Cash for Clunkers Runs Out, Carmakers Immediately Feel the Slump

A few days ago I pointed out :

Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings

Now we are seeing this in action as Ford Sept. sales fall 5.1 percent:

Chrysler Group LLC and Ford Motor Co. said Thursday their September sales fell, revealing a tough hangover from this summer’s Cash for Clunkers buying spree.

Ford and other automakers got a big lift in July and August from clunkers, which spurred sales of nearly 700,000 new cars and trucks. The government program’s big discounts lured in many customers who otherwise would have waited until later in the year to walk into dealerships.

Now automakers are starting to feel the effect. Ford sales of cars and light truck fell 5.1 percent from a year ago to 114,241. The decline followed two straight months of rising sales.

Chrysler said it sold 62,197 vehicles last month, off 42 percent in the same month last year.

Cash for Clunkers and summertime production cuts kept inventories of popular models low during the month, but even so, Chrysler predicted its market share will rise 0.8 percentage points from August levels. The company increased factory output to replenish supplies.

“While we had some bright spots in September, it was still a challenging sales environment for the industry,” Peter Fong, CEO of the Chrysler brand, said in a statement.

Sales of Ford’s popular F-series trucks rose 3.5 percent, while sales of the new 2010 Taurus sedan increased more than 60 percent.

The September results fell 37.2 percent from August totals, which were boosted by the government’s Cash for Clunkers program. Two of Ford’s vehicles — the Focus and Escape — were top sellers in the program that ran during July and August and offered big discounts to buyers.

Sales of the Focus fell 64.1 percent from August, when Ford sold 25,547 of the small, fuel efficient cars. The company sold 9,182 in September.

The Escape crossover posted a month-over-month sales decline of 58.5 percent, with Ford selling 8,692 of the vehicles last month, compared to 20,933 August sales.

The Dearborn, Mich.-based automaker was the first of the automakers to release its monthly U.S. sales numbers on Thursday. Other automakers are expected to follow later in the day.

Volvo, which Ford intends to sell, posted a 16.3 percent increase.

Automakers sold a combined 1.3 million vehicles in August for a seasonally adjusted sales rate, or SAAR, of 14.1 million. Many analysts expect a SAAR of 9.3 million for September.

Shares of Ford fell 7 cents to $7.14 in midday trading.

The past 2 months were a lofty basis for some of the carmakers’ future earnings estimates. Expect those to be revised downward big time as reality kicks in.

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Moody’s Commercial Property Index Shows 7.6% Decline in May

The MIT Center for Real Estate reports a 7.6% Decline in Commercial Property Prices:

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GE – What Are People Expecting?

GE’s dismal results seemed to take people by surprise last week, as Reuters writes GE results slam market:

NEW YORK (Reuters) – Wall Street stocks skidded on Friday after disappointing earnings at General Electric Co jolted investors who had hoped a U.S. slowdown would be mild and sent them scurrying to the safety of government debt.

The slide pulled European shares down as well, though Asian markets closed higher before the U.S. news hit.

The dollar fell broadly as GE’s results and lowered outlook for 2008 — along with a worse-than-expected slide in consumer confidence — undermined a view that the worst of a credit crisis that has battered markets for months might be over.

Oil steadied after an earlier decline as supply concerns and the weak dollar countered expectations that slowing economic growth will reduce global demand this year.

GE shares slumped more than 13 percent, their worst decline since the stock market crash of October 1987. The conglomerate, viewed as an economic bellwether because of the range of its businesses, reported an unexpected 6 percent decline in first-quarter earnings and lowered its forecast for 2008.

…let’s remind everyone about GE’s predicament, in March I referenced:

For more than a decade General Electric Co. could easily avoid disclosing the value of its real estate and business loans. Not any more.

Since Jan. 2, GE has lost 45 percent on the New York Stock Exchange, mostly because shareholders are no longer willing to accept whatever the Fairfield, Connecticut-based company tells them about its finance subsidiary unless it’s based on so-called mark-to-market accounting rules.

The world’s biggest maker of jet engines and power turbines told shareholders last week that 2 percent of GE Capital Corp.’s assets are being valued based on market prices. The remaining $624 billion is being carried at levels that GE, the last original member of the Dow Jones Industrial Average, established in many cases years ago, according to CreditSights Inc.

“The notion of having 98 percent opaque and 2 percent valued with clarity is something that by its very nature would make investors nervous,” said Robert Arnott, founder of Research Affiliates LLC, which oversees $30 billion in Newport Beach, California and owned 481,201 GE shares as of Dec. 31. “Having some clarity on what the other 98 percent is worth is valuable.”

The simple conclusion that one has to draw when applying simple math is precisely what I wrote back then:

98% valued at fantasy prices, 2% at real world prices means that there is nothing but trouble down the road for GE.

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CMBS Talf Launches – Nobody Cares

A few days ago the Fed said most eligible CMBS OK for TALF:

Most commercial mortgage-backed securities eligible under published guidelines for the Term Asset-Backed Securities Loan Facility will also meet other Federal Reserve criteria, the Fed told investors on Friday, according one investor and a dealer.

Uncertainty over which CMBS could still be rejected from the TALF program next week has created confusion and capped gains in the $700 billion market, which the Fed wants to help unlock with the lending program.

The assurance by the Fed “will help, but we expect the market will be cautious,” Citigroup analysts said in a research note obtained by Reuters.

CMBS derivative index prices rose after the Fed conference call, according to one investor.

Today the program launched, and Investors request $669 mln in TALF loans for legacy CMBS:

Investors requested $668.9 million in loans for legacy commercial mortgage-backed securities on Thursday in a slow start for a key government program aimed at reviving the commercial real estate market.

The Fed is offering loans to investors for commercial mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, or TALF, in an attempt to revive markets both for new and existing commercial bonds.

Lowering lending costs in commercial real estate could help ease refinancings by borrowers, who are increasingly defaulting on loans for a lack of credit.

Thursday was the first time the Fed accepted existing bonds under the TALF and the second round for its newly issued CMBS TALF program.

Investors did not request loans for newly issued CMBS in June or July.

It seems like CMBS TALF is off to a slow start. $668 million out of $700 billion is a drop in the bucket. Don’t expect it to pick up significantly. Commercial property lenders are loaded with non performing loans, precisely because lessees are going out of business or are unable to make their full payments. Demand for new loans is dried up. As I explained before, what the initiators of this program are missing…

(…)is the fact that the consumption credit expansion has brought about an abundance of retail space in malls, shopping centers and elsewhere. On top of that, a lot of businesses from the lending business were utilizing a significant portion of prime office space.

Now those businesses that were utilizing these spaces are going out of business. The recession is trying to send a signal that the resources are needed elsewhere. They are unable to make their rent payments. The owners of the properties start defaulting on the loans made during the credit expansion. The lenders notice that way too much space was built. There is no demand for any more retail space. In fact, there is a significant surplus. Nobody wants any more retail space. People are sick and tired of debt and over consumption.

Now, what are those very lenders going to do when they receive additional loans from the Fed, at around 2.9% to 3.7%, maybe even more for higher maturities. So they would have to earn at least an additional 100 basis points, probably more, in rental yield in order to make this investment worth their while, and that over the next 3-5 years.

Is this going to happen in an environment of falling prices for commercial properties, falling rents, and record vacancies? No, absolutely not. When people have had enough of something, they’ve had enough. If this is still not clear, I would recommend reading Robert Prechter’s example on Jaguar Inflation which I posted in Inflation and Deflation Revisited.

CMBS TALF will be a miserable failure, just as all other lending facilities launched by the Fed. It is possible that this failure will actually expose the dire situation of commercial lenders and accalerate the downward spiral. Thus, look out for the aftermath of first CMBS TALF auction on July 16th. Rather than it being a cure, it is likely that it will usher in a significant acceleration of commercial property loan defaults.

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