Early signs of stabilization are emerging for U.S. finance companies–with one significant exception: commercial real estate, according to Standard & Poor’s latest Industry Report Card.
“Among the areas experiencing stabilizing trends are consumer finance asset quality, the credit markets–specifically for unsecured and asset-backed securities (ABS), and the performance of certain business development companies (BDCs). On the downside, the commercial real estate (CRE) sector continued its slide, which we expect will only worsen.”
“Consumer finance asset quality showed early signs of stabilizing during the third quarter. Early-stage delinquencies declined from the previous quarter for rated credit card issuers, hinting that asset quality deterioration may finally stabilize over the next several quarters. For captive auto financiers, such as General Motors Acceptance Corp., increased volumes due to the “cash-for-clunkers” program, industry-wide strength in used car prices, and stabilizing credit supported more-favorable results.
“Despite these nascent signs of consumer credit steadying, we believe that significant near-term challenges remain. Unemployment is currently above 10% and we expect it may rise further in 2010. Consumer spending remains tepid at best. In addition, the seasonally weak fourth quarter may see deterioration in firms’ credit metrics, especially for consumer finance companies that cater to subprime borrowers.”
CRE was markedly weak during the quarter–funding markets remained essentially frozen, with limited opportunities for borrowers seeking to roll over or obtain new funding.
“Nonperforming loans continued to build due to these limited refinancing options, leading to net losses and necessitating outsized loss provisions. We expect these trends to intensify as soft residential housing markets and rising unemployment put pressure on a wide spectrum of CRE asset types, including loans backed by condominium, land development, retail, hotel, and office properties.”
Technorati Tags: commercial-real-estate, finance companies, GMAC
Cash For Clunkers a Trojan Horse for Lesser Known Brands
Korea’s Hyundai and its sibling Kia Motors recently reported strong results, driven in part by the US cash for clunkers and other car scrappage schemes. Hyundai reported record profits on Oct 22, while Kia said Friday it swung to a third-quarter profit from losses in the year-earlier period, earning rating upgrades from Credit Suisse to neutral from underperform, and from Macquarie Research to outperform from underperform.
While US total car sales were off 22.7% in September and down 27.4% year-to-date, Hyundai sales in September were up 27.2 percent from the year-ago month to 31,511; year to date, Hyundai’s U.S. sales were up 1.3 percent to 342,217. Kia sales gained 24.4 percent in September to 21,623; year-to-date sales were up 4.6 percent to 238,570, BNET reports.
As noted by Research Recap, makers of smaller, less expensive cars have benefited disproportionately from these schemes. It seems reasonable to assume that many of these purchases are simply bringing forward buying activity that would have occurred anyway in coming months and that this surge in sales will be offset by lower sales going forward. That said, it seems likely that there will be some long-term benefit to Kia, Hyundai and other “lower end” manufacturers such as Skoda.
The scrappage schemes have certainly encouraged many drivers to take a look at these makers for the first time, and finding that they get more for their dollar or deutschemark, and that these companies make some very decent and safe cars with long warranties.
This can only help build the brands of the Korean automakers and through world-of-mouth help them make further inroads into the US and European markets, much as Japanese brands did a few decades ago.
Also, following in the footsteps of Honda and Toyota, the 2011 Sorento will be built at Kia’s first factory in North America, in West Point, Ga, removing another barrier to purchase. For sure, Hyundai/Kia will be stiff competition for the reentry of the Fiat brand into the US following its tie-up with Chrsyler.
Technorati Tags: automotive, Chrysler, Fiat, Hyundai, Kia, Skoda
There are some interesting findings from Moody’s analysis of the impact of European “cash for clunkers” schemes. German automakers all appear to have lost market share under the German scrapping scheme, with luxury brands faring the worst. Makers of “cheap and cheerful” cars were the main beneficiries, with Skoda, Fiat and Hyundai all more than doubling their market share (albeit from a small base).
German brands were the only ones that lost share and even GM’s up-for-adoption Opel unit managed to boost its share. OK, so it’s almost a German brand.
VW maintained its overall lead despite losing over 2 share points while sales of Audis, BMWs and Mercedes Benzes plummeted to below a 2% market share from 8%, 9% and 10% respectively. Of course, buyers of more expensive automobiles are not the primary targets of these schemes, and no doubt some of theses share losses will be recouped now that the scheme has ended. But will they all?
Moody’s said the incentive programs have helped contain the revenue decline at OEMs and auto suppliers and have given the industry time to adjust its cost base to a lower level of demand.
However, Moody’s believes they have resulted in a significant “pull-forward” effect, i.e. they have increased demand only temporarily.
We estimate that approximately one half of purchases supported by the German scheme were merely brought forward and would likely have been made during coming quarters anyway.
“Moreover, as most of the schemes have driven up demand for smaller (and thus lower-priced) vehicles, industry revenues are likely to lag behind volumes in 2009. The mix-effect will also have a negative impact on profit margins as large cars are often more profitable for OEMs than smaller vehicles and have a higher portion of optional equipment with high margins for suppliers. In sum, the scrapping schemes will not prompt any rating upgrades.”
Technorati Tags: auto bailout, automobiles, BMW, Fiat, General-Motors, Mercedes, Volkswagen
RT @RetailTraffic CMBS Deliquencies Drop for First Time in Almost a Year http://bit.ly/125wvs
RT @alacra1 New Post by Integrity Research: Why Does Debt Research Differ from Equity? http://bit.ly/p0NRR
Confidence among UK business professionals sees the biggest rise for two years, suggesting the recession is at an end. http://bit.ly/1Rf7Xk
RT @FTAlphaville Up to five UK building societies could be pushed into mergers over the next couple of years: KPMG http://tinyurl.com/kpya2p
Why venture capital needs more regulation – by Georges van Hoegaerden of the Venture Company (h/t DJ Venture wire) http://bit.ly/45XOIG
Global downward trend in top rates of personal tax about to reverse: KPMG study http://bit.ly/HQpKx
RT @OECDtweet RT @soyroberto: How many weekly hours workers in OECD countries put in. Korea top at 44 vs low at 27 http://bit.ly/26QU1
RT @planetmoney A new kind of Big Mac index – how much time it takes to earn a burger http://bit.ly/X4Fii The Economist via @andyzilch
RT @zerohedge Cash for Clunkers: A welfare program where we borrow from China to buy cars we can’t afford and ship profits to Japan.
RT @StructuredFin Rating Agencies Look to Make Ratings More Transparent with New Tool http://bit.ly/L8Q4V
U, V or W for recovery: The world economy has stopped shrinking. That’s the end of the good news (The Economist) http://bit.ly/pkzlC
Philly Fed survey points to manufacturing rebound (via CreditWritedowns) http://bit.ly/G0JqD
RT @FTAlphaville The shape of things to come is probably not ‘V’: So say Bank of America Merrill Lynch economists http://tinyurl.com/lxejdg
The Blatant Opacity of Banks’ Balance Sheets (The Motley Fool) $BAC $WFC $RF $STI $KEY http://shar.es/FVby
Technorati Tags: banks, building societies, business confidence, CMBS, economic indicators, investment-research, recession, tax-policy, venture-capital
Excerpted from RGE U.S. Economic Outlook Update (available only for RGE Advisory Services subscribers)
A number of economic and financial variables have exhibited signs of improvement recently even if macro indicators are still mixed. The pace of economic deterioration has slowed significantly, and after four quarters of severe contraction in economic activity, RGE Monitor now forecasts that the U.S. will display positive real GDP growth in the second half of 2009. As discussed below, however, that does not mean that the recession in the U.S. is already over, as many analysts have argued. Indeed, all the variables used by the National Bureau of Economic Research (NBER) to date recessionary periods will continue to contract or display sub-par growth.
However, RGE Monitor now anticipates that policy measures and other factors will boost real GDP growth, albeit in a temporary manner, in the second half of 2009. Yet the shape of the recovery (will it be V, U or W?) and other challenges will influence the U.S. economic outlook going forward. According to RGE Monitor, growth will remain well below potential in 2010, while the shape of the recovery will be closer to a U.
Some of the so-called “green shoots” observed in the economy in recent months can be defined as green shoots only if compared with the economic picture painted at the beginning of the year. The contraction in some indicators, such as industrial production, is still comparable to the recessions in the 1970s and 1980s. The July 2009 employment report displayed “only” 247,000 non-farm payroll losses—hardly qualifying as a green shoot in any other post-war recession. However, given how close the U.S. was to entering a depression, even 250,000 payroll losses seem capable of cheering up investors.
In H2 2009, as the economy bottoms out from a record contraction (the worst in the last 60 years), adjustments, such as slower inventory destocking, will occur, while policy measures such as “cash for clunkers” will boost auto production and induce continued spending brought on by the stimulus. According to RGE Monitor, these factors will likely bring U.S. real GDP growth back to positive territory in Q3 2009.
However, the NBER is not likely to call the end of the recession until at least late 2009 or early 2010.
In addition to GDP growth, the NBER looks at four variables in making recession calls: real personal income less transfer payments, real manufacturing and wholesale-retail trade sales, industrial production and payroll employment. While all of these indicators might perform better in H2 than in H1 2009, they are likely to remain in contraction or register sub-par growth. With the labor market now a leading indicator for the recovery in private consumption and the wider economy, trends in payrolls will definitely influence the NBER’s call.
The inventory adjustments will largely be over by the middle of 2010 as will the impact of the stimulus. But since the recovery in private demand will be weak, the economy is poised to slip back to anemic growth (well below potential) in 2010, posing the risk of a double-dip recession. Exhausting most policy measures now means that there will be little room for additional fiscal and monetary stimuli in the future. Policy measures entailing long-term fiscal costs can only provide temporary stimulus to growth. Any sustained economic recovery will ultimately have to come from the revival in private demand—i.e. through consumption and investment—both of which will be constrained by structural factors.
Preceded by a financial crisis, this is the most severe and prolonged recession since the 1930s. Avoiding the short-term pain of private-sector deleveraging by socializing private losses and re-leveraging the public sector with large deficits and debt accumulation will spur long-term costs and crowd out private spending. The drivers of the previous economic boom—consumers, the housing sector and easy credit—will remain under pressure even after the economy is out of recession. Structural weaknesses will persist. Until the economy finds new sources of growth, it will grow below potential for several years.
Potential GDP growth might also take a hit, falling from around 2.8% during 1997-2008 to around 2.25% in the coming years. Productivity growth has held up—on a temporary basis—during the current recession, not due to innovation or productive investment, but due to aggressive cuts in labor and labor hours by firms. In the coming years, productivity growth will remain under pressure as workers age, structural unemployment rises, labor skills deteriorate, and investment and innovation slow.
See also Roubini Project Syndicate Op-Ed: A Phantom Economic Recovery (free access)
Technorati Tags: economic-forecast, GDP
RT @AlacraPulse Henry Blodget says MSFT deal is “significantly more favorable” to YHOO than he originally thought $YHOO http://bit.ly/46u8u
Four of the five top-selling cars in the government’s “Cash for Clunkers” program are made by foreign automakers http://bit.ly/qHHtn
RT @alacra1 Great op-ed page@financialtimes: R.Thaler on Efficient Markets; W.Cohan on inv. banking; John Kay on econ books; P.Satia on Iraq
Overcoming Nuclear Power’s Biggest Hurdle: Guest Post by Noam Neusner The Obama administration is counting on nu.. http://bit.ly/14mnZS
RT @FTAlphaville UK banks with government stakes saw a sharp downgrading of chunks of their debt by S&P http://u.mavrev.com
RT @implode_o_meter Fannie Mae, Freddie Mac Likely to Be Wound Down, Moody’s Says (from Bloomberg) http://bit.ly/vkUwe
Technorati Tags: automakers, investment banks, nuclear-power, UK banks, Yahoo
The United States yesterday introduced a federal ‘Cash for Clunkers’ scheme, providing incentives for motorists to trade-in old vehicles for new, more fuel-efficient models. The scheme is an example of a program, which has become popular as a response by many governments to the current crisis facing the automotive sector. Oxford Analytica looks at how these schemes have fared in Europe.
United Kingdom. The UK scheme has government and manufacturers offering 1,000 pounds each towards the cost of a new car or van if owners trade in a vehicle more than ten years old they have owned for at least a year:
- Increasing prices. In January, due to the recession and oversupply, some analysts were claiming cars were at their lowest ever prices in real terms. Following introduction of the scrappage scheme (and depreciation of the pound) car prices have increased steeply from manufacturers. Prices were also likely to be driven up by the need to recoup some of the costs of the manufacturer’s 1,000-pound share of the 2,000-pound grant.
- Environment. The environmental benefits of the UK scheme have been diluted by the omission of the government to put in place a minimum vehicle efficiency standard under the scheme. Indeed, the benefits of the scheme are highest for targeting the worst polluting cars. For example, using the metric of gallons per hundred mile (gphm) a Toyota Prius gets 2.17 gphm, a RAV4 4.17 and a Range Rover 7.14. This highlights how targeting these worst polluting cars is likely to lead to the largest environmental gain.
- Oversupply. The environmental and economic logic of providing incentives for people to scrap cars still with several years of useful life may also be questioned as it takes energy to produce new cars and may exacerbate problems of oversupply in the sector.
Germany. Germany’s scheme provides a scrappage premium of 2,500 euros (3522 dollars) for new car purchases and has been widely held responsible for a 40% surge in car sales in March and 18% increase in April compared with similar times last year:
- Boosting imports. German vehicle production in April fell 34% compared with a year earlier with exports also falling 48%. Increased sales have been driven by Japanese, South Korean, Italian and French small, low priced cars — for example Hyundai’s sales in Germany have increased by 140% since the beginning of the scheme.
- Diluting stimulus. There is also concern in the wake of a collapse in the used car market that scrappage has shifted activity from used-car sector to new cars. New car buyers may also be bringing forward their plans to buy, to take advantage of the temporary scheme. This suggests future sales will be lower when the scheme ends causing a ‘hang-over’ in sales. There is also the chance that people are trading-in second cars which they do not value highly and did not drive much.
- Short-run political gain? The temporary German scheme has now been extended to the end of 2009. With an election due in September 2009, this highlights the danger that these schemes can become entrenched in the political economy. This would not only be costly for the taxpayer but would fuel an over production of cars, distort competition between sectors and delay the restructuring of the automotive sector penalising firms that could better read industry trends. However, these negative arguments can be tempered by the observation that the scrappage scheme in Germany seems to have rewarded the producers of small, efficient cars that were better positioned for the downturn anyway — potentially accentuating the structural shift desired by policy makers.
If designed well, vehicle scrappage schemes can provide an effective temporary boost to ease the effects of the economic crisis on the auto sector and consumers.
European experience suggests sales of small, cheap cars especially benefit. However, scrappage schemes are likely to disappoint as a tool to assist struggling car manufacturers that produce larger, more expensive and often polluting vehicles.
Technorati Tags: automotive, cash for clunkers, environment, greenhouse-gases, stimulus
While politicians of all stripes, egged on by most of the media, were foaming at the mouth over the financially insignificant “AIG bonus scandal,” visitors to Research Recap during the last week were focused on meatier fare.
Our top post this week was based on a CreditSights analysis of the Flow of Funds report, once considered fodder for only the hungriest of economic analysts, but now the stuff of headlines. The worrisome implication is that the US is facing a massive cut in lending to US consumers and the corporate sector over a period of not months, but years.
In second place came another complex but important topic: the potential impact of mortgage cramdowns ordered by bankruptcy judges. While much of the mortgage industry has been strongly opposed to the legislation, the analysis finds that lenders (and hence holders of mortgage-backed securities) might fare better under a cramdown scenario than under foreclosure.
Also drawing interest: Jim Kaplan’s Guest post defending Moody’s for publishing a “Bottom Rung” of companies at highest risk of default. Of course, Kaplan’s Audit Integrity is in the business of identifying companies with high-risk corporate governance attributes, but his point is valid nonetheless. If only the rating agencies had been as vigilant about identifying high-risk debt derivatives.
There has been no shortage of horror stories about the misfortunes of many hedge funds, but another popular post from Aite found that as a group hedge funds have actually fared pretty well. Although there will undoubtedly be regulatory changes and adjustments to the business model, hedge funds are here to stay - though the sector is a prime example of past performance being no indication of future results.
Recent Reason for Reading Research Recap:
Apparently, the German government reformed its vehicle tax, which provided ample incentive for Germans to dump their clunkers and order new cars. Perhaps U.S. policymakers could take a page from the German playbook.
U.S. Automakers Race to the Bottom, (ResearchRecap, March 5, 2009)
Proposed bill would allow government to buy vehicles — at least eight years old — for recycled parts and grant owners vouchers toward more fuel-efficient N. American vehicles.
(Washington Post, March 19, 2009)
Technorati Tags: auto bailout, corporate-default, cramdown, credit-markets, foreclosures, Hedge-Funds, lending, Moodys, mortgage-backed-securities, Zeitgeist
Credit analyst Shelly Lombard at Gimme Credit LLC is calling it a “race to the bottom.” Ford Motor Co. (NYSE: F) and General Motors (NYSE: GM) both reported plunging sales for February on Tuesday, with Ford sales down 48 percent from a year ago and GM sales down 53 percent.
This is looking like a race to the bottom and there is no grand prize, just grief for the first one to get there. The most frightening thing is that 2009’s seasonally adjusted annualized sales rate is threatening to come in below the two auto makers’ worst case scenarios.
Now comes the expected word of GM’s auditors’ “substantial doubt” about the firm’s ability to survive outside bankruptcy if it fails to stem its losses and stop burning cash.
How bad is it on the ground? At The Truth about Cars, you can see the latest memo from GM to its dealers, detailing how the company plans to buy back vehicles from bankrupt dealerships.
GM and Ford had plenty of company in their miserable sales results, with Nissan, Toyota and Honda reporting 37 percent, 40 percent and 38 percent declines, respectively, for February.
But believe it or not, German auto sales rose 21 percent in February, according to Verband der Automobilindustrie. Here’s what VDA President Matthias Wissmann said at the Geneva Auto Show:
These are the highest February sales numbers in the last ten years. For the first time in six months, registrations are growing. We expect that domestic sales of the complete first quarter will be above prior year numbers.
So what gives? Apparently, the German government reformed its vehicle tax, which provided ample incentive for Germans to dump their clunkers and order new cars.
Perhaps U.S. policymakers could take a page from the German playbook.
Technorati Tags: (F), (GM), auto financing, auto sales, Ford, General-Motors, German auto sales, recession, VDA
