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April 2005, EWFF
The Elliott Wave Financial Forecast’s 2005 forecast called for a bull market in caution, and it got going with a bang in March. The powder keg of woes surrounding GM came as no surprise to EWFF subscribers. From GM’s pension deficit problem (October 2002 EWFF) to its reliance on debt financing (July 2004) to the deflationary psychology gripping car-purchasing consumers and our forecast of a looming bankruptcy at one of the two U.S. car companies (March 2005), EWFF has covered the waterfront of risk facing GM and the U.S. auto industry. GM’s debt rating is actually still teetering above junk status at BBB-, Standard & Poor’s lowest investment-grade rating. Last week, a leading brokerage predicted GM’s downgrade to junk “within six months,” but, as usual, the market is way ahead, as GM’s bonds already trade at levels comparable to companies whose debt is rated junk, and in some cases, it’s far worse.

The yield spread between GM’s 30-year benchmark bond and 30-year U.S. Treasuries rose steadily beginning in January 2004 before exploding to 515 basis points last week.
Former GM president Charles Wilson used to say, “What’s good for America is good for General Motors and vice versa.” It’s the “vice versa” part that investors need to focus on now. Some may simply dismiss the automaker as a manufacturing relic, but GM remains a tremendously important financial player in the U.S. and global debt markets. After General Electric, GM is the biggest issuer of corporate debt, with $136 billion outstanding. It is also a bellwether debtor in the Lehman Credit Index, the benchmark corporate bond index used by many fund managers. As one manager notes, a GM downgrade to junk status by the ratings agencies would be “horrific” because most institutions are not allowed to hold junk bonds and would be forced to sell. GM bonds are such a large part of the market that such a move would decimate prices in general. The break in GM bonds on March 16 demonstrated the potential ripple effect, as all sectors of bonds were affected, including a large drop in emerging market debt. The Morgan Stanley Dean Witter Emerging Markets Debt Fund has fallen about 15% in just 3 weeks.

March 2005. EWFF
Back in mid-2004, when rebates on many popular car models rose to $4,000 and $5,000, The Elliott Wave Theorist stated that the auto industry was “locked into a competitive rebate-offering death spiral. It’s a tug of war now, but deflation will win the contest.” The following headline from February 21 confirms that deflation is assuming control: “A Sticker Shocker: GM Slashes Prices.” The lowering of prices by up to $2000 on some of GM’s most popular SUVs in the middle of a model year is considered “highly unusual.” It is still the early stage of a trend that will surely lead to the failure of at least one of the two remaining U.S. car companies. This trend already mimics falling prices for everything from online brokerage commissions to couture. Oscar De la Renta is pushing a line of day suits that run for less $100.

September 2004
It’s true, there is a “new spring in consumers’ stride,” but a closer look at the monthly spending numbers reveals an important new development that takes the shine off of the consensus assessment of economists. Most of the June drop in sales of durable goods was from a fall in auto sales, and virtually all of the July’s rebound was also due to cars. The head of market and industry analysis at General Motors explained that the July pop in sales was due to the “summer sell-down,” when car makers offer deals to clear the lots. “Consumers are timing their purchases more. That has changed.” This development is bad news for car companies and the overall economy. As EWI has long noted, deflation is a state of mind. Consumers’ decision to wait for lower July prices is a sign that this mindset is taking hold, as a willingness to forestall purchases is one of its primary attributes.