Automotive Stocks Stuck in Neutral

We've all heard about the disaster in the financial sector due to problems in the housing market. But the automotive industry is quickly following the housing into the financial abyss! 

Let's look at some of the recent news: Daimler Chrysler (DAI) has had to exit the leasing business, and is strapped for cash now that two major banks refused to renew $1 billion and $2 billion commitments in short-term debt for Chrysler Financial. Ford (F) has lost money on vehicle leasing due to lower than anticipated residual values of gas-guzzling pickups and SUVs, and saw European vehicle sales dip 6.6% In July. General Motors (GM) has curtailed vehicle leasing too, going so far as to offer "new car" warrantees on their pre-owned stock just to unload its massive inventory!  Even mighty Toyota (TM) has boosted it loss reserves due to falling residual values. 

Things are bad for imported brands, too. BMW posted 58% drop in operating earnings due to slumping U.S. sales, higher material costs and announced production cuts.  Nissan (NSANY) posted a 42% earnings decline due to a fall in value of leased vehicles and unfavorable exchange rates.  Both companies were hurt by a glut of used SUVs and pick-up trucks in the U.S. and posted large losses due to falling residual values from car leasing. 

There are now heightened concerns about GM's liquidity, which has been bleeding about $1 billion in cash each month so far this year.  GM's cash reserves have dropped from $27.3 billion last December to $21 billion on June 30. GM posted a devastating $15.5 billion loss of $27.33 per share as sales slumped 18% in the second quarter!

As housing and the automotive sectors face tighter financing and excessive inventories, the "velocity" of money, which measures how fast money changes hands, has abruptly decelerated. This has ominous implications–not just for these sectors, but for the entire U.S. economy.  With consumers responsible for over 70% of GDP growth, negative GDP growth is now very possible in the upcoming months, since the lubricant of "easy money" is being increasingly cut off for many consumers.

Even the best automotive stocks right now aren't looking too hot. It'll be some time before I'm comfortable investing in automakers again!