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 raised $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.

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

Source: As GM Cruises Toward Government Deadline, U.S. Automakers Must Learn to Deal With a Permanently Smaller Market

With steeply rising disposable incomes and savings rates that approach – and in some cases exceed – 35% a year, it isn’t difficult to see why the China auto market is zooming along. But what may be tough for U.S. consumers to picture – especially as they deal with rising unemployment and a nagging economic malaise – is the intensity with which domestic demand is growing here in China.

Autos are more than just transportation here. They’re a symbol of wealth and success – a sexy status symbol. One’s social position can be determined by the type of vehicle one owns and flaunts.

This isn’t the first time we’ve detailed the promise of the China auto market. Nor is it the first time we’ve talked about the “Chuppies” (Chinese Yuppies), the demographic group China will rely on as the nation attempts to decrease its reliance on exports and become more of a consumer-driven economy.

Investors, economists and other “experts” on China are finally becoming attuned to this economic transition. But what those observers don’t realize is that the story doesn’t stop there. China isn’t just evolving into a consumer economy. As auto sales demonstrate, China is becoming a “complete” economy, in which such key ingredients as consumer spending, domestic business investment and foreign investment are each increasingly playing their required role.

Take business spending. The auto has become an important business tool: It’s believed that having your customers see an impressive car conveys confidence and helps build trust with the government. That kind of thinking is very Western in focus. What’s different here, however, is that cars are also believed to be a key contributor to the concept of “face,” which is ever so important here.

Huang Jin, a native Beijinger and longtime friend, explained it this way: “If you drive a late-1980s-model Japanese car, people will not want to do business with you. Your car suggests how much you are worth and, by implication, whether you are worth doing business with.”

He drives an Audi A8 that’s jet black, with all the trimmings. [Given his objective, the A8 was apparently an excellent choice. Its U.S. marketing tagline says that "(even) motionless, it still commands respect."]

Another friend of mine, Luo Xin, puts a different spin on things. The way he sees it, the car he drives makes a statement about who he is – which is why he craves the sporty, futuristic proto-types that were all over the Shanghai exhibiting center this week as part of the Auto Shanghai 2009 auto show.

“Why not dream?” he says. “The new stuff suggests that I’m hip and gives prospective wives the image that I am successful, enjoy my life and think about the future.”

Julian Hardy, who serves as general manager for Aston Martin China, recently told the China Daily newspaper that China’s mega-rich may have lost 1 billion yuan (about  $146 million), but adds that they’ve “still got 5 billion ($730 million) left.”

Aston Martin, long the preferred ride of fabled super spy James Bond, sold 50 cars here last year and sales may hit 150 within the next 12 months. It’s a similar story with Lexus. The company’s newest Shanghai store has already sold 20 cars since opening in mid April. And Ferrari, BMW (Bayerische Motoren Werke AG), Porsche (Porsche Automobile Holding SE), and any of a half dozen other high-end brands are finding a market among China’s emerging consumer class.
China recorded 15 billionaires last year, as well as several hundred thousand millionaires, so this is not a trend that’s going away anytime soon.

At the other end of the spectrum, low-end cars continue to move at record pace, too. Last year, we told readers that General Motors Corp.’s (GM) Buick line, Ford Motor Co. (F) and Volkswagen AG (OTC ADR: VLKAY) produce the lion’s share of the small, sporty and fuel-efficient models sold here. At the time, I suggested that it wouldn’t be long before Chinese automaker’s like Geely Automobile Holdings Ltd., Red Flag (or Hong Qi, as it’s known to its China customers), and BYD Co. Ltd., have come up to speed.

In fact, the MidAmerican Energy Holding Co., which is roughly 88% owned by the Berkshire Hathaway Inc. (BRK.A, BRK.B) investment vehicle run by U.S. stock-market icon Warren Buffett, announced in October that it would pay roughly $230 million for a 10% stake in BYD, which makes cars and specialized batteries.

I originally thought it might take as long as 24 months for China’s domestic automakers to really get traction, but somehow I have not been surprised to see how quickly the markets have evolved to accommodate utilitarian cars that are “basic transportation” in words only. Why Detroit can’t do this is beyond me; the so-called  “Big Three” would be wise to take an extended field trip over here to learn how to get back into the ballgame.

A few years ago, I suggested that China would overtake the United States as the world’s largest car market. Now China’s done it not once, but for the last three months in a row, with sales reaching a record 1.1 million. Incidentally, at the same time I made that prediction, I also suggested that one or more of China’s automakers would enter the U.S. market. Now it’s all but a foregone conclusion. So stay tuned.

When it comes to cars – or to any other product or commodity for that matter – China’s newly moneyed class is not going away anytime soon. The estimated 330 million people in this country’s broad middle class continue to amass economic purchasing power at a rate that will exceed the capability of their counterparts in the U.S., Japanese and Eurozone markets combined during the next 12 months.

The bottom line: Investments focused on the ambition of China’s emerging consumer class may prove to be some of the best available in the coming post-financial-crash environment.

Chinese iron-ore demand creates money-making opportunity for one company… and a few lucky investors…

Reconstruction of earthquake damage in Sichuan is shooting the demand for iron ore higher than the total supply in China right now. The country is importing like never before, and using this dry bulk shipper to get the materials there. This company is super cheap by all value measurements, and is poised for a double. See how you can profit by clicking here.

Source: While the Rest of the World is Stuck in Reverse, the China Auto Market Zooms Ahead

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is one of the world's leading experts on Asia, especially China. Right now, Fitz-Gerald is leading an investment tour of the Red Dragon, and he'll be sending along regular investment travelogues to update Money Morning readers on his latest observations. This is the second installment of that series.]

Good day… Not sure when all of you will be receiving this today, as it took nearly over a half hour for my computer to boot up this morning. But its all good news for currency investors, so I’ll get it written and out to you as quickly as I can. The dollar slowed its decent overnight, but continued to fall vs. most of the major currencies as the US Senate rejected the $14 billion bailout for the auto industry.

The big winner in the Senate rejection of the bailout plan was the Japanese yen, as Japanese car makers are predicted to grab an even bigger piece of the US auto market. The yen, which has been rallying due to global deleveraging and carry trade reversals, suddenly had another reason to rally. The yen rose to a 13 year high, trading below 90 yen per dollar, and some are now predicting a rise to 80. Finance Minister Shoichi Nakagawa boosted the yen further after telling reporters in Tokyo that Japan isn’t considering intervening in the currency markets.

But even before the automakers got the bad news from the Senate, the dollar was falling faster than we’ve seen in the past few weeks. Chuck shouted out across the trade desk around noon yesterday that the dollar index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc, had fallen below the 55 day moving average. This is a major level for technical traders, and signaled the dollar could be headed for a further fall.

The data released yesterday showed initial jobless claims in the US surged to a 26 year high as the recession deepened. Claims increased to 573,000 last week, an increase of 58,000 from a revised 515,000 the previous week. The total number of workers staying on the benefit rolls jumped to just below 4.5 million, the most since November 1982.

While the markets had predicted another increase in the jobless claims, the trade deficit numbers were a big surprise. US exports slid to a seven month low causing the trade deficit to widen to $57.2 billion in October. No one I read was predicting a widening deficit. The worsening trade balance removes what has been the sole source of support for the economy during this recession.

A separate report issued by the Federal Reserve showed US household wealth fell by the most on record in the third quarter. Net worth for households and non-profit groups decreased by $2.81 trillion, the most since records began in 1952. So we have record unemployment, a widening trade deficit, and falling consumer net worth; not a good picture for the incoming President. But President Elect Obama has a plan, we can just spend our way out of this problem!! Chuck sent me the following comments yesterday afternoon:

“So… All this week I’ve talked about the President-elect’s plan to spend more money since 1950 on infrastructure, which is fine in good times, but these are faaaaaaaaarrrrrrrr from “good times” for the economy… Well… Yesterday the P/E said this, “We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can’t worry about the deficit.”

Can’t worry about the deficit? Did I hear that correctly? Geez Louise, here we go again, sliding down the same old slippery slope of “deficits don’t matter”! Aye, yi, yi! What is everyone smoking? I’ve said this before many times at presentations, and here in the Pfennig, but I can’t pass this up… These people, who should know better, that claim that deficits don’t matter, remind me of the guy standing on top of the Empire State Building, and decides to jump off… As he passes the 56th floor he says… “So far… So good!”

Well, that’s right, so far he hasn’t hit the ground! And… So far deficits have only bruised us, but they haven’t hit the ground yet either! A quick look at my fave book on deficits, I.O.U.S.A. tells me that we’ve passed the $10 Trillion mark for Federal Debt… “today’s deficits reduce national savings, which dramatically decreases productive investment and wealth-creating activities. Increased indebtedness to foreign lenders puts future financial decisions in the hands of people who may or may not have our interests in mind when they make them. Further, interest payments that have historically stayed home now provide more and more income to investors abroad.”

“At the current rate, with existing laws, by 2040 the federal government will be spending twice as much as it takes in from taxes. Our children and grandchildren already face a more competitive, challenging, and uncertain world than most Americans have grown accustomed to.”

Failure to recognize this by our leaders is the biggest mistake we can make… And comments like the one above from the new PE lead me to believe we’ll have more of the same old “deficits don’t matter” and that, my friends will eventually weigh heavily on the dollar…

Sorry to be so gloom and doom on a Friday… But that comment by the new PE just sent me reeling! Now, back to Chris…”

I’ve known Chuck for nearly 20 years now, and nothing gets his blood boiling as quick as the saying ‘deficts don’t matter’! The leaders of Europe sure think they matter, as the EU decided to trim down a proposed stimulus package, as Germany warded off calls by France and Britain for deficit-boosting programs. This announcement, combined with a statement by ECB council member and Bundesbank head Axel Weber caused the Euro to jump vs. the US$. ECB member Weber cautioned against reducing interest rates below 2 percent, suggesting the bank is probably near the end of its rate-cutting cycle. “If the benchmark rate sinks below 2 percent when medium to long term inflation expectations are just below 2 percent, that implies negative real interest rates,” Weber said in an interview. “I would like to avoid that.”

Weber knows the long term impacts of negative real interest rates, they are very inflationary. The generation before his lived through the German hyper inflation of the early 1920’s which helps explain why financial leaders from Germany are such inflation hawks. So the 75 basis point cut by the ECB last week, which was the biggest in ECB history, will likely be the last cut for some time. The Euro has benefited from this perceived change in attitude. As of this morning, the Euro has risen over 5 percent vs. the US$ this week.

We have been suggesting that the recent dollar rally was not a change in the long term trend for the dollar, and some big name currency traders are starting to jump on our bandwagon. Goldman Sachs Group lowered its forecast for the dollar against the euro and the yen for 2009, saying the repatriation of overseas assets by US investors and demand for the greenback for funding are ‘diminishing’. Goldman is now predicting the Euro will rally to $1.45 per euro by the end of next year, up from their previous prediction of $1.30. “We are at a turning point,” Goldman’s Jens Nordvig wrote in a research report. “We expect the dollar support from temporary deleveraging and funding flows to diminish, and, in that scenario, the underlying pressure from more standard sources should once again become more important.” Sounds like he has been reading the Pfennig, as Chuck has been calling for a return to underlying fundamentals for a while now!

The folks at Citigroup are also jumping on the dollar bear bandwagon. “There are good indications that the US dollar is likely to weaken against many Asian currencies into year-end,” wrote Tom Fitzpatrick and Shyam Devani, analysts at Citigroup. They went on to say the dollar will retreat from a two year high against an index of Asian currencies after breaching levels where orders to buy the greenback are clustered. They believe the dollar will fall vs. the Singapore dollar, Chinese Renminbi, and the Indian rupee.

The Chinese Renminbi continued to rally for a seventh day in a row, the longest winning streak since June. Assistant Finance Minister Zhu Guangyao vowed to keep the currency at a ‘reasonable and balanced’ level after the Chinese let it drop sharply on Dec. 1. China stalled the Renminbi’s appreciation in July to aid exporters after letting it rise 6.6% in the first half of 2008. I think China will continue to slowly let the Renminbi appreciate, but will keep the pace of the appreciation at a manageable rate of 6 to 7 percent per year. China’s economy is slowing, but Asia will continue to be the growth engine of the global economy. I still suggest investors allocate at least a portion of their investments into the Asian currencies of Singapore, Japan, or China.

Currencies today 12/12/08: A$ .6586, kiwi .5453, C$ .8038, euro 1.3363, sterling 1.4962, Swiss .8473, ISK 218, rand 10.2214 krone 6.8858, SEK 7.9616, forint 197.96, zloty 2.9621, koruna 19.488, yen 90.35, baht 35.01, sing 1.4918, HKD 7.75, INR 48.577, China 6.8433, pesos 13.3266, BRL 2.3684, dollar index 83.68, Oil $44.97, Silver $10.10, and Gold… $817.05

That’s it for today… Drove the side streets in to work for the last time today. The highway department shut down a 5 mile stretch of interstate which runs from the front door of our office to my house. After a full year of taking side roads to and from work, I will be able to take the newly refurbished highway on Monday. This will drop my commute big time, and is great news for yours truly!! Chuck is off on his annual Christmas shopping trip with his buddies today. They start first thing in the morning and spend the entire day spreading Christmas cheer around town. Hopefully I will be able to meet up with them this evening, as they typically end their trip at a local restaurant/bar not too far from my home. Hope everyone has a Fantastic Friday, and a Wonderful Weekend!!!

Source: Bailout Failure Accelerates Dollars Decline