Debt Rattle, June 21 2008: Financa Morgana

Dorothea Lange Breakfast, Lunch and Dinner July 1939
Noontime chores: feeding chickens on Negro tenant farm. Granville County, North Carolina.

Ilargi: It must be coincidence.

While we usually deal with what I see as details and subtleties here, today of all days, summer solstice, comes with a number of clearly defined major themes in the world of finance fata morgana. Take a listen:

1 Waves and Cycles
Stoneleigh and I play clearly defined roles when it comes to the more science based approach of economics, the wave theories, Kondratieff cycles etc. That is to say, she brings them up all the time, and I then laugh and say: yeah, right, economic science?!. I do that because:

1. It all is and will remain an attempt at fitting square pegs in round holes, i.e. catching human behavior in models derived from physics
   
2. It doesn’t have, in my view, nearly enough space for market manipulation, which I am certain is far more rampant than we allow ourselves to believe
   
3. Most importantly, the collapse we are about to witness will break through the models so far and so violently that they will become obsolete
   
4. It’s fun to play tricks with Stoneleigh’s mind

That all said, do read Mike Nystrom on breaking the 34 year trendline. It’s not without a message. For those who don’t know the material, Elliot Wave has a great freebie until Wednesday.

2 Detroit
On Friday, major reports came from Ford and GM, and they were not good ones. Their shares plunged 8-9% as a consequence. I have wondered for years what is holding up the Detroit car industry, and I think the no. 1 reason is that no president wants to see them go down on his/her watch, it’s political suicide. That in turn has left me to conclude that the plug can and will only be pulled between presidencies. That is, between the moment the new president has been elected and the day he/she takes office.

You see where I’m going with this: I think a stunning announcement is highly likely come next December/January. The US can no longer realistically afford to prop up companies that have in economic terms ceased to be going concerns years ago. After this narrow window, which allows the incumbent and the next chosen one to blame each other, and so deflect that blame, there would be another 4-year wait. America doesn't have 4 years.

I dread to even think about the misery that will ensue. Hundreds of thousands will lose their jobs, and their pensions, and 21st century ghost-towns are about to be created.

3 RBS
The report this week from RBS, especially Bob Janjuah, predicting a huge market crash in the next three months, is sending shock waves all over. If only people would simply have read The Automatic Earth all along, they wouldn’t need to be so surprised.

4 MBIA
There are gaping differences of "opinion" about the ability of the monolines to answer the money calls that follow their downgradings. When reading about MBIA and Ambac, I can’t help remembering Terry Schiavo, may she rest in peace.

5 Dodd
We are now finding out that the mortgage bailout legislation that is being pushed and shoved through the US lawmaking system has been written by those who have fleeced the populace most, and try to do one better: make that same nation of hapless twits fork over for the losses incurred over their tired backs. Think this is bad? Don’t hold your breath: we are about to see much more and much worse.


Market Catastrophe

The Dow Tests 34 Year Trendline!

While it may not be the best representation of the overall market, everyone watches the Dow. It is a handful of the bluest of the blue chips, so whatever happens to the Dow will likely happen to the broader market as well. The Dow is in the midst of a 200 point Friday afternoon decline, in the larger context of one-month slide, falling once again below 12,000. It looks like we're headed for a retest of the January and March lows. The watchword is: CAUTION!


According to our friends at Elliott Wave International, should the Dow break its March lows, it will also break the long term trend line dating back to 1974!


(You can read the most recent three months of Elliott Wave's US Market Analysis this week only - free signup required, no obligation.)

Ladies and gentlemen, this is a big deal. The US stock market, measured by the nominal Dow, has been in an uptrend for the last 34 years. Of course, the Dow measured in gold began its crash long ago, resulting in the decimation of over 75% of the Dow's real value. Should the Dow break its 1974 uptrend line, it will send an ominous signal that inflation alone is not sufficient to keep up appearances on the Dow. This will likely signal that a long term decline is directly ahead.

In the past, I would make market pronouncements with absolute certainty, but I have since learned my lesson. I don't know what will happen, but I do know that all good things come to an end. Nearly everyone who doesn't work for the government believes the economy is in recession. The second quarter ends this month and companies will start releasing earnings reports in early July. What will they say? How was business? The market already seems to be getting the jitters.

Common sense dictates slow to no growth for a long time coming:
• High gas prices with no sign of abating
• Higher food prices, especially in light of Midwest floods
• No end in sight to housing bust
• Continued tight credit
• Rising unemployment
• Consumers maxed out, little savings and starting to save what they can
• The possibility of war before the election

It is that last item that could result in catastrophe. A war with Iran, as is being discussed, would send oil prices skyrocketing overnight. Americans may be able to get by - barely - on $4 gas, but what if that doubles? What would happen to the economy at $8 gas? How would people get to work? What would happen to the price of food, and to heating our homes come winter? Printing more money for the war would send the dollar's value down further. Inflation would go into overdrive.

Considering the cavalier attitude this administration has shown towards war, it simply cannot be ruled out. The drums of war are getting louder. The stock market is clearly getting nervous about something heading into summer.

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Global woes send Wall St. into tailspin

Concerns about skyrocketing oil prices, the deteriorating state of banking balance sheets and the growingly fragility of the global economy shook Wall Street yesterday, pushing the stock market to one of its lowest points this year. The market's decline came amid rising signs that problems in the worldwide financial system are far more serious than most observers had believed.

For the first time since March, the Dow Jones industrial average closed yesterday below the 12,000 mark, dropping 220.40 points to 11,842.69. The broader Standard & Poor's 500 fell 24.90 to 1,317.93, and the Nasdaq composite index fell 55.97 to 2,406.09. For the week, the Dow was down 3.8 percent, the S&P 500 3.1 percent and the Nasdaq 2 percent.

The S&P 500, one of the best indicators of the health of the overall stock market, is now at the same level as it was in March 1999, erasing nearly a decade of gains and losses. As has been true in recent weeks, the fall in the market was due in part to the persistent rise in oil prices. After a $5 fall Thursday, crude oil futures jumped $2.69 to $134.62 a barrel yesterday on the New York Mercantile Exchange.

Although members of the Organization of Petroleum Exporting Countries, or OPEC, will be meeting this weekend to discuss the rise in oil prices, few analysts expect the meeting to alleviate the situation, since OPEC members already are pumping oil at full capacity. Oil has contributed to a worldwide outbreak of inflation. Costs of raw foods and other commodities, including metals and building materials, have also shot up dramatically.

Inflation during a time of economic stagnancy is known as stagflation, which was the bane of the 1970s. The specter of another bout of stagflation is giving investors a bad case of the jitters. In addition, this week's sell-off had another catalyst: growing troubles among financial firms, which have been writing off hundreds of billions of dollars because of bad loans tied to the U.S. housing market.

Many of the steepest declines yesterday were in banking and investment stocks: UBS was down 5.1 percent, Merrill Lynch 4.6 percent, Royal Bank of Scotland 4.4 percent, Citigroup 4.3 percent and Bank of America 3.7 percent.
“Bank stocks keep going lower and lower, and they all got whacked again today,” said Richard Russell, a nationally known market analyst who edits the Dow Theory Letters in La Jolla. “It seems that there's something that we don't know about that's going on in the banking sector.”

Over the past several days, Wall Street has been rocked by a drumbeat of negative news about banks, including a warning that Citigroup was facing another wave of losses from its loans, an announcement that Washington Mutual plans to lay off 1,200 workers and a downgrade in the credit ratings of the two biggest bond insurers, MBIA and Ambac.

“There could be significant losses among financial institutions over the next few months,” said Allan Timmerman, professor of finance at the University of California San Diego. “And that can affect the entire market, given the importance of the financial sector and how it may affect consumer behavior through tighter credit.” Lenders are tightening their credit standards to stave off further losses. But that increases the risk of an economic slowdown or recession.

Jim Welsh, who heads Welsh Money Management in Carlsbad, said the troubles among the nation's largest lenders signals that “the credit creation system – the ability of banks to lend and credit markets to function properly – has broken down.”

Although the troubles in the financial industry emanate mostly from the troubled U.S. mortgage market, the problems have spread beyond this country into the global financial system. U.S. mortgage-backed securities were packaged and sold to financial institutions throughout the world, raising the risk of a global slowdown now that so many of the securities have proven worthless.

The Royal Bank of Scotland – one of the world's largest financial service firms – this week issued a report warning that the credit crunch and rising oil prices could create a global economic slowdown that will last through 2009. “A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, the bank's credit strategist.

The report said that “people are beginning to wake up to the view that 2009 growth will be stagnant and weaker than 2008.” Such a slowdown would push down the value of stocks worldwide, lowering the S&P 500 to 1,050 – 20 percent below its current value, which is already 16 percent below its all-time high set in October.

Russell said he expects the Dow to drop below 11,000 before the end of the year and he would not be surprised if it falls below 10,000, virtually erasing all the gains that the index has made since the spring of 1999. “Right now, people are selling because they're frustrated, but not because they're scared,” Russell said. “The market will go much lower once the fear kicks in.”

He said that the lowest points for the stock market could occur this fall – in late October or early November – which historically have seen some of the deepest stock market crashes.

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BofA, Perhaps Countrywide Wrote Dodd-Shelby Bailout - THIS NEWS MUST GET OUT THERE!

None of us really believed that Dodd could come up with anything close to this. Just go through transcripts or videos and look at the language and terminology he used just a few months back when referring to the subprime and credit meltdown.

Think back to the left-field, irrelevent questions he asked at hearings when he could have made a difference by asking the right questions and getting information out. I have always wondered who was behind it all.  Now we know what $70k in contributions, which is what BofA has given Dodd in the past 18-months, will buy. Only Hillary and Obama have received more from BofA.

This $300 billion Dodd-Shelby bailout is an absolute crime. It bails out the banks by limiting their loss to 10%; a joke since many of the problem areas like CA are down as much as 30% already on the median in the past 12-months and the rate of acceleration of the price declines are picking up steam. The subprime crisis is nearly over and now Prime, Alt-A, Pay Option ARMs and Home Equity Lines/Loans are failing.

If they get this $300 billion passed, another $1 trillion+ will have to come on its heels for all of the other bailouts.

This needs to be fought and/or vetoed or it’s potentially $300 billion of taxpayer money down the toilet. Bernanke already cost global citizens enough by ratcheting down rates the most in the shortest amount of time in history, sparking a massive inflation wave in order to save the very investment banks who started all of this in the first place. Now, unless we all do something and get this story out there, another $300 billion will go up in smoke.

The National Review Online has obtained an internal 64 page document on Bank of America letterhead dated March 11th that matches the Dodd-Shelby Bill almost identically. First, we find out that Dodd is a Countrywide “insider” who claimed ignorance over being given special considerations saving him $75k over the life of his loan and is so ignorant he didn’t read his loan papers.

Now, we find out that BofA, who is supposed to be closing on their Countrywide purchase in the next few months, wrote the Bill for him.If this Bill passes, BofA’s Countrywide buyout is much more palatable and the $60+ billion in toxic loans are mostly covered by the taxpayers.

This stinks to high-heaven. its no wonder why BofA is so comfortable closing the CFC deal, which will cost them at least $40 billion when considering the value of theie toxic assets (loans) vs massive debt.

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MBIA Says Downgrade Triggers $7.4 Billion in Payments, Collateral Postings

MBIA Inc.'s five-level downgrade by Moody's Investors Service probably will force it to make $7.4 billion of payments and collateral postings. MBIA has $15.2 billion of assets available to satisfy the requirements, the company said yesterday in a statement. That includes $4 billion in cash and short-term investments, $1 billion of unpledged collateral and $10.2 billion of other securities, MBIA said.

The company issued the statement in response to questions it received after Moody's yesterday reduced MBIA's insurance financial strength rating to A2 from Aaa. The company's stock dropped 13 percent yesterday after the downgrade on concern that the Armonk, New York-based company would be forced to pledge assets.

In its report downgrading the debt, Moody's said MBIA faced payments and collateral calls triggered by the reduction. MBIA this month decided against giving $900 million to its insurance unit. While that contributed to the downgrade of the subsidiary, the money now puts the parent company in a stronger position, Moody's said yesterday.

"We have more than sufficient liquid assets to meet any additional requirements arising from any terminations or collateral posting requirements," MBIA said in a statement earlier this week in response to the Moody's downgrade. The payments relate to the company's guaranteed investment contracts or GICs, backed by its insurance unit, and held by municipalities.

The contracts are used by cities, states and investment securities in lieu of bank accounts. They require MBIA's holding company to post collateral against the contracts if its insurance unit's credit rating is cut as far as A2, according to company filings. Credit-default swap sellers today demanded 38.5 percent upfront and 5 percent a year to protect MBIA's insurance unit from default for five years, according to broker Phoenix Partners Group in New York. The upfront requirement rose from 31.5 percent yesterday.

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Ford, GM shares drop on reports of more write-downs

Ford Motor Co.'s credit arm will write down the value of its leased-car portfolio in the wake of a report that both Ford and General Motor Corp. will have to write down the value of their financial arms by more than $1 billion each. Citing the weakening used-car market, Lehman Brothers auto analyst Brian Johnson said both auto companies may have to substantially reduce the value of their credit portfolios.

A person familiar with the decision said Ford Motor Credit Co. would take a charge when it releases second-quarter financial information in July. Ford said in a statement Friday that Ford Motor Credit will lose money this year "primarily due to further weakness in large truck and SUV auction values" and it would not provide a cash distribution payment to Ford in 2008.

A May survey said prices for used large SUVs are down 24 percent and used full-sized pickups down between 21 percent and 26 percent. "With large pickups and SUVs accounting for 40 percent to 50 percent of light truck sales, we believe Ford and GM's financial arms may need to write down $1.1 billion and $1.5 billion respectively," Johnson wrote in a research note.

JP Morgan Chase said in a separate research note that Ford could see a $1 billion write-down and GM $600 million, since it owns only 49 percent of GMAC. Cerberus Capital Management LP owns the other 51 percent. Credit companies must constantly assess the value of the portfolios. The sharp reduction in housing values has required numerous financial companies to take steep multi-billion write downs this year.

In heavy trading today, GM's stock hit a new low of $14.05, falling to a level not seen since at least January. Ford's stock dropped 6.4 percent to $5.91 a share on the report, also in heavy trading. Ford Credit spokeswoman Brenda Hines declined to comment on the figure cited in the Lehman Brothers report, but acknowledged that the issue of declining value of used vehicles "is a key issue for our business."

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Ford facing dire financial crisis

Fears are mounting over a potential cash crisis at America's top carmakers after Ford warned that its losses are running into billions as the rocketing price of petrol keeps customers out of its showrooms.

The company's second profits warning in a month prompted Standard & Poor's to reveal that it is considering cutting the credit ratings of all three major Detroit-based manufacturers - Ford, General Motors and Chrysler. It cited cash outflows and the "dire state" of the vehicle finance market.

Ford's shares dived by 8% while GM's stock slumped by 6.7%. The slump in motoring stocks, together with fresh fears of losses at leading banks, contributed to a gloomy mood on Wall Street as the Dow Jones Industrial Average dropped 220 points to 11,842. Alarmed by the cost of a tank of petrol, consumers are seeking more fuel-efficient cars.

Ford's traditional speciality of pickup trucks and sports utility vehicles has left it particularly badly exposed and so the company is shifting its production in the US to introduce European favourites such as the Fiesta and the Focus.
Ford's chief executive, Alan Mulally, said the trend was no flash in the pan: "We view the move to smaller, more fuel efficient vehicles as permanent."

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Ford to lose (way) more than $2.7 billion as oil hike bites

Fears are growing over a potential cashcrisis at America's top carmakers after Ford warned its losses were running into billions as the rocketing price of petrol keeps customers out of its showrooms.

The company's second profits warning in a month prompted Standard & Poor's yesterday to reveal that it is considering cutting the credit ratings of all three major Detroit-based manufacturers - Ford, General Motors and Chrysler. It cited cash outflows and the "dire state" of the vehicle finance market.

Ford's shares fell by 8% while GM's stock slumped by 6.7%. The fall in automobile stocks, together with fresh fears of losses at leading banks, contributed to a gloomy mood on Wall Street as the Dow Jones industrial average dropped 220 points to 11,842.

Alarmed by the cost of a tank of petrol, consumers are seeking more fuel-efficient cars. Ford's traditional speciality of pickup trucks and sports utility vehicles has left it particularly badly exposed, so it is shifting its production in the US to introduce European favourites such as the Fiesta and the Focus.

Ford's chief executive, Alan Mulally, said the trend was no flash in the pan: "We view the move to smaller, more fuel efficient vehicles as permanent." The company said it would fare worse this year than its $2.7bn (£1.3bn) loss in 2007. In a sign of the enduring nature of its difficulties, it believes it will struggle to break even next year.

In cutbacks likely to mean more job losses in Ford's already reduced workforce, the number of vehicles rolling off the company's production lines will fall by 25% year-on-year in the third quarter and by between 8% and 14% in the fourth quarter. Ford is delaying manufacturing of a new version of its F-150 pickup truck which was launched with a performance by country music star Toby Keith and fanfare at the Detroit motor show in January.

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Ford Delays New Pickup and Reduces Production

The Ford Motor Company said on Friday that it would delay introducing its new pickup, a vehicle critical to its plan to become profitable, and that it would probably lose money for a fourth consecutive year in 2009 because of a precipitous drop in demand for large vehicles.

Ford said it would begin selling the highly anticipated 2009 version of the F-150 pickup in late fall, two months later than intended, because dealers needed more time to clear out the current model, which had been deeply discounted.

In addition, the company announced its second significant production cut in a month, saying it would build 90,000 fewer pickups and sport utility vehicles in the second half of the year than it had previously planned.
It is increasing production of more fuel-efficient cars and crossovers, but over all, Ford plans to build 25 percent fewer vehicles in the third quarter than it did in the same period of 2007.

Ford said it expected industry sales of 14.4 million to 14.9 million light vehicles, down from its previous projection of up to 15 million. “As gasoline prices average more than $4 a gallon and consumers worry about the weak U.S. economy, we see June industry-wide auto sales slowing further and demand for large trucks and S.U.V.’s at one of the lowest levels in decades,” Ford’s chief executive, Alan R. Mulally, said in a statement.

“Ford has taken decisive action to respond to this accelerating shift in customer demand away from large trucks and S.U.V.’s to smaller cars and crossovers.” Two debt-rating services, Standard & Poor’s and Moody’s, warned on Friday that they might downgrade Ford, along with the other Detroit automakers.

Bruce Clark, a senior vice president at Moody’s, said Ford’s ability to finance its reorganization was becoming a concern. Ford said cash outflows would be larger than expected and that its automotive business would lose more money this year than in 2007, the opposite of its previous guidance.

“Ford is going to burn a considerable amount of cash until it adequately expands its fleet of fuel-efficient cars and convinces consumers that these vehicles offer competitive value relative to Japanese product,” Mr. Clark said.

A liquidity crisis could allow Kirk Kerkorian, the billionaire investor, to gain influence at Ford. On Thursday, Mr. Kerkorian said he had increased his stake in the company to 6.49 percent and offered to infuse additional capital.

Ford took another step back from its long-held goal of returning to profitability by 2009, saying it would have difficulty breaking even, which is the projection that executives made in late May. Ford lost $2.7 billion over all in 2007 and has not earned a full-year profit since 2005.

The automaker said the market had deteriorated to such a degree that its financing arm, Ford Motor Credit, which had been a dependable source of profit, would lose money this year and was no longer planning a distribution payment to Ford in 2008. Ford Credit will have a pretax loss — excluding any potential payment related to Ford’s profit maintenance agreement — primarily because of further weakness in large truck and S.U.V. auction values.

Brian Johnson, an analyst at Lehman Brothers, projected that both Ford and General Motors might have to write down the value of their financing arms by at least $1 billion because of falling used-car prices.

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Used Truck Trade-In Values Plunge, Deepening Auto-Sales Decline

Plunging prices for used pickups and sport-utility vehicles are deepening U.S. automakers' sales slide, with Ford Motor Co. the latest company to feel the pinch. Gasoline near $4 a gallon helped send prices for used large pickups and SUVs tumbling at least 21 percent in May, Atlanta- based Manheim Consulting estimates.

That cuts trade-in values, pushing light-truck sales down 16 percent in 2008, compared with less than 1 percent for cars.
"Regular consumers don't need larger SUVs or pickups; it's a lifestyle choice," Standard & Poor's equity analyst Efraim Levy in New York said in an interview. "If it's getting to be a bad investment, it's not worth buying a new one right now."

Detroit automakers including Ford are vulnerable to the drop in pickup and SUV sales. The U.S.-based companies depend on those models for almost 70 percent of their sales and a greater share of profits than Asian competitors such as Honda Motor Co. Industrywide sales declines led by trucks helped spur Ford's forecast yesterday for a wider 2008 loss.

The second- largest U.S. automaker said it will pare output by as much as 25 percent and delay unveiling the latest version of its top- selling vehicle, the F-Series pickup. Auto-loan unit Ford Motor Credit also will post a loss, Ford said. June auto sales in the U.S. may drop to 12.5 million, their lowest annualized rate in 15 years, according to Citigroup analyst Itay Michaeli. That would be 20 percent below June 2007 levels.

Ford fell 51 cents, or 8.1 percent, yesterday in New York Stock Exchange composite trading. The shares of the Dearborn, Michigan-based automaker have declined 14 percent this year. General Motors Corp. slid $1, or 6.8 percent and is down 45 percent in 2008. The stock is at a 26-year low. Used SUVs may fetch an average of $6,100 less than they did three years ago, according to Bandon, Oregon-based industry- analysis firm CNW Research. That means a possible writedown of almost $5 billion for vehicle lessors, CNW wrote on June 16.

Writedowns at the finance units of GM and Ford may be $1.5 billion and $1.1 billion, respectively, as used-truck values drop, New York-based Lehman Brothers analyst Brian Johnson said in a note yesterday. Al Castignetti, vice president and general manager of Nissan Motor Co.'s North American sales unit, said the lenders are being squeezed by the so-called residual value they projected for the vehicles at the end of their lease terms.

"Residual values are far out of whack from where they were pegged three, four years ago," Castignetti said in a June 19 interview in Beverly Hills, California. Consumers trying to unload full-size pickups and SUVs aren't faring much better than the finance companies seeing less money from auctioning off the models as leases expire, Castignetti added.
"Dealers don't want those vehicles on their lots," he said.

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GM sheds 18,657 with buyouts, retirements

The departure of 18,657 hourly employees allows General Motors Corp. to take a major step toward solving one of its most pressing problems -- the need to shed workers as it downsizes its truck production to match dwindling demand. But adjusting to a smaller work force while keeping plants operating could challenge the world's largest automaker.

GM said yesterday that about 25 percent of its U.S. hourly workers will leave the company by July 1 through buyout and early retirement offers. The Detroit-based automaker previously said about 19,000 would accept the offers. The number includes 1,259 workers who retired before the offers were made, but were told they could take the packages if they were offered. At the Bowling Green, Ky., plant that makes the Chevrolet Corvette and Cadillac XLR, 206 of the 960 employees accepted the offers.

GM expects to fill some of the vacancies with employees earning a new entry-level wage of about $14 per hour, roughly half the rate of current production workers. The company also is halting indefinitely a major overhaul of its full-size pickup trucks and sport utility vehicles as it deals with the drastic drop-off in sales.

GM spokesman Tom Wilkinson said the automaker instead will work on more modest updates and enhancements as it shifts resources toward higher-mileage vehicles. The move has been largely spurred by skyrocketing gasoline prices that have radically changed customers' buying habits, he said.

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GM Puts Product Development on Hold

General Motors Corp. is re-evaluating several products it is considering launching sometime after the turn of the decade as it considers whether the lineup will match customer demand in an era of $4-a-gallon gasoline, the company said.

The intensified strategy review began about two to three months ago after Frederick "Fritz" Henderson was named chief operating officer, and sales of GM's highest-profit trucks and sport-utility vehicles essentially collapsed, GM spokesman Steve Harris said. He said the company continually evaluates its product portfolio, but "certainly within the last 60 to 90 days" those reviews have taken on added weight.

Mr. Harris said GM is slated to launch 18 cars and crossovers in the coming couple of years, and it is looking for opportunities to evaluate certain vehicle launches. Beyond that, GM is looking at various vehicles currently being developed, and considering the capability of those products to meet customer demand.

The fate of a new generation of full-size pickup trucks and SUVs that were originally slated to be launched early next decade, hangs in the balance. GM has suspended developing those products as it tries to gauge the viability of those products.

GM spokesman Dee Allen said GM believes sales of full-size pickup trucks will rebound, but doubts sales of truck-based SUVs will approach the highs they hit earlier this decade. GM is giving serious thought to how it should approach the SUV segment, he said. People familiar with the matter said GM is considering adding a pickup truck that is built on the lighter "unibody" underpinnings used in cars instead of the heavy steel frame that trucks have. Such a vehicle could offer better gas mileage than body-on-frame trucks, they said.

To meet growing demand for fuel-sipping vehicles, GM is scouring its Asian operations -- including South Korea and China -- for small cars that could be shipped to the U.S. or eventually built there, and is exploring how quickly and broadly it can expand the range of plug-in electric vehicles it plans to introduce in late 2010, these people said.

"It's like gripping the wheel and taking a hard left," said one automotive supplier executive briefed on the company's plan. "They know they can't afford to be behind anymore." Mr. Henderson and his boss, Chief Executive Rick Wagoner, are hoping they can refocus GM's marketing and product portfolio quickly enough to convince consumers it is as relevant as Toyota Motor Corp. and Honda Motor Co. when it comes to building fuel-efficient vehicles.

GM's decline in truck sales in May pulled the company's U.S. market share to 19.4%, leaving the company less than one percentage point ahead of Toyota. Toyota is benefiting from its lineup of small cars and hybrids and saw its market share in May rise to 18.6%. Analysts are now watching to see if Toyota pulls ahead of GM in June. At the beginning of the decade, GM's share was around 30% and Toyota's about 9%.

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BCE's Buyout Back on Track After Supreme Court Approves Deal

BCE Inc.'s plan to go private in the world's largest buyout got back on track yesterday after the Supreme Court of Canada approved the deal, sending the stock up as much as 8.2 percent in late trading.

Canada's highest court unanimously overturned an appeals- court decision blocking the C$52 billion ($51.3 billion) deal. The lower court had ruled that the transaction ignored the interests of BCE's bondholders. The Supreme Court said yesterday it would provide reasons for its decision, without saying when.

The ruling moves BCE a step closer to completing the deal, which the Montreal-based company now expects to close by the end of the third quarter. Still, the buyout of Canada's biggest phone company, by the Ontario Teachers' Pension Plan and U.S. private- equity firms, isn't assured. Banks have sought to renegotiate terms of debt in other LBOs amid a contraction in credit markets, derailing more than 60 buyout plans since last year.

"There's still uncertainty," said Neeraj Monga, an analyst at Veritas Investment Research in Toronto, who advises selling the shares. "It's not a done deal yet." The buyers, which include Providence Equity Partners Inc., agreed a year ago to pay C$42.75 for each BCE share, 36 percent more than the average price of C$31.42 in the 12 months before the bid. The stock has since slumped on concern that bondholders would block the deal or that financing would collapse.

The buyout group plans to raise C$34 billion in debt from Toronto-Dominion Bank, Citigroup Inc., Deutsche Bank AG and Royal Bank of Scotland Group Plc to pay for BCE. Leveraged buyouts are funded mainly through new debt, which increases the risk of a default.

The banks said in an e-mailed statement that they expect the buyout to close in accordance with the agreement. "We continue to negotiate the financing documents in good faith with the sponsors and stand behind our original commitment to the transaction," the banks said.

The final price of the deal may be 10 percent lower than the current offer price, Veritas's Monga said. Bondholders may launch another legal challenge, this time over the proposed new ownership structure of the company, the Toronto-based National Post newspaper reported this week.

Lawyers representing the bondholders canceled a conference call scheduled for yesterday, saying in an e-mail to Bloomberg News that "since there are no reasons yet, there is nothing we can explain about the decision." The bondholders said in a separate statement that while they were disappointed by the decision, they "believe they had a duty to protect the interests of their clients."

In May, the bondholders -- including Manulife Financial Corp., Canada's biggest insurer -- appealed a trial judge's decision to approve the transaction, claiming the additional debt would cut the value of their holdings because the bonds would lose their investment-grade rating.

The bondholders may lose about C$1 billion, a fifth of their total holdings, from a cut in their notes' credit rating, John Finnigan, a lawyer for the group, told the high court judges at a June 17 hearing.

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Is the stock market headed for a crash?

Regular readers know I'm pretty bearish compared to the average investor. Even so, if I was to come out and say that I thought stocks would fall by about 20-25% within the next three months, then you'd probably think that was a bit extreme.

But that's pretty much what a report from Royal Bank of Scotland, picked up in The Telegraph this week, has said. "The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks," reported Ambrose Evans-Pritchard. So just how bad does the team think things will get? And what should you be doing about it?

Well, let's take a look at the report. The juiciest bit of the note comes from credit analyst Bob Janjuah. It's important to realise that this isn't particularly new information - Mr Janjuah has pointed out his bearish feelings for this year already. But it's certainly worth repeating. He believes that "mid-July through to October is likely to be the most bearish period we will experience in the bear market that began in the fourth quarter of last year."

And when he says bearish, he means it. He reckons the S&P 500 will fall by more than 300 points to around 1,050. That's a more-than-20% fall - a proper bear market plunge. Pretty dramatic. So is this really likely, or is it all a nice bit of attention-grabbing doom-saying?

Well, while I'm not convinced that anyone can time the market to that kind of accuracy, I think it's fair to say that prospects look a lot more grim than anyone's really accepting at the moment. And that's, broadly speaking, the reason that Mr Janjuah thinks things will get worse - the dreadful sense of disappointment as everyone twigs that there really will be a recession, more and more companies are going to go bust, and there won't be any rapid comeback from the housing slump.

You don't just have to take his word for it. Credit ratings agency Standard & Poor's reports that in May, the global default rate for "junk" bonds - that's those that have to pay higher interest rates because they're seen as more risky than 'investment grade' debt - hit a 31-month high of 1.45%, up from 1.29% in April.

Companies relying on consumption were hardest hit, with 16 of this year's 33 global defaults coming from consumer-facing sectors such as retail, restaurants, leisure and media. For now, the situation is worst in the States. That's no surprise, given that they are further into their slump than anyone else. The US default rate on high-yield debt hit 1.89% in May, up from 1.64% in April, and the highest in more than two years.

It's going to get a lot worse. The rate is expected to surge to 4.7% within a year. And there's a 20% chance that it could shoot up to 8.5%, said S&P. That would see "corporate casualties piling up faster than in many years, as economic conditions deteriorate and volatility in the financial markets stays high."

What's all this mean in English? OK. The housing crash means consumers have less money, and are more worried about what they spend it on. Banks are also less willing to lend money to anyone, and are being tougher on those they have already given money to. That spells disaster for small businesses in particular - skint consumers on one hand, and twitchy lenders on the other.

All this spells economic slowdown. Now, the experience of the past decade or so at least has been that when a slowdown looms, the central banks will cut interest rates. But the resurgence of inflation makes this a lot harder (and to be honest, the banks are so scared about their own liquidity that they're not passing on rate cuts anyway).

When you have an unstable situation, it helps to have strong leadership. Instead, we have central bankers running around in a blind panic. We've got one bank - the European Central Bank - adopting a rate-raising tone (though it's furiously back-pedalling in the face of clear opposition from various eurozone finance ministers).

Another - the US Federal Reserve - is pretending it might consider raising rates, but everyone knows this is nonsense; and then there's our own Bank of England, whose governor Mervyn King has warned that inflation will be here for a while, but says it's not up to the Bank to deal with it. As for Asia - inflation there is already a serious problem, but the same rising oil prices and food prices that are pushing up inflation are also going to choke off growth. So much for "decoupling".

In short, regardless of what central banks do, the global economy is heading for a slowdown at least; and a recession in the US and the UK look certain from where I'm sitting. So while I can't say for sure that Western stock markets are going to drop by 22% by October 31st, I can agree with Mr Janjuah when he says that "2008 is a year that is all about not losing money and not losing your jobs. The very nasty period is soon to be upon us - be prepared."

The big question then is - what can you do about it? Well, as Mr Janjuah puts it: "Cash is the key safe haven." So making sure you've got your emergency fund (call it three to six months pay) is always a good option. I also think paying down your mortgage is a pretty good use of your money at the moment as well, particularly if you don't have a big equity cushion. Bear in mind that some banks are now looking for at least 40% equity before they'll give you their top rates. So if you need to remortgage any time soon, take a good look at trying to pay off some of that debt.

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Dangers - Danger period 2008 and 2009

We have some rather ominous conclusions about the Summer and Fall of 2008. They are economic as well as geopolitical. The actual gold focus becomes more of a point of reference, as it reacts to events that seem to be readying to occur. In addition, we foresee some rather scary trends for the entire world, going into 09. We are not going to cover all of this in this article, but to give a basic overview.

First of all, let’s list some of these dangers and danger periods that we foresee coming.
• The US and Israel are getting ready to do something about the newly militant Iran. The nuclear debate is only one dimension of that issue. Another is the threat that Iran is becoming too big a bully to the other more moderate Mid East nations, and not just Israel.

• There is a very large unease again building in the world financial markets. Not only is the credit crisis not really improving (new estimates out now that financial institutions are looking at $1.3 trillion of losses) but world financial markets are actually way down over the last year. Many Asian markets and also many US stocks are down 30% and more. A building unease is accumulating that can only lead to another real big world financial sell off, lasting probably up to a month, before any settling comes in after a month long bout of central bank firefighting efforts.

• Rising inflation is unsettling financial markets, as it is unsettling the US and EU central banks. A serious friction has developed that the ECB is not coordinating efforts with the US Fed, as the ECB fights inflation, and the Fed focuses on preventing a total world financial meltdown. So far, these efforts are rather contrary to each other. The dissention is unsettling financial markets.

• Intolerably high energy and food prices. Disastrous floods in the US Mid West grain belts are going to lead to a world food crisis in 09. We have only seen hints of this in 08. World inflation will be seriously increased in the entire world as a result. The Chinese are particularly vulnerable to this issue.
There are more dimensions to this but we’ll stop there.

The results of these economic and political pressures are likely to be:
• A significant risk (well over 50%, meaning more likely than not) of serious world stock and financial problems over the Summer. This makes a much higher risk of a real world financial and stock meltdown exceeding a 20% drop going into the Fall.

• We have an expectation that Israel is going to act as soon as this Summer, but by Jan 09 roughly, to do something significant to stem the Iranian nuclear problem. Israel has repeatedly stated publicly in the past that they will never tolerate a radical Islamic nation to achieve the nuclear bomb. We believe them.

• Friction between the US Fed and the ECB over inflation policy destabilizes the markets and make a real financial panic much more likely. It is not clear the central banks will be able to pull off another ‘Bear Stearns’ type emergency bailout fast enough if there is a new huge financial meltdown emerging. So far, those efforts have succeeded in part, but all this means is one that more bullet has been dodged. How many times can they do that?

• A likelihood of political turmoil in many nations over the food situation. For example, Argentina is in the middle of an incredible battle between farmers and the government’s policies to tax/tariff agricultural exports. The months long battle between farmers and truckers who are paralyzing their economy and a totally unrelenting government may lead to a revolution there. Other nations such as Egypt, China, and India tried to reduce budget busting food and energy subsidies but had to pull back on subsidy reductions due to widespread riots.

• China is exhibit number one in vulnerability to a food and energy shortage. There is one thing above all that China fears, that is a big viral insurrection involving the 800 million disenfranchised rural peasants. The rising food and energy prices worldwide are hammering the world’s poorest, who already spend over 50% of their $2 a day income on food. The rising food and energy prices are causing worldwide riots as of now, in many disparate places, from the richer EU region, to poor Asia, to India, to South America. 09 does not look good in this respect.

• The prospects of the world having a record grain harvest in 2008 are rapidly diminishing. Although it’s stated that China may have record harvests this year, the US, the world’s biggest grain exporter, is seeing widespread damage to its grain crops. Without the US ability to continue huge grain exports into 09, the world will face new grain export restrictions by many other grain exporters. This will lead to a real world food crisis into 09. There is no bigger factor that will lead to world destabilization than food shortages.

• The commodity markets will continue to drive prices up, and big investment funds will continue to pump billions into these markets, making prices shoot higher. There will be a big controversy over financial gains in energy and food commodities into 09.

• A new US president will likely be tested by some military related threat. That is a typical cycle, and it’s coming in 09 as well.

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Banks Trimming Limits for Many on Credit Cards

The easy money that led Americans to depend on credit cards to pay their bills is starting to dry up. After fostering the explosive growth of consumer debt in recent years, financial companies are reducing the credit limits on cards held by millions of Americans, often without warning.

Banks that issue cards like Visa and MasterCard, as well as the American Express Company, are cutting the limits for customers who have run up big debts, live in areas that have been hit hard by the housing crisis or work for themselves in troubled industries. The reductions come as consumers, squeezed by a slack economy, a weak housing market and rising unemployment, are falling behind on monthly credit card payments in growing numbers.

Credit card lenders are also culling their accounts ahead of new rules that are intended to benefit consumers but could limit the profits on customers deemed bigger risks. Many Americans have come to rely on credit cards to cover everyday expenses like groceries, gasoline and medical bills, in addition to big-ticket items and luxuries.

While consumer spending, the nation’s economic engine, has been surprisingly resilient of late, a more sweeping reduction in credit card limits could pose serious challenges for hard-pressed consumers and, in turn, the broader economy.

Many are already feeling pinched. Pamela Pfitzer, a family therapist with a stable six-figure income, was stunned when she went to a garden center near her home outside Sacramento in early April and tried to buy about $30 worth of flowers with her American Express card. Her transaction was denied, she says, even though she insists she had rarely missed a payment and had just made one for $1,000.

After inadvertently hitting her credit limit a few months ago and then falling behind on a mortgage payment, Ms. Pfitzer said her limit was lowered by American Express to $900 from $2,300. The flowers pushed her over the new cap. Then last month it happened again, she says, when she tried to buy office furniture with her Wells Fargo Visa card. Although she had just made a payment of about $700, Ms. Pfitzer found out that her credit limit had been lowered to $2,000 from $2,800.

“In all the years I have had credit cards, I have never had this happen before,” Ms. Pfitzer said. “Now it has happened twice in the last few months.” Banks and mortgage companies are required by law to notify customers within three days of changing the limits on a home equity line of credit, and many have been aggressively lowering them. But credit card lenders have 30 days to notify their customers, and often do so only after taking action.



Such moves can cause a consumer’s credit score to drop, forcing the person to pay higher interest rates and making it harder to obtain new loans. Even so, disclaimers in the fine print of credit card applications typically stipulate that the issuer can cancel or alter credit limits at any time, regardless of a customer’s payment or credit history.

Washington Mutual cut back the total credit lines available to its cardholders by nearly 10 percent in the first quarter of the year, according to an analysis of bank regulatory data. HSBC Holdings, Target and Wells Fargo each trimmed their credit card lines by about 3 percent.

Among those four lenders, that amounts to a reduction of about $15 billion in three months. Over all, the amount of available credit for the industry appears to be about flat, with the three biggest issuers — Bank of America, JPMorgan Chase and Citigroup — slightly increasing their overall credit lines. But even they are trying to rein in risky individual accounts.

Big banks face intense pressure on their balance sheets as they bring on billions of dollars worth of complex mortgage-related investments and other loans they are struggling to sell. Meanwhile, they are bracing for a surge in credit card losses as the job market and economy falter.

Consumers are reaching deeper into their pockets to pay for groceries and gas. Last year, as many as half of all those who took out home equity loans used the money to help pay down their credit card debt, according to J. D. Power research. But home equity is no longer an easy source of financing. Month after month, cardholders keep falling behind on their bills.

“This downturn is the perfect storm where the consumer is getting squeezed from all levels,” said Michael Taiano, a credit card industry analyst at Sandler O’Neill. He projects that credit card loss rates for lenders, now around 5.7 percent, could go as high as 10 percent in next 18 months. That would be higher than the peak levels reached after the 2001 technology bust.

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Ilargi: Yesterday, I said that what occupies me most these days is the fact that societies should be preparing for what is inevitable, and that they don’t do it.

Pensions are the no.1 candidate for breaking societies apart from within. And I don’t see anyone addressing this, which scares the heebees out of me. Pension funds will not be able to pay out what they promise, because they simply don’t have the capital, and because what capital they DO have is very often invested in places that will lose money, big time.

People younger than 55 will simply never see a pension that is anywhere near enough to live on. Those over 55 today still believe that they will retire with a nice cushion in 10 years, but at best that will be highly contentious. More likely, the younger generation will take the money away from them.

Societies need to come together, and that starts with facing facts, not illusions. If we don’t deal with the existing pension delusions very soon, we don’t need enemies to bring us down. We will be them.

The pensions gap that could split Britain

Pensions are about to become one of the most important and divisive issues of our age. Let me explain why. There are basically two types of pension. There's the "defined contribution" scheme - this is where you and/or your employer, pay a certain amount of money into a pot each year. This pot is invested and hopefully grows.

Whatever's left when you retire, after you've taken out your tax-free lump sum, buys you an annuity which will then pay you a set amount until you die. The other type is the "defined benefit" scheme - this is where your employer guarantees to pay you a set amount each year after your retire, based on the number of years that you worked for the company or your final salary. You may have to pay something towards this, but the point is that the end amount is set regardless of how this is funded.

Good pension, bad pension
You can probably already see that one of these pension types is a lot better for the employee than the other. Under a final salary pension scheme, you know exactly what you're going to get. That makes planning ahead a lot easier. You don't have to worry about how much money you put in, or how badly the stock market's performing. Indeed, a recent survey from financial services firm MetLife Europe suggested that one in 10 private sector employees would take a pay cut in exchange for a final salary pension scheme.

Of course, employers aren't so keen on them. If you work for one of the few private sector companies that still offers a defined benefit pension, then they have to make sure there's enough money in the company pension pot (which is invested in equities, bonds and sometimes even commodities these days) to fund it. That's why you're always hearing about the "pensions black hole" opening and closing every time the FTSE 100 moves a few hundred points.

The rise of defined contribution
Now most employers don't want that responsibility any more than you or I do. People are living longer, so the amount of money they need to put away for employees is rising. Investment returns were battered by the dot com bust. And Gordon Brown didn't help by scrapping the dividend tax credit in 1997, taking roughly £5 billion a year out of pensions to spend on - well, not a great deal, it seems.

A pension fund is basically a dirty great ever-expanding, unpredictable liability. So it's little wonder that most private sector employers are trying to dump the responsibility back on their employees. Of the private sector's 20-odd million employees, less than a million are working for companies with final salary schemes still open to their staff, reckons the Association of Consulting Actuaries.

Gold-plated public sector pensions
So what about the public sector? Well, it's a very different story. About five million of the 5.8 million public sector staff are on defined benefit schemes. Here the government is the employer, which ultimately means that you, the taxpayer, is the one that foots the bill - even though your own pension almost certainly offers far poorer terms than any public sector one.

Is this fair? One of the main reasons that public sector workers were traditionally given better pensions was because pay in the public sector was lower than in the private. And in my experience, if you ask the average public sector worker, they still tend to believe that their private sector peers are all bathing in money, while they barely scrape by.

Public sector pot of gold
But if you look at the median wage data, this isn't actually the case. In fact, in the year to April 2007 (the most up-to-date Office for National Statistics data) public sector workers earned an average of £498.30 a week, compared to £438.90 for private sector staff.

Now this is pretty simplistic. But it is a median average (in other words, it's the middle wage from a big list of everyone's wages) which means that it shouldn't really be skewed by either those on minimum wage at one end, or the "fat cats" of both pedigrees at either end.

And according to the Institute of Fiscal Studies: "Relatively generous public sector pensions mean that a public sector worker is on average around 12% better off than a private sector worker on the same basic salary." So, if you think about it, the poorer workers with the least secure retirements are paying for the richer workers to have the ultimate in gold-plated pensions.

That doesn't seem right. But worse still, it's not just workers who are paying for these pensions. It's pensioners too. Because about £1 in £4 of your council tax (you know, the tax that has seen various pensioners locked up for objecting to it), according to some calculations, also goes to fund public sector pensions. So no, it doesn't seem fair. But that's not even the main point. This isn't a debate about whether public sector staff deserve these pensions or not. The simple truth is that we can't afford it.

Where does the money come from?
I pointed out earlier why private sector companies want to ditch their final salary schemes. Well, the same problems of increasing longevity affect the public sector too. So the government's big public sector pension pot must be some size, eh, to keep up with all those liabilities?

Well, no, actually. Because there isn't a big fund out there in government-land marked "public sector pensions" - most public sector pensions, except local government ones, are "financed by current receipts". In other words, all those taxes you pay. They go to fund pension payments for people who are already retired. The future pension promises the government has made to its staff are entirely unfunded. They're just sitting there, for your kids and grandkids to worry about.

The government estimates that there's about £700 billion of future liabilities there already but the Institute for Economic Affairs has put the figure at about £1 trillion. That colossal figure will just keep rising. So without reform, you could see private sector employees working into their 70s, paying ever-more tax to pay for their younger public sector neighbours' luxurious retirement lifestyles, rather than public services.

Meanwhile, the government will have to borrow more and more money to meet its obligations, which could wreck the public finances (already in a precarious state), demolishing sterling and driving up interest rates. It won't come to that of course. Reform will have to be pushed through, simply because we'll reach a tipping point where it becomes obvious that this is unsustainable. But you can expect a lot of upheaval and a lot more news on this in the months and years ahead.

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