Interview: Auto Analyst
>> welcome back, it is 612 a.m. on a thursday here in hong kong. one of the biggest corporate stories greeting you this morning, general motors, third most indebted corporate debt issuer in the world, faces the prospect of a junk credit rating from standard & poor’s. fitch lowered the rating comparable with s&p’s and moody’s may follow suit. general motors forecasts the largest quarterly loss since 1992 as toyota and other global carmakers take market share from them. and the stock lost about 14% on the session. it even caused rotation from corporate issue into safe haven u.s. treasuries. standard & poor’s lowered its outlook on g.m. to negative after the carmaker forecast that loss and the stock lost its biggest threshold since black tuesday in 1987. it slashed estimates for full-year profits more than 50% and restated a 2004 fourth-quarter profit as a loss. g.m. shares down 14%. joining us is the auto analyst with s&p, joining us from new york city. scott, the company is doing what it can. we’ve got new models launched to compete with toyota and honda offerings. why did you do this?
>> well, the rating doesn’t just reward good efforts. it speaks to credit quality and the fact is that the company is ailing at this point and we have affirmed the rating, but that depends on some progress towards better earnings beyond this year. we couldn’t justify the existing rating based on the performance now expected for the current year.
>> what’s the biggest problem at general motors, scott? is it legacy costs? pension and health benefits? they have been cutting output and production and paring back costs.
>> the legacy costs you refer to is an issue. it’s a big competitive disadvantage for them and financial liability that absorbs a lot of cash flow. the other side of it is revenue and the fact is that they haven’t gotten much of a boost from their investment in new product. and their sport utilities which account for a good deal of their earnings have been suffering because of a variety of issues. industry issues, but also the aging of their product lineup.
>> they’re just at the bottom rung of investment grade. why didn’t you cut them to junk if you’re so negative on the company? are you waiting another swing factor before you do that?
>> we characterize the rating now as tenuous. we’re going to watch things closely and it’s not inconceivable that we would move with a downgrade in fairly short order. but in the wake of all this disappointing news today, the company is formulating new strategies for dealing with things and we’d like to assess that before making any further change.
>> what would you like to see them do to improve their lot? they have new models in the pipe. there’s not much they can do in terms of the product lineup in the next 12 months or so. what about keeping more cash on hand, maybe cutting their payout, keeping more cash on hand to deal with legacy costs?
>> may do have a lot of cash on hand relative to near-term requirements. even if they were to cut the dividend at this point, it’s not big enough that it would move the needle much in anyone’s assessment of their credit quality. it really is a question of paring costs but also getting better results out of new product. i did speak today about accelerating new product introductions. that’s something that might help because, as i mentioned, their s.u.v. sales have been off significantly and if they could advance the introduction of new models, that could make a difference.
>> i do want to ask you, even though you don’t have them in junk category yet, scott, the market is treating this as high yield corporate debt and across a number of metrics, pitched on the same level of double-b, even single-brated companies. your comments on that?
>> i think there are a few things involved there, one of which is that they’ve always traded at a premium in the market because there’s so much debt outstanding. secondly, i think there’s a lot of concern in the market about what displacement might occur if they were lowered out of investment grade, even apart from direct worries about the credit quality.
>> i appreciate your time. thank you for spending it with us. we want to mention that it was the 8.275 coupon bond maturing in 2033 which was the most active in the corporate credit markets . they had an investment rating from 1954 until 1981. by the way, s&p is maintaining their call on ford, saying that ford’s credit profile is significantly better than g.m.’s. still to come, the dollar down against the euro and yen as the current account deficit in america balloons beyond expectations.
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Listen Market briefing --- Bernie (slow)
Opec --- David (slow)
Tokyo market --- Ron (slow)
good thursday morning from hong kong, i’m bernie lo. we’ll have a report from the opec meeting going on in isfahan, iran and speak to the s&p auto analyst as g.m. stock posts its largest loss since ronald reagan was in the white house. and we’ll talk about the dollar’s latest drop. the u.s. current account deficit ballooned to a record. we’ll talk commodities with a strategist who will tell us if $ 60-a-barrel oil is on the horizon. oil rocketing to an all-time high as opec promised to increase output. prices currentlied above $56 a barrel on concern demand will outstrip supply.
>> opec members reached agreement in isfahan to raise quotas after two days of talks, increasing 500,000 barrels a day, the new quota to 27.5 million barrels a day in a bid to arrest rising prices and meet surging demand. the group’s secretary general told me the group may enact a decision to increase quotas by an additional 500,000 barrels a day should prices remain high.
>> if prices remain high beyond what fundamentals are telling us, because stocks are already above their five-year average, or if they continue to rise because of perceptions about the market in future years and months, that could be the trigger, but this requires concentrations among the president and minister.
>> is $60 oil a trigger?
>> a trigger is higher oil prices than present if it goes $60 for one day or half a day, that’s not necessarily akinggger.
>> a decision to boost quotas in the second quarter represents a shift? in strategy when the second quarter is normally lower in demand. the group is trying to build inventories ahead of demand in the fourth quarter of this year.
>> clearly, there has been a seismic shift in opec in terms of its outlook. coming into the meeting, the concerns were over a second-quarter seasonal demand dip. that’s not going to materialize. this is a bullish market .
>> a lot of talk about no need to take action now. they not only had the saudi proposal but went a step further and gave themselves another option for 500,000.
>> china has changed the dynamic and we’re coming to adjust to that reality. their buying pattern suggests is that that the second quarter is when they like to come in and we’re starting to see.
>> that more than half of opec’s 11 members are operating at or near capacity levels, leaving little room for disruption should supplies be hurt by, for example, supply short anels. analysts say, while opec is trying to build stock ahead of a buildup in demand later in the year, the gesture may prove too little, too late. damian ryan in isfahan, iran.
>> soaring oil prices pushed stocks lower in the u.s. and plunging shares of g.m. pushed the industrials lower. s&p 500 and nasdaq losing close to a percent respectively. g.m. plunging 14%, the biggest loss since black tuesday and the markets melted in 1987. this is the biggest quarterly loss since 1992. g.m. slashed its estimates for the full year by 50% and restated fourth quarter 2004 figures into a loss. fitch cut its credit rating on the company and standard & poor’s lowered their outlook on general motors to negative in terms of corporate debt and they are the number three most indebted corporate issuer in the world, falling apart across all spectra. we’ll talk to s&p’s car analysts a little bit ahead in 10 minutes on what they’re doing with g.m. and why. one fund manager suspected that the warning from g.m. and the dip in the stock caused a rotation into the safe haven u.s. treasury market . emerging market stocks and bonds and currencies fall on concern that overgrowing economic risk, rising interest rates and g.m.’s warning undermine confidence in smaller markets in the world. the index of two dozen countries traded in eastern europe fell and the brazilian benchmark sovereign due in 2040 dropped to a four-month low before recovering. the head of merging―emerging market fixed income research at credit splus sights feels there will be concern for liquidity problems for emerging market borrowing as u.s. rates go higher. turning to currencies―the u.s. current account deficit widened to a record and the dollar dropped more than a cent against the euro, dipping into the 103 range against the japanese currency. the latest indication it’s screen. the deficit ballooned a bigger-than-expected 14% to a quarterly record of $188 billion. for the year, the current account shortfall totalled 5.75% of g.d.p. across that metric, also a record. one economist points out that the deficit will continue to grow as long as asian nations peg or manage currencies.
>> obviously, the dollar’s depreciation will somehow affect our trade with europe but it’s not likely to stop or slow down our trade with china and the asians.
>> the trade deficit with china grew 30% to $160 billion last year, the biggest two-way trade deficit ever. the deficit with japan up 14% to $75 billion. australian mining companies helping to lift pacific rim stocks in u.s. trading. the indexes tracking asian stocks traded stateside gained and the chicago mercantile ended the session with a pricing at a start at 11,700. to get a thursday update on world news, to ron madison in tokyo.
>> u.s. president george w. bush nominated deputy defense secretary paul wolfowitz to head the world bank.
>>. wolfowitz would replace james wolfen son who is retiring the position may 1. the deputy secretary was one of the bush administration’s key architects of the u.s.-led war in iraq. wolfowitz predicted americans would be welcomed as liberators rather than occupiers once saddam hussein was toppled. the new nomination must be approved by all of the world bank’s member countries.
>>. palestinian flags fly over jericho as israel transferred control of the west bank town to the palestinian authority. it is the first in a series of steps to help with peace talks. israel demands that palestinian authority president, mahmoud abbas, rein in armed groups responsible for attacks on israelis and suicide bombings. abbas steps up efforts to get militant groups to agree to a cease-fire with israel. the iraqi parliament convened as a freely elected party for the first time in 50 years, amid tight security and despite a series of explosions nearby that targeted the gathering. the assembly convened in an auditorium with the heavily guarded green zone. bernie, that’s the latest look at world news. back to you.
>> thank you very much, ron. after the break, s&p lowering its outlook for g.m. and according to the different ratings agencies, we’re about a notch above junk for the biggest carmaker after forecasting their biggest quarterly loss since 1992.
