By William Patalon III
Executive Editor
Money Morning/The Money Map Report
General Motors Corp. (NYSE: GM) is closing in quickly on its June 1 deadline to finish overhauling its operations, or opt for Chapter 11 bankruptcy. Because that deadline is actually one week from yesterday (Monday), analysts and investors will be watching GM closely this week.
No matter which path GM chooses – conventional restructuring or bankruptcy – the U.S. Big Three of GM, Ford Motor Co. (NYSE: F) and Chrysler LLC will have to adjust to the U.S. auto market’s post-financial-crisis “new reality.” Automakers will sell only 10 million cars and trucks in the U.S. market this year, the worst in at least 3 decades – and roughly 38% less than the 16 million vehicles that were sold in the United States annually in recent years before the financial collapse caused an accompanying collapse in auto sales.
Part of the reason for the slump in new vehicle sales is that consumers are increasingly turning to used cars. Pre-owned car sales are up 10% this year over last, as credit availability increases, but buyers focus on affordability. In fact, according to the most-recent report, used-car sales jumped in April, and the trend is expected to continue at least until the middle of the year as pent-up demand for affordable, pre-owned vehicles jacked up the used-vehicle segment of the auto marketplace.
Market Matters
U.S. Treasury Secretary Timothy F. Geithner put his most optimistic face forward in assessing the progress with the bank bailout plan. Geithner pointed out that the 19 stressed-tested banks have already raise $56 billion in capital [including Bank of America Corp.’s (NYSE: BAC) $13.5 billion stock offering] and several could begin to pay back Trouble Asset Relief Program (TARP) money shortly. He also indicated that the public-private partnership to remove “toxic” assets from banks’ books should be up and running in the next month-and-a-half, a move that may instill greater confidence in the financial markets.
However, an analysis by The Wall Street Journal rained on Geithner’s parade by estimating that small and mid-sized banks could face losses on bad commercial real estate loans of $100 billion by year-end 2010. A Money Morning investigation of the looming commercial real estate crisis predicted that this sector of the real-estate market would pose major problems for the U.S. economic recovery.
Meanwhile, GMAC LLC may be close to receiving a fresh $7 billion in new (bailout) money as the government continues to seek ways to rescue the auto industry. GM reached an agreement with its main union (UAW) that would reduce retiree benefits and overall labor costs to make them comparable to those of their foreign rivals.
As another negative earnings season comes to a close, investors searched long and hard for a bright spot – any bright spot. With most Standard & Poor’s 500 Index companies reporting, earnings plunged more than 30% in the first quarter and are on track to fall 13% for the full year, the worst annual performance in six years.
Still, Thomson Reuters PLC (Nasdaq ADR: TRIN) says that a consensus of sell-side analysts projects a 29% increase in earnings in 2010 as cost-cutting measures pay off and relative results begin to look more attractive.
The Lowes Cos. Inc. (NYSE: LOW) reported better-than-expected quarterly profits and raised its outlook for the year, but The Home Depot Inc. (NYSE: HD) saw its numbers disappoint investors who were looking for stronger signs from the home improvement giant. Likewise, Hewlett-Packard Co. (NYSE: HPQ) reported weaker earnings, and that spawned renewed pessimism for the high-tech sector.
On a brighter note, retailers Sears Holdings Corp. (Nasdaq: SHLD) and Aeropostale Inc. (NYSE: ARO) reported better-than-expected quarterly profits. Ratings upgrades brought early promise as Citigroup Inc. (NYSE: C) boosted its forecast on homebuilder Lennar Corp. (NYSE: LEN); Deutsche Bank AG (NYSE: DB) raised its views on McDonalds Corp. (NYSE: MCD); and Goldman Sachs Group Inc. (NYSE: GS) made Bank of America a “Buy.” However, S&P warned it may downgrade the United Kingdom’s debt below AAA due to ongoing economic obstacles, a development that prompted others to wonder if U.S. securities could face similar dire possibilities.
Crude oil surged past $62 a barrel on lower inventory data and gasoline climbed above $2.36 a gallon heading into the Memorial Day holiday weekend, a far cry from the $3.80 of this time last year – although it was 30 cents higher than late April levels.
Market/ Index |
Year Close (2008) |
Qtr Close (03/31/09) |
Previous Week |
Current Week |
YTD Change |
Dow Jones Industrial |
8,776.39 |
7,608.92 |
8,268.64 |
8,277.32 |
-5.69% |
NASDAQ |
1,577.03 |
1,528.59 |
1,680.14 |
1,692.01 |
+7.29% |
S&P 500 |
903.25 |
797.87 |
882.88 |
887.00 |
-1.80% |
Russell 2000 |
499.45 |
422.75 |
475.84 |
477.62 |
-4.37% |
Global Dow |
1526.21 |
1347.38 |
1,564.63 |
1,604.53 |
+5.13% |
Fed Funds |
0.25% |
0.25% |
0.25% |
0.25% |
0 bps |
10 yr Treasury (Yield) |
2.24% |
2.68% |
3.12% |
3.45% |
+121 bps |
Economically Speaking
While Geithner was “spinning” the bailout progress in the most favorable light possible, the U.S. Federal Reserve meeting minutes painted a picture of a more sluggish economy than most had predicted just three months ago. In fact, the policymakers negatively revised their projections for economic contraction and warned that the unemployment rate could push toward 10% by the end of the year. Still, central bank Chairman Ben S. Bernanke believes improvements are on the way as the impact of the Obama administration stimulus package aids in the recovery over the year’s second half. Furthermore, the Fed stands prepared to buy more U.S. Treasury and mortgage-related securities should such moves be deemed beneficial.
In the “it could be worse” category, Mexico (-21.5%), Japan (-15.2%), and Germany (-14.4%) each reported severe economic declines (as measured by gross domestic product, or GDP), as these three primary U.S. trading partners suffered the ill effects of the lower domestic demand for foreign-made goods and services.
Though the economic calendar was rather light during the week, some positive signs did emerge from deep within the numbers. While analysts were surprised by a decline in April housing starts, the losses stemmed from a reduction in apartment activity, and single-family construction actually jumped by almost 3%, its second consecutive positive monthly showing.
Additionally, a private survey of the nation’s construction professionals depicted that homebuilder sentiment soared to its highest level in eight months, another sign that the prolonged housing slump may finally be nearing an end.
Finally, leading economic indicators, a predictive index that forecasts activity for the ensuing six months, turned positive after six straight down months. Unfortunately, labor continued to struggle as the number of folks who have been receiving unemployment benefits for over a week hit a new record high. While the economy definitely seems to be moving past the dreaded recession, any recovery will be limited as long as the labor picture remains weak and employees hold off on purchases until their job situations become more stable. And the risk of a “double-dip” downturn remains somewhat high.
Weekly Economic Calendar
Date | Release | Comments |
May 19 | Housing Starts (04/09) | Gains in single family offset by declines in apartments |
May 20 | Fed Policy Meeting Minutes | Signs of economic improvement though slow recovery |
May 21 | Initial Jobless Claims (05/16/09) | Continuing claims still at record highs |
Leading Eco. Indicators (04/09) | Better than expected increased in forecasting index | |
The Week Ahead | ||
May 26 | Consumer Confidence (05/09) | |
May 27 | Existing Homes Sales (04/09) | |
May 28 | Durable Goods Orders (04/09) | |
Initial Jobless Claims (05/23/09) | ||
New Home Sales (04/09) | ||
May 29 | GDP – Qtr 1 (revised) |
News and Related Story Links:
-
Auto Week:
Used Car Sales Rise as Buyers Shun New Cars. -
Money Morning Investigative Report:
Will the Dark Cloud of Commercial Real Estate Blot Out the U.S. Recovery? -
Money Morning News Analysis:
U.S. Housing Starts and Permits Revisit Record Lows in April.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.
Keith R. Enste
krenste@verizon.net
This entire fiasco with the American Auto Industry has been a very long time in the making: back when Americans first became concerned about gas consumption: what was the Big 3 primarily producing: Large gas-hogs that had been the cornerstone of the industry. This opened the doors wide and clear for the import market that by then had already “seen the “writing on the wall” and was more than happy to accommodate fuel conscious consumers. After-all the
Europeans and the Japanese markets were dealing with high fuel prices long before they became an issue in the U.S.
The mistake made by the big 3 was that they only wanted to sell larger more expensive, more supposedly lucrative vehicles. Failing to heed the demands of the market and being so blatantly unwilling to be responsive to this fundamental change, caused the Big 3 to lose their prominence in the marketplace. And, as they say, the rest is history: the American Auto industry has never able to recover. And like the dinosaurs that they are they should be allowed to become extinct.
How can this industry whose own CEO’s screwed up so badly, and who yet refuse to shoulder any of the blame, expect to remain viable and productive? Pouring hundreds of billions of dollars on this problem will do nothing to correct the underlying problems within the corporate mentality of the Big 3. While I feel empathy for all the workers and ancillary industries that will be affected by such a fundamental restructuring of this industry; more bailout money, clearly is not a viable answer. Only through a restructuring: fundamentally changing the corporate mentality, and paying attention to market demands will the US auto industry even stand a chance of surviving. Without this, nothing will salvage the once mighty auto industry. Sounds, a lot like a bankruptcy proceeding. It is unwise to believe that anything short of this will rectify so many systemic problems within the industry. While this might be a painful pill to swallow; in the long run it is likely the only course of action that may offer some of the industry a chance at survival. Besides, do we really want the government to have total control over this industry? If you really want to mess up this industry have Uncle Sam become the major stake-holder. We’ll be revisiting this whole mess at some later time; and then the pain will likely be far worse.
[…] Money Morning: As GM Cruises Toward Government Deadline, U.S. Automakers Must Learn to Deal With a Permanently Sma… […]
The worst US auto sales in 30 decades? By my calculations that's 1707 – some seventy years before there was a United States, and almost 200 years before the invention of the automobile. Could you clarify where you obtained this information.
Tom Davey
Wow – the worst in 30 decades! I knew the 'big three' had been around a long time, but didn't realize their sales were worse now, than they were 300 years ago!!!!!
[…] Money Morning: As GM Cruises Toward Government Deadline, U.S. Automakers Must Learn to Deal With a Permanently Sma…. […]
[…] But here's one factor that should help: By downsizing, GM's leadership has admitted that the financial crisis has reduced the size and makeup of the market for new cars and trucks in the United States – probably permanently. […]