General Motors Corp.’s (OTC: GMGMQ) emergence from bankruptcy Friday marks the beginning of the “new GM,” which will try to stay out of the ashes from which it emerged to become a leaner, customer-centric and modern company.

The official ownership of the new GM is divided as follows:

• 60.8%: U.S. Department of the Treasury, after a $50 billion taxpayer-funded investment.
• 17.5%: United Auto Workers (UAW) Retiree Medical Benefits Trust.
• 11.7%: Canada and Ontario governments.
• 10%: The “old” GM.

By the end of next year, the new GM will operate 34 assembly, powertrain and stamping plants, down from 47 in 2008. In the United States, its headcount will decline from roughly 91,000 at the end of last year to about 64,000 by the end of this year, which GM said will create “a company sized to respond quickly to changes in the market, while still retaining the global scope necessary to develop world-class products and technologies.”

Those left behind after the dust clears will be expected to perform with fewer human resources. GM will reduce the number of U.S. executives by 35% and its salaried employment by 20% by the end of the year-”flattening the organization and speeding decision making,” the company said.

Among the executive cuts will be the elimination of the GM North America president position. Taking those responsibilities will be newly announced Chairman Edward E. Whitacre, Jr., who oversaw the creation of the new AT&T Inc. (NYSE: T).

GM’s balance sheet will include a debt of approximately $11 billion, excluding preferred stock of $9 billion, and could change under its fresh-start accounting, it said. Overall, the company’s total debt has been reduced by more than $40 billion, representing mostly unsecured debt and the Voluntary Employee Beneficiary Association Trust fund that provides medical benefits to UAW retirees.

Those looking to invest in the new GM will have to wait until at least next year.

Though not a public company, “[GM] will be transparent in our financial and other reporting to further strengthen trust and confidence,” President and Chief Executive Officer Fritz Henderson said in a prepared statement. “We expect to take the company public again as soon as practical, starting next year, and to repay our government loans as soon as possible.”

The company’s emergence from bankruptcy comes roughly three weeks earlier than the U.S. government expected, and three days faster than Motown rival Chrysler LLC. GM is shooting to beat the clock on its deadline to repay the $50 billion in Troubled Asset Relief Program (TARP) bailout funds.

“We are required to pay off the loans by 2015, but our goal is to repay them much sooner,” Henderson said.

A slimmer catalog will be the face of the new GM, which now has four primary brands: Cadillac, Chevrolet, Buick and GMC. Gone are Saab, Saturn, Hummer and this fall, Pontiac.

Winning Back America

As Money Morning reported last month, the consumer backlash against GM’s bankruptcy likely won’t be as damaging as had been initially feared. In fact, as rival U.S. carmaker Chrysler already discovered in its own bankruptcy process, potential defections and severed relationships can be avoided with aggressive discounts and strong marketing efforts.

The image of the new GM will rest largely on the shoulders of 77-year-old Bob Lutz, whom the company coaxed out of retirement to sign on as its vice chairman and senior advisor. “Maximum Bob,” the auto industry veteran who originally joined GM in 2001 and chief cheerleader for the upcoming Chevy Volt, will be responsible for “all creative elements of products,” as well as customer relationships.

Translation: Lutz is tasked with winning back the droves of customers who fled from GM in the last 40 years-primarily to foreign automakers-to reduce the company’s domestic market share to less than 20%, down from more than 50% in GM’s heyday in the late 1960s and 1970s.

“[Lutz] has a proven track record of unleashing creativity in the design and development of GM cars and trucks. This new role allows him to take that passion a step further, applying it to other parts of GM that connect directly with customers,” Henderson said. “In August, we’ll begin regular visits with customers, dealers, suppliers, employees and others-in the U.S. and abroad-who impact our relationships with customers. We’ll be listening to their ideas, and acting on the ones that will improve our ability to serve our customers.”

A Fresh Coat of Paint for an Old Classic

Parts of GM’s transparency and customer bond-forming attempts will come online. Henderson will hold live chats with customers and respond to some ideas, concerns and suggestions through a “Tell Fritz” website to be launched next week.

Other GM online initiatives include:

• A Twitter page, containing “as it happens” updates on the company.
• A Facebook page, which includes company news, behind-the-scenes videos of things like the production of the Volt, or a video of the “Bumblebee” Camaro as seen in the new Transformers movie, which is filled with GM vehicles.
• GM FastLane, a blog from company executives and other employees.
• GM Facts and Fiction, a website devoted to dispelling myths about the carmaker.

Of course, when the rubber hits the road, modern means environmentally friendly vehicles. The Volt, which GM said can go 40 miles on one charge before using gasoline to continue, gets the most press. That vehicle is currently being road tested and scheduled to launch next year, with prices starting at $32,500 after tax credit incentives.

While President Barack Obama said he doesn’t want the U.S. government to be involved in the day-to-day operations of its bailout beneficiaries, there’s no doubt the pressure is on both GM and Chrysler to produce more fuel-efficient vehicles. To that effect, GM said it has moved “aggressively” to develop a range of energy-saving technologies, including advanced internal combustion engines, biofuels, fuel cells and hybrids.

“The new GM is also taking steps to make advanced battery development a core competency, and expects to make additional announcements on this matter late this summer,” the company said in what will likely be an attempt to address consumer concerns over battery life in hybrid and electric cars.

Source: The “New” GM: What Will it Look Like, and How Far Will it Go? ]]> http://www.contrarianprofits.com/articles/the-%e2%80%9cnew%e2%80%9d-gm-what-will-it-look-like-and-how-far-will-it-go/19035/feed 0 http://www.contrarianprofits.com/articles/drop-in-continuing-unemployment-claims-could-signal-onset-of-recovery/18142 http://www.contrarianprofits.com/articles/drop-in-continuing-unemployment-claims-could-signal-onset-of-recovery/18142#comments Fri, 19 Jun 2009 20:00:25 +0000 Don Miller http://www.contrarianprofits.com/?p=18142 The economy continued to show signs of recovery from the worst recession in 60 years as the total number of Americans receiving unemployment benefits dropped for the first time since January, the Labor Department reported yesterday (Thursday).

The good news came in spite of a small jump in initial applications for state unemployment insurance, which rose by a more-than-expected 3,000 to 608,000 in the week ended June 13. Analysts polled byReuters were expecting claims to dip to 600,000 from a previously reported 601,000.

But analysts were largely focused on a trend in continuing claims, which tracks jobless workers who stayed on government benefit rolls.

Those claims plunged by 148,000 to a smaller-than-anticipated 6.69 million in the week ended June 6, the latest week…

BRIC Building; Bankruptcies Accelerate; Auto Parts Suppliers Denied Additional Government Funds; GM Sells Saab; Best Buy Misses Expectations; MySpace Cuts 1,000 Workers; Banks See Recession Ending in Late Summer

• Members of the so-called “BRIC” nations – Brazil, Russia, India and China – met in Russia yesterday (Tuesday) for their first ever summit. The meeting was followed by the release of a joint communiqué that demanded a larger role for emerging nations. “The emerging and developing economies must have a greater voice and representation in international financial institutions,” the statement said. “We also believe that there is a strong need for a stable, predictable and more diversified international monetary system.” However, the statement did not mention a smaller role for the dollar and a supranational reserve currency, suggestions previously proposed by Russia and China as a result of the financial tidal wave that emanated from the United States.

Source: Investment News Briefs Wednesday, June 17, 2009

Top financial officials from the Group of Eight (G8) industrialized nations on Friday issued an upbeat evaluation of the global financial crisis, describing signs that markets were stabilizing around the world and warning that it was necessary to devise “exit strategies” to disengage from stimulus programs that have been put in place.

The G8 met for two days in Lecce, Italy. Eight world finance ministers – including U.S. Treasury Secretary Timothy F. Geithner, and his global counterparts from Britain, Canada, France, Germany, Italy, Japan and Russia – also agreed to create “a set of common principles and standards governing the conduct of international business and finance,”The Washington Post reported.

In a communiqué called “the Lecce Framework” – which described the strategy for obtaining those goals – the finance ministers called on government leaders to fill in the regulatory gaps that led to the global financial crisis, including breakdowns caused by financial firms that operated in multiple economies.

Strikingly more rigorous initiatives already are being adopted in Europe, where new measures aimed at creating more-rigorous oversight of the credit-rating agencies – especially those involved with creating securitized securities, whose U.S. breakdowns have been identified as a key contributor to the credit crisis. The United States will offer its own broad proposals for “more conservative standards” when it unveils a much-anticipated reform plan to overhaul domestic financial regulation later this week, Geithner said in an interview after the meeting.

The U.S. will include tougher proposed capital standards and oversight for banks, better coordinated oversight of global financial institutions, and improve monitoring and transparency in global derivatives markets,The Post reported.

“Because risk does not respect borders, we will put forward several international proposals in our reform package to help raise standards globally,” Geithner told journalists after the meeting.

With recent rebound in stock markets and a flurry of upbeat economic reports, finance ministers said they were cautiously optimistic about the state of the world economy.

Market Matters

Despite some last minute drama at U.S. Supreme Court, Chrysler LLC closed on its deal with Fiat SpA (OTC ADR: FIATY) and effectively moved beyond bankruptcy.  While Supreme Court Justice Ruth Bader Ginsburg gave the would-be deal-breakers (Indiana pension funds) some false hope, the Supreme Court ultimately disallowed their objections andlet the transaction proceed.

General Motors Corp. (OTC: GMGMQ) announced the hiring of a formerAT&T Inc. (NYSE: T) exec to guide its rebirth and moved closer to selling its Saab unit as it “speeds” through its own restructuring.

In a “sign of financial repair,” the U.S. Treasury Department has granted its blessing to 10 major banks to repay $68 billion in Troubled Asset Relief Program (TARP) loans; JPMorgan Chase & Co. (NYSE: JPM) ($25 bln), Morgan Stanley (NYSE: MS)($10 bln), and American Express(NYSE: AXP) ($3.4 bln) expect to take the plunge in the next few days.

And in a sign of renewed economic strength, Texas Instruments Inc. (NYSE: TXN) raised its outlook for the second quarter amid growing demand for semiconductors.  Meanwhile, Bank of America Corp. (NYSE: BAC) and U.S. Federal Reserve officials took a grilling from (grandstanding) politicos as the “he said/he said” controversy over theMerrill Lynch (NYSE: SAR) acquisition continued.  The Obama administration ended its plan to limit compensation within financials and also is reevaluating prior proposals about consolidating regulatory bodies.

In transactional news, BlackRock Inc. (NYSE: BLK) acquired ETF-giantBarclays Global Investors to form the largest global asset manager.

Energy prices continued the upward trek as an International Energy Agency suggested that global demand for 2009 would be stronger than previously predicted.  On the supply side, a BP PLC (NYSE ADR: BP)report showed that global reserves fell in 2008, the first such decline in 10-years.  Crude surged past $72 a barrel for the first time this year as traders analyzed the supply/demand issues in conjunction with the ongoing prospects for an economic recovery.  Likewise, gas prices rose again (for 42 straight days) to above $2.60 per gallon nationally and consumers began to feel the pinch at the pumps as summer travel season arrives.  Inflation anyone?

Economically Speaking

Economists are at it again.  With little substantive data on the calendar,The Wall Street Journal announced results of its latest forecasting survey and a majority of respondents expect the recession to end by late summer (though the subsequent recovery may not be as swift as many had hoped).  About half even believe the Fed will be inclined to raise the benchmark Federal Funds rate (from virtually 0% today) by the middle of 2010.  Despite the potential for an economic rebound, the labor market is expected to remain weak as unemployment is projected to climb just below 10% by the end of the year.

On the inflation front, the rapid rise in oil prices does not seem to be worrying most economists surveyed (or they simply have not been paying attention), as they pegged the price of crude at $72 a barrel by December 2010, very close to today’s level.

Retail sales rose in May for the first time in three months, though much of the increase reflected rising gasoline prices which is bad news for a consumer-driven economy. Discretionary spending seems to be going to the gas pumps rather than for household or luxury items.  Still, consumer sentiment is improving as the latest Reuters/University of Michigan confidence index rose to its highest level in nine months.

The trade deficit jumped for the second month in a row as oil imports climbed, also the result of higher crude prices.  Home foreclosures actually declined in May, a positive sign for housing, though its elevated level was still the third highest ever reported.  The Fed “Beige Book“ was released during the week and the messages were mixed, at best.  While certain regions of the country have begun to experience resurgence in economic activity (or, at least, less contraction), others remained quite weak and ongoing challenges in the labor markets threaten to hinder any sustained recovery.  Despite the recent increase in interest rates, many Fed watchers do not expect the policymakers to commit to additional Treasury and mortgage-related securities purchases at the next open market committee meeting.

Weekly Economic Calendar

Source: G8 Finance Chiefs Express Cautious Optimism About the State of the World Economy

• 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

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

GM dealers targeted for separation were informed by letter over the weekend, Reuters reported.

The eradication of hundreds of hundreds of American auto dealerships is merely the latest development in the ongoing dismantling of the so-called U.S. “Big Three’’ – a  process that seems likely to leave Ford Motor Co. (NYSE: F) as the last American automaker standing.

“These companies are making up for now for what they have avoided doing for years, if not decades,” industry analyst John A. Casesa, managing partner of consultantcy Casesa Shapiro Group LLC, told The New York Times. “And if the market doesn’t stabilize, this may only be Phase I.”

The moves will clearly change the entire auto-purchasing landscape for U.S. consumers. All told, nearly 800 dealers selling Chrysler brands were given notice that they would be cut off next month. These dealers represent about a quarter of the 3,200 in Chrysler’s dealership network, but account for only 14% of the company’s sales.

Without the dealership cuts, U.S. automakers will likely see their troubles continue. For instance, in its bankruptcy filing, Chrysler says it needs to streamline its distribution-and-sales operation to become more competitive. The current Chrysler dealership sells 303 vehicles per year, compared with 1,219 for a Honda (NYSE ADR: HMC) and 1,292 for Toyota. (NYSE ADR: TM).

GM is looking to close as many as 2,600 of its dealers – about 40% – by 2010. This weekend, it notified the first 1,010 that their franchise deals with General Motors would not be renewed after they expired in October. The other dealerships that will get cut are those that sell such brands as Hummer and Saturn – brands that GM plans to divest.

Both Chrysler and GM have been subsisting on government loans for months.

Just a few years ago, U.S. auto dealers were selling an aggregate 16 million vehicles annually. But after the biggest drop in vehicle sales in a quarter century, dealers are now struggling to even reach the 10-million-vehicle mark.

The letters to GM dealers did not specifically say the company would be filing for bankruptcy, but the move indicates that could well happen next month, which is when the longtime No. 1 U.S. automaker is due to submit a restructuring plan to U.S. President Barack Obama, The Times reported.

In fact, General Motors sales chief Mark LaNeve told reporters on a conference call that carrying out the plan without the benefit of bankruptcy-court protection would be nearly impossible, since state franchise laws make it “onerous and expensive” for manufacturers to force dealers out of business. Wrapped in the cloak of bankruptcy protection, however, the dealership contracts can be nullified, the The Wall Street Journal said.

Chrysler on Thursday asked its bankruptcy judge, U.S. Justice Arthur J. Gonzalez, to hold a hearing on June 3 to allow the company to reject its “contracts and unexpired leases with certain domestic dealers.”

At a time when the falling earnings are continuing to push U.S. companies to make deep job cuts, the dealership closures will add to the national rise in joblessness. The National Automobile Dealers Association (NADA) has estimated that all dealership closings – including those already announced by Chrysler and GM – could cost the U.S. economy 187,000 jobs – or more than the total U.S. employment of the two companies.

Market Matters

When the government was “forced” to help resolve the global financial crisis with bailouts and stimulus packages, analysts hoped for the best (economic and market recoveries) and feared the worst (overreach or even socialism).

To date, some signs have emerged that the recession may be nearing an end, though naysayers also warn about the ramification of “excessive” intervention.

On that note, the Obama administration has begun talks about a complete overhaul of the compensation structure for the entire financial services industry, a move that could even impact employees at institutions that did not accept bailout moneys.  While some believe the current system rewards short-term goals in lieu of longer-term performance, many still feel the government is overstepping its bounds.

President Obama’s administration also announced plans to regulate certain derivative securities, many of which have done considerable damage to the balance sheets of the world’s leading institutions.  While many “experts” agree greater transparency and oversight may have prevented some of the carnage, others worry that over-regulation is never a good things and efforts to improve the system actually may have the exact opposite impact.  Stay tuned.

With the much-ballyhooed stress-tests in the books, banks moved to raise capital with US Bancorp (NYSE: USB), Capital One Financial Corp. (NYSE: COF), and Bank of NY Mellon Corp. (NYSE: BK) among those issuing $1 billion to $2.5 billion in new stock (and diluting current shareholders).

In fact, US Bancorp expects to be the first major institution to repay Troubled Asset Relief Program funds over the next few weeks.  Meanwhile, as banks begin to move off the Treasury’s coffers, insurance companies become the latest recipients as The Hartford now is eligible for a $3 billion-plus government infusion with others to follow.  Automakers continued their cost-cutting moves as both GM and Chrysler started saying goodbye to large percentages of their dealers (and perhaps another 150,000 in related workers), while Ford raised about $1.6 billion through a 300,000-share offering of its own.  GM’s share price fell into penny stock territory for the first-time since 1933 as bankruptcy becomes an even greater likelihood.

On the earnings front, Macy’s Inc. (NYSE: M), JC Penney Co. Inc. (NYSE: JCP), Liz Claiborne Inc. (NYSE: LIZ), and Sony Corp. (NYSE ADR: SNE) all posted disappointing results, a sign that retailers have yet to overcome the ongoing consumer negativity.  While Wal-Mart Co. Inc. (NYSE: WMT) continued to outshine rivals, its earnings were negatively impacted by currency translation.

Both SAP AG (NYSE ADR: SAP) and Intel Corp. (Nasdaq: INTC) expressed optimism about the future for techs as phrases like “bottomed out” and “glimmers of hope” brought renewed investor confidence, though the latter was greeted with a $1.45 billion record fine in Europe over sales and marketing abuses.  Microsoft Corp. (Nasdaq: MSFT) announced its first debt offering in its 36-year existence and some expect the tech giant to explore acquisition opportunities.

Economically Speaking

Yep, the consumer is a fickle sort.  In fact, consumer statistics are quite fickle these days as well.  A few weeks back, same store sales for April showed enhanced retail activity, a strong sign for the consumer-driven economy.  Well, this past week, the U.S. Commerce Department reported that April retail sales actually fell by 0.4%, a worse than expected showing and the eighth decline over the past 10 months.  Before analysts could express renewed doubt about any pending recovery, Redbook Research threw even more confusion into the equation by reporting that chain-store sales climbed 0.1% during the first week in May and bested Wall Street expectations.

Additionally, the University of Michigan Sentiment Index reached its highest confidence level since September 2008.  As long as the labor picture remains bleak, however, consumer activity may vary from one month (week) to the next as many folks remain hesitant to spend and continue saving for that rainy day.

The inflation gauges calmed down those deflation naysayers as the producer price index (PPI) climbed in April on rising food prices and the consumer price index (CPI) was reported as unchanged last month.  Additionally, as oil prices creep a tad higher, the threats of (economy-hurting) price declines lessens; therefore, analysts can focus on other more pressing matters (like labor, manufacturing, housing, retail, etc.) and leave the (soon-to-come) inflation hysteria for another day.  Of note, RealtyTrac reported foreclosures soared by over 30% last month as unemployed homeowners struggle to make their mortgage payments.

Weekly Economic Calendar

Source:  Chrysler, GM Dealer Cuts Point to More Rough Times Ahead for U.S. Automakers

The identity of the bank that is alleged to have failed the bank stress test was not revealed.

The bank-stress-test findings were reported yesterday (Sunday) by CNBC.com, which said it obtained the information from a source that it did not identify. The source did not identify the company, CNBC.com reported.

“At least one firm – under the [bank] stress test assumptions – will require more capital,” the source said.

The bank-stress-test results were contained in a two-dozen-page report that the government released Friday. But the results had already been “conveyed” to the firms, meaning the bank in question is aware of the U.S. central bank’s assessment, according to the published report.

This round of bank stress tests was essentially a two-step process. The first step – outlining how the banks have been analyzed – was taken care of with the report released over the weekend.  The second step – releasing the results to the public – will be taken care of when the actual results are released May 4, which is one week from today (Monday).

Neither the U.S. Federal Reserve nor the U.S. Treasury Department would comment.

The bank stress tests have a very specific purpose. Financial institutions that are found to have inadequate capital will have six months to raise the money via the private sector. If that doesn’t work, the government has said the financial institutions will be eligible for an infusion of capital via the federal government’s so-called “Capital Access Program.”

U.S. Treasury Secretary Timothy F. Geithner said he would be open to banks repaying their Troubled Asset Relief Program (TARP) loans, as long as the availability of credit (borrowing) was not adversely affected.  As a Money Morning special report detailed last week, the credit markets don’t seem to be loosening up: Lending dropped by more than 20% from October 2008 to February 2009, despite initiatives to encourage such activity.

According to the conclusion of the report released over the weekend, “most banks currently have capital levels well in excess of the amounts needed to be well capitalized.”

However, as Money Morning has reported, the tests have become a “no-win” situation for the Obama administration.

“There are two things that are terribly wrong,” William M. Isaac, the Secura Group chairman who served as head of the Federal Deposit Insurance Corp. (FDIC) from 1981 to 1985, told CNBC.com. The first problem – and a big one – is the fact that the details were announced at all.

“I can’t imagine what Treasury was thinking when it made that move. It has been causing incredible angst in the markets,” said Isaac. “The second big problem is that the Treasury is directing the stress testing, apparently with direct involvement of the White House at the highest levels. Bank regulation by law is supposed to be carried out by the independent banking agencies without any political interference.”

Market Matters

As Money Morning reported Friday – in a Wall Street version of the old “he said/(s)he said” drama, Bank of America Corp. (BAC) Chairman and Chief Executive Officer Kenneth Lewis claimed that ex-U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. and central bank Chairman Ben S. Bernanke threatened to remove him from office if he backed out of the Merrill Lynch & Co. Inc. (SQD) merger or (publicly) discussed the mounting losses.

Paulson had previously testified that Lewis must have misinterpreted their comments, but then seemed to blame Bernanke for the threat (Translation: Paulson tried to throw Bernanke “under the bus.”).

New York Attorney General Andrew M. Cuomo has been investigating the activities surrounding the merger to determine why shareholders were kept in the dark about the financial “challenges.”

Shifting to autos, Italy’s Fiat SpA (OTC ADR FIATY) emerged as a potential major global player as it attempts to forge a partnership with (soon-to-be-bankrupt?) Chrysler LLC, and also has interest in buying General Motors Corp.’s (GM) Opel unit. Meanwhile, GM will be closing 13 production plants over the summer to trim inventory and seems likely to miss a $1 billion debt payment due June 1 as it too moves closer to bankruptcy protection.

How bad is GM’s plight: GM may close its Pontiac division after 82 years of operation, The Wall Street Journal and MarketWatch.com reported over the weekend.

While the earnings news of the week found plenty of winners and losers, ultimately analysts perceived a bit of “cautious optimism.”  Bank of America and Morgan Stanley (MS) failed to live up to the favorable showings by Wells Fargo & Co. (WFC) and other financials, though techs like Texas Instruments Inc. (TXN), Apple Inc. (AAPL) and International Business Machines Corp. (IBM), beat Wall Street expectations, and brought new hope that the downturn was nearing an end. (Watch for an updated “Hot Stocks” feature on IBM here in Money Morning later this week).

Unfortunately, Microsoft Corp. (MSFT) posted the first quarterly revenue decline in its 23-year history, though investors still cheered its ability to reduce costs during these challenging times for PC sales. McDonald’s Corp. (MCD), AT&T Inc. (T), and Ford Motor Co. (F) were among the diverse group of companies reporting better-than-expected results, while United Parcel Service Inc. (UPS), Caterpillar Inc. (CAT), and Continental Airlines Inc. (CAL) issued disappointing numbers.

Amazon.com Inc. (AMZN), the subject of a recent “Buy, Sell or Hold” feature here in Money Morning, bucked the negative trend facing many retailers and posted higher quarterly earnings and revenue.

Additionally, U.S. retailers J.C. Penney Co. Inc. (JCP) and Coach Inc. (COH) each expressed positive sentiment that sales activity seems to picking up.  Oracle Corp. (ORCL) snapped up Sun Microsystems Inc. (JAVA) for $7.4 billion after IBM chose to pass, and PepsiCo Inc. (PEP) is attempting to purchase two related bottling companies as corporate execs seek favorable deals in this environment.  Such merger-and-acquisition (M&A) transactions often signal boardroom confidence and also indicate that the “worst” part of a downturn may be over.

Oil prices surged above the $51-a-barrel level late in the week as traders overlooked the higher inventory levels and instead focused on some favorable signs that the economy may be closing in on turnaround mode.

With a six-week winning streak on the line, investors offered their best “clutch hitting” late Friday, pushing all major indexes to higher levels. Early in the week, after investors digested negative news from the likes of Bank of America and GM, prognosticators said the weekly stock-market winning streak was all but over. However, some better-than-expected earnings and economic reports brought out the “bulls” for one final run.  The Nasdaq Composite Index ended the week in positive territory, and the other equity indexes were virtually flat from last week’s closing levels (with the Dow Jones Industrial Average suffering a slight decline).

Economically Speaking

According to the International Monetary Fund (IMF), the global downturn will be far worse than previously expected.  For 2009, the IMF expects the world economy to contract by 1.3%, its first such decline in 60-years, with over 10 million employees losing their jobs.  Unfortunately, its projections for the United States are even more dire (-2.8% for the year), with domestic financial institutions suffering $2.7 trillion in losses, almost twice the IMF’s prior estimates from just six months ago.

While much of the economic data of the week confirmed the IMF’s weak projection, analysts found a few positive signs that the downturn very well may have bottomed out.  While both new home sales and durable goods orders declined in March, the results beat the weaker Street expectations and came in the aftermath of some (relatively) strong February numbers.

In another promising sign of stability within the housing sector, the median price of an existing home sold in March actually rose for the second straight month.  Still, the record unemployment filings last week revealed the ongoing difficulties facing job seekers amid these tight labor conditions.  Likewise, leading economic indicators, a predictive report, dropped for the third consecutive month and many economists expect the recession to last at least until late third quarter.

Weekly Economic Calendar

Source: Controversial Stress Tests Reveal Only One Bank Needs Capital, but Worries Remain

The new viability plans were part of the bargain automakers struck with Congress in December, when the two U.S. car companies received $17.4 billion in U.S. Treasury Department loans.

GM requested up to $16.6 billion in additional funding, on top of the $13.4 billion it has already received from the government. The automaker said it needs $2 billion by March and $2.6 in April to avoid running out of cash.

GM also wants a $7.5 billion line of credit that could be drawn upon, if needed, and asked to defer repayment of a $4.5 billion credit line due in 2011.

In an effort to cut costs and return to profitability by 2011, GM plans to shutter another five U.S. plants, in addition to nine it closed in December. It will sell or wind down its Hummer and Saturn brands, and said that it was talking to the Swedish government and other parties about making Saab an “independent business entity.”

The company will cut its global workforce by 47,000 this year, a figure that includes the 10,000 white-collar job cuts announced last week.

Meanwhile, Chrysler, which received $4 billion in federal loans two months ago, renewed a request for $3 billion of additional aid and said it needs $2 billion to implement its restructuring plan, bringing its total bailout request to $9 billion.

Chrysler’s plan includes discontinuing its Chrysler Aspen and Dodge Durango sport-utility vehicles, as well as the once-white-hot PT Cruiser car.

Chrysler has also cut its workforce from 87,000 at the end of 2006 to less than 54,000 now. It has also eliminated 12 shifts at its plants, equal to roughly one-third of its production capacity.

Italy’s Fiat S.p.A. (OTC: FIATY) last month agreed to buy a 35% stake in the foundering Chrysler. The deal is expected to boost Chrysler’s small-car technology and give Italy-based Fiat access to the U.S. auto market. It will also give Chrysler access to Fiat’s global distribution network.

The United Auto Workers union (UAW) said Tuesday that it reached an agreement with GM, Chrysler and Ford Motor Co. on changes to its contracts with each of the car companies.

Ronald A. Gettelfinger, UAW president, said that the changes “will help these companies face the extraordinarily difficult economic climate in which they operate.”

Source: GM and Chrysler Request Another $22 Billion in Federal Aid