The good news about this particular banana republic: everything else may be imploding, but at least still has bananas.
"I will not be purchasing any further GM vehicles since GM does not stand behind vehicles when a serious malfunction occurs... My children and I could have been fatally injured due to the disintegration of the brake line."
If there was some hope that in April the trend of the US adding low-quality (as in low-paying) jobs may finally be coming to an end, this came to a quick end in May, when more than half of the 217K jobs added were in the lowest paying sectors. Specifically: Education and health: +63K; Leisure and Hospitality: +39K; Temp Help Services: +14K. These three lowest paying categories amount to 116K, or well over half of the total jobs gains.
Here is a verbal account of precisely what happens when domestic car-makers overestimate the purchasing power of the US, and clog channels to an epic extent. In this case, we refer to the recently launched GM Cadillac ELR, launched to much aplomb just five months ago as a competitor to the Tesla Model S for a $76,000 price point (above Tesla's $70,000), has been a complete disaster. And how is GM dealing with this latest sales disappointment (which struck even before all the recent recall scandals had hit)? Why by jamming dealers with an unprecedented 725-day supply, or exactly two years worth of cars!
In the past several years, one of the topics covered in detail on these pages has been the surge in such gimmicks designed to disguise lack of demand and end customer sales, used extensively by US automotive manufacturers, better known as "channel stuffing", of which General Motors is particularly guilty and whose inventory at dealer lots just hit a new record high. But did you know that when it comes to flat or declining sales and stagnant end demand, channel stuffing is merely the beginning? Presenting... Where the World's Unsold Cars Go To Die
As usual, there was the now traditional book-cooking going on at GM, which only managed to "beat" estimates thanks to the tried and true gimmick of channel stuffing. Indeed: after hitting an all time high of 815K cars parked at dealer lots last month, in April GM's channel stuffing rose to a fresh all time high of 826K, in effect suggesting that had it not been for the extra 11K parked but "sold" cars, GM sales would really have been up just 2.3% Y/Y, missing estimates, and down 13K from March. Hardly the picture of health the fudged data makes it out to be.
While the topic of HFT-assisted "price discovery" has been beaten to death on these pages, and courtesy of Michael Lewis is now a household, and soon FBI, topic, what is more notable is that in addition to a better than expected jump in March car sales, GM also confirmed that the post-bankurptcy company has never had a greater difficult in liquidating warehoused inventory. As the chart below shows, dealer inventory of GM autos on US lots, aka Channel Stuffing, just rose to a new all time high, of 815,492 units, up from 805,769 last month, and up 15% from the 743.8K units parked at dealer lots a year ago. So 15% increase in unpurchased inventory vs a 4% increase in sales. Someone smarter than us can probably do the math here.
We knew that the legal market was in bad shape last summer when we came across the story that top law firm Weil, Gotshal & Manges announced its first mass layoffs in 82 years, but I had no idea it was this bad. As most will be aware, U.S. News & World Report publishes a widely anticipated ranking of undergraduate as well as graduate schools. It appears law schools are so consumed with performing well in these rankings that they are going to outrageous lengths to make it look like their students are performing better financially after graduation than they actually are. One of the most ridiculous ways they achieve this is by paying the salaries of their graduates upon graduation.
General Motors is in trouble. On the heels of a 1.3 million car recall over fault ignition switches (that allegedly caused 12 deaths and could have been fixed with a $1 part), the bailed-out car maker has announced it will take a $300 million charge in Q1 to cover costs associated with this and 3 new recalls covering an additional 1.5 million cars. As Reuters reports, unsold vehicles will be placed on a stop-delivery until development of a solution has been completed. Why is this such a problem? Because GM's channel-stuffed dealer inventory is already at all-time record highs as the entire industry projected the sales to continue ad infinitum and inventory-to-sales surged to near-record highs.
It’s nerve-wracking to live in the historical moment of an epic turning point, especially when the great groaning garbage barge of late industrial civilization doesn’t turn quickly where you know it must, and you are left feeling naked and ashamed with your dark worldview, your careful preparations for a difficult future, and your scornful or tittering relatives reminding you each day what a ninny you are to worry about the tendings of events. Persevere. There are worse things in this life than not being right exactly on schedule.
Moments ago GM reported that February total sales in February dropped 1% Y/Y to 222,2014, beating expectations of a 7.7% drop (if the same beat was not matched by GM's key competitor Ford, whose February sales dropped 6.1%, below the 5.3% expected, and Volkswagen whose US sales tumbled 13.8%). The bounce was largely thanks to Buick sales which posted an 18.8% increase in February. However, the actual sales were largely irrelevant. What was notable is the following number: 805,769. This is the number of units in dealer inventory at month end. This was an increase from the 780,140 in January and is the largest ever channel stuffing print yet recorded by the post-bankruptcy GM in history.
Step aside long-time hedge fund hotel darlings Apple and AIG, and make room for...
With inventories of unsold cars at or near record highs and the Big 3 up to their old tricks of channel-stuffing (as we have vociferously exposed), it seems time has run out for the US manufacturing renaissance. The 'if we build cars, they will come and buy them' mentality has hit a literal wall as not only are dealers bloated with stock, the buyers have dried up. As the following chart shows, the average number of days it takes to sell a car in the US has surged recently after 9 months of improvement. This is the worst (slowest) pace of sales since August 2009. Not what the 'recovery' faithful wanted to hear...
While loathed to admit it, US auto makers have done it again. As we have vociferously explained month after month (and has been vocally denied until now by the car makers themselves), much of the recovery in auto sales has been a massive channel-stuffing make-work program (mal-investment once again triggered by 'false' signals created by Fed intervention). Now, as the WSJ reports, Detroit's big 3 are trying to sweeten discounts to clear a massive inventory of unsold vehicles from dealer lots (desparate not to start a profit-killing price war). "We believe we can sell our way out," said GM, but as Morgan Stanley warns, "the best of the U.S. auto replacement cycle is over." Good luck...
What better way to assure your company has an earnings bomb? Have Jim Cramer tout it before earnings of course. Sure enough from January 28: "GM sales are going to be superb", and "Europe's coming back." Fast forward to today when GM reports Q4 revenues of $40.5 billion which missed expectations of $40.9 billion, and EPS of $0.67 vs the $0.87 expected. Additionally, GM's global market share just dropped to 11.4% - matching the lowest in the past year. So much for the superb sales. As for Europe? Well, as the chart below shows, Europe just posted its weakest quarter in the past year. And don't count on much growth either: CapEx was down to $7.5 billion in 2013, from $8.1 billion in 2012, even as the company's total free cash flow declined from $4.3 billion last year to just $3.7 billion.