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To: reaper who wrote (235586)	4/15/2003 8:40:41 PM
From: orkrious	Read Replies (1) \| Respond to of 436258

Clock's Ticking on GM's House Party By Peter Eavis Senior Columnist 04/15/2003 05:38 PM EDT thestreet.com It looks like one of the brashest corporate gambles in recent history is starting to backfire. General Motors (GM:NYSE) began offering its infamously aggressive incentives on auto purchases just days after 9/11, hoping to generate strong sales to counteract an economic shock. The bet apparently aimed to sustain sales until the economy recovered, when incentives could be trimmed. But GM's move Tuesday to pull back from its earnings forecast shows that the extra demand created by incentives is subsiding before an economic recovery has kicked in. And as we're seeing, lower sales can quickly crush earnings at GM, because of its high and relatively inflexible cost base. GM shares, trading at barely half of their year-ago highs as investors worry about the company's outlook, dropped 95 cents Tuesday to $35.17. Growth in the Garage In communicating its first-quarter earnings Tuesday, GM said it was "less certain" about achieving its 2003 earnings guidance of $5 per share, blaming "uncertain economic conditions around the globe." At first glace, first-quarter earnings weren't bad. The headline profits growth was strong; "adjusted" earnings per share in the first quarter jumped 32% from the year-ago quarter. But a look at GM's finance division, GMAC, shows that the company relied heavily on a spectacular 150% jump in profits at its mortgage unit, where disclosure is poor. Ironically, houses, not cars, were the chief driver of profits growth at the nation's largest automaker. In fact, the auto segment produced little to cheer about. The first-quarter financials betrayed a drop in GM's share of the U.S. auto market, to 26.6% from 28.2% in the year-ago quarter. This and "intense pricing pressure" helped drive down net income in the North American auto division by 16% to $548 million. The danger of the zero-percent strategy always was that consumers would grow to expect heavy incentives, and on a conference call Tuesday, GM finance chief John Devine said that the incentives "have become part of the landscape." The other problem for GM is that rival auto manufacturers are making headway in SUVs and light trucks, a higher-margin part of the market where GM has recently been strong. And on the call, Devine noted that "competition keeps getting fiercer" in these two lines. Incentives effectively bring forward demand, or create it, where it wouldn't normally exist. Once those two sources have been more or less exhausted, the incentives will have less traction. That would be OK if personal incomes were growing and personal debt levels falling, allowing "regular" auto demand to take up the slack. But they aren't. Asked if the zero-percent strategy was a big miscalculation, a GM spokesman replied: "Incentives are giving us an opportunity to reach customers that previously would not have considered a GM vehicle." He added: "We believe that capturing those customers and improving opinion and consideration overall will pay dividends going forward." A company that is able to provide cheap financing for its products can get hooked. Indeed, Devine showed his ambiguous stance toward incentives on the call. A reporter asked why GM just didn't get rid of them. Devine responded: "If we stopped incentives, there'd be a lot of people out of work," adding: "Would we like to see incentives lower? Sure." Transparency Incentives are booked on GM's income statement as a cost, but the company doesn't break it out so that investors can see the extent of the subsidy. GM bulls argue that this cost is worth bearing. That's because without these highly attractive financing offers, sales would suffer and the income statement would be worse off than with the incentives. True, but the cost over time of running the incentives may be more. Here's why: The incentivized loans also accumulate on GMAC's balance sheet, which increases the need for capital at the division. And if a large number of the loans look like they're going to go bad, GM will end up making earnings-eroding additions to its loan-loss reserves. To be fair, credit quality has not yet become a big negative at GM, and an executive from the division was relatively sanguine about the outlook for bad loans on the call. GMAC's bad-loan provision in the first quarter was $378 million, well below the $506 million in the year-ago period. The dropoff was a big benefit to earnings, as provisions are an expense. Raising the Roof While investors must keep their eyes on GMAC's car loans, the unit's mortgage division must also remain under scrutiny, especially after the bizarre leap in profits in that business in the first quarter. Mortgage profits soared to $371 million in the first quarter from $148 million in the year-ago period. Devine said the profits here were due to higher mortgage originations, adding that gains from selling loans, which some believe are unsustainable and therefore a low-quality contributor to earnings, were "very little" in the quarter. Sharply lower interest rates led to a huge increase in mortgage prepayments last year, causing GMAC to take big charges on its mortgage servicing rights. These MSRs, an asset on the balance sheet, must be written off when the mortgages to which they are attached get prepaid. However, MSR charges were not a big negative impact on earnings in the first quarter, even though the prepayment craze is still strong. This elicited a number of questions from skeptical analysts on the call. A GM exec responded that the relative stability in interest rates in the first quarter was the reason for the seeming lack of MSR charges. One executive said that MSR valuations are determined by an internal model. But the fact that outside investors can't see the workings of this model will do nothing to dispel doubts surrounding GMAC's strong earnings.

To: reaper who wrote (235586)	4/16/2003 10:25:17 AM
From: JRI	Read Replies (2) \| Respond to of 436258

R- That was a helluva a comeback by the Royals last night...the team just doesn´t quit, regardless of circumstance....I think you are right about the arms tiring later this year, but if they add a quality pitcher and maybe bench player in mid-year, they could challenge for division IMO. Twinkies are light-hitting, and KC beaten White Sox 4 straight (Cleveland still couple years away IMO). AL Central will be one of the weaker divisions in baseball this year (weakest?) and a lesser record can get far. Remember, they´ve done this start WITHOUT Beltran, which is really quite remarkable- they are much more no name then Angels last year (they do need to move Relisford to top of line-up too, the guy can steal, get on base...Tucker´´s OBP never has been good) core of lineup of Sweeney, Beltran, Ibanez, Harvey will be as good as Mariners, Twins, White Sox and maybe even A´s IMO, and Royals are decent defensively Historically, its no cinch that they´ll be competing for division-lead by eoy, but odds favor vast improvement over last year. I think they are the real deal (will at least challenge for wild-card, w or w/o extra help).. I hope we blow thru this range on upside, and get some irrational exhuberence...until we do, sitting tight..(major positions)