Crash test dummies

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The car embodies the pressures on the ailing US economy. It is built from expensive metal and plastic. It burns oil. Buying one usually means taking out a loan.

It is a measure of how bleak the auto sector’s prospects are that shares in General Motors and Ford actually bounced when June sales data were released this week. Although not as bad as some feared, the industry’s annualised figure of 13.6m light vehicles is the lowest since 1993. The rapid shift away from high-margin gas-gulping trucks to smaller cars adds to the misery. In spite of the bounce, Ford stock changes hands for less than $5, a level last visited in the mid 1980s. GM’s stock, at less than $10, is a genuine 1950s throwback.

Renewed talk of potential bankruptcy, however, looks overdone. GM ended the first quarter with $31bn of cash, securities and available credit. Citigroup estimates $18bn is a desirable liquidity buffer to maintain during a recession. Take off the $7bn GM is likely to burn through in the rest of 2008, and that leaves about $6bn of excess liquidity – not ideal but not bankruptcy. Moreover, while sales at home are dismal, GM’s international businesses are performing well and could be pledged to secure new financing.

What is not clear is where the current cycle will bottom out. Merrill Lynch estimates each 1m drop in the industry sales figure equates to an extra $3bn of cash burn at GM. Raising extra finance may be possible, but is unlikely to be cheap, leaving shareholders vulnerable to dilution. Ford, which tapped the credit market before it froze up, enjoys a bigger cushion. But it has few unencumbered assets and its big 2008 product launch, the F-150 truck, is coming at the worst possible time. Even if Detroit is not about to hit a wall, investors should avoid hitching a ride.

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