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Old 03-15-2016, 02:56 PM   #1
steve_biegler
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Default Fiat's finally getting Chrysler's cash

http://www.autonews.com/article/2016...autonews-daily


We all talked about this a long time ago. Sergio finally has his way. The Chrysler cash is now available. I sure am glad the government saw fit to gift all of this to Fiat back in '09.
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Old 03-16-2016, 10:55 AM   #2
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I have to admit that I haven't followed FCA closely enough to realize that the company already didn't have access to Chrysler's cash - I was surprised when I read the headlines yesterday.

As I understand it FCA had existing loan covenants that prevented them from gaining access to Chrysler's cash. Now that FCA has paid down the existing loan the covenant has been lifted and FCA could theoretically use cash that was generated by Chrysler's operations for other FCA ventures.

While there's no question that Daimler raided Chrysler's pile of cash in the "merger of equals" it remains to be seen what FCA will do. Will cash generated by Chrysler be used to save Fiat and Alfa Romeo - time will tell...
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Old 03-18-2016, 11:33 AM   #3
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Default FCA has $11.6 Billion in cash

I ran across an article in USA Today that covered the story about Fiat now having access to Chrysler's cash and the following excerpt caught my attention:
At the end of 2015, FCA US had about 10.4 billion euros ($11.6 billion) of cash. The additional funds will help FCA develop future vehicles. The company also wants to eliminate its net debt by the end of 2018
I was surprised to see that FCA had that much cash available. I know in the past there have been criticisms that FCA was not fully funding their pension accounts and they have been under-investing on R&D but I have to give them credit for accumulating a large quantity of cash.

That said, the auto business is cyclical and an OEM can burn through cash during the downward cycle. As I recall, GM was losing $1 Billion per month back in 2008 and 2009.

Here's a link to the USA Today article - click here
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Old 03-18-2016, 04:21 PM   #4
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The pile of cash could certainly start to deplete fairly quickly if there is another market downturn as in 2008 and 2009.

That's why I'm not sure it makes sense to cut the 200 and Dart.... because in a higher gas price environment those small margin units are at least better than admitting defeat in the entire segment... we shall see.

Even if small and midsize cars are farmed out to another manufacturer, I can't imagine the margin will be markedly better in that situation but only time will tell.
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Old 03-21-2016, 03:33 PM   #5
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Quote:
Originally Posted by mryan55 View Post
Even if small and midsize cars are farmed out to another manufacturer, I can't imagine the margin will be markedly better in that situation but only time will tell.
I totally agree.

While I don't claim to be an accounting expert I'd like to think I've got a pretty solid grasp on the concept of "incremental accounting" and to the extent FCA is already fully invested in building the Chrysler 200/Dodge Dart I have a hard time believing that it makes sense to bail on the cars at this point.

If Marchionne is talking about the successor to the current models, that would be one thing, but to the extent the conversation addresses the current vehicles it just doesn't make sense.
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Old 03-22-2016, 08:34 AM   #6
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Quote:
Originally Posted by XDCX View Post
That said, the auto business is cyclical and an OEM can burn through cash during the downward cycle. As I recall, GM was losing $1 Billion per month back in 2008 and 2009.

Here's a link to the USA Today article - click here
In the early summer of 2007, both GM and Chrysler were sitting on large cash reserves and expressed confidence they had plenty of money to ride out any downturn. Two HUGE differences occurred rapidly that changed the situation drastically.

In past market downturns, if they needed to shore up cash reserves, they could simply sell bonds to raise cash. Also, in the past all they had to worry about in a downturn was to keep funding R & D, and manufacturing costs and just covering operating losses out of cash reserves. By September 2007, when the mortgage industry was starting to implode, they were losing money, but at a "normal " level for the slowdown. Within 45 days, 3 of the top 4 mortgage lenders had collapsed and the panic began to set in throughout the financial industry. All the big banks stopped making mortgage loans after Countrywide, the largest mortgage lender, went under. Then, several large banks failed in California when they had runs on them, and ALL he big banks started hoarding cash and not making loans, which further impacted the car market severely. The operating losses began to double and triple overnight. The final nail in the coffin came in January of 2008 when 3 of the largest investment banks in the world went under or had to be merged with others funded by the government. There was no possibility of selling a bond issue at that point. I saw GM bonds selling on the secondary market at discounts offering a 68% yield on the money prior to the governments "managed bankruptcy" and no buyers for them. At that point the financial market was dead in the water and NOBODY would loan big money. All the automakers had their revolving lines of credit shut off that are normally used to fund the day to day operations...covering payrolls, utilities etc...they just paid interest on a monthly basis when they needed to access it. At that point they were having to fund all of the payroll etc...out of cash reserves at the same time they were already losing a billion a month on sales. As I recall, GM burned through 7.3 billion between October -January...almost 2 Billion a month...an amount they had thought would last 18-24 months under an "ordinary" downturn.

What worries me now, is that just 5 years later, we are heading right back into the same situation except we have almost no weapons left in the Fed's financial arsenal to fight it off again. The Fed dropped "money bombs" into every area of the economy to shore up the market, save the financial and auto industry by slashing rates and printing money. The European and Asian markets are already at negative interest on their 90 day bonds now and the US is hanging on at .6% on 90 day T-bills and a 5 year rate of 1.3% currently. That doesn't leave a lot of room to try and jump in and kickstart the market the next time it crashes and yet here we are, only 5 years removed from the end of the last crash, and the mortgage industry has been offering the lowest rates ever seen and the stock market has regained all of its losses from 08-09 and is poised for another bubble to burst.

The people and industry most responsible for all of it, (finance, insurance and politicians) went right on doing their thing...reaping huge rewards...and laughing all the way to the bank.
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Old 03-22-2016, 10:27 AM   #7
steve_biegler
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If you really want a scare go to red box and get "The Big Short" and watch it. Pay special attention at the very end. They talk about what is going on now. Scary stuff.
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Old 03-22-2016, 02:56 PM   #8
DealerEx
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Quote:
Originally Posted by steve_biegler View Post
If you really want a scare go to red box and get "The Big Short" and watch it. Pay special attention at the very end. They talk about what is going on now. Scary stuff.
My wife is chomping at the bit to see it....in addition to watching the manipulations in our own markets, she watches the Chinese currency markets as well as all the other Asian and European currencies and is convinced they are trying to drive down the value of the dollar now that they have been given a much greater say in the World Bank decisions and are wanting to use their own currency as the standard of value and will dump the dollars they hold to strengthen their own.
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Old 03-25-2016, 11:18 AM   #9
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Quote:
Originally Posted by DealerEx View Post
In the early summer of 2007, both GM and Chrysler were sitting on large cash reserves and expressed confidence they had plenty of money to ride out any downturn. Two HUGE differences occurred rapidly that changed the situation drastically.

In past market downturns, if they needed to shore up cash reserves, they could simply sell bonds to raise cash. Also, in the past all they had to worry about in a downturn was to keep funding R & D, and manufacturing costs and just covering operating losses out of cash reserves. By September 2007, when the mortgage industry was starting to implode, they were losing money, but at a "normal " level for the slowdown. Within 45 days, 3 of the top 4 mortgage lenders had collapsed and the panic began to set in throughout the financial industry. All the big banks stopped making mortgage loans after Countrywide, the largest mortgage lender, went under. Then, several large banks failed in California when they had runs on them, and ALL he big banks started hoarding cash and not making loans, which further impacted the car market severely. The operating losses began to double and triple overnight. The final nail in the coffin came in January of 2008 when 3 of the largest investment banks in the world went under or had to be merged with others funded by the government. There was no possibility of selling a bond issue at that point. I saw GM bonds selling on the secondary market at discounts offering a 68% yield on the money prior to the governments "managed bankruptcy" and no buyers for them. At that point the financial market was dead in the water and NOBODY would loan big money. All the automakers had their revolving lines of credit shut off that are normally used to fund the day to day operations...covering payrolls, utilities etc...they just paid interest on a monthly basis when they needed to access it. At that point they were having to fund all of the payroll etc...out of cash reserves at the same time they were already losing a billion a month on sales. As I recall, GM burned through 7.3 billion between October -January...almost 2 Billion a month...an amount they had thought would last 18-24 months under an "ordinary" downturn.

What worries me now, is that just 5 years later, we are heading right back into the same situation except we have almost no weapons left in the Fed's financial arsenal to fight it off again. The Fed dropped "money bombs" into every area of the economy to shore up the market, save the financial and auto industry by slashing rates and printing money. The European and Asian markets are already at negative interest on their 90 day bonds now and the US is hanging on at .6% on 90 day T-bills and a 5 year rate of 1.3% currently. That doesn't leave a lot of room to try and jump in and kickstart the market the next time it crashes and yet here we are, only 5 years removed from the end of the last crash, and the mortgage industry has been offering the lowest rates ever seen and the stock market has regained all of its losses from 08-09 and is poised for another bubble to burst.

The people and industry most responsible for all of it, (finance, insurance and politicians) went right on doing their thing...reaping huge rewards...and laughing all the way to the bank.
I'm getting caught up and just had a chance to read your post - thanks for the great information/perspective.

I remember that time period vividly and often wonder if we'll repeat the same mistakes all over again.

I remember Chrysler and GM dealers who stepped up to take inventory when they really didn't need it or want it just to support their OEM or relent to the never ending pressure. Some of those dealers then lost their store when the vehicles couldn't be sold (for the reasons you cited above) and then faced curtailments from GMAC and Chrysler Financial.

In my mind the "root cause" of the Great Recession was decision by the bond rating agencies to allow banks and other lending institutions to bundle questionable real estate loans with high quality real estate loans - the theory was the bonds could still be AAA rated because the mix of questionable loans was carefully monitored and there was insurance in place in the event the questionable loans failed at a higher rate than projected.

When the real estate market started to implode the failure rate of the questionable loans spiked and exceeded the limitations of the insurance policies that were in place. Suddenly a AAA rating meant nothing since there was no easy way to determine how "toxic" the portfolio of loans was.

All of this happened while Alan Greenspan looked on and Congress seemed more interested in the drama associated with steroids in professional baseball.
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Old 03-25-2016, 11:21 AM   #10
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Quote:
Originally Posted by steve_biegler View Post
If you really want a scare go to red box and get "The Big Short" and watch it. Pay special attention at the very end. They talk about what is going on now. Scary stuff.
Thanks for the post - I've heard about that movie but haven't had a chance to watch it. With your recommendation I'll look forward to watching the movie at some point in the future.
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Old 03-25-2016, 11:24 AM   #11
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Originally Posted by DealerEx View Post
My wife is chomping at the bit to see it....in addition to watching the manipulations in our own markets, she watches the Chinese currency markets as well as all the other Asian and European currencies and is convinced they are trying to drive down the value of the dollar now that they have been given a much greater say in the World Bank decisions and are wanting to use their own currency as the standard of value and will dump the dollars they hold to strengthen their own.
I've heard that theory too - that the Chinese want to have their currency used as the standard of value for the oil market and other commodities.

I don't profess to have enough knowledge to know if this is likely to happen, but there's no question that China owns a lot of the U.S. debt and they're clearly going to act in whatever is in their best interest.
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