C.M.O. 5.4.2010

Credit Market Overview

May 4, 2010

Total Vehicle Sales coming in at over 11MM for April marks the 7th straight month above the 10MM mark, the second with an 11 handle and a marked improvement over the 9MM of April a year ago.  Add to this the seasonally adjusted sales rate for 1Q10 was 11MM vehicles and you have what Jesse Toprak, an analyst for TrueCar Inc., calls “a full-blown recovery in the automotive industry.”

What has been good for the car makers has also been good for the auto-parts makers with American Axle (AXL) recently reporting a profit of $0.22 per share compared with a loss of $0.59 a share a year ago.  AXL’s CFO, Michael Simonte attributed cuts made during the crisis for the swing to profitability saying; “We are seeing the results we expected after cutting our fixed costs by 50% over the past two years.  We are optimistic about the improving economy, but we know it is fragile.”

AXL sells 75% of what it makes to General Motors Co. which is and independent company.  Most of us here in the States have seen General Motors Co.’s CEO, Edward E. Whitacre on TV talking about the firm’s resurgence.  One of those ad’s has Ed boasting about the repayment of the TARP money to the government “five-years ahead of schedule”, and even our Treasury Secretary, Timothy Geithner was recently heard to say, “This continued progress is a positive sign for our auto industry – not only more funds recovered for the taxpayer, but also countless jobs saved and the successful stabilization of a vital industry for our country”.

A closer look at the $4.7BN payment, however, reveals what Sen. Charles Grassley of Iowa called “nothing more than an elaborate TARP money shuffle”, with the funds coming not from General Motors Co.’s earnings, but a Treasury escrow account.  Senator Grassley believes the hoopla being made over the repayment is actually an attempt to divert attention away from another issue, that being that while General Motors Co. will generate some of the biggest losses of any company that received TARP funds it won’t be required to pay what is being called the TARP tax.  This tax is designed to help Uncle Sam recoup funds lost under the TARP plan but in letting General Motors off the hook the tax seems primarily focused at those other TARP recipients, the “Fat Cat Bankers” so rued by the populist media.

If General Motors is getting off easy due to “TARP shuffle” uncovered by Senator Grassley then two questions come to mind.  Doesn’t this make Geithner’s claim of “more funds recovered for the taxpayer” extremely misleading and since the UAW are now part owners of the rescued auto makers doesn’t the loan “repayment” become, in effect, a tax-payer funded cash payment to one of the administration’s largest voting blocks?  I’m not saying I know the anwer; I’m just asking the question.

Far away from the smoke and mirrors of D.C. the folks of Flora, Illinois, all 4,772 of them, are very happy to see the revival of the U.S. auto industry regardless of its source.  Five-hundred-fifty of Flora’s family members were laid off when General Motors and Chrysler filed for bankruptcy last year.  But, as the fortunes of those two companies reversed, so have the employment statistics in Flora with 400 of those same folks being recently rehired.

In order for AXL’s Simonte to continue to be “optimistic about the improving economy”, it will take many more Flora’s to flourish again.  Hopefully, as that happens, Mr. Toprak’s “full-blown recovery” will extend beyond the automotive industry.

Enjoy the week.

Jim Delaney

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