Highlights include General Motors Corp. (GM), American International Group, Inc. (AIG), Ford Motor Co. (F) and Toyota Motor Corp. (TM).

The economic numbers we have been getting recently have been a mix of “awful but not quite as bad as feared” and “just plain awful.” Recently, the market has been paying more attention to the former than the latter.

Auto sales came in yesterday at a seasonally adjusted annual rate (SAAR) of 9.86 million, which — while well below the 16 million rate we regularly saw a few years ago — is a nice improvement over the 9.12 million SAAR in February. This morning, factory orders for February were reported as a 1.8% increase, a nice reversal from the 3.5% decline in January.

A big fly in the ointment, though, was that the January number was revised down — it was originally reported as a decline of just 1.8%. Some of the increase in orders is probably due to either direct or indirect effects of the stimulus package.

There should be a few more glimmers of sunshine ahead. The adjustments to withholding taxes that were part of the stimulus package took effect on 4/1/09. A few more dollars in each paycheck might just cushion some of the declines in retail sales going forward. This does not mean we are out of the woods, by any means.

The improved auto sales numbers are still a long way away from the levels at which any car maker can be profitable (especially with the huge incentives the car companies are offering).  The year-over-year sales declines were not noticeably worse for the big three than for the major Japanese firms, although the Koreans are picking up lots of market share.

If Chrysler or General Motors Corp. (GM) end up filing for bankruptcy, the ripple effects will be huge.  You do not have to be a financial institution to be systemically important. The idea that it could be pulled of as a neat, clean, quick, prepackaged bankruptcy is simply preposterous.

If it happens, Chrysler is headed for liquidation. GM’s time under court supervision is likely to last years, not months. It will be undoubtedly the largest and most complicated bankruptcy in the history of the world. There has never been an automaker that was able to survive a Chapter 11 filing, so GM making it out to the other side, even with very generous government-supported DIP ["debtor-in-possession"] financing would literally be unprecedented. The closest recent parallel would be the bankruptcy filing by Delphi (DPHIQ), the former GM parts unit.  It filed in 2005 and has yet to emerge.

The bondholders have not been negotiating seriously with the company up until this point.  In all probability, they have lots of CDS protection on those bonds, and will probably do better if GM does default rather than survive. They know that the government will pay off those CDS’s at 100 cents on the dollar if they happen to be written by AIG (AIG).

If GM files, look for AIG to be back looking for yet another handout. It is no longer an insurance company, simply a conduit to funnel money to big banks — both foreign and domestic — with an insurance company veneer over it.

So what is the bondholders’ incentive to reach a deal? A sense of patriotism and doing the right thing? Yeah, right! A filing by either, but especially by GM, will drag under scores if not hundreds of suppliers, greatly exacerbating unemployment.

The loss of the supplier base will also hurt firms like Ford (F) and Toyota (TM). Ditto for all the folks that work at the dealerships that will close.

The pension insurance system will be overwhelmed by the impact of moving the underfunded auto pension liabilities onto its plate. This is even after the existing pensioners take a huge haircut in their monthly checks (not exactly good for consumer spending, especially in the Midwest, but also in retirement areas like Florida and Arizona).

It’s not like the employment picture is looking so hot right now to begin with, and the recent numbers on that front fall into the second category — “just plain awful.”

The graph below (larger version available at http://www.calculatedriskblog.com/) shows the path of both initial claims (4 week moving average, blue line) and continuing claims for unemployment insurance. This week, initial claims moved up to 669,000 — the highest we have seen so far this cycle, up from 657,000 last week (org. reported as 651,000). The four-week average is now at 657,750, up from 650,250 last week. It is now within spitting distance of the record high set back in 1982 (674,250).

Unemployment is not just about the number of people getting laid off, it is also about the number getting hired. This can be seen in the change in the number of continuing claims. They now stand at a record 5.73 million, up from 5.57 million just last week.  That’s more than 160,000 people receiving unemployment checks rather than paychecks than just one week ago.

Note how much more persistent high levels of continuing claims have been historically than initial claims. High levels of unemployment are going to be a very persistent problem.

The ADP survey that came out yesterday was also very downbeat, estimating that the economy lost 742,000 jobs last month. Tomorrow we will see how accurate they were. If they are correct, it would probably translate to an unemployment rate of about 8.6%, up from the current reading of 8.1%.

That level of unemployment will also show what a complete farce the “stress tests” that the banks have to go through are. The term is borrowed from the medical profession where you walk on a treadmill while your heart rate and vital signs are monitored. The base case for the stress tests is essentially the equivalent of conducting a medical stress test while the patient is laying on a couch stuffing his face with potato chips.

Even the “adverse scenario” is a bit on the rosy side. It calls for seeing what would happen if the unemployment rate were to average 7.9% in the first quarter, rising to 8.8% in the second quarter and eventually peaking at 10.4% in 2010. It seems very clear that reality, at least for the first half of this year, is going to be much more adverse than the adverse scenario calls for. If Chrysler and GM go under, an unemployment rate of over 12% in 2010 would be more likely.

Combine that with the Financial Accounting Standards Board (FASB) caving to political pressure and relaxing the mark-to-market rules, and it is clear that the Administration is more interested in papering over the true condition of the banking system than facing up to (or letting investors see) the truth. The new rules will allow banks to use “significant judgment” in valuing their assets.

Is there a “legitimate” group in this country that has shown significantly worse judgment than bankers in recent years?

Read the full analyst report on “GM”
Read the full analyst report on “F”
Read the full analyst report on “TM”
Zacks Investment Research

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