Other Editorials

Another Letter From Your Chairman

Porter Stansberry
Monday, February 18, 2008

Dear Shareholders,

It's disco time again. And I'm the dancing fool.

At the end of each quarter, when I must discuss our results with Wall Street, I feel like a doped-up baseball pitcher. Every word that comes out of my mouth and into our press releases is no different than a steroid-fueled fastball: It's all dressed up and completely phony. But it's awfully hard to pin down.

(That's why the press release summary of our earnings came to 47 pages this quarter. And wait until we publish the entire quarterly with the SEC! Give us enough pages of data, and we can make it nearly impossible to figure out the real, core numbers in our business.)

Read the headline of our February 12 annual earnings press release one more time. Have you ever seen more mysterious qualifications? I love it! Almost every line must be "adjusted." Every forward-looking statement is qualified. And we have nothing  absolutely nothing  to say about when, or if, we will ever regain profitability. In fact, our crafty PR people can spend all day writing and not really tell you anything at all. They're brilliant, aren't they?

2007 adjusted net loss of $23 million, reported net loss of $38.7 billion.

2007 adjusted automotive operating pre-tax income improved by almost $900 million.

Strong emerging market performance helps drive record automotive revenue of $178 billion.

Adjusted automotive operating cash flow improvement of $2 billion
Continued improvement in automotive earnings expected for 2008.

How are we really doing? Well, as I've been telling Porter Stansberry for years, we're on the Acela train to bankruptcy. I'll update you on the real facts below.

Nevertheless, I continue to spew in public whatever nonsense our PR flacks tell me to say. But this month, it was hard to say it with a straight face. "We're pleased with the positive improvement trend in our automotive results..."

What a bunch of bullsh*t.

Pardon my French. But if your job were to blow this kind of smoke up investors' butts year after year, pretty soon you'd forget your manners, too. It's truly hard to believe that anyone believes this nonsense...

We suffered the largest annual loss of an automaker EVER last year  $38.7 billion. And nothing about it was pleasant.

Keep in mind, the largest corporate bankruptcy ever  Enron  produced total losses (equity and debt) of about $60 billion. So, we've managed to lose more than half of the Enron total in only one year.

(Some folks who think they know something about accounting will tell you most of this loss was "non-cash" and thus, isn't real. Don't listen to them. If I hadn't refused to merge with Nissan or another profitable car company, we would have had more than $35 billion in tax-loss carry forwards to use, which would have prevented us from paying corporate income taxes for a long, long time. Believe me, those tax-related assets were part of our crown jewels. And now? They're gone, mostly because I wanted to keep my job. That's the real story.)

Here are the real facts.

Nothing in our business has changed. We're still losing money on every car and truck we sell. But we're getting a lot more creative about how we dress up this pig.

For example, the value of the dollar is plummeting. That makes it easier for us to sell cars and trucks in places like Latin America, where for the first time in a generation even the printing press receipts of the banana republics are worth more than our greenback. So, we trumpet and crow that our "automotive" operations on an "adjusted" basis produced record-breaking revenue totals and "operating cash flow" improvements of $2 billion.

While this is technically true  we did bring in more dollars last year selling cars  we don't mention the other side of the ledger, our costs. A weaker dollar means it costs us a lot more money to buy the raw materials we need to make the cars.

Thus, while the nominal amount of our sales went up, the profit margin of those same sales plummeted to negative 3.2%. Told in a much more honest way, last year the weak dollar made it easier for foreigners to buy our cars, which is why sales went up. Unfortunately, the government printing more dollars doesn't change the real economics of our business. The corresponding effect is higher raw materials costs. And thus, our losses grew. (A quick look at our income statement tells you all you need to know. Automotive sales did grow, by about $3 billion. But automotive cost of sales grew more, by nearly $5 billion.)

As I've been warning you privately for months and months, there's simply no way to cram the expenses and obligations we've assumed over the last 40 years on top of the business we have today. It's like we're trying to tow the Titanic into port with a rowboat. And the Titanic is sinking and pulling our shareholders straight to the bottom along with her.

You must understand: Our cost structures and fixed overhead were designed to support an automaker with 30% of the world's car and truck business. But our market share continues to fall every quarter, relentlessly. In the fourth quarter of last year, we hit 13.1%  a new low. Unless we're able to significantly reverse these declines, we can't do anything to save our shareholders.

Here are the things I ought to tell our shareholders.

Given our debt load and our utter inability to grow our market share, it will be impossible for us to avoid bankruptcy. This is the only thing that truly matters to the fate of our shareholders  which is why we never mention it in our press releases and why the mainstream press never brings it up. (More about the obtuse nature of the press in a minute...)

We owe our bondholders more than $33 billion. The interest expense of these debts continues to increase as our credit worthiness continues to decline. This is our death spiral.

We don't make it easy for analysts to see what we're paying in interest. We break down the debts of our various subsidiaries into different categories and list the interest expense in a half dozen different places in our 50 page "summaries." Good luck trying to sort it all out, suckers. But... I can tell you this: Our interest expense in our automotive group alone increased from $2.5 billion in 2005 to more than $2.9 billion in 2007. And that's far more than we can afford, as we're not even making money selling cars anymore. This slow and steady increase to our interest expense is what will eventually drive us out of business. Our interest costs will grow much faster than our nonexistent profits.

These obligations and our rising cost of capital are our real problems, beyond our inability to sell cars at a profit.

And... if our bondholders don't kill us, our employees will. We owe our retired employees health care benefits estimated to be worth $47 billion and pensions worth another $11 billion. Yes, we're trying to work through these obligations by cutting a deal with the union, but the union isn't going to let us out of $60 billion worth of compensation easily.

A few investors are hanging on to the myth that our emerging-markets business in China and Latin America will save us. While these are good businesses, competition in these markets will heat up over time, eroding our margins. And it's extremely unlikely these markets will be big enough in time to save us. Consider: We lost more than twice as much money on our North American operations last year as we made in Latin America. And our profits in China were roughly the same size as our losses in Europe.

Whether we like it or not... our global share of the car market continues to decline.

And so, dear shareholders, you only need to pay attention to those two numbers. As long as our market share continues to fall and our debt service costs continue to climb, we will go bankrupt. There's no doubt about it. When? That's hard to say. We could do a lot of things to postpone the day of reckoning, including mortgaging the rights to our brand names, like Ford has done. Right now, my best guess is that we will file for bankruptcy sometime within the next two years.


Your Chairman

P.S. I get asked this a lot: If the facts are so clear-cut and easy to see, why doesn't anyone in the mainstream press talk about how dire our situation really is? That's easy. Do you have any idea how much advertising we buy? Not a single TV network or newspaper publisher in America can afford to say anything about us we don't approve.