• The housing market showed further signs of bottoming in April, as pending sales of previously owned U.S. homes saw their biggest monthly gain in seven and a half years, the National Association of Realtors reported. The number of Americans signing contracts to buy previously owned homes climbed 6.7% in April, more than forecast and the fourth increase in five months. The report supports the case for a housing bottom made in Money Morning on Monday, where it was noted that housing prices are starting to move upward in western U.S. markets and should soon slowly begin to rise in hard-hit east coast markets.  “Based on what we just heard, we are now formally calling for the end of the housing depression and that we increasingly think that the housing market is beginning to turn up. All signs are pointing to a bottoming out now of the housing market” Bernard Baumohl, Chief Global Economist at the Princeton-New Jersey based Economic Outlook Group, told Reuters.

• Detroit’s ailing Big Three automakers, all reported that May sales in the U.S. fell less than analysts’ estimates while Toyota Motor Corp. (ADR NYSE: TM) and Honda Motor Co. (ADR NYSE: HMC) did worse than expected. Sales at General Motors Corp. (NYSE: GM) dropped 30% from last year, Ford Motor Co.’s (NYSE: F) sales fell only 24% and Chrysler LLC plummeted 47%, better than estimates, as shoppers returned to showrooms.  Deliveries at Toyota plunged 41% and Honda plunged 42%. Among Japanese carmakers, only Nissan Corp sales exceeded estimates, falling only 33%, Bloomberg reported.

• Microsoft Corp (Nasdaq: MSFT) said on Tuesday its new Windows 7 operating system, which will replace the unpopular Vista, will be available on October 22, well ahead of its original schedule and in time for the holiday shopping season, Reuters reported.  Windows 7 was originally scheduled to launch at the start of next year, but Microsoft confirmed last month that it would push up the schedule to allow sales during the year’s busiest buying period.

• The U.S. Federal Reserve Bank has successfully pulled the economy back from the brink, Dallas Federal Reserve Bank President Richard Fisher said yesterday (Tuesday).  The Fed official also said that conditions are “getting less worse” over time and the Fed needs to unwind its new, expansive credit programs as soon as it can, Reuters reported.  Furthermore, the U.S. central bank needs to make it clear it will not “monetize” the rapid expansion of U.S. debt, Fisher told a gathering of community leaders at a Dallas Fed event.

• Unemployment in Europe rose to 8.6% in April, up from 8.4% in March and 6.8% during the same period last year. Although the economic downturn in Europe is showing signs of slowing, the employment rate typically lags behind economic health.

• Pepsi Bottling Group Inc. (NYSE: PBG) Chairman and Chief Executive Officer Eric Foss is being promised a minimum $16.5 million in severance pay and stock benefits if PepsiCo Inc.’s (NYSE: PEP) takeover succeeds. He earned $6.1 million in total compensation last year. Pepsi Bottling, along with PepsiAmericas Inc. (NYSE: PAS) rejected a $6 billion acquisition attempt by PepsiCo, calling it “grossly inadequate” and “not acceptable.” Pepsi Bottling and PepsiCo are now locked up in a lawsuit, with PepsiCo accusing Pepsi Bottling of adopting a “poison pill” takeover defense that restricts its rights as a shareholder.

Source: Investment News Briefs Wednesday, June 3, 2009

The largest of the U.S. Big Three automakers yesterday (Wednesday) announced that it failed to persuade the required 90% of its bondholders to swap $27 billion in debt for stock, pushing the venerable GM several steps closer to a bankruptcy filing.

The rejection by bondholders is the latest chapter in the ongoing saga of GM’s desperate attempts to reorganize as it faces a government-imposed Monday (June 1) deadline to restructure or file for bankruptcy.

In recent days, the company struck a deal with its United Auto Workers (UAW) union on payment terms for $20 billion of debt in a retiree healthcare trust, and it successfully convinced the union to take a reduced stake of common stock in the new company.

GM also is still in negotiations to sell its European Opel and Vauxhall units to a consortium of bidders. Those talks were scheduled to continue in Berlin last night, as German and U.S. government officials met with representatives from three prospective new owners.

Still, the odds now favor what would be one of the biggest Chapter 11 cases in history, as the global auto giant that has been an icon of American culture since the early 1900s will likely follow Chrysler LLC into bankruptcy court.

Last Hope Bond Offer Fails

In what was seen as GM’s last best hope to cut debt outside of a government-financed bankruptcy, bondholders rejected the company’s offer of 225 shares in a restructured GM for each $1,000 of principal – the equivalent of 10% of the new company for their $27 billion in debt.

The principal amount of notes tendered was “substantially less than the amount required by GM” and, as a result, “the exchange offers will not be consummated,” the company said in a statement.

The news was no surprise to many analysts.

Bankruptcy is “imminent,” Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tenn., told Bloomberg News.

“It’s no surprise at all that a deal that was as unattractive as this one would be soundly rejected,” said Hastings, who had recommended that his clients refuse the exchange offer.

Some analysts blamed the offer’s failure on the unyielding stance of U.S. President Barack Obama’s auto task force, which had a hand in deciding the terms of any deal made with the debt holders.

“I think the task force made that hurdle so high, they wanted them to go into bankruptcy, they see that as the solution,” independent auto industry analyst Erich Merkle told Reuters.

Others saw GM’s long history of mismanagement and failure to respond to market conditions as the primary culprits.

“I think the exchange offer was really a transparent attempt to blame bondholders for the bankruptcy rather than to accept responsibility for years of mismanagement and failure to anticipate things that should have been understood,” Richard N. Tilton, a restructuring analyst at Covenant Review LLC, told Reuters.

The New “Good” and “Bad” GM

A GM bankruptcy is likely to involve so-called “debtor-in-possession” financing so it can continue daily operations as it is divided into a “good” and “bad” company by the bankruptcy court.

The “good” GM would include the company’s most successful operations, including the Chevrolet and Cadillac brands, and within months would exit bankruptcy in sound financial health. The “bad” GM would be left with such laggard brands as Pontiac, Hummer and Saturn, and other liabilities that would be divested in a lengthier court-supervised reorganization.

The U.S. government is expected to increase its ownership stake in GM from its current 50% to as much as 70% in order to slash debt and will lend the new company almost $30 billion, The Washington Post reported last week, citing sources familiar with the matter. That’s in addition to the $19.4 billion the United States has already invested. Canada is expected to lend GM an additional $9 billion for a smaller ownership stake in the company, sources familiar with the talks told The Post.

When all these financial packages are included, the GM bailout will have a sticker price of about $60 billion, making it one of the largest – and most costly – rescue and reorganizations in corporate history. When it’s finalized, the United States and Canada would own almost three-fourths of GM, the newspaper said.
Despite the vote, bondholders would be left with a 10% equity stake in the reorganized company and current shareholders would own about 1%. As much as 20% could go to the health-care trust fund for union retirees.

Chrysler Bankruptcy Paves the Way

Ironically, Chrysler’s swift journey through the bankruptcy process may be a major factor in inducing GM to steer its way into Chapter 11.

Chrysler appears to have made great strides towards a successful restructuring and may be ready to emerge from bankruptcy as early as next week, Bloomberg reported, citing an anonymous source.  That would be well in advance of the 60-day upper limit announced at the time of the filing on April 30.

Chrysler has asked a bankruptcy judge to let it sell most of its assets to Italy’s Fiat SpA (ADR OTC: FIATY) in order to avoid liquidation.  Up until now, the judge in the Chrysler case has signed off on all elements of the company’s simplified bankruptcy process that calls for Fiat to take a major equity stake. The deal is still opposed, however, by some of the automaker’s dealers, bondholders, and former employees.

But consumers apparently are buying into President Obama’s pledge to keep Chrysler alive, as the automaker’s sales in May were about even with those from April. That could mean shoppers remain optimistic about the viability of factory warranties and dealer services if GM enters the same process.

“The government has showed that it’s going to put its muscle behind this,” George Magliano, director of automotive research for IHS Global Insight Inc. (NYSE: IHS) in New York, said in a Bloomberg Television interview. “They don’t want a long bankruptcy. They want to get it in, get it out to minimize the impact of a long bankruptcy.”

Jeremy Anwyl, chief executive of automotive research firm Edmunds.com, told Reuters that “a few months ago, the idea of putting a major automaker into bankruptcy raised fears of things spiraling out of control, but the Chrysler bankruptcy seems to be going well, so right now the idea of bankruptcy seems a lot less frightening.”

GM Bankruptcy More Complex and Risky Than Chrysler’s

A GM filing would be far bigger and more complex than what Chrysler is attempting.

For one thing, GM’s bankruptcy would take longer than Chrysler’s, simply because it is a larger company. GM employees 244,500 people, compared with 54,000 at Chrysler. It also boasts a network of dealers that outnumbers Chrysler by almost two-to-one, with about twice as many brands.

And even though the automaker put 1,100 of its 6,000 dealers on notice that they will have their contracts terminated next year, they are shielded by a labyrinth of state franchise laws.

GM also has publicly traded equity and debt, complimented by international operations in Europe, Asia and Latin America.

Those factors contribute to a large web of complications that could hinder the bankruptcy process and present other, more serious risks, David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., told MSNBC.

“If you look at the complexity of the company infrastructure and the number of players involved here – the union, the creditors, the dealers, the suppliers and the government – it’s an unholy cast of characters,” said Cole. “Any one of them could cause a problem, and bankruptcy laws are not well designed to deal with institutions of this complexity.”

Cole also said if a “quick-rinse” GM bankruptcy predicted by the administration fails, it could present more far-reaching and serious implications for the overall U.S. economy.

If the planned bankruptcy process “blows up,” he says, it could lead to a “cascading failure,” shoving auto suppliers into insolvency and forcing other automakers into bankruptcy, according to MSNBC.

“We are talking about the potential for a rapid collapse – it could trigger a national depression,” he said. “The automotive supply structure is in pretty serious trouble now… so if we were to see a cascading failure it could quickly spread to the rest of the economy. That’s the scale of this industry.”

Source: Collapse of Bond Deal Steers GM Toward ‘Imminent’ Bankruptcy Filing and Majority Government Ownership

To those who have followed his career, that’s not a huge surprise. After all, while 2008 was a year that Wall Street would very much like to forget, for Fitz-Gerald it ended up being a year to remember.

Fitz-Gerald, a longtime market professional who has been investment director of Money Morning since 2007, made a number of key investment calls last year and has watched as the market continues to prove his forecasts correct. For instance:

• When crude oil was trading listlessly at less than $90 a barrel, Fitz-Gerald predicted in a Money Morning Outlook 2008 investment story that “black gold” would move well into the high triple digits – and months later saw oil prices soar to an all-time high of $147 a barrel,
• When analysts and elected officials in Washington were attempting to soothe American taxpayer fears by saying the cost of fixing the financial crisis could be capped in the “billions,” Fitz-Gerald dismissed the prognostications and warned that the cost would be well into the trillions. He also warned that the crisis would involve the global banking community in a contagion that would spread well beyond our own borders.
• Predicted – within a few points – what’s so far proved to be the interim market bottom in the Standard & Poor’s 500 Index.
• Warned investors that China’s stock market was in for a correction, but told investors to swap out of China stocks and into stocks of global companies doing business in China as a means of minimizing risk – a market call that brought Fitz-Gerald a “speaker of the year” award from a prestigious group of high-net-worth private investors.
• Predicted – when America’s “Big Three” automakers appeared to be working through some issues with onerous union contracts and retirement benefits – that the heyday of the U.S. auto company was already over and that the car companies would soon be fighting for their actual survival.

Fitz-Gerald has some ideas. A longtime energy bull, and an avowed expert on China, Fitz-Gerald says he’s now tracking some trends that could lead to the best profit opportunities of our lifetime. Money Morning recently caught up with Fitz-Gerald at his home in Oregon, where he was working between speaking engagements. Here is a partial transcript of that discussion.

Money Morning:  You’re acquired a reputation over the years as a sharp market analyst, in large part because of a series of public market calls that he’s made over the past couple of years – market calls that were ultimately proven correct. What’s your secret? What advice can you give to investors?

Keith Fitz-Gerald: Most investors make the classic mistake of being more concerned with being proven right or wrong than they do with what actually happens with their money. That’s why we see such a “herd” behavior in the markets today. I’m more concerned with “possibilities,” and with structuring profitable investment opportunities around them. I really don’t care if I’m right or wrong as long as the strategies I assemble are flexible enough to deal with both contingencies and profit at the same time.

MM: This sounds complicated. Can you give us an example?

KF: What I do is actually very simple. I use a highly specialized branch of mathematics based on fractal theory to identify the underlying nature of the financial markets. This allows me to find relationships in data that would otherwise appear random and that others can’t see using traditional analytical techniques. And I simply recommend high probability investments based on that understanding.

MM: I know this is at the heart of the Geiger Index. Is this also the key to your newest service, Time Trader Pro?

KF: Yes. In fact, there’s a little fractal theory in everything I recommend, and in every forecast I make. But when it comes to the Time Trader Pro, there’s a twist. The Geiger Index is set up to scan for probabilities associated with directional moves. The Time Trader Pro, which uses similar calculations, is set up to determine the relative lack of movement.

The advantage is that while the Geiger sets up the big gains that will carry investors forward into the eventual recovery I see building even today, the Time Trader Pro allows investors to potentially capture gains and high-probability profits in the directionless markets we’re experiencing now. The two are designed to complement one another and, indeed, to also help establish the core positions we highlight in The Money Map Report.

MM: Do the numbers tell you everything?

KF: Not in my opinion. To be a really effective forecaster, I think you really have to combine firsthand knowledge with accurate analytics. To me, that means having “boots on the ground” and seeing stuff with your own eyes. The way I see it, there’s simply no substitute for that personal observation. That’s why I travel extensively every year.

For example, years ago, when oil was trading at $20 a barrel, I was tromping all over Asia and Europe, and was seeing the beginnings of a terrific ramp up in demand. At the same time, I was doing work that suggested severe supply constrictions. That led me to forecast oil at $100 within a decade. It got there far faster than that, of course, but the fact that I had planned for such contingencies paid off more than the actual price level, itself.

Incidentally, I have to tell you, I was laughed out of more boardrooms than I can count at the time. But that goes with the territory: You have to have the courage of your convictions to make such forecasts.

MM: Well, oil did go to $100 a barrel. Then it dropped back into the $80 range. And that’s when you said that oil prices were going to head much higher.

I like to remind people that this was a “real” call – it’s on the record in an oil story that was part of our yearly “Outlook” series. The story ran in late December, when oil was starting to move again. But you’d actually made the prediction a month or so before, while Money Morning writer Jason Simpkins was still researching the article. You said oil could “spike” to prices as high as $187 a barrel, and would then settle back down.

Oil didn’t quite hit the $187 level you forecasted, but it did run up to an all-time high of $147, before settling back to where it is now. Did this surprise you?

KF: Given that we didn’t get a major geopolitical shocker, I’m not surprised that we didn’t hit $187. But I’ve been very candid in stating that the dramatic fall we’ve seen has been much deeper than I’d expected.

MM: Could oil prices stay this low for much longer?

KF: Anything is possible. The real question is: What’s probable.

People are chalking the fall in prices up to lower global demand, but I think that’s a mistake. What’s really going on here is that, at lower prices, hedgers and speculators haven’t had the need to hedge their contracts as extensively and this, more than any single factor, has helped pull down futures prices – which are tied to delivery – and keep them there.

The other factor that’s affected oil has been the relatively rapid rise in the U.S. dollar. Oil is priced in dollars, so it’s important to remember that a substantial portion of the fall in oil prices can simply be accounted for by that increase in the dollar.

MM: What about the long term?

KF: Longer-term, the world won’t realize that global demand is rising all along – despite what the statistics say – until the economic recovery stimulates oil demand again. Probably no more than five years from now. Eventually, the fundamentals of declining production, growing demand, and thin inventories will overwhelm today’s low prices. Which is why I think oil will be back at $212 dollars a barrel … a figure that’s downright conservative compared to Matthew Simmons [peak oil pundit and author of "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy"], who’s on record predicting that oil prices will reach $500 a barrel.

MM: I know that your expectations for China have a lot to do with this. And India.

KF: Yes, they do. From a macroeconomic standpoint, both nations are growing by leaps and bounds – even with the problems posed by the global financial crisis. Sure there’s a short-term contraction, but let’s get that off the table right now. Longer-term, the trend is clearly for higher oil prices.

Both China and India have huge populations that are using increasing amounts of petroleum and petroleum-based products. And both have millions of drivers and middle-class consumers who have never known lower prices – so they don’t think twice about paying more.

From a technical standpoint, oil is dramatically oversold to the point where much of the industry is unsustainable. History suggests that these stunningly low prices will result in diminished capital investment, declining exploration efforts and a reduction in rig counts. When the stimulus programs of the United States – and other key countries – ultimately take hold, these factors will combine to reflect net shortages and, logically, will force prices higher.

MM: We’ve seen this cycle before …

KF: Absolutely.

MM: Speaking of China, Keith, what’s next for the Red Dragon? What do you see there this year? How about over the next five years?

KF: At this stage of the game, China is literally the only player on the field with enough muscle to pull the rest of the world out of hock. This means the rest of the world will have to play ball – whether they like it or not. Ironically enough, that’s exactly what the G7 concluded recently when its members noted that China can use its huge trade surplus to spend it’s way out of this mess at a time when the rest of the world is busy borrowing it’s way out. There’s a big difference between the two scenarios. I’d rather invest in growth, rather than borrow to grow, any day of the week.

MM: What else do you see, here?

KF: The view from 30,000 feet is this: I don’t think there’s an asset class on the planet that won’t be at least indirectly affected by their China’s actions within the next decade. In that sense, every investor needs some sort of China strategy, especially now.

MM: What about the stimulus?

KF: [U.S. Federal Reserve Chairman Ben Bernanke and his minions have decided upon a course of action and are taking it. And while I’m as hopeful as the next person that it’s ultimately successful, history paints a different picture.

No nation in recorded history has ever bailed itself out of a hole by debasing its currency, and debasing their currencies is precisely what the United States (and many other nations) are doing right now – at least for anything other than short periods of time.

The bottom line is this: The U.S. Federal Reserve, the U.S. Treasury Department, and the elected officials in Washington all believed they could spend the crisis into submission. But, ironically, all they’ve done is prolong it and I think that history will show that the cost of preventing the crisis actually exceeded the potential costs of simply letting it unfold and play itself out. What’s more, history supports my contention.

I also think that history will show that there are all sorts of unanticipated consequences from all the spending and the debt that’s now choking our country.

What really stinks to me is that a relatively small number of people drove the rest of us to the brink of financial oblivion, and that huge numbers of people who have tried to be responsible with their assets, who paid their mortgages on time, who own up to their debts, are now being involuntarily saddled with the bailout.

MM: What you’re saying, Keith, is that lots of innocent American taxpayers and conscientious individual investors have paid with their homes and even their jobs for the misdeeds of others.

KF: That’s right.

You know, during the early days of the financial crisis, there was a lot of conjecture on the Internet that the federal government should simply hand out a few trillion dollars to U.S. consumers. Most experts dismissed that as fringe thinking. It didn’t seem so fringe to me then, and it certainly doesn’t seem so now. The vast majority of the American people would have been far better off being able to put cash directly in their pockets to stimulate the economy than they will be now with government programs that reward bad business decisions and that throw good money after bad.

We may not have liked how it would have felt had the government held back and allowed some of these institutions to just fail. History has shown us time and again that the financial markets have a remarkable ability to deal very swiftly with such adverse financial situations – and with a surprising cost effectiveness. Why would this situation be any different?

MM: What will the fallout be here? For the economy? For the U.S. dollar? For gold?

KF: Let’s start with the dollar because that drives everything else. In the extreme short term, the dollar has proven to be a safe haven, which is largely responsible for its rise. At some point, however, this is going to have to change. You cannot put the printing presses in overdrive and expect things to remain the same. But that’s exactly what Team Fed has done to date.

MM: What about inflation?

KF: Well that’s the big unknown. Right now, the markets are pricing in deflationary expectations – based on the global downturn. In the long run, however, history demonstrates that the markets eventually must deal with this. What’s more, the embers that are only smoldering now could easily ignite and turn into one of the hottest inflationary conflagrations we’ve ever seen.

What people don’t understand is that consistent currency manipulation is merely staving off inflation; it isn’t removing the threat of it. Most people also don’t understand that this is being done at the expense of people’s savings. They’ll soon see this is the case. Knowing this, I don’t see how any rational investor can afford to avoid preparing for inflation.

MM: So how does this play out with gold? With other commodities?

KF:  Contrary to what people believe, gold has never been statistically proven to be an inflationary hedge. But it is a great crisis investment that does have a direct correlation to interest rates and bond prices. So gold should really be tied, proportionately, to fixed-income investments because it helps stabilize them – and to provide an inflation hedge at the same time.

As for other commodities, the markets tend to run in 17-21 year cycles, and if we look to 2000 the beginnings of the latest one, that suggests we have until 2017, or so, before commodities lose their luster. In general, I’m a commodity bull, but clearly we have to time our selections carefully, because now’s not the time for indiscriminant buying.

MM: One final U.S.-related question. What’s the outlook for U.S. stocks right now? I know your models recently showed that the U.S. indices were nearing the “sweet spot,” where valuations made them compelling enough to buy. Has that changed?

KF: No. We’re still closing in on what could be the buying opportunity of our lifetimes, but there are a lot of things that have to lock into place to make that happen. The most important off all is that banks have to again begin lending to consumers and to each other. Taking TARP money and hoarding it, or using it for buyouts – something our ongoing Money Morning coverage has chronicled – just isn’t acceptable. If the banks won’t play ball, the government should force them to … or take the money back and let them fail.

Now is not the time to play partisan politics either. This crisis is serious enough that we need to concentrate on just being Americans and work through this as quickly and expediently as possible. Washington is only just beginning to understand how serious this crisis is, which means as investors we have to take our personal financial security into our own hands. The unfortunate reality is that the government may not get around to protecting our personal financial security – despite our elected officials best intentions.

MM: In a bit of financial irony, you’ve pointed out to lots of folks that China will actually benefit from this financial crisis, using it to enhance its stature in the global financial community. And no one is better positioned than you to understand how China will fare … you run an annual investment trip to that country each year and you have a substantial network of contacts there. Given that perspective, tell us how China can benefit from this situation.

KF: Absolutely. First of all, China has $2 trillion in reserves … the most in history and the highest stockpile as a percentage of GDP on the planet. This gives China not only the clout to spend its way out of this mess, but the muscle to work with the rest of the world in a controlled, measured fashion that helps maintain global financial balance. Clearly, a lot of people on Wall Street won’t like the fact that they don’t call the shots anymore, but they had their chance. Now they need to let someone else lead.

From an investment standpoint, I think it’s particularly ironic that the global financial crisis – more so than any other factor – may be the catalyst that ultimately transforms China into the investment of a lifetime. Even during the depths of the Asian Financial Crisis a decade ago, I don’t’ recall seeing Chinese markets this undervalued relative to the upside profit potential.

MM: What about Japan? The Japanese yen has traditionally been a safe haven during troubled times.
KF: Yes it has, but I think that could come crashing to an end this time around.

Japan bailed itself out the last time around through a massive stimulus program aimed at exports. But it did little to stimulate the domestic economy and that’s costing the country dearly this time around, because now it’s behind the proverbial eight ball. In fact, there are some indications that Japan may be sinking into another “Lost Decade” that’s even worse than the malaise we face here in the United States. It’s not illogical to assume the yen could fall off the cliff and crash as a result.

I’ll be home again in Kyoto shortly and will update you on what I find when I get there.

Source: Financial Crisis May be Creating the Best Investment Opportunities of our Lifetime, Money Morning Expert Says

All told, the Big Three will idle about 59 factories over the next month as each of the three American carmakers struggle to wait on a rescue that the White House says is still under study. The announcement comes in the wake of a stubborn credit crisis and debate over the government bailout for the Big Three automakers.

The Chrysler announcement – because it came first – was the stunner.

“This is definitely out of the ordinary,” Edmunds.com analyst Jesse Toprak told MarketWatch. “I’ve never seen this kind of shutdown for this long.”

At Chrysler, some 46,000 employees will be affected by the shutdown, but will receive about 95% of their pay through unemployment and contributions from Chrysler.

Meanwhile, Chrysler’s new credit terms are forcing some dealers to sell cars at a loss.  At a time when many are struggling to survive, the company’s financing arm imposed large fees on aging, unsold inventory, which could cost dealers hundreds of thousands of dollars in 2009.

David Kelleher, who owns two Chrysler dealerships in metro Philadelphia, told The Wall Street Journal he has 56 vehicles more than a year old, which are subject to the fees.

“I’m taking, in some cases, a loss to get rid of cars before I face curtailment,” said  Kelleher, who is making deals to reduce his aged inventory before he gets a bill from Chrysler on Jan. 1. Kelleher said he knows of many dealers in worse shape.

Any loss of dealers could hurt the automaker’s sales and increase consumer worries about the company’s future.

The company also threatened to temporarily suspend new-inventory loans. Known in the industry as floor planning, the loans are funded by the dealers themselves to stock their  lots with new vehicles and drawn down as they pay off inventory. But since July, dealers have yanked $1.5 billion from the accounts on worries that Chrysler could go bankrupt.

Blaming its woes squarely on the credit crisis, Chrysler said that dealers have indicated “many willing buyers for Chrysler, Jeep and Dodge vehicles,” but have been unable to close the deals, due to lack of financing.

Automakers’ cash troubles are coming to a head, which is what forced General Motors, Chrysler and Ford Motor to conserve cash by halting production at many or all of their plants.

Ford said Wednesday that it would idle 10 North American plants for an additional week in January because of the slumping industry. GM said it will indefinitely delay the construction of a Michigan factory that will make its electric car, the Volt – one of the vehicles GM hopes will help turn the company profitable.

Even Toyota Motor Co. (ADR:TM), the world’s top automaker, told Reuters that it will announce a revised 2009 sales forecast at its end-of-the-year news conference Dec. 22. The company is expected to cut at least one million cars from its original forecast of 9.7 million units.

The Big Three have warned that without a loan package, millions of jobs could be lost, which would send ripple effects through the nation’s already faltering economy. U.S. auto sales sank 37% in November amid talk of a bankruptcy at GM or Chrysler if Washington fails to deliver a massive bailout package

The latest news raises new questions about the viability of any proposed bailout, with some analysts saying a rescue plan – no matter how large – won’t solve the industry’s underlying problems.

“Even though the industry has improved its products in the last few years, the government shouldn’t give the Big Three a dime until they can demonstrate compelling changes to their products, management, and productivity that will be rewarded by increased market share,” said Money Morning Investment Director Keith Fitz-Gerald.

Fitz-Gerald estimates the final cost of a rescue package would exceed $100 billion.

Meanwhile, the White House remains evasive about any plans for a bailout.

President George W. Bush said late Wednesday he was “looking at all options,” according to the transcript of a Fox News interview. “A disorganized failure, disorganized bankruptcy or disorderly bankruptcy … could cause great harm to the economy, beyond that which we’re now witnessing. And that concerns me,” Bush said.

The news came a day after the White House warned that the U.S. auto industry would have to make “concessions” to win a government bailout.

“And the other point is that, I’m not interested in … really putting good money after bad,” Bush said.

Big Three to Shutter 59 Plants – Chrysler Forces Dealers to Sell at a Loss

So the question no longer seems to be whether the Fed will ease, but whether the move will make any difference.

The Fed has been hamstrung by a credit-market double-whammy: borrowers who are in limbo due to fears of soaring unemployment, and banks that have turned off the lending spigot. Even so, a U.S. economy facing its worst financial crisis since the Great Depression demands the central bank take decisive action.

That has led to a strong undercurrent of opinion among analysts that the Fed will pursue other measures to spark a moribund U.S. economy.

“We look for the accompanying statement to highlight that the main nexus of policy in the coming months will be quantitative easing operations, and we expect these operations to be aimed at lowering borrowing costs for households and businesses,” Dean Maki, economist for Barclays Capital Management (ADR: BCS), told MarketWatch.com.

In other words, get ready for another attempt to kick-start bank lending by injecting more federal cash into the U.S. financial system.

One move the Fed could make is to buy massive amounts of U.S. Treasuries in an effort to keep yields from rising. Fed Chairman Ben S. Bernanke suggested in a Dec. 1 speech that the central bank might buy “longer-term Treasury or agency securities on the open market in substantial quantities.”

Bond market traders seemed to confirm that notion yesterday (Monday) by driving the price of 10-year Treasuries higher for a third straight day. The yield curve, the difference in yield between two-and 10-year notes, flattened as the difference between the two narrowed.

Driven lately by uncertainty over the Bush administration’s handling of the Big Three automakers’ bailout, investors have pushed yields on Treasuries to record lows. Treasury security yields last week reached the lowest levels since the U.S. started selling two, five, 10- and 30-year securities.

In a report issued last week, JPMorgan Chase & Co. (JPM) predicted the yield on Treasuries in 2009 will be driven as low as 1.65% (from about 2.65% currently) amid “high uncertainty.”
Unloading stocks, corporate bonds and debt from mortgage-finance companies Fannie Mae (FNM) and Freddie Mac (FRE), investors purchased $34.6 billion of Treasury securities in October, up from $20.7 billion in September, according to the U.S. Treasury Department.
“You still have a massive paranoia in the marketplace and you’ve got that safety-at-any-cost mentality,” Jay Mueller of Wells Fargo Capital Management (WFC) told Bloomberg News. “People are not buying Treasury bills because they think the yields are attractive. They are buying them because they are afraid to put money anywhere else.”

According to Merrill Lynch & Co. (MER), U.S. government bonds have returned 12.4% so far in 2008. That’s the best return since 2000, when they gained 13.4%. Meanwhile, the Standard & Poor’s 500 Index is down 40%, and the Dow Jones Industrial Average has lost 35%.

The Fed’s Arsenal

The Fed is pulling out every weapon in its arsenal to avoid deflation.  A sustained drop in asset prices is the central bank’s worst fear since it could lead to more foreclosures and heightened economic chaos.

One undesirable side effect of the numerous economic stimulus packages is the potential for inflation and a decline in the dollar.  Based on its actions, the Fed is apparently willing to take that risk.

In fact, speculation around the probable Fed interest rate cut knocked the greenback down to a two-month low against the euro, touching $1.3703 yesterday, the lowest it’s been since Oct. 14.  With reduced demand for the dollar as a safe haven, the greenback dropped to a 13-year low against the Japanese yen and also lost ground to the British pound.

“We will stay in a low-interest-rate environment for some time,” Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank Ltd. in New York, told Bloomberg. “That will take away interest-rate play, and the dollar will suffer.”

After a four-month rally of 24%, consensus estimates for the dollar issued last week by Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), BNP Paribas SA and Bank of America Corp. (BAC), predicted further weakness against the euro.

After strengthening from July to November, the U.S. currency has retreated by 6.6% from a two-year high on Nov. 21, as measured by the trade-weighted Dollar Index. The dollar has fallen against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona since peaking three weeks ago.

Source: Fed Policymakers to Cut Rates Today … But Does Anyone Really Care?

“The definition of stupidity is doing the same thing over and over again and expecting different results,” said Albert Einstein.

The best thing that could happen to the auto industry is the Big Three filing for bankruptcy protection. As a former turnaround professional, I am convinced that the tools afforded by the bankruptcy courts would allow these companies to restructure dramatically, thus allowing them to renegotiate and drastically lower most of their liabilities. Management would be overhauled, pensions renegotiated, union agreements tabled and made more flexible. Everything that these three companies have attempted to do for years, and could never achieve, would now be possible.

So, why in the world is management siding with the unions in their appeal to Congress?

Because under bankruptcy protection, management becomes accountable to the court, many of their perks and benefits would be curtailed, and they could, heaven forbid, even lose their jobs.

The auto industry, its unions and allies are therefore quick to point out that they, too, are “too big to fail” (have we heard that before?), that the American economy would not recover from the job losses and the economic impact of failures that would have far-reaching implications.

The Center for Automotive Research (CAR) has just released a comprehensive study on the impact of a 100% failure of the Big Three in the U.S.:

• In the first year, the U.S. economy would lose 3 million jobs (about nine additional jobs for each auto worker that is laid off). It would lose another 2.5 million in year two and 1.8 million in year three.
• U.S. personal income would decline by over $150 billion in the first year and another $250 billion in the next two years.
• Our government would also lose $60 billion in 2009 and almost another $100 billion in the next two years.
• We would lose a piece of Americana (those of you who are nostalgic for the good ol’ days might enjoy the following video clip: http://www.youtube.com/watch?v=KGZvQoPxhNs)

I agree – it poses a very grim scenario.

In fact, Senate Bill Sec. 402 seeks to “(C) preserve and promote the jobs of 355,000 workers in the United States directly employed by the auto industry and an additional 4,500,000 workers in the United States employed in related industries; and (D) safeguards the ability of the domestic automobile industry to provide retirement health care benefits for 1,000,000 retirees and their spouses and dependents.”

Obviously, the $25 billion approved by Congress on September 24, 2008 is already falling short. It is clearly not enough to deal with a problem of that scale and, the car makers lament, needs to be doubled immediately. But in case you wonder, the industry and its unions do reserve the right to come back for more…

So let’s review some of CAR’s assertions in light of what we know:

Auto sales are forecast to decline from 16.1 million in 2007 to 14.9 million in 2008. 2009 can be expected to be much worse. Spending on capital goods such as cars and trucks will be affected long-term as a result of excessive consumer debt, tighter credit terms, higher unemployment, and a serious recession (or depression).

If car sales decline dramatically, manufacturing capacity has to be reduced to match demand. This means that the less productive plants would be shut down, employees laid off, and that the supply chain would have to adjust accordingly. This is basic economics so far.

Now comes our choice: On the one hand, we have some highly productive global manufacturers that produce fuel-efficient vehicles the U.S. consumer wants and can afford to buy. On the other hand, we have three inefficient companies that produce unattractive gas guzzlers and are plagued with high legacy costs and liabilities (Big Three workers make $73/hr, Toyota’s $48, the average manufacturing worker makes $32). Why should U.S. taxpayers subsidize these losers? Is it so that they can continue to compete unsuccessfully with productive manufacturers and avoid any dramatic (and much-needed) changes in their way of doing business?

In light of the fact that throwing good money after bad almost never works out, I think the U.S. taxpayers should not bail out GM, Ford, and Chrysler. A common-sense alternative would be to save our tax dollars and allow the most efficient manufacturers to gain market share and hire more workers. Ultimately the U.S. market will post sales of 12 to 15 million cars annually. If it takes one, two, or three million fewer workers to produce the cars U.S. consumers can afford to buy, so be it.

A farmer with one modern wheat combine can do the job of a thousand 18th century farm hands. That is a lot of unemployed farm workers, yet nobody demands to return to those good old days. Productivity and efficiency do result in job losses and dislocation, but eventually progress creates new jobs and additional wealth.

Whether a Honda, GM, Toyota, Ford, Hyundai, or VW, currently each and every car still requires one engine and four wheels. Each manufacturer uses basically the same domestic and overseas suppliers, and each has dealers selling its cars (most dealers represent a broad spectrum of brands and will sell whatever car the market wants). The argument that GM closing its doors would result in the loss of 2 million jobs or more is ludicrous as the competitors that pick up the slack will hire workers and buy more from their suppliers. While that may not be good for Detroit, it may be good for the Carolinas or Tennessee.

Simply, business shifting from certain players in the industry to others is called competition. Capitalism and competition are the forces that have made the U.S. the most successful economy for many decades. Granted, it is a harsh reality, but it works, and so far no other system has come even close to creating as much wealth for most of its agents.

Anyone who follows our flagship newsletter, The Casey Report, knows our stance: we hope, most likely in vain, that the new administration will finally come to the realization that no entity is too big to fail. Besides, bankruptcy reorganizations have a much greater chance of success with larger corporations, as they usually have lots of assets to dispose of — assets that can be sold cheaply to new enterprises, which are then able to build businesses on a much sounder basis. In the process, there is innovation and progress.

The choice is clear: Either the Obama administration can continue on the path of nationalizing entire segments of our economy (so far banking, insurance, auto – next, health, airlines…) and run them into the ground. Or it can let poorly managed companies fail, thereby making it easy for successful businesses and new entrepreneurs to buy the assets of these organizations. Step back and let the markets work their magic instead of blaming the market for ills that were created by special interests and poorly designed regulations.

Source: Should the Big Three Be Allowed to Fail?

And while the plans include such politically palatable moves as salary cuts for top-tier executives, the sale of cushy corporate jets and the elimination of moribund brands, the three embattled U.S. automakers are also now seeking government aid of as much as $34 billion – which is as much as $9 billion more than the $25 billion figure that’s been on the table from the very beginning of the industry’s bid for bailout money.

Here’s the breakdown:

• General Motors, the largest domestic automaker, said late yesterday that it is seeking as much as $18 billion to survive into 2010 – and that it needs $4 billion of that cash just this month in order to dodge a bankruptcy filing. GM is seeking a loan of $12 billion. It’s also requesting an additional $6 billion line of credit to provide more cushion, should the severe current market downturn persist.
• Ford is asking for $9 billion. The Dearborn, Mich.-based carmaker hopes it won’t need to utilize the federal loans, and that it just wants to have access to the capital as a backstop. Ford is aiming to return to profitability by 2011.
• Chrysler confirmed its previous request for a $7 billion loan that its executives detailed during Congressional hearings two weeks ago. But it now says that it needs the loans by the end of the year if it’s to survive, because its projected year-end cash reserves of $2.5 billion won’t come close to covering its projected major first-quarter expenses of $11.6 billion, Dow Jones Newswires reported. The loans – coupled with Chrysler’s ongoing restructuring efforts – would keep that carmaker operating through the end of March. But it will need to access the capital before the end of this year.

The plans were submitted on the same day that the auto industry reported the worst U.S. sales in 25 years. Both U.S. and top overseas automakers all reported sales declines of more than 30% from year-ago sales, increasing the level of urgency for the embattled Big Three, CNNMoney.com reported yesterday.

“This is part of an urgent request for federal funding to create ‘a new GM’ – a lean and fully competitive company,” GM Chief Executive Officer Richard Wagoner said during a conference call with journalists. “Taking these tough actions will help us weather the current economic stresses, and will position the new GM to be profitable.”

U.S. Sen. Carl Levin, D-Mich., a strong advocate of the bailout, said he is confident Congress will return next week to approve a loan package. He said he’s not concerned about the higher price tag being requested, stating that lawmakers wanted an honest accounting of how much might be needed in a worst-case scenario.

Speaking at a press conference late yesterday, House Speaker Nancy Pelosi, D-Calif., told listeners that it was imperative that the Big Three get the federal rescue money immediately.

“Bankruptcy is not an option,” Pelosi said. “Everyone is disadvantaged by bankruptcy. It takes too long. What takes a year we can do in a few weeks … I don’t think anyone wants to see bankruptcy.”

Despite those concerns, Pelosi would not commit to having Congress pass a Big Three bailout when it returns next week. But if Congress doesn’t return, Pelosi urged the U.S. Treasury Department to use money available under the previous $700 billion Wall Street bailout to tide the automakers over until early next year.

It’s not clear if the Treasury Department would agree to this, since the Bush Administration does support the concept of aid for the U.S. auto sector, but opposes using the $700 billion Troubled Assets Relief Program (TARP) to money to help them.

To help persuade lawmakers to approve the bailout money, the carmakers proposed a wide range of changes. Among the highlights:

• Executive salary cuts: Ford announced that the salary of Ford CEO Alan Mulally would be cut to $1 a year if the firm actually borrowed money from the government. General Motors said that Wagoner, the CEO, also will accept a $1 salary. Chrysler’s Robert “Bob” Nardelli is already being paid only $1 a year, according to the Chrysler plan. Mulally had a base salary of $2 million and total compensation of $21.7 million last year, according to the company’s filings. Wagoner received base pay of $1.6 million and total compensation of $14.4 million. Closely held Chrysler does not disclose executive pay.
• Financial restructuring: GM intends to renegotiate its outstanding debt with lenders and bondholders. As of the third-quarter’s close, the firm had more than $30 billion in unsecured debt. GM said it anticipates making all of the roughly $28 billion in payments it owes its suppliers.
• Product streamlining: As part of its cost-cutting efforts, GM suggested that two of its brands – Pontiac and Saturn – could be dropped from its product mix. Pontiac – known in the past for such cars as the Firebird, Trans-Am and GTO – could become a niche brand sold by other dealerships. GM would look for alternatives for dealers of the Saturn, which revolutionized the industry with its no-haggle pricing policies. The company has already said it was considering the sale of its Hummer vehicle line.
• Union concessions: GM intends to seek additional changes in the labor contract it has with the United Auto Workers union – enabling it to modify retiree health care plans and job guarantees the company says it can no longer afford. Money Morning previously reported that national union leaders with all three of the U.S. automakers are planning to hold an emergency meeting in Detroit today (Wednesday).
• New alliances: Chrysler, which a year ago was sold by German automaker Daimler AG (DAI) to the U.S. private equity group Cerberus Capital Management LP, said it remains focused on “developing partnerships, strategic alliances or consolidations” as part of its long-term plans. Chrysler leaders say the firm could save between $3.5 billion and $9 billion a year if it merged with another automaker. GM last month said that it had halted discussions about a possible combination with Chrysler to focus on its own turnaround efforts.
• More hybrids, no corporate jets: Each of the Big Three pledged an accelerated introduction of hybrid vehicles. Ford yesterday promised to put “a family of hybrids, plug-in electric vehicles, and battery-electric vehicles” on sale by 2012, BusinessWeek.com reported. The specific plan calls for a battery-powered electric commercial van in 2010 and a battery-powered retail sedan in 2011. The company is also believed to be developing plug-in versions of its Focus and Fusion cars by 2012-2013. By 2010, Ford said 80% of its investments will be in cars and so-called “crossover” vehicles—as opposed to trucks and SUVs. That’s up from 60% in 2007. Ford and GM also announced plans to get rid of corporate jets. Mulally, Wagoner and Nardelli were all criticized at a House hearing last month – and ridiculed in the media afterwards – when they admitted they had each flown their corporate jets to Washington to ask for rescue money. According to CNNMoney, Ford promised to sell its five corporate jets, while GM vowed to sell four of its seven – and to transfer the leases on the remaining three to another operator. Chrysler spokesman Ed Garsten says Chrysler does not own any private aircraft but instead leases them on an “as-needed” basis. The CEOs apparently learned their lessons well, albeit a bit late: When they return to Washington to beg for the loan money later this week, Mulally and Wagoner will be wheeling hybrid vehicles made by their companies; Nardelli will also drive a hybrid in his return to Capitol Hill, published reports state.

Planning to Stand Tall

The bailout loans aren’t the ultimate answer for the auto companies, however. Indeed, the cash is intended to tide the firms over and buy time for their restructuring plans to take hold and yield results.

With the turnaround plan its leaders have crafted, Ford believes its North American auto operations will be breakeven – or possibly profitable – by 2011, on a pre-tax basis. Ford had previously announced a goal of returning those operations to profitability in the New Year, but dropped that target in May, without providing a new objective.

Ford also said it expects industrywide sales of 12.5 million vehicles in 2009, 14.5 million vehicles in 2010 and 15.5 million vehicles in 2011. That’s well below the industry average of roughly 17 million a year – which was the standard every year from 1998 through the end of 2006.
GM and Chrysler submitted plans with far more conservative sales forecasts.

GM said once its restructuring plans are complete, it thinks it can be profitable even if annual vehicle sales only range between 12.5 and 13 million. GM President Frederick A. “Fritz” Henderson said the company’s restructuring plan will make it fully competitive with Japanese automaker Toyota Motor Corp. (ADR: TM) by 2012.

Chrysler is forecasting a return to profitability with industrywide sales of 13.7 million vehicles in 2011 and 2012.

Those less-aggressive forecasts might be the ones the Big Three wants to concentrate on, for current sales figures have been horrid.

GM said yesterday that light vehicle sales plunged 41% in November, dropping to 153,404 vehicles last month from 261,273 during the same month a year ago. Ford didn’t fare much better, with U.S. sales in November falling 31%. Every line of Ford vehicle posted falling sales, and the company responded by slashing first-quarter North American output by 38% to 430,000 vehicles, Bloomberg reported.

Wagoner has been fuzzy on the company’s goal to cut at least $15 billion in costs, but few options have been ruled out.

GM could further reduce its North American work force. It could eliminate and/or sell one or more of its brands. The primary name on the table is Sweden-based Saab, and the interested buyer is the Swedish government.

Some of its directors say filing for Chapter 11 bankruptcy protection is also an option, though it’s one option that Wagoner has repeatedly said is not on the table, TheStreet.com reported.

So far, GM has asked to delay a $7 billion payment to a union retiree health fund. It returned two of its leased private jets. It stopped running its escalator at 7 p.m. at its headquarters. It stopped buying batteries for hanging wall clocks, eliminated voicemail in plants and consolidated printers and copies. It’s also buying cheaper toilet paper and pencils.

Meanwhile, Ford has pulled back the curtain on nearly all of its plans to hopefully break even by 2011.

In the cost-cutting arena, the company is canceling 2009 bonuses for its managers around the world, as well as for all U.S. employees. Mulally would work for $1 a year if Ford receives a bailout. Ford will continue reducing its dealer and supplier base, estimating it will have 3,790 dealers by end of 2008, Reuters reported.

Ford also is considering the sale its Sweden-based car unit Volvo Car Corp. to Sweden. Despite high safety ratings, Volvo only captured a 0.5% of the market through October, down from 0.8% a year earlier and accounting for 3.7% of Ford’s total sales last year.

Ford is also hatching plans to produce better and more-appealing vehicles. It plans to invest about $14 billion over the next seven years in fuel-efficient technologies and products. And it is planning a line of electric cars, but details on those won’t be revealed until the Detroit Auto Show.
Chrysler has been mum on current cutback plans.

In October, Nardelli ordered a 25% reduction in the Chrysler’s salaried workforce. And the company is close enough to its stated goal of eliminating 5,000 salaried jobs by year’s end – largely facilitated by salaried employees who accepted buyouts and early retirement – that it doesn’t anticipate many more layoffs.

Nardelli was the first of the CEOs to suggest he’d work for $1 a year. He also said that Chrysler’s owner, private equity firm Cerberus Capital Management LP, will pledge to forgo any profits from a Chrysler sale if the car company receives government money, The Detroit Free Press reported.

Emergency Meeting With Union

Before their bigwigs arrive in Washington D.C., the companies will ask United Auto Workers officials to reopen a 2007 labor agreement to further cut costs, a person familiar with the situation told Bloomberg.

According to Bloomberg, GM will seek to stop paying union workers when plants are closed and no work is available, and Ford and Chrysler likely will ask for similar concessions. Union leaders with each company will hold an emergency meeting in Detroit today, published reports state.

“We are at the bargaining table every day working on things to make these companies, to put them in better shape if you will,” UAW President Ron Gettelfinger said in an interview on Bloomberg Television. “Other people need to come in to see what they can do to assist these companies.”

Source: That $25 Billion in Loans America’s “Big Three” Automakers Had Sought … It’s Now $34 Billion

Instead of direct financing assistance, it looks like the Bush Administration will speed up a $25 billion loan program that was approved by Congress in September and that’s aimed at helping automakers develop more-fuel-efficient vehicles. The program is administered by the U.S. Department of Energy. The administration is also believed to have asked the U.S. Commerce Department to explore other ways that aid could be brought to the automakers – without expanding the scope of the bailout package.

The so-called “Big Three” automakers – GM, Chrysler, and Ford Motor Co. (F) – are in need of government assistance after being pushed to the brink of bankruptcy: Foreign competition and a slumping economy have combined to push vehicle sales down to their lowest level in 15 years.

GM has been in talks with Cerberus Capital Management LP about buying Chrysler since September. But potential investors in the deal have been hesitant to back the merger without the safety net of federal assistance, or a government guarantee of some sort. GM’s inability to secure financing at a time when credit is hard to come by and auto sales are in decline has left the No. 1 U.S. automaker with few options other than appealing to the government.

GM spokesman Greg Martin said in late October that the company had asked the Treasury Department to broaden recently passed legislation, intended to bolster banks and financial institutions, to include auto companies.

In fact, General Motors Chairman G. Richard “Rick” Wagoner Jr. reportedly went right to Treasury Secretary Henry M. “Hank” Paulson Jr. and lobbied for the government to provide emergency financial aid to the Big Three via the $700 billion bailout plan.

Badly in Need of a Bailout

GM desperately needs some sort of outside funding, as the company lost $18.8 billion in the first six months of the year, and is hemorrhaging about $1 billion in cash each month. That has raised the prospect of bankruptcy for the company. GM had $21 billion as of June, but a merger with Chrysler would give the company access to another $12 billion in cash.

Cerberus bought Chrysler from former parent Daimler AG (DAI) last year for an estimated $7.4 billion. But the new owner hasn’t proven anymore adept at arresting Chrysler’s financial and market-share declines. Chrysler, perennially the smallest of the Big Three, has seen its sales fall by 25% — almost double the 12.8% overall decline in U.S. auto sales. Chrysler has been hurt because its fleet of pickup trucks, minivans, sport utility vehicles and high-performance cars include a number of gas guzzlers – popular for their performance when fuel prices are low, but an albatross to market when oil prices were at record highs.

Cerberus had buyout discussions with the Japanese automaker Nissan Motor Co. Ltd. (ADR: NSANY) – and Nissan’s French partner, Renault SA – about recruiting Chrysler into its international auto alliance. But Chrysler has apparently decided to focus exclusively on the potential for a deal with General Motors.

Just how deep the Big Three’s problems actually are will become very clear this week: Sales figures for October will be released this week as part of the third-quarter earnings reports that Ford and GM are scheduled to release.

Industry sales fell 26.6%, but many analysts believe that October could be even worse. Edmunds.com, a well-known auto-industry researcher, is predicting a sales decline of roughly 30%, The Times reported.

Should any of Detroit’s Big Three go bankrupt the consequences for the U.S. economy would be both deep and long lasting. Together, the companies employ more than 200,000 Americans, and support millions more U.S. workers indirectly through suppliers and dealerships. And that doesn’t count the estimated 1 million Americans – including many retired autoworkers – who rely upon the U.S. auto companies for pension and healthcare benefits. Many of those retirees already saw their benefits suffer severe cutbacks as the carmakers struggled to find cost-savings. Any new cutbacks would undoubtedly affect them, too.

The unemployment rate hit 6.1% in September and continues to rise. Some analysts anticipate the jobless rate could climb as high as 8.5% to 10% next year. With a jobless rate that reached 8.7% in September, the state of Michigan has the highest unemployment rate in the country.

Alternative Energy is No Longer an Alternative

If bailout money isn’t an option, the first step for automakers is to get the Energy Department to expedite the release of the $25 billion in low-interest loans for GM, Chrysler and the Ford Motor Co.

The loan program is viewed as key to the U.S. auto industry’s future – allowing the three U.S. carmakers to use government money to develop fleets of new, more-fuel-efficient cars and trucks, new hybrid technologies, and new powerplants to run these new vehicles. By doing that, the automakers could then take the money from the corporate coffers that would otherwise have been used for this hybrid research and development and redirect it for use modernizing plants and developing new, more-competitive production techniques.

“The auto companies are clearly running out of cash, and badly in need of more liquidity,” David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., told The Times. “Releasing the $25 billion in loans is a necessary first step.”

Getting Political

Like the U.S. defense industry, the U.S. auto industry has always enjoyed strong political support. And the current period is no exception. Elected officials in states with a heavy automotive employment base are rallying around the Big Three. Just last week, the governors of Michigan, Ohio, New York, Kentucky, Delaware and South Dakota wrote a letter to Treasury Secretary Paulson and U.S. Federal Reserve Chairman Ben S. Bernanke, urging “immediate action” to assist the foundering industry.

“While all sectors of the economy are experiencing difficult times, the automotive industry is particularly challenged,” the letter said. “As a result, the financial well-being of other major industries and millions of American citizens are at risk.”

But with the presidential election set for today (Tuesday), it’s unclear if some of the Bush Administration’s reluctance to add the auto industry to the bailout plan is part of a concern about setting a precedent that could open the door to other industries – further boosting the rescue plan’s ultimate cost – or if the administration is seeking to avoid making any decisions that could subsequently conflict with the goals of the incoming president. For instance, the Democratic nominee, U.S. Sen. Barack Obama, D-Ill., has said in recent days that he supports increasing aid to the troubled auto companies, while Republican hopeful John McCain, R-Ariz., has not said whether he would support auto-sector aid beyond the $25 billion, The Times reported.
And, as Money Morning has reported, President George Bush realizes that some decisions about how the bailout will be administered will have to be left to the next president.

Source: Government Won’t Extend $700 Billion Bailout Plan to U.S. “Big Three”

Detroit’s “Big Three” automakers – GM, Chrysler, and Ford Motor Co. (F) – are in need of government assistance after being pushed to the brink of bankruptcy by slumping sales and increased foreign competition.

GM has been in talks with Cerberus Capital Management LP about buying Chrysler since September. But GM’s inability to secure financing at a time when credit is hard to come by and auto sales are in decline has left GM with few options other than appealing to the government.

GM spokesman Greg Martin said Monday that the company has asked the U.S. Treasury to broaden recently passed legislation, intended to bolster banks and financial institutions, to include auto companies. “We believe the federal government should consider using all the tools available to it, including some recently enacted, to support industries that are in distress and that are essential to the U.S. economy,” Martin told the New York Times.

Earlier this month, Congress gave the Treasury Department the authority to spend up to $700 billion to take equity stakes in ailing financial institutions and buy up troubled assets. While automotive companies would not be eligible for cash injections, the government could end up purchasing bad auto loans from the financing subsidiaries of Detroit’s automakers, an anonymous source told Reuters.

Meanwhile, the Energy Department could release $5 billion in loans to GM to help it finance the merger. The money, according to The Wall Street Journal, would come from the $25 billion approved by Congress last month to help domestic manufacturers make more fuel-efficient cars.

The White House yesterday (Tuesday) confirmed that the Bush administration has been in talks with GM.

“I can tell you we’ve been in contact with automakers, GM and others,” said White House spokeswoman Dana Perino. “And beyond that, I’m just not able to comment on any of those discussions.”

GM desperately needs funding, as the company lost $18.8 billion in the first six months of the year, and is hemorrhaging about $1 billion in cash each month. That has raised the prospect of bankruptcy for the company. GM had $21 billion as of June, but a merger with Chrysler would give the company access to another $12 billion in cash.

Should any of Detroit’s Big Three go bankrupt the consequences for the U.S. economy would be severe. Together, the companies employ more than 200,000 Americans, and support millions more U.S. workers indirectly through suppliers and dealerships, The Times reported.

The unemployment rate hit 6.1% last month and continues to rise. Some analysts anticipate the jobless rate could climb as high as 8.5%-10% next year. With a jobless rate that reached 8.7% in September, Michigan has the highest unemployment rate in the country.

Source: GM, Chrysler Merger Could Get Government Backing