufacturers fail or consolidate to stay afloat.

American auto manufacturers got away with producing over-sized vehicles for far too long and the industry is paying the piper. To analogize, the American OEMs faltered precisely where the big banks ran astray - they got greedy. General Motors, Ford and Chrysler all had high margin truck portfolios which yielded big rewards; unfortunately, risk reared its ugly head.

The past year has provided some stellar collapses. Real estate, mortgage-backs and now sport utility vehicles. Unfortunately, there are going to be repercussions for these firm’s actions. The only way I can see the playing out is through mergers or consolidations.

Welcome to the SUV bubble.

rp

August SAAR data: A Fluke.

Although we are currently in one of the greatest eras for automobile development and innovation, sales are still tanking.

August’s US SAAR total sales have painted a reasonably grim picture. You may ask, “how?” or “why?” The approximate 1.2 million vehicle sales increase can be seen as artificial due to the incentives that you can find on 2008 models and gas guzzling sport utility vehicles.

Data: Bloomberg

A CNN report implied that due to oil’s recent pull back, currently near $106 per barrel, consumers are starting to get back into sport utility vehicles. Check the 8th and 9th paragraph of that story. I am not sure if I believe that as I do not see gas prices below $3.50 in my region; what would motivate someone to run out and buy a SUV?

Are the incentives that good? What does it matter if you pay your savings back in gas bills during the vested life of the vehicle?

Back to the SAAR data. Another crucial point which must be taken into consideration is that during this time of year, auto dealers are attempting to push out as many of the prior year’s cars out of their inventory before the new models are introduced. There is a seasonal re occurrence and you can see it on the Domestic Sales and Japanese Sales charts.

Data: Bloomberg

Last August, Domestics and Japanese autos saw a nice up-tick in their respective sales. This year, it appears that General Motors is seeing a similar trajectory while Ford and Chrysler are struggling. The Japanese are fairing well with similar trends in respect to last year.

Data: Bloomberg

Essentially, after taking into consideration the seasonality of August’s numbers, as well as the significant increase in incentives I can not foresee this year’s car sales to remain on this upward trend. I am calling August a fluke. It is extremely negative to see that Ford and Chrysler are struggling with sales this past month when there should have been an improvement in sales given the current incentive programs and 2008 model year liquidations.

Out of curiosity I inserted trend lines into these charts and it appears the only company which is doing well sales-wise is Honda. The company, known for its gas-sipping cars, recently surpassed the Ford F-150 as the most sold model in a given month - Three cheers for the Honda Civic. Pretty earth-shattering news for the car world.

If you want to see how bad things have gotten, look at the year-over-year numbers. They will turn anyone who is not squeamish a nice shade of green. US SAAR has declined nearly 16% while the big three, General Motors, Ford and Chrysler lost 20%, 25%, and 34%, respectively. The Japanese are doing much better albeit not well by any means; Toyota’s sales lost 9% YOY while Honda dropped 7% in sales.

The Domestics will have to keep their chin up during this time of distress and pray their new models and changes reverse their losses. Good luck, boys.

Watch for next month's SAAR data to downtrend, I can not see it rising or going flat.

rp

Good Times Are Here Again.

Perhaps it is a bad time for the automotive industry. Oh, wait! It is an awful time for the auto manufacturers. At least that is what the majority of the media is reporting. Taking a step back and observing, it seems as though the industry has been turned upside down, essentially.

The Germans are infatuated with flashy, swoopy, awkward designs (with the exception of Audi AG). The Japanese are creating fast, interesting vehicles. The American manufacturers are building decent looking, well-received cars. And, the Italians are trying to make a comeback stateside.

Last time I checked, it should appear more like this:

The Germans are infatuated with subtle, timeless designs. The Japanese are creating emotionless, boring vehicles. The American manufacturers are building unreliable garbage. And, the Italians are too busy in the mirror; they do not make it to the factory to build more than 500 units per year.

Oh-kay, oh-kay. You have got me. Oil prices are taking away sales, big time. Last month’s seasonally adjusted annual selling rate (SAAR) data showed total new car sales at 12.55 million units sold while we are use to seeing approximately 15-17 million units sold. SAAR gives a glimpse into what the year’s total production will be if demand remains constant into the year’s end. Clearly, July’s number reveals a poor year for sales.

Although many Wall Street research analysts have changed their views of American auto builders going bankrupt, due to oil’s “back down” from $147 a barrel, they remain to see a significant cash burn. It is essential these firms inject fresh capital into their respective balance sheets in order to make it past next year. Years of reliance on pig-like, high margin sport utility vehicles, which had automakers absolutely delusional (Porsche produced an SUV, is it any more clear than that?!), have harmed manufacturers due to the recent spike in energy costs affecting demand. Inventories are building up alongside the layoffs which keep rising, just take a look into the Challenger report.

Source: WTRG Economics

Did Ford whole-heartedly believe that consumers would want Expeditions with $3.50 gas? Did General Motors expect buyers to rush out to their nearest dealers to pick up the latest and greatest Yukons and Escalades when inflation came home to roost? Now, the manufacturers who were way off the curve have to retool their respective factories and rework their game plans. Rightfully so, this may paint a dull image into the future of the automotive industry as well as the American economy, but I beg to differ.

If you ask me, this must be the best period the auto industry has ever found itself in. Out are the old, gluttonous vehicles many have come to know and unfortunately love. In are sleeker, smaller and more practical cars. Miles-per-gallon numbers are on the rise! The shock from crude oil’s jump has lit a fire under the American’s and has motivated them to compete; this is good.

Look at the new Dodge Challenger and the upcoming Chevrolet Camaro. Although retro-inspired rehashes, these cars are exciting and I predict they will both sell very well. Note: the Camaro’s interior is one of the best American interiors I have seen in eons. It appears that Chevrolet will not drop the ball like Ford did with the Mustang concept, i.e. cost cutting.

Source: PimpMyChevy

With all of the incentives and deals on cars, especially with 2008 inventories dwindling due to 2009’s making their annual September/October debut, I would not be surprised to see August’s SAAR number see a rise. Could I be wrong? Absolutely. But, I am going to put more weight into the fact that with crude’s back track to teens we will see a small “snapback,” and some more volume pushed out dealer’s showroom floors.

It is good to see that the American’s have been pushed to act. This will fuel other foreign manufacturers to continue raising the bar and resist complacency. So, do you understand where I am coming from now?

rp