The two stories below tell me all I need to know about the great auto recovery. I bet you didn’t know that GM and the rest of the automakers record their sales when the vehicles are shipped to their dealers. Zero Hedge has been all over the channel stuffing being done by Government Motors for the last two years as they now have 60% more vehicles sitting on dealer lots than two years ago, even though sales are up less than 20%. And now we see that Obama is doing his union bretheren a favor and buying GM cars like they’re going out of style. You the American taxpayer are subsidizing GM, just as you took the $50 billion hit when Obama screwed bondholders using your money.
Lastly, we know for a fact that Ally Financial (aka GMAC) is still 85% owned by you. It is dishing out subprime auto loans like SNAP cards in West Philly. Moody’s is already warning about the coming disastrous losses that will be experienced by YOU the taxpayer when all these crap loans go bad. But that doesn’t matter to Obama. There is an election to be won. The losses to the American taxpayer will come in 2013 and 2014. Don’t expect the MSM to fill you in on the government scam. They are part of the scam, as their ad revenue is dependent on car ads. What a great country.
GM Finds Creative New Ways To “Stuff Channels”, Get Backdoor Taxpayer Bailouts
Submitted by Tyler Durdenon 07/06/2012 12:53 -0400
Zero Hedge readers know that we have long followed channel stuffing trends at GM, whose month-end dealer inventory hit a record (for the post-reorg company which is completely different from the pre-bankruptcy entity) of 713K cars stuck in various dealer “channels” at the end of March 2012, and since then has been stagnant at just about 700K, with the most recent June number coming at 701K, an increase of 6K over May. It would be great to assume that the company has given up on cheap ways to cheat investors and the taxpaying public into believing it is doing better. It would also be wrong. As it turns out, GM has merely turned to more backdoor methods of stuffing channels, and getting money from its biggest shareholders, which still happens to be Joe Sixpack (and “superpriority” labor unions of course) by way of the US Treasury, with 32% of the common stock.
The NLPC explains:
It looks like General Motors will be throwing everything in but the kitchen sink to help fluff its second quarter earnings numbers. Taxpayers continue to help with the cause as President Obama campaigns on the “success” of GM following the manipulated bankruptcy process that cost taxpayers $50 billion and another $45 billion of tax credits gifted to GM to help protect powerful UAW interests. We now learn that government purchases of GM vehicles rose a whopping 79% in June.
As a reminder, this is how GM’s general channel stuffing looked like for all its vehicles:
However there is a rather important data subset here:
According to a Bloomberg report, “GM said inventory of its full-size pickups, which will be refreshed next year, climbed to 238,194 at the end of June, a 135 days supply, up from 116 days at the end of May.” 135 days supply is huge, the accepted norm is a 60 day supply. The trick here is that GM records revenue when vehicles go into dealership inventories, not when actually sold to consumers.
This is how pickup truck channel stuffing looked in the period that the company has released the data, or since December 2011. Not pretty.
And while we all know by now that the tried and true mechanism to channel stuff is a staple when it comes to fooling the buyside as to its business efficacy, the fact that its biggest shareholder has become a key marginal client of GM should make one’s head spin at the Ponziness of the transaction:
The government’s increased spending on GM vehicle purchases presents yet another conflict of interest as Treasury refuses to sell taxpayers’ stake in GM and Obama campaigns on the auto bailouts. It does not appear that any members of Congress (from either party) are questioning the increased spending. Also ignored was the Department of Energy’s gifting of $2.7 million of taxpayer money to GM to reduce energy consumption in its door manufacturing process by 50%. The DOE seems to be one of the main conduits to funnel taxpayer funds to cronies of the Administration. The $2.7 million contribution to GM comes after additional millions of dollars were spent by the DOE on advisory fees paid to legal firms that helped smooth the way for the GM bankruptcy process (as reported here); another move that went unquestioned.
And there is more:
GM claimed that sales increases did not rely on incentive spending, which appeared to remain in check, but one analyst during GM’s sales conference call questioned whether the company’s “stair step” incentive spending was accurately depicted. This incentive spending kicks in after dealerships report final sales figures for the month and may be yet another deceptive way for GM to fudge its numbers. Not mentioned was GM card rewards programs that do not get counted as incentive spending.
Why is GM forced to succumb to such increasingly more deceptive practices? Why simple presidential election politics of course: when a failed company like GM is destined to symbolize the “success” of one’s administration, there aren’t many straws one can latch on to.
The upcoming earnings announcement by GM is, politically, the most important to date. The pressure is on Government Motors to appear financially strong as this may be the last earnings report before November elections and sets the stage for how “successful” GM is. One of GM’s past tricks to help fudge earnings numbers has been to stuff truck inventory channels. Old habits die hard at GM.
The article goes on to quote Kelley Blue Book’s Alec Gutierrez who stated “They’re (GM) likely going to have a relatively high days supply of trucks moving forward and they’re already placing some pretty aggressive cash incentives on the hood. It’s going to eat into their profit margins…”
GM’s earnings announcement comes on August 2nd. The main headwinds will be weak European operations and growing pension liabilities. The headline number for earnings should be viewed skeptically and an eye kept on the share price reaction after the conference call. Expect Government Motors to put a positive spin on its financial health as the stakes are now at their highest. The long-term health of GM remains in question and the true financial picture may not surface until well after voters decide who will be running our country. Eventually we will see just how successful GM really is.
At the end of the day, all of this is noise. If China retaliates in kind to the recen escalation by Obama vis-a-vis alleged Chinese deceptive trade practices, the GM will soon be able to kiss half of its top line, and who knows how much of its margin and bottom line goodbye. Because when half of your sales go to the one country which America’s non-existent (and unionized) manufacturing base loves to hate, the last thing you want is to bite the hand the pays the bills. Yet this is precisely what is going on as the politics of this country become so misguided that in the pursuit of a few extra votes, the administration is willing to sacrifice what little clout and momentum the recently bankrupted automaker may have generated.
In the meantime, looks for channel stuffing and direct government purchases to soar to unseen levels in the weeks and months heading into the presidential election as GM (and its 40% stock price drop since the IPO) will certainly be a key debate point between the Democrats and the GOP.
Moody’s: Hot US subprime auto lending market has parallels to the 1990s
New York, June 28, 2012 — The subprime auto lending market in the US is developing a resemblance to its condition in the early- and mid-1990s, when overheated competition among lenders led to poor underwriting that drove up losses, says Moody’s Investors Service in a new report. As in that earlier period, capital is pouring into the sector and the issuance of subprime auto asset-backed securities (ABS) is booming.
“It is too early to predict whether today’s subprime lending market will deteriorate as it did in the 1990s, but the early similarities between then and now suggest that losses will climb if competition intensifies,” says Moody’s Vice President Peter McNally, author of the report “US Subprime Auto Lending Market Harkens Back to 1990s.”
Over the last two years, because of the sector’s profitability, a large amount of private equity investment has gone into the subprime auto lenders, many of which are relatively small, specialty finance companies, says Moody’s.
Moody’s says the interest of investors from outside the subprime auto market niche and the potential for increased competition carry the risk that losses could increase if a race for profits and market share lowers underwriting standards. The growth in the market can lead to capacity issues, says Moody’s McNally. “When losses rise quickly, inexperienced lenders have trouble servicing a loan portfolio that requires more attention.”
In the 1990s, the number of small lenders boomed, leading to intense competition for loans that in turn led to weak underwriting and high losses on securitized loans. Net losses in subprime auto ABS, according to Moody’s, jumped from under 3% in early 1995 to over 10% in December 1997.
For the past several years subprime auto loan performance has been strong, with the net loss rate currently below 4%. However, the credit quality of pools securitized in 2011 and 2012 indicate that credit has loosened since 2010, says Moody’s.
Issuance of subprime auto ABS is on pace this year to exceed the robust issuance of 2011, which comprised 24 deals, totaling $14.3 billion.
Moody’s notes several differences between today’ s market and the overheated market of the 1990s.
One credit positive for today’s market is that most lenders no longer practice gain on sale accounting, whereby lenders capitalized securitization gains and credited them to equity, which made their balance sheets look stronger than they were.
Another is that the market is not yet overcrowded with new lenders. Moody’s counts 13 active securitizers at the moment, compared with 34 issuers in 1997.
An important credit negative is that transactions are no longer backed by monoline guarantors. These bond insurers absorbed losses on transactions that would have otherwise defaulted in the 1990s and took over transaction servicing from failing lenders.