AFSCME 3357-HOF'S BLOG

General Motors' Woes
Pickups down - no Pick-Me-Up in sight

The current truck sales slump has hit GM hard, very hard. Sales of its Silverado full-size pick-up are down well over 40% from last year, and it doesn't look like there is a significant improvement over the short term. The company is extending its summer shutdown of truck plants and reducing the shifts at plants that build trucks and pickups.

According to Businessweek.com, the General's stock fell 6% just yesterday. The total value of all of General Motors' stock (market cap) is now about $7.6 billion, well below the market cap of many smaller companies, including Starbucks. It's also well below the PROFIT that Toyota makes in 6 months. Even Ford has a much higher market cap, at $11.8 billion.

According to the Wall Street Journal, if you have a GM 5 year bond, and you want to take out default insurance on it, you'd have to pay 28% of the face value down, and then you'd have to pay 5% per year during the 5 year life of the bond. According to WSJ, that equates to a 70% likelihood that GM will default on its bonds over that period. This type of default insurance is called a credit swap. As bad as parent company General Motors' swaps look, things are even bleaker for Rescap. Rescap is the mortgage lending subsidiary of GMAC. According to Bloomberg.com, a JPMorgan model credit swaps in Rescap reflect a 100% probability of default. If Rescap goes belly-up, GMAC is likely to follow in short order. Even though General Motors only owns 49% of GMAC now, it's hard to see how GM could survive the default of GMAC.

Ironically, to get sales going, GM just announced a 0% 6 year loan program on most of its vehicles. It seems to me that that's about the worst type of promotion GM could offer. GM's cost of credit is high, so to encourage your customer to use your capital for and keep the capital outstanding for as long as possible without paying interest seems suicidal.

GM's chickens are coming home to roost. GM operated for years on a sales model selling trucks to people who didn't really need trucks. GM could get away with this as long as oil prices were (artificially)low. Now that oil prices are rising to where they have to be to discourage excess energy consumption, people are finally starting to conserve and drive vehicles that are more fuel-efficient than full-size trucks and RVs. Since lots of motorists traded in their gas guzzling trucks earlier this year, used trucks have gutted the market. According to CarMax, the nation's biggest seller of used cars, the wholesale price of a fullsize truck has gone down 25% in the past three months. (That's more than a normal year's worth of depreciation.)

For the (relatively) few people who actually NEED a truck, the most cost-effective solution to high oil prices is to just keep your old truck. You can still buy a lot of gasoline for the $600-$1000 per month that you save driving a paid up vehicle versus a new one. If you need to buy a truck, the price of a used truck never looked better. If last year's prices reflected an equilibrium between the value of a new truck and a used one, this year's price-drop for used trucks clearly make used trucks a better deal economically.

General Motors' options in raising capital are limited. They can't borrow much money because their credit rating is low. Their best bet is to undertake a big equity offering, even if it means diluting present shareholders to almost nothing. Nothing is exactly what current shareholders will get if GM doesn't get the capital to wait out this economic cycle and get to a more car-centric line-up.

GM may be able to attract equity by playing up the metaphor of Shel Silverstein's, The Giving Tree. By reminding stakeholders of what GM has given them, perhaps GM can raise enough equity to make it to the next round.