In the Eye of the Storm of the Credit Crisis Hurricane – GM, Ford, Chrysler on Sales Collapse Risk Bankruptcy – House prices suffer biggest fall since records began
In the Eye of the Storm of the Credit Crisis Hurricane
As we enter the height of the hurricane season, it may be worthwhile to recall, when considering the economy at large, the particular deception that lurks in the “eye” of the storm. After a raging tempest, the sudden appearance of the calm ‘eye’ can all too easily encourage people to leave their shelter in order to assess and even repair damage, exposing themselves to the often more devastating second leg of the hurricane.
We have long warned our readers of a coming real estate crash which would then lead to a credit crunch, and eventually a major round of bank failures. We have argued that these developments would be the precursors to a major recession, and perhaps a depression.
As predicted, the collapsing values of bonds backed by subprime mortgages did indeed lead to a collapse of the entire mortgage market, a bank liquidity crisis, a credit crunch and a steep fall in consumer confidence. This was the first leg of the storm, but the full blown banking collapse and the deep recession are not yet manifest. The conventional wisdom holds that the bullet has been dodged.
The markets are buying this hypothesis. Tempted by the latest crop of economic data that seems to show expansion, U.S. stocks have moved sideways, and even climbed slowly. The U.S. dollar has risen from its lows, and the rate of bank failures appears to be under control. In short, with gold off almost twenty percent from its highs, it looks as if many investors have concluded that the worst of the storm has past, and have decided look for good deals amid the stock market wreckage. Proceed with caution.
At its core, our economy is simply showing the effects of a national depletion of wealth caused by decades of consuming more than we produce and spending more than we earn. The natural corrective mechanism to such a condition is a recession. But recession is very bad for politics, especially in an election year. So, the potential corrective recession has been postponed by a massive injection of billions of dollars into the economy. At a time when we needed serious physical therapy, the government instead offered four massive pain killers:
-First, the debased U.S. dollar has boosted exports and helped the GDP to remain positive.
-Second, by setting interest rates below the rate of inflation the Federal Reserve discouraged savings and encouraged borrowing and spending.
-Third, massive government lending kept the financial service industry solvent and the mortgage lenders operating.
-Fourth, stimulus checks have kept American’s spending money that they have not earned.
Although these government palliatives have succeeded in calming the immediate crisis (by saddling American taxpayers with massive liabilities), they have not cured the disease. If anything the huge doses indicate that the patient is getting far worse, even if in silence!
Last week, the FDIC announced that bank losses have tripled to $26.4 billion, leading to a fall of 86.5 percent in bank earnings. The Case- Shiller home price index shows American housing to have fallen in value by some 20 percent and still sliding. These massive movements have yet to be felt along the entire economic spectrum…but it is inevitable that they will be.
Don’t be lulled into a false sense of security and start buying U.S. equities at seemingly knockdown prices. We are in the eye of the hurricane. Beware of the second leg!
By John Browne
Euro Pacific Capital
http://www.europac.net/
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GM, Ford, Chrysler on Sales Collapse Risk Bankruptcy
The Wall Street Journal is reporting Auto Sales Tumble, But Industry Sees Signs of Hope .
Sales of cars and light trucks fell 15.5% to 1.25 million last month, down from 1.48 million a year earlier, according to Autodata Corp. The closely watched seasonally adjusted annualized selling rate was 13.7 million vehicles, up from 12.55 million in July, but down from 16.3 million in August 2007, Autodata said.
“There are early indications of somewhat improving conditions,” said Ford Motor Co. economist Ellen Hughes-Cromwick, in a conference call with analysts and reporters. She pointed to a decline of about 40 cents a gallon in the price of gasoline, improvement in a key measure of consumer confidence and an upward revision in the federal government’s estimate of second-quarter economic growth.
“The biggest issue is credit,” Chrysler President Jim Press said in an interview. “It isn’t the gas mileage of the vehicles turning people off, it’s getting credit and financing.
Disingenuous Talk At GM, Ford, Chrysler
There are no legitimate reasons to state “There are indications of somewhat improving conditions”. Falling crude prices are a strong sign of a collapsing global economy. Second quarter GDP is simply not believable. See GDP Much Weaker Than Headline Numbers for the rationale.
To suggest that auto financing issues are “the biggest issue” is complete silliness. People are tapped out and increasingly frugality is one issue. GM, Ford, and Chrysler producing SUVs, trucks, and cars that are now out of favor is another reason.
Car Sales Post 10th Straight Decline
Bloomberg is reporting GM, Ford Drag U.S. Car Sales to 10th Straight Decline .
Here is my favorite quote from the article. It is from Chrysler President Jim Press: ” Maybe towards the end of ‘09, going into 2010, there’ll start to be some signs of recovery. “
GM Celebrates
In celebration of our 100th anniversary, we’re sharing our GM Employee Discount . You pay what we pay. Not a cent more.
2009 models include Chevy HHR, Cobalt, Malibu, Impala, Equinox, Avalanche, Silverado, Buick Enclave, Pontiac G5, G6, Vibe, G8, Solstice, Torrent, GMC Acadia, Sierra, Saturn Aura, SKY, OUTLOOK, Cadillac CTS, SRX, DTS, STS, HUMMER H2 and H3. At participating dealers only. Take delivery by 9/30/08. See dealer for details.
If things were improving, would GM be celebrating?
On June 24 GM announced price hikes on 2009 models by an average of 3.5%. I called it GM’s Ridiculous Bluff . Indeed it was.
I panned GM’s Employee Pricing Ploy on August 19th with this statement:
” GM is offering over $4,000 in incentives and extending the offer to some 2009 models as well. It will not be long before the offer is extended to all 2009 models (and/or some other incentive program is put in place for 2009 models). “
Well that did not take too long.
The original offer was due to expire on September 2nd, but has now been extended to September 30th. Coverage of included 2009 models has been expanded to most 2009 models as noted in the above list.
Shop Until You Drive
Chrysler continued its ‘Shop ‘Til You Drive’ Campaign by offering Up to 40 Percent Off MSRP.
“To help consumers, we are offering some of our most popular vehicles at significant savings. In August, we saw this formula generate new signs of momentum on vehicles like our Chrysler and Dodge minivans, Dodge Ram light-duty trucks and Jeep(R) Liberty. In September, we will continue to offer competitive values and showcase dynamic new vehicles like the 2009 Dodge Challenger, and hybrid Dodge Durango and Chrysler Aspen SUVs.”
Chrysler’s ‘Shop ’til You Drive Sales Event’ continues through Sept. 30, offering up to 40 percent off MSRP on select vehicles, and zero percent APR for 72-months on the 2008 Dodge Ram, Dodge Durango, Chrysler Aspen, Jeep Grand Cherokee and Jeep Commander. Especially strong values are available on Dodge Ram pickup trucks, with up to $9,000 discounts in select markets. The only sign of momentum is in reverse. Nonetheless, at 40% off Chrysler will eventually clear inventory. What a difference from 2006.
Chrysler Achieves All Financial Targets
Chrysler CEO says Chrysler Shrinking to a Profitable Size .
Chrysler cut a million units of assembly capacity in the past year, pared its lineup and now will thin its dealer ranks with a goal of making money on annual sales of as many as 2.5 million vehicles, down from an “unprofitable” 4 million, Press said today in Los Angeles.
In the first half of 2008, “we’ve achieved all of our financial targets that Cerberus set at the start of the year,” Press said. Those must have been the easiest financial targets in automotive history.
Chrysler Tops Peers in Bankruptcy Risk
On August 15 Bloomberg reported Chrysler Tops Peers in Bankruptcy Risk, JPMorgan Says .
Chrysler LLC is the most likely of the three U.S. automakers to file for bankruptcy protection in the next two years, JPMorgan Chase & Co. said, citing a panel discussion among credit-rating companies.
General Motors Corp. is the next most likely and Ford Motor Co. is the least, JPMorgan analyst Himanshu Patel wrote in a report today, quoting discussion yesterday by analysts from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. S&P and Moody’s both cut Chrysler’s credit one level on Aug. 7, seven steps below investment grade.
Moody’s cut GM’s rating to Caa1 on Aug. 13. S&P lowered GM and Ford to B- on July 31. Fitch downgraded Ford to B- on Aug. 1, matching its action on GM on June 25.
Without government (taxpayer) bailouts, these companies simply cannot survive.
By Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
http://www.marketoracle.co.uk/
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House prices suffer biggest fall since records began
House prices fell by 1.8% in August, bringing the average price of a property in the UK below the government’s new stamp duty threshold, figures showed today
The UK’s largest lender, Halifax, said the average price of a property had fallen by 12.7% since last August – the biggest fall since it began publishing a monthly survey in the early 1980s.
Prices have dropped by more than £25,000 since August 2007 when the average cost of a home was £199,612, and by more than £3,000 since July.
The average house price now stands at £174,178.
This is below the new £175,000 stamp duty threshold introduced by the government on Tuesday as a temporary measure designed to stimulate the housing market.
The annual price fall quoted by Halifax is 10.9% – lower than the fall shown by comparing the average prices in August this year and the same month last year.
This is because the lender calculates the annual change on the basis of three months’ figures, which it says gives a fairer representation of what is happening in the market.
This is the first time that figure has been in double-digits since the survey began in 1983.
Last week, rival lender Nationwide also reported a first double-digit fall in prices, saying values were down 10.5% year-on-year.
The 1.8% fall in August reported by Halifax followed a 1.7% drop in July and was the sixth consecutive monthly fall of more than 1.5%.
Martin Ellis, Halifax’s chief economist, said market conditions looked set to remain “challenging”.
He said: “The pressure on householders’ income, together with the reduction in the availability of mortgage finance due to the global financial markets crisis, is resulting in both lower property prices and activity levels.”
But he said the market continued to be supported by high employment levels, low interest rates and a shortage of new houses.
He added: “This week’s announcement on stamp duty is a welcome development and will benefit a significant number of homebuyers, particularly outside the south-east.”
Decline as a deterrent
House prices have been falling since last autumn when the credit crunch started to reduce the availability of mortgages, making it harder for first-time buyers to raise funds to buy a property.
The sharp downturn in prices – and predictions of further falls to come – has also deterred would-be buyers.
Figures published by the Bank of England on Monday showed the number of mortgage approvals for house purchases fell to a record low in July, and surveyors and estate agents have reported low levels of buyer interest over the summer.
Although the stamp duty change has been welcomed by lenders and buyers, many experts say the continued lack of mortgages will continue to dampen demand.
“Major downward pressure on house prices continues to come from extremely weak market activity, stretched buyer affordability, and tight lending conditions,” said Howard Archer, chief UK economist at Global Insight.
Archer added that rising unemployment could also lead to an increase in the number of homeowners putting their properties on the market for “distressed” reasons, which would further depress prices.
“Given these very poor fundamentals for the housing market, it is unlikely that the recently announced government measures to support the housing market will have a significant impact in stabilising activity or prices,” he said.
Mortgage cuts
Although an interest rate cut might encourage buyers into the market, Archer said the high level of inflation in the UK meant the Bank of England was likely to hold rates when it made its decision today.
There has been some good news for borrowers in recent weeks, however, as mortgage rates have started to edge down.
According to Moneyfacts, the average cost of a two-year mortgage has returned to its pre-credit crunch level – dropping to 6.39% from a peak of 7.08% in early July.
And today, Abbey announced it was cutting rates on its two-, three- and five-year fixed-rate loans by up to 0.3%.
First-time buyers have also been given a glimmer of hope, with Skipton building society announcing it would be renewing offering 95% mortgages from September 15.
However, the deal is only available to borrowers who save with the society or who have family members who do.
http://www.guardian.co.uk/money/2008/sep/04/houseprices.property
