• China will increase its annual oil refining volume by 18% over the next two years to meet expected long-term demand. China’s State Council also said that it would boost stockpiles and encourage petro companies to merge operations, Bloomberg reported.

• Lowe’s Cos. Inc. (NYSE: LOW) reported an analyst-beating quarterly profit and raised its full-year forecast. The No. 2 home improvement retailer cited improving consumer confidence and signs the housing market may be bottoming, Reuters reported.

• Toshiba Corp. has begun a $3 billion stock sale to raise capital after posting a record loss last year. Japan’s biggest semiconductor maker plans to offer 870 million new shares priced at a 3% to 5% discount to the stock’s closing price the day the sale ends, which may be as early as next week, Bloomberg reported.

• Seeking to pay back government loans, American International Group Ltd. (NYSE: AIG) is speeding up plans to list its Asian subsidiary, American International Assurance Co. Ltd., through an initial public offering, Reuters reported. AIG hopes the IPO will raise more than $4 billion, a small number considering the insurer has racked up a $180 billion debt to the U.S. government.

• President Barack Obama will announce today (Tuesday) a federal standard for greenhouse-gas emissions from vehicles, the first nationwide limit on pollution scientists say is triggering global climate change.  The emissions limit will be coordinated with new national fuel economy standards for cars and trucks, Bloomberg reported, citing people familiar with the matter.

• U.S. homebuilders confidence rose in May to the highest level since September, providing further evidence that the housing slump that started in 2006 may be closer to a floor. The National Association of Home Builders/Wells Fargo index of builder confidence rose to 16 from 14 the prior month, the Washington-based agency said yesterday (Monday), capping the first back-to-back gain since February 2008. A reading below 50 means most respondents view conditions as poor, Bloomberg reported.

• State Street Corp (NYSE: STT), the Boston-based custodial bank and asset manager, said it plans to sell $1.5 billion of stock and will also sell notes to help repay government bailout funds. The bank said it took a $3.7 billion charge to move some assets onto its balance sheet at a loss, and will said it will use proceeds from the securities sales to help repay a $2 billion infusion from the Troubled Asset Relief Program, Reuters reported.

• Oil prices rose sharply yesterday (Monday), as violence in Africa’s top crude exporter Nigeria and a fire at a key U.S. East Coast refinery revived concern about supplies.  U.S. crude for June jumped $1.98 to $58.32, while London Brent for July rose $2.51 to $58.49.  The gains came after Nigerian militants said they had blown up two oil and gas pipelines in the Niger Delta and would blockade waterways in the region in an effort to disrupt energy exports from the Organization of Petroleum Exporting Countries (OPEC) member, Reuters reported.

• An earnings surprise and a buy recommendation on a major U.S. bank sent U.S stocks skyward yesterday (Monday). The Dow Jones Industrial Average had its best day since April 9, zooming 235.44 points, or 2.85%, to close at 8,504.08 – as 29 of the 30 stocks that make up that closely watched blue-chip index rose. The Standard & Poor’s 500 Index recouped  more than half of last week’s losses, advancing 26.83 points, or 3%, to close at 909.71. Home-improvement retailer The Lowe’s Cos. (NYSE: LOW) topped earnings estimates – sending its shares up more than 8% — while one analyst recommended buying shares of Bank of America Corp. (NYSE: BAC), and set a $15 price target. BofA’s shares closed yesterday at $11.72, up 9.84% each. The Nasdaq Composite Index surged 52.22 points, or 3.1%, to end the day at 1,732.36.

Investment News Briefs Tuesday, May 19, 2009

Now facing bankruptcy, GM has an opportunity to shift its operations to China, its fastest growing and most profitable market. The company is already attempting to move its manufacturing operations to the Asian powerhouse, and that has given rise to speculation that it will move its headquarters as well.

Of course, if GM – which has already received $15.4 in government loans – were to pick up stakes, the political fallout would be epic. What could be more “un-American” than a 101 year-old American automotive company that’s being propped up by taxpayer dollars moving to a communist nation?

But the reality is that American consumers aren’t buying GM vehicles and Chinese consumers are. That means if the company is going to remain viable, China, not America, is GM’s land of opportunity.

GM CEO: Bankruptcy ‘Probable’

GM still has two weeks before the government imposed deadline to demonstrate sustainable viability expires on June 1. But even GM Chief Executive Officer Fritz Henderson has admitted that bankruptcy is “probable” at this point. And in the minds of analysts, it’s almost certain.

“[Bankruptcy] is looking like a real high probability,” Brett D. Hoselton, an analyst with KeyBanc Captial Markets, told the New York Times. “Chrysler is the best indicator at this point of where we’re heading with GM.”

GM reported a first-quarter net loss of $5.98 billion, compared to a loss of $3.3 billion a year earlier. Revenue fell to $22.4 billion, a 47% drop from 2008. The company burned through $10.2 billion in cash in just three months. GM has now lost $88 billion since 2004.

Last year, GM lost its crown as the world’s largest carmaker to Japan’s Toyota Motor Corp. (NYSE ADR: TM). And a company that 40 years ago produced one out of every two vehicles sold in the United States, has seen its U.S. market share slide to just 19%.

On Friday, GM notified 1,100 of its 6,000 U.S. dealerships that it is terminating their contracts, and it plans to cut its network down to 3,600 dealers by next year.

“This company is sick,” Charles Ballard, an economics professor at Michigan State University told Michigan NBC television affiliate WILX 10, “they’re likely going to file for bankruptcy.”

Investors are equally pessimistic. GM stock has plunged 70% since the Obama administration announced it would give the company 60 days to restructure outside of bankruptcy court. GM has lost 94% of its equity value in the past year.

Is China the Right Cure for GM?

So if GM is sick, what then is the medicine? Many analysts believe it’s a healthy dose of China.

While its U.S. sales have plunged, sales in China continue to grow exponentially. In fact, GM sold more vehicles in Asia in the first quarter than it did in the United States. Only 26% of GM’s first-quarter sales came from the U.S., a 36% decline from a year ago.

And while global car sales continue to plunge, auto sales in China are expected to grow between 8% and 9% this year. China actually overtook the United States as the world’s largest auto market for the first time in history in the first quarter.

And unlike the United States, there is actually a strong demand for GM model cars. In China, where the company is neck and neck with Volkswagen for the market-share lead, GM set a monthly sales record of 151,084 vehicles in April. That’s a 50% increase from its April 2008 results.

“Within 10 years, this will be our largest market in the world,” Kevin Wale, president of GM China, told TIME magazine.

GM has been so successful in China it is reportedly negotiating plans with U.S. lawmakers that will send the carmaker’s production overseas, the U.K.’s Telegraph reported.

GM will start shipping cars to the United States from Shanghai in 2011. The company plans to export slightly more than 17,000 vehicles in the first year before ramping up to 50,000 by 2014.

Backlash from GM’s China Plan

While many carmakers import components from China to save on labor costs, GM would be the first company to import whole cars from the Mainland.

Of course the plan doesn’t sit well with unions.

“GM should not be taking taxpayers’ money simply to finance the outsourcing of jobs to other countries,” Alan Reuther, a Washington lobbyist for the United Auto Workers (UAW) union wrote in a letter to U.S. lawmakers.

Indeed, the UAW and others argue that the whole point of bailing out the U.S. auto industry was to save American jobs and help prop up the sagging economy.

Two weeks ago, GM CEO Henderson said his company would cut an additional 21,000 factory jobs, close 13 plants, eliminate about 2,600 dealerships and close its Pontiac division. GM aims to shed 23,000 jobs – 38% of its workforce – by 2011.

But the company expects to open a new factory in mainland China within the next few years and continues to build upon its 21,000 Chinese employees.

“I think that’s wrong,” Keith Pokrefky, a Michigan autoworker, told NBC’s WILX. “I think that’s wrong for America. I think it’s wrong for American jobs. It’s un-American.”

On the other hand, GM argues that it is only logical to produce cars where they’re going to be sold.

“GM’s philosophy has always been to build where we sell, and we continue to believe that is the best strategy for long-term success, both from a product development and business planning standpoint,” GM’s China office said in a written statement to the Associated Press.

Plus, GM already imports cars from other countries, just not China. The Chevrolet Aveo and Pontiac G3 come from South Korea. The Pontiac G8 comes from Australia. The Saturn Astra comes from Belgium, and the Vue from Mexico.

Harvard Business School professor Clayton Christenson – who was also a consultant to Richard Wagoner, the architect of GM’s China strategy – told TIME that inexpensive, Chinese-made Chevys, exported to the United States could be the “disruptive” force the company needs to resuscitate North American sales.

“It’s exactly the right thing for them to do,” Christenson said.

While China keeps its data on labor costs under lock and key, analysts estimate that wages and benefit payments per factory worker are less than a tenth of what they are in North America, TIME reported.

MSU professor Charles Ballard says that while the notion of outsourcing more jobs to China may not be pleasing, it is also in GM’s best interest.

“I think everyone needs to keep in mind that if this company fails, that’s the worst case scenario,” Ballard said. “It would be really good for the people of Michigan and for Lansing for GM to become a viable company. Right now, it’s not.”

And perhaps that’s the root of the issue. There was a time when what was good for GM was good for America. But somewhere along the line, the interests of the two diverged. Now, they’re too far entangled for there to be an amicable solution to this problem, and the Obama administration is left with a political powder keg.

The government stepped in to fire former GM chief Richard Wagoner, but it doesn’t want to be too heavy-handed in its treatment of the private sector. It has already spent months sidestepping questions about whether or not it would nationalize U.S. banks.

“We didn’t think in America that the President could fire the CEO of a private company,” one Chinese executive told TIME. “For us Chinese it was very confusing.”

But if the Obama administration lets GM move ahead with its plans, it must confront the unpleasant reality that it is subsidizing the outsourcing of U.S. jobs with taxpayer money.

“Production location is a corporate decision, but when it’s on the taxpayer dime, there are different sensitivities, so the notion of billions for a rescue package and offshore production, I think, could be politically combustible,” Harley Shaiken, a professor at the University of California at Berkley who specializes in labor issues, told the AP.

Source: General Motors Leaves U.S. Workers by the Wayside as it Accelerates Operations in China

Zombie companies like GM stink up the marketplace like a dead skunk on a Georgia country road. Bury the corpse we say. Otherwise the same corrupt, failed policies continue. Legally obligated expenses like inflated bonuses and cushy retirement packages, big brand advertising campaigns (such as the company name on a sports stadiums), union costs, health insurance, and over-capacity of office space, all must be paid… and the bill is being handed to the US taxpayer!

Then there are the lost opportunities for innovators and entrepreneurs who could pick up the pieces and create real value. Instead, the birth of new technologies and products is put on hold.

And consider the long term effects of retaliatory bailout policies from foreign governments. They are compelled to prop-up their national industries to stay competitive with free-money-financing from the US government. That’s the way it is with government intervention in the marketplace. The effects are so complicated and far-reaching the average bureaucrat couldn’t possibly fathom it.

GM has spent around $1 million a month on lobbying Washington over the last few years. This includes the first quarter 2009. In return, the company got $13.4 billion in bailout money. That’s a helluva of ROI. But it stinks to high heaven.

Under the restructuring plan GM detailed last month, government loans would convert to stock in the automaker, making Uncle Sam the majority owner. GM also owes the United Auto Workers Union $10 billion for a trust fund for retiree healthcare. If that were converted to stock the union would get a 39 percent stake in the restructured company.

With these two business geniuses as the new owners, the UAW and the US government, we’re sure the new restructured GM will be a great success… a big shining tribute to bailout culture.

Marchionne said he’s aiming for Chrysler’s U.S. and Canada labor costs to match those of plants in Japan and Germany. Otherwise, he is prepared to scrap the deal, a move that would likely send Chrysler into bankruptcy court.

“Absolutely we are prepared to walk. There is no doubt in my mind,” he in an interview. “We cannot commit to this organization unless we see light at the end of the tunnel.”

Marchionne gave 50-50 odds that a merger will be formed, and spoke strongly about the reality Chrysler faces if its unions – the Canadian Auto Workers (CAW) and United Auto Workers (UAW) – don’t “change the framework of the discussion.”

“We are not anti-organized labor. No one wants to remove the UAW or the CAW from the table. But it will happen if a bankruptcy process drags on,” he said, adding that the negotiations with the CAW are especially lacking progress.

Privately owned Chrysler has been survived only by taking on $4 billion in emergency government loans, and the Obama administration has given the car company until the end of April to produce a viable business model. If Chrysler succeeds, the administration will provide another $6 billion loan.

“What we’re asking for is difficult,” President Obama said. “It will require hard choices by companies. It will require unions and workers who have already made extraordinarily painful concessions to do more. It’ll require creditors to recognize that they can’t hold out for the prospect of endless government bailouts.”

The first stipulation for Chrysler is that the company alters its partnership with Fiat, which agreed in January to take a 35% stake in Chrysler.

Under new terms, Fiat would take a 20% stake in Chrysler with the White House’s backing. And as Chrysler reaches certain milestones, Fiat would gradually increase its ownership to 49% in 5% increments. The Fiat stake would only rise above 49% after Chrysler repaid all money owed to the U.S. Treasury.

Chrysler is currently 80% owned by Cerberus Capital Management LP and 20% owned by Daimler AG of Germany, owner of Mercedes-Benz.

Chrysler creditors are also planning to make a counteroffer to the U.S. Treasury this week – possibly asking for equity in a firm combining Chrysler and Fiat S.p.A. (ADR: FIATY), The Wall Street Journal reported.

The lenders, which include JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), were in talks with the government to reduce Chrysler’s debt by swapping some of it out for equity, new debt or a lesser amount in cash.

Source: Fiat CEO Gives 50% Chance of Chrysler Merger, Demands More Labor Cost Cuts

But some analysts questioned whether the company can stay off the government dole and stay in business after the worst annual performance in its 105-year history.

The company said yesterday (Thursday) it burned $5.5 billion in cash in the fourth quarter and plans to exercise a $10.1 billion secured credit line. Chief Financial Officer Lewis Booth said the company is tapping the credit line only to make sure it’s available and not to fund its operations.

The company has managed to forgo the federal loans doled out to General Motors Corp. (GM) and Chrysler LLC because Chief Executive Officer Alan Mulally decided to borrow $23 billion in 2006, securitizing all of Ford’s assets, including its trademark blue oval logo, Bloomberg News reported.

Company spokesman Mark Truby said Ford’s position on seeking federal loans is unchanged.  It asked for a $9 billion line of credit from the government but said it has enough cash to make it through 2009 and doesn’t intend to use government loans unless economic conditions worsen.

“We don’t plan to or foresee using it,” Truby told MSNBC.

But some analysts said Ford will need the money eventually and is simply trying to slip under the public radar.

“They’ll need money from the government by mid-year. But when they do put their hand out, it won’t captivate the media nearly as much, and it will go by with less fanfare,” said John Wolkonowicz an analyst at IHS Global Insight in Lexington, Massachusetts.

Ford’s cash burn in the past two quarters totaled $13.2 billion. Ford’s burn rate slowed to $5.5 billion for the fourth quarter from $7.7 billion in the third quarter. The company said this year’s cash drain will be less than in 2008 as capital spending and inventories shrink.

“We are confident that our burn rate will be substantially slower in 2009,” Booth said.

Ford won’t specify the minimum amount of cash it needs to stay in business. But some analysts question how long the government’s largesse will continue.

“They should go to the U.S. government very quickly and get it while they still can,” Sean Egan, president of bond ratings firm Egan-Jones Ratings Co., said in a Bloomberg Television interview. “They are going to need the cash, perhaps not immediately, but certainly within the next two quarters.”

Ford also announced that its credit arm would cut 20% of its work force, or 1,200 jobs, and that it has reached agreement with the United Auto Workers union to end the “jobs bank” from which laid-off workers get most of their pay. The date of that is still being negotiated.

Booth said Ford still is on track to break even in 2011, but the company anticipates worldwide sales to fall more than 10% in 2009. Ford sees improvement later this year, however, as government stimulus packages take effect.

The company said it lost $2.46 per share in the fourth quarter, compared with a loss of $2.8 billion, or $1.13 per share, for the year-ago period. Revenue in the three months ended Dec. 31 fell to $29.2 billion, down 36% from $45.5 billion in the fourth quarter of 2007.

For the full-year, Ford reported a net loss of $14.6 billion, compared with a loss of $2.7 billion in 2007. The results missed Wall Street expectations.

“These losses are not sustainable,” Egan said. “Even if they draw down their lines and the money from the government, it begs the question of whether or not the overall situation is going to improve.”

Vehicle sales in the U.S. are at their lowest levels in 26 years as consumers face tight credit markets and economic uncertainty. Ford’s U.S. sales plunged 20.5 percent in 2008, and its market share fell slightly to 15% from 15.4% in 2007.

Source: Ford Says “No Bailout Funds” Despite Worst Loss Ever