Fortune is reporting GM plunges 31% as outlook dims

Investors cast a shocking vote of no confidence in the future of U.S. automakers Thursday.

After dropping sharply early in the day, GM (GM, Fortune 500) shares hit their lowest point since 1950, closing down 31% to $4.76 a share. Ford (F, Fortune 500) fell nearly 22% to $2.08.

GM said in a statement Friday that bankruptcy protection was “not an option.”

But the stock plunge effectively puts both companies on death watch, and it’s easy to see why. The ratings warnings followed a new report by Global Insight that shows U.S. auto sales hitting recession levels this year – and then sinking lower in 2009.

“We won’t get back to where we were in 2006 until 2013,” said George Magliano, director of forecasting for North America for Global Insight. The economic forecasting and consulting firm based outside Boston is forecasting sales of 13.8 million units this year and only 13.4 million in 2009, compared with 16.1 million last year.

It turns out that auto finance companies were as guilty as mortgage lenders in providing loans to subprime borrowers – and their generosity is coming back to haunt them. Lenders dramatically cut standards for credit worthiness at the beginning of 2008 and now delinquency rates have been shooting up to levels not seen in 30 years.

“Some 18% of sales volume came from people with bad credit scores,” said Magliano. “Now the subprime buyer has been squeezed out.”

There is little relief overseas. According to Global Insight, at least half a dozen countries in Western Europe experienced greater house-price appreciation over the last 10 years than did the United States. Ireland led the way with a nearly 250% rise and the United Kingdom was not far behind. With that kind of wealth accumulation unlikely to be repeated, sales experienced a “total collapse” in July and have gone into a “violent downshift.”

World’s largest Chevrolet dealer files Bankruptcy

Last week Bill Heard Chevy chain filed chapter 11.

Bill Heard Enterprises has filed for Chapter 11 bankruptcy protection, a casualty of an easy-credit economy that relied on a shaky consumer base to keep sales churning.

Bill Heard, which had four dealerships in metro Atlanta and one in Columbus and operated in seven states, grew into the world’s largest Chevrolet dealer with more than $2 billion in sales a year. Much of its recent growth was based on aggressively marketing autos to those with blemished credit.

The company said in a statement last week that the combination of rising fuel prices, a slowdown in car sales and problems in the banking sector piled up to “create a business environment in which the company simply did not have the resources needed to continue to operate.”

Though it blamed the current economic turmoil, the company’s financial and legal problems have been mounting for several years.

The most recent example was GMAC Financial Services’ decision last month to discontinue credit for new inventory for some of Bill Heard’s dealerships. It cited concerns about financial losses at the company.

Capital One Ends Financing of Car Dealers

Car dealers have enough trouble already but the woes continue to pile up. On Friday Capital One Halted Financing of N.Y., N.J. Car Dealers.

Capital One Financial Corp., the lender that added $200 million in September to cover future losses, said it will end financing of auto dealers’ inventories in New Jersey and New York later this month.

Capital One will keep financing dealers in Louisiana and Texas, where it also has banking offices, spokesman Steven Thorpe said today in an interview. The decision affects about 20 dealers and a small part of the company’s total loans, he said, declining to provide more details.

The move will put pressure on new-car dealerships, which according to the National Automobile Dealers Association already face a rise in closures of as much as 40 percent this year. Retailers are paying higher interest rates to get cars on their lots, shrinking profit margins, said Sheldon Sandler, chief executive officer of consulting firm Bel Air Partners.

“It’s a defining moment when Capital One gives up the ghost,” said Sandler. His firm in Skillman, New Jersey, advises auto retailers. “Banks are seeing the bottom fall out of the dealership business and they don’t want to be caught sitting there owning a bunch of Chevys, instead of getting cash.”

As many as 600 new-vehicle retailers in the U.S. may shut down or consolidate with other dealers this year, equal to about 3 percent of the total, said Paul Taylor, an economist at NADA. That compares with 430 a year earlier.

Without access to floorplan financing, most dealerships would be forced out of business, said John Casesa, partner in Casesa Shapiro Group in New York.

Casesa said another sign of the struggle is that so-called captive finance companies are less willing to make floorplan loans to dealerships of different brands. Credit availability for consumers wishing to buy cars already has been cut. Many lending companies have stopped offering leasing, and yesterday Regions Financial Corp., Alabama’s largest bank, told about 2,600 auto dealers that it will stop issuing loans through their businesses after Jan. 1.

Credit Default Swaps at Lehman, GM

Contributing to the meltdown this week was the Settlement of Credit Default Swaps on Lehman.

Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.

More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly who has what at stake because there’s no central exchange or system for reporting trades.

For comparison purposes, the payout on those swaps was $270 billion. There is over $1 trillion bet on GM credit default swaps.

G.M. and Chrysler Explore Merger

The New York Times is reporting G.M. and Chrysler Explore Merger.

General Motors is in preliminary talks about a possible merger with Chrysler, a deal that could drastically remake the landscape of the auto industry by reducing the Big Three of Detroit automakers to the Big Two.

The talks between G.M. and Cerberus Capital Management, the private equity firm that owns Chrysler, began more than a month ago, and the negotiations are not certain to produce a deal. Two people close to the process said the chances of a merger were “50-50” as of Friday and would most likely still take weeks to work out.

Given that both G.M. and Chrysler are struggling, the two sides may determine a merger may not be in their best interests.

The exploratory talks have included debates over various calculations of the savings that would result from a merger, these people said, but neither side has yet to dig into each others’ private financial books and records.

The ramifications of the merger would be enormous in the global auto industry. G.M. and Chrysler together would control more than 35 percent of the United States vehicle market, and be by far the dominant producer of pickup trucks, sport utility vehicles and minivans.

It would also marry such iconic American brands as G.M.’s Chevrolet and Cadillac with Chrysler’s Jeep and Dodge divisions.

However, the potential merger carries enormous risks. Both G.M. and Chrysler are struggling mightily in what is the worst market for vehicle sales in the United States in 15 years.

But the marriage of G.M. and Chrysler has far more potential than hitching Chrysler to a foreign automaker. While G.M. and Chrysler may be hamstrung by labor contracts from cutting jobs, the two companies could combine dealers, product lines and advanced vehicle technology.

The merger may help some efficiencies, but union rules seem to prohibit what most needs to be done, and that unfortunately is eliminating a lot of jobs and excess capacity. The merger also does nothing about poor model selection and lack of consumer demand. Merger or not, neither GM nor Ford can possibly survive without government (taxpayer) support.

GM hit hit a new 52 week low today of $4.00 closing at $4.89. Ford hit a new weekly low of $1.88, closing at $1.99. This was the lowest close on GM since 1950.

Mike “Mish” Shedlock
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