Here in the United States, at a cost of a mere $3 billion, the “Cash-for-Clunkers” program appears to have given new hope to the U.S. auto industry.

But that new hope is destined to be short-lived.

It’s true that – in terms of value delivered for the money invested – “Cash for Clunkers” has eclipsed every other stimulus program that has been tried. But the program has a projected lifespan of only three months, meaning it can’t reverse the powerful global forces that are destined to turn the U.S. auto market from leader to laggard on the global stage.

Financial Crisis Fallout Reshapes Sector

Thanks to the financial crisis whose impact continues to be felt, worldwide automobile demand had dropped on an overall basis since 2008.

But regional differences are already emerging.

In the United States, for instance, the benchmark seasonally adjusted annual sales rate (SAAR) finally jumped up past the 11-million mark in July after failing to eclipse the “breakeven point” of 10 million vehicles in any prior month this year. But the actual year-to-date sales of 5.81 million vehicles through July was still 33% below the 8.55 million that had been sold by that point in 2008, and is 67% below the all-time annual record of 17.4 million achieved in 2000 and 65% below the decade average of 16.4 million.

(Prior to the global financial crisis and accompanying recession – which prompted the U.S. auto industry to restructure and shift its breakeven point down to 10 million vehicles – the breakeven point was actually 16 million vehicle sales in a year. Below that point, several or all of the U.S. “Big Three” would be spinning their wheels in red ink.)

It’s a much different story abroad, however, where several markets are in a long-term growth mode. In India, for example, sales were up 31% on a year-over-year basis, while auto sales in China were an astonishing 70% above those of a year ago. Even if U.S. auto sales continue to improve, China’s automobile market may outsell its U.S. counterpart for a full year for the first time ever.

Granted, India’s auto market – around 2.5 million cars and light trucks a year – is still much smaller than either China or the United States. However, its growth makes it comparable to the Japanese or German markets, the next largest automobile markets after its U.S. and China counterparts.

Thus, global automobile sales are undergoing a major reorientation towards Asia and away from the United States and Europe. This will inevitably have a huge effect on the structure of the sector.

That’s why Asia will become the new Detroit – the future center of the automaking world.

Gone For Good?

In the United States, General Motors Corp. and Chrysler Group LLC have lost market share because of the government takeover. They are unlikely to get it back in spite of the debt costs they have relinquished through bankruptcy.

For Chrysler, the partnership with Fiat SpA (OTC ADR: FIATY) is unlikely to help much. Fiat is among the weakest of the European companies, and has not been competitive in the United States since the 1980s. The U.S. market is undoubtedly moving toward smaller automobiles. That trend is being “fueled” by the new Corporate Average Fuel Economy (CAFE) standards for 2015 and probably by higher fuel taxes for environmental and budget reasons. Nevertheless, it seems unlikely that the Chrysler/Fiat partnership will have the models to compete.

General Motors has the model range to compete in the United States. However, GM is doing much better in China, thanks largely to its joint venture with Shanghai Automotive Industry Corp., which expects to sell 1.4 million vehicles in 2009. Since GM is also selling Opel, its European operation, GM (NYSE:GRM) will find itself driven primarily by the demands of the Chinese market. Given the growth of that market, it will probably make the most economic sense for GM to become Chinese-owned. Politics may delay this, but probably only for a few years.

The United States’ One “Better Idea”

Ford Motor Co. (NYSE: F) has picked up market share in the United States from GM and Chrysler’s problems. It should benefit both from “Cash for Clunkers,” and from the early stages of the U.S. market recovery. If GM and Chrysler continue to have difficulties, Ford may be in a good position here in the large U.S. market – as the most-effective manufacturer of the large automobiles that Americans continue to prefer – no matter what the government tells Ford to do.

Nor is that Ford’s only competitive advantage going forward. Ford Europe is big and viable enough to allow Ford to remain credible as a producer of smaller cars, primarily in the higher price brackets.

Outside the United States, European manufacturers will find themselves increasingly confined to the luxury end of the market. However, as global incomes rise and the newly wealthy become brand-conscious – particularly in the emerging economies of Asia – that upscale portion of the auto market should continue to be strong.

Japanese and Korean manufacturers will continue to dominate their domestic markets. And such companies as Honda Motor Co. Ltd. (NYSE ADR: HMC), Toyota Motor Corp. (NYSE ADR: TM) and Kia Motors Corp., will also do well in the United States and Europe, and in countries where they have been able to establish viable local manufacturing operations, and lower labor costs.

But it will be the players from China and India who are destined to be the big market-share gainers on a global basis.

The New Leaders

For U.S. investors, India’s Tata Motors Ltd. (NYSE ADR: TTM) is the best known of the newly emerging global auto elite. Tata’s $2,500 for-the-masses “Nano” car has been well received. Over the long term, the Nano may expand the entry-level portion of the worldwide auto market, forcing other manufacturers to produce equivalent low-price models.

Indeed, the introduction of $2,500 cars may greatly expand the market’s size in India and other emerging markets, much as Ford’s Model T did after its introduction in 1908, or the Volkswagen AG (OTC ADR: VLKAY) VW Beetle did in the 1950s and 1960s.

Tata looked to be in financial difficulty after it bought the loss-making Jaguar and Land Rover brands in 2008 at the top of the market. However, the $300 million loan for its Jaguar Land Rover Unit announced on Aug. 10 gives Tata the room it needed to maneuver. Market growth in India, combined with the strength of its Tata Group parent now suggest that Tata Motors has the strength to survive without dismemberment.

The bottom line: Tata and its India-based competitors – Maruti Suzuki India Ltd. (Mumbai: MSIL) and Mahindra and Mahindra Ltd. (London: MHID) – as well as such top China carmakers as Chery Automobile Co. Ltd. (still publicly owned), Geely Automobile Holdings Ltd. (OTC: GELYF) and Great Wall Motor Co. (OTC: GWLLF), are thus the companies that will see most growth in the automotive market of the decade to come.

By 2020, the global auto sector will look nothing like it does today. Given that most of the muscle will be in Asia, investors shouldn’t be surprised.

Source: Why Asia Will Supplant Detroit as the Global Center of the Auto Industry

A federal judge handed the Obama administration an important victory in its push to steer the automobile industry back to health Sunday, approving the sale of General Motors Corp.’s (OTC: GMGMQ) most profitable assets to a new government-run company.

The move removes an important barrier to the company’s plan to exit bankruptcy.

Judge Robert E. Gerber of the U.S. Bankruptcy Court for the Southern District of New York issued a ruling saying the sale was GM’s only option and that it would “prevent the death of the patient on the operating table,” according to Reuters.

The 87-page ruling rejected appeals from a group of bondholders, tort claimants and unions who had objected to the plan.

“As nobody can seriously dispute, the only alternative to an immediate sale is liquidation — a disastrous result for GM’s creditors, its employees, the suppliers who depend on GM for their own existence, and the communities in which GM operates,” Gerber said in the opinion.

When the sale is completed, it would transfer GM’s “good assets” – including the Chevrolet, Cadillac, Buick and GMC brands – to a new company majority-owned by the U.S. Treasury.  It would also pave the way for the new GM to exit bankruptcy in less than two months, one month earlier than the government’s projection.

The plan would allow the company to jettison unwanted property to the old GM, including 16 automotive plants in Delaware, Ohio, New York, Indiana, Pennsylvania, Virginia and Michigan. The Treasury will also provide the estate with $1.175 billion to unwind the remaining assets, up from original projections of $950 million after creditors complained about possibly getting stuck with liquidation costs.

The U.S. government would own 60% of the new GM in return for $50 billion in loans, the Canadian government would get 11.7% for $9 billion in loans, and workers would receive a 17.5% stake for relinquishing future health-care benefits.

Bondholders would be forced to convert about $27 billion in bonds into about 10% of stock in the new company, plus warrants with a total value of $7.4 billion. New GM’s total equity is anticipated to be worth more than $38 billion, according to Bloomberg News.

During three days of hearings, the workers and bondholders objected to the plan, saying the “new GM” is just “old GM” minus a slew of liabilities. They contend the company would market nothing new, pedaling the same cars and trucks, made by the same workers managed by the same executives.

Gerber dismissed the bondholders’ assertion that GM should restructure under a Chapter 11 reorganization plan, which would let creditors vote on details of the plan, saying the argument was unrealistic.

“In the event of liquidation, creditors now trying to increase their incremental recoveries would get nothing,” he ruled.

Gerber’s ruling also torpedoed arguments from dealers whose contracts are being terminated, groups of car-accident victims who said they would now be unable to sue GM for their injuries, and others who claimed that the U.S. government had been overbearing in its negotiations to restructure the automaker.
Gerber issued a typical four-day stay of the order approving the sale, which allows for possible appeals.

Steve Jakubowki, a lawyer for product-liability claimants said he would appeal the ruling even though GM recently revised its bankruptcy plan to take on claims from future car-accident victims.

“This issue is too important, too unsettled and too many people’s lives hang in the balance for me not to pursue this appeal through to the end,” Jakubowski told The Wall Street Journal.

Gerber ruled that the sale could be “free and clear of claims,” because his hands were tied by precedents established in the second judicial circuit during the bankruptcy filed by Chrysler LLC.  The second judicial circuit encompasses Gerber’s court.

But in the end, Gerber concluded that the government’s plan was the only one that makes sense.

“GM cannot survive with its continuing losses … and without the governmental funding that will expire in a matter of days,” Gerber wrote.

The ruling marks the second big victory for the Obama administration’s auto task force, which will be charged with supervising the liquidation of the remaining assets.  The task force had previously engineered the sale of Chrysler to a consortium headed by Italy’s Fiat S.p.A. (ADR OTC:FIATY).

Source: GM Bankruptcy Judge Approves Obama Administration’s Exit Plan ]]> http://www.contrarianprofits.com/articles/gm-bankruptcy-judge-approves-obama-administration%e2%80%99s-exit-plan/18801/feed 0 http://www.contrarianprofits.com/articles/g8-finance-chiefs-express-cautious-optimism-about-the-state-of-the-world-economy/17890 http://www.contrarianprofits.com/articles/g8-finance-chiefs-express-cautious-optimism-about-the-state-of-the-world-economy/17890#comments Mon, 15 Jun 2009 14:20:15 +0000 William Patalon III http://www.contrarianprofits.com/?p=17890

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 –…

Source: Investment News Briefs Tuesday, June 9, 2009

If history is our guide, then the rally we’ve seen in U.S. stocks in recent weeks is more than just a periodic run-up in share prices – it’s the initial stage of a prolonged bull market.

The 13-week rally the Dow Jones Industrial Average has experienced off its March lows is the most powerful surge that index has seen since the Great Depression. If we look to history, stocks should continue to rally over the next three months.

“I say this with the utmost confidence and my fingers tightly crossed: This is the start of a new bull run,” Hugh Johnson, chairman of Johnson Illington Advisors, told MarketWatch.com.

The 13-week stretch from March 9 through May 29, which saw the Dow soar 28.3%, has been bested only once – by the 40.8% run-up the Dow enjoyed in the 13 weeks that followed its hitting a bottom in May 1932. The Dow surged an additional 3.1% last week.

Going back to 1900 – in any given quarter (13 weeks) – there have been 18 cases in which the market surged 20% or more, Johnson said.

Looking at the trends, the odds are strong that the Dow will be higher three weeks from now, and that means the odds are strong that the index will be higher three months from now.

“Based on history, who knows where we’re going to be four weeks from now? But in 12 weeks, the odds are we’ll be 3.8% higher,” Johnson said.
That can’t be guaranteed, however, since there has been at least case where stocks had a huge quarter, only to plunge afterward: In May 1929, the Dow zoomed 26% in 13 weeks – only to plunge 38.9% in the 12 weeks that followed.

Market Matters

General Motors Corp. (OTC: GMGMQ) officially filed for Chapter 11 bankruptcy protection and another U.S. icon has been laid to rest (until the “new” GM emerges better than ever).  With another $30 billion in government aid in hand, GM quickly moved forward by financing the acquisition of supplier Delphi Corp. (OTC: DPHIQ) by a buyout firm that will help it emerge from its own bankruptcy; reaching an agreement to sell Saturn to Penske Automotive Group Inc. (NYSE: PAG); and entering into a deal to unload Hummer to China’s Sichuan Tengzhong Heavy Industrial Machinery Corp. (though regulatory “challenges” are sure to hold up that one).  Meanwhile, Chrysler LLC progressed with its own restructuring Fiat SpA (OTC ADR: FIATY), much to the chagrin of about 800 dealers; and Ford Motor Co. (NYSE: F) plans to increase production to take advantage of the misfortunes of its primary competitors.

Shifting to a more “stable” industry, the Federal Deposit Insurance Corp. and FDIC Chairman Sheila Bair seem to be targeting Citigroup Inc. (NYSE: C) for a management shake-up, a move that could give regulators greater control of the one-time financial behemoth.  Smith Barney brokers found their new homes as a significant joint venture between Citi and Morgan Stanley (NYSE: C) was completed.  Citi also attempted to save face from the prior American International Group Inc. (NYSE: AIG) embarrassment by announcing plans to withhold millions in previously promised severance packages to former execs. On the Troubled Asset Relief Program (TARP) front, JPMorgan Chase & Co. (NYSE: JPM), Morgan Stanley, and American ExpressCo. (NYSE: AXP) each revealed plans for stock offerings as they race to become the first major bank to repay “bailout” moneys.  With GM now in bankruptcy and Citi struggling to overcome its own problems, theDow Jones Industrial Average is replacing them with Cisco SystemsInc. (Nasdaq: CSCO) and The Travelers Cos. Inc. (NYSE: TRV)effective June 8.

Energy prices resumed their higher trek, as crude spiked above $70 a barrel for the first time since last October, despite reports that showed demand at its lowest level in 10 years.  Goldman Sachs Group Inc. (NYSE: GS) analysts upwardly revised their projections for future global demand and warned of a “likely return to energy shortages” in 2010.  As gas prices have skyrocketed about 50 cents above last month’s levels, consumers are facing pressures at the pumps that threaten to hinder some of next year’s anticipated growth in the economy.

Economically Speaking

It looks like fixed-income traders are not the only ones concerned about the expanding debt position in this country.  U.S. Federal Reserve Chairman Ben S. Bernanke warned that the government “can’t borrow indefinitely” and politicos need to take crucial steps to reduce a budget deficit that is rapidly approaching $2 trillion.   Bernanke again confirmed his belief that the economy will move beyond recession by late 2009, though he also warned that the weak jobs market (among other conditions) will restrict future expansion.

Speaking of labor, the unemployment data highlighted the week’s releases and the jobless rate surged to 9.4%, a new 25-year high, as 345,000 nonfarm jobs were lost from the economy.  However, even bad news becomes good news these days as economists had predicted a far more substantial loss (525,000 jobs), and the May decline was the smallest since October 2008.  Still, more than six million folks have seen their jobs disappear since the recession began in December 2007 and May represents the seventeenth consecutive month of labor contraction.

In other news, the manufacturing sector appears to be on the verge of recovery (though ever-so-slightly) as the ISM index reported its best showing since September 2008.  On the housing front, construction spending jumped for the second straight month and pending home sales experienced its biggest increase in eight years.  Personal income surprisingly rose in April, a positive sign for future consumer activity.  Though retailers reported weaker-than-expected same-store sales for May, analysts were quick to point out that Wal-Mart Stores Inc. (NYSE: WMT) is no longer participating in these reports, a decision that should skew the numbers lower because the world’s largest retailer accounts for about 10% of total retail sales.  Luxury chains and department stores were among the worst performers last month, while The Gap Inc. (NYSE: GPS) benefited from a nice increase in activity at its Old Navy chain.

U.S. Treasury Secretary Timothy Geithner ventured over to China during the week where he praised it leaders for past stimulus measures (a tad different tact than used by his predecessor).  Recently, China has complained about the ballooning U.S. debt and analysts remain worried about its continued participation in our Treasury auctions.  The domestic powers-that-be have long criticized China about unfair trade practices and currency issues.

While the respective leaders have reservations about each other’s policies, Geithner’s remarks may be seen as smoothing over relations as our combined efforts will be imperative to securing an effective and long-lasting global recovery.

Weekly Economic Calendar

Source: History Hints that Current Stock Market Rally May Be the Leading Edge of a New Bull Market

GM has lost an aggregate $82 billion in the past four years even as it slashed production capacity, nameplate brands – and more than 100,000 U.S. jobs. It needs to cut another 19,000 workers by 2012 to bring its domestic employment down to 72,500 jobs.

GM on Saturday passed a major milestone ahead of a bankruptcy filing planned for today (Monday) as the deadline passed for bondholders to accept an exchange offer brokered by the Obama administration.

As of late Saturday night, GM would not comment on how many investors had tossed in their support for the debt-for-equity swap that would have them surrender $27 billion in corporate bond debt in return for as much as 25% of a restructured GM. However, the company did say this enhanced deal already had the support of investors who held 35% of GM’s bonds. The deadline passed at 5 p.m. Saturday.

Fund managers and analysts told Reuters that that it was possible that this enhanced  bond offer could have attracted a majority of the GM bond investors by the deadline. Under the new offer, bondholders would have a recovery of around 9 cents on the dollar, up from an estimate of zero to 5 cents under the previous offer. GM bondholders last week rejected a proposal that would have given them a 10% stake in a reorganized GM.

“The warrants and the improved capital structure make for an improved recovery for bondholders,” Brian Johnson, an analyst for Barclays Capital PLC (NYSE ADR: BCS), told the news service. “In terms of the bankruptcy process, we expect the likely bondholder assent to smooth the process.”

The United Auto Workers union (UAW) on Friday cleared the way to the bankruptcy filing when it overwhelmingly approved a new labor pact that lets GM slash costs.

GM has struggled in recent years to compete, hurt by its truck and SUV-dominated vehicle line-up and a deep plunge in U.S. vehicle demand.

Market Matters

In the holiday-shortened work week, investors searched for  the tonic needed to escape the “excessive” volatility that still exists in the markets.  How did that cure-all work out?  In three consecutive sessions, the Dow Jones Industrial Average jumped 193, plummeted 173, and finally rebounded 104 points.  Meanwhile, the yield on the 10-year U.S. Treasury, the perceived safe-haven for risk-averse investors, soared by 30 basis points during the week and its declining value prompted many to rethink their “flight-to-quality” strategies.  After the recent talks that Standard & Poor’s Inc. may cut its rating on UK debt, investors began speculating that the mass domestic borrowings (to rescue virtually every industry and near-bankrupt company) will take its toll on US debt ratings as well.  While Moody’s Investors Service Inc. (NYSE: MCO) offered a bit of confidence by proclaiming the Aaa rating remains “stable,” it did leave the door open for a future downgrade. Fortunately, the week’s treasury auctions were generally well-received, though investors remain cautious that demand may subside in the future as the deficit balloons.  Stocks followed bonds for a change as traders unloaded equities on weakness in fixed income, only to buy again after the favorable auctions (among other news).  And the volatility continued.

With its bankruptcy filing, GM is merely taking a step to following in Chrysler LLC’s footsteps. Chrysler hopes to move beyond its own bankruptcy as a judge considers its restructuring via the Fiat SpA (ADR OTC: FIATY) deal.

A Federal Deposit Insurance Corp. (FDIC) report showed that banks earned $7.6 billion in profits in the first quarter, rebounding from the first quarterly loss for the industry in 18 years.  Before executives could award themselves (excessive) bonuses, the report added that the number of institutions considered “problem” climbed from 252 to 302 and said that delinquencies rose across most loan types.

In other corporate news, Microsoft Corp. (Nasdaq: MSFT) is set to launch “Bing,” its upgraded search engine on June 3 and Yahoo! Inc. (Nasdaq: YHOO) remains open to a partnership (after last year’s failed buyout) if offered a “boatload of money.”  Costco Corp.’s (Nasdaq: COST) earnings fell by more than analysts expected; Dell Inc. (Nasdaq: DELL) continued to struggle from a decrease in IT spending; Time Warner Inc. (NYSE: TWX) plans to spin-off AOL by year-end.  The Organization of the Petroleum Exporting Countries (OPEC) met and held production levels steady, though crude prices surged above $66 a barrel for the first time in six months and prices now stand almost twice as high as its mid-February level.

Economically Speaking

A recent survey by the National Association for Business Economics showed that 93% of the respondents believe the recession will end in 2009, with almost 75% of them seeing a third-quarter recovery. Still, most feel the rebound will be slow to develop as unemployment continues to climb (the survey says it will average 9.1% this year).   The results also predict gross domestic product (GDP) to contract by 1.8% in the second quarter, before turning positive (though ever-so-slightly) over the latter six months of the year.  By comparison, the first quarter GDP revision was reported as down 5.7%, a modest rebound from the 6.1% initially released, though weaker than many prior forecasts and still reflective of some pretty dire domestic economic conditions.

Since the consumer accounts for two-thirds of the activity within the economy, analysts point to some favorable sentiment data as further proof that the recession is nearing an end.  In May, the Conference Board said that consumer confidence experienced its best showing in eight months, while the Reuters/U of Michigan Index also posted stronger results.  Renewed activities should be welcome news to retailers and manufacturers alike, some of whom will be counted on to resume hiring over the next few months as they reap some rewards to their bottom lines.

April housing data also highlighted the week’s economic releases as both new home (+0.3%) and existing home sales (+2.9%) posted gains.

However, the inventory of unsold properties continued to climb and the median sales prices fell from already weak levels.  Delinquencies remain on the rise as 12% of all homeowners have fallen behind on their mortgages and foreclosures rates on even the prime borrowers (with decent credit) have surged in recent times.  Even though housing still has a way to go before the “worst of times” officially will be considered over, some early signs of a rebound in activity may be emerging.

Weekly Economic Calendar

Source: Bankrutpcy Will Let General Motors Move Forward

• Crude oil yesterday (Wednesday) rose above $62 a barrel, a six-month high, after the U.S. government released a report that showed inventories fell below forecasts. “The big drops in both crude and gasoline are very bullish,” Nauman Barakat, senior vice president of energy at Macquarie Futures USA Inc., told Bloomberg. “If people were surprised by how fast crude oil moved from $50 to $60, they will be really shocked by how quickly the market will hit $70.”

• The courtship of General Motors Corp.’s (NYSE: GM) Opel unit is down to three potential suitors – Italy’s Fiat SpA (OTC ADR: FIATY), Canadian-Austrian car parts group Magna International Inc. (NYSE: MGA) and investment firm RHJ International, Reuters reported. GM has a June 1 deadline to restructure and raise capital if it wants to avoid a forced bankruptcy.

• Brazil is on the mend from its biggest economic drought and may grow as much as 4% in the second half of the year, Itau Unibanco Banco Multiplo SA’s (NYSE ADR: ITU) Chief Executive Officer Roberto Setubal said at a conference in New York. “Our economy is showing very strong signs of recovery,” Setubal said, Bloomberg reported.  “The pace of growth is already there, and I believe we will see a very strong second semester in Brazil.”

• Target Corp. (NYSE: TGT) and BJ’s Wholesale Club, Inc. (NYSE: BJ) reported better-than-expected earnings for the first quarter. Target did so by reining in expenses and inventory. BJ’s – which raised its first-quarter forecast earlier this year – cited higher-than-expected merchandise sales and margins, Reuters reported.

• President Barack Obama is expected to quickly sign a bill imposing sweeping new limits on the credit card industry passed by Congress yesterday (Wednesday), Reuters reported.  The House of Representatives voted 361-64 to approve the bill as adopted on Tuesday by the Senate, in a major win for the president and congressional Democrats.  The so-called “Consumer’s Bill of Rights” would strictly limit credit card issuers’ ability to raise interest rates on cardholders’ existing balances and to charge certain fees.

• California voters yesterday (Wednesday) struck down five measures backed by Republican Governor Arnold Schwarzenegger and the Democrat- led legislature that were intended to shore up the state’s finances. With the governor expecting California to have $21 billion less than it needs over the next 13 months, the most-populous U.S. state is on the verge of running out of cash for the second time this year after the ballot measure defeat added $6 billion to the budget deficit, Bloomberg reported.

• Wall Street securities brokers are not expected to rehire many of the workers let go during the global financial meltdown, a New York City fiscal monitor said in a gloomy report released yesterday (Wednesday). The Wall Street firms will replace only a small number of the lost jobs by 2013 even if the industry returns to profitability next year, the city’s Independent Budget Office said in the report, according to Reuters.

• A group of Indiana pension funds filed court papers late yesterday (Wednesday) objecting to a plan to auction Chrysler LLC’s assets and said a U.S. District Court judge should rule on the legality of the sale, Bloomberg reported.  The pension funds, which hold first lien debt of the automaker, asked U.S. Bankruptcy Judge Arthur Gonzalez in New York to block the sale, claiming the plan is illegal and infringes their rights.  The funds are also asked for appointment of a trustee to run Chrysler.

Source: Investment News Briefs  Thursday, May 21, 2009

• Agricultural Bank of China raised 50 billion yuan ($7.3 billion) in the nation’s biggest corporate bond sale. The goal of the bond sale was to raise capital and help set up an initial public offering, Bloomberg reported.

• A handful of banks have applied to repay the billions they borrowed from the U.S. government’s Troubled Asset Relief Program (TARP). Sources told Reuters that Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) are two of the banks eager to begin repaying the government.

• Fiat SpA (OTC ADR: FIATY) Chief Executive Sergio Marchionne said in a Bloomberg interview that an offer he plans to make for General Motors Corp.’s (NYSE: GM) Opel unit will include assets that are “better than cash.” Today (Wednesda) is the deadline the German government set for Opel bids.

• World Bank President Robert Zoellick said that a global economic recovery could begin at the end of this year, Reuters reported. “I’m neither an optimist nor a pessimist, I am uncertain, a realist. Clearly the fall has been interrupted. I think there’s a good chance that while we face declines, they will be smaller in size. The majority expect a recovery at the end of this year, at the beginning of next year,” Zoellick said on Spanish television.

• The Bank for International Settlements said the derivatives market declined for the first time in the second half of 2008 as the global financial crisis curbed trading, Bloomberg reported. The Switzerland-based bank said yesterday (Tuesday) the amount of outstanding contracts linked to bonds, currencies, commodities, stocks and interest rates dropped 13.4% to $592 trillion, the first decline in 10 years of compiling the data. The amount of credit-default swaps insuring investors against losses on bonds and loans fell 27% to cover $41.9 trillion of debt.

• General Electric Co (NYSE: GE) Chief Executive Officer Jeff Immelt said yesterday (Tuesday) has already borrowed all the money it planned to raise on debt markets for 2009 and may reach funding goals for 2010 before the year is out.  “From a funding standpoint, 2009 is already done,” the head of the largest U.S. conglomerate told an investor conference in Florida, Reuters reported. “We’re going to pre-fund a lot of 2010 in 2009, maybe the whole thing.”

• The United Auto Workers and General Motors Corp (NYSE: GM) still have a “long way to go” to reach an agreement that local labor leaders could vote on, UAW President Ron Gettelfinger said after a union-sponsored forum at the U.S. Capitol, according to Bloomberg. GM’s decision to shut 16 U.S. plants and boost the number of cars it imports to 7% of North American sales has emerged as a sticking point in talks on a new UAW contract.  GM has a June 1 deadline to complete a restructuring plan or enter bankruptcy.

• Home Depot Inc. (NYSE: HD), the world’s largest home improvement chain reported higher-than-expected quarterly earnings as massive cost cuts offset weak sales. But investors found the results disappointing in comparison with those of smaller rival Lowe’s Cos Inc. (NYSE: LOW) and shares fell.  On Monday, Lowe’s reported better-than-expected quarterly earnings.  Home Depot affirmed its fiscal-year outlook, Reuters reported.

Investment News Briefs Wednesday, May 20, 2009

I’ve repeated that warning many times since. Now, it appears that the idea is finally entering mainstream thought. China may well be Detroit’s lifeline. From some – chiefly those who don’t understand that Detroit has largely failed to make a passing grade in an increasingly global economy – my warnings have attracted a lot of criticism.

That’s unfortunate, because by adopting such a defensive posture, these critics have missed the real point I was making: Chinese companies would initially have no interest in taking over Detroit, but over time would likely demonstrate a deep interest in acquiring key parts of the U.S. auto sector “value chain” that could support the expansionist efforts of their domestically produced brands. Distribution channels would be very attractive. And so would auto-parts producers, since they are a key element of such post-purchase “aftercare” initiatives as maintenance and repair.

The only real question, I noted at the time, was how big the lag would be between China’s acquisition of the U.S. auto-parts companies and the international expansion of its own brands. Absent the current financial crisis, I estimated the lag would have been five to 10 years. Now, however, that lag time has dropped to as little as five years. The reason: The financial crisis has eviscerated the market values of so many Western companies, creating bargain-basement opportunities for cash-rich Chinese companies that are so alluring that they were unfathomable a decade ago. Events are playing out just as I predicted.

Enter the (Red) Dragon

Back in November, as GM and Chrysler tottered on the bring of complete collapse – and after Japan’s Toyota Motor Co. (NYSE ADR: TM) had reportedly considered, and ruled out, the purchase of one, or both, of these carmakers – China’s SAIC Motor Co. Ltd. and Dongfeng Automobile Co. Ltd. – were reportedly working on a play to buy the two embattled U.S. firms, Huliq News and the 21st Century Business Herald both reported. Said one China auto-industry executive (who requested anonymity): “We really want to acquire some of our global counterparts’ core technologies now, because prices are so low.”

His sentiment was echoed by Xu Liuping, chairman of Chongqing Changan Automobile Co. Ltd., Mainland China’s fourth-largest automaker, who recently said that “the longer the [global financial] crisis lasts, the bigger the chance of [a] failure or [of] a scale-down of some American and European carmakers.” For the most part, Chinese companies are still learning to do business overseas. They are not yet comfortable leading the charge in overseas markets, which is why so much of their overseas expansion efforts and shopping sprees remain largely confined to natural-resource sectors and, in the auto sector, auto-parts players.

Top-tier managers of China-based companies recognize that the acquisition of overseas assets can strengthen their company’s domestic competitiveness. And with a market as big as Mainland China, that’s logical. But what might not occur to Western business leaders is that Chinese executives don’t yet view themselves has having global-branding expertise, particularly when it comes to the so-called “design elements.”
For instance, as my friend, Kishore K. Sakhrani, director of Hong Kong-based ICS Trust (Asia) Ltd., noted during a presentation to our investment group: “In the past, when a Westerner wanted a product in sea green, you often got something that was lime green. But many Chinese companies are now establishing Western design shops and closely consult [with] Western marketing experts, and the results will be obvious.” Indeed, in a sentiment that closely echoes my own philosophy, Sakhrani said that “there isn’t an industry on the planet that the Chinese won’t dominate – or at least materially affect – in the next 20 years.” My experience suggests that the biggest changes and the most dramatic expansion will occur when Chinese executives become comfortable in assuming leadership roles that push them far beyond the manufacturing stage of the value chain and into product development. And while 10 years ago I thought that process might take another two decades, the financial crisis has dramatically accelerated the timeline. And we’re seeing that now – particularly with China’s automaking industry.

China’s Shopping List

Just this March, Geely Automobile Holdings Ltd. (PINK: GELYF) bought Australia-based Drivetrain System International – a supplier for Ford, Chrysler and Ssangyong Motor Co. Ltd. – for $42.55 million (HK$329.79 million). More recently, the company has denied rumors that it’s ready to purchase Ford’s Volvo passenger car unit for between $1.3 billion and $2 billion, which would represent a catastrophic loss for beleaguered Ford, which paid $6.45 billion to buy Volvo in 1999. Three of the most prominent Chinese car makers – Geely, Dongfeng and Chongqing – are reportedly in the hunt for GM’s Saab and Opel units in deals that could be worth as much as $200 million. Clearly, the Fiat SpA (OTC ADR: FIATY) transaction complicates things a bit, but there’s still plenty of room for surprises. Said another Chinese executive, who also chose to speak anonymously: “We view [buying parts-makers, for now] as a viable alternative to acquiring good brands that have suffered from terrible management. We don’t know enough – yet. We have to build our competency in the meantime.” And you can bet that they’ll do just that – build a world-class “competency” that just adds more muscle to the growing China business juggernaut. My contacts tell me that transmission systems, hybrid technologies and power-gearing systems are at the top of the list in the immediate future. Actual manufacturing plants and assembly lines are running a distant second until Beijing gets comfortable with the suitability of overseas manufacturing as part of China’s business value chain. Many Westerners who recall the Japanese acquisition spree of the 1980s will not react favorably to this. But it’s not a one-way Street. As troubled as Detroit is, it’s clear that their representatives have been working quietly in China for months now, which is entirely logical. Chinese companies remain some of the healthiest on the planet in financial terms, and most continue to demonstrate strong domestic growth despite the softness of the overall global economy. It also doesn’t hurt that the Chinese government is backing many of these initiatives. China has a world record $2 trillion in foreign reserves, which gives it a lot of financial credibility with any deals that country’s companies may wish to pursue. In an interview with the South China Morning Post, Geely Automobile Holdings Executive Director Lawrence Ang said that “we’re constantly approached by bankers about the possibility of mergers and acquisitions [with international auto makers].”

A Long List of Deals

The auto sector has already been bustling with deals. Here are just a few that have transpired in recent years:

• 2004 – SAIC Motor Co. spends $500 million to buy an initial 48.92% stake in South Korea’s Ssangyong Motor Co., and then boosts its stake to a 51.33%.
• 2005 – SAIC purchases the design rights to the super-looking MG Rover 25 and 75 models for $99.97 million (HK$775.33 million) from kaput British carmaker MG Rover.
• 2005 – Competitor Nanjing Automobile Group buys the rest of MG Rover’s assets for $87 million.
• 2007 – Working together, SAIC, Chery Automobile Co. Ltd., and First Automotive Group Corp. (FAW) band together in preliminary buy out talks with Chrysler. No deal.
• 2009 – January – SAIC learns the hard way not to buy brands when Ssangyong goes belly up and files for bankruptcy.
• 2009 – February – Beijing says it will slow down global acquisitions and concentrate on competencies that boost local strength.
• 2009 – March – Geely purchases Australian parts-maker Drivetrain System International for $42.55 million (HK$329.79 million).
• 2009 – April – Chongqing Changan Automobile Co., Geely Automobile Holdings, Dongfeng and Guangzhou Automobile Industry Group Co., Ltd. (GAIG) announce their desire to purchase global assets from international brands in trouble. Geely’s chairman also notes at the much publicized Auto Shanghai 2009 auto show that he sees Geely being a major global brand by 2015.

At the end of the day, many Americans will fear the acceleration in China’s pace of global acquisitions. But there are two key reasons that I’m glad to see this happening. First, history shows that the markets continually weed out the financially weak in a form of financial Darwinism that is as inevitable as the dawn of a new day. And with the financial crisis serving as an extinction-level event, the imminent arrival of Chinese companies on the global scene is an opportunity. It’s also part of the solution however reluctantly people might want to view that. And second, while there will be short-term pain and probably more than a few dented egos in Detroit, I will be glad to see the era of greedy, incompetent and overcompensated executives who summarily fleeced the last of America’s once proud automotive industrial complex for all its worth is coming to an end. It will be nice to see the industry return to doing what it does best – making great cars and great parts even if it ultimately takes on a form that we cannot imagine today

If that happens, we may look back and see that China was, in fact, Detroit’s lifeline.

[Editor's Note: Money MorningInvestment Director Keith Fitz-Gerald has just completed his investing tour of China. His conclusion: Every investor has to have a China strategy. As this essay shows, the global financial crisis has re-written the rules for global investing. It’s also generating a whole host of new profit plays, having created what Fitz-Gerald likes to call "The Golden Age of Wealth Creation." Investors who ignore this "New Reality" will get left behind. But those with the courage and conviction to press ahead could well find this to be the greatest profit opportunity of their lifetime. China’s just one such opportunity. To find out about the others, click here. ]

But there’s now another problem looming – one that could ultimately weigh down the global financial system.

The problem: Europe’s banks.

As economies slow in other parts of the world, rising joblessness and plunging housing prices and escalating loan losses are putting banks under pressure. That’s especially true in Europe, where consumers and companies are continuing to run into trouble.

Royal Bank of Scotland PLC (NYSE ADR: RBS), now 70% state-owned, fell to a loss in the first quarter and wrote down $3.17 billion in risky assets after its bad debts quadrupled to $4.37 billion.

Bank executives “[expect] a slowdown in financial-market activity compared with the very buoyant conditions seen in Q1,” Chief Executive Officer Stephen Hester told Reuters.

In Germany, Commerzbank AG (OTC ADR: CRZBY) had to take a $1.61 billion charge from its investment bank and a $72.38 million charge from commercial real estate initiatives, resulting in a $1.2 billion loss for the quarter.

In late December, the Institute of International Finance released its global economic outlook for 2009, and estimated that banks around the world had collectively lost nearly $1 trillion – $678 billion from U.S. banks and $300 billion from their European counterparts.

That was in December. We know it got worse – a lot worse – for U.S. banks after that point. Thanks to a mix that included lots of government bailout and an injection of new capital from investors, U.S. banks have experienced an improvement in their outlook.

Indeed, U.S. Federal Researve Chairman Ben S. Bernanke stated that the banks tested are all solvent and the results should provide “considerable comfort about the health of the banking system.”

But in the five months since that Institute of International Finance report was issued, it’s  likely that European banks have experienced a major decline in their fortunes.

Last week’s release of the bank stress tests results removed significant uncertainty about the U.S. banks, since it created a blueprint of what the troubled institutions needed to do to stabilize their finances. Morgan Stanley (NYSE: MS) and Wells Fargo & Co. (NYSE: WFC) have announced plans to raise an aggregate $15 billion in capital. Bank of America Corp. (NYSE: BAC) plans to sell assets and issue more common stock after being told by the federal government that it must raise $33.9 billion to adequately guard against “more adverse” economic conditions.

Bank of America was one of 10 banks told by the government to raise more capital following the so-called stress test. The government concluded that BofA faces a potential $136.6 billion in losses from troubled loans and investments in 2009 and 2010. The bank’s $34 billion capital shortfall was more than twice that of Wells Fargo, which had the second greatest capital need.
Are we destined to see this all play out now in Europe?

Market Matters

Shifting back to autos, General Motors Corp. (NYSE: GM) lost $6 billion in the first quarter and is shopping Saturn to Renault SA of France as it moves closer to its restructuring deadline (and potential bankruptcy). China’s Geely Automobile Holdings Ltd. (PINK: GELYF) has interest in GM’s Saab unit, and Fiat SpA (OTC ADR: FIATY) may look to complement its Chrysler LLC line with the German Opel (also late of GM).  Meanwhile, Ford Motor Co. (NYSE: F) claims to be on track with its restructuring plan and still believes it can manage just fine without any government assistance.  On the earnings’ front, The Walt Disney Co. (NYSE: DIS) and Kraft Foods Inc. (NYSE: KFT) bested estimates, while Cisco offered some mixed results as its better than expected numbers actually prompted some profit-taking among techs.

A poorly received 30-year Treasury auction sent bond prices tumbling as fixed income investors focused on the massive programs the government will need to finance over the next few years.  Oil prices surged above $58 a barrel for the first time in six months as traders seemingly failed to consider rising inventory levels and instead bought on signs (feeble as they are) of an economic recovery that would lead to enhanced energy demand.

The Standard & Poor’s 500 Index pushed beyond the crucial 900 level and ended the week in positive territory for the year.  Techs struggled late as investors realized any economic rebound would not translate into capital expenditures overnight.  Still, the Nasdaq Composite Index has outperformed the other indexes on a year-to-date basis.  With stress tests out of the way, where will the next leaks come from?

Economically Speaking

U.S. retailers released same-store sales data for April and the results were actually quite promising.  As usual, Wal-Mart Stores Inc. (NYSE: WMT) led the charge with a 5% increase in activity, while Children’s Place Retail Stores Inc. (Nasdaq: PLCE), Stage Stores Inc. (NYSE: SSI), Gap Inc. (NYSE: GPS), and The TJX Cos. Inc. (NYSE: TJX) were among those stores that posted better-than-expected results and beat analysts’ expectations.  A late-Easter holiday (April instead of March) helped many retailers as consumers waited until the last minute (as has become the norm) for their related holiday shopping.

On the global front, the European Central Bank dropped its key lending rate by 25 bps to 1%, and initiated other monetary moves to stabilize its (16-country) economy.  Likewise, the Bank of England announced a plan to buy up government and corporate bonds, thus, increasing its money supply.

Speaking of the labor market, the U.S. unemployment rate climbed in April to 8.9%; however, only 539,000 jobs were lost from the economy.  The contraction represented the smallest in six months and was below most analysts’ expectations.  Still, since December 2007, about 5.7 million domestic jobs have disappeared and businesses continue to be slow to hire until they see additional signs of greater stability in the economy.

Construction spending climbed in March after five consecutive monthly declines, though the gains were attributed to non-residential activity and the housing sector remains sluggish at best.  In more promising news, the National Association of Realtors reported a 3.2% increase in pending homes sales, the second straight monthly gain.  Because the release is considered a predictive indicator, analysts took it as a favorable sign that sales activity may pick up in the months ahead.

Weekly Economic Calendar

Source: Are Europe’s Banks Next to be Stressed?