The last week has seen grim news piling on top of grim news in the auto sector. Let’s take a look at a few articles.

GM U.S. October light vehicle sales fall 45.1%
MarketWatch is reporting GM U.S. October light vehicle sales fall 45.1%

Nov. 3, 2008
General Motors Corp. (GM) said Monday that October U.S. light vehicle sales fell 45.1% to 168,719 units from 307,408 a year ago. Total vehicle sales fell 45% to 170,585 units from a year ago. October U.S. sales of GM cars declined 34.3% to 73,466 units, and total truck sales dropped 51% to 97,119 vehicles

Auto Makers Shut Out Of Bond Market
Bloomberg is reporting GM, Ford, Chrysler Shut Out of Auto-Bond Market for Fifth Month

Nov. 3 (Bloomberg)
Ford Motor Co., GMAC LLC and Chrysler LLC were shut out of the market for bonds backed by auto loans for the fifth straight month, adding pressure on the automakers to consider mergers and seek taxpayer funding.

Sales of auto bonds slumped to $500 million last month, compared with $9 billion in October 2007, according to Merrill Lynch & Co. data. The cost to sell the debt surged to record highs over benchmark rates as concern that car owners won’t be able to make loan payments amid job losses, higher food and fuel costs and falling property values.

The difference, or spread, on three-year AAA auto asset- backed securities over the London interbank offered rate rose 50 basis points to 600 basis points in the week ended Oct. 30, according to JPMorgan Chase & Co., more than seven times the 80 basis points demanded by investors in the week ended Jan. 3. A basis point equals 0.01 percentage point.

Ford, Toyota October U.S. Sales Fall
Bloomberg is reporting Ford, Toyota October U.S. Sales Fall as Loans Tighten

Nov. 3 (Bloomberg)
Ford said in a statement today that its sales declined 30 percent from a year earlier. Toyota posted a 23 percent drop, while Honda’s were down 25 percent and Nissan Motor Co.’s slid 33 percent.

Sales at Ford, the second-largest U.S. automaker, dropped to 132,838 cars and trucks, from 190,195 a year earlier. The slide was Dearborn, Michigan-based Ford’s 23rd in the past 24 months.

Toyota, the largest Asian automaker, reported sales of 152,101 vehicles, down from 197,592 a year earlier. The Toyota City, Japan-based company last month offered no-interest financing on 11 car and light-truck models.

Adjusted for the change in sales days from a year earlier, the decline was 26 percent, Toyota said. Honda, Japan’s second-largest automaker, sold 85,864 cars and light trucks, dropping from 114,799 a year earlier, spokesman Kurt Antonius said in an interview.

Obama To Meet With GM, Chrysler, Ford
Bloomberg is reporting GM-Chrysler Merger Talks to Intensify After Election

Nov. 3 (Bloomberg)
GM and Chrysler, pressing for an agreement as a slumping economy and a freeze on auto loans push industry sales toward a 15-year low, don’t expect to make significant progress on government aid until after the U.S. election, the people said. Combining the companies would require $10 billion to $12 billion in additional cash to mesh operations, Citigroup Global Markets Inc.’s Itay Michaeli said in a note to investors on Oct. 20.

Financing and a union agreement remain the two biggest hurdles for the merger, people familiar with the talks said. The United Auto Workers union has hired former GM adviser and Morgan Stanley auto analyst Stephen Girsky to assist the union in the talks with GM, Girsky confirmed in an e-mail.

Obama said he would meet with the chiefs of GM, Chrysler, Ford Motor Co. and the United Auto Workers union to develop a plan for an industry overhaul should he win the election, according to a transcript released by NBC.

GMAC May Halt Dealer Financing
Bloomberg is reporting GMAC Says It May Halt Financing to Some GM Dealers

Oct. 30 (Bloomberg)
GMAC LLC, the lender partly owned by General Motors Corp., is telling some GM dealers it will no longer provide them with financing to buy vehicles because of its own reduced funding, according to letters sent to the retailers.

Some dealers also are being told that they will have to start repaying such loans after vehicles have been on lots for at least 180 days, according to one of the three letters. Gina Proia, a GMAC spokeswoman, yesterday declined to confirm them.

Hundreds of the retailers may have received such letters in recent weeks, Denny Fitzpatrick, chairman of the California New Car Dealers Association, said in an interview. The Detroit-based automaker has about 6,500 U.S. dealerships. GMAC also has set tougher standards on loans for customer auto purchases, excluding about 42 percent of U.S. consumers.

Under the new arrangements, dealers in November will be required to begin paying down their principal balance on the loans at a rate of 5 percent monthly for 2008 models and 10 percent monthly for 2007 vehicles, according to the letters.

GMAC said it will also cut the size of the loans to dealers for used vehicles to between 70 percent and 90 percent of the cost, starting Jan. 1. The lender will require 30 percent of the initial advance to be paid off by the sixth month the vehicle is on the lot. After six months, it expects full payment, GMAC said.

GM-Chrysler Merger May Cost 74,000 Jobs
Bloomberg is reporting GM-Chrysler Merger May Cost 74,000 Jobs

Oct. 30 (Bloomberg)
A merger of General Motors Corp., the largest U.S. automaker, and Chrysler LLC may cost 74,000 jobs and close half of the smaller company’s plants, according to a report from an accounting firm.

The combination may eliminate all but seven of Chrysler’s car and truck models, Grant Thornton LLP said. Chrysler, the No. 3 U.S. automaker, would keep the Dodge Ram pickup, minivans and some Jeep models, the report said. GM and Chrysler owner Cerberus Capital Management LP are studying a merger, people familiar with the plans have said.

GMAC Seeks To Become Bank Holding Company
Bloomberg is reporting GMAC May Seek `Significant’ Capital in Banking Effort

Oct. 30 (Bloomberg) — GMAC Financial Services, the auto and home lender shut out of some credit markets, said it may raise “significant amounts of additional capital” as part of an effort to become a bank holding company.

GMAC’s ability to force a restructuring reflects covenants written when few investors were concerned about the company’s health, said Anthony Canale, a New York-based analyst at Covenant Review LLC, a debt research firm. He compared the situation to GMAC’s $60 billion debt restructuring in June needed to keep its Residential Capital LLC unit from bankruptcy. Rising foreclosures left the mortgage business short of cash.

GMAC replaced $6 billion of unsecured revolving credit lines, half of which were scheduled to mature that month, with an $11.4 billion secured revolving credit line that matures in three years. ResCap got a one-year extension on $11.6 billion of bank loans. “Because these bonds have flimsy covenants, GMAC has wide latitude to move assets around and into different subsidiaries,” Canale said. “They could definitely pull a ResCap.”

Ford Says “Me Too” If GM Gets Aid
Bloomberg is reporting Ford Wants `Parity’ on Aid Should GM, Chrysler Merge

Ford Motor Co., the second-largest U.S. automaker, is having an “ongoing dialogue” with U.S. officials and wants to ensure parity should competitors receive aid, the company’s North American chief said.

Ford wants “policy makers and the powers that be” to understand “the challenges facing the industry but also the challenges facing us and that there’s a degree of parity,” Executive Vice President Mark Fields told reporters today after a ceremony at a factory in Dearborn, Michigan.

Subprime Disaster On A Deathbed

I have been saying for years that GM and Ford were headed for bankruptcy. It should now be perfectly obvious to everyone that both companies are insolvent walking zombies kept alive only because bond market participants keep throwing good money after bad.

GMAC is a subprime disaster on a deathbed. It is going to take thousands of dealerships to the grave with it. And those dealers will go bankrupt regardless of whether the government attempts to bailout the industry. The business model of “financing anyone who can breathe” will not return for decades no matter what Bernanke does.

Chrysler is not worth saving. For that matter neither is GM or Ford. Auto capacity is at ridiculous levels compared to demand. The reason demand got as high as it did in the first place is because of subprime lending from GMAC and others that is now blowing sky high.

Lending standards are tightening and unemployment is going to be rising for at least another year, most likely two or more.

Attempts by the Fed or the administration to “save the auto industry” will only make matters worse. Industry consolidation is badly needed as is a massive reduction in production capacity. Throwing money at the auto sector will delay the recovery as it would divert capital from more productive uses.

Mike “Mish” Shedlock
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