The new year gives rise to reflection over the last months of 2008, and a look forward in 2009. We live in historic times and sail unknown waters. The following is a look at where we are and where we might go.
At the end of summer 2008 the car company was already in trouble with high fuel destroy volume, product mix and resale values. Overnight, consumers and their banks found themselves thousands of dollars upside down, or they were leasing or long-term financing contracts. Lenders, already running scared because of increasing delinquencies and defaults, experienced terrible losses in their remaining lease-off portfolios. GAP insurance was nervous.
Furthermore, the housing and mortgage core melting, which began in 2007, the building steam. Few knew that the breadth and depth of the mortgage securitization exposure and the potential impact on the financial sector. Who knew that speculation, especially in the 4 countries of CA, AZ, NV, FL, and fundamental deficiencies in Fannie and Freddie's risk management can wreak such havoc? In my view, the core melting due to the perverse alignments of conservatives called for the legislation and the Liberals wish for everyone to own a home. On September 7 it was announced that Fannie Mae and Freddie Mac were placed in the government conservator ship. They have to be juiced with billions of federal dollars and a new mandate. Detailed notes of the hearings in Congress regarding Fannie and Freddie may be an e-mail received by the author on ruggles@msn.com Use subject "Request Notes"
For a detailed overview of how risk mathematical modeling led to the core financial system melting Google "a mountain, forgotten, How Risk Models Failed Wall St. and Washington, by James G. Rickard
On September 15 Lehman Brothers declared Chapter 11 bankruptcy, the largest in American history. Surprisingly enough, the government does not bail them out. The markets asked: "If Lehman can go, who's next?" The government announced a bailout of AIG, the biggest bailout in history. Panic was setting in. September 2008 will go down as one of the darkest months in our economic history and not much better there. In October we had a short suspension of the presidential campaign so that Congress could focus on an economic bailout plan called Tarp for Troubled Asset Relief Program. The author, Hank Paulson, began with some credibility. By the time Congress has finished with the bill we had more reason to revile our elected officials if they added billions to their particular interests. Later, Paulsen and his people lost all credibility when it was revealed that the money was not used for the purpose stated when we were all sold the program. Then we learned about AIG executives going off on an expensive retreat from what was seen as taxpayer money and the banks could not or would not answer questions about what they had done their share of the Tarp money. We learned new terms like "credit default swaps", "risk modeling" and "installment". Google "The Perfect Machine" will allow you to the rather long story of AIG as published in the Washington Post. It is a great read and very informative!
In July, Wall Street pressure Chrysler Credit lease, as part of a refinancing deal. This was not known at the moment. Once this was announced as independent banks thought Chrysler would not support their own vehicles, why should we? What do they know that we do not? The banking environment was uncertain enough. Lenders bailed out a lease after the other. Prediction residuals showed an incorrect most if science can not predict fuel prices. Lessors have large baths on luxury models and HEAVIES. Some OEM prisoners remained in leasing, but they were of German or Japanese brands. The German luxury brands in particular rely on leasing for a large part of their volume. Unfortunately, there are rumors of a large number of lease vehicles stored in marshalling yards in the country. Ford remained in leasing a very limited basis.
U.S. Bank stands alone as the only bank with national scope that has remained in the new car leasing. They also leave pre-owned leasing, which only the programs of some OEM's for those who want to lease pre-owned vehicles. A number of regional banks and credit unions have stayed in even a back-off of their residuals. Yet everyone agrees that after a period of low SAAR (Seasonally adjusted annual rate), we will experience an extreme shortage used car at a certain point on the road.
We saw the CEO's of the "Big 3, to Washington on private jets with their hands just spanked, lectured and told to come back in two weeks with another means of transport and with a plan. I stubbornly insist on a reference them as the Big 3 even though they do not anymore. Maybe I should call them the Detroit 3. The hearings played on television. The country was familiar with both old and new players such as Bob Nardelli of Chrysler, Barney Frank, D-MA and Bob Corker R-TN. After much theatrics Congress failed to act, usually divided among party lines UAW labor issues. The Bush administration stepped in last minute to ensure that GM and Chrysler go bankrupt with a cash infusion from funds Tarp . In the meantime, had finally Tarp not be used for its intended purpose. Since the first Tarp funds were not used to buy mortgage securities, no one seemed to know what the mortgage securities were worth. Fear of the known and the unknown cause of the credit markets to seize up. In the car industry, consumers with credit scores above 700 or below 580 can probably get credit, although the low credit scores were almost exclusively BHPH (Buy Here, Pay Here) transactions. They were between largely on luck, unless they are a credit union or a particular circumstance they could rely on. negative equity? forget they funded!
Ford's CEO Alan Mullaly came to Washington with his two competitors, but Detroit declared his company's situation was not so necessary as an immediate "bailout". Ford had raised a lot of cash early for the credit market dry. She asked to receive a credit if the economy remained in recession longer than their cash cushion could take. It makes one wonder if someone in the Ford family could have seen the potential for a situation whereby the company would have to go to the government for help. One wonders what could happen to the Ford family of the special class of voting shares in the case of the taxpayer money injected into the company. Ford hopes to benefit from positive PR as the only OEM not need American taxpayer money. They are also banking on to bring small cars to the U.S. from Europe as required. In addition, some new technology they are almost ready for release allowing them to increase engine displacement of small engines with direct injection and twin turbochargers. They stand to benefit from the concessions that the UAW negotiates with their competitors.
Despite all this, the American buying public has short memories. With the price of fuel is about $ 1.60, and small hybrid vehicle sales decreased remarkably. Toyota recently announced a 45% drop in Prius hybrid sales. This shows residual prognosticators more heartburn. Let's face it, as gasoline remains cheap Americans do not pay extra for advanced fuel efficiency. It has been proven time and time again. Bob Lutz, GM has weighed on the subject. Accessing the link will refer his remarks to Ward's Auto World. Keep in mind that Lee Iacocca pitched a 25-cent gasoline tax in the early eighties. To say that industry leaders are mixed on this subject would be an understatement. Energy policy is an issue that goes beyond the auto industry as it is really a matter of national security. Also at issue is the value of the dollar and our country's balance of payments based on the extreme outflow of dollars to pay for foreign oil. Google "Bob Lutz in Wards Auto World" for this very important article.
Detroit was accused by some Washington lawmakers and the media Pundits, building cars nobody wanted to buy. However, the decline in sales hit South Detroit and imports alike. Even Lexus was more than 40% and inventory stacked in the port. Toyota Tundra idled its plant in San Antonio for 3 months and plans for a new hybrid plant in Mississippi. They ran the first quarter of red ink in history.
Despite the fact that the Detroit 3's market share steadily erode them a lot of work on vehicles and a lot of people. Zij zijn ook verantwoordelijk voor de betaling van een stuk van de belastingen als hun dealers in hun respectieve markten. Zuid-Detroit hebben hun "bailouts" up front in de vorm van fiscale prikkels en subsidies uit de zuidelijke staten, waar ze zich in de eerste plaats. Dit is niet te verdedigen voor de domme beweegt door de besluitvormers op de Detroit 3, maar de meeste van deze beslissingen zijn het onderwerp voor een volgend verslag. Naar mijn mening heeft de regering enige verantwoordelijkheid voor wat er is gebeurd. Het is niet de Big 3's schuld dat we geen alomvattend energiebeleid in dit land net als andere ontwikkelde naties. Ook is het niet hun fout dat de rol van de overheid op de woningmarkt en de hypothecaire markt door de debacles bij Fannie en Freddie veroorzaakt de financiële markten te grijpen en belet de Big 3 uit te kunnen gaan financiering via de normale kanalen naar "brug" zelf.
Door dit alles de economie verloren miljoenen banen. De beurs heeft haar dia uit eerder in het jaar. De achtbaan de natuur tijdens de donkere dagen van september en oktober verlaten velen van ons met een gevoel van misselijkheid. De auto-industrie SAAR vertraagd tot een lager dan 11 miljoen. Veel auto-dealers werden achtergelaten door de weg, met meer mislukken in de komende maanden. De T.A.R.P. vondsten die zijn uitgebracht bij de grote banken konden zij verzwelgen kleine banken die in de problemen en zou waarschijnlijk failliet zijn gegaan. Hoewel dit niet doen om onderneming de waarde van het zogenaamde "toxische activa" zij dienen de functie van het voeren van de kleine banken sluiten zonder de FBI te micromanage elke situatie. Er werd gedacht dat zelfs kleine bank storingen kunnen veroorzaken een run op een groot aantal banken. Maar de belastingmoraal publiek voelde verraden. Eind november CitiBank ontvangen een 300 miljard euro, vermeerderd met inzet van de FBI dat was boven de Tarp In the middle of all this, we elected a new President largely based on hope for the future.
So where are we now? The Detroit 3 have been "bridged" with the prospect of additional financing looking good under the incoming administration. GMAC/Cerberus has received a change in banking status to qualify for government funds. This is a MAJOR deal as they desperately need cheap money to lend to support their dealer's sales efforts.
Mortgage applications are up 82% in Las Vegas, due mostly to low interest rate refinancing. But it's a start. The "bottom feeders" are starting to pick up distressed properties. We still have the cloud of unknown value mortgage securities hanging over the head of the economy, but the first step is getting a handle on home values. Here in Las Vegas it has been hard to know what a house is worth. But as transactions occur, values for other properties can be ascertained. If a mortgage security includes mortgages from states where values just aren't known, how can Fitch or anyone else rate or value that security? How can a bank value these assets on their balance sheet, let alone turn them into cash? Getting a handle on the value of these securities will be a major task of the new administration, as well as coming up with a major stimulus and jobs package. I expect them to hit the ground running.
So what else has to happen for the economy to recover? Americans have to start buying more stuff. As usual I expect the auto industry to be the "leading indicator." Maybe we should dig up Joe Garagiola who with Chrysler almost single handedly yanked us out of the recession of the mid seventies with "Buy a car, Get a check!" But rebates won't work this time. Buyers are so accustomed to them they don't represent anything "special". An auto buyer's tax holiday might get some attention. This has been effective in some foreign countries where the consumption tax is federal, not state by state. Repealing the federal excise tax on vehicles worked in the early seventies to yank us out of the economic downturn of 1970. How I date myself, as I was actively in the auto business as a new car sales person when these events took place. But we will first have to work through tremendous unsold inventories of both new AND pre-owned. There are other issues as itemized by Brian Wesbury, Chief Economist from First Trust. Google "We Are the Catalyst," by Brian Wesbury of First Trust for his forward thinking commentary.
So what's the outlook for the long term of the auto industry? The Detroit 3 have been touting their quality and J. D. Power statistics have supported their claims to some degree. But in my opinion a huge problem the Detroit 3 has in competing in the marketplace is in resale value. Years of desperation "push marketing" brought on by short sightedness and over production have undermined the value of most Detroit 3 vehicles. Many sophisticated consumers purchase a Toyota or Honda because they know that a Honda or Toyota at MSRP is a relatively better long term value than most Big 3 products are at invoice or under. This is not to say that everyone buys a particular product for the same reason, but it doesn't take a genius to figure out that a big rebate or discount upfront doesn't mean much if it gets eaten up in depreciation in the first year of ownership. Low resale value tarnishes an OEM's image. It betrays their owner body. It makes it more difficult for a borrower to achieve anything close to equity which makes it more difficult for them to trade in their encumbered vehicle on a new one. In other words, it costs sales. It reduces owner loyalty. It also means that leasing strategies to make monthly payments more achievable on new vehicles are more costly and/or not as competitive. All OEMs know these things. But when trying desperately to survive they resist allocating resources to bolster their resale values, especially if it involves using their captive finance arm to aggressively finance or lease their late model pre-owned vehicles. CPO (Certified Pre-Owned) is a great strategy but without strong finance and lease support it will never realize its potential. For the sake of the Detroit 3 and their dealers let's hope they survive and take a long term view of their business that includes taking necessary measures to maintain a high resale value. A great way to move the over flow of pre-owned late model vehicles currently in the pipeline would be through pre-owned leasing. With the current low SAAR and the projected pre-owned vehicle shortage down the road, pre-owned leasing would be a really safe bet!
0 comments:
Post a Comment