Posted at 3:51 PM (CST) by & filed under Jim's Mailbox.

Jim,

Click here to listen to a song on the current economic crisis.

Regards,
CIGA JB Slear

Jim,

Jim Rogers said the next to come is an “inflationary holocaust.” This was taped last week. The salient comment, past half way into his interview, dovetails what you often have written about. The agreement you have is that monetary inflation is the cause and precursor of price inflation regardless of the level of business activity. The greater the amount of money and the shorter the time in history to inject this infinite floods of dollars result in a “inflationary holocaust” quite soon.

Click here to see the video…

Regards,
CIGA Christopher

Dear Christopher:

Today every political and financial interviewer pulled out a host of Nobel Laureates, Professors, Dean of Business Schools, former Secretaries of the Treasury and other well known equity professionals to high five and applaud the G7 accomplishment of flooding the world with dollars.

Speaker of the House Pilosi got into the act by rehashing the hash of the bailout. She was sure to emphasize the line “do more.”

The answer that governments apply to all situations is to throw cash in dollar swaps in the trillions as a off balance sheet injections.

How did Einstein define insanity? I believe he said it was doing the same thing repeatedly while anticipating different results. The government is doing the same thing that created this crisis and is apparently anticipating different results.

As Jim Rogers says, we are bailing out 29 year old brats driving Maserati’s who we know are the manufacturers of mountains of OTC derivatives. The actions of these brats will end (via what was done this weekend) the financial world as we know it.

The inflation that is heading towards us without regard to the level of business activity is WILD.

I am not concerned that gold will fail to trade at $1650 by January 11, 2011. My concern is that it might be much higher.

Regards,
Jim

Posted at 6:30 PM (CST) by & filed under General Editorial.

Dear CIGAs,

Wrong financial targeting produces zero results after the first flush of glee and high fiving.

  1. Who is going to guarantee the Federal paper of bankrupt nations?
  2. After Lehman, what banks are going to have faith in the government guarantee of all and everything? You can make the public happy, but fellows, it is your landsmen who are panicked, not the general depositors.
  3. Government guarantees of all and everything means an infinite printing of paper, be it a non marketable T-bill or pure cash.
  4. The problem to avoid is the allowing of one quadrillion one thousand one hundred and forty-four trillion dollars of notional value to become real value. The Lehman bankrupt counterparty proves this.
  5. Do you fellows really understand the anchor that is sinking your ship? I honestly don’t think so at the level of G7 ministers.
  6. If you are trying to fool the public, the action by FASB this weekend might have some real impact. It is not the public that is in a state of panic. It is an OTC derivative collapse accelerated by the Fed’s error in letting Lehman enter Chapter 11. That moved nominal value to full value.
    Now a move to non-transparency is not going to do anything for the problem of banks trusting banks because of the valueless type of derivative after type of derivative.

The FASB’s reprehensible action might just be a major BACKFIRE.

The FASB is violating their own mandate to protect the general interests of the public through transparent true value and clear auditing procedures.

FASB rushes to get revised fair-value guidance out on Saturday
Why? Because tweaked guidance on valuing assets could boost third-quarter earnings for some companies
By Marine Cole
October 10, 2008 2:05 PM ET

(Excerpt from article)

“Thus, Mr. Willens noted, “it would not be surprising to see third-quarter earnings reports show marked improvement from past periods as the values derived from ‘mark-to-model’ assumptions exceed those resulting from the use of observable inputs, in such prior periods, with respect to the same securities.”

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Jim Sinclair’s Commentary

Even though Merrill only got 20 cents and Lehman got .0875 cents on the dollar for their bag of failed derivatives, the financial entities can now put false and misleading values on their worthless OTC derivatives. Maybe they will even mark up the crap to develop totally false and misleading earning.

Remember the problem is between banks and not between the public and banks.

FASB rushes to get revised fair-value guidance out on Saturday
Why? Because tweaked guidance on valuing assets could boost third-quarter earnings for some companies
By Marine Cole
October 10, 2008 2:05 PM ET

The Financial Accounting Standards Board adopted new guidance on fair-value accounting in illiquid markets today, giving financial institutions more leeway to value financial instruments based on internal inputs.

The board will release its final guidance Saturday, and it will be effective upon issuance.

“I think it’s safe to say when we wrote [Financial Accounting Standard 157 on fair-value accounting], we probably didn’t contemplate exactly the current situation that’s developed in the credit and financial markets,” Robert Herz, chairman of FASB, said during today’s meeting.

“Under such conditions, it’s important to understand and apply both the objective of 157 and the framework,” Mr. Herz said. “By doing that, it will require in some cases more analysis, more judgment.”

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Jim Sinclair’s Commentary

Well here it comes. The cost of the Formula combined with the derivative madness is beginning to hit the cash register. The USA will be quite fortunate if the next year’s Federal Budget Deficit is only 2 trillion. Now there is a great reason to own US dollars. Do you think the Geek Algorithms will get it now before they get it in the end?

Cost of U.S. Crisis Action Grows, Along With Debt
By Matthew Benjamin

Oct. 10 (Bloomberg) — “The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.”

Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger.

“I always assumed they would be asking for more money along the way if it was necessary, and it looks like it’s going to be necessary,” said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington. “At the moment, there’s nothing happening here that’s positive for the budget. Nothing.”

The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley’s chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.

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Jim Sinclair’s Commentary

Hey G7 (should be G13), the problem is called OTC derivatives, not runs on the regional banks.

FASB folds and permits financial entities to egregiously lie to the public, missing the real target which is Bank to Bank confidence.

Traders’ worst fears realized at Lehmans auction
By Stephen Foley in New York
Saturday, 11 October 2008

“The auction set a price for Lehman bonds of 8.625 cents on the dollar. Financial firms that sold credit default swaps, therefore, owe 91.375 cents on the dollar – more than Wall Street had been factoring in. That figure increased nerves about whether everyone in the chain will actually be able to pay the amount that they owe, something that will become clear over the coming days. “

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Jim Sinclair’s Commentary

Just in case you missed it this Friday afternoon:

FDIC news release:
Failed Bank Information
Information for Main Street Bank, Northville, MI

On October 10, 2008, Main Street Bank, Northville, Michigan was closed by the Michigan Office of Financial & Insurance Services and the Federal Deposit Insurance Corporation (FDIC) was named Receiver.  No advance notice is given to the public when a financial institution is closed.

The FDIC has assembled useful information regarding your relationship with this institution.  Besides a checking account, you may have Certificates of Deposit, a car loan, a business checking account, a commercial loan, a Social Security direct deposit, and other relationships with the institution.  The FDIC has compiled the following information which should answer many of your questions.

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Posted at 2:09 PM (CST) by & filed under General Editorial.

Dear Jim,

You said that FASB, under significant pressure, would trade away years of their long and well earned reputation this weekend by more than likely supporting value to maturity – another title for accounting bullshit.

Will this change everything?

Your friend,
The Green Hornet

Mr Dear Old (me not you) Friend,

The value of this garbage has already been set in cement. This is a professional, not yet public, panic based on the financial destruction between financial institutions. The FASB cannot cure bank (professional) trust of each other by instating a foundation of today’s new fabrication, value to maturity.

The reason for this is value has already been set to “Value to Maturity.”

Merrill got 20 cents on the dollar. Lehman got less than 10 cents.

Only numb-nuts can fluff that off.

What a shame to see the policemen of proper auditing of values bastardize all the good they have done in one cowardly act of submission

Yours,
Jim

Dear Little Tatanka,

According to the following article, it looks like a holiday is coming to the UK on Monday.

Best,
Ciga Big Tatanka

State to save HBOS and RBS
Government set to become biggest shareholder in top banks as Japanese weigh bid for Morgan Stanley
John Waples and Iain Dey

THE government will launch the biggest rescue of Britain’s high-street banks tomorrow when the UK’s four biggest institutions ask for a £35 billion financial lifeline.

The unprecedented move will make the government the biggest shareholder in at least two banks.

Royal Bank of Scotland (RBS), which has seen its market value fall to below £12 billion, is to ask ministers to underwrite a £15 billion cash call.

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Dear Big Tatanka,

The Chancellor said, “Hey, it’s only a small holiday. Give us a break, we’re broke like everybody else!”

Jim

Posted at 7:54 PM (CST) by & filed under General Editorial.

Dear Friends,

According to news reports, the G7 on one weekend of mutual understanding will restructure the entire world monetary system and make the present consequences of more than one quadrillion one thousand one hundred forty-four trillion dollars of notional value rotten garbage go away.

A few of the characteristics of the problem that will be solved in two days of deliberation of the G7, but they mistakenly think they are still the Sun of the World around which all other countries orbit quietly and obediently. That alone has to give you some insight into the problem.

Behind the curtain of silence the subprime loan problem, better described as a global meltdown of credit and default derivatives, continues. The reason for this condition is an attempt to value that for which there is no value. It is spreading globally as a product of the limitless manufacturing PRIMARILY (above 75%) by USA financial entities.

Keep in mind that over the counter derivatives created between 1999 and 2007 generally have the following characteristics:

  1. Without regulation.
  2. Without listing on public exchanges.
  3. Without standards.
  4. Therefore not in the least bit transparent.
  5. Therefore without an open market of the bid/ask type.
  6. Dealt in by private treaty negotiations.
  7. Without a clearinghouse
  8. Unfunded without financial guarantee of any kind.
  9. Functioning as contracts of specific performance.
  10. Financial character or ability to perform is totally dependent on the balance sheet of the loser in the arrangement.
  11. Evaluated by computer assumptions made by geek, non market experienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions.
  12. Now in the credit and default category alone considered by accepted authorities as totaling more than USD$20 trillion in notional value.
  13. Notional value becomes real value when the agreement is forced to find a real market for ending the obligation which is how one says sell it.

The US dollar has improved based on the well crafted Urban Myth that Euroland has more problems than the USA. That like all great lies of history becomes true by experts, saying it loud and often. This method of the transition of nonsense into manufacturer truth is known as Spin. It was one of the most important imports from Germany in 1945. Some think this method of spin exceeded the imports of Dr. Von Braun.

The first plan crafted for the dollar recovery was experts assuring everyone that Euroland, as the source of this problem, clearly would have to have more problems than the USA, with a finger clearly pointing at UBS.

Next many interventions took place with fanfare galore. I love the picture of the Congressional personality high fiving on the passage of the bailout bill.

Since then the Secretary of the US treasury has announced investments in bankrupt banks four times, each time as a new intervention cure of problem.

The best of all might be the collapse of FASB this weekend as the overseers of fair accounting making values where there is none.

FASB to release fair value guidance this weekend
Friday October 10 2008

NEW YORK, Oct 10 (Reuters) – The Financial Accounting Standards Board, which sets U.S. accounting rules, is likely to release formal guidance on mark-to-market accounting this weekend, it said at a meeting on Friday.

The board’s guidance is intended to formalize clarifications issued by FASB and the U.S. Securities and Exchange Commission last month, which told companies they could rely on internal estimates, rather than fire-sale prices, to value assets trading in illiquid markets.

At a special meeting on Friday to consider the reforms, the FASB directed its staff to rework and clarify certain parts of its proposal, but stuck to the general concepts issued earlier.

FASB members said at the meeting they wanted to make sure companies were not completely disregarding market transactions in illiquid markets, but rather using them as one of many inputs.

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THE ABILITY TO GIVE VALUES TO VALUELESS INSTRUMENTS, CLEARLY KNOWN TO THE BANKS TO BE WORTHLESS IS NOT GOING TO MAKE INTER-BANK LENDING RECOVER.

Jim’s Formula:
September 1, 2006

  1. First interest rates rise affecting the drivers of the US economy, housing, but before that auto production goes from bull to a bear markets.
  2. This impacts many other industries and the jobs report. An economy is either rising at a rising rate or business activity is falling at an increasing rate. That is economic law 101. There is no such thing in any market as a Plateau of Prosperity or Cinderella – Goldilocks situations.
  3. We have witnessed the Dow rise on economic news indicating deceleration of activity. This continues until major corporations announced poor earnings, making the Dow fall faster than it rose, moving it deeply into the red.
  4. The formula economically is inherent in #2 which is lower economic activity equals lower profits.
  5. Lower profits leads to lower Federal Tax revenues.
  6. Lower Federal tax revenues in the face of increased Federal spending causes geometric, not arithmetic, rises in the US Federal Budget deficit. This is also true for cities & States as it is for the Federal government.
  7. The increased US Federal Budget deficit in the face of a US Trade Deficit increases the US Current Account Deficit.
  8. The US Current Account Balance is the speedometer of the money exiting the US into world markets (deficit).
  9. It is this deficit that must be met by incoming investment in the US in any form. It could be anything from businesses, equities to Treasury instruments. We are already seeing a fall off in the situation of developing nations carrying the spending habits of industrial nations; a contradiction in terms.
  10. If the investment by non US entities fails to meet the exiting dollars by all means, then the US must turn within to finance the shortfall.
  11. Assuming the US turns inside to finance all maturities, interest rates will rise with the long term rates moving fastest regardless of prevailing business conditions.
  12. This will further contract business activity and start a downward spiral of unparalleled dimension because the size of US debt already issued is of unparalleled dimension.

Therefore as you get to #12 you are automatically right back at #1. This is an economic downward spiral.

I heard all this “slow business” as negative to gold talk in the 70s. It was totally wrong then. It will be exactly the same now.

Spin it, intervene in it, witness the media glee. Regardless of it all, gold will trade at $1200 and $1650, the dollar at .72, .62 and .52.

Regards, Jim

Posted at 3:54 PM (CST) by & filed under General Editorial.

Thoughts for the Day:

The expectation for dramatic action by the G7 are extremely high. The options available to the G7 however are quite limited.

The consequences of all the limited options available to the G7 will create a modern day worldwide Weimar Republic.

The generally accepted theory that Europe will suffer worse than the US as a result of the OTC derivative collapse is a popular urban legend, yet the euro is off from $1.60 to $1.34 based on a carefully structured myth.

Japan says G-7 countries must look forward
The Associated Press
Published: October 11, 2008

WASHINGTON: Japan’s finance minister says that although the United States is the source of the financial “earthquake” roiling world markets, the world’s top economies should struggle together and not assign blame.

WASHINGTON: Japan’s finance minister says that although the United States is the source of the financial “earthquake” roiling world markets, the world’s top economies should struggle together and not assign blame.

Shoichi Nakagawa says the efforts Friday by the so-called Group of Seven countries are not the end of what they are prepared to do.

He provided few specific details.

But he said through an interpreter that the International Monetary Fund has to “fulfill its role” and strongly respond to the crisis. He says Japan will make further contributions if necessary.

He had said earlier in the day that Japan is set to propose that a joint fund be set up to give emergency loans to nations hit by the crisis.

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Jim Sinclair’s Commentary

Please read the following article.

Pakistan will turn out to be the most serious problem out there. It will be more disturbing and world changing than the present fact that there is no major money center bank, nor is there an international investment firm that is solvent.

Dexter Filkins: Pakistan’s long road to chaos
02:06 PM CDT on Friday, October 10, 2008

Hours after a truck bomber killed 53 people last month at the Marriott Hotel in Islamabad, Pakistan’s interior minister laid responsibility for the attack on Taliban militants holed up in the Federally Administered Tribal Areas, or FATA — the remote, wild region that straddles the border with Afghanistan.

“All roads lead to FATA,” Rehman Malik said.

If the past is any guide, Mr. Malik’s statement is almost certainly correct.
Also Online

But what Mr. Malik did not say was that those same roads, if he chose to follow them, would very likely loop back to Islamabad itself.

The chaos that is engulfing Pakistan appears to represent an especially frightening case of strategic blowback, one that has now begun to seriously undermine the American effort in Afghanistan. Tensions over Washington’s demands that the militants be brought under control have been rising, and last month an exchange of fire erupted between U.S. and Pakistani troops along the Afghan border. So it seems a good moment to take a look back at how the chaos has developed. It was more than a decade ago that Pakistan’s leaders began nurturing the Taliban and their brethren to help advance the country’s regional interests. Now they are finding that their home-schooled militants have grown too strong to control. No longer content to just cross into Afghanistan to kill American soldiers, the militants have begun to challenge the government itself.

“The Pakistanis are truly concerned about their whole country unraveling,” said a Western military official, speaking on condition of anonymity because the matter is sensitive.

That is a horrifying prospect, especially for Pakistan’s fledgling civilian government, its first since 1999. The country has a substantial arsenal of nuclear weapons. The tribal areas, which harbor thousands of Taliban militants, are also believed to contain al-Qaeda’s senior leaders, including Osama bin Laden and Ayman al-Zawahri.

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Posted at 7:06 PM (CST) by & filed under General Editorial.

Dear Friends,

Stay the course or jump directly into the fire! That’s the soundest advice I can give you in this highly volatile market period. I told you that you would see volatility in gold beyond your wildest imagination. That statement usually went along with my warning that by margining anything gold you were putting yourself in great financial risk.

Today has to seal the veracity of that advice. Now get a hold of yourself. There is absolutely no way governments can make a problem of this size go away over a weekend. Those that question me on this issue are the same ones that laughed in 2000 when I said the growth of OTC derivatives was going to break the world. I told the lead director of Bear Stearns at the time that OTC derivatives were going to break his firm but the profits from them was simply too intoxicating for anyone to listen. Now I am asking you to listen.

Whatever is done to resolve this global financial crisis is going to inject incomprehensible amounts of new money into the global financial system.

Academics see the world as a ‘Picture In Time.” That means they are static thinkers who can’t perceive motion. Visionaries like Harry, Monty, Trader Dan & Tony are “Dynamic Thinkers.” At present, some academics are promoting the dumbest line I have ever heard. They say that all this new money going into the system is not monetary inflation because it is simply replacing all the money lost and therefore is a wash. That is part of the thinking pattern I am talking about and it’s dead wrong.

Dynamic thinkers know that the outflow of these losses has existed from the time of transaction and therefore prior to truer valuation as mandated by Financial Accounting Standards Board (FASB).

The day the FASB mandated truer value had existed for years but was not recognized as such because it was generally accounted for off balance sheet. Just because financial institutions tried to hide their losses, those capital depletions were already a growing cancer inside their organizations.

You can be certain that a repetition of Germany’s Weimar crisis is coming soon. There is nothing that can be done to make matters better – even if done by governments unilaterally in a unified action. In fact, such action will only serve to make matters worse.

The larger the financial action, the deeper the financial fall. The G7 still thinks they run the world. That should tell you something about the degree of what they can do.

Gold is honest money that will push all crappy paper out of its way. Why do you think so much intervention took place in gold in US market hours today?

All I can tell you is to stay the course or jump directly into the fire! If the heat in the kitchen is too hot for you, there is nothing I can do for you.

Regards,
Jim Sinclair

Posted at 3:17 PM (CST) by & filed under Guild Investment.

Dear CIGAs,

Merrill Lynch issued a big report today on the banking crisis.

Here are the main points:

  1. Everyone is waiting for the big government solution.
  2. Coordinated moves will not necessarily be effective, but it will be historic if it happens.
  3. We are barely past the halfway point of the credit down cycle.
  4. People will continue to crowd into treasuries Rosenberg (and in my opinion, gold).
  5. Corporate profits not yet impacted will go lower.
  6. Private sector interest rates are rising.

As Jim Sinclair has predicted in his model, Merrill Lynch’s David Rosenberg, who is their chief economist corroborates my opinion. He states “It is truly a modern day depression, in our view- what else do you call it when an entire industry vanishes (investment banks) in less than a year: the ranks of the unemployed soar more than 30%, and nearly one in ten homeowners with a mortgage are either in arrears or foreclosure?”

Like us, he goes on to say “Now let’s not confuse that with the Great Depression – this is not the 1930’s all over again.”

More points:

  1. The government will have taken over many banks before this ends.
  2. Finally, Rosenberg states that the current money supply boost may not be inflationary. His argument is that the velocity of money is shrinking in the US and Europe, and that is clearly true.

Over the short term I agree with him. For this reason I stated a few weeks ago that the inflation rate would moderate for a few months.

It will moderate over the short term; long term is a different story. Once the velocity of money resumes its normal functioning, the massive amounts of money currently being pumped into the system worldwide will create a big inflationary bubble.  The inflation will not hit in the next few months, but it will be big when it does hit. As Jim Sinclair likes to say, “Weimar on Weimar.”

Respectfully yours,
Monty Guild
www.GuildInvestment.com

Posted at 2:04 PM (CST) by & filed under General Editorial.

Jim Sinclair’s Commentary

Merrill got 20 cents on the dollar. Lehman got less than 10 cents.

Only numb-nuts can fluff that off.

Attorneys are in a bull market among the financial specialists.

What the OTC derivatives did not suck out of financial firms litigation will.

Lehman debt auction gives clue to potential losses
Friday October 10, 3:20 pm ET
By Stephen Bernard, AP Business Writer

Pricing for Lehman debt provides guidance on potential bank losses tied to credit swaps

NEW YORK (AP) — Sellers of insurance on bonds issued by bankrupt Lehman Brothers Holdings Inc. are now likely to face demands that they pay out more than 91 cents on the dollar to buyers of those insurance contracts.

That’s the upshot of an unusual auction process Friday that established the price for defaulted Lehman debt, and in turn potential claims payouts on insurance protecting that debt, known as credit default swaps.

Certainly, some firms will take a hit because of the pricing, potentially amounting to billions of dollars in combined losses. In the Lehman auction, participants included most major financial firms from around the world. But it’s too early to tell which companies will be on the hook or for how much.

“Where this is helpful is this is the first real-world situation where we see how market participants handle settling CDS,” said Barry Silbert, chief executive of SecondMarket Inc., a marketplace for trading illiquid assets.

In a best-case scenario, Silbert said, financial firms who sold CDS contracts would make their payouts in the coming weeks, have enough capital to cover all the positions, and take their losses and move on. In a worst-case scenario, sellers of the swaps would not have the cash to make the payments and would have to liquidate their assets to cover their positions.

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Jim Sinclair’s Commentary

Today is paper gold. Here is what is real gold.

Germans Stockpiling Gold Amid Market Panic

German gold dealers have stopped taking new orders for the precious metal as demand has skyrocketed. Gold is seen as a safe investment during the market turmoil.

In uncertain economic times, Germans are dumping stocks and shares to take refuge in precious metal, accoring to a Wednesday article in a Berlin newspaper.

German gold dealers report running low on stocks of gold bars and coins.

Heiko Ganss, head of the Berlin branch of gold merchant Pro Aurum, told the Berliner Zeitung newspaper that most gold traders were refusing new orders, as they couldn’t meet the current demand.

“Demand is running well above our capacity to supply,” he was quoted saying, saying retail banks in Germany were also unable to meet demand.

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Jim Sinclair’s Commentary

As goes Motors so goes the USA.

GM, Ford May Face Bankruptcy on Slowdown, S&P Says (Update3)
By Jeff Green and Marco Bertacche

Oct. 10 (Bloomberg) — General Motors Corp., Ford Motor Co. and Chrysler LLC may be forced into bankruptcy by slowing economies and dwindling U.S. auto sales, Standard & Poor’s analyst Robert Schulz said.

“Macro factors could overwhelm them at some point” even as the three biggest U.S. automakers vow to stick with their turnaround plans, Schulz, S&P’s lead automotive credit analyst, said today in a Bloomberg Television interview in New York. The companies said they have no plans for a bankruptcy filing.

His assessment underscored the pressure on GM, Ford and Chrysler as the worsening global credit crisis makes it harder for buyers to get loans and dealers to finance their operations. S&P said yesterday it may further trim credit ratings for GM and Ford on forecasts for 2009 auto demand falling to the lowest level since 1992.

With all three companies working to boost cash, any bankruptcy filing would be a last resort, not a “strategic” decision, Schulz said.

“We don’t see that as something they would choose,” he said. Schulz said the “trigger” for a forced restructuring under bankruptcy protection would be based on the automakers’ ability to preserve liquidity as sales decline. Industrywide U.S. sales slid 27 percent last month, the most in 17 years.

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