Ford Sales Decline 48%, Toyota 32%, Honda 21%, Nissan 35%

Once again the auto sales statistics were grim with Ford leading the way. GM and Chrysler have yet to report. Please consider Ford’s February U.S. Auto Sales Declined 48% as Economy Slumped.

Ford Motor Co.’s U.S. sales fell 48 percent in February, the 15th straight monthly decline, as unemployment rose and consumer confidence weakened.

Sales of cars and trucks dropped to 99,400 from 192,799 a year earlier, the Dearborn, Michigan-based company said today in a statement.

No automaker is immune to the slump. Toyota, forecasting its first loss in 59 years, may ask for 200 billion yen ($2 billion) in loans for its credit unit from the Japanese government as private financing has become too expensive, public broadcaster NHK reported today, without naming its source.

Opel Running Out of Cash

GM says Opel Running Out of Cash; Three Factories Risk Closure.

General Motors Corp. said its European Opel unit risks running out of cash next quarter, threatening three factories with closure and imperiling as many as 300,000 jobs across the region.

Opel, based in Ruesselsheim, near Frankfurt, is struggling with 30 percent overcapacity as sales slide, GM’s European chief, Carl-Peter Forster, said today in a press briefing at the Geneva International Motor Show. He didn’t specify which sites might close. The U.S. company has major plants in Germany, Spain, Poland, Belgium and the U.K.

GM expects European governments to reach decisions in “days or weeks” on aid the carmaker is seeking to help save operations in the region, Chief Operating Officer Fritz Henderson said. Any interest in the Saab brand depends on a bailout from the Swedish government, according to the executive, who said GM is determined to eliminate failing units in order to channel resources toward more successful models.

“GM will be global, we think,” Henderson said in an interview earlier. “But we have to be realistic, and the environment today requires us to take a lot of tough measures. We need to focus our brand portfolio. We need to get down to fewer brands that can focus very clearly on the market.”

A failure to reorganize Saab would lead to its bankruptcy, according to Detroit-based GM, which wants to get rid of the unit but aims to keep Opel and the Vauxhall brand in the U.K.

Henderson said GM is “wide open” to options for saving the business and may still end up with a stake of more than 50 percent. Wage cuts, shorter hours and a buyout of worker contracts are being considered to avoid plant closures, he said.

Hypocrisy From GM

Look at the hypocrisy from Henderson. He talks about hard choices but refuses to make any. The way to reduce overcapacity is to shut plants. It's time to give up on Saab, Opel, Hummer, Saturn, etc. instead of seeking help from governments to keep those failed brands alive. Plant closures are absolutely necessary.

Japan Car Sales Hit 35-Year Low

Bloomberg is reporting Toyota Leads Drop as Japan Car Sales Hit 35-Year Low.

Toyota Motor Corp. and Honda Motor Co., Japan’s two biggest automakers, led a drop in the country’s monthly vehicle sales as falling wages and rising unemployment cut demand to the lowest level in 35 years.

Sales of cars, trucks and buses, excluding minicars, fell 32 percent to 218,212 vehicles in February, the Japan Automobile Dealers Association said in a statement today. Toyota’s sales slipped 32 percent, Honda’s slumped 21 percent and Nissan Motor Co., the country’s No. 3 automaker, sold 35 percent fewer vehicles.

Japanese consumers have slashed spending on cars as Toyota, Sony Corp. and other manufacturers shed workers and curb production on plunging demand. The country’s economy, the world’s second-biggest, shrank at the fastest pace since the 1974 oil shock last quarter.

Chrysler Struggles To Stay Alive

Inquiring minds are reading Chrysler Talks Stall as Banks Balk at Trading Loans for Equity.

Chrysler LLC, needing lender concessions by March 31, isn’t negotiating with its banks because it can’t persuade them to discuss trading loans for uncertain equity, people familiar with the companies’ actions say.

Banks have little incentive to trade their loans, and the only other creditors Chrysler lists that could take more equity for debt are the U.S. government and the United Auto Workers union, which already has agreed in principle to reduce its obligation by 50 percent.

“It’s going to be a tough sell to get the banks to give up their position for worthless equity,” said Don Workman, a bankruptcy attorney at Baker & Hostetler LLP in Washington. “The best Chrysler can hope is that the government is going to force them to do it.”

Chrysler Should Give Up The Ghost

The best thing for the banks and for the auto industry is the same. Chrysler should give up the ghost. To keep Chrysler alive will require banks to trade debt for worthless equity. This will hurt the creditors while keeping the zombie Chrysler alive only temporarily. A few months down the road, Chrysler will need yet another bailout from someone. In the meantime Chrysler's production will continue to add to the massive overcapacity in autos.

The attempt to keep all of these zombie auto companies alive means that none of them can be profitable. It is the worst possible approach.

Mike "Mish" Shedlock
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American Express, Chase Cut Card Limits As Chargeoffs Soar

Credit card chargeoffs are soaring. In response American Express, Chase Cut Card Limits, Lowering Credit Scores.

About 45 percent of U.S. banks reduced credit limits for new or existing credit-card customers in the fourth quarter of 2008, according to a Federal Reserve January survey of senior loan officers. Financial institutions may slash $2 trillion in credit-card lines in the next 18 months, Meredith Whitney, a former Oppenheimer & Co. analyst, wrote in a Nov. 30 report.

“Don’t cancel the card to spite the card company because you’ll just hurt your own credit,” said Emily Peters, San Francisco-based personal finance expert at consumer Web Site credit.com.

Cardholders will damage their credit history if they cancel an older account and lose the available credit on that card, she said.

Chase increased the minimum payment to 5 percent from 2 percent for certain borrowers with large balances, Capital One Financial Corp. increased the rates for new customers on fifteen cards and Citigroup and Bank of America Corp. began charging a 3 percent fee for all transactions made outside the U.S. in U.S. dollars, according to Bill Hardekopf, chief executive officer of LowCards.com, a Web site that compares the rates of almost 1,100 credit cards.

American Express’ charge-off rates of loans rose to 8.29 percent in January from 7.23 percent a month earlier, a 15 percent increase, based on Bloomberg data. Chase’s charge-off rates increased to 5.94 percent from 5.32 percent, a 12 percent jump.

Cardholders most likely to see credit limits slashed have large balances, delinquent payments or recent dips in credit scores, said Arnold of CardRatings.com.

Consumer Lending Standards Tighten Further

According to the Senior Loan Officer Opinion Survey on Bank Lending Practices consumer lending standards continue to tighten.

Large fractions of domestic banks continued to report a tightening of policies on both credit card and other consumer loans over the past three months. Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card and other consumer loans, about the same fractions as in the October survey. Close to 55 percent of respondents reported having reduced the extent to which both credit card accounts and other consumer loans were granted to customers who did not meet credit-scoring thresholds. Roughly 45 percent of the respondents also reported having raised minimum required credit scores on credit card accounts and other consumer loans, a proportion slightly lower than posted in the October survey. About 45 percent of banks reported having lowered credit limits for either new or existing credit card customers, down from the 60 percent that reported doing so in the October survey.

On net, about 15 percent of domestic banks indicated that they had become either somewhat or much less willing to make consumer installment loans over the past three months, a notable change from the roughly 45 percent that so indicated in the October survey. About 45 percent of respondents, on net, reported that they had experienced weaker demand for consumer loans of all types, similar to the fraction in the October survey.

Blessing In Disguise

Consumers are complaining that their minimum payments are going up. Instead they should consider it a blessing. Anyone carrying a balance month to month is doing something wrong, most likely living beyond their means and/or not having a cash cushion to fall back on in case of emergencies.

Utilization Rate Factor

This advice to not cancel cards is interesting. By implication one can increase his credit score simply by getting another card. I don't buy that line of thinking, but here is an example from the first article.

The credit limits on Brown’s cards have been lowered, which has raised his debt relative to his available credit. This so-called utilization rate is a key factor in determining credit scores. Brown, a 58-year-old construction company owner in San Diego, has seen his credit score drop to 650 from 760 over the past 13 months.

“Interest rates on all of my cards are going up now and my minimum payments are almost doubling because it looks like I’ve maxed out my cards,” said Brown, who uses credit cards to fund his home-building company. “It’s a Catch-22.”

I think the key factor in Brown's case is the fact that he is using credit cards to fund his home-building company. Funding a home building construction company with credit cards is a damn risky thing for lenders in this environment. I don't blame the lenders one bit for being nervous.

Mortgage Equity Withdrawal (MEW) went first, Home Equity Lines Of Credit (HELOCs) went next, now credit card lines are being cut every month. In this environment there is little hope for those with no cash cushion who lose their jobs and credit lines.

Mike "Mish" Shedlock
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Time To Rollback Government Salaries Across The Board

In response to falling state revenues, the state of Oregon slashed $11.1 million from its judicial budget. That in turn prompted the Chief Justice to order Oregon State Courts to Close Fridays.

Oregonians will wait longer for their day in court after Chief Justice Paul De Muniz announced today he's closing all state courts on Fridays and forcing 1,800 judicial staffers to take Fridays off without pay.

The decision came after the Legislature's combined Ways and Means Committee voted today to cut $11.1 million from the state Judicial Department's 2007-09 budget. That's a 28 percent cut from the parts of the budget available to cut.

The closures will begin Friday, March 13 and last at least through June 30, says Phil Lemman, a Judicial Department spokesman. They affect the state Supreme Court, Court of Appeals, Tax Court, county circuit courts and administrative offices.

About 1,800 judicial staffers statewide will face a 20-percent pay cut when they're forced to take Fridays off. But Lemman says judges' salaries are protected by state law and cannot be reduced until they finish their elected term.

As a result, Lemman says, circuit court judges will keep the 17-percent pay raise they received last year from the Legislature. Their current annual salary is $112,488.

Chief Justice Paul J. De Muniz Blasts The Legislature

Chief Justice Paul J. De Muniz blasted the legislature in a Press Release On Court Closures.

“These budget reductions are a huge blow to Oregon’s courts and the people we serve and will affect public safety, the welfare of children, and everyone who needs their day in court,” Chief Justice De Muniz said. “Oregonians will have the unfortunate opportunity to learn how justice delayed means justice denied.”

The closures are made necessary by an $11.1 million General Fund reduction to the Oregon Judicial Department’s 2007-09 budget. That cut was approved today by the legislative Ways and Means Committee. If approved by the full legislature and signed by the governor, expected next week, the cuts will require all department employees to take 16 unpaid furlough days before the end of June.

Chief Justice De Muniz said he will issue a closure order when the governor signs the budget reduction into law. The Friday closures will affect over 12,000 trials and other proceedings already scheduled through June. The closures threaten the courts’ ability to meet statutory deadlines in all cases and cause lengthy delays in resolving landlord/tenant, divorce, child support, child custody, and many other civil cases. More than 50,000 new cases are filed in Oregon circuit courts each month. Of particular concern is the continuing ability of courts to meet federal deadlines to review and handle child welfare cases to ensure their proper placement.

If Chief Justice De Muniz feels so badly then he and the circuit court justices ought to agree to forgo their 17% pay hike to keep the court open on Fridays. Instead, De Muniz along with the Supreme Court, Court of Appeals, Tax Court, and the county circuit court judges are taking a 17% raise while working 20% fewer days.

I see no shared sacrifice offer from the judges, instead I see crocodile tears and an extra day of golf. Tough decisions are going to have to be made but for now they were postponed.

It's time to roll back the salaries of all elected and appointed government officials at every level including local, state, and federal. It would be nice to see this happen voluntarily instead of by force.

Mike "Mish" Shedlock
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ISM Manufacturing Sector Contracts 13th Consecutive Month

The Institute for Supply Management February 2009 Manufacturing ISM Report On Business® shows "Economic activity in the manufacturing sector failed to grow in February for the 13th consecutive month, and the overall economy contracted for the fifth consecutive month."

Manufacturing At A Glance



click on chart for sharper image

PMI

Manufacturing contracted in February as the PMI registered 35.8 percent, which is 0.2 percentage point higher than the 35.6 percent reported in January. This is the 13th consecutive month of contraction in the manufacturing sector. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates contraction in both the overall economy and the manufacturing sector.



Prices

In February, none of the 18 manufacturing industries reported paying higher prices.

Although inventories are rapidly shrinking, new orders are shrinking even faster. Note that customer inventories are still rising. Thus, further cutbacks in production are necessary and prices will remain under pressure.

There are many other charts in the report. Please take a look.

Mike "Mish" Shedlock
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You Walk Away LLC sued in class action lawsuit

Last week You Walk Away LLC was sued for alleged violations of California State Law. Here is a copy of the News Release.

Distressed Homeowners Sue Carlsbad-based “Foreclosure Consultant” YOU WALK AWAY, LLC for Violations of California State Law

CAPISTRANO BEACH, Calif., February 23, 2009 – The Law Offices of Benjamin L. Meeker, APC announced today that it represents the plaintiffs in a class action lawsuit filed against You Walk Away, LLC, a “foreclosure consultant” company located in Carlsbad, California.

According to the complaint filed in San Diego County Superior Court on February 13, 2009, You Walk Away peddles foreclosure consulting “services” and “protection kits” through which it entices desperate homeowners into paying an upfront fee of $995 for an essentially worthless service.

“We believe that You Walk Away’s conduct falls within that described by the California Attorney General’s Office as the ‘Foreclosure For a Fee Scam’” says attorney Benjamin Meeker. As described by the California Attorney General’s Office, foreclosure consultants who perpetrate this scam advertise to homeowners that they can provide “advice” on staying in their home until they are evicted.

“As its business name illustrates, the plaintiffs allege that You Walk Away entices homeowners into believing that simply walking away from a foreclosed home has few, if any, consequences, while charging hefty fees for its products” Mr. Meeker explained.

You Walk Away Responds

Jon Maddux, CEO of You Walk Away responds with a list of some of the things You Walk Away provides.

1. We provide a personalized cease and desist letter addressed to your lender to stop harassing phone calls.

2. We will provide you with the amount of days you have to live in your house payment free. We stay on top of your walk away plan and keep you up to date with weekly progress emails. We also will notify you if the lender is taking longer than expected subsequently giving you more time in your home payment free.

3. You get a personal consultation with a highly experienced real estate attorney in your state, making sure that you know your rights and that you are protected by the law.

4. You will have an experienced YouWalkAway advocate available to answer any questions you may have during the entire process.

5. You will get a personal consultation with a CPA to go over any tax questions related to walking away.

6. You get access to our attorney network to answer questions via email about your foreclosure throughout the entire process.

7. You will be referred to a 3rd party BBB accredited law firm who has legally removed thousands of foreclosures.

My Take On You Walk Away

Is $995 too much to pay for a decision involving potentially hundreds of thousands of dollars, to make sure everything is done in a legal manner? I think not and if I was to walk away, I would opt for making sure I did not make any mistakes.

Arguably some of what You Walk Away provides can be researched for free, assuming one has the time and energy. On the other hand, a defendant can represent himself in court for free, but that does not make it advisable.

Besides, it is not the amount being charged that is at issue, but whether or not there is a scam. I am not a lawyer, but it seems clear to me that You Walk Away provides a legitimate service.

I have talked about the business model of You Walk Away on many occasions. Here is a sampling.

• January 28, 2008: 60 Minutes Legitimizes Walking Away
• January 29, 2008 The Business of Walking Away
• February 07, 2008 Moral Obligations Of Walking Away
• February 15, 2008 Businesses Advised To Walk Away
• April 15, 2008 Walking Away: The Next Mortgage Crisis

I can sum up my position on all of those as follows: If it's in your best interest to walk, and you are willing to pay the penalty (primarily a bad mark on your credit), then walk.

Anyone who objects on moral grounds certainly has the right to not walk.

Some might notice the ad for You Walk Away on the right side of my blog and object that I am biased. To address that concern, and because I feel strongly about the right to walk away in accordance of the law, I am waiving my fee on that ad for the time being.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Commercial Real Estate Mutiny In Downtown LA

Numerous merchants in LA's Grand Central Market did not pay their February rents for more than two weeks. The merchants were protesting high rents and advertising fees as described by Los Angeles DownTown in Mutiny at the Market.

A tenants' mutiny at Grand Central Market was resolved last week after a group of merchants who had withheld their February rents came to an agreement with the landlord and paid up.

As part of the resolution with landlord The Yellin Company, rents will be lowered and advertising fees charged to the tenants will be eliminated.

Adele Yellin, president of the Yellin Company, said that the move will lower costs for the 40 merchants.

"We do understand the pressure that our tenants are under in these times and we've taken steps to reduce their rent by eliminating the advertising budget," Yellin said.

The situation had been bubbling for months, and began to come to a head in late January. That is when Ralph Leech, an attorney representing some of the Grand Central Market tenants, sent a letter to the Yellin Company citing the deteriorating economy and asking for a 30% reduction in rents and a discontinuation of the monthly publicity charge that pays for advertising the market.

The crisis quickly escalated, as most of the tenants withheld the rents that were due Feb. 1. That led the Yellin Company to send notices to those who had not paid, threatening eviction.

Last week, both sides said they had reached a tentative agreement that should alleviate some of the financial woes.

Yellin and tenants who spoke with Downtown News said there will not be an-across-the-board 30% reduction, but instead the landlord will deal with each tenant individually. The monthly publicity fee paid by the merchants, which can vary from a few hundred to more than $1,000 a month, was removed from their lease requirements.

"The businesses are very slow. People are using lines of credit to pay rent. It's a bad situation, but hopefully we'll survive. We just need help," said Robina Sookasya, owner of Kabab and More, a Mediterranean food vendor.

The mass mutiny at Grand Central Market provides a strong hint at what's coming.

With rising unemployment and falling discretionary spending, the economy is not coming back anytime soon. Thus, tapping credit lines to pay rent is a tactic guaranteed to fail. Yet, the economic situation is such that using lines to pay bills will continue until every cent of those credit lines are used up. After all, what vendor will voluntarily go out of business now?

Those lines of credit will eventually be defaulted on and that in turn will sink the regional banks who made the loans.

This crisis was "resolved" for now, but how many more rounds like this can the tenants take? Equally important, how many more rounds like this can the Yellin Company take? Next, multiply this scene by every similar market in the US. A conclusion is not hard to reach: A massive fallout on commercial real estate is right around the corner.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Warren Buffett Loses His Way

Bloomberg is reporting Berkshire Profit Plunges 96% on Stock Market Bets.

Warren Buffett’s Berkshire Hathaway Inc. posted a fifth-straight profit drop, the longest streak of quarterly declines in at least 17 years, on losses from derivative bets tied to stock markets.

Fourth-quarter net income fell 96 percent to $117 million, or $76 a share, from $2.95 billion, or $1,904 a share, in the same period a year earlier, the Omaha, Nebraska-based firm said in its annual report. Book value per share, a measure of assets minus liabilities that Buffett highlights in his yearly letter to shareholders, slipped 9.6 percent for all of 2008, the worst performance since Buffett took control in 1965.

“The credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country” at the end of 2008, Buffett in his letter to shareholders today. “A freefall in business activity ensued, accelerating at a pace that I have never before witnessed.”

Berkshire shares have fallen 44 percent in the past year as the value of the firm’s top equity holdings dropped and losses increased on the derivatives. Nineteen of the top 20 stocks in Berkshire’s U.S. portfolio declined last year.

‘Major Mistake’

Coca-Cola Co., Berkshire’s top holding, dropped 26 percent. American Express Co. plunged 64 percent. Oil producer ConocoPhillips fell 41 percent, and Buffett said in his shareholder letter that he made a “major mistake” in buying shares when oil and gas prices were near their peak.

Berkshire’s equity derivatives were sold to undisclosed buyers for $4.85 billion as of Sept. 30. The derivatives are tied to four indexes -- the S&P, the U.K.’s FTSE 100 Index, the Dow Jones Euro Stoxx 50 Index and Japan’s Nikkei 225 Stock Average. The indexes would all have to fall to zero for Berkshire to be liable for the entire amount at risk, which was $37.1 billion as of Dec. 31 and can fluctuate with currency valuations. Buffett previously identified only the S&P.

Under the agreements, Berkshire must pay out if, on specific dates starting in 2019, the four benchmarks are below the point where they were when he made the agreements. Buffett, recognized as one of the world’s pre-eminent investors, gets to use the money in the interim. The liabilities on the derivatives are accounting losses that reflect the falling value of the stock indexes, not cash Berkshire has paid out.

“Derivatives are dangerous,” Buffett said in the annual letter. “Our expectation, though it is far from a sure thing, is that we will do better than break even and that the substantial investment income we earn on the funds will be frosting on the cake.”

The worldwide recession and global contraction of the credit markets are giving Buffett, 78, opportunities to invest some of the firm’s cash hoard, which was about $25.5 billion at yearend, down from $33.4 billion three months earlier.

According to the Wall Street Journal Buffett's exposure on those derivatives now stands at $10 billion up from $6.7 billion at the end of the third quarter. See Berkshire Hathaway Reports Worst Year Ever for more details.

I do not buy Buffett's "accounting loss" defense that looks only at cash paid out. That defense smacks of the same logic that says Bear Stearns and Lehman were well capitalized and that Citigroup, Ambac, and MBI still are.

Of course Berkshire Hathaway has enough capital at this point to weather the storm. However, the fact remains Buffett made a major mistake in the timing of those derivative bets. Conceptually, this is a far bigger mistake than his ill-timed buy of more ConocoPhillips at the peak. ConocoPhillips is not going to zero, many of the financial companies in the S&P will.

I still wonder what he possibly could have been thinking to make such a bet right as the entire world was entering a recession. There has not been a recession in history where equity prices did not decline substantially, yet he made his bets before the recession was even acknowledged.

Buffett claims the bet frees up cash. It actually does no such thing. It ties up cash even though he claims by agreement it doesn't. Cash will only be "freed up" when he is ahead on the bet. That may or may not happen.

Had he been "freeing up cash" now instead of when he did, he would have $10 billion more "free cash" instead of being billions of dollars in the hole.

Warren Buffett is clearly an incredibly bright man. And while everyone makes mistakes, what strikes me most is his attempt to defend an indefensible derivatives play made at the worst possible time, while simultaneously stating “Derivatives Are Dangerous.”

Regardless of what eventually happens, there is no frosting on Buffett's derivatives cake. Warren Buffett has lost his way.

Mike "Mish" Shedlock
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