NationStates Jolt Archive

NOTE: And maybe not just for investors! :(


Junk Ratings Make a Big Splash, Ripples Are Next (http://www.nytimes.com/2005/05/06/automobiles/06bond.html?th&emc=th)

By JONATHAN FUERBRINGER
Published: May 6, 2005

Many investors knew it was coming, but they did not expect that two of the nation's biggest issuers of bonds would be reduced to junk status so soon.

As a result, Standard & Poor's announcement at midday yesterday that it was cutting its credit ratings for both General Motors and the Ford Motor Company set off a selling spree in the corporate bond market. The rating cut to below investment grade begins a process of adjustment that could ripple through, and roil, the fixed-income markets for weeks.

"It was a Richter-scale event," said Edward B. Marrinan, head investment-grade strategist at J. P. Morgan. "The market is selling off violently," he said from the trading floor, soon after the announcement. "The downgrade was no surprise, but the timing of it was and has caught the market on the hop."

Some investors - like pension funds that prefer investment-grade bonds or are restricted to only such securities - will now sell their G.M. and Ford bonds to those that invest in high-yield or junk bonds and to other investors, including hedge funds, that favor so-called distressed securities.

Read the entire article. (http://www.nytimes.com/2005/05/06/automobiles/06bond.html?th&emc=th)

This is bad news. I'm glad I bought more GE and didnt buy any automotive co stock.

Yeah, like who didn't know this two years ago. Those companies are dogs.

What I like though is the crap fuckers that are running them are blaming health care costs, rather than their inabilty to get a decent car to market in less than six years.

STOP MAKING CRAP, your company will recover.

This was to be expected. The fact that other car manufacturers like toyota took the risk of using resources to create fuel efficienct cars (hybrids) American domestic manufacturers sat on their ass's and did nothing. As the demand for oil exceeded the supply the price for gas climed through the roof. More people moved to hybrids to cover their fuel costs. Looking at all possibilities they found that neither ford nor GM had any hybrids in their lines. Hence they become a null factor in their buying process. It is Ford and GM's fault, they were stupid, they deserve to die as a company if they are not willing to look to the future. (almost every other company did)

This was to be expected. The fact that other car manufacturers like toyota took the risk of using resources to create fuel efficienct cars (hybrids) American domestic manufacturers sat on their ass's and did nothing. As the demand for oil exceeded the supply the price for gas climed through the roof. More people moved to hybrids to cover their fuel costs. Looking at all possibilities they found that neither ford nor GM had any hybrids in their lines. Hence they become a null factor in their buying process. It is Ford and GM's fault, they were stupid, they deserve to die as a company if they are not willing to look to the future. (almost every other company did)


Ford has had a hybrid on the market for a while and GM is working on several.

Hrrmmmm... I just bought a brand new GM car and I'm wonderin' if GM will still be 'round until the warranty expires. :(

Ford has had a hybrid on the market for a while and GM is working on several.

Ford has the escape. (36mpg city/ 31 hwy.)
Although by definition a hybrid, it doesnt compare to the ones toyota put out, for example, toyota has the prius (and others) (60mpg city/ 51 hwy) If a consumer is looking for a car based solely on gas efficiency they will choose foreign cars over anything ford offers and people may not want to wait until GM puts out their own.

This was front page news in the Detroit Press. Admittedly, they missed the bus on engine efficientcy. They made bigger, with short term profits, and did not establish a dominant market share in the smaller, fuel efficient cars.

This is a terrible blow for the US car industry, but more so for my home state, Michigan. If Ford and/or GM goes under, the economy of michigan woud collapse. Ford and GM combined employ hundereds of thousands of workers each. Furthermore, there are MILLIONS of workers making parts for GM and Ford products.

Terrible, terrible.

Dont worry America will make a war and require copius amounts of Vehicles and when its over will destroy all the vehicles like they did in WWII so as not to flood the market!

Globalization strikes the USA.

I don't think fuel economy is the issue here, as it is too fast a response for the auto market to be responding to oil prices at the moment. I think it is just pure strategical mismanagement, with the manufacturers not really paying attention to what the market is demanding, nor adjusting their manufacturing patterns to fit what were predictable shifts in the market.

Lower consumer confidence meant less frequent changes of vehicle, meaning lower demand. Keeping production output high when the demand is known to be falling off is simply being a slave to the current production figures and a lack of strategic oversight. It happens in many companies, just these two are bigger than most.

I seriously hope that other manufacturers learn from this, or else the USA is in for a very rough couple of years at least.

Globalization strikes the USA.

I don't think fuel economy is the issue here, as it is too fast a response for the auto market to be responding to oil prices at the moment.
(...)
I seriously hope that other manufacturers learn from this, or else the USA is in for a very rough couple of years at least.

I beg to differ. Fuel economy may not be the only issue, but it is a factor. A company that does not look for future problems is doomed. Toyota (and others) recognized the problem and took pre-emptive action years ago, for them it was an issue. The fact that ford and GM were slow at doing this leaves them behind.

And yes, I hope manufacturers learn from this too, the automobile sector has long been a staple in the American economy. They need to get some smarter people in there.

China's auto industry leaders are probably giggling with delight at how they're going to introduce themselves to the US market.

Maybe this is the time to invest in the American car companies. I remember that GM hemorrhaged money in the early nineties, only to be the first to cash into the SUV craze later that decade. Their stock soared.
It is my firm belief that GM won't go anywhere. One their cash cushion contracts a bit, their board will wake up and fight the unions that make it loose money. I'm confident that GM is a bargain compared to what it will be in a few years.

Globalization strikes the USA.

I don't think fuel economy is the issue here, as it is too fast a response for the auto market to be responding to oil prices at the moment. I think it is just pure strategical mismanagement, with the manufacturers not really paying attention to what the market is demanding, nor adjusting their manufacturing patterns to fit what were predictable shifts in the market.

Lower consumer confidence meant less frequent changes of vehicle, meaning lower demand. Keeping production output high when the demand is known to be falling off is simply being a slave to the current production figures and a lack of strategic oversight. It happens in many companies, just these two are bigger than most.

I seriously hope that other manufacturers learn from this, or else the USA is in for a very rough couple of years at least.

You know why production is high? Because GM does not run for its shareholders, but its labor union, the United Auto Workers. The UAW demands the usual salaries and pensions. The so called "legacy" costs of its 340,000 living retirees exceeds the price of steel per car. But they make it very hard to trim the workforce. In their contract, all factories must run at 80% capacity minimum, and it is nearly impossible to fire an employee. The only way GM can really shrink is by attrition.

I never liked American cars. I prefer my parents' Civic, but I'd like them to have a Toyota Prius (hybrid petrol/electricity).

GM and Ford are tanking because they suffer from major problems. The first is that their designs for cars are poorer or more outdated than the competition, they get mediocre gas mileage and are of terrible quality (Ford F150, three years in garage, less than 50k miles and rust spotted). This is combined with the unions who are unwilling to compromise despite the dire situation, and there's no reason they won't collapse. The junk status is both deserved and required. Having them go under would be the wake up call the UAW needs.

When the American automotive market tanks all the people who lost their jobs will be hired by Toyota, so no problem there.

When the American automotive market tanks all the people who lost their jobs will be hired by Toyota, so no problem there.

Toyota probably pays better as well. As I recall, they outsource operations in to the US, not out of it like GM and Ford!

Toyota probably pays better as well. As I recall, they outsource operations in to the US, not out of it like GM and Ford!That's why Toyota is in the Nascar Truck Series. The Toyota Tacoma is made entirely in the USA. With American parts even.

GM and Ford are tanking because they suffer from major problems. The first is that their designs for cars are poorer or more outdated than the competition, they get mediocre gas mileage and are of terrible quality (Ford F150, three years in garage, less than 50k miles and rust spotted). This is combined with the unions who are unwilling to compromise despite the dire situation, and there's no reason they won't collapse. The junk status is both deserved and required. Having them go under would be the wake up call the UAW needs.
It needn't be this way. The design problems are due to redundancy they create. They have only a few chases for all their cars, yet simply sell them under different brand names. They'd be wise to eliminate a few brands. I personally suggest that Buick and Pontiac must go. Chevrolet has the recognition, and the Cadillacs are probably the most profitable brands. Their designs these days are probably the best for Cadillacs ever.

Meh, stock value. The market is so full of speculation, people looking for a quick buck, and those who think they know but really don't, that stock market value means absolutely nothing about a company.

Take the records for the last three years of GM and FMC: http://www.hoovers.com/general-motors/--ID__10640--/free-co-fin-annual.xhtml and http://www.hoovers.com/general-motors/--ID__10640--/free-co-fin-annual.xhtml

Ford's profit has increased nicely, while GM's has remained more stable, although the before taxes took a dive. Both company's assets / liabilities ratio is around the ideal 50%.

If you look at stock value data, their stock prices soared during the nineties, without there having really been an increase in profit, sales, etc. That must have been pure speculation, a few growing incredibly rich by getting money from a lot of hopefuls who thought their stock would keep growing and growing forever and ever without their companies having to make absolutely anything. Of course, those values have no legs and finally dropped.

In general they seem to be doing nicely and, if facing a down, they can recover well. There will be GM and Ford for many many years. Of course, those investing in the stock market are screwed.

-SNIP-

Good research. I thought I smelled a rat when I heard about this "dire" news. Folks, as said before, stock price and the and the actual value and status of a company are two different things.

Ford and GM's stock were grossly over-priced. Now that price will come down as investors start cashing out and bringing the price to more reasonable levels. There is a possibility that the stock will go BELOW what it should, but the stock should come down first and then adjust to its actual market value.

Perhaps this correction of the market distortion will have ripple effect on other sectors. This would probably be a very good thing; ironing out some of the stock prices for companies that have over-priced, unrealistic stock value.