Jeff Rubin and Benjamin Tal warned Thursday, saying that gasoline could surge to $7 a gallon

As oil hits $140, a new low for Detroit

GREG KEENAN
Thursday, June 26, 2008
Chrysler LLC trotted out celebrated retired chairman Lee Iacocca to rally employee spirits on Thursday, but investors were more interested in bankruptcy rumours that continued to haunt the auto maker and yet another fresh high for energy prices that are pounding the entire industry.

The Chrysler rumours and a downgrade of General Motors Corp. stock by Goldman Sachs Inc. knocked down the shares of major North American auto makers and their suppliers.
“There is no basis for the rumour,” said Chrysler spokesman David Elshoff, after the speculation started up in Europe and swirled throughout the North American auto industry, sparking a meltdown of auto industry stocks on Bay Street and Wall Street.

Hours later, Mr. Iacocca, told cheering employees at the company's headquarters in Auburn Hills, Mich., that the third-largest Detroit auto maker will ride out the storm the way it did when he was at the helm more than 25 years ago. Mr. Iacocca is still regarded as a saviour who helped keep it from falling into the financial abyss during the early 1980s.

The message didn't work as well with the Street. Making matters even more dour, oil surged above $140 (U.S.) a barrel again on the New York Mercantile Exchange and closed t a record $139.64.

The Detroit auto makers are reeling from a collapse in sales of pickup trucks and sport utility vehicles in the U.S. market amid gasoline prices above $4 a gallon and the U.S. real estate collapse.

It could get even worse, CIBC World Markets Inc. economists Jeff Rubin and Benjamin Tal warned Thursday, saying that gasoline could surge to $7 a gallon, which will cause Americans to abandon some of their vehicles and send sales through the floor.

Ford and GM have already scaled back truck and SUV production twice in recent weeks. Chrysler announced last November that it will slash production this year, but has insisted it will plow ahead with a redesign of its Dodge Ram pickup and has not adjusted production to deal with the recent slide in the U.S. market.

There are forecasts that June sales in the United States could reach a 16-year low of 12.5 million on an annualized basis – a bad sign because April, May and June are key months for sales.
“If you don't sell vehicles in April, May and June, you're screwed for the rest of the year,” the source said.

A day with wave upon wave of bad news is becoming a regular occurrence for auto makers – especially Detroit, where the U.S. housing crisis and the soaring price of gasoline are combining to cause what could be the worst situation the three auto makers have faced.

“We think GM's automotive cash flow burn this year and next is likely to lead it to look to raise capital, which we believe could lead to significant shareholder dilution and/or a cut to the company's dividend,” Goldman analyst Patrick Archambault wrote in a research note.

GM shares fell 11 per cent to a 33-year low and Ford Motor Co. shares briefly dipped below the $5 level to $4.94, a penny below their 52-week low.
Mr. Archambault urged investors to stay away from parts makers that have the bulk of their business with the Detroit Three.

That includes Magna International Inc.,which generates 53 per cent of its sales from Chrysler, Ford and GM, and has a close relationship with Chrysler that goes well beyond simply supplying the auto maker with parts.

The Motor City Meltdown spilled over to Magna's shares and sent them cascading. The stock fell $3.72 (Canadian) or 5.6 per cent Thursday and closed at a seven-year low of $62.27 on the Toronto Stock Exchange.

The growing crisis in Detroit overshadowed the positive news for Magna that Porsche AG has chosen the auto parts giant's Magna Steyr assembly division in Austria to build Boxster and Cayman sports cars beginning in 2012.

With files from Reuters and Associated Press
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