Busch: Autos on a Roll—Downhill
Today the number two Japanese auto market, Honda Motor Co, warned of lower-than-expected annual profits as a deepening financial crisis has hammered demand for cars and sent the yen soaring according to Reuters.
Honda is seen as one of the best managed and best positioned to deal with the on-going credit crisis and it's impact on global sales. However, it's clear than even the best are struggling. Honda Executive Vice President Koichi Kondo said, "Market conditions have turned much worse than we had anticipated....What's different now is that it's not just light trucks that aren't recovering (after a recent drop in gasoline prices). Passenger cars have started to fall, too, and that suggests the credit crisis is sapping the desire to consume."
Andrew Busch will appear on CNBC's " Closing Bell" today to discuss the McCain/Palin interview and the outlook for the election.
In one of the largest examples of irony known to the markets, Volkswagen AG briefly became the world's biggest company by market value after Porsche SE announced plans to raise its stake in the German carmaker to 75 percent, forcing short-sellers to cover their bets on a decline in the tock. (BBG) As the most shorted stock in the German DAX index, Volkswagen is only the 16th largest company by sales and is struggling with the decline in global auto sales. Shorting Volkswagen's stock has been a favorite play by guess who? Hedge Funds. The massive short rally underscores that there is no safe haven for levered strategies...even with an industry under severe strain.
An indication of that strain is the GM-Chrysler situation. General Motors Corp and Cerberus Capital Management have asked the U.S. government for roughly $10 billion in an unprecedented rescue package to support a merger between GM and Chrysler LLC, two sources with direct knowledge of the talks said on Monday. (RTRS) Also, the Bush administration is working to release to General Motors Corp. a portion of the loans Congress approved for the auto industry and help ease the way for the merger with Chrysler LLC.
The WSJ reports that the government loan, which may total around $5 billion, would come from the $25 billion in low-interest loans approved by Congress and being administered by the Energy Department. "Although the loans are supposed to speed the availability of fuel-saving technologies, the money could help steady GM's finances and make it easier for the struggling auto giant and Cerberus to persuade investors to back a merger."
Due to the past run-up in petrol/gasoline prices and the current credit crisis, demand for autos has collapsed in the United States. The startling fact that Toyota has 2k auto dealerships and Ford alone has 4k tells you the direction this sector is heading towards. With the dramatically stronger Japanese yen, Honda, Toyota, and Nissan will all now be struggling to compete due to the speed of the move. This is why the Japanese had the G7 mention the currency in the emergency statement over the weekend. More importantly, the currency situation provides further momentum to change the global financial structure at the November 15th G20 meeting in DC.
- GM, Chrysler Ask for $10 Billion to Aid Merger