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

• 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

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

• American Insurance Group (AIG), the insurance giant that is already 80% owned by the U.S. government, is in discussions with the government for more federal funding so it can keep operating after next Monday, when it will report the largest loss in U.S. corporate history, CNBC reported. Sources close to the company told CNBC that the loss will be close to $60 billion.

• Both the Dow Jones Industrial Average and Standard & Poor’s 500 Index tumbled yesterday (Monday) to their lowest levels in 12 years.  The Dow fell 250.89 points, or 3.41% to close at 7,114.78 and the S&P 500 plunged 26.27 points, or 3.47%, to close at 743.33.

• No. 2 Japanese carmaker Honda Motor Co. Ltd. (ADR: HMC) – forecasting its first quarterly loss in at least 15 years – has named Takanobu Ito as its next president, Bloomberg News reported. The Tokyo-based company is watching its sales plunge in both Japan, and in the United States, its biggest market, thanks to the worst financial crisis since the Great Depression. Ito, 55, now global chief of Honda’s automobile division, succeeds Takeo Fukui, 64, in June. Fukui will become an advisor to Honda.

• Toyota Motor Corp. (ADR: TMC), the world’s biggest automaker, is prepared to set a 2009 production target of about 6.5 million vehicles, the lowest in six years, The Nikkei, Japan’s top business daily, reported yesterday (Monday). For the fiscal year that ends in March, Toyota is skidding towards its first net loss since 1950, due to precipitous sales declines in virtually every market – including the United States, Japan, Europe and even the emerging economies of Asia, BusinessWeek said. This reversal for the Toyota City-based firm follows seven years of aggressive expansion, and has led to an onogong management shakeup. Toyota also said yesterday that three executive vice presidents were retiring in June; last month, Toyota tapped a member of the founding family, Akio Toyoda, 52, grandson of the company founder, as president, replacing Katsuaki Watanabe

Source: Global Investment News Briefs Tuesday, February 24, 2009

• The publisher of one of the world’s best known adult magazines, Playboy Enterprises Inc., (PLA) said it would be open to discussions about an outright sale after posting a wider fourth-quarter loss on weaker-than-expected revenue.  The company, which has been through a management shake-up including the resignation in December of longtime Chief Executive Officer Christie Hefner, posted a net loss in each quarter of 2008. A restructuring charge of $157.2 million, and other one-time costs, also hurt results, Reuters reported.

• Confronting its first quarterly loss in at least 15 years, Honda Motor Co. Ltd. (ADR: HMC) will scale back plans to make business jets and may offer voluntary retirements for the first time as it slashes costs in the United States.  The worst global financial crisis since the Great Depression has cut corporate demand for jets. The company will produce 70 to 80 jets a year for delivery from the end of 2010, compared with an earlier plan to make 100 planes a year, CEO Takeo Fukui said in a Monday Bloomberg News interview.

• After record investment losses and client redemptions cut assets by 37% in the second half of 2008, many hedge funds are looking to consolidate, Bloomberg reported.  As many as 40% of the 9,000 hedge funds and funds of funds may disappear in the next two years, according to Karamvir Gosal, a New York-based investment banker at Jefferies Putnam Lovell. While some will return money to investors and shut their doors, mergers and acquisitions will be more prevalent than in the past.

• JPMorgan Chase & Co (JPM) could modify more than the 600,000 mortgages it has already singled out for restructuring, CEO Jamie Dimon told CNBC in an interview yesterday (Wednesday).  JPMorgan and other major banks have announced plans to modify loans as unemployment has risen in recent months, raising concerns that more borrowers may start to miss payments on their mortgages. Dimon’s bank has agreed to renegotiate $70 billion in mortgages since October.

• Google Inc. (GOOG) wants to curb growth in the number of frivolous patent challenges it faces by fighting rather than settling lawsuits, Bloomberg reported.  Patent claims against Google rose to 14 last year from 11 in 2007 and three in 2006.  The company is going on the offensive to fight patent claims, a strategy the Internet-search giant says will deter frivolous lawsuits.  Google didn’t settle any patent suits last year.

• Mortgage applications filed last week rose a seasonally adjusted 45.7% compared with the week before, reflecting a spike in refinancings as interest rates fell, the Mortgage Bankers Association said yesterday (Wednesday). Applications to refinance existing loans jumped 64.3% on a week-to-week basis, and total application volumes increased an unadjusted 5.2% from the comparable week in February 2008. The rate on 30-year fixed-rate mortgages averaged 4.99%, down from 5.19% the previous week, MarketWatch reported.

Source: Global Investment News Briefs Thursday, February 19th, 2009

Sales of cars, minicars, trucks and buses hit a 28-year low, falling 5%, or 5.08 million, from the 5.35 million sold in 2007, according to figures released by the Japan Automobile Dealers Association (JADA) and Japan Mini Vehicles Association, Bloomberg reported.

Worse, domestic auto sales in December totaled 183,549 vehicles – a 22% decline and the biggest drop on record – showing the sales crunch is a growing problem.

“We never imagined sales would fall this badly,” JADA Director Takeshi Fushimi said, Reuters reported. “This is a bleak situation.” Widespread job losses plagued the industry, sapping consumer demand and chopping hundreds of thousands of vehicles from sales tallies.

“The industry is going through a blizzard,” said Ichiro Takamatsu, chief investment officer at Alphex Investments Co., a Tokyo-based hedge fund, told Bloomberg. “In Japan, people don’t see cars as their status symbol anymore with this economic slowdown.”

According to JADA figures, Toyota sold 1.47 million vehicles in Japan last year, a 7.4% fall. Nissan’s sales came in at 537,553 units, down 5.8%.

Honda Motor Co. (ADR: HMC), however, sold 423,628 units – a 6.4% gain – partially because of higher demand for new and moderately priced models of the Fit compact and Freed compact minivan. The latter only sold domestically in its first year.

Last month, the Japan Automobile Manufacturers Association projected annual sales would fall again in 2009. It estimates that new automobile sales will fall to 4.86 million vehicles, which would be the first drop below 5 million in 31 years.

Source: Dour Demand Sends Japan 2008 Auto Sales Down Dramatically

• With Morgan Stanley’s (MS) $2.2 billion loss in the third quarter, the carnage from the credit crisis passed the $1 trillion mark. About 67% of that came from U.S. financial firms, and about 30% from European firms, Bloomberg reported.

• A day after the U.S. Federal Reserve’s deepest rate cut in history, the dollar fell hit fresh lows against other currencies. It fell toward a 13-year low against the yen and a two-and-a-half-month low against the euro, Reuters reported.

• Gold and silver prices rallied yesterday (Wednesday) as the dollar declined. February gold futures climbed 4% to $872.90, while silver for March delivery climbed 7% to $11.45 an ounce on Globex, MarketWatch reported.

• A strengthening yen and plummeting car sales forced Honda Motor Co. (ADR: HMC) to slash its full-year profit forecast by 62%. Japan’s second-largest automaker may also post its first half-year loss in 11 years, Bloomberg reported.

• Trying to cut costs, troubled cell-phone maker Motorola Inc. (MOT) will suspend 401(k) contributions to worker retirement plans, freeze its pension plan, stop some raises and skim the salaries of two top executives.  “It’s a small step in the right direction, but it’s not going to save them either,” Nomura Securities technology specialist Richard Windsor told Reuters. “If you look at the degree the market has deteriorated since they last spoke to the Street, you could conclude that they will need more aggressive actions.”

• Europe auto parts supplier Valeo SA said it will cut 5,000 jobs, 9.3% of its workforce, in face of slowing demand for cars, Bloomberg reported. “For 2009, Valeo anticipates no improvement in production levels compared with the fourth quarter of 2008,” the company said in a statement.

• British retailer Woolworths will close its doors Jan. 5, leaving 27,000 people without jobs unless it finds a buyer. The 99-year-old retail company will close its 807 stores in tranches of 200 starting Dec. 27, Reuters reported.

• Online brokerage E-Trade Financial Corp. (ETFC) said it added a net of about 26,000 new accounts in November. However, total customer assets fell 42% since November 2007, and 8% from October, the Associated Press reported.

Global Investing Roundups Thursday, December 18th, 2008

The bailout package bill for General Motors Corp. (GM), Ford Motor Co. (F) or Chrysler LLC was passed by House lawmakers by a vote of 231-170. Democrats said they reached agreement with the White House on the details of the plan yesterday.

“If we do nothing, we take the risk that, sometime soon, there’ll be no American automobile industry,” House Majority Leader Steny Hoyer, D-Md., told MarketWatch.com.

The $14 billion is a long way from the $34 billion now being sought by the Big Three. And that $34 billion was well in excess of the $25 billion in loans the carmakers said they would need. Of the three companies, GM and Chrysler are in the greatest need of cash. Ford says it is seeking a long-term line of credit and doesn’t need money in the short term.

The House bill, if enacted, would do several things. It would:

• Grant the U.S. government warrants for nonvoting stock equal to 20% of the value of the loan it makes to each company.
• Create a White House-chosen “car czar,” an appointee empowered to hold the companies accountable for developing long-term viability plans. The czar would be able to require immediate repayment of the loans if the companies don’t make adequate progress by Feb. 15.
• Require GM, Ford and Chrysler to submit “final” restructuring plans by March 31.
• End such financial standard fare as dividends for shareholders and “golden parachutes” and bonuses for executives – in the interest of conserving cash.

House Speaker Nancy Pelosi, D-Calif., said the bill is “tough love” for the industry but offers the Big Three “a chance to get back on track.”

The Bush Administration said yesterday that the “car czar” would have the power to revoke the loans and develop a new plan – including one that would have the Big Three seek Chapter 11 bankruptcy protection if the carmakers don’t make progress toward long-term viability by March 31.

“If there’s not a plan that makes these firms viable, the government gets its money back,” Joel Kaplan, deputy White House chief of staff for policy, told reporters.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., unveiled a bill similar to the House measure late yesterday. A vote in the Senate may not come until the weekend, Senate Majority Leader Harry Reid, D-Nev., said yesterday. Congress has been working on this for several weeks.

Shares of GM closed at $4.60 each yesterday, down 2%. Ford shares advanced 2 cents, or 0.62%, to close at $3.25. Chrysler is privately held, with private-equity firm Cerberus Capital Management LP holding a controlling interest. Before Cerebrus bought it, Chrysler had spent years as part of Germany’s Daimler AG (DAI).

Throughout the day yesterday, House and Senate Republicans repeatedly said that a Big Three bailout wouldn’t lead to a long-term viability or competitiveness for GM, Ford and Chrysler. In fact, U.S. Sen. Richard Shelby, R-Ala., who is the ranking GOP player on the Senate Banking Committee, vowed to block the legislation with a filibuster.

“Unless Chrysler, Ford and General Motors become lean and innovative and competitive in the marketplace, this is only delaying their funeral,” Shelby told journalists yesterday.

Of course, as MarketWatch reported, Shelby’s home state of Alabama has provided millions of dollars in subsidies to attract Japan’s Honda Motor Co. Ltd. (ADR: HMC), South Korea’s Hyundai Motor Co. (PINK: HYMLF) and the Mercedes-Benz unit of Germany’s Daimler AG, to build plants that provided 48,457 jobs in 2007. The Toyota Motor Corp. (ADR: TM) factory in Huntsville, Ala., makes motors for SUVs and pickup trucks.

The Wall Street Journal reported that a breakthrough in the negotiations between the White House and Democrats came after Democrats agreed to scrap language that would have forced the carmakers to drop lawsuits challenging tough emissions limits in California and other states.

Reid told MarketWatch that that he needs 60 votes to get the plan through the Senate. A key Democrat, Finance Committee Chairman Sen. Max Baucus, D-Mon., actually came out against the bill, since it contains a tax provision he said that he opposes. Democrats control the Senate by a narrow 50-49 majority.

Dodd said the Senate bill is “a far cry from a blank check to the industry.”

Said Dodd: “The legislation requires these companies to make painful, fundamental changes if they are going to be competitive internationally and viable in the long term.”

Source: Auto Bailout Passes House, Faces Hostile Senate

The bill clearly falls short of the $34 billion the Big Three were asking for, but should be enough to keep the automakers running through January, when the new Congress and Obama administration take the wheel.

As previously reported in Money Morning, there will be limits on executive pay, prohibitions for golden parachutes and requirements that the automakers get rid of their corporate aircraft and not pay dividends while loans are outstanding. The bill also provides a “car czar,” or presidential appointee, to oversee keep tabs on the companies’ restructuring efforts.

Of course, the bill is still awaiting congressional approval and there is cause to believe it may stall in the Senate.

Sen. Richard Shelby, R-AL, was a member of the panel that twice grilled Big Three CEOs and one of the bailout’s most vocal critics. Yesterday (Wednesday), Shelby threatened to filibuster the deal if it reaches the Senate.

It’s interesting to note that Shelby’s home state of Alabama, has built three foreign car assembly plants – Honda Motor Corp. (ADR:HMC), Mercedes-Benz and Hyundai – as well as a Toyota Motor Corp. (ADR:TM) engine plant, in the past 20 years.

Shelby’s efforts induced the formation of Boycott Alabama Now, a group that says it wants America to give Shelby a taste of what he’s doing to America. Such a boycott “will include any travel into the state well as boycotting the purchase of anything produced in any way within the state,” according to the group’s Web site.

Senate Minority Leader Mitch McConnell expressed reservations about the bill’s legislation and doubts it’ll garner enough Senate votes to pass. The state he represents, Kentucky, has a 7,000 employee Toyota plant, The Boston Globe reported.

Then there’s Tennessee, the only state with U.S., Asian, and European auto assembly plants. And in an interview with BusinessWeek, Tennessee’s Sen. Bob Corker seems to understand his colleague Shelby’s positions on the bailout more so than his own.

“It has not been an issue of local politics. For me there is no issue of local politics. I try and dig into these issues and present thoughtful responses to the situation. In defense of Senator Shelby, I knew where he was going to be on this issue before this ever arose,” Corker said. “He was against the Chrysler loans back in 1979. He was always going to be against this, as he was against the Wall Street bailout legislation. In his case, it’s not the politics of the auto industry. That’s just who he is.”

But Corker nailed the source of problem.

“Regardless of what happens this week, the legislation, if passed, is not going to move people to buy cars,” Corker said.

Auto Woes Extend Beyond the Big Three

Falling demand is something all carmakers can agree on, especially in Germany, Europe’s largest economy and the home of Europe’s largest carmaker, Volkswagen.

While all focus has been on Detroit’s Big Three, few have noticed that Volkswagen – like Detroit’s Big Three – is trying to bite off its own piece of a broad government bailout. In October, Germany’s parliament passed a $642 billion (500 billion euro) bank-rescue plan to stabilize the country’s banks. And Volkswagen has quietly sought government help for its financial services and banking units.

Premium carmaker BMW said it wasn’t sure if it would ask for similar help, Reuters reported.

That’s why it’s not accurate to assume bailout opponents share the same opinions on the bailout as foreign automakers. As Money Morning previously reported, it’s more than just Big Three employees on the line.

While the Big Three employ more than 200,000 people directly, they support millions more indirectly through suppliers and dealerships. The collapse of the Big Three could ultimately cost the economy more than 2 million jobs total. And that doesn’t count the estimated 1 million Americans – including many retired autoworkers – who rely on the U.S. auto companies for pension and healthcare benefits.

According to Germany’s VDA industry group, parts purchased by manufacturers account for 75% of the value of an average car, Bloomberg reported.

Here in the United States, as many as 60% of Honda’s U.S. parts suppliers are also major parts sources for the Big Three.

If a manufacturer’s major customer goes under, it too may scale back operations and therefore be unable to meet the manufacturing and shipping demands of another customer.

“You can’t underestimate what would happen when a large player collapses,” BMW Chief Executive Officer Norbert Reithofer e-mailed to Bloomberg. “That would impact the supplier structure and therefore the entire industry.”

The United States is also the largest market for most foreign automakers. Allowing one or all of the Big Three to go under would add millions to the running unemployment numbers and deepen the recession, making the U.S. market less likely to buy their cars.

Source: Auto Bailout Awaits Congressional Approval with Millions of Jobs at Stake

The Fed extended the lives of recently initiated programs (lending facilities for investment firms, for instance) and is exploring additional moves (like Treasury purchases) aimed at reviving the credit markets.  Bernanke believes more needs to be done to slow the pace of foreclosures, especially since they jumped another 10% in September.

Meanwhile, the U.S. Treasury Department is working on a plan to rejuvenate the housing market by slashing mortgage rates to 4.5% on new purchases.  Experts say that at some point these stimuli must take hold, but that’s not necessarily true.

This week’s economic calendar is highlighted by two late-week releases that are sure to garner much analysis.  The producer price index (PPI) brings another look into the inflation picture, though the dramatic decline in energy prices may renew “premature” talks of deflation.  And November retail sales should offer few positive surprises for the holiday season.

Are there any 12-step programs for overcoming “gloom and doom?”

Market Matters

Black Friday has passed. And so has Cyber Monday (the Monday after Thanksgiving when online shopping begins in earnest).  So let the analysis begin.

While retailers continued to cry “gloom and doom,” the so-called experts did not appear to be quite as pessimistic.  According to National Retail Federation, holiday sales will climb by 2.2% from last year’s levels.  Research firm ShopperTrak claimed that sales on Black Friday rose by 3%, and ComScore Inc. (SCOR) said Monday’s online activity soared by 15% from 2007. Toys “R” Us Inc. execs “were definitely pleased with sales” during the initial holiday shopping weekend, and Internet data collector, Hitwise, revealed that web traffic increased by 21% at Amazon.com Inc. (AMZN).

While November sales remained bleak (see below), analysts point out Thanksgiving came late in the month (Nov. 27) and Cyber Monday actually fell in December.  The optimists (rare as they are) are hopeful holiday activity may be skewed with December faring far better than November.

Automakers returned to Capitol Hill. But for “Begging for a Bailout II,” the “Big Three” CEOs were smart enough leave their corporate jets at home and arrive in hybrid sedans.  Maybe next time they can carpool. But there’s a problem: Combined, the Big Three are this time are requesting $34 billion in loans, which is $9 billion more than they’d been lobbying for all along. Ford Motor Co. (F) implied its situation may be less dire and a mere $9 billion standby line of credit would suffice (assuming the others don’t fail).  The execs also expressed a willingness to operate under a federal oversight board, and even the unions offered concessions regarding health plans and the jobs bank.  While some politicos used scare tactics to predict even greater economic hardships should relief not be granted, others remained skeptical of the unlimited bailouts.  Mostly, they chose to grandstand and politicize the tragic times to win support at home (as if their constituents even watch C-SPAN).  Stay tuned…

In other corporate news, Goldman Sachs Group Inc. (GS) may be forging more into the banking world as it considers launching an Internet operation to increase its deposit base.  Meanwhile, analysts predict its fourth quarter loss could skyrocket to $2 billion.  Beezer Homes USA Inc. (BZH) and Blackberry-maker Research in Motion Inc. (RIMM) both lowered their quarterly outlooks and AT&T Inc. (T) became the latest domestic giant to announce layoffs.  While General Electric Co. (GE) believes its earnings will be weaker than initially expected, the company plans to maintain its dividend and solid commitment to shareholders.  Merrill Lynch & Co. Inc. (MER) shareholders approved its sale to Bank of America Corp. (BAC), though total valuation plunged to $20 billion (from $50 billion at announcement) as a result of the stock market decline.

Oil continued its never-ending decline below the $41 a barrel level, a point not seen in four years, while gas fell below $1.80 a gallon nationally. While winter weather generally means higher energy prices, the economic doldrums have more than offset the traditional trend.

Treasury yields plunged to historic lows on speculation that the Fed may purchase government securities to support the credit markets (as well as the ongoing “flight-to-quality” moves).  Stocks resumed their overall bearish ways on dramatic volatility, as investors grew more fearful about the economy before totally disregarding the awful unemployment data (see below) and staging a late-week “illogical” rally.  Then again, since when have markets been considered logical?

Economically Speaking

In what could one of the worst kept secrets of the year, the National Bureau of Economic Research (NBER) revealed the domestic economy has been in a recession since December 2007.  In the post-World War II era, the average length of recession has been 11 months, with the downturns of 1973-74 and 1980-81 lasting 16 months.

And the current recession will likely surpass the norm.  As the data gets weaker with each passing release, most economists expect this recession to last beyond the next four months and to set a new duration record in post-World War II times.

Then again, each new month means we are getting closer to the end; additionally, equity markets typically serve as leading indicators and begin to rebound months before a recovery starts – meaning we’ll see a bull market get under way while the economy is still in the depths of recession.

The weekly releases revealed that any pending rebound should remain on the back burner for some time.  In November, the unemployment rate jumped to 6.7% as the U.S. economy lost more than 500,000 jobs, the largest monthly decline in 34 years.  In the last three months alone, more than 1.2 million individuals have moved into the ranks of the unemployed.

November represented the 11th straight month of labor contraction.  Both the manufacturing and services sectors continued to struggle according to Institute for Supply Management and factory orders plummeted by the largest amount in eight years.  Retailers reported weak same-store sales numbers, with only Wal-Mart benefiting from the dire times.  Even Costco Wholesale Corp. (COST) experienced a steeper than expected decline.   And of course, dismal auto sales brought more ammunition to those Congressional hearings as General Motors Corp. (GM) (-41%) and Ford (-31%) were joined by Honda Motor Corp. (ADR: HMC) (-32%) and Toyota Motor Corp. (ADR: TM) (-34%) in the “if misery loves company” category.  Meanwhile, Bernanke and friends are hard at work dreaming up creative ways to shore up the economy, particularly after the Beige Book reported softer activity across the country.

Weekly Economic Calendar

Source: Fed Looking at Another Rate Cut, While Treasury Has New Plan for Housing