U.S. Economic/Financial News
November Auto Sales: Collapse Continues
Ford made headlines Dec. 4 as it dropped to fourth place (from second) last month among the world's leading automakers. Total U.S. car and light truck sales were 1.19 million units in November, which was up 2.6% from a year ago, with GM sales increasing by 6%. This was not enough to save Ford, however, which dropped behind GM, Toyota, and DaimlerChrysler. Ford losses were driven by the cancellation of its best-selling Taurus, and the collapse of its main "F series" of pick-up trucks.
Indicating the continued downward pressure on sales, Chrysler, which is already losing $1,000 on every car it sells, announced an unprecedented factory bonus of $7,000 in "dealer cash" to help move backlogged 2006 inventory from dealers' lots. The move could cost Chrysler up to $500 million. According to sources, Chrysler is planning to announce the shutdown of at least three plants, starting in January.
"Locust" fund Cerberus is now in talks with Delphi Corp., with an eye on buying 12 of their 21 closed plants. No details have emerged about which ones, but the UAW is involved in the talks, and is said to be considering further cuts in wages.
Ford on Bankruptcy Watch
Since announcing its jumbo mortgage-the-company $18 billion borrowing this month, Ford has significantly increased its debt to a total of at least $23.5 billion, financial media reported Dec. 8. Ford is explaining this jump as due to a "strong credit-market response" to its tendersundoubtedly true, with trillions sloshing around in leveraged credit funds, etc. In fact, its secured bonds are trading up over 100% of par. A Bloomberg report Dec. 8 says the borrowings "will provide the ... automaker with enough money to pay for eliminating 40,000 jobs and closing nine factories."
But Ford's going for $23.5 billionwhich now includes pledging all its next several years' income from earnings of its financial division, Ford Creditclearly shows the company's desperation for cash over the next year, expecting huge losses and costs of "restructuring" and shrinking, and expecting to be completely shut out of even secured credit markets by early 2008 or earlier. One analyst said, "They're getting buried under the debt, but it's better than the alternative, bankruptcy."
Most of the added $5.5 billion borrowing is unsecured; it will be at high interest rates, and be convertible into Ford stock at a value 28% inflated above the current price of the common stock.
White-Collar Jobs Losses Hit Hardest in Michigan
The loss of white-collar auto jobs could hit Michigan hardest, according to the Detroit News and MarketWatch.com Dec. 5. Sean McAlinden, chief economist at the Center for Automotive Research, told the Detroit Economic Club that, concerning the "massive auto cutbacks," the worst is yet to come. "All of the bad headlines you've seen this year are going to get much, much larger," he said. "None of the biggest lay-offs of salaried workers has actually happened yet. And they're about to in the coming months. So we've got to prepare ourselves."
Overall, the number of automotive jobs in Michigan has fallen 34% in the last two years, but the concentration of white-collar jobs is the highest in that state. Livonia has seen its population go from 18,000 in 1950, to 120,000 in 1970s, and estimates place it below 100,000 now.
Vulture Grab for U.S. Auto Plants Is On
A new set of auto plant closures is about to hitthis time at Chrysleralong with the coming buy-up of Delphi's Steering Division and Climate Control Division plants by Cerberus, the giant hedge fund started by Mega-speculator and organized crime-linked figure Michael Steinhardt, and now run by Jack "Snow Job" Snow. The Detroit News Dec. 5 quoted Sean McAlinden, chief economist at the Center for Automotive Research, that the worst is yet to come, with "massive auto cutbacks." In Detroit, Dec. 3 was the last workday for the remaining 350 workers at the historic Budd plant, which at one time employed 18,000.
Chrysler is reportedly getting ready to close two big assembly plantsSt. Louis North, and Newark, Delawareand its Detroit Axle plant. Ford is closing its former Visteon plants in Ypsilanti and Kansas City, and announced the sale of the former Visteon climate-control-systems plant in Plymouth Township, Michigan, with 1,250 workers, to the French firm Valeo. Valeo will demand "a new and competitive compensation agreement" from the UAW (these are already "second-tier," $14/hour workers), and will further reduce the workforce to 800 and replace some of it with workers it hires.
Total employment in all 23 former Visteon plants is down from 13,600 UAW workers in mid-2005, to 9,800 now, and will fall to about 4,000 over the next nine months as plants are sold or closed, according to Ford VP Michael Ver. That will be an average of only about 200 UAW workers remaining in each plant.
At the same time, Cerberus, which just bought majority ownership of GMAC, is negotiating to purchase up to 12 Delphi plants in the United States, and 12 more in Europe, under the same "rules of engagement" for employment and wages as with Valeo. This will include Steering Systems plants in Saginaw, Michigan; Indianapolis, and Athens, Alabama; and Interiors Division plants in Columbus, Ohio; Adrian, Michigan; Vandalia, Ohio; and Gadsden, Alabama.
Manufactured Goods Orders Slide Again in October
New orders for manufactured goods fell again in October, down 4.7%, or $19.3 billion to $390 billion, the Commerce Department's Census Bureau reported Dec. 5. This was the third drop in four months, and the largest drop in 6.5 years. New durable goods orders were down 8.3%, the biggest decline in 6.5 years for that also. Transport goods orders were down 21.6%; all other durables, down 1.5%. Manufactured goods shipments were basically flat, up 0.1%. Yet, for 18 months in a row, unfilled orders for durable goods have been rising, and are now at the highest level ever for this statistic, at $666.5 billion.
Meanwhile, the Institute for Supply Management, which on Dec. 1, said the U.S. manufacturing sector was shrinking in November, by its index, reported on Dec. 5 that the service sector, by contrast, was expanding rapidly, with its index rising to 58.9 from 57.1 in October.
Collapse of Real Estate Now Hitting Lenders
In unusually blunt language, the Wall Street Journal Dec. 5 announced on its front page, "The surge in mortgage delinquencies in the past few months is squeezing lenders and unsettling investors worldwide in the $10 trillion US mortgage market. The pain is most apparent in sub-prime mortgages, though there are signs it is spreading to other parts of the mortgage market." Delinquencies have been rising for over a year, they say, but have "accelerated sharply in the past two to three months." Option One, the sub-prime unit of giant H&R Block, posted a $39 million loss in the three months ending Oct. 31, compared to a $48 million profit a year ago.
Dope Inc.'s HSBC Holdings, the world's third-biggest bank by market value, said that third quarter revenue growth slowed, as bad loans rose in the U.S. and the U.K. Loan delinquencies and write-downs increased due to more bankruptcies and a "weaker" housing market. "There is little in the statement that will calm fears of a slowdown," said an analyst. "People were looking for signs of a stabilization in bad debts, [but] things seem to be worsening." HSBC says they "miscalculated some borrowers' ability to repay mortgage loans...."
Toll Brothers, noted builder of McMansions, was forced to drastically downgrade its forecast for 2007, after posting a nearly 50% collapse in profits for the quarter ending Oct. 31. Income was down from $310 million in 2005 to $178 million. They had 585or 37%cancellations, and customers only signed $710 million in contracts, less than half of its $1.59 billion in 2005. Whistling past the graveyard, CEO Robert Toll said, "Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic ... seem [to be] dancing on the bottom, or slightly above."
Sub-Prime Mortgage Market Begins to Falter
The sub-prime mortgage market, the weak sister of the housing market, is starting to cave in. During October, the percentage of sub-prime mortgage loans that entered into defaulteither delinquent by 90 days or more; in foreclosure; or turned into repossessed propertiesleapt to 2.52% of all sub-prime mortgages issued during 2006. During the late 1990s, the volume of sub-prime mortgages was less than $100 billion; today, it is placed between $650 billion and $980 billion, the latter one-tenth of the home mortgage market.
Ten years ago, it was predatory loan-shark-type companies that made sub-prime loans. But the largest commercial banks, already having run through the upper- and middle-income households, looking for new areas to loot, bought outright many loan-shark companies, and now dominate the market. During 2005, in one-half of the sub-prime loans, the banks required no firm income documentation. The sub-prime market has become so large, that during first half of 2006, one in every five mortgage loans made in the United States was sub-prime, according to the Mortgage Bankers Association.
Sub-Prime Loan Losses Rock H&R Block
The United States' largest tax-preparation company, H&R Block, announced Nov. 29 that it suffered a $156.5 million loss during its quarter ending Oct. 31. H&R Block's losses stem from its subsidiary Option One Mortgage, which is a large maker of sub-prime mortgage loans. During the previous quarter for H&R Block, that ended July 31, the company recorded a $131 million loss. At that time, Block's Option One Mortgage had to buy back mortgage-backed securities (MBS) that it had issued, because those securities had been floated against sub-prime mortgages which were going into default. Those investors who had purchased MBS issued by Option One raised an uproar. H&R Block thought it would make a bundle by being a player in the sub-prime mortgage market. Now, according to The Street.com Nov. 30, H&R Block is desperately seeking a buyer for Option One.
Paulson's Plunge Protection Team Reactivated
Treasury Secretary Henry Paulson's crisis team has been reactivated, with a command center in Washington, to cope with the "systemic risk" in a market meltdown, according to the London Daily Telegraph Dec. 7. The Telegraph was referring to an article that appeared in the neo-con Weekly Standard Nov. 27, that said the crisis team is constituted of several senior advisors of Goldman Sachs whom Paulson brought along to the White House, to insulate himself from the Treasury bureaucracy.
But Paulson is worried, because of the 8,000 unregulated hedge funds with $1.3 trillion at hand, and derivative contracts now worth $370 trillion, the Telegraph pointed out. It quotes Paulson saying: "We need to be very careful here."
Paulson is deeply concerned because of the falling dollar. "The US needs a trillion dollars a year just to stand still," said a currency analyst with the HSBC (HongShang). The analyst pointed out that the global economic seizure this time will be at the heart of the system as the dollar buckles, pressing down on the "aorta of capitalism."
What adds to Paulson's worries is that average house prices fell from $244,000 to $221,000 in November, with more violent effects in Florida, Arizona, and New England. The paper cited builders warning of a "death spiral," as they slash prices to off-load a glut of unsold houses.
As a result of these nasty developments, the Weekly Standard says Paulson fears a "serious crisis that would be a body-blow to the U.S. economy."